Unit 2: Open Accounts, Financial Profiles and Investment Objectives

Question 1

Cash account

Answer 1

Most basic investment account. Customer pays in full for any securities purchased. Certain accounts must be opened as cash accounts:

• personal retirement accounts (individual retirement accounts and tax-sheltered annuities)
• corporate retirement accounts
• custodial accounts (Uniform Gift to Minors Act and UTMA)

Question 2

TOD Account

Answer 2

Transfer on Death account. Allows the registered owner to pass all or a portion of it, upon death, to a named beneficiary. Account avoids probate as estate is bypassed. H/ever, assets in account do not avoid estate tax, if applicable.

Question 3

Inheritance FMV

Answer 3

Fair Market Value on inheritance is on the date of the owner’s death.

Question 4

Which type of accounts are not available for margin transactions.

Answer 4

Mutual fund, retirement accounts or custodial accounts.

Question 5

Define a Prime Brokerage Account

Answer 5

One in which a customer, generally an institution, selects one member firm (the prime broker) to provide custody, trading and other services while other firms, called executing brokers, typically execute most of the trades placed by the customer.

Question 6

Define fee-based accounts

Answer 6

accounts that charge a single fee (either fixed or a percentage of asses) instead of commission-based charges for brokerage services. Fee-based accounts are not wrap accounts

Question 7

Define wrap account

Answer 7

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

Question 8

Define “advisory account”

Answer 8

An advisory account is an account through which a Registered Investment Advisor (RIA) or an Investment Adviser Representative of the RIA provides investment advice to clients for a fee. Advisory accounts are very different than brokerage accounts. RIA’s have fiduciary obligation to act in best interest of client. RIA’s must provide Form ADV which describes how they do business, reveals any potential conflict of interest and describes how they do business.

Question 9

What is the Dividend Exclusion Rule

Answer 9

Dividends paid from one corporation to another are 50% exempt from taxation. Create to encourage corporations to invest in common and preferred stock of other US corporations.

Question 10

What are the three basic steps that apply to accounts at death of customer?

Answer 10

• cancel open orders
• freeze the account (mark it deceased) and
• await instructions from the executor of the estate

Question 11

Is a customer’s signature required on new account forms?

Answer 11

No, 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. Four items MUST be obtained:
-name
-address
-SSN or Tax ID
-DOB.
If sufficient information has not been received to determine suitability, recommendations cannot be made and only unsolicited trades may occur.

Question 12

What is the Trusted Contact Person Rules 2165 and 4512

Answer 12

If person opening account is over 65, members must make reasonable efforts to obtain the name and contact info for a trusted person who is 18 or older. Firms may place temporary hold on distribution of funds if person is over 65 or if person has mental or physical impairment that renders the individual unable to protect her own interests. Temporary holds are not applicable to transactions in securities.

Question 13

When must updated client forms be submitted?

Answer 13

Form must be sent to client within 30 days. After that account info must be updated no less frequently than once every 3 years. Anytime account is amended, an updated form must be sent to customer within 30 days.

Question 14

What is regulation S-P?

Answer 14

Regulation enacted by SEC to protect the privacy of customer information.

Question 15

What is CIP

Answer 15

Customer Identification Program. Falls under USA Patriot Act. Designed to verify identity and check against OFAC (Office of Foreign Asset Control). Firms must check OFAC list on a ongoing basis. Designed to prevent, detct and prosecute money laundering and the financing of terrorism.

Question 16

What is ACATS?

Answer 16

Automated Customer Account Transfer Service: Automates and standardizes the procedure for the transferring of an account from one BD to another. Customer signs a Transfer Initiation Form (TIF).

Question 17

What is FINRA Rule 2273?

Answer 17

Requires registered reps who move to a new firm and try to convince former customers to move with them, to provide educational material outlining things for the customer to consider, including financial incentives that could rise to a conflict of interest. Not applicable if customer initiates the transfer unsolicited after 3 month wait.

Question 18

What are the 2 basic types of retirement plans?

Answer 18

Qualified and non-qualified. Qualified plans allow pretax contributions and non-qualified are funded with after tax money. Both types allow money to grow tax deferred and distributions are taxed as income.

Question 19

What is a nonqualified deferred compensation plan?

Answer 19

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. Persons affiliated with the company solely as board members are not eligible as they are not considered employees for retirement planning purposes.

Question 20

What is a section 457 plan?

Answer 20

Nonqualified retirement plan set up by state or local gov’t and tax-exempt employers. Functions as a deferred comp plan in which earnings grow tax deferred and all withdrawls are taxed at time of distribution.

Question 21

What is the IRA limit for 2019?

Answer 21

$6,000 earned income. Catch up contribution of $1,000 is available for those over 50. Contributions are fully tax deductable if investor is not covered by a qualifying employer plan or in the case of a defined benefit plan is ineligible. Excess contributions are subject to a 6% penalty.

Question 22

What types of investments are not permitted for funding an IRA?

Answer 22

collectibles
life insurance contracts
muni bonds (considered inappropriate because the benefit of their tax-free interest is lost within the retirement plan.

Question 23

Which type of investment practices are considered inappropriate for an IRA?

Answer 23

Margin trading
short sales of stock
uncovered call options
Covered call writing is permissible because it does not increase risk.

Question 24

What types of investments ARE allowed in IRAs?

Answer 24

Stocks and bonds
mutual fund (other than municipal bond funds)
Unit investment trusts (UITs)
Government securities
US government issued gold and silver coins

Question 25

When do distributions begin on retirement plans?

Answer 25

may begin without penalty at 59 1/2 and RMD (Required Minimum Distributions) must begin by April 1 of the year after the individual turns 70 1/2. 50% penalty insufficient distribution penalty applies to the amount that should have been withdrawn. Distributions before 59 1/2 subject to 10% penalty + regular income tax. 10% penalty not applied:
death
disability
purchase of principal residence by a first-time homebuyer
education expenses for the taxpayer, spouse, child or grandchild
medical premiums for unemployed
medical expenses in excess of defind AGI limits
Rule 72t: substantially equal periodic payments.

Question 26

How long is the holding period for a ROTH IRA

Answer 26

5 years to avoid 10% withdrawal penalty.

Question 27

What are the limits on transferring personal retirement plans?

Answer 27

Rollovers (when account owner takes temporary ownership) must occur within 60 days or will be subject to tax and 10% early withdrawal penalty. Only 1 rollover in any 365 day period regardless of number of IRS owned. Limit applies by aggregating all of the individual IRAs.
*Trustee-to-trustee transfers between IRAs are not limited
*Conversions from traditional to Roth IRAs are not limited.
no limit on direct transfers (one custodian to another)
If participant in an employer-sponsored qualified plan moves assets to conduit IRA (employee takes possession) there is a 20% withholding on federal taxes.

Question 28

Conversion from IRA to Roth

Answer 28

Subject to tax in year of conversion at ordinary income tax rate. No additional contributions to the Roth are allowed.

Question 29

What is a defined benefit plan?

Answer 29

A type of corporate retirement plan that promises a specific benefit at retirement that is determined by a formula involving typical retirement age, years of service and comp level. Typically used by firms that wish to favor older employees.

Question 30

What is a defined contribution plan?

Answer 30

Contribution is specified by plan’s trust agreement. Easier to administer than a defined benefit plan. Benefit paid at retirement is unknown. Favors younger employees because they have more time for the money to grow. 2 types:

• Money purchase plans. Employer simply contributes a specified fraction of the employee’s comp up to an indexed maximum.
• profit-sharing plans. Do not require a fixed contribution formula and allow contributions to be skipped in years of low profits.

Question 31

SEP Plan

Answer 31

Simplified employee pension plans. A qualified individual retirement plan that offer self-employed persons and small business easy-to-administer pension plans. SEPs allow employers to contribute money to SEP IRAs that their employees set up to receive employer contributions.

Question 32

SIMPLEs

Answer 32

Savings incentive match plans for employees are retirement plans for businesses with fewer than 100 employees that have no other retirement plan in place. Employees make pretax contributions and employer makes a matching contribution. Limits defined by IRS.

Question 33

Keogh plans

Answer 33

Retirement plans for self-employed. Formerly referred to as HR 10 plans.

Question 34

Tax-sheltered Annuities

Answer 34

know as 403(B) plans or TSAs. Available to:

• public educational institutions
• tax-exempt organizations (501(c)(3) and
• religious organizations
• students can’t participate as they aren’t employees of schools.

Question 35

Describe ERISA

Answer 35

Employee Retirement income Security Act. Established to prevent abuse and misuse of pension funds. Only applies to private sector retirement plans and certain union plans. Provisions Include:
Participation: All employees covered if 21 or over
Funding: Segregated from other corporate asssets
Vesting: Defines timeline.
Communication
Nondiscrimination
Beneficiaries - must be named to receive an employee’s benefits at death.

Question 36

A corporation in the 35% tax bracket reports operating income of $4 million for the year. The firm also received $200,000 in preferred dividends. Assuming no other items of income or expense, what is the company’s tax liability?

Answer 36

The corporation’s $4 million operating income is taxed at a rate of 35%. For tax purposes, corporations can exclude 50% of all dividends received from domestic common and preferred stocks. Thus, 50% of the $200,000 received from preferred dividends is taxed at the 35% tax rate ($200,000 X 50% equals $100,000). The $4 million in income plus the $100,000 in taxable dividends equals $4,100,000 ($4,100,000 multiplied by a 35% tax rate equals taxes of $1,435,000).

Question 37

A corporation in the 35% tax bracket reports operating income of $4 million for the year. The firm also received $200,000 in preferred dividends. Assuming no other items of income or expense, what is the company’s tax liability?

Answer 37

The corporation’s $4 million operating income is taxed at a rate of 35%. For tax purposes, corporations can exclude 50% of all dividends received from domestic common and preferred stocks. Thus, 50% of the $200,000 received from preferred dividends is taxed at the 35% tax rate ($200,000 X 50% equals $100,000). The $4 million in income plus the $100,000 in taxable dividends equals $4,100,000 ($4,100,000 multiplied by a 35% tax rate equals taxes of $1,435,000).