SIE Chapter 8: Customer Accounts

Financial Institutions (such as banks, insurance companies, and pension plans)

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

Commission-based advisors

are paid to trade securities and, as a result, are motivated to increase the number of transactions they execute.

In commissioned-based accounts,

customers are charged on a per transaction basis.

Confirmations of transactions

must be sent out 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 confirmation must disclose the settlement date of the transaction and disclose if the security is callable. *Note: This requirement does not apply to Direct the Participation Programs.

Risk/Reward Relationship

the greater the risk, the greater the reward / the less risk the less the reward.

Components of Return — Returns can come in many forms such as:

1. Interest 2. Dividends 3. Realized/unrealized gains or losses 4. Return on capital 5. Cost basis

Broker-dealer Failure Procedures — If a firm fails:

1. Customers are entitled to obtain any securities registered in their name. 2. The firm pays liquidation expenses. 3. Remaining assets are available to satisfy remaining portions of customer claims. 4. If any customer claims still remain, SIPC will provide protection for customers of up to: -$500,000 per separate customer for cash and securities, but no more than -$250,000 (formerly $100,000) may be paid for a cash claim. 5. If the claim exceeds the maximum, the customer becomes a general creditor of the firm and securities will be settled at the market value on the date that a Federal Court was petitioned to appoint a trustee.

The following are some of the considerations when handling accounts of senior customers:

1. Designate a specific individual or department (e.g., compliance) 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 attomey. 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. The following may be considered to be inappropriate investment recommendations when dealing with senior investors: 9. 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." 10. Generally, when making recommendations to senior investors, a registered representative should take into consideration the client's status (already retired or planning to retire) and the possible inflation risk of any investment product. 11. 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 (Charted Retirement Planning Counselor), CFP (Certified Financial Planner), etc.). a. Use of such designation requires the firm's approval.

Reg Bl has four components:

1. Disclosure Obligation 2. Care Obligation 3.Conflict of Interest Obligation 4. Compliance Obligation

Some basic facts about SIPC:

1. It is a non-profit organization. 2. Membership consists of registered broker-dealers. 3. SIPC is NOT an agency of the U.S. Government. 4. SIPC does not cover claims relating to commodity accounts. 5. The protection it provides is limited to certain amounts.

Joint Accounts:

1. Joint Tenants With Rights of Survivorship (JTWROS) 2. Tenants In Common 3. Transfer on Death (TOD)

There are three main obligations:

1. The reasonable-basis obligation 2. The customer-specific obligation 3. Quantitative suitability

recommendation

A ______________________ covers any securities transaction or investment strategy involving securities, including recommendations of types of accounts. For example, Reg Bl would apply if an RR recommended that a client open an options or margin account or rollover assets into a 401 (k).

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 OfA 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.

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 your investment. Risk tolerance categories are: 1. Conservative 2. Moderately Conservative 3. Moderate 4. Moderately Agressive 5. Agressive

Diligence in Opening Accounts —

Collection of the following customer information demonstrates diligence in opening customer accounts: 1. Investment objectives 2. Employment status 3. Estimated annual income from all sources 4. Estimated net worth (exclusive of family residence) 5. Estimated liquid net worth 6. Marital status and number of dependents 7. Age

Street address

If an individual does not have a residence, APO, FPO, or business address, the residence or business address of a next of kin or another individual contact may be used.

Regulation Best Interest (Reg Bl)

In 2020, the SEC adopted Regulation Best establish a •best interest' standard of conduct for broker-dealers when they make recommendations to retail investors. Reg Bl incorporates and enhances principles that are in FINRA Rule 2111.

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.

Profile Changes

As the customer's account profile changes, the RR must update records to reflect those changes. Updates are required for changes in the customer's employment, income, address, or investment objectives as well as all changes in securities positions.

a new account report form

Before your customers can conduct a securities business with your firm, they must open an account by completing __________________________. The new account report is an important document because it plays an integral role in the "know your customer" process. The FINRA "Know Your customer" rule states: "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." (Rule 2090)

"trusted contact"

Communication with the ____________________: 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.

