Unit 2 Flashcards
Opens Accounts After Obtaining and Evaluating Customers' Financial Profile and Investment Objectives, Retirement Plans
Cash Account
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).
Transfer on Death (TOD)
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.
Inheritance (Cost basis)
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.
Margin Account
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.
Prime Brokerage Account
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.
Key Advantage of Prime Broker
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.
Fee-based account
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.
Advisory Account
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.
Transfer and Ship
Securities are registered in customers name and shipped to them
Transfer and hold in safekeeping
Securities are registered in customers name, and broker holds them in safekeeping
Hold in street name
Securities are registered in BD name and held by BD. Customer is the beneficial owner.
Delivery vs. Payment (DVP)
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.
Joint Account
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.
Joint Account Agreement
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.
Joint Tenants With Rights of Survivorship
The deceased tenant’s interests is passed onto survivor.
Tenants in Comon
ownership represents a fractional interest in account . If party dies, their % share is passed onto their estate, not surviving tenant.
Community Property
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.
Sole propiertorship
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.
Partnership Accounts
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.
Corporate Accounts
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.
Dvidend exclusion rule
Dividends paid from one corp to another are 50% exempt from taxation. Includes stock dividends of other domestic corps. Encourages investment amongst corps.
Fiduciary
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
Opening a Fiduciary Account
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
Death of account holder JTWROS
account cannot be transferred to name of new owner until death certificate is presented. Other documents not needed.
Death of account holder TIC
Interest of decedents goes into their estate. Member firm must freeze the account and any orders until required docs are presented.
New Account - Required Info to be kept on record
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
IS a signature required on new account form?
No - only signature is required to open an account is a partner, officer, or manager.
Customer information - regarding trades
Only unsolicited trades are permitted without BD obtaining personal information - Otherwise it is prohibited.
Trusted Contact Person (Rule 4512)
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.
Updating Client information
Completed form must be sent to customer within 30 days. And must be updated no less than every 3 years.
Regulation S-P
Privacy Notices. Firm must provide privacy notice when account is opened and annually thereafter (SSN, Balances, etc). Includes safeguarding of computers and files.
CIP Required Info
> 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
Opening accounts for other Brokers’ Employees
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.
Discretionary power rules
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
How to identify a discretionary order
3 A’s (if any one of the following are missing - assume discretionary)
Activity (buy/sell)
Amount (# of shares)
Asset (security)
When discretionary authority is not needed
Market
Not held order or Market not held order
When customer tells BD to buy or sell at best possible price.
Full power of Attourney
Allows:
>Deposit or withdrawl of cash/securities
>Make investment decisions for account owner
Usually given to: Custodians, trustees, guardians
Limited Power of Attorney
Allows: >Some but not total control >Limited trading authorization >enter buy/sell orders >No withdrawal
Durable Power of Attorney
Will survive declaration of mental incompetence, but not death
Authorization Records for Draws
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
Approval and Documentation of Changes to Account Name
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.
Suitability and Customer Info
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.
Automated Customer Account Transfer Service (ACATS)
Automates and standardizes the transfer of accounts between broker-dealers.
Transfer Initiation Form (TIF)
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.
FINRA Rule 2273
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
Rule 2273 Educational Material
> 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.
Rule 2273 required communication
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
>
Qualified Retirement Plan
allow pretax contributions. Allows money to grow tax deferred. Distribution taxed as ordinary income
Non-Qualified Retirement Plan
funded with after-tax money. Allows money to grow tax deferred. Distribution taxed as ordinary income. Typically benefits executives because nondiscrimination are not applicable.
Deferred Compensation Plan
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.
Section 457 Plan
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.
Payroll deduction plan
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)
Traditional IRA
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
IRA Contribution limits
Permitted up to 70.5. Tax deductible. catch up contribution is available those 50 and older. Excess contributions are subject to 6% penalty
Not permitted investments for IRA
> Collectibles (antiques/rare coins)
life insurance contracts
Muni-Bonds
Note: Annuties are allowed
Not permitted investment practices
> Margin
Short Sale
Uncovered call options
Permitted IRA investments
>Mutual Funds >Stocks Bonds >UITS >Gov't securities >US gold and silver coins
IRA Distribution rules
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.
IRA Distribution exception (exempt from penalty)
>Death >Disability >First time homeowner >education expenses >Medical premiums for unemployed
Roth IRA
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).
Biggest advantage of Roth IRA
Distributions that satisfy holding period requirements are income tax free.
Rollover IRA
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
Transfer of IRA
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.
Conduit IRA
If participant in employer sponsored qualified plan leaves place of employment, he may move plan into conduit.
IRA Conversion
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.
Why would someone IRA Convert?
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.
IRA Conversion rules
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.
Defined benefit plan
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.
Defined contribution plans
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.
Money purchase plans
Simplest qualified plan. Employer contributes specified fraction of employee’s compensation up to indexed maximum.
Profit sharing plan
Popular form of defined contribution. Do not require fixed contribution formula. ALLOW CONTRIBUTIONS TO BE SKIPPED IN YEARS OF LOW PROFITS.
401K plan
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.
Roth 401k
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.
Simplified Employee Pension Plans
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.
Savings Incentive Match Plan for Employee (SIMPLE)
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.
IRA Contribution timing factor
You may contribute for the past year after April 15, provided you have filed extension properly.
403(b) - Tax Sheltered Annuities
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
IRA minimum distribution timeline
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
Stock Purchase Plans
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
Stock option purchase plan basics
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
Additional stock option
Employer may allow employee to purchase number of shares over a preiod of time. Usually there is a minimum vesting periods.
Employee Retirement Income Security Act of 1974 (ERISA)
Eztablished to prevent abuse and misuse of pension funds. ERISA guidelines apply to private sector plans and credit union plans. Not public plans
ERISA provisions - Not applied to nonqualified plans
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
