Unit 1: Types Of Accounts

Question 1

These type of accounts may only be opened as cash accounts.

Answer 1

• personal retirement accounts, such as IRAs
• corporate retirement accounts, such as 401(k)s
• custodial accounts, such as UTMAs and ESAs

Question 2

The use of borrowed money is referred to as ___________.

Answer 2

Financial leverage

Question 3

This account entails the firm lending the necessary funds at the time of purchase, with the securities in the portfolio serving as collateral for the loan.

Answer 3

Margin account

Margin refers to the minimum amount of equity a customer must deposit to buy securities.

Question 4

This type of account:

• charges a single fee (either fixed or a percentage of assets in the account) instead of a commission-based charge for brokerage services.
• FINRA states this type of account is for investors who engage at least a moderate level of trading activity

Answer 4

Fee-Based Account

Question 5

The practice of moving clients over to a fee-based account from a brokerage account.

• leading to additional fees then what low trading activity would incur

Answer 5

Reverse Churning

Question 6

This type of account:

• provide a group of advisory services in addition to brokerage services.

   - These might include; asset allocation, portfolio management, executions, and administration

• charged a single fee (usually a % of AUM)
• require the firm offering such an account to register as investment advisors in what would be in addition to their registration as a BD

Answer 6

Wrap-fee accounts

Question 7

What is the key advantage of a prime brokerage account ?

Answer 7

Provides a client with the ability to trade with multiple brokerage houses while maintaining a centralized master account with all the clients cash and securities.

Question 8

DVP & RVP

Stand for?

Answer 8

Delivery vs. Payment (DVP);

Receipt vs. Payment (RVP)

Question 9

In a _______ arrangement

Payment for securities purchased is made to the selling customers agent, and/or delivery of securities sold is made to the buying customer’s agent in exchange for payment at time of settlement.

• normally used for institutional accounts
• this is a cash-on-delivery settlement

Answer 9

DVP/RVP

The BD handling the trade must verify the arrangement between the customer and the bank or depository, and the customer must notify the bank or depository of each purchase or sale.

Question 10

Someone who executes four or more day trades in a five-business-day period.

   - are required to maintain a minimum account balance of $25,000 in their margin account. This amount must be in the account before they can continue day trading.
 - below the $25,000 minimum equity requirement, they will be issued a margin call and will not be allowed to day trade until the balance is restored.

Answer 10

Patter Day Trader

Question 11

Take Note

Know the following UGMA/UTMA custodial account rules

Answer 11

• all gifts (and transfers in the case of UTMA), are irrevocable.
• an account may have only one custodian and one minor or beneficial owner
• A donor of securities can act as custodian or appoint someone to do so
• unless acting as a custodian, parents have no legal control over an UGMA/UTMA account or the securities in it
• the minor has the right to sue the custodian for improper actions
• these can only be opened as cash accounts - margin is not allowed.

Question 12

• taxed like a partnership
• offers the limited liability associated with corporations in general
• P&Ls are passed through directly to the shareholders in proportion to their ownership in the __ corporation
• may not have more than 100 shareholders, none of whom may be a nonresident alien, or more than one class of stock (presumably common)

Answer 12

S Corporation

Question 13

A business structure that:

Distinguishes the company as a separate entity from its owners.

• for those businesses that expect to need significant capital
• officers and directors are shielded from corporate creditors
• corporate income tax applies to the corporation as an entity rather than being passed through to the shareholder (as is the case with a DPP)

Answer 13

C Corporation

*

You will only look at the corporations financial needs and objectives when determining suitability

Question 14

Take Note

Answer 14

C corp earnings are subject to double taxation. Before distribution, the earnings are taxable to the corporation and then are taxed again to the shareholder when paid out as a dividend.

Distributions from LLCs and S Corporations are taxed only once because there is no taxation at the business entity level.

Question 15

Regulation S-P

What does this entail?

Answer 15

Enacted by the SEC to protect the privacy of customers non-public information.

Nonpublic includes:

  - SSN
  - account balance
  - transaction history
  - any info collected through.    Internet cookies

Clients are provided a privacy notice whenever a new account is opened, and annually thereafter.

Question 16

A ____ is an individual who obtains a financial product or service from a firm and has no further contact with the firm.

Answer 16

Consumer

Question 17

A ____ has an ongoing relationship with the firm

Answer 17

Customer

Question 18

Under regulation S-P a Broker-Dealer must give a customer ____ days to implement any opt-out provision in the privacy notice.

