Unit 5 (Series 7)

Three basic steps apply at the death of a customer

-Cancel open orders -Freeze the acct (mark it deceased) -Await instructions from the executor of the estate

Before opening a account a broker/dealer must obtain at least:

-Customer name -DOB -Physical address (no PO) -SSN Exceptions for ppl who have applied for a SSN

The registered rep for a fiduciary acct must be aware of the following rules:

-Proper authorization must be given-the necessary court docs must be filed with and verified by the broker/dealer -Speculative transactions are generally not permitted -Margin accts are only permitted if authorized by the legal docs establishing the fiduciary accts -the prudent investor rule requires fiduciaries to make wise and safe investments -many states publish a legal list of securities approved for fiduciary accts -a fiduciary may not share in an accts profits but may charge a reasonable fee for services

The firm may take exception to the transfer instructions if...

-The acct # is invalid -The ssn on the instruction does not match -the acct title does not match -The customers sig is improper The firm may not take exception soley because of a dispute about the value of the cash or securities in the acct.

A firm is permitted to hold mail for a customer who will not be receiving mail provided that:

-The member receives written instructions that include the time period the request is being made for up to 3 mo (unless special circumstances) -The member firm informs the customer of methods such as email and members website as sources to receive or monitor account activity -The member verifies at reasonable intervals that the customer's instructions still apply

Under provisions of the USA Patriot Act, broker/dealers are required to:

-Verify the identity of any new customer -Maintain records of the info used to verify identity -Determine whether the person appears on any list of known or suspected terrorists or terrorist organizations

A discretionary order is missing

-activity (buy or sell) -amount (# of shares) -assets (the security) Price and time do not apply

The custodian has full control and can:

-buy or sell securities -exercise rights or warrants -liquidate, trade or hold securities

FINRA rules regarding instructions from customers sent to a firm by email:

-verify that the email was sent by the customer -be designed to identify and respond to "red flags"

A copy of the account record must be furnished to each customer within..

30 days of opening the account

How to open a prime brokerage acct?

A member (the prime broker) must sign an agreement with the customer spelling out the terms of agreement as well as names of all executing brokers the customer has contracted with. The prime broker will then enter into written agreements with each executing broker named by the customer. The customer then rcvs trade confirmations and acct statements from the prime broker.

Fiduciary/Custodial acct

A person other than the owner initiates trades. The investments exist for the owners beneficial interest yet the owner has little or no legal control over them. The fiduciary makes all of the investment, management and distribution decisions and must manage the acct in the owners best interest. The fiduciary may not use the acct for his own benefit, although he may be reimbursed for reasonable expenses incurred in managing the acct.

Which of the following individuals could most likely open an account at a FINRA member firm without notifying or receiving permission form their employer? A) A bank employee selling fixed annuities only B) A government security trader employed by a member C) An agent who sells variable annuities D) A purchases and sales clerk of a member

A) A bank employee selling fixed annuities only

Your broker/dealer acts as a prime broker for ABC fund. In this arrangement, your broker/dealer is likely to be providing which of the following services? Execution of all transactions for the fund portfolio Clearing services Lending for trades done on margin Ensuring that all exchange-trading rules are complied by A) II and III B) II and IV C) I and IV D) I and III

A) II and III

Which of the following is the beneficial owner of securities in an UTMA account? A) The custodian. B) The minor. C) The donor. D) The guardian.

B) The minor.

When a customer gives limited power of attorney to his registered representative, which of the following statements is TRUE? A) The customer must renew the power of attorney each year. B) The power of attorney must have the customer's signature. C) The registered representative needs written permission from the customer for each trade. D) A principal must initial each order before it is entered.

B) The power of attorney must have the customer's signature.

