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SIE Exam > Unit 3 > Flashcards

Unit 3 Flashcards

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1
Q

Types of Orders

A

Market Orders

Limit Orders

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2
Q

market orders

A

buy or sell, executed immediately at best available price

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3
Q

limit orders

A

buy or sell, limits acceptable purchase or selling price paid or received for purchases

for a buy - means limit price or lower
for a sell - means limit price or higher

stand in time priority, once stock begins trading at specified price, limit orders entered first are filled first

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4
Q

buy market order

A

executed immediately to buy at best available market price

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5
Q

sell market order

A

executed immediately to sell at the best available market price

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6
Q

buy limit order

A

executed to purchase at price or better, in this case price would need to be lower

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7
Q

sell limit order

A

executed to sell at price or better, in this case would need to be higher

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8
Q

stop order

A

buy or sell a stop order does not become live working order in market until stock trades at or through specified price once triggered becomes order

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9
Q

stop limit order

A

order also has a stop price and does not become live until stock trades through stop price.

has a limit price, the ordered is triggered
has a limit to buy or sell at

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10
Q

day order

A

an order is assumed to be a day order, valid only until close of trading day.

if not filled is canceled

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11
Q

good till cancelled GTC order

A

orders are valid until executed or cancelled

automatically cancelled on last business day of april and last business day of October

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12
Q

market at open or market on close order

A

executed at the opening of day or close of day

customer is not guaranteed exact opening or closing price but instead a price at, or close to

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13
Q

fill or kill order

A

applicable to limit orders
fill (execute immediately) or cancel order completely

never have partial execution

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14
Q

immediate or cancel

A

IOC like FOK except partial execution is acceptable.

fill portion can, cancel the rest

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15
Q

all or none orders

A

executed in entirety or not at all

can be day or GTC

don’t have to be filled immediately

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16
Q

Bid Price

A

highest price anyone is willing to pay for securities at that moment in time

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17
Q

ask price

A

lowest price anyone is willing to accept to sell securities at that moment

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18
Q

quotations (bid-ask)

A

all quotes maintained in active markets like a stock exchange are dynamic and change constantly throughout the trading day.

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19
Q

Trade Capacity - Agent

A

if the firm acts as agent, it is a broker acting on behalf of its customer to buy or sell securities in the market.

the firm is paid commission when acting as agent

agent = broker = commission

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20
Q

Trade Capacity - Principal

A

if firm is acting as principal, firm is buying into, or selling out of its own inventory to accommodate its customer.

firm is dealer and will markup - selling out
markdown - buying into
rather than charging commission

principal = dealer = markup or markdown

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21
Q

Long (Bullish)

A

when investor buys security, taken a position

taken ownership portion

security rise in value and will be able to sell later for profit

buy to open position = long = bullish

someone who shares, owning securities convertible into shares, rights, warrants are bullish market attitudes

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22
Q

short (bearish)

A

sell security to open position

investor selling security they do not own

borrowing stock from a lender and selling borrowed shares

stock will decline price, buy back at later price

customer profits by differences between short sale price and price bought back at

sell to open position = short = bearish

long put options, owning contracts

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23
Q

Opening / closing transactions

A

Long
Buy = opening
sell = closing

short
sell short = opening transaction
buy back = closing transaction

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24
Q

Naked Short Selling

A

selling stock without first borrowing shares or confirming where shares can be borrowed from.

naked short selling is a violation

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25
Q

Covered Short Selling

A

shares have been properly borrowed, located, known they can be borrowed.

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26
Q

located shares sold short

A

not something investors undertake
back office function of broker dealer

meeting location requirements and borrowing of securities is by BD on behalf of customer

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27
Q

discretionary account

A

preapproved authority for RR to make transactions without approval

what security
number of shares or unit
whether to buy or sell

does not apply to timing

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28
Q

discretionary account - power

A

must file trading authorization, limited power of attorney

customer may continue to enter trades on own

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29
Q

discretionary account rules

A

order must be identified

officer or partner approve each order

record kept of all transactions

no excessive churning

review trading activity

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30
Q

Solicited Orders

A

transaction initiated by agent or registered representative

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31
Q

unsolicited orders

A

initiated by customer

order tickets should mark

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32
Q

Ordinary Income

A

income earned form interest, wages, rents, royalties

taxed at different rates depending on IRS tax brackets

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33
Q

capital gains

A

sale or exchange of property including securities

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34
Q

capital gains - long term

A

asset sold greater than 1 year

taxed at favorable long term rate

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35
Q

capital gains - short term

A

asset sold within 1 year

tax rates are same as taxpayer ordinary income

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36
Q

dividends

A

distribution of company profits to its shareholders

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37
Q

cash dividends

A

distributed by check to investor holds certificate

automatically deposited brokerage account if shares held in street name

when declared paid quarterly and taxed in year distributed

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38
Q

stock dividends

A

wishes to reinvest profits for business purposes

company issues additional shares of common stock as dividend to its current stockholders instead of cash

own more shares, cost per share adjusted downward

stock dividend itself is not taxable

when sold will have tax consequences

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39
Q

Cash Dividends - Qualified

A

maximum rate specific IRS tax code

higher investor income, higher tax rate on qualified dividends

always lower than investors ordinary income tax rate

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40
Q

Cash Dividends - non qualified

A

ordinary taxed at investors ordinary income tax rate

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41
Q

Dividend - Declaration Date

A

BOD approves dividend payment recognized as date declared.

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42
Q

Dividend - Ex Dividend Date

A

FINRA or exchange post an ex date.

one business day before record date

customer may purchase two days prior and receive dividend

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43
Q

Dividend - Record Date

A

on record date receive dividend distribution

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44
Q

Dividend - Payable Date

A

dividend disbursing agent sends dividend checks to all stockholders whose name appear on books as owners.

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45
Q

Dividend Disbursement Dates

A

DERP help you remember order dates involved
Declaration - Ex - Record - Payable

declaration - record - payment = BOD
ex = FINRA

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46
Q

interest

A

income paid to those purchase debt securities

bond holder

% of face (PAR) value on annual basis

interest is taxed as ordinary income received in semiannual payments

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47
Q

capital gains

A

occurs when security sold for a price higher than cost basis

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48
Q

capital loss

A

selling price is lower than cost basis

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49
Q

Cost Basis - Liquidation

A

upon liquidation cost basis represents a return on capital. the cost basis is not taxed as a gain but any sales proceeds above cost basis would be

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50
Q

Dow Jones Industrial Average

A

most widely cited measure of market

performance of 30 stocks of large, well known companies

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51
Q

S&P 500 index

A

tracks 500 stocks of large US company

is basis for several index mutual funds and exchange traded funds

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52
Q

Russell 2000

A

index of 2000 small company stocks

benchmark for component of overall market

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53
Q

Dow Jones Willshire 5000

A

5,000 stocks covers all companies listed on major market, include all sizes, all industries

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54
Q

Lipper Fund Indexes

A

calculates several indexes tracking different categories of mutual funds, such as growth, core, value funds

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55
Q

Barclays Capital Aggregate Bond Index

A

composite index

combines several bond indexes

picture entire bond market

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56
Q

Trade Settlement

A

Trade Date - date transaction occurs

Settlement Date - date ownership actually changes,, date brokers dealers are required to exchange

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57
Q

Regular Way Settlement

A

FINRA / UPC

regular way settlement for most corporate securities (equity and debt) is t+2

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58
Q

T+2

A 
corporate securities
municipal bonds 
government agency securities 
Ginnie Mae 
Fannie Mae 
Freddie Mac 
Debt securities
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59
Q

T+1

A 
Federal government securities 
T Bills 
T Notes 
T Bonds 
Option 
same day as trade date - money market securities
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60
Q

Cash Settlement

A

requires delivery of securities from seller and payment from buyer on same day trade is executed

stock / bonds - spot for deliver

both parties agree

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61
Q

Sellers Option

A

available to customers want to sell securities but cannot deliver physical securities in time for regular way settlement

lock in selling price without having to make delivery

seller can settle trade as specified in contract

sellers and buyers settlement option can take place sooner than the trade date plus three business days (t+3)

the seller or buyers option settlement is allowing settlement to occur after regular way.

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62
Q

Physical Delivery

A

physical paper certificates

stocks & bonds

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63
Q

Book Entry

A

shares sold without evidence

all government issues by US treasury are issued in book entry form, no physical securities exist

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64
Q

Forward Split

A

make stock more attractive, increases the number of shares, reduce price, without affecting total market value of shares outstanding

more shares, reduce value per share = same total ownership interest before and after adjustment

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65
Q

Forward Split - Even Split

A

investor always given certain number of shares for each owned.

2 for 1 , 3 for 1

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66
Q

Forward Split - Uneven Split

A

split can be designated in any ratio

3 for 2
5 for 4

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67
Q

Reverse Split

A

price low and undesirable

investor owns fewer shares worth more per share

fewer shares, increased value per share = same total ownership interest before

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68
Q

Reverse Split - Even

A

1 for 2, 1 for 3

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69
Q

Reverse Split - Uneven

A

2 for 3, 4 for 5

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70
Q

Stock Rights

A

preemptive rights

entitle existing shareholder to maintain proportionate ownership shares in ownership by buying newly issued shares before offered to general public

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71
Q

A Rights Offering

A

stockholders purchase below current market value

subscription period 30 to 45 days

  1. exercise rights to buy stock by sending the rights certificates and a check for the required amount to rights agent
  2. sells rights and profit from their market value (rights certificates are negotiable securities)
  3. let rights expire and lose value (not likely scenario)
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72
Q

Stock Warrants

A

certificate granting its owner right to purchase securities from issuer at specified price

normally higher than current market price at time warrants are issued, sometime in future

long term instrument, option buying.

hopeful exercise price will be below current market when exercised

offered as sweetener

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73
Q

Stock Rights Vs. Warrants

A

Rights - short term, given to existing shareholders, allows one to purchase shares below current market value

warrants - long term, bundled with other securities, allows someone to purchase shares at price above current market value at time warrants were issued

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74
Q

M&A

A

ownership of companies or their operating units are transferred as in the case of acquisition

combined in the case of merger

allow enterprise to grow, shrink, change nature of business

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75
Q

Takeover

A

purchase of one company known as target company by another company

hostile takeover - go directly to shareholders bypassing BOD

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76
Q

spin off

A

type of divestiture where parent company sells shares of subsidiary or distributes new share of company or division it owns to create a new company

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77
Q

tender offer

A

offer to buy securities for cash or cash plus securities

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78
Q

buyback

A

repurchase

company buys its own outstanding shares in open market from existing shareholders

doing so reduces number of shares (supply) and increase value

way to eliminate threat of takeover

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79
Q

Delivery Notice and Corporate Action Deadlines

A

Issuers required by SEC give notice

a notice is not required for an ordinary interest payment on corporate debt (bond) security

  • title of security
  • date of declaration
  • date of record
  • date of payment or distribution
  • for cash dividend - amount
  • for stock dividend - rate
  • for split - rate distribution

must be given no later than 10 days prior

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80
Q

Proxy

A

Limited power of attorney

automatically revoked if stockholder attends shareholder meeting

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81
Q

proxy solicitation

A

if solicited -

proxy contest - everyone participates register with SEC

unsolicited - register as participant

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82
Q

Forwarding Proxies

A

Member broker dealer firms must cooperate with issuers by ensure customers securities held in street name are altered to all financial matters

Member firms that are nominal owners (stock is held in street name) must vote street name stock in accordance with wishes of beneficial owner. if signed proxy and fail to indicate member vote as recommended by management

customer not return proxy by 10th day - member may vote as seems fit if minor importance

if major importance - may never vote

if proxy not returned, shares are not voted

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83
Q

Cash accounts

A

payment is expected to be made in full at time securities are purchased

anyone eligible to open investment account can open cash account

Regulation T = T+2

if corporate stock is purchased in cash account and settle regular way t+2 would required to be received t+4

IRA, corporate retirement accounts, custodial account must be opened as cash accounts

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84
Q

Margin Account

A

payment can be partially made at time of purchase

allows customer to increase trading capital by borrowing either cash or securities

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85
Q

Long Margin Account

A

Borrow Money

customer purchase securities and pay interest on money borrowed until load is repaid.

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86
Q

Short Margin Account

A

Borrow Securities
stock is borrowed and then sold short, enabling customer to profit if its value declines. all short sales must be executed through, and accounted for in a margin account

87
Q

Stock Borrowed for Margin Account

A
  1. member firm executing short sale on behalf of customer
  2. margin customers of that member firm
  3. other member firms
  4. specialized
  5. customers margin account - must receive loan consent agreement
88
Q

Advantage of Margin Accounts - Customers

A
  1. purchase more securities with lower initial cash outlay

2. leverage investment by borrowing a portion of purchase price

89
Q

Advantage Margin Account - Broker Dealers

A
  1. margin account loans generate interest income for the firm
  2. margin customers typically trade large positions, increased trading capital, generating higher commission for firm
90
Q

Margin Accounts - Hypothecation

A

is the pledging of customer securities as collateral for margin loans.

Hypothecation agreement must be signed by customer who wants to open margin accounts. This is contained in margin agreement.

Customers are giving permission for hypothecation to occur when sign margin agreement

firms can commingle one customers securities with another customers securities if customer has signed hypothecation agreement

91
Q

Margin Accounts - Re-hypothecates

A

after customer pledge securities to broker dealer by signing margin account.

Broker dealer rep ledges them as collateral for loan from a bank.

Broker dealer is not lending own funds - borrowing from bank.

92
Q

Regulation U

A

overseas process of bank lending money to broker dealer on customer securities pledged as collateral.

firms cannot commingle customer securities with securities owned by firm

93
Q

Types of Accounts permitted to trade on margin

A
  1. Individual and Joint Accounts
  2. Corporate Accounts
  3. Fiduciary (Trust and Custodial) Accounts
  4. IRA - prohibited
94
Q

Margin Account - Corporate Accounts

A

may utilize margin if not restricted / prohibited in corporate charter

95
Q

Margin Account - Partnership Accounts

A

may utilize if not restricted in partnership resolution

96
Q

Margin Account - Fiduciary Accounts

A

can only utilize margin if permitted with trust or collateral agreement.

margin must be specifically listed as permitted

97
Q

Margin Accounts - Account Approvals

A

need to be approved by principal of firm prior to first trade

98
Q

Regulation T

A

identifies which securities are eligible for purchase on margin and which may be used as collateral

FRB can change at anytime current requirement is 50%

99
Q

Margin vs. marginable

A

margin - is amount of equity that must be deposited to buy securities in a margin account

marginable - securities that can be used as collateral in a margin account

100
Q

Margin Account - Used as Collateral

A
  1. Exchange Listed Stocks, Bonds
  2. Nasdaq Stocks
  3. NMS OTC issues approved by FRB
  4. Warrants
101
Q

Margin Accounts - Cannot Use As Collateral

A
  1. Options (both calls and puts)
  2. Rights
  3. NMS OTC issues not approved by FRB
  4. Insurance Contracts
102
Q

Margin Accounts - cannot be used as collateral after 30 days

A
  1. Mutual Funds

2. New Issues

103
Q

Margin Account - Securities Exempt Regulation T

A
  1. US Treasury Bills
  2. US Treasury Notes
  3. US Treasury Bonds
  4. Government Agency Issues
  5. Municipal Securities

if exempt securities are bought and sold they are subject to initial deposit requirements.

104
Q

Margin Account - Required Disclosures

A
  1. Credit Agreement (mandatory)
    terms of credit extended
  2. Hypothecation Agreement (mandatory)
    allows securities pledged as collateral
  3. Loan consent agreement (optional)
    permission for firm to loan customer margin securities

to open a margin account, it is mandatory that the customer signs the credit agreement and hypothecation agreement. the loan consent is optional

105
Q

Margin Account - Risk Disclosure

A

before opening, must provide customer with risk associated with margin trading

  1. not entitled to choose which securities are sold if maintenance call is not met
  2. customers can lose more money than initially deposited
  3. customers not entitled to extensions
  4. firms can increase their in house margin requirements without advance notice
106
Q

Margin Requirements

A

first purchase
minimum amount
Regulation T - 50%
FINRA - not less than $2000

greater than $4000 = 50%
$2000 to $4000 = deposit $2000

less than $2000, deposit 100% of purchase price

107
Q

Margin Calls

A

Regulation T requires margin account customers to meet initial deposit requirements

T+2

fully paid are only marginable to 50% of value

if no extension requested - freeze account for 90 days

108
Q

Discretionary Orders

A

entered by registered representative without orders being approved first by customer

109
Q

Non-discretionary Orders

A

no order can be entered without customers prior approval

110
Q

Commission Based Accounts

A

commission is billed for each transaction

111
Q

Fee Based Accounts

A

firms can offer fee based accounts that charge single fee instead of commission for brokerage services

moderate level of trading

investors must be given disclosure for services provided

112
Q

Wrap Accounts

A

firm provides group of services such as asset allocation, portfolio management, executions, and administration for a single fee

are usually investment advisory accounts

113
Q

Education Accounts - Section 529 plans

A

specific type of education savings account available to investors

114
Q

Education Accounts - Coverdell (Education IRA)

A

after tax contributions up to $2000 per student per year younger than 18.

contributions limits - may be reduced or eliminated for higher income tax payers

distributions - tax free as long as funds are used for education

not depleted by age 30 - funds must be distributed and subject to income tax and 10% penalty or rolled over to another IRA

115
Q

Account Owner

A

Person registered

only individuals allowed access and control of investments in account

116
Q

Single Account

A

Has one beneficial owner.

account holder is only person who can control investments within the account and request distributions of cash or securities from the account.

117
Q

Single Account - Take Note

A

if person not named on account will have authority over the account, the customer must file written authorization with the broker dealer giving that person access to account.

this trading authorization usually takes the form of a power of attorney.

118
Q

Single Account - Full Power of Attorney

A

someone not owner, deposit, withdraw, make investment decisions.

custodians, trustees, guardians, similar legal duties

119
Q

Single Account - Limited Power of Attorney

A

allows an individual to have some, but not total, control over an account.

also called limited trading authorization - able to buy/sell orders but no withdrawal of assets

120
Q

Single Account - Transfer on Death (TOD)

A

type individual account allows registered owner to pass all ore portion of it to named beneficiary.

avoids probate (decedents will declared in court) because estate is bypassed.

assets in account do not avoid estate tax

121
Q

Joint Accounts

A

two or more adults named on account as co owners.

requires signature of all owners

any or all tenants may transact business in the account.

must be designated as TIC or JTWROS

122
Q

Joint Accounts - TIC

A

ownership provides that deceased tenant fractional interest is retained by that tenants estate and not passed on

123
Q

Join Accounts - JTWROS

A

interest in account passes to surviving tenants

124
Q

Joint Accounts - Test Topic Alert

A

JTWROS = all parties have undivided interested in account

TIC - each party must specify percentage interest in account

125
Q

Corporate Accounts

A

firm must obtain corporate charter and corporate resolution

charter is proof that corporation does exist and resolution authorizes opening of account

  1. business legal right to open investment account
  2. indication of any limitations
  3. individuals who will represent the business in transactions involving the account
126
Q

Partnership Accounts

A

unincorporated association of two or more individuals.

complete partnership agreement - partners can make transactions.

Margin Account - investment limitations

amended partnership agreement - obtained each year if changes are made

127
Q

Fiduciary Accounts

A

person other than owner initiates trade

fiduciary makes all investment, management and distribution decisions.

may not use for own benefit

may be reimbursed for reasonable expenses

beneficial owner SSN used

trustee designated to administer a trust, executor, administrator appointed by court, guardian designated by court, custodian of minor, received in bankruptcy,

128
Q

Fiduciary Account - Rules

A
  1. Proper authorization filed
  2. speculative transactions are generally not permitted
  3. margin account only permitted by legal documents
  4. prudent invest rule, wise and safe
  5. legal list approved for fiduciary accounts
  6. may not share in profit, may charge fee
129
Q

UGMA

A

minor reach age of majority, property of account is transferred

130
Q

UTMA

A

custodian can withhold transfer of property until 25

131
Q

Custodial Full Custody of Account and Can

A
  1. Buy and sell Securities
  2. exercise rights and warrants
  3. liquidate, trade, hold securities
132
Q

Registered Representative Rules

A
  1. account only one custodian, one beneficial owner
  2. one person can be custodian
  3. minor can be beneficiary of more than one account
  4. donor can act as custodian
  5. unless custodian, parents have no legal control
133
Q

Opening and Managing Custodial Accounts

A

representative confirms

  1. custodian name
  2. minors name and social security number
  3. state registered

no documentation of custodial rights

securities registered
UGMA - securities cannot be registered in street name
UTMA - securiteit can be registered in street name

securities bought in custodial account must be registered that custodial relationship is evident

134
Q

Custodial Account - Beneficial Owner

A

any tax liability is that of minor, parents or legal guardians responsibility to see that taxes are paid.

135
Q

Custodial Account - limitations

A
  1. custodial accounts may be opened and managed as cash accounts only
  2. may not purchase on margin or pledge as collateral
  3. custodian must reinvest all proceeds, dividends, interest within reasonable time.
  4. investment decisions take into account minors age.
  5. inappropriate investments include
    commodities futures, naked options, other high risk
  6. options may not be bought in custodial account, no evidence
  7. covered call writing - normally allowed
  8. stock subscription rights must be exercised or sold
  9. custodian not delegate
  10. custodian may loan money but not borrow
  11. custodian reimbursed responsbile expenses incurred
136
Q

Death of Minor or Custodian

A

if custodial dies, security pass to minors estate, not parents or custodian estate

137
Q

Traditional IRA - Contributions

A

all employed individuals regardless of whether are covered by qualified plan, may open and contribute to IRA

IRAs are considered qualified plans by IRS

earnings are tax deferred

make tax contributions up to maximum dollar amount, does not exceed earned income.

138
Q

IRA - Funding

A 
investments can be made in 
stocks, 
bonds, 
investment company securities, 
US Minted gold 
Mutual Funds 
UITs 
Government Securities 
Annuities

although life insurance is not allowed within IRA other life insurance company products like annuities are.

Annuities are frequently used as funding vehicles for IRAs

139
Q

IRA - Ineligible

A 
Collectibles 
Life Insurance 
Short Sales of Stock 
Speculative Options Strategies 
Margin Account Trading
140
Q

IRA - Rollover and Transfers

A

may take possession to move to another qualified plan

cannot do more than once every 12 months

must be completed within 60 calendar days of withdraw

141
Q

IRA - Example

A

if individual changes employers, the amount in his pension play may be distributed lump sum payment. he may then deposit the distribution into rollover IRA, retains tax deferred status

transfer of funds between qualified plans differ from rollover in that account owner never takes physical possession of funds.

there is no limit to the number of times per year a person can transfer investments between custodians, provided the assets in the accounts do not pass through the hands of the taxpayer.

142
Q

IRA Distributions / Withdrawals

A

begin without penalty after age 59.5 must before after 70.5

distributions are subject o 10% penalty and income tax

exempt 
1. death 
2. disability 
3. first time homebuyer purchase of a principal residence 
4. education expense 
5. medical premiums for unemployed 
6. medical expense in excess of AGI lists 
RMD and RBD

ordinary income taxes apply to full amount

143
Q

Roth IRA

A

after tax contributions up to maximum annual allowable limit per individual year

contributions to traditional + roth may not exceed maximum annual allowable limit.

contributions are not tax deductible

earnings are not taxed for as long as they accrue when they are distributed as long as money has been in account for five taxable years and owner has reached 59.5

required minimum distribution age does not apply to roth IRA

10% penalty waved for first time homebuyers

144
Q

401(k) plans

A

retired contribution plan allows an employee to elect to contribute a percentage of salary up to maximum dollar limit to a retirement account.

catch up contributions are allowed

contributes excluded from earnings and tax deferred

145
Q

401(b)

A

qualified retirement plan available to employer of education institutions.

tax sheltered annuities

earnings accumulate tax deferred until distribution

besides 403(b0 plans for employees, tax sheltered annuities are also available for employees of tax exempt organizations and religious organizations

146
Q

Anti Money Laundering (AML)

A

Bank Secrecy Act establishes US Treasury Department as lead agency for developing regulations in connection with AML

money laundering defined as process of creating appearance that money obtains from criminal activity came from legitimate source.

prevent clean money from being used for dirty purposes

147
Q

AML 3 phases

A
  1. Placement
  2. Layering
  3. Integration
148
Q

AML - Placement

A

first stage when assets are moved.

This stage is recognized when illegal funds are most susceptible to detection

149
Q

AML - Layering

A

conceal the source of the funds or assets.

done through series of transactions and can vary in form and complexity

150
Q

AML - Integration

A

Final stage

illegal commingled with legitimate funds

using front companies operating on a cash basis, import and export companies

151
Q

AML Compliance Program

A

broker dealers are required to establish internal compliance procedures to detect abuse.

Red Flags

  1. customer exhibiting lack of concern regarding risk, commission, other transactions
  2. customer attempting to make frequent large deposits cash and currency
  3. large number of wire transfer to unrelated third parties
  4. excessive journey entries between unrelated accounts
  5. designs currency deposits or withdrawals to fall under 10,000 - structuring
152
Q

suspicious activity report (car)

A

USA patriotic requires firms report to FinCEN when questionable.

FinCEN is bearer that collects and analyzes information about financial transaction orders in order to combat money laundering.

153
Q

SAR - Fines

A

transaction must involves at least $5,000

  1. transaction derived from illegal activity
  2. evade requirements of bank secrecy act
  3. no business or lawful purpose
  4. use of firm to facilitate criminal activity

file - 30 days

must remain confidential

154
Q

USA Patriot Act

A

requires firms to make and retain records of wire transfer of 3,000 or more

name and address both send and recipient
amount of the transfer
the name of recipients financial institution
account number of recipient

155
Q

Currency Transaction Report (CTR)

A

broker dealers report any currency received in amount of more than $10,000 on a single day.

failure to report can be 500k or 10 years

records must be retained for 5 years

report must be filed within 15 days

Federal Reserve and Department of Treasury

156
Q

structuring

A

design deposits to fall under 10,000 radar

financial systems have in place to monitor

example
25 $500 deposits - structuring

157
Q

Customer Identification Program (CIP)

A

USA patriot act requires maintain customer identification to prevent financing terrorist and money laundering.

financial institutions, banks, broker dealer, keep records checks against SDN maintained by OFAC

158
Q

OFAC

A

publishes and maintains list of individuals

when appear on SDN assets are blocked

US persons and business - RR and BD are prohibited from dealing or conducting business with them

159
Q

Lifetime record

A 
partnership articles, 
articles of incorporation, 
minute books, 
stock certificate books, 
organization documents such as Form BD and amendments
160
Q

Six Year Records

A 
Blotters - 
General Ledger - 
Stock Record - 
Customers Ledgers - 
Customer Account Records -
161
Q

Three Year Records

A 
advertising 
trial balances 
form u-4 and u-5 
customer confirmations 
order tickets 
subsidiary ledgers 
list every office conduct business 
associated persons compensation records 
firms compliance and procedures manual
162
Q

Retention Requirement

A

Whether 6, 3 the two most recent years must be easily accessible

163
Q

Exception to Lifetime

A

six year and three year retention is requirement for written customer complaints. customer complaint records must be retained for four years

164
Q

Account Statements - Electronic Form

A

customers must provide written consent to electronic delivery

165
Q

Account Statements - Updating

A

must provide copy of account record within 30 days

changes in employment and financial status are two common amendments needed to be made to an account record.

changes in investment objective should be expected and are likely overtime.

166
Q

Account Statements - Delivery Requirements

A
  1. all activity in account since previous statement
  2. secures positions, long or short
  3. account balances

firms more hold cash balance.

FINRA. - send quarterly unless penny than monthly

statement advising customers to promptly report any discrepancy or inaccuracy

167
Q

Account statement - activity

A

activity is defined as purchases, sales, interest, or dividend received or any funds flowing in or out of account.

penny stocks are those under $5 per share

168
Q

Trade Confirmation

A

printed document confirms trade, settlement date, amount of money

for each transaction sent or written confirmation of trade at or before completion/ settlement date

  1. trade date -
  2. account number -
  3. representative -
  4. BOT
  5. Number or Quantity
  6. Description
  7. Yield
  8. CUSIP
  9. Price
  10. Amount
  11. Commission
  12. net amount

also show capacity broker firm acts (agency or principal) and commission in cases when BD acts as agent

169
Q

Non Trade Confirmations

A

required to send confirmations

  1. customer foreign bank account wire money to brokerage account. confirmation of deposit is sent
  2. deposit or withdrawal of stock certificate is made, receive confirmation of activity
  3. outside money manager withdraws quarterly fee
170
Q

BCP Plans

A

data backup and recovery
alternative communication firm and customer
alternative communication firm and employees
alternate physical location employees
communication with regulators
prompt access to funds

171
Q

Privacy Requirements

A

Nonpublic Personal Information - SSN, Acct Balances, Transaction history, internet cookie

Confidentiality Information - reserves write to disclose unless opt out.

Privacy Notifications - new account is opened and annually thereafter

Safeguard requirements - securing desktop and encrypting email

172
Q

Three Categories of Communication

A
  1. Retail - 25 ore more, anyone that is not institutional
  2. correspondence - less than 25 not institutional
  3. institutional communication - institutional investor
173
Q

institutional investors

A 
another member firm or registered rep 
bank 
savings and loan 
insurance company 
mutual fund 
employee benefit plan

if an entity does not fall under any designated categories for institutional investor then they must be considered and treated as retail customer

174
Q

DNC - Exempt

A
  1. established business relationship
  2. prior express permission or invitation
  3. tax exempt nonprofit organization
  4. not made for commercial purpose
  5. legitimate debt collection purpose
175
Q

Nonfinancial considerations

A
  1. customers age
  2. customers marital status
  3. employment status
  4. age and dependents
  5. immediate family
  6. current and future financial needs
176
Q

DNC Registry

A

asking a particular broker dealer to add your name to that broker dealers do not call list is not the same as adding your name to the national DNCR

broker specific request and subject to 5 year retention policy

177
Q

risk tolerance and investment goals

A
  1. what kind of risks can you afford to take
  2. how liquid must your investments be
  3. how important are tax considerations
  4. seeking LT or ST
  5. investment experience
  6. types of investments you currently hold
178
Q

Market Manipulation

A

no security is exempt from industry’s anti fraud provision

179
Q

Market rumors

A

misleading information or rumors employed for sole purpose of manipulating stock price.

attempting to manipulate share price by spreading false or misleading information about stock

180
Q

Pump and Dump

A

inflating the price of an owned stock by perpetrating false and misleading positive rumors in order to sell the stock at a higher price.

181
Q

Front Running

A

Is the act of placing order for ones own account ahead of orders that are known to be entering into market in an attempt to gain form price movement that is likely to occur

182
Q

Excessive Trading (Churning)

A

generate commission rather than help customer achieve investment objectives.

excessive frequency or excessive size of transactions

183
Q

Marking the Open

A

entering orders before opening or falsely reporting trades that never occurred to influence opening price of stock

184
Q

Marking the Close

A

effecting trades at or near close of trading day or falsely reporting trades that never occurred to influence closing price of stock.

putting in buy orders at close for purpose of pushing up price, valued higher in one account

185
Q

Backing Away

A

market maker can revise quote in response to trading activity,

backing away from quote - refuse to do business at prices

186
Q

freeriding

A

securities are purchased and then sold before making payment for purchase.

prohibited in both cash and margin accounts

frozen account for 90 days.

187
Q

capping

A

short option call contracts

act of entering sell orders in stock for purpose of keeping it from rising above strike price of calls someone is short

188
Q

supporting

A

short put option contracts

entering purchase orders for purpose of keeping price from falling below strike price of puts someone is short.

189
Q

pegging

A

any activity intended to keep the price of stock from moving

190
Q

wash sales

A

attempt to create a loss for tax purposes when ones intent is to still maintain ownership of securities.

repurchase within 30 days

recreating long positions, recreating short positions

attempts to recreate same positions using substantially identical

long position - sell - purchase call options or rights that can be exercise is establishing positions

191
Q

matched orders

A

one party selling stock to another with understanding that stock will be repurchased later.

make it appear far more activity exists

referred to as painting the tape

192
Q

Breakpoint sales

A

Mutual Funds

FINRA does not define near or just below breaking to trigger violation

investor make certain that customer is advised of breakpoints

193
Q

securities act of 1934

A

prohibits use of insider information in making trades

act of 1988 amended it and applied penalties

194
Q

insider

A

any person access nonpublic information and insider trader is someone that used the information

material in nonpublic, not available to general public

195
Q

Tipper

A

person who relays the information

196
Q

tippee

A

person who receives information

197
Q

key elements of liability for insider trading

A
  1. is information material and nonpublic
  2. does tipper owe fiduciary duty
  3. does tipper meet personal benefits test
  4. do either parties know
198
Q

Insider Trader Penalties

A

SEC can investigate any person

RR/BD - $1m and three times profit / loss avoided ,

criminal penalties - $5m and 20 years

employee of BD - 25M

199
Q

Use of Manipulative, Deception, Or Fraudulent Devices

A

FINRA member firms are strictly prohibited from using manipulative, deceptive, or fraudulent tactics to induce security sales.

Statue of Limitation - act 1934 - three years from alleged and within one year discovering.

No dollar limit

RR shows customer brochure indicating premature taken in when selling naked call options. No where in the brochure state that naked call selling has unlimited loss potential.

200
Q

Improper Use of Customers or Securities Funds

A
  1. suspicious activity involving transfers and disbursements in customer accounts
  2. activity in account of deceased person
  3. excessive customer complaints
  4. exception report showing discrepancies
201
Q

Borrowing Or Lending

A

Must have Loan Consent agreement, lending arrangements, Written notice

  1. immediate family relationships between representative and customer
  2. customer is in business of lending money
  3. both registered with same firm
  4. outside business relationship

before borrowing or lending to a customer, a representative must advise his firm in writing and receive written permission.

notice and approval are not needed if loan is between immediate family member

notice and approval are not needed if customer is a lending institution and the loan is on standard commercial terms.

202
Q

Guarantees and Sharing in Customer Accounts

A

Broker Dealers, investment advisers, and registered representatives may not guarantee and customer against loss or guarantee a gain.

member firms and representatives are prohibited from sharing in profits unless joint account and approved.

contributions can only be measured in dollars

firms cannot have joint accounts with customers.

representatives may have join account with customer only if the arrangement has been approved by the principal and account proceeds are shared in proportion to each party’s contribution

203
Q

Financial Exploitation of Seniors

A

FINRA Defines

  • age 65+
  • age 18+ mental impairment

wrongful or unauthorized act to obtain control through deception, intimidation, under influence, over money, assets, property, or convert.

any act aligning power of attorney, guardianship, authorization.

prevent

  1. reasonable efforts
  2. permitted, not required place temporary holds
204
Q

Trusted Contact person

A

Member firm is not prohibited from opening account customer refuses to provided

  1. opening accounts
  2. updating information

reasonable efforts

must disclose in writing firm can contact

trusted person is intended to be resource

member firm unable to contact customer after multiple attempts contact customer person

member firm suspects diminished capacity, trusted contact

member firm financial exploitation - temporary hold, contact trusted contact

205
Q

Temporary Holds on Disbursements

A

member firm reasonably believe

can place, does not required

no longer than 15 days

must internal review, provide notification of hold

not required to provided notification to trusted contact

206
Q

Unregistered Person

A

may not conduct certain business activities

prohibited against soliciting customers and taking orders to buy or sell securities

207
Q

Paying Commission to Unregistered Person

A

only registered can be paid commissions.

member firms can only grant commission and other allowances to other members

nonmembers are treated as general public

nonmember firms, including suspended members, always buy at public offering price, sell at public bid price, never at discount

208
Q

Exception to Unregistered Person

A

foreign nonmember firms, ineligible FINRA membership, may be granted commission if they agree to abide by FINRA rules, regulation, and standards

209
Q

Continuing Commission

A

Registered Person Leaves, may continue to receive commission

no requirement for member firm to do this

must be contract is effect before representative leaves

heirs deceased may receive continuing commissions if in written contract

continuing commission may never be paid on business referred or introduced by an employee after that person ceases to be registered with member

210
Q

Falsifying or Withholding Documents

A

FINRA requires
“a member in the conduct of business shall observe high standards of commercial honor and just and equitable principles of trade.”

forgery and falsification is not consistent with high standard

211
Q

Sanction

A

sanction against a member or associated person, if found guilty of falsifying or withholding

  1. censure
  2. fine
  3. suspension
  4. expulsion, canceling
  5. barring
  6. imposition
212
Q

Signatures of Convenience

A

altering documents previously signed by customer or reusing for convenience of customer is prohibited

reusing old signature is prohibited

213
Q

Responding to regulatory request

A

FINRA grants itself authority to inspect and copy books ,records, accounts of member firms, associated person whom FINRA has jurisdiction.

  • documents relating to compliance
  • other FINRA Rules
  • SEC Rules
  • MSRB Rules
  • federal securities laws

met promptly - two most recent years easily accessible

SIE Exam (9 decks)

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