What constitutes a recommendation?

FINRA does not define what constitutes a recommendation, but has provided guidance. FINRA has stated that determining whether a recommendation has been made depends on "the facts and circumstances of the particular case." In other words, it must be approached on a case by case basis. Clearly, recommendations would be instances when an explicit recommendation to buy, sell, or hold a security was made. When no explicit call to action is expressed, "the facts and circumstances Of the particular case" will be how FINRA determines if a recommendation has been made.

Member Firm Obligations When Relating to Seniors (Regulatory Notice 07-43)

FINRA has published guidance on what they believe is the proper handling by members of senior customers.

SIPC Trustee

If a broker-dealer fails, the local Federal District Court will appoint a SIPC Trustee to liquidate the firm. The SIPC Trustee is responsible for: 1. The orderly liquidation of a failed firm 2. Distribution of customer securities 3. Notifying customers of a firm in SIPC liquidation

financial exploitation

If a member firm believes _________________________ 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 disbursement of funds or securities from the accounts.

dementia

If an elderly customer develops ___________________, the RR or a relative of the client would have to acquire a court approved Guardianship — not a Power of Attorney. A Power Of Attorney can only be signed by a person of "sound mind."

retail investor

Reg Bl defines a ___________________ as a natural person, or the legal representative of such natural person, who receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer and uses the recommendation primarily for personal, family, or household purposes (not for commercial purposes).

Customer Relationship Summary (Form CRS)

Reg Bl requires registered investment advisers and broker-dealers to provide retail investors only (not institutional investors) with a. Form CRS for broker-dealers b. Form ADV (Part 3) for investment advisers c. These Forms provide simple, easy-to-understand information about the nature of the customer's relationship with their financial professional (investment adviser or Registered Representative). Broker-dealers file Form CRS using the CRD system. Some of the information that must appear in Form CRS is an explanation or description of the following: -Firm's Services -Fees and costs -Conflicts of interest -Disciplinary history of its financial professionals -A link to the SEC's investor education website, Investor.gov. d. Delivery of Form CRS — Form CRS must be delivered to new and existing retail customers. For new customers, it must be delivered before or at the time a recommendation of a security or an account type is made. e. If Form CRS must be amended or revised, it must be filed with CRD within 30 days of any information becoming materially inaccurate. Amended or revised versions of Form CRS must be delivered within 60 days of change to each retail investor who is a client or considered a prospect of the firm.

Mitigation of Risk

Risk is inherent to investing. It can be mitigated by employing any of the following strategies: 1. Diversification 2. Portfolio Rebalancing 3. Hedging

Revenues

SIPC obtains its revenues by assessing broker-dealers a percentage of their gross revenues or by a nominal annual assessment depending on the level of the SIPC fund.

Protection Provided

SIPC provides protection on a separate customer basis, not on a per account basis

FINRA Rule 2111,

Under _____________________, a member who makes a recommendation to a customer must have a reasonable basis (FACTS) that the recommendation is suitable for the customer. The governing factor in a proposed transaction must always be in the best the interest of the customer. Prior to executing a transaction with a retail customer, the RR must make reasonable efforts to obtain the following information: 1. the customer's financial status 2. the customer's tax status 3. the customer's investment objectives 4. any other pertinent facts the member knows about the customer

Member firms

____________________ are required to advise all new customers in writing at the time that the account is opened and annually thereafter that they may obtain information about SIPC including the SIPC brochure, by contacting SIPC and providing SIPC's website address and phone number.