A customer signs a trading authorization form granting written discretion over the account to the registered representative. All of the following practices are permitted EXCEPT A) buying or selling stocks without notifying the customer B) leaving order tickets unmarked as either solicited or unsolicited C) shifting funds among several mutual funds within a fund family, based upon the representative's expectations for market performance D) notifying the customer periodically of the account's performance

B) leaving order tickets unmarked as either solicited or unsolicited

6. Which of the following would be considered discretionary? A. Order that specifies the size of the trade and name of the security but leaves the choice of price and time up to the registered representative B. Account in which the broker has the power to decide when and what to trade, without specific customer authorization for those trades C. Joint account with right of survivorship D. Joint tenants in common account

B. Account in which the broker has the power to decide when and what to trade, without specific customer authorization for those trades

9. The documents required to open a cash account for a customer and give a sibling trading authorization include I. a new account form II. a loan consent agreement III. a customer margin agreement IV. a limited power of attorney A. I and III B. I and IV C. II and III D. II and IV

B. I and IV

7. One of your clients dies. Upon notification of the death, you should immediately do all of the follow-ing EXCEPT A. mark the account Deceased until proper documents are received B. obtain the names of beneficiaries of the estate for the purpose of notification C. cancel all GTC orders for the account D. cancel all day orders for the account

B. obtain the names of beneficiaries of the estate for the purpose of notification

15. All of the following are true of custodial accounts EXCEPT A. the account should contain the Social Security number of the minor B. securities in a custodial account may be kept in street name C. custodial property may be used for support of the minor D. only an adult may make a gift under the act

B. securities in a custodial account may be kept in street name

Who are prime brokerage accts likely to be offered to?

Broker/dealer's more active trading clients like hedge funds who may require a number of executing broker outlets to conduct their transactions & who can benefit by having margin requirements that are netted across all of the prime brokers positions.

A customer, without giving written authorization, may permit a registered representative to exercise his judgment as to: the security. the price at which to enter the order. the amount of shares. when to enter the order. A) I and III. B) I and II. C) II and IV. D) III and IV.

C) II and IV.

When a member firm opens an account for a registered representative of another member, the employer-member must be sent written notification A) only if requested by the registered representative B) within 5 business days C) before executing an order D) either by the representative or by the firm opening the account

C) before executing an order

If two brothers open a joint account tenants in common, at year's end, the member firm carrying the account will send Form 1099 to: A) the brother with the largest percentage interest in the account. B) both of the brothers. C) the brother whose Social Security number is on the account. D) either of the brothers.

C) the brother whose Social Security number is on the account.

13. A new account is opened joint tenants with rights of survivorship. All of the following statements are true EXCEPT A. orders may be given by either party B. mail can be sent to either party with the permission of the other party C. checks can be drawn in the name of either party D. in the event of death, the decedent's interest in the account goes to the other party

C. checks can be drawn in the name of either party

14. All of the following information must be obtained from new customers EXCEPT A. employer name and address B. date of birth C. educational background D. citizenship

C. educational background

1. If a customer wishes to open a numbered account, you should inform him that A. it may be opened only with prior permission from the SEC B. numbered accounts are restricted to cash accounts C. he will have to supply a written statement attesting to his ownership of the account D. he will have to supply proof of U.S. citizenship and reside permanently in the United States

C. he will have to supply a written statement attesting to his ownership of the account

For custodial accounts, all of the following statements are true EXCEPT A. an UGMA account may have only one custodian for only one minor B. only an adult can make a gift to a minor C. the maximum amount of money an adult can give to a minor in any one year is limited D. once a gift is given to a minor, it cannot be reclaimed

C. the maximum amount of money an adult can give to a minor in any one year is limited

A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need? The corporation's charter, account resolution, and bylaws. A copy of the corporation's most recent balance sheet. The corporation's last 3 profit and loss statements. The name(s) of natural persons authorized to trade the account. A) I and III. B) II and III. C) II and IV. D) I and IV.

D) I and IV.

Under FINRA's rules governing the activities of broker/dealer firms, prior notification to the employing firm and prior written consent from the employing firm would be required in order to open a cash account for all of the following EXCEPT A) an exchange employee B) an employee of another member C) a registered representative of another member D) a bank officer

D) a bank officer

Which of the following individuals may NOT open a joint account? A. Two spouses B. Three sisters C. Two strangers D. Parent and a minor

D. Parent and a minor

8. Under which of the following circumstances may a gift given to a minor under UGMA or UTMA be revoked? A. At any time before the minor reaches the age of majority B. If the minor dies before reaching the age of majority C. If the custodian dies before the minor reaches the age of majority D. Under no circumstances

