Series 7: TC Chapter 8: Customer Accounts

Risk/Reward Relationship

- The greater the risk, the greater the reward / the less risk the less the reward

Proxies:

- Legal authorization for one party to act on the behalf of another - Shareholders who do not attend a company's annual shareholder meeting can elect to vote their shares via a proxy

For equity securities the member must forward all:

- Proxy material - Annual reports - Information statements - and other material furnished by the issuer

Return on Capital:

- Is broad term to describe what investors make or lose on their investment - For bondholders it's the interest they receive and for stockholders it's the dividends - Note also that they sell their investment the profit or loss of that sale would be included in their return on capital calculation

Under FINRA Rule 2111, a member who makes a recommendation to a customer must have a:

- Reasonable basis (FACTS) that the recommendation is suitable for the customer

Interest:

- Is money paid by the bond issuer to the bond holder - Most fixed income securities pay interest-semi annually for bonds - Issuers can be corporations, federal, state and local governments - Issuers paying fixed income securities are obligated to make interest payments

Credit Risk

- Is the risk that a company will declare bankruptcy or financial obligations wont be met

FINRA "Know Your Customer" rule:

- "Every member shall use reasonable diligence in regard to the opening and maintenance of every account, to know and retain the essential facts concerning every customer and concerning the authority of each person acting on behalf of such person

The new account report is an important document because it plays an integral role in the __________ process.

- "know your customer"

Sole Proprietorship

- A business owned by an individual - It is the simplest way of doing business - No legal fillings are required except for a DBA for the use of a fictitious name

Hedging:

- A common risk mitigation technique - Used to offset the risk of a particular investment or strategy - For example, if you own a stock you can purchase a put option to offset a decline in the stock price - This can be done at a portfolio level too with index options - Short selling

Corporate Accounts

- A corporation which opens a securities account must provide a Certified Copy of the Corporate Resolution and Articles of Incorporation and may require a copy of the Corporate Bylaws or Charter - This demonstrates that the corporation may engage in securities transactions - The Corporate Resolution is a document from the Board of Directors of the corporation and authorizes a specific person or persons to enter orders on behalf of the corporation - Required documents must be completed whether the corporation opens a cash or margin account - Corporate accounts do NOT require an Affidavit of Domicile

If the customer develops dementia so that he cannot handle his affairs:

- A court order will be required for the RR to take orders from a third party

A Fiduciary:

- A person vested with legal rights and powers to be exercised for the benefit of other persons

Investment Advisor

- A person who is in the business of giving investment advice for compensation (Management or wrap fee-based business), not for the execution of transactions (commissions by RRs) - Anyone who receives compensation for giving advice must be registered as an investment advisor under the Investment Advisers Act of 1940 - Management fees charged by Investment Advisers may be different for each investment Adviser and from fund to fund.

Probate

- A process in which the will of a deceased person is handling in the court system

Before your customers can conduct a securities business with your firm, they must open an account by completing a new______

- Account report form.

When a firm accepts orders from Investment Advisors on behalf of a client or clients, the IA is allowed to make:

- Allocations of their orders to client accounts - Such allocations must be received by the firm by noon on the business day following the trade - Such allocations are not allowed for Registered Representatives trading on behalf of customers

Letter of Authorization (LOA)

- Allows for the transferring of a customer's cash and/or securities

Account requests made by spouses of customers:

- An RR cannot accept an order or a request to withdraw funds from a spouse of a customer unless the account holder provides written authorization to the RR stating that the request by the spouse is authorized - Note that regarding withdrawals, the check must be made out to the account holder only, not the spouse

Joint Tenants With Rights of Survivorship (JTWROS)

- An account for two of more people, generally a husband and wife - Upon death of either party, the surviving tenant becomes the sole owner of the securities - The surviving tenant must present a death certificate and an affidavit of domicile (Certifies the decedent's place of residence at the time of death)

Trust Account

- An arrangement in which property is managed by one person for the benefit of another person - The Trustee is a fiduciary who holds the title to the trust assets for the benefit of the trust's beneficiaries - In order for a trustee to establish a margin account for the trust, it must be authorized in the trust agreement

a TOD is appropriate for:

- An investor who wants to leave securities to a specific person but maintain control of assets while they are alive

Reinvestment Risk

- Is the risk that interest rates will decline and income received from existing investments will earn when reinvested than the original investment (Treasury Bills do not have reinvestment risk until maturity)

Portfolio Rebalancing

- Another method to mitigate risk. Most portfolios are constructed according to an asset allocation that meets the investment objectives and risk appetite of the investor - So, investors who have a long time horizon to retirement may construct a portfolio that is 90% stocks and 10% bonds now, but they should rebalance that portfolio as they approach retirement age so as to meet their changing risk tolerance

Financial Institutions (Banks, insurance companies, pension plans):

- Are generally required to invest either using a Legal List provided by some States or conservatively under the Prudent Man Rule

Benchmarks and Indices

- Are integral part of measuring investment performance - Benchmarks vary and are used for many asset classes such as stocks, bonds, and commodities - They are a point of reference to measure investor's portfolio or security returns - A common benchmark are indices, with the S&P 500 that most common benchmark that stock portfolio managers track

Dividends:

- Are usually cash payments made by corporations to their shareholders - They are typically paid on a quarterly basis - However, unlike interest payments, corporations are not obligated to make dividend payments

Business Risk

- Associated with the unique circumstances of a particular company as they might affect the price of that company's securities - It may relate to the execution of its business plans and consequently will experience a period of poor earnings and resultant failure

The Custodian may:

- At his discretion use the custodial property for support, maintenance, education, and general use and benefit of the minor - Usually permitted to receive compensation for reasonable services (unless he is the donor) and reimbursement for necessary expenses - Checks can never be drawn on the account in the custodian's own name - Transactions may only be executed by the custodian

Exemptions from Investment Advisor registration include:

- Banks - Lawyers, accountants, teachers and engineers and anyone who gives advice as an incidental part of their profession or does not charge a separate fee

Asset Allocation models that are

- Based on generally accepted investment theory - Accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor's assessment of the asset allocation model of any report generated by such model - If the asset allocation model is a covered "investment analysis tool"

General Financial Investment Information:

- Basic investment concepts such as risk and return, diversification, dollar cost averaging, compound return - Historic differences in the return of asset classes based on standard market indices - Effects of inflation - Estimates of future retirement income needs Assessment of a customer's investment profile

In other accounts with multiple owners the signature of all the owners who will be authorized to trade to the account must:

- Be obtained

Once the registered representative has completed the New Account Report form with the customer it must be signed by the:

- Branch manager or principal - However, the registered Representative and the customer do not need to sign the form

Order tickets must indicate:

- Buy or sell - Number of shares - The security - Whether or not it is for a discretionary account - The account number - The time the order was entered - The time that the order was executed, if available or time the order was cancelled - Any terms and conditions of the order

Guardian Account:

- Can be opened for a child or an adult with disabilities who is unable to manage their own financial situation - A Guardian Appointment Certificate issued by a court is required to open the account - The guardian handles the account but has no ownership of the account

Death of a customer - If a customer dies, the RR must:

- Cancel all open orders (first action) - Freeze the account and note that the client is deceased - Await instructions from the estate's representative - Obtain a death certificate - Obtain an affidavit of domicile (Legal document which verifies where the person resided at the time of death) - In order for an executor to the estate to transfer funds they must obtain an Affidavit of domicile, a certified copy of the Death Certificate, and abide by the instructions in the last Will and Testament of the deceased person - Do NOT liquidate or churn the account

If an RR discovers that a client has filed for bankruptcy, the RR should:

- Cancel all open orders to buy and sell

Types of Investment Risks

- Capital Risk - Interest Rate Risk - Inflationary Risk or Purchasing Power Risk - Liquidity Risk - Systematic Risk - Un-systematic Risk - Credit Risk - Economic and Social Risk - Risk/Reward Relationship - Reinvestment Risk - Call risk - Currency Risk - Regulatory or Legislative Risk - Market Timing Risk - Business Risk

Fee Based Accounts:

- Charge a flat fee, usually based on percentage of assets in the customer's account - Can be a one time or ongoing fee, depending on the types of services they provide

Risk tolerance categories are:

- Conservative - Moderately Conservative - Moderate - Moderately Aggressive - Aggressive

The custodian must turn over all:

- Custodial property to the minor when the minor reaches age of majority - Legal title is vested in the minor and cannot be revoked

Commissioned Based Accounts:

- Customers are charged on a per transaction basis

When acting as a broker, the member firm must furnish or be prepared to furnish information as to the:

- Date and time of the transaction, the source and amount of commission received by the member from all sources, and the identity of the purchaser or seller

Time and price discretion orders are good for the _______ of _______ only

- Day of entry - Prior written instructions are required for the order to be good for more than one day

Order tickets do NOT have to indicate the name of the:

- Designated Market Maker or market maker who executed the trade

If a fiduciary wants to open a margin account, the fiduciary must present:

- Documentation to the broker-dealer stating that margin trading is permitted

Diversification

- Essentially spreads the risk across several asset classes - For example if your entire portfolio is invested in equity securities and the stock market falls, your entire portfolio is at risk - But if you mix or diversify your portfolio to invest a portion in bonds, stocks and commodities, your overall risk decreases as the entire portfolio is no longer subject to stock market swings - Note this is also true within an asset class - If your portfolio contains bonds only, you should diversify the types of bonds you have by issuer and maturities

If a client is terminally ill, you should advise the client to see a tax attorney for:

- Estate tax advice

If the custodian is someone other than a child's legal guardian, the guardian cannot:

- Exert any control or enter orders in the account

Reimbursement of Costs:

- FINRA rules allowed member firms to be reimbursed for forwarding these materials to their customers - Costs associated with the mailing of proxies directly by the issuer to the customer are paid by the issuer and not the customer

Automated Customer Account Transfer Service (ACATS)

- Facilitates the transfer of customer accounts from one brokerage firm to another brokerage firm - The transfer must be completed in 3 business days following validation of the transfer - The firm carrying the account must validate the transfer instructions within 1 business day

Partnership accounts - If one of the partners dies, the RR should:

- Freeze the account because a partnership is legally dissolved at the death of a partner

The US Patriot Act requires as a minimum the customers:

- Full and true name - Date of birth - Street address - Taxpayer identification number

- However, excluded from an explicit recommendation, as long as they do not include a recommendation of a particular security or securities would be:

- General Financial Investment information - Descriptive information about an employer-sponsored retirement or benefit plan - Asset allocation models that are - Interactive investment materials that incorporate 1, 2 or 3

Economic and Social Risk

- Generally refers to how domestic and world affairs affect investments as well as fiscal and monetary policies

Investment Clubs:

- Groups of individuals that pool their money together and may choose any investment strategy that the group agrees on (conservative or speculative) - Investment clubs do not qualify for breakpoint discounts from mutual funds

Erroneous Trades:

- If a mistake is made and a trade is erroneously reported, the customer must pay the actual price at which the trade was executed - If an RR is given a bad report, the RR should contact their supervisor immediately

Discretionary Authority

- If customers want to grand authority to their registered representative to make investment decisions on their behalf, they must open a discretionary account - Prior to executing discretion, the RR must obtain prior written authorization on a discretionary account agreement, designating the RR is authorized to trade in the account, and obtain the firms approval

In handling a joint tenant with rights of survivorship account:

- If one party dies, ownership passes to the survivor - Orders may be placed by either party - Correspondence may be mailed to either party. Both names must appear of the correspondence - All checks must be drawn payable to the owners of the account (Both names)

Officers of Financial Institutions

- If the President of a Bank or office of any financial institution wishes to open a margin account, they would have to complete a New Account Report Form, sign a margin agreement or hypothecation agreement, but would not be required to obtain authorization from the bank's board of directors

Tenants in Common

- In a tenancy in common, if one of the tenants dies, his interest will pass to his estate and not to the other joint owner - There is no right of survivorship in a tenancy in common - Either owner can place orders

Community Property:

- In certain states married couples have joint ownership of assets under what is referred to as "community property" - All assets acquired after becoming married, either acquired individually or as a couple, are owned equally by both persons, regardless of whose name appears on ownership titles

Recommended Strategy:

- Includes an investment strategy involving a security or securities with an "explicit" recommendation to hold a security

Components of return:

- Interest - Dividends - Realized/unrealized gains or losses - Return on capital - Cost basis - Benchmarks and indices

Diligence in Opening Accounts - Collection of the following customer information demonstrates diligence in opening customer accounts:

- Investment objectives - Employment status - Estimated annual income - Estimated net worth - Estimated liquid net worth - Marital status and number of dependents - Age

Non-systematic Risk:

- Is a company specific risk, meaning that the value of a single investment choice will decline - Non systematic risk can be minimized with diversification

unincorporated association

- Is a group of two or more individuals who voluntarily enter into an agreement to form an organization for a common purpose - An important factor with unincorporated associations is that members have unlimited personal liability for any legal action taken against the association

Interest Rate risk:

- Is a loss of market value on fixed income securities because of a rise in competitive interest rates, especially on securities with long-term maturities

Systematic Risk

- Is a securities market risk common to all securities of the same general class and therefore cannot be eliminated with diversification

Regulatory or Legislative Risk

- Legislative changes may adversely affect your investments, eg legislation that significantly curbs the sale of tobacco or delays in FDA approval of a new drug or perhaps the favorable tax treatment of an investment product has been withdrawn

A registered representative can obtain either of the following two types of trading authorizations from a customer:

- Limited Trading Authorization or Limited Power of Attorney - Full Trading Authorization of Full Power of Attorney

A member must disclose the amount of a:

- Markup charged to a customer if it is not a market and engages in a riskless or simultaneous transaction with the customer

Final approval of the new accounts is the responsibility of the ____________ as evidenced by the signature and approval of a principal executive officer or partner

- Member firm - As evidenced by the signature and approval of a principal executive officer or partner

Under FINRA Rule 2165 Financial Exploitation of Specified Adults:

- Member firms must have written procedures on handling and escalating the financial exploitation of two specific groups of adult customers - Individuals 65 years old and older - Individuals 18 years old and older who the member firm reasonably believed has a mental or physical impairment that renders these individuals unable to protect their own interests

The Custodian must manage the account for the best interests of the:

- Minor, which could include purchase and sales of securities as well as the exercising of subscription rights - The custodian is empowered to collect, hold, manage, invest, and reinvest custodial property as the custodian deems advisable, generally seeking capital growth

Margin accounts are not allowed for:

- Minors (securities may not be purchased on margin) Short sales are not allowed in UGMA accounts

The Donor for a UGMA/UTMA:

- Must be an adult - May give any kind of securities or cash, including mutual fund shares (When gifting securities, only fully paid securities may be gifted) - Any amount may be given, there is no limit to the size of the gift - Appoints the custodian for the account. The donor is permitted to designate himself as custodian - The donor cannot make a gift through his last will and testament - The donor does not pay capital gains taxes on the donated securities

Day Traders:

- Must have a minimum equity of $25,000 - Are most concerned with market "timing risk" - Are least susceptible to inflationary risk because the close all positions daily - Buying power limit is 4 times the maintenance margin excess in the account

Advantages of Sole Proprietorship

- No or low start up and maintenance costs - Losses may be used to offset income for tax purposes

"Buy 100 ABC, whenever you think the time is right"

- Not discretionary because the RR must decide when to buy and at what price only

Changes to orders:

- Once a change has been entered, any change or correction to the order requires the approval of the branch manager or supervisor, before the change is made

For each UGMA account there may only be:

- One person as custodian (Joint custodians are not permitted) - One minor as beneficiary (Multiple beneficiaries are not permitted on the same account)

Individual Accounts

- Opened for one person only - Sometimes referred to as a "Natural person" which means that the entity is not a corporation or organization

Time and Price Discretion:

- Orders where the RR only determines the time when the order will be entered and the price of the security at the time of entry - The broker does not decide which security or how many shares or whether to buy or sell - This type of order does NOT require written discretionary authority from the customer

Descriptive information about an employer-sponsored retirement benefit plan

- Participation in the plan - The benefits of plan participation - The investment objectives available under the plan

If a member firm believes financial exploitation of these adults has occurred, is occurring or will occur, Rule 2165 allows (but does not require) the member firm to:

- Place temporary holds on the disbursement of funds or securities from the accounts - The hold can be imposed for up to 15 business days - The member firm can extend it 10 additional business days if it believes it has grounds to do so - The member firm must contact all authorized individuals in the account within two business days of the imposition of the hold

Conservative:

- Preservation of initial principal in this account with minimal risk - Current income is desired, but preservation of principal is more important

A prime brokerage agreement is needed to open a:

- Prime brokerage account

RRs Sharing in customer accounts: - When registered reps want to share in a customers account, they must obtain

- Prior written authorization of their employing member and obtain the prior written authorization of the customer - RR's can share only in direct proportion to their financial contribution to the account - They must share in the profits and losses - Sharing is allowed with prior written authorization BUT rebating any part of the registered representative's compensation is strictly prohibited

The fiduciary cannot share in the:

- Profits of the account

Institutional Investor Suitability Exemption:

- Provides an exemption to customer specific suitability regarding institutional investors - An institutional investor may exercise independent judgement on a trade by trade basis, on an asset class basis, or in terms of all potential transactions for its account

Direct Registration System (DRS)

- Provides for electronic direct registration of securities in an investor's name on the books for the transfer agent or issuer, and allows shares to be transferred between a transfer agent and broker electronically - DRS provides investors with an alternate approach to holding their securities in certificate or "street" form - under DRS, investors can elect to have their securities registered directly on the issuer's records in book entry form

The following may be considered to be inappropriate investment recommendations when dealing with senior investors:

- Recommending products which include withdrawal penalties or lack liquidity such as deferred variable annuities, equity indexed annuities, and limited partnerships - Variable life products or settlements - Complex structured products such as collateralized debt obligations (CDOs and CMOs) - Home equity loans to be used for other investments - Taking early withdrawals from retirement plans to invest in high risk investments

Realized/unrealized Gains or Losses:

- Refer to the change in value of the holdings in an investor's account - It is classified as realized or unrealized depending on whether the investor has sold the security

A Prime Brokerage Account

- Refers to a bundled package of services offered by broker-dealers to hedge funds, other broker-dealers and institutional investors that use aggressive trading strategies - Services may include: 1. Securities lending 2. Centralize trade processing (settlement) 3. Calculating an "absolute return" (total return) for the hedge funds

Non-Managed Fee Based Account Programs

- Refers to arrangements in which no investment advisory services are provided by the member firm and in which customers are charged a fixed fee and/or percentage of the account's value rather than transaction-based commissions - These programs benefit customers who trade frequently - All fees and costs associated with the account must be dislocated before the account is established - Customers who want to open a non-managed fee-based account must receive a full description of the services they provide and a list of eligible assets available to the account - The firm must have procedures in place which monitor these accounts for possible "excessive" trading

Cost Basis

- Refers to what an investor paid to purchase an investment - The cost basis is needed to determine the investor's tax liability upon realization of a gain or loss when the stock is sold - Stock splits and stock dividends can impact cost basis

The reasonable basis obligation:

- Requires a member firm and its RR's to have a reasonable basis to believe that a recommendation is suitable for at least some investors. - The lack of such an understanding when recommending a security or strategy violates the suitability rule

Quantitative Suitability

- Requires a member or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer's investment profit

If a customer wants to transfer his account to a different registered representative in the same firm, the new representative must:

- Review and update the customer account form - The newly assigned RR must treat the account as a new customer and update the customer's profile - Once the review and update are completed the RR can then make appropriate recommendations

All transactions in a customer's account must be:

- Reviewed and initiated by a principal or supervisory person of the broker-dealer

Types of trusts include:

- Revocable (changeable) - Irrevocable (Unchangeable) - Living (Set up while the grantor is "living") - Testamentary trusts (created from a will)

Market Timing Risk

- Risk incurred trying to time the market, or a particular investment - Investors may enter the market too soon or too late and that would negatively impact their portfolios

Inflationary Risk or Purchasing Power Risk

- Risk of loss of buying power, especially on fixed income securities with long-term maturities (Treasury Bonds) if an investment value decreases and the income decreases, the investor's purchasing power would also decrease

Call Risk

- Risk that changes in the exchange rate will adversely affect your investment

Currency Risk

- Risk that changes in the exchange rate will adversely affect your investment

Unregistered cold callers are limited in what they may do with respect to solicitation of customers because they lack the appropriation registration. However they can:

- Send investment literature to prospects - Set up appointments for prospects with the registered representative - May extend invitations to sponsored events

If a broker-dealer receives a proxy concerning a customer's security being held in street name, then the broker-dealer must:

- Send the proxy to the customer promptly

Customer accounting information must be:

- Sent to the customer within 30 days of opening - Furnished to each customer at least once every 36 months - Updated within 30 days after receiving notice of a change in the customer's investment objectives - (Must be maintained for 6 years after the account is closed)

The Custodian Account is opened with the minor's:

- Social security number, not the donor's or custodians - Taxes due are paid by the minor

A RR should consider the following when determining a customer's financial profile:

- Temperament - Marital Status - Number of dependents and educational needs - Equity in their home

Profile Changes

- The RR must update records to reflect those changes - Updates are required for changes in the customers employment, income , address, or investment objectives as well as changes in securities posititions

Investment Objectives:

- The RR needs to understand what the customer investment objectives are as there can vary significantly from customer to customer - Preserve Wealth - Fund retirement or educational needs - Generate current income - Growth wealth over time - Speculation

Customer confirmations must show:

- The capacity in which the broker-dealer acted - The broker dealer may have acted as the customer's agent, for another person, bona fide market maker or as a principal

Confirmations of transactions must be sent to customers at or before:

- The completion of any transaction in any security effected for or with the account of a customer - All customers must be sent confirmations whether they are individual customers or institutional customers - Such confirmations must disclose the settlement date of the transaction and disclose if the security is callable - This requirement does not apply to Direct Participation Programs

Prior to executing a transaction with a retail customer, the RR must make reasonable efforts to obtain the following information:

- The customer's financial status - The customer's tax status - The customer's investment objectives - Any other pertinent facts the member knows about the customer

A fax must contain:

- The date and time that the fax is sent - The identity of the sender - The telephone number of the sender It does not require that the number of pages in the fax be included

Communication with the "Trusted contact"

- The member firm is permitted to communicate with the "trusted contact person" identified with this customer account to discuss its concerns about actual or possible financial exploitation - The trusted contact person, for example, can be reached (orally or in writing) if a temporary hold is imposed

For debt securities:

- The member must make reasonable efforts to forward any communication or document pertaining to the bond issue that has been prepared by or on behalf of the issuer

The custodian retains control over the minor's account until either:

- The minor attains the age of majority in which case the cash and securities remaining will be distributed to the individual - The custodian is removed by a court order - The custodian dies, a successor custodian will be appointed - If the minor dies, the remaining proceeds will be payable to the minor's estate

Firms do not need:

- The names of other broker dealer firms - The educational background of the customer - The tax return or tax bracket for the previous year - Designation of beneficiaries

Student loans incurred prior to marriage would be the responsibility of:

- The party who incurred the debt

Components of Suitability Obligations:

- The reasonable basis obligation - The customer-specific obligation - Quantitative suitability

Capital Risk:

- The risk of loss of the principal value of an asset or security

Liquidity Risk

- The risk that an investor will not be able to sell or liquidate a security at the fair market value - Thinly-traded stocks and Direct Participation Programs (DPPs) are examples of securities that have greater liquidity risk as compared to a Blue Chip common stock

Limited Partnership Accounts require:

- The signature of the General Partner(s) when establishing a new account but do not require the signature of each limited partner since the general partner(s) manager(s) and controls the partnership

Considerations for excessive activity include:

- The turnover rate - The cost-equity ratio - Use of in and out trading

Discretionary Accounts

- They are immediately terminated upon death of the owner of the account - Checks (withdrawals) must always be paid to the owner of the account - Account owners may waive their right to receive confirmations and statements upon written request - Although discretionary authorization has been granted, the owner of the account may still initiate orders - The RR must designate each discretionary order as such on the order ticket - Discretionary authorization is good until revoked in writing by the customer - The RR must never take transactions which are excessive in size or frequency (Churning) - All discretionary orders must be reviewed by a principal of the firm

Limited Trading Authorization or Limited Power of Attorney

- This gives a registered representative the right to make purchase and sale decisions for the account - The Registered rep can buy and sell stocks, bonds, warrants, options, etc for the account - However, the registered representatives cannot withdraw any cash or securities from the account - Checks must be disbursed payable to the owner of the account - When power of attorney is granted, the RR must know essential facts about both the customer and the agent that is granted the power of attorney

Essential facts are defined as those that allow an RR:

- To effectively service a customer's account - To act in accordance with special handling instructions for the account - The understand the authority of any person acting on behalf of a customer (Eg a power of attorney) - To act in compliance with applicable laws, regulations, and rules

A DK (Dont Know) notice is sent to the confirming broker dealer when:

- Trade comparisons between broker-dealers do not match (such as price discrepancy)

Though a spouse may have equal claim to assets under community property laws, if the spouse's name does not appear on the securities account, that spouse is not permitted to:

- Trade or withdraw assets without authorization under FINRA Regulations

A fiduciary cannot grant:

- Trading authority to a third party

Registered Representatives are never allowed to receive a percentage of commissions earned while executing:

- Transactions for customers

Examples of a fiduciary:

- Trustees - Executors - Administrators - Guardians - Custodians - FBO - for the benefit of

Any account that includes an adult and a minor must be set up as a:

- UGMA/UTMA, not at a joint account

Disadvantages of Sole Proprietorship

- Unlimited personal liability - Sole proprietors must pay self-employment tax for themselves and employees - Sole proprietors are responsible for running the business, including record-keeping responsibilities

Transfer on Death (TOD)

- Upon the death of an individual investor or the last surviving account owner in a joint account, the assets in the account are passed on to beneficiaries according to the written TOD agreement, thus eliminating the need for probate - Beneficiaries remain responsible for any estate taxes - Assets NOT eligible for a TOD include Limited partnership interest, precious metals, variable annuities, fixed annuities, and commodities - A TOD is used for basic securities including stocks, bonds, and mutual funds

A member organization, which has not received voting instructions from the beneficial owner of the security by the date specified in the proxy material may:

- Vote the shares on behalf of the beneficial owner provided the matter to be voted on does not involve 1. A merger or consolidation 2. A proxy contest 3. Appraisal rights concerning a security

Moderately Aggressive:

- Willing to accept high risk to initial principal - Including high volatility, to seek high returns over time - Understand I could lose a substantial amount of the money invested

Moderately Conservative:

- Willing to accept low risk to initial principal, including low volatility to seek a modest level of portfolio returns

Aggressive:

- Willing to accept significant risk to initial principal to achieve maximum returns, the customer could lose most, or all, of the money invested

Moderate:

- Willing to accept some risk to initial principal and tolerate some volatility to seek higher returns - Could lose a portion of the money invested

Full Trading Authorization

- Would allow a registered representative to make purchase and sale decisions for the account and also withdraw cash or securities from the account - However, an approved discretionary account does not mean that the registered representative has unlimited trading privileges

If a customer uses the services of an investment Advisor and wants duplicate copies of his confirmations and statements sent to his Advisor, the request would have to be made in:

- Writing by the customer and the customer would have to provide the name and address of the investment advisor

"Here's $20,000, buy whatever you think is best"

- Written discretionary authority required because the customer is asking the RR to decide what security to buy and how many shares

Holding mail for a customer who is traveling is permitted if the firm receives:

- Written instructions from the customer that includes the time period the firm is requested to hold the mail. - If the time period is longer than 3 conservative months, the instructions must include an acceptable reason for the request - Convenience is not an acceptable reason - The maximum holding period is 3 consecutive months, but more that one holding period can occur per year

- If a customer requests that duplicate confirmations and statements be sent to an Investment Advisor, the firm must keep on file the

- Written notice of the request along with the investment advisor's address

If a customer wants to open an account bearing only a number or symbol rather than his or her name, the customer must submit a:

- Written statement attesting to the ownership of the account

Pattern Day Traders

- are customers who execute four or more day trades within 5 business days, and generally do not keep positions overnight

- The donor, when making gift under the UGMA and UTMA, should consider the following:

1. Completion of the transaction occurs when the securities are registered in the name of the custodian for the benefit of the minor 2. The age of the person to whom the gift is made 3. The gift is completely irrevocable 4. Certain states permit gifts of money, life insurance policies, and annuity contracts

New account report forms must contain the following information:

1. Customer's name and any titles - A broker cannot open an account in the name of a person other than the customer - The account name must match the name that appears in the account documentation - New accounts may not be opened in the name of a third party, an alias, or a minor 2. Email address 3. Telephone numbers 4. Annual income, net worth, and bank references 5. Occupation and employer 6. Citizenship 7. Date of birth 8. Social security or tax ID number 9. Customers must provide a government-issued photo ID and it must be verified that the customer does not appear on a terrorist list 10. The identity of the associated person(s) responsible for the account 11. Trusted contact person

Customer Account Statements

1. Customers must receive statements of their accounts at least quarterly 2. Such customer account statements must disclose: - The current securities positions in the account - Any and all money & debit balances - Any activity such as margin interests, interest, and dividend payments (The statements would not be required to show the original price paid for the securities or year to date income in the account

Member Firm Obligations When Relating to Seniors:

1. Designate a specific individual or department to serve as central advisory contact for questions about senior issues 2. Provide employees with written guidance on senior-related issues 3. Offer training to help RRs understand and meet the needs of older investors 4. Determine at the opening of the account whether the customer has an executed durable power of attorney 5. Ask the client to designate a secondary or emergency contact for the account 6. Ask the client if he or she would like to invite a friend or family member to accompany the customer to appointments 7. Members must inform the customer that unsolicited trades placed by the customer with the member firm may be unsuitable - if that is the case 8. High-pressure sales seminars and tactics are prohibited especially when they are aimed at seniors such as "limited time offer" or "you have to sign up today" 9. Generally when making recommendations to senior investors, a registered representative should take into consideration the clients status and the possible inflation risk of any investment product 10. Registered Representatives may use a "Senior Designation" such as "retirement specialist" if the RR is currently an accredited member of a national accreditation organization (CRPC (Chartered Retirement Planning Counselor) ,CFP, etc) - Use of such designation requires the firm's approval

Telephone Consumer Protection Act or "Cold Calling Act"

1. Telephone solicitations may be placed only between the hours of 8am and 9pm local time of the party called 2. Called must provide the called party with the identity of the caller and a telephone number or address at which the caller or firm may be contacted 3. If the people being called indicate that the DO NOT WANT TO TBE CALLED IN THE FUTURE, the firm making the calls must maintain such phone numbers on a permanent in-house "Do not call" list and compare this information to the national "do not call" list 4. Customer account numbers must be encrypted 5. Personnel engaged in telephone solicitations must be informed and trained in the existence and use of the "do not call list" 6. Auto-dialing used in conjunction with pre-recorded messages is prohibited to residencies, health care facilities, and radio common carriers 7. The act also bans unsolicited or "junk fax" advertisements 8. If a prior business relationship with the person being called exists, the "no-call" restriction does not apply 9. These rules do not apply to non-profit organizations 10. The provisions set forth in this rule are applicable to members who make telephone solicitations calls to wireless telephone numbers 11. A member firm may outsource telemarketing functions, but the firm remains responsible for ensuring compliance with all provisions of the telemarketing rules

The following are required in trade confirmation of corporate and agency debt securities for retail customers only

1. The member firm must disclose the amount of mark-up or mark-down if the member also executes an offsetting principal trade in the same security on the same trading day - Mark up and markdown must be expressed as in total dollar amounts AND as a percentage of the prevailing market price 2. The confirmation must contain: - A reference and a hyperlink if the confirmation is electronic to a web page hosted by FINRA that contains publicly available trading data for the specific security that was traded - The execution time fo the transactions to the SECOND

Investment Risk Tolerance:

All investing involves risk - Different investment products and strategies involve different degrees of risk - The higher the expected returns of a product or strategy, the greater the risk that you could lose most of you investment

The customer specific obligation:

Requires a member firm and its RRs to have a reasonable basis to believe that a recommendation is suitable for a particular customer based on their investment profile.