Unit 1: Types of Accounts Flashcards
1
Q
Cash Account
A
A basic investment account, and anyone eligible to open an investment account can open one.
-Customer must pay IN FULL for any securities purchased
2
Q
What type of accounts MUST BE OPENED AS A CASH ACCOUNT?
A
Personal retirement accounts (IRAs)
Corporate retirement accounts (401k)s
Custodial accounts (UTMAs, UGMAs, Coverdell Education Savings Acct. (ESA)
3
Q
Margin Accounts
A
Some cash and some credit to purchase the securities
The securities firm lends the necessary funds at the time of purchase, with the securities in the portfolio serving as collateral for the loan.
-Borrowed money = a debt that must be repaid
customers who open margin accounts must meet certain minimal suitability of requirements.
4
Q
The use of borrowed money is known as
A
financial leverage
5
Q
The term “margin”
A
refers to the minimum amount of equity a customer must deposit to buy securities
6
Q
Fee-based accounts
A
charge a single fee (either fixed or % of assets in the account)
-are appropriate only for investors who engage in at least moderate level of trading activity
Disclosure document given
7
Q
Fee-based accounts tend to reduce the likelihood of
A
churning - illegal and unethical practice that occurs when a BD or one of the registered reps engage in exessive buying and selling of securities in a customer acc to generate more commissions
8
Q
Fee-based acct have introduced the risk of
A
reverse churning - when RRs recommend a switch from brokerage acc to a fee-based which clearly shows the disadvantage to the customer
-means moving low-activity trading customers to fee-based
9
Q
Fee-based accounts are NOT wrap accts
A
wrap accts are accts for which firms provide a group of advisory services **in addition to brokerage services
10
Q
Wrap accounts
A
-accts charged a single fee
-fee usually % of assets being managed
-firms offering wrap accts must be register as investment advisors
11
Q
prime brokerage acct
A
Usually an institutional account
Centralized master acc that utilizes executing firms for trades ,
selects one member firm (the prime broker) to provide custody and other services, while other firms, called “executing brokers” handle most of the trades placed by the customer
12
Q
what is needed to open a prime brokerage acct
A
- sign agreement with customer, spelling out the terms of the agreement, as well as the names of all executing brokers the customer has contracted with
13
Q
Key adv. of prime brokerage acct
A
provides clients with ability to trade with multiple brokerage houses while maintaining a centralized master acct with all the clients cash and securities
-more active trading
-hedge funds
14
Q
DVP/RVP ?
A
-Collect on delivery - you will not pay until you receive the securities
-Usually an institutional account
Cash-on-delivery settlement
15
Q
Day trader
A
someone who buys and sells the same security on the same day to try and take advantage of the intraday price movements
16
Q
Pattern Day trader
A
someone who executes 4 OR MORE DAY TRADES IN A 5-BUSINESS-DAY PERIOD
-minimum equity requirement in a pattern day traders acct. or $25k
-Special risk disclosure required
-Cross guarantee not allowed: can’t use guarantees from third parties to cover (margin) maintenance calls
-Principal approval required before OPENING
17
Q
Pattern Day Traders must
A
have on deposit at least $25k in the acct equity on any day in which day trading occurs
18
Q
Before opening an acct (with day trading)
A
- provide the customer with a risk disclosure statement that outlines all the risks associated with day trading
- AND approve the acct. for a day trading strategy or receive from the customer a written statement that the customer does not intend to engage in day trading
19
Q
Individual accounts
A
account with one owner
-owner can control the investments within the account
-request distributions of cash or securities from the acct
-have their name on the check or certificate
*suitability is based solely on the individual**
20
Q
Joint Accounts
A
- JTWROS
2.Joint TIC - *Community property (based on states)
21
Q
co-owners of joint accounts are called
A
tenets
22
Q
Forms for joint acct
A
- appropriate new account form
- joint agreement must be signed (allows tenets to transact business in the acct. )
23
Q
Other features of joint acct
A
-checks must be payable to the names on the account & endorsed for deposit by all tenets
-when securities are sold from the joint acct., the certificate must be signed by all tenets
-suitability based on everyone in the group - not just one member of the group
24
Q
JTWROS
A
-equal ownership
-deceased tenants interest is passed to the surviving tenets
-assets divided equally
25
Joint Tenets in Common (TIC)
-Assets divided per customer instructions
-each tenet has authority to act
-ownership provides that a deceased tenets fractional share in the accounts goes to the tenets estate
-each owner sets their own heirs
FREEZE acct if one owner dies before - then the account will be retitled
26
Test Topic alert:
JTWROS vs TIC
JTWROS: all parties have undivided interest in the account
TIC: each party must specify a percentage interest in the account
27
Community Property
Joint account that is a marital property classification recognized by some, but not all states.
in these states, most property acquired during marriage is considered to be OWNED JOINTLY by both spouses and would be divided at the time of divorse, annulemnt or death
28
What is important to know about community property
-comm. property laws differ from state to state
some states have created separate classifications called "community property with rights of survivorship" that are similar to TIC with rights of survivorship property designations
29
Custodial accounts
not technically joint accounts cause there is only one owner but there are 2 names on the account:
1. Custodian
2. Beneficial owner or minor
-custodian for the minor enters all the trades . UGMA and UTMA accts require adults to act as custodian for a minor (beneficial owner)
30
what year was UTMA founded
1986 - these are more flexibility
31
what year was UGMA founded
1956
32
UTMA Account features
1. reregistgered as late as 25
greater flexibility (real property can be transferred to a UTMA - BUT NOT UGMA)
2. custodian has full control over the minors account and can perform the following
- buy or sell securities or other assets, such as real estate, in UTMA
-exercise rights or warrants
-liquidate, trade, or hold securities
33
RRs must know the following about UTMAS/UGMAS custodial account rules:
-all gifts, and transfers in the case of UTMas are IRREVOKABLE
-an account may only have 1 custodian and one minor/beneficial owner
-a donor of securities can act as a custodian or appoint someone to do so
-unless acting as a custodian, parents have no legal control over UTMA/UGMA account or securities in it
a minor can be a bene in one or more accounts
a minor has the right to sue the custodian for any improper actions
can only be opened as cash accounts - no margin
34
TOD
Transfer on death is a type of account registration that allows the owner of the account to pass all or a portion of it, upon death, to a single or multiple beneficiaries
no specific legal documentation is needed
***TOD avoids probate but the assets in the account do not avoid estate tax***
35
Business accounts
1. sole proprietorship
2. general partnership
3. limited partnership
4. LLC
5. S Corp
6. C Corp
36
Sole Proprietorship
Simplest form of business organization and is treated like an individual account
-all income (or loss) is that of the individual. All of the individuals assets are liable for the debts of the business - you can loose everything.
37
General partnership
unincorporated association consisting of 2 or more individuals.
partners manage and are responsible for the operation and debts
38
limited partnership
the management and liability is assigned to the general partners, while the limited partners are passive and have liability limited to their investment
suitability decisions are similar to general partnership except that the limited partners do not have full liability
39
LLC
business structure that combines the benefits of incorporation (limited liability) with the tax advantages of a partnership (flow-through of taxable earnings or losses)
distributions from LLCs are taxed only 1 TIME: bc no taxation at the business entity level
40
LLC owners are _____
MEMBERS - are not personally liable for for the debts of the LLC
*not shareholders,
41
S Corporation
-taxed like a partnership
-offers investors the limited liability associated with corporations in general
-profits/losses are passed through directly
distributions from S Corporations are taxed only 1 TIME: bc no taxation at the business entity level
42
Community Property States *joint acct
AZ
CALI
IDAHO
LOUISIANA
NEVADA
NEW MEXICO
TX
WASHINGTON
WISCONSIN
43
S Corp may not have more than ___ shareholders. None of whom may be a nonresident alien, or more than one class of stock
100
44
C Corporation
Business structure that distinguishes the company as a SEPERATE entity from its owners
-used when business expects to raise a lot capital
-shareholders are shielded from corporate creditors
-corporate income tax applies to the corporation as an ENTITY rather than being passed through the shareholder
45
C Corporation earnings are subject to double taxation
Yes - they are.
explanation: before distribution, the earnings are taxable to the corporation and then are taxed again to the shareholder when paid out as a dividend
46
Acc opening requirements: New account form
1. new account form
FINRA RULE 4512: requires member firms create a record for each acc with an individual customer that includes the following info
-name/residence addy
-whether customer is of legal age
-name(s) of firms associated persons
-if customer is a corp, partnership or other legal entity ,
-signature OF THE PARTNER, OFFICER, OR
MANAGER denoting that the acc has been accepted in accordance
-Trusted Person Contact rule (2165) - name and contact info
47
T/F the customers signature is not required on the new account form
true - only need signature needed is from the partner, officer, or manager (principal) signifying that the acc. has been accepted in accordance with the members policies and procedures for acceptance of accounts
48
SEC Rule 17a-3
REQUIRES delivery of a copy of the acct. info within ***30 DAYS*** of opening (and every 36 months thereafter) - 3 yrs
customers are to verify the info and note any relevant changes to the info
49
FINRA rule requires that a person associated with a member firm, before opening an acct or placing an initial securities order with another member DO WHAT
-notify the employer and the executing member (where new acc. is being maintained) IN WRITING , of his/her association with the other member
-before acc can be open, the employing FINRA member firm must grant written permission
-upon written request from the employing member frim, the executing member firm must supply member DUPLICATE copies of confirmations, acct. statements, or any other account information requested
50
exceptions to opening accounts at a different member firm than the finra member firm you work at
-if employee is purchasing mutual funds or variable annuities directly from the issuer, rule doesn't appl
-any non-securities products (fixed annuities, term life insurance)
51
MSRB rule - opening accounts at a different member firm
-sending duplication confirmations is REQUIRED, not optional
-exemption: purchase of municipal funds securities (529 college savings plans)
52
CIP (Customer Identification Program)
Under provisions of USA Patriot Act 2001, financial institutions are required to institute a customer identification program (CIP)
-verify the identity of any new customer
-maintain records of the information used to verify identity
-determine whether the person appears on the Office of Foreign Assets Control (OFAC)
53
Office of Foreign Assets Control (OFAC)
list of suspected terrorists or terrorist organizations
-prohibit transactions with certain persons/organizations listed on the OFAC website as Terrorists and Specially Designated Nationals and Blocked Persons, as well as listed embargoed countries and firms.
54
Before opening an account , as part of CIP (Customer Identification Program)
1. name
2. date of birth
3. address
4. SS or tax identification number (for business entity)
5.
55
Trusted Contact Person (Rules 2165 and 4512)
requirement to obtain trusted contact info for "specified adults"
FINRA rule 2165: a specified adult "is a natural person age 65 or older or a natural person age 18 or older who the member reasonably believes has a mental or physical impairment that makes the individual unable to protect his/her own interest."
56
FINRA Senior Exploitation Rule
Trusted contact person rule
57
Trusted Contact Person key characteristics
-must be age 18 or older
-not required to have on file but firm must make reasonable effort to get a TCP
-may place temporary hold on the distribution of funds or securities from the account of the specified adult
rule does not require members to place temporary holds on DISPURSEMENTS of funds or securities from the accounts of specified adults
58
one of your accounts is a specified adult. if the firm reasonably believes that an attempt at exploiting the person has been made, a temporary hold is permitted on disbursements for
FINRA rule 2165 allows firms to place a temp hold (**15 BUSINESS DAYS***) on disbursements from the accounts.
59
Regulation S-P (Privacy Notices)
Protecting privacy of customer nonpublic info
-SS 3, acc balances, transaction history, and any info collected through internet cookies
Firms must provide a **privacy notice**
-when the account is opened
-after that it must provide privacy notice on ANNUAL basis
60
Reg. S-P: Reasonable Opt-Out
include providing customers with a form with check-off boxes along with a prepaid envelope, providing an electronic means to opt out for customers who have agreed to electronic delivery of information
61
Regulation S-P: Difference between Consumer and CUSTOMER
Consumer: individual who obtains a financial product/service from a firm and has no further contact with the firm.
-initial privacy notice ONLY
Customers: individuals who has an ongoing relationship with a firm
-given initial privacy notice and annual notice
ONLY INDIVIDUALS, NOT BUSINESSES OR INSTITUTIONS, ARE COVERED BY THE REGULATION
62
Reasonable opt-out methods available to members include:
providing a reply form with the opt-out notice, an electric means to opt out if the customer has agreed & toll-fee
63
Under regulation S-P, if a BD sends a customer an initial privacy notice that contains an opt-out provision, the firm may NOT disclose nonpublic, personal info about the customer for how many days from the mailing?
a. 10
b. 15
c.20
d. 30
**30 DAYS**
A bd must give a customer 30 days to implement any opt-out provision in the privacy notice
64
POA
(Limited vs Full)
Power of Attorney: person who is not named on the acc that is to have **trading authority**
-written authorization with the BD giving that person access to the account
(HAS TO BE IN WRITING)
Full POA:
-deposit or withdraw cash or securities and
-make investment decisions for the account owner
-entry of orders
Limited POA:
-allows an individual to have some, but not total, control over an account. the document specifies the level of access the person may exercise
-entry of orders
65
TEST TOPIC ALERT: Limited POA is also known as
Limited trading authority, allows entering of buy and sell orders but NOT withdrawl of funds
66
Durable Power of Attorney (POA)
Full or limtied poa can be made "Durable"
-basically is like a TCP for the account owner. You are a POA + a TCP
67
TEST TOPIC ALERT: A durable POA survives the physical or mental incompetence of the grantor but NOT THE DEATH of EITHER PARTY
This means that orders entered AFTER the time of death of the grantor, even if the purchase or sale was decided upon before death ARE NOT EXCEPTED
68
Changing account names or designations:
Processes/documentation requirements
Principal must, before giving approval of the account designation change, be personally informed of the essential facts relative to thereof and indicate her approval of such change in writing
69
Internal Transfers
when a transfer is made to an account from an account of which the recipient is NOT A SIGNATORY, approvals and documentation similar to a change in designation is **required**
70
Bulk Transfers/SWEEP ACCOUNT
when customers sell securities held in their accounts, cash representing the proceeds of those sales are deposited to their accounts. In many cases, the cash is SWEPT into a money market mutual fund where it will earn income until the money is either withdrawn or used for a new purchase ---> sweep account
FINRA RULES allow member firms to make bulk exchanges at net asset value of money market mutual funds without obtaining affirmative consent but
71
Negative response letter
generally informs the recipient of the letter of an impending action and requires the recipient to respond or act within a specified time frame if the recipient OBJECTS the action
72
Negative response letter
The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members in exchanges of fonts, used and sweep accounts
The negative response letter contains a tabular comparison of the nature in amount of the fees charged by each fund
The negative response letter contains a comparative description of the investment objectives of each found in a prospectus of the fund to be purchased
The negative response feature will not be activated until at least 30 days after the letter was mailed 
73
Tax deferred
Income taxes put off to a later time the most retirement plans tax on the amount of the contribution that usually referred until withdraw tax on earnings is always deferred until withdrawal
74
Qualified plan
An employer sponsored plan, such as pension 401(k) or 403B where the contributions are made with pretax dollars in earnings in account, growth tax deferred until the funds or withdrawn qualified plans are usually governed by the employee retirement income security act of 1974 ERSA
75
Qualified
Contributions made with pretax dollars earnings in the account or tax a third until the phones are withdrawn. This can apply to their qualified plan or traditional IRA
76
Non qualified
Employer sponsored plan, such as deferred compensation plan where there is no tax advantage other than the pay is not received until sometime later in the individual should be placed in the lower tax bracket.
Employer can discriminate between employees
Term can also apply to an annuity purchased on an individual basis outside a retirement plan
77
Deductible contribution
The conservation is made by the individual weather in employee contribution to a qualified plans, which is a 401(k) plan or buy any individual to a traditional IRA. This means the amount contributed is pre-tax in otherwise deductible on the tax return.
78
Nondeductible contribution
A contribution to a qualified plan or an IRA traditional, or Roth, which is made with after-tax dollars the funds growth tax deferred, but there is no tax benefit direct from the contribution
79
Deferred compensation plan
Is an agreement between a company in an employee and wish employee agrees to defer receipt of current income in favor of PI retirement. It is assumed that the employee will be in a lower tax bracket a retirement age.
Persons affiliated with the company solely as board members are not eligible
Deferred compensation plans may be somewhat risky because the employee covered by the plan has no right to the plan benefits of the business fails in the situation the employer becomes a general creditor of the firm, covered or covered employees. They also forfeit benefits if they leave the firm before retirement.
80
When the benefit is payable at the employees retirement, it is taxable as 
🚨Ordinary income🚨to the employee. The employer is entitled to the tax deduction at the the benefit is paid out
Deferred comp plans usually benefit highly compensated employees who are just a few years from retirement
81
Payroll, deduction, plan (nonqualified)
Alkaloses employees to authorize their employer to deduct a specified amount for retirement savings from their paychecks. The money is deducted after taxes in our paid it may be invested in the number of retirement vehicles at the employees option.
82
TEST TOPIC ALERT🚨🚨🚨 payroll deduction plans
A 401(k) plan is not considered a payroll deduction plan for the funeral exams 401(k) plans are considered salary reduction plans, not payroll, deduction plans, and exam questions. Assume that the payroll deduction plans are non-qualified. Also note that the 401(k) plan or are qualified plans were as payroll, deduction plans or not.
83
Generally speaking ***non qualified***retirement plans
Are funded with after tax dollars
84
A deferred comp
Might not protect employees from losing the deferred compensation. Should the employee leave the company before retirement
85
Transfer on Death
When inheriting securities, cost basis of investment is stepped up to the fair market value on date of death
-more flexible than a will
-Avoids probate
85
Transfer on Death
When inheriting securities, cost basis of investment is stepped up to the fair market value on date of death
-more flexible than a will
-Avoids probate
86
Fiduciary Accounts
executors
court-appointed administrators: probate court will appoint fiduciary
guardians (for minors)
conservators (for ppl deemed incompetent)
trustee
87
Custodial Accts: UGMA vs UTMA
*Death of minor or custodian*
If minor dies -- $ passes to minor estate
if custodian dies -- donor/court elects new custodian
88
Custodial Acc features
-use minors SS to open acct
-only 1 custodian/1 minor on each acct
-NO MARGIN / NO SHORT SELLING
