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Series 7 > Unit 2 > Flashcards

Unit 2 Flashcards

Opens Accounts After Obtaining and Evaluating Customers' Financial Profile and Investment Objectives, Retirement Plans

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Series 7 Top-off Exam flashcards
1
Q

Cash Account

A

Most basic investment account. Anyone who is eligible to open investment account can open cash account. Customer pays in full for securities purchased. MUST BE CASH ACCOUNTS: Retirement, Corporate Retirement, Custodial (UtestTMA).

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2
Q

Transfer on Death (TOD)

A

Allows the registered owner of the account to pass all OR a portion of it, upon death, TO A NAMED BENEFICIARY. Avoids Probate, does NOT avoid estate tax.

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3
Q

Inheritance (Cost basis)

A

Person dies and leaves securities to heir. Cost basis for the recipient is the FMV on date of owner’s death.

Example: $5,000 stock purchased was worth $10,000 at death - if stock sold after transfer there would be no tax due on sale.

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4
Q

Margin Account

A

Firm can lend funds at time of purchase with securities in the portfolio serving as collateral. Margin Transactions are not available for use within: Mutual Funds, Retirement Accounts or in Custodial Accounts for Minors.

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5
Q

Prime Brokerage Account

A

Generally used by institutions. Selects one member firm to provide custody and other services, while other firms (executing brokers) handle trades. Prime broker facilitates the clearance and settlement of securities.

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6
Q

Key Advantage of Prime Broker

A

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

Likely to be offered to hedge funds who have many accounts/investments.

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7
Q

Fee-based account

A

Firm charges a single fee (either fixed or as % of assets) instead of commission charges. Appropriate for investors engaging in at least moderate level trading.

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8
Q

Advisory Account

A

When Registered Investment Adviser (RIA) provides investment advice to client for a fee.

Different than investment account where fees are paid when transactions occur. Adviser paid for advice regarding securities.

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9
Q

Transfer and Ship

A

Securities are registered in customers name and shipped to them

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10
Q

Transfer and hold in safekeeping

A

Securities are registered in customers name, and broker holds them in safekeeping

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11
Q

Hold in street name

A

Securities are registered in BD name and held by BD. Customer is the beneficial owner.

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12
Q

Delivery vs. Payment (DVP)

A

Securities are delivered to a bank or depository against payment. Used for institutional accounts and is a COD settlement. BD verifies arrangement between customer and bank/depository. Customer must notify bank.

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13
Q

Joint Account

A

Includes two or more adults named as co-owners with each allowed some control over the account. For new accounts - joint agreement must be signed.

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14
Q

Joint Account Agreement

A

Allow any or all tenants to transact business in the account. Checks must be made payable AND ENDORSED to and by all names on account.

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15
Q

Joint Tenants With Rights of Survivorship

A

The deceased tenant’s interests is passed onto survivor.

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16
Q

Tenants in Comon

A

ownership represents a fractional interest in account . If party dies, their % share is passed onto their estate, not surviving tenant.

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17
Q

Community Property

A

Martial property recognized by SOME states. Most property acquired during marriage is considered to be jointly owned.

Exceptions: Inheritances, gifts, property owned by spouse prior to marriage (unless otherwise designated)

May result in lower federal cap gains taxes after death of spouse.

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18
Q

Sole propiertorship

A

Simplest form of business organization. Treated like individual account. Income/loss is assumed by individual. Risky b/c all owner’s assets are liable for debts of business. Easy to create easy to dissolve.

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19
Q

Partnership Accounts

A

unincorporated association of 2 or more individuals. Frequently open cash, margin, retirement, and other accounts for business. Must complete PARTNERSHIP AGREEMENT. Agreement must disclose if limitations for margin.

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20
Q

Corporate Accounts

A

Must include:
Legal right to open investment account
indications of any limitations on owners, stockholders
Who represents business in transaction for account

When opening - firm must get corporate charter and corp resolution.

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21
Q

Dvidend exclusion rule

A

Dividends paid from one corp to another are 50% exempt from taxation. Includes stock dividends of other domestic corps. Encourages investment amongst corps.

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22
Q

Fiduciary

A 
Anyone appointed legally and authorized to represent another person on their behalf as well as make investment decisions
Examples:
>Trustee
>Executor of estate
>Admin appointed by court
>Guardian of minor
>Custodian of UGMA
>Receiver in bankruptcy
>Conservator for incompetent person
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23
Q

Opening a Fiduciary Account

A

Do documentation of custodial rights required for individual acting as custodian for UTMA. Must be ware of the following:
>Proper authorization must be given - court docs must be filed with BD
>Speculative transactions usually not permitted
>Margin only permitted if SPECIFICALLY ALLOWED
>Prudent investor rule applies
>Fiduciary must not share profits

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24
Q

Death of account holder JTWROS

A

account cannot be transferred to name of new owner until death certificate is presented. Other documents not needed.

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25
Q

Death of account holder TIC

A

Interest of decedents goes into their estate. Member firm must freeze the account and any orders until required docs are presented.

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26
Q

New Account - Required Info to be kept on record

A 
SEC requires the following:
>Name
>Tax ID
>Address
>DOB
>Telephone #
>Drivers license or other gov't ID
>Employment status and occupation
>Whether they are employed by BD
>Annual Income
>Net Worth
>Investment Objectives
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27
Q

IS a signature required on new account form?

A

No - only signature is required to open an account is a partner, officer, or manager.

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28
Q

Customer information - regarding trades

A

Only unsolicited trades are permitted without BD obtaining personal information - Otherwise it is prohibited.

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29
Q

Trusted Contact Person (Rule 4512)

A

If person opening account is over 65, FINRA requires members to make reasonable efforts to obtain (for noninstitutional) the name and contact info of a trusted person over the age of 18.

Firm may put a temporary hold on funds to protect the investor.

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30
Q

Updating Client information

A

Completed form must be sent to customer within 30 days. And must be updated no less than every 3 years.

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31
Q

Regulation S-P

A

Privacy Notices. Firm must provide privacy notice when account is opened and annually thereafter (SSN, Balances, etc). Includes safeguarding of computers and files.

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32
Q

CIP Required Info

A

> Identity of new customer
Government ID
Proof of existence of entity (articles of incorp)
Maintain records of information
Determine if on OFAC list
Used to thwart Money Laundering and Terrorism

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33
Q

Opening accounts for other Brokers’ Employees

A

Includes BD and immediate family of individual
Before opening account or placing order, associated person must NOTIFY employer and executing member of their association with other member. MEMBER FIRM MUST GRANT PERMISSION prior to execution.

Exceptions: purchasing directly from investment companies, variable contracts, and 529.

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34
Q

Discretionary power rules

A

Principal approval is required for rep to have discretionary authority
Rules:
>each order must be identified as such when it is entered
>officer or partner must approve
>record must be kept of activity
>no excessive trading may occur

35
Q

How to identify a discretionary order

A

3 A’s (if any one of the following are missing - assume discretionary)
Activity (buy/sell)
Amount (# of shares)
Asset (security)

36
Q

When discretionary authority is not needed

Market

A

Not held order or Market not held order

When customer tells BD to buy or sell at best possible price.

37
Q

Full power of Attourney

A

Allows:
>Deposit or withdrawl of cash/securities
>Make investment decisions for account owner

Usually given to: Custodians, trustees, guardians

38
Q

Limited Power of Attorney

A 
Allows:
>Some but not total control 
>Limited trading authorization
>enter buy/sell orders
>No withdrawal
39
Q

Durable Power of Attorney

A

Will survive declaration of mental incompetence, but not death

40
Q

Authorization Records for Draws

A

No member is permitted to submit for payment a check, draft or other negotiable paper drawn on a customers checking, savings, or similar account without express written permission.

Must preserve this authorization for 3 years

41
Q

Approval and Documentation of Changes to Account Name

A

Before any order is executed, there must be place upon order for or other similar records, the name of the account for which such order is to be executed.

42
Q

Suitability and Customer Info

A

All recommendations, even hold, must be suitable. If customer goes against AP’s recommendation it is suggested that a signature is obtained expressing that this is an unsolicited order and against advice.

43
Q

Automated Customer Account Transfer Service (ACATS)

A

Automates and standardizes the transfer of accounts between broker-dealers.