Asset allocation models that are:

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

General financial and investment information including:

a. Basic investment concepts, such as risk and return. diversification, dollar cost, averaging, compound return b. Historic differences in the return of asset classes (e.g. equities, bonds. or cash) based on standard market indices c. Effects of inflation d. Estimates of future retirement income needs e. Assessment of a customers investment profile

Cost basis

a. If an investor buys 100 shares of stock at $50 per share, the investor has a cost basis of $5,000. The cost basis is needed to determine the investor's tax liability upon realization of a gain or loss when the stock is sold. b. The following items can affect cost basis: 1. Stock splits 2. Stock dividends

Note some specifics of the hold:

a. It can be imposed up to 15 business days. b. The member firm can extend it 10 additional business days if it believes it has grounds to do so. c. The member firm must contact all authorized individuals in the account within two business days of the imposition of the hold.

Descriptive information about an employer-sponsored retirement or benefit plan

a. Participation in the plan b. The benefits of plan participation c. The investment objectives available under the plan

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

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

Care Obligation

although this component of the regulation basically mirrors FINRA's suitability rule, Reg Bl explicitly states that the broker-dealer must consider the cost of the recommendation.

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 retums. A benchmark can be an interest rate, the value of a group of stocks, or bonds. However, the most common benchmark are indices, with the S&P 500 the 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 plan and consequently will experience a period of poor earnings and resultant failure.

Compliance Obligation

broker-dealers must establish, maintain, and enforce policies and procedures regarding Regulation Bl.

Conflict of Interest Obligation

conflicts that cannot be eliminated must be disclosed.

The securities Investor Protection Act of 1970

created the Securities Investor Protection Corporation (SFC) for the purpose of protecting public customers against the risk of loss due to the failure of a broker-dealer.

Diversification

essentially spreads the risk securities across and several the stock asset market classes. falls, For yourexample if your entire portfolio is invested in equity 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.

Economic and Social Risk

generally refers to how domestic and world affairs affect investments as well as fiscal and monetary policies.

Recommended Strategy

includes an investment strategy involving a security or securities with an "explicit" recommendation to hold a security. However, excluded from this rule, as long as they do not include a "recommendation" of a particular security or securities would be: 1. General financial and investment information 2. Descriptive information about an employer-sponsored retirement or benefit plan 3. Asset allocation models that are 4. Interactive investment materials that incorporate 1, 2, or 3.

Return on capital

is a 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 when they sell their investment, the profit or loss of that sale would be included in their return on capital calculation.

Hedging

is a common risk mitigation technique. Hedging is 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. Another popular hedging strategy is short selling.

Portfolio rebalancing

is another approach 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.

Non-Systematic Risk

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

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 of interest paying fixed income securities are obligated to make interest payments.

Credit Risk

is the risk that a company will declare bankruptcy or financial obligations won't be met.

Reinvestment Risk

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

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 believes has a mental or physical impairment that renders these individuals unable to protect their own interests

Conservative

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

Institutional Investor Suitability Exemption

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

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. To explain further we'll use an example. Let's assume an investor purchases a stock at $10 per share and the stock rises to $1 1, but the investor has decided not to sell that stock. The $1 profit is an unrealized gain. If, however, the investor had decided to sell the security, the $1 profit would be considered a realized gain. The same principle applies to losses.

cost basis

refers to what an investor paid to purchase an investment.

The reasonable-basis obligation

requires a member or associated person to have a "reasonable basis" to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors. In order to satisfy reasonable diligence the member or associated person must have an understanding of the potential risks and rewards associated with the recommended security or strategy. The lack of such an understanding when recommending a security or strategy violates the suitability rule.

Quantitative suitability

requires a member or associated person 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 profile. Considerations for excessive activity include: a. The turnover rate b. The cost-equity ratio c. Use of in and out trading

The customer-specific obligation

requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for "a particular customer' based on that customer's investment profile.

Market Timing risk (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.

Currency risk

risk that changes in the exchange rate will adversely affect your investment.

Regulatory or Legislative Risk

risk that legislative changes may adversely affect your investments, e.g., 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.