Answer 18

30 days

Question 19

In a _____ account:

• 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.

Answer 19

Sweep account

Question 20

A _____________ 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 to the action.

• if he/she does not respond, he/she is deemed to have consented to the action.

Answer 20

Negative Response Letter

Question 21

Also known as an employer-sponsored plan, such as a pension, 401(k), or 403(b).

• pretax contributions and earnings until withdrawal.
• usually governed by the Employee Retirement Income Security Act of 1974 (ERISA)

Answer 21

Qualified plan

Question 22

This type of plan:

arranges an agreement between the company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement.

• affiliated persons with the company solely as board members are not eligible for these plans
• Employees have no right to plan benefits if the business fails (Risky)
• Employees may forfeit benefits if they leave the firm before retirement
• benefit is taxed as ordinary income at retirement
  
  • employer is entitled to tax deduction at the time the benefit is paid out

Answer 22

Deferred Compensation Plan

Question 23

This type of plan:

Allow employees to authorize their employer to deduct a specified amount for retirement savings from their paychecks.

• deducted after taxes are paid
• may be invested in a number of retirement vehicles.

Answer 23

Payroll Deduction Plan

Question 24

Test Topic Alert.

A 401(k) plan is not considered a payroll deduction plan. For the FINRA exams, 401(k) plans are considered salary reduction plans. In exam Qs assume the payroll deduction plans are nonqualified.

Also, note that 401(k) plans are qualified plans.

Answer 24

Note

Question 25

The benefits of qualified plans are that;

Employer contributions are a current deductible expense
Employee contributions are generally made with pretax money
- all contributions and earnings in the account are tax-deferred until withdrawal
- certain protections are offered to employees under ERISA

Answer 25

Note

Question 26

TEST TOPIC ALERT
The customer’s signature is not required on the new account form.

The only signature required to open an account is a partner, officer, or manager (a principal) signifying that the account has been accepted in accordance with the member’s policies and procedures for acceptance of accounts.

• SEC Rule 17a-3 requires delivery of a copy of the account information within 30 days of opening (and every 36 months thereafter). Customers are to verify the information and note any relevant changes to the information.

Question 27

Designed to provide that a specifically designated person maintains power over the account even upon the grantor’s incapacitation.

• could be because of physical or mental causes.
• power is terminated upon the death of either principal.

Answer 27

Durable Power of Attorney (DPOA)

Question 28

is a type of employer-sponsored retirement or deferred compensation plan that does not meet the specific requirements set forth by the Employee Retirement Income Security Act (ERISA) or the Internal Revenue Code (IRC) to receive favorable tax treatment.

• not subject to nondiscrimination rules

Answer 28

nonqualified plan

These plans are typically offered to highly compensated employees or key executives as part of their overall compensation package.

Question 29

These plans allow employees to defer a portion of their salary or bonuses to a future date, typically until retirement.

• compensation is not taxed until it’s distributed to the employee, which is usually when they are in a lower tax bracket.
• Employers may also contribute to the plan, but those contributions are not tax-deductible.

Answer 29

Nonqualified deferred compensation (NQDC) plans

Question 30

is a contribution made to a traditional IRA or qualified plan with after-tax dollars

• earnings grow tax-deferred, there is no tax benefit derived from the contribution
• earnings are taxable when withdrawn.

Answer 30

Nondeductible contribution

Benefit: earnings grow tax deferred. When withdrawn, the hope is that the client will be in a lower tax bracket.

Question 31

____ plans allow pretax contributions to be made, while ____ plans are funded with after-tax money.

• both can allow money to grow tax-deferred until needed (withdrawn)

Answer 31

Qualified Plans, Nonqualified Plans

A taxable distribution from any retirement plan is taxed as ordinary income, never as a capital gain

Question 32

Take Note

Answer 32

In a qualified plan, if all of the funds were contributed by the employer, (known as a noncontributory plan), the employee’s tax basis (cost) is zero. If the employee’s contribution was pretax, the basis for that is zero as well. Because everything above the cost is taxed at the employee’s ordinary income rate at the time of distribution, in most cases all funds received are fully taxable.

Question 33

A deferred compensation plan

A. must allow all eligible employees to participate.
B. is funded through a trust agreement that protects the employee in the event the company goes out of business.
C. might not protect the employee from losing the deferred compensation should the employee leave the company before retirement.
D. typically benefits younger employees.

Answer 33

Answer: C. A provision commonly found in deferred compensation plans is that the
employee might forfeit some or all of the benefit if she leaves the company before retirement.

Question 34

Benefits on what type of plan?

• employer contributions are a current deductible expense,
• employee contributions are generally made with pretax money,
• all earnings and growth in the account is tax-deferred until withdrawal, and
• certain protections are offered to employees under ERISA.

Answer 34

Qualified Plan

Question 35

Compensation for IRA purposes

• Wages, salaries, and tips
• Commissions and bonuses
• self-employment income
• Alimony
• Nontaxable combat pay

Answer 35

Not compensation for IRA purposes

• Capital gains
• Interest and Dividend Income
• Pension or annuity income
• Child support
• Passive income from DPPs

Question 36

the _ was the source of the legislation permitting certain individuals to make additional contributions to their IRAs.

• those individuals being 50 years of age or older.

Catch up is $1,000

Answer 36

Economic Growth and Taxation Relief Reconciliation Act of 2001
(EGTRRA)

Exam may require this to be known

Question 37

Any taxpayer of any age who reports earned income for a given tax year may contribute to a traditional IRA.

If one spouse has little or no earned income and a joint tax return is filed, a spousal IRA may be opened for that person and the contribution limits and tax treatment are the same as for any other IRA.

Take Note

Question 38

The exam may try to trick you into thinking that you can make a contribution later than April 15 if you have received an extension to file your taxes. You can’t! You should know that an extension does not give you more time to pay your taxes, it only extends the time that you have to file your return.

Test Topic Alert

Answer 38

Clients have from Jan 1 to April 15th of the following year to make contributions for the current year.

So, a 2022 return may be filed by April 15th of 2023.

• Unless the 15th falls on a holiday or weekend

Remember

Question 39

Excess contributions are subject to a _ penalty tax if the excess is not removed by the time the taxpayer files a tax return.

But no later than April 15th

Answer 39

6%

Question 40

This type of account:

• does not allow contributions to be deducted for tax purposes

Earnings however can be withdrawn tax-free, 5 years following the initial deposit, provided the

• account holder is 59 1/2 or older
• money withdrawn is used for the first-time purchase of a principal residence (up to $10,000); or
• account holder has died or become disabled

Answer 40

Roth IRA

Question 41

This type of account:

• does not allow contributions to be deducted for tax purposes
• Contributions are phased out - an can even be eliminated - based off the clients AGI

Earnings however can be withdrawn tax-free, 5 years following the initial deposit, provided the

• account holder is 59 1/2 or older
• money withdrawn is used for the first-time purchase of a principal residence (up to $10,000); or
• account holder has died or become disabled

Answer 41

Roth IRA

remember that the maximum Combined contribution is $6,500 (or $7,500 if 50 or older) . One cannot contribute $6,500 twice (once into a Trad IRA, the other to a Roth) in the same year.

Question 42

_ is computed on the bottom of the first page of your 1040

among the items that are deductible are:

• Trad IRA contribution
• Alimony paid as part of a pre-January 1, 2019 divorce decree;
• self-employment tax
• penalties paid on early withdrawal from a savings account

Answer 42

Adjusted Gross Income (AGI)

Take Note: although tax-exempt income from municial securities is shown on Form 1040, it is not included in AGI

Question 43

Roth Conversions:

• are permitted for anyone with a traditional IRA.
• The amount converted is added to the investor’s ordinary income.
• if some portion of the contributions to the traditional IRA were made with after-tax money, the IRS uses a proportionate system to determine how much is nontaxable
• May be done from any qualified employer plan such as a 401(k) and 403(b) plan.

Key Note

Question 44

Key points to remember about Roth IRAs:

• Contributions are not tax deductible.
• Distributions are tax-free if taken after age 591⁄2 and a Roth account has been open for at least five years.- Contributions can be made at any age as long as there is earned income.
  Distributions are not required to begin at age 72.
• If because of death, disability, or first-time home purchase, the distribution is qualified and not subject to tax or the 10% penalty.
• As with all IRAs, there must be a named beneficiary (who can be a minor).
• The contributions (all made with after-tax money) may always be withdrawn without tax or penalty. It is only the earnings where the five years & age 591⁄2 rules apply to avoid tax and penalties.

Answer 44

Again, if a client makes an early non-qualified distribution

Earnings are taxable at the clients ordinary income tax rate in addition to a 10% penalty on those same earnings.

Question 45

An account owner must take the first RMD for the year in which the account owner turns 73. However, the first RMD payment can be delayed until April 1 of the year following the year in which the account owner turns 73. For all subsequent years, including the year in which the first RMD was paid by April 1, the account owner must take the RMD by December 31 of the year.

• must meet minimum Internal Revenue Code (IRC) distribution requirments or incur a 50% penalty on the amounts falling short of the RMD.

Take Note

Answer 45

Remember that Roth IRAs are not required to take RMDs

Question 46

Taxable withdrawals before age 59 1⁄2 are also subject to a 10% early withdrawal penalty unless they are because of

• death;
• disability;
• first-time purchase of a primary residence ($10,000 lifetime maximum);
• qualified higher education expenses for immediate family members (including
  grandchildren, but not nieces or nephews); or
• certain medical expenses in excess of an AGI limit.

These exceptions also apply in the case of a nonqualified (taxable) distribution from a Roth IRA.

Question 47

also known as Rule 72(t), is a provision in the Internal Revenue Code that allows individuals to withdraw funds from their tax-deferred retirement accounts, such as a traditional IRA or 401(k), without incurring the standard 10% early withdrawal penalty, even if they are under the age of 59½.

• requires the individual to take a series of substantially equal periodic payments based on their life expectancy or a joint life expectancy with a beneficiary.

Answer 47

The Substantially Equal Periodic Payments (SEPP) exception

Question 48

Income and capital gains earned from investments in any IRA account are not taxed until the funds are withdrawn and, if a qualified withdrawal, are not taxed at all in the case of a Roth.

Test Topic Alert

Question 49

Ineligible Investments

• collectibles
• Whole life insurance
• Term life insurance

Assume Traditional IRAs

Answer 49

Ineligible Investment Practices

• Short sales of stock
• Speculative option strategies
• Margin account trading

Covered call writing is allowed

Question 50

Allowable investments within an IRA include all of the following except
A. investment company securities.
B. corporate stocks and bonds.
C. certain U.S.government-minted gold and silver coins.
D. collectibles such as postage stamps.

PRACTICE QUESTION

Answer 50

D.
Collectibles are not permitted as investments in an IRA.

Question 51

involve taking personal possession of the funds and redepositing them into another qualified retirement account within 60 days.

• The IRS generally limits this to one time per 12-month period
• distribution is subject to a mandatory 20% tax withholding
• The full 100% of the distribution is required to be deposited into the new account, otherwise their may be additional taxes and penalties
• The client must claim the 20% on their next income tax return to receive the refund

Answer 51

60 Day Rollover

aka an Indirect rollover

Question 52

How often can an IRA be rolled over to another IRA?
A. Once every 60 days
B. Once every 90 days
C. Once every 12 months
D. There are no limits on how often a rollover can occur

PRACTICE QUESTION

Answer 52

C.

An IRA can be rolled over to another IRA once every 12 months. It is the transfers from trustee to trustee where there is no limit. Unless the question says direct rollover, or indicates that it is from a qualified plan to an IRA, rollover always refers to the 60-day type.

Question 53

This type of account:

• has annual contribution limit of $2,000
• after-tax contributions
• contributions must be made in cash and must be made on or before the beneficiary turns age 18, unless the beneficiary is special needs.
• earnings are excluded from income when used to pay qualified education expenses
• subject to a 10% penalty when not used to pay qualified education expenses.
• Contributions may be limited depending on the amount of AGI and filing status

Answer 53

Coverdell ESA

• in addition to higher education expenses, the account can also be used for elementary and secondary education expenses and for public, private, or religious schools.

If the money is not used by a beneficiary’s 30th birthday, it must be distributed and the earnings are subject to ordinary income taxes and a 10% penalty.

Question 54

• Contributions can be made by parents and other adults; the total for one child is still $2,000.
• Contribution limit is $2,000 per year per child until the child’s 18th birthday.
• Contributions are not tax deductible, but all earnings are tax-deferred.
• Distributions are tax-free if they are taken before age 30 and used for eligible education expenses.
• If the accumulated value in the account is not used by age 30, the funds must be
  distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member. Their definition of family is extremely broad and, in addition to the obvious, includes cousins, aunts and uncles, and even in-laws.

Answer 54

Coverdell ESAs

Question 55

The following tax advantages apply to 403(b) plans:

Answer 55

• Contributions (which generally come from salary reduction) are excluded from a participants gross income
• Participants’ earnings accumulate tax-free until distribution

Question 56

A retirement plan that allows the employee to make pretax contributions (within certain limits), provides for tax deferral of earnings, and is available for employees of public school systems and certain tax-exempt organizations is
A. a 403(b) plan.
B. a 401(k) plan.
C. an SEP IRA.
D. a payroll deduction plan.

Practice Question

Answer 56

A. The giveaway here is the public school employees—the 403(b). That is
their plan as well as being offered to employees of certain, but not all, tax-exempt organizations.

Question 57

This type of plan:

may be used by employees of a state, political subdivision of a state, and any agency or instrumentality of a state. This plan may also be offered to employees of certain tax-exempt organizations (hospitals, charitable organizations, unions, and so forth, but not churches).

• considered a deferred compensation plan
• technically a nonqualified plan, the amount deferred is not reportable for tax purposes. therefore, the employee receives a deduction each year for the amount deferred.

Answer 57

457(b) Plans

 - contributions are  tax-deferred

Question 58

• These plans are exempt from ERISA
• nongovernmental plans must be unfunded to qualify for tax benefits, while government plans must be funded.
• These plans are generally not required to follow the nondiscrimination rules of other retirement plans.
• Plans for tax-exempt organizations are limited to covering only highly compensated employees, while any employee (or even independent contractor) of a governmental entity may participate.
• Distributions from 457(b) plans of nongovernmental tax-exempt employees may not be rolled over into an IRA, but there is no 10% penalty for early withdrawal.

Several important facts to know about 457 plans

Answer 58

457 plans

Question 59

A basic difference between a Section 457 plan established on behalf of a
governmental entity and one established by a private tax-exempt organization is that

A. a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants.
B. a tax-exempt plan participant does not have to include plan distributions in her taxable income.
C. a governmental plan cannot make a distribution before the participant attains age 70 1⁄2.
D. a tax-exempt plan’s distributions are not eligible for a favorable lump-sum 10- year averaging treatment.

Answer 59

A.
A governmental Section 457 plan must be funded—that is-it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded.

Question 60

is federal legislation that regulates the establishment and management of corporate pension or retirement plans, also known as private-sector plans.

Answer 60

Employee Retirement Income Security Act of 1974 (ERISA)

Question 61

All _ plans must be established under a trust agreement.

• a trustee is appointed for each plan and has a fiduciary responsibility for the plan and the beneficial owners (the plan holders).

Answer 61

Qualified Corporate Plans.

Question 62

Offer no specific end result, but, instead focus on current, tax-deductible contributions, are _ plans.

Those that promis a specific retirement benefit but do not specify the level of current contributions are _ plans.

Answer 62

Defined Contribution Plans

&

Defined Benefit Plans

Question 63

Profit-sharing plans, 401(k) plans, and money purchase pension plans

Are all examples of ?

Answer 63

Defined Contribution Plans

• account value depends on total amount contributed, along with interest and capital gains fom the plan investments
• the plan participant assumes the investment risk

Question 64

Designed to provide specific retirement benefits for participants such as fixed monthly income.

• this promised benefit is paid under the contract terms, regardless of investment performance
• plan sponsor assumes the investment risk
• benefit is usually determined via a formular that takes into account years of service and average salary for the last 5 years before retirement.
• Plans annual return must be signed by an actuary (plays a crucial role in evaluating the financial health of the plan)

Answer 64

Defined Benefit Plan

Question 65

Contributory vs Noncontributory Plans

What is the main difference?

Answer 65

In a contributory plan, both the employer and the employee make contributions to the account.

In a noncontributory plan, only the employer makes the contributions.

Question 66

Unlike an annuity payout or life insurance premium, contributions to a defined benefit plan are not affected by the participants sex.

Test Topic Alert

Question 67

Employer contributions to defined benefit or defined contribution (money purchase) pension plans are mandatory. Although profit-sharing plans and 401(k) plans are technically defined contribution plans, they are not pension plans, and employer contributions are not mandatory. In all cases, allowable employer contributions are 100% deductible to the corporation. There is no tax obligation to the employee until withdrawal.

Test Topic Alert

Question 68

This type of plan:

• need not have a predetermined contribution formula
• must have substantial and recurring contributions, according to the IRC
• offer employers the greatest amount of contribution
  flexibility
  
  • contributions can be skipped in years of low profits (often the case for businesses with unpredictable CFs)
• easy to install, admin, and. Communicate to employees

Answer 68

Profit-Sharing Plans

Question 69

This type of plan:

• an employee directs an employer to deduct a % of the employees salary to contribute to a retirement account.
• permits an employer to make matching contributions
• pre-taxed contributions

Answer 69

401(k) plans

• considered defined contribution plans
• contributions reduce the employees salary (aka taxable income)

Question 70

Take Note

Answer 70

If you are covered under a qualified corporate plan and are still working for that employer at 72 or older, minimim distributions are not required until after you retire.

Question 71

This type of plan has eligibility requirements for employees, such as:

• has reached age 21
• has worked for the employer in at least 3 of the last 5 years
• has received at least $600 in compensation from the employer during the year

Also

• contributions may be made by the employer on behalf of the employees
• employer may also contribute to the employees account
  
  • such contributions are
    tax-deductible each year in which they are made
• employee deferrals are excludable from the employees gross income

Answer 71

SEP-IRA

Question 72

What are Keogh plans?

Answer 72

Retirement plans for self
-employed people.

Question 73

Known as the minimum time the employee must remain in the company to be able to use their stock option

Answer 73

The vesting period

Question 74

• protects participants in private-sector retirement plans such as a pension from the creditors of the corporation
• a retirement plan may not discriminate against who is eligible to participate in the plan
• defines when employer contributions become the employees money (vested)

Answer 74

ERISA

Question 75

When a person dies and leaves securities to heirs, the cost
basis to the recipient is

Answer 75

the fair market value on the date of the owner’s death.

Question 76

Margin Account

Answer 76



In a margin account, the customer can use some cash and some credit to purchase securities. This is a leveraged purchase of securities; investors can buy more securities with some cash and some credit than they can purchase with just cash. The firm can lend funds at the time of purchase, with the securities in the portfolio serving as collateral for the loan. This is called buying securities “on margin.” The shortfall between the purchase price and the amount of money put in is a loan from the brokerage firm, and the customer will incur interest costs, just as with any other loan.

Margin transactions are not available for use within mutual funds, retirement accounts or in custodial accounts for minor children.

Question 77

Prime Brokerage Account

Answer 77

institutional customer select one firm (prime broker) to provide custody; other firms handle trades. - prime broker facilitates clearing, lending, settlement - enables customer to trade at multiple brokerage houses and maintain central master account

Question 78

To open a prime brokerage account for a customer

Answer 78

a member (the prime broker) must sign an agreement with the customer spelling out the terms of the agreement, as well as names of all executing brokers the customer has contracted with. The prime broker will then enter into written agreements with each executing broker named by the customer. The customer receives trade confirmations and account statements from the prime broker, who facilitates the clearance and settlement of the securities transactions. Responsibility for compliance of certain trading rules rests with the executing brokers.

Question 79

are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee.

Answer 79

Wrap Accounts

are generally investment advisory accounts.

Question 80

are delivered to a bank or depository against payment. Normally used for institutional accounts, this is a cash-on-delivery (COD) settlement. The broker-dealer must verify the arrangement between the customer and the bank or depository, and the customer must notify the bank or depository of each purchase or sale. In addition, the customer designates whether the broker-dealer should hold or forward any cash balance.

Answer 80

Delivery versus payment (DVP)

Question 81

Corporate Accounts

Answer 81

A registered representative who opens a corporate account must establish:

 -  the business's legal right to open an investment account; 
 -  an indication of any limitations that the owners, the stockholders, a court, or any other entity has placed on the securities in which the business can invest; and
 - who will represent the business in transactions involving the account. (Authorized agent)

Question 82

Depending on the type of account, the documents necessary
to release the assets of a decedent are:

Answer 82

• a certified copy of the death certificate
• inheritance tax waivers; and
• letters testamentary

Question 83

This Rule Entails:

Dividends paid from one corporation to another are 50% exempt from taxation. A corporation that receives dividends on stocks of other domestic corporations, therefore, pays taxes on only 50% of the dividends received. This provision encourages corporations to invest in common and preferred stock of other U.S. corporations.

Answer 83

Dividend Exclusion Rule

Question 84

The completed form must be sent to the customer within 30 days. After that, account information must be updated no less frequently than every three years. Anytime the account is amended, an updated form must be sent to the customer within 30 days.

Answer 84

Updating Client Information

Question 85

This regulation was enacted by the SEC to protect the privacy of customer information. In particular, the regulation deals with nonpublic personal information. Examples of nonpublic personal information include a customer’s Social Security number, account balances, transaction history, and any information collected through an internet cookie. Your firm must provide a privacy notice describing its privacy policies to customers whenever a new account is opened and annually thereafter.

Answer 85

Regulation S-P (Privacy Notices)

Question 86

Under provisions of the USA PATRIOT Act, broker-dealers are required to institute a customer identification program (CIP) designed to:

• verify the identity of any new customer;
• for an individual, an unexpired government-issued identification such as a drivers license, passport, military ID, or state ID;
• for a person other than an individual, documents showing the existence of the entity, such as certified articles of incorporation, a government-issued business license, a partnership agreement, or trust instrument;
• maintain records of the information used to verify identity; and
• determine whether the person appears on the Office of Foreign Assets Control (FOCA)
  list of known or suspected terrorists or terrorist organizations.

These rules are designed to prevent, detect, and prosecute money laundering and the financing of terrorism.

Answer 86

Customer Identification Program (CIP)

Question 87

The FINRA rule requires that a person associated with a member, before opening an account or placing an initial securities order with another member,

Answer 87

notify the employer and the executing member (where the new account is to be maintained), in writing, of her association with the other member.

Before the account can be opened, the employing FINRA member firm must grant written permission. Prior written consent from the employer is specified within the rule.

Upon written request from the employing member firm, the executing member must sup- ply to the employing member duplicate copies of confirmations, account statements, or any other account information requested.

Exceptions exist when the registered representative is limited to purchasing directly from investment companies, including variable contracts, and 529 plans.

Question 88

When a customer, whose securities account is carried by a broker-dealer, wants to transfer the account to another broker- dealer,

Answer 88

the Automated Customer Account Transfer Service (ACATS) automates and standardizes the procedure for the transfer. The customer signs a Transfer Initiation Form (TIF), which is sent to ACATS by the receiving firm. For purposes of this rule, customer authorization could be the customer’s actual signature or an electronic signature.

Question 89

Are not required to meet _______ standards regarding employee coverage, contribution limits, and vesting.

• employers may not deduct contributions made
• income contributed to these plans will accumulate on a tax-deferred basis until withdrawn.
• designed to benefit high income employees and executives.
• exempt from the discriminatory and top-heavy requirements that apply to qualified plans.

Answer 89

ERISA, Nonqualified Plans

Question 90

Deferred Compensation Plan

Answer 90

A nonqualified deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. It is assumed that the employee will be in a lower tax bracket at retirement age (persons affiliated with the company solely as board members are not eligible for these plans because they are not considered employees for retirement planning purposes).

Deferred compensation plans may be somewhat risky because the employee covered by the plan has no right to plan benefits if the business fails. In this situation, the employee becomes a general creditor of the firm. Covered employees may also forfeit benefits if they leave the firm before retirement.

When the benefit is payable at the employee’s retirement, it is taxable as ordinary income to the employee. The employer is entitled to the tax deduction at the time the benefit is paid out.
Benefit highly compensated employees that are just a few years from retirement.

Question 91

Section 457 Plan

Answer 91

are nonqualified retirement plans set up by state and local governments and tax-exempt employers for their employees and independent contractors that work for those entities.

• function as deferred compensation plans
• earnings grow tax deferred and all withdrawals are taxed at the time of distribution.
• Employees may defer up to 100% of their compensation, up to an indexed contribution limit.

Question 92

Payroll Deduction Plan

Answer 92

allow employees to authorize their employer to deduct a specified amount for retirement savings from their paychecks.

The money is deducted after-tax and may be invested in any number of retirement vehicles at the employee’s option.

Question 93

Following is a partial list of which investments are appropriate
for IRAs:

Answer 93

■ Stocks and bonds
■ Mutual funds (other than municipal bond funds)
■ Unit investment trusts (UITs)
■ Government securities
■ U.S. government-issued gold and silver coins and annuities

Question 94

The 10% penalty is not applied in the event of:

Answer 94

■ death;
■ disability;
■purchase of a principal residence by a first-time homebuyer (up to $10,000);
■ education expenses for the taxpayer, a spouse, a child, or a
grandchild;
■ medical premiums for unemployed individuals;
■ medical expenses in excess of defined AGI limits; and
■ Rule 72t: substantially equal periodic payments.

Question 95

Rollover

Answer 95

A rollover occurs when an IRA account owner takes temporary ownership of IRA account funds when moving the account to another custodian. One hundred percent of the funds withdrawn must be rolled into the new account within 60 days or they will be subject to tax and a 10% early withdrawal penalty, if applicable. An individual can make only one rollover from an IRA to another (or the same) IRA in any 365-day period (not per calendar year), regardless of the number of IRAs the individual may own. The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs, as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. However,

■ trustee-to-trustee transfers between IRAs are not limited, and
■ conversions from traditional to Roth IRAs are not limited.

Question 96

This Plan:

Like a Roth IRA, requires after-tax contributions but allows tax-free withdrawals, provided the plan owner is at least 591⁄2—though unlike a Roth IRA, there are no income limitations on who may have such a plan. Like a 401(k), it allows the employer to make matching contributions, but the employer’s contributions must be made into a traditional 401(k) account. The employee, who would thus have two 401(k) accounts, may make contributions into either, but may not transfer money from one to the other once it has been deposited. In contrast to a Roth IRA, the account owner must begin withdrawals by the age of 73 (unless still working—see Required Beginning Date in the following topic).

Answer 96

Roth 401(k) Plan

Question 97

are qualified individual retirement plans that offer self-employed persons and small businesses easy-to-administer pension plans. SEPs allow an employer to contribute money to SEP IRAs that its employees set up to receive employer contributions.

Self-employed individuals may contribute up to a maximum amount each year to a SEP IRA for themselves or employees. Catch-up contributions are generally not allowed for the self- employed person. However, if an employee is enrolled in a SEP and the SEP permits non-SEP-IRA contributions be made to the SEP account, they may also make additional catch-up contributions to the SEP account if they are age 50 or older.

Generally, an employer can take an income tax deduction for contributions made each year to each employee’s SEP. Also, the amounts contributed to a SEP by an employer on behalf of an employee are excludable from the employee’s gross income.

Answer 97

Simplified employee pension plans (SEPs)

Question 98

is a type of tax-deferred retirement savings plan

  - Both employers and employees can contribute 
   
  - a business must have 100 or fewer employees who received at least $5,000 in compensation during the previous calendar year. Additionally, the business cannot maintain any other retirement plan concurrently
   
   - Employers must make contributions to employees' SIMPLE IRA accounts, either through a dollar-for-dollar matching contribution (up to 3% of an employee's compensation) or a non-elective contribution equal to 2% of each eligible employee's 
 
- Immediate vesting

Answer 98

Savings incentive match plans for employees (SIMPLES)

Question 99

Essentially a payroll deduction plan that:

• allows employees to buy company stock without having to effect the transactions themselves.
• Money is automatically taken out of a participant’s paycheck on an after- tax basis every pay period and accrues in an escrow account until it is used to buy company shares on a periodic basis, such as every six months.
• similar to other types of stock option plans in that they promote employee ownership of the company but do not have many of the restrictions that come with more formal stock option arrangements.
• are designed to be somewhat more liquid in nature.

Answer 99

Employee stock purchase plans

Question 100

■ Contribute from 1% to 10% of salary. The contribution is a payroll deduction. This is calculated on pretax salary but taken after tax (unlike with a 401(k), there is no tax deduction on ESPP contributions).

■ At the end of a “purchase period,” usually every 6 months, the employer will purchase company stock for participants using contributions during the purchase period. There will be a discount on the purchase price. The employer takes the price of the company stock at the beginning of the purchase period and the price at the end of the purchase period, whichever is lower, and THEN gives a discount from that price.

■ Participants can sell the purchased stock right away or hold on to the stocks longer for preferential tax treatment.

Answer 100

Basics of stock purchase plans (ESPP)

Question 101

are available to employees of:
■ public educational institutions,
■ tax-exempt organizations (501(c)(3) organizations), and
■ religious organizations.

In general, the clergy and employees of charitable institutions, private hospitals, colleges and universities, elementary and secondary schools, and zoos and museums are eligible to participate if they are at least 21 years old and have completed one year of service.

are funded by elective employee deferrals. The deferred amount is excluded from the employee’s gross income, and earnings accumulate tax free until distribution. A written salary reduction agreement must be executed between the employer and the employee.As with other qualified plans, distributions are 100% taxable, and a 10% penalty is applied to distributions before age 59 1/2.

Answer 101

TAX-SHELTERED ANNUITIES (403(B) PLANS)

Question 102

is a securities industry settlement method that guarantees the transfer of securities only happens after payment has been made. Stipulates that the buyer’s cash payment for securities must be made prior to or at the same time as the delivery of the security.

Answer 102

Delivery Versus Payment

Question 103

Is the settlement process from the seller’s point of view, meaning the seller must deliver the securities once payment has been made.

Answer 103

Receive Versus Payment (RVP)