44
Q

Transfer Initiation Form (TIF)

A

Sent to ACATS by receiving firm, which is signed by customer.

Once this is forwarded, the carrying firm has one business day to validate securities. If no exceptions, then carrying firm has 3 BD to process.

45
Q

FINRA Rule 2273

A

Requires registered reps who move to a new firm and convince customers to follow to provide educational material that could rise conflict of interest to rep (Fees, etc)

Not applicable to institutional

46
Q

Rule 2273 Educational Material

A

> Whether financial incentives received by rep may create conflict of interest
Some assets may not be directly transferable
Potential costs could be incurred
Differences of products and services for new firm.

47
Q

Rule 2273 required communication

A

Required at time of contact with former customer by registered rep or firm transferring assets:
>written, electronic, or oral communication
>Delivery of communication applies for 3 months following the date of registered reps new employment
>

48
Q

Qualified Retirement Plan

A

allow pretax contributions. Allows money to grow tax deferred. Distribution taxed as ordinary income

49
Q

Non-Qualified Retirement Plan

A

funded with after-tax money. Allows money to grow tax deferred. Distribution taxed as ordinary income. Typically benefits executives because nondiscrimination are not applicable.

50
Q

Deferred Compensation Plan

A

Agreement between company and employee - employee agrees to defer receipt of current income in favor of payout at retirement. Assumed that employee will be in lower tax bracket at retirement.

These are risky because employee in plan has no right to plan benefits if business fails - would become creditor.

Best for highly compensated employees close to retirement.

51
Q

Section 457 Plan

A

Non qualifed retirement plan set up by state and local government and tax-exempt employers. Deferred comp plan which earnings grow tax deferred. Employees may defer up to 100% of compensation up to indexed contribution limit.

52
Q

Payroll deduction plan

A

Employees authorize employer to deduct a specified amount for retirement savings from paycheck. Money is deducted AFTER TAXES ARE PAID.

Not 401k (which is a salary reduction plan and pretax)

53
Q

Traditional IRA

A

Retirement account for those under age 70.5. Annual contribution up to $5,500 or 100% of earned income (whatever is less). Contributions are fully deductable, regardless of income

54
Q

IRA Contribution limits

A

Permitted up to 70.5. Tax deductible. catch up contribution is available those 50 and older. Excess contributions are subject to 6% penalty

55
Q

Not permitted investments for IRA

A

> Collectibles (antiques/rare coins)
life insurance contracts
Muni-Bonds

Note: Annuties are allowed

56
Q

Not permitted investment practices

A

> Margin
Short Sale
Uncovered call options

57
Q

Permitted IRA investments

A 
>Mutual Funds
>Stocks Bonds
>UITS
>Gov't securities
>US gold and silver coins
58
Q

IRA Distribution rules

A

Must occur after 59.5 and must begin by April on of year you turn 70.5.

Early distributions before are subject to 10% penalty.

Note: if you don’t begin distributions by 70.5 - 50% penalty is applied to what should have been distributed.

59
Q

IRA Distribution exception (exempt from penalty)

A 
>Death
>Disability
>First time homeowner
>education expenses 
>Medical premiums for unemployed
60
Q

Roth IRA

A

Same contribution amounts as Traditional. Contributions are NOT tax deducible (after-tax).

Contributions can be made in Roth after after age 70.5, and do not need to be withdrawn by 70.5

Can withdraw contributions any time without tax or penalty if after 50.9

Can be tax and fee free if held account for more than 5 years (up to $10,000).

61
Q

Biggest advantage of Roth IRA

A

Distributions that satisfy holding period requirements are income tax free.

62
Q

Rollover IRA

A

100% must be rolled over within 50 days or it is subject to tax and 10% early withdrawal penalty. Individual can only make one rollover per 365 day period.

Exceptions:
>Trustee to Trustee transfers are not limited
>Conversion from traditional to Roth IRA are not limited

63
Q

Transfer of IRA

A

when assets are sent directly from one custodian to another and account owner takes possession. No limit on number of transfers that may be made.

64
Q

Conduit IRA

A

If participant in employer sponsored qualified plan leaves place of employment, he may move plan into conduit.

65
Q

IRA Conversion

A

Most common is changing from IRA to Roth IRA, and participant wishes to revert back to original IRA.

Accomplished via a trustee to trustee transfer. If done in same tax year, can treat original conversion as it never happening.

66
Q

Why would someone IRA Convert?

A

Exceeding earling limitation on contributing to Roth IRA. This way they can undo the Roth IRA conteibution and put money into traditional IRA.

Significant decrease in value of the account since original conversion. This is to avoid taxes.

67
Q

IRA Conversion rules

A

You cannot convert and reconvert in same tax year, or if later, during the 30 day period following re characterization.

Will result in failed conversion.

68
Q

Defined benefit plan

A

promises specific benefit at retirement that is determined by a formlula involving typical retirement age, years of service and compensation level achieved. Amount of contribution is determined by plan’s trusta greement.

69
Q

Defined contribution plans

A

Easy to administer. The current contribution amount is specified by the plans trust agreement and individual employee accounts re created.

Benefit that is paid at retirement is UNKNOWN.

Favor younger employees - more time to grow.

70
Q

Money purchase plans

A

Simplest qualified plan. Employer contributes specified fraction of employee’s compensation up to indexed maximum.

71
Q

Profit sharing plan

A

Popular form of defined contribution. Do not require fixed contribution formula. ALLOW CONTRIBUTIONS TO BE SKIPPED IN YEARS OF LOW PROFITS.

72
Q

401K plan

A

Allows employee to elects to contribute a specific % of salary to a retirement account. Contributions are excluded from gross income, accumulate tax-deferred.

Permit certain hardship withdrawals.

73
Q

Roth 401k

A

Requires after-tax contributions but allows tax free withdrawals - provided owner is at lease 59.5 years old.

No income limitations.

Allows employer matching like traditional 401k, but must only be to traditional 401k.

MUST BEGIN WITHDRAWALS by age 70.5, unless still working.

74
Q

Simplified Employee Pension Plans

A

Qualified retirement plan. Offers self-employed and small biz easy to administer plans.

Self employed individuals my contribute up to a max $ amount each year. Catch ups are generally not allowed.

Employer can take income tax deduction for contributions.

75
Q

Savings Incentive Match Plan for Employee (SIMPLE)

A

Retirement plans for businesses with less than 100 employees that have no other retirement plan in place.

Employee makes pretax contributions into SIMPLE up to an annual contribution limit. Employer matches.

76
Q

IRA Contribution timing factor

A

You may contribute for the past year after April 15, provided you have filed extension properly.

77
Q

403(b) - Tax Sheltered Annuities

A

Qualified retirement plan for non-profit employees, tax exempt organizations (501c c3), and religious orgs.

Participants have to be at least 21 years old and complete one year of service.
Deferred amount is excluded from gross income, earnings are tax free until distributions.

10% penalty for distributions before 59.5

78
Q

IRA minimum distribution timeline

A

Must occur by April 1st of the following:

> first calendar year in which they reach 70.5
First year after calendar year where they retire from employment with the employer benefit

79
Q

Stock Purchase Plans

A

Type of payroll deduction plan that allows employees to buy stock without having to effect the transactions

Money is automatically taken out after-tax every pay period and accrues in escrow until it is used to buy shares

Usually every 6 months

80
Q

Stock option purchase plan basics

A

Contribute 1%-10% of salary. Payroll deduction. Taken after tax.

At end of purchase period (usually 6 months) company picks stock price at beginning or end of period and selects lower of two for purchase price

Participants can sell immediately or hold

81
Q

Additional stock option

A

Employer may allow employee to purchase number of shares over a preiod of time. Usually there is a minimum vesting periods.

82
Q

Employee Retirement Income Security Act of 1974 (ERISA)

A

Eztablished to prevent abuse and misuse of pension funds. ERISA guidelines apply to private sector plans and credit union plans. Not public plans

83
Q

ERISA provisions - Not applied to nonqualified plans

A

Participation - all employees must be covered if they are 21 and older and performed 1 full year of service (1,00 hours)

Funding - contribtuinosmust be managed prudently and segregated from corp assets.

Vesting - Defines when employer contributions become employees money.

Communication - employee must be given at lease annual statements

Nondiscrimination - all employees must be treated equally

Beneficiaries - must be named in event of death

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