Investment Objectives

the RR needs to understand what the customer investment Objectives are as these can vary significantly from customer to customer. 1. Preserve wealth 2. Fund retirement or educational needs 3. Generate current income 4. Growth wealth over time 5. Speculation

Moderate

willing to accept some risk to initial principal and tolerate some volatility to seek higher retums; could lose a portion of the money invested

Disclosure Obligation

the broker-dealer services, must and the disclose capacity material the broker-dealer facts regardingis the recommendation such as fees, acting in (as an investment adviser v. agent (broker)).

Call risk —

the risk that a bondholder will have their bond called or redeemed prior to maturity. The bonds would be redeemed by the issuer if interest rates declined. This would leave the bondholder reinvesting their money at a lower retum.

Moderately Aggressive

willing to accept high risk to initial principal, including high volatility, to seek high returns over time, and 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 in to achieve maximum returns, the customer could lose most, or all, of the money invested.

Firms do not need:

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

Other Fiduciary account considerations:

1 . A fiduciary cannot typically grant trading authority to a third party. 2. If a fiduciary wants to open a margin account, the fiduciary must present documentation to the broker-dealer stating that margin trading is permitted. 3. These accounts must adhere to the Prudent Investor Rules which require investments to be low-risk conservative investments. 4. The fiduciary cannot share in the profits of the account.

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. The services may include: 1. Securities lending 2. Centralize trade processing (settlement) 3. Calculating an "absolute return" (total retum) 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 disclosed 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.

would not

The statements ___________________ be required to show the original price paid for the securities or year to date income in the account.

"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 -To understand the authority of any person acting on behalf of a customer (e.g. a power of attomey) -To act in compliance with applicable laws, regulations, and rules

Time and Price Discretion Example:

1. "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. 2. "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.

Exemptions from Investment Adviser registration include:

1. Banks 2. Lawyers, accountants, teachers and engineers and anyone who gives advice as an incidental part of their profession or does not charge a separate fee.

New account report forms must contain the following information:

1. Customer's name — complete customer name, and any titles (such as Mr., Mrs., Military, or Professional). 2. For an individual, a residential or business street address, or for an individual Who does not have a residential or business street address, an Army Post Office (APO) or Fleet Post Office (FPO) box number. If an APO or FPO is used, the CUStomer does not need to provide another address. A post office box is not a valid address but can be used for mailing purposes. 3.Email address 4. Telephone numbers — residence, business, and mobile 5. Annual income, net worth, and bank references (excluding primary residence) 6. Occupation, name, and address of employer — If the customer is associated with another FINRA member firm that information must be disclosed. 7. Whether the person is a citizen 8. Date of birth 9. The customer's social security number or Tax ID number. An account cannot be opened without some form of tax identification number. a. For non-U.S. Citizens, a tax ID, passport number or alien ID is sufficient 10. Customers must provide government issued photo ID and it must be verified that the customer does not appear on a terrorist list. 11. The identity of the associated person(s) (RR) responsible for the account. 12. Trusted Contact Person — This is optional. FINRA Rule 4512 states that a "trusted contact person" can be provided at the time of account opening if the customer chooses.

The Telephone Consumer Protection Act or "Cold Calling Act" states:

1. Telephone solicitations party called.may be placed only between the hours of 8 a.m. and 9 p.m. local time of the 2. The caller 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 they DO NOT WANT TO BE 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. The firm making telephone solicitations must have a written policy available on demand for maintaining a "Do not call" list. 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 residences, health care facilities, and radio common carriers (i.e., cellular phones or other services for which the recipient called is charged). 7. The Act also bans unsolicited or "junk fax" advertisements. A fax sent to a customer must contain all of the following information: a. The date and time that the fax is sent b. The identity of the sender, and c. The telephone number of the sender -It does not require that the number of pages in the fax be included. 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 solicitation calls to wireless telephone numbers. 11. Unregistered cold callers are limited in what they may do with respect to solicitation of customers because they lack the appropriate registration. However, they can: a. send investment literature to prospects b. set-up appointments for prospects with the registered representative c. may extend invitations to firm-sponsored events *Note: They CANNOT pre-qualify or profile prospects.

The following are required in trade confirmations of corporate and agency debt securities for retail customers only (FINRA Rule 2232):

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. The mark-up/mark-down must be expressed as in total dollar amounts AND as a percentage of the prevailing market price. 2. The confirmation must contain: (1) 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 (in other words, a link to TRACE), and (2) the execution time of the transaction, expressed to the second.

Day Traders:

1. must have a minimum equity of $25,000. 2. are most concerned with market "timing risk." 3. are least susceptible to inflationary risk because they close all positions daily. 4. buying power limit is 4 times the maintenance margin excess in the account.

Order tickets must indicate:

1.Buy or sell 2. Number of shares 3. The security 4. Whether or not the order is for a discretionary account 5. The account number 6. The time the order was entered 7. The time that the order was executed, if available or the time the order was canceled 8. Any terms and conditions of the order 9. The identity Of each associated person, if any, responsible for the account 10. The identity of any other person who entered or accepted the order on behalf of the customer or, if a customer entered the order on an electronic system, a notation of that entry

outsource

A member firm may ________________ telemarketing functions, but the firm remains responsible for ensuring compliance with all provisions of the telemarketing rules

prime brokerage account.

A prime brokerage agreement is needed to open a _____________________________.

Proxies (absentee voting)

A proxy is 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.

Trust the benefit Account

A trust is an arrangement in which property is managed by one person for the benefit of another person. The trustee is a fiduciary who holds 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.

Types of investment Risks

All investments have risk. The degree of risk varies depending on the investment product or security. As an RR you must be able to understand and explain those risks to your customers.

Joint Tenants With Rights of Survivorship (JTWROS)

An account for two or people, generally a husband and wife. Upon the 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) and then the securities can be registered in the name of the surviving tenant.

6

Customer Account Information must be maintained for ____ years after the account is closed.

quarterly

Customers must receive statements of their accounts at least _________________.

member firm

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

If the custodian is someone other than a child's legal guardian, the guardian cannot exert any control or enter orders in the account.

For Example: If a child's uncle establishes a UGMA for his nephew and names himself as custodian, then the uncle is the only person that can manage the account — not the parents.

Transactions may only be executed by the custodian.

For Example: If the stock certificate is signed by the minor, the certificate is not in negotiable form.

Holding mail

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 consecutive months, the instructions must include an acceptable reason for the request. Convenience is not an acceptable reason.

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

I) The minor attains age of majority in which case the cash and securities remaining will be distributed to the individual, 2. The custodian is removed by a court order, or 3. The custodian dies. If the custodian dies, a successor custodian will be appointed. 4. If the minor dies, the remaining proceeds will be payable to the minor's estate.

proxy

If a broker-dealer receives a ______________ conceming a customer's security being held in street name, then the broker-dealer must send the proxy to the customer promptly. (FINNA Rule 2251)

cash account

If a customer has a ____________________ with instructions to hold securities in "street name," the customer must be informed that the securities can be "registered" later per the customer's instructions.

duplicate

If a customer requests that ____________________ confirmations and statements be sent to an Investment Adviser, the firm must keep on file the written notice of the request along with the Investment Adviser's address.

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 Authorization

If an RR does not have __________________ the RR cannot enter orders on behalf of a customer without the customer's consent.

Discretionary Authority

If customers want to grant 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 that the RR (or another person) is authorized to trade in the account, and obtain the firm's approval.

President of a bank or officer of any financial institution

If the _________________________________ 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.

signed

Once the registered representative has completed the New Account Report form with the customer it must be _____________ by the Branch Manager or Principal. However, the Registered Representative and the customer do not need to sign the form.

Prospecting for new customers

One way for registered representatives to build their customer base is to make unsolicited telephone calls to potential customers. This practice, known as cold calling or telemarketing, is regulated by Federal and FINRA rules.

Trusted contact person

Providing the member firm this information authorizes the firm, at its discretion, to contact the trusted contact person to: a. disclose information about the customer's account to address possible financial exploitation. b. confirm the specifics of the customer's current contact information. c. discuss the customer's health status. d. identify any legal guardian, executor, trustee or holder of a power of attorney on the account.

Erroneous trades example:

The RR receives a report that sell order was executed for 500 PG @ $50 for his customer and communicates that to the customer. A few minutes later he receives a correction and the execution was actually done @ $49. The customer is obligated to accept the $49 execution.

"quality"

The ____________ of the securities traded is not a factor. Churning can happen with penny stocks and blue chip stocks.

holding period

The maximum _____________________ is 3 consecutive months, but more than one holding period can occur within a year, provided none of the holding periods exceeds the 3-month maximUm•

For equity securities

The member must forward all proxy material, annual reports, information statements, and other material furnished by the issuer.

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.

advisors

The way _____________ are paid makes a difference as it affects their incentives.

Full Trading Authorization or Full Power of Attorney

This 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.

Limited Trading Authorization or Limited Power of Attorney

This gives a registered representative the right to make purchase and sale decisions for the account. In other words, the registered representative 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.

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. Probate is a process in which the will of a deceased person is handled in the court system. Beneficiaries remain responsible for any estate taxes. Assets NOT eligible for a TOD include Limited partnership interests, precious metals, variable annuities, fixed annuities, and commodities. A TOD is used for basic securities including stocks bonds, and mutual funds.

trade comparisons

When ___________________ between broker-dealers do not match (such as a price discrepancy), a DK (Don't Know) notice is sent to the confirming broker-dealer.

power of attorney

When a ___________________ is granted, the RR must know essential facts about both the customer and the agent that is granted the power of attorney.

member firm

When acting as a broker, the __________________ 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.

RRs sharing in customer accounts (FINRA Rule 2150)

When registered representatives want to share in a customer's account, they must obtain prior written authorization of their employing member and obtain 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.

Member firms

_________________ do not have to send proxy materials to an ERISA plan fiduciary.

TOD

a ___________ is appropriate for an investor who wants to leave securities to a specific person but maintain control of the assets while they are alive.

Guardian Account

a 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.

Customer's name:

a. A broker cannot open an account in the name of a person other than the customer. b. The account name must match the name that appears in the account documentation. c. New accounts may not be opened in the name of a third party, an alias, or a minor. d. Numbered Account— If a customer wants to open an account bearing only a number or symbol rather than his or her name, the customer must s

The Custodian Account

a. For each UGMA account there may only be: 1. one person as custodian —joint custodians are not permitted. 2. one minor as beneficiary — multiple beneficiaries are not permitted on the same account. b. The account is opened with the minor's social security number, not the donor's or custodian's. Taxes due are paid by the minor. c. Only new gifts permitted. Property already owned by the minor may not be given• d. Stock certificates must be registered in the name of the custodian, not as trustee or guardian. The registration of the securities completes the gift. e. Margin accounts are not allowed for minors - securities may not be e. purchased on margin. Short sales are not allowed in IJGMA accounts. f. Cash proceeds from sales or dividends may be held in a custodian account for a reasonable period if they are reinvested. g. The transfer agent is given the minor's social security number, not the donor's or custodian's SSN. h. Uneamed income over amounts specified by the IRS (Kiddie Tax) for a child under 18 will be taxed to the child at the rate at which it would be taxed at the parent's top marginal rate if that rate is higher than the child's rate.

In handling a joint tenant with rights of survivor ship account:

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

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

a. Limited Trading Authorization or Limited Power of Attorney b. Full Trading Authorization or Full Power of Attorney

The Donor:

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

Customer Account Information:

a. Must be sent to the customer within 30 days of the opening of the account. b. Must be furnished to each customer at least once every 36 months. c. Must be updated within 30 days after receiving notice of a change in the customer's investment objectives.

The Custodian:

a. 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. b. 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. c. Is empowered to collect, hold, manage, invest, and reinvest custodial property as the custodian deems advisable, generally seeking capital growth. d. May, at his or her discretion, use custodial property for support, maintenance, education, and general use and benefit of the minor. e. Is usually permitted to receive compensation for reasonable services (unless he is the donor) and reimbursement for necessary expenses. f. The custodian retains control over the minor's account until either: g. If the custodian is someone other than a child's legal guardian, the guardian cannot exert any control or enter orders in the account. For Example: If a child's uncle establishes a UGMA for his nephew and names himself as custodian, then the uncle is the only person that can manage the account — not the parents. h. Checks can never be drawn on the account in the custodian's own name. i. Transactions may only be executed by the custodian. For Example: If the stock certificate is signed by the minor, the certificate is not in negotiable form.

Pattern Day Traders

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

Discretionary Accounts:

a. They are immediately terminated upon death of the owner of the account. b. Checks (withdrawals) must always be paid to the owner of the account. c. Account owners may waive their right to receive confirmations and statements upon written request. d. Although discretionary authorization has been granted, the owner of the account may still initiate orders. e. The RR must designate each discretionary order as "discretionary" on the order ticket. f. Discretionary authorization is good until revoked in writing by the customer• g. The RR must never make transactions which are excessive in size or frequency. This is called "Churning." Firms must have procedures in place monitor RR trading activity for possible churning and maintain a heightened supervisory review of discretionary accounts. h. All Discretionary orders must be reviewed by a principal of the firm.

Types of trusts include

a. revocable (changeable) b. irrevocable (unchangeable) c. living (revocable or irrevocable trust set-up while the grantor is "living") d. testamentary trusts (a trust created from a will)

Such customer account statements must disclose:

a. the current securities positions in the account. b. any and all money & debit balances. c. any activity such as margin interest, interest, and dividend payments.

Individual Accounts

accounts that are opened for one person Sometimes the individual is referred to as a "natural person," which means that the entity is a corporation or organization.

The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA)

allow the opening of a securities account for a minor. The accounts are commonly used to transfer securities or cash to a minor upon reaching legal age without involving an attomey to establish a special trust. Any account that includes an adult and a minor must be set up as a UGMA/UTMA, not as a joint account.

Fee-based accounts

are charged a flat fee, usually based on a percentage of assets in the customer's account. The fee can be a one-time or ongoing fee, depending on the types of services they provide.

Order tickets

do not have to indicate the name of the Designated Market Maker or market maker who executed the trade.

Financial advisors can be categorized into two types:

fee-based or commission-based.

Fee-based advisors,

have an incentive to grow their client's portfolio in size, as they would get paid more as a result.

multiple owners

in other accounts with __________________ the signatures of all owners who will be authorized to trade the account must be obtained.

Investment Clubs

investment clubs are 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.

Stock/Bond Power

is a legal document printed on the back of a or bond that, when signed, permits the transfer of a registered stock or bond certificate from one owner to another owner.

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.

A Fiduciary

is a person vested with legal rights and powers to be exercised for the benefit of other persons. Examples include: 1. Trustees 2. Executors 3. Administrators 4. Guardians 5. Custodians 6. FBO — for the benefit of

An Investment Adviser

is 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 Adviser 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.

Systematic Risk

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

"Prior business relationship"

is defined as the person contacted has an account with the person making the call and that there has been some form of activity in th e account such as a trade, interest, or dividends received etc., during the last 18 months

Inflationary Risk or Purchasing Power Risk

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

Capital Risk

is the risk of loss of the principal value of an asset or security.

Liquidity Risk

is 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.

Confirmations

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

Time and Price discretion

orders are good for the day of entry only. If a customer wants a Time & Price discretionary order to be good for more than one day, written instructions would be required from the customer.

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.

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) manage(s) and controls the partnership.

The USA Patriot Act

requires, as a minimum, the customer's full and true name, his/her date of birth, a street address and a taxpayer identification number (e.g. a social security number). If a customer refuses to submit this required information, the account should not be opened.

Discretionary agreements

that have been signed and dated by the customer must be maintained on file at the firm as evidence of discretionary authorization for a third party.

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