D. Under no circumstances

5. A dealer must use special procedures whenever it opens a municipal securities account for A. a clerical employee of another dealer B. the spouse of a trader employed by another dealer C. the minor child of an operations supervisor employed by another dealer D. all of the above

D. all of the above

All of the following statements regarding customer accounts are true EXCEPT A. stock held in a custodial account may not be held in street name B. the customer who opens a numbered account must sign a statement attest-ing to ownership C. stock held under JTWROS goes to the survivor(s) in the event of the death of one of the tenants D. margin trading in a fiduciary account does not require any special consideration

D. margin trading in a fiduciary account does not require any special consideration

12. An employee of another broker/dealer would like to open an account with your firm. Under FINRA rules, all of the following statements regarding the employee and the account are true EXCEPT A. the employer must receive duplicate copies of all transactions made in the account if requested B. prior notice to the employer is needed for a cash account C. prior notice to the employer is needed for a margin account D. the broker/dealer holding the account must approve each transaction made by the person before entry of the order

D. the broker/dealer holding the account must approve each transaction made by the person before entry of the order

Which of the following persons are considered fiduciaries? I. Executor of an estate II. Administrator of a trust III. Custodian of an UGMA/UTMA account IV. Conservator for a legally incompetent person

D.) I, II, III, IV

Cash on delivery (COD)

DVP securities are delivered to a bank or depository against payment.

The primary types of trading authorization are:

Discretionary, Custodial, and Fiduciary

A cash and a margin accts are considered how many accts?

Just one

Notification and Confirmation Requirements (FINRA)

Margin acct: Notification (not permission) Cash acct: Notification (not permission) Duplicate Confirm: Upon written request

Notification and Confirmation Requirements (MSRB)

Margin acct: Notification (not permission) Cash acct: Notification (not permission) Duplicate confirm: Must supply confirms, other acct info if requested.

Trust agreement

Must be included for an acct for a trustee. Details the limitations placed on the fiduciary.

Is any documentation of custodial rights or court certs required for an individual acting as a custodian for a UGMA or UTMA?

No

Must the acct approval take place before the first trade?

No, it can be done promptly after the completion of the first transaction

When opening a cash account, whose is the only signature required?

The principal accepting the account. Neither the registered rep nor the customer are required to sign the new account agreement.

Trust acct

Type of fiduciary acct. Money or securities are place in trust for one person, often a minor, but someone else manages the acct. The manager or trustee is a fiduciary.

Trading authorization

When a customer gives discretionary power over his acct or a limited power of attorney with the broker/dealer. Once authorization has been given, the customer is legally bound to accept the decision made by the person holding discretionary authority.

Prime Brokerage Accts

When a customer selects one member firm (the prime broker) to provide custody and other services while other firms called executing brokers handle all trades placed by the customer. The key advantage of a prime brokerage acct is that it usually provides a client with the ability to trade with multiple brokerage houses while maintaining a centralized master acct with all the clients cash and securities. Includes list of specialized services.

Automated Customer Account Transfer Service (ACATS)

When using this service to communicate instructions on form ACAT both validation and transfer can occur. Once the receiving broker has received written instructions from the customer regarding the positions to be transferred, the receiving broker must immediately submit the instructions to the carrying firm member through the ACATS service using form ACAT

Can a customer place a transaction that the registered representative considers unsuitable or has not recommended?

Yes, but in this case the registered rep should mark the order ticket "Unsolicited"

Market not held Order

You are not held to secure a specific price for the order. Must be executed on the day received (day orders) unless the customer has given written instructions to the contrary.

Direct Registration System (DRS)

an offering of the Depository Trust Company that provides registered owners the option of holding their assets on the books and records of the issuer or their transfer agent in book entry form. Its primary function is to facilitate the direct transfer of assets electronically between transfer agents and broker dealers.

Distressed debt

debt instruments of companies that have declared bankruptcy or are considering declaring bankruptcy

If the custodian dies or resigns...

either a court of law or the donor must appoint a new custodian

Reasonable opt out

include providing an electronic means to to opt out for customers who have agreed to the electronic delivery of info, providing a toll-free telephone # or form with a check off boxes.

A custodian account can receive negative tax consequences if...

it is used to pay expenses associated with raising a child

If the beneficiary to of a custodial acct dies, the securities are...

passed to the minors estate, not to the parents' or custodians estate

Office of Foreign Assets Control (OFAC)

publishes and maintains a list of individuals and companies owned or controlled by or who are acting for or on behalf of, targeted countries and individuals, groups or entities that are designated under programs that are not country-specific, such as terrorists and those trafficking in narcotics.

Statements and confirmations may be sent to someone who holds power of attorney for the customer if the customer

requests it in writing and if duplicate confirmations are also sent to the customer

Uniform Transfers to Minors Act (UTMA)

require an adult to act as custodian for a minor (the beneficial owner). Any kind of security may be given to the acct without limitation. The custodian can withold transfer of property in the acct until the new adult reaches age 25 (21 in some states)

Uniform Gift to Minors ACT (UGMA)

require an adult to act as custodian for a minor (the beneficial owner). Any kind of security may be given to the acct without limitation. When the minor reaches the age of majority the property in the acct is transferred into the name of the new adult.

Good delivery form

securities sold from a joint acct must be signed by all tenants.

Indefeasible title

the donor may not take back the gift nor may the minor return the gift.

Joint acct

two or more adults are named on the acct as co-owners with each allowed some form of control over the acct. A joint acct agreement must be signed. The account forms for joint accts require the signatures of all owners. The acct must be designated either TIC or JTWROS. Checks or distributions must be made payable to all parties and endorsed by all parties.

Fee-based accts

Accts that charge a single fee (either fixed or a % of assets in the acct) instead of a commission based charges for brokerage services. Appropriate only for investors who engage in at least a moderate level of trading activity. Before opening a fee based acct, investors be given a disclosure document describing the services to be provided and the cost.

2. Which of the following occurs in a partnership account if one partner dies? A. The surviving partners receive the deceased partner's share. B. The account is frozen until an amended partnership agreement is received. C. The surviving partners are considered joint tenants. D. The surviving partners are considered joint tenants and receive the deceased partner's share.

B. The account is frozen until an amended partnership agreement is received.

Whose signatures does the FINRA rules require on the new account form?

Signature of the principal or branch manager accepting the account FINRA rules do not require the signatures of the registered representative or the customer on the new account form

The docs necessary to release the assets of a decedent for a (JTWROS) acct are:

-certified copy of the death cert *does not preclude the remaining tenant from entering orders

Durable power of attorney

Survives a declaration of mental incompetence

Fiduciary responsibility for custodial accts

-Custodial accts may be opened and managed as cash accts only -A custodian may not purchase securities in an acct on margin or pledge them as collateral for a loan -a custodian must reinvest all cash proceeds, dividends and interest within a reasonable time -investment decisions must take into acct a minors age and the custodial relationship. (High risk securities are inappropriate, options may not be bought bc no evidence of ownership is issued, covered call writing is normally allowed) -stock subscription rights or warrants must be either exercised or sold if they have any value -a custodian cannot delegate away fiduciary responsibility but can grant trading authority and investment decisions to a qualified third party -a custodian may loan money to an acct but cannot borrow from it -a custodian may be reimbursed for any reasonable expenses incurred in managing the acct unless the custodian is also the donor.

Discretionary accts are subject to the following rules

-Each discretionary order must be identified as such at the time it is entered for execution -an officer or a partner of the brokerage house must approve each order promptly and in writing but not necessarily before order entry -a record must be kept of all transactions -no excessive trading or churning -to safeguard against the possibility of churning, a designated supervisor or manager must review all trading activity frequently and systematically

Registered reps must know the following rules of custodial accts:

-an acct may have only one custodian and minor/beneficial owner -only an individual can be a custodian for a minors acct -a minor can be the beneficiary of more than one acct, and a person may serve as a custodian for more than one acct as long as each acct benefits only one minor -the donor of securities can act as custodian or can appoint someone else to do so. -unless they are acting as custodians parents have no legal control over a custodial acct or the securities in it.

The docs necessary to release the assets of a decedent for a (Partnership) acct are:

-certified copy of the death cert -inheritance tax waivers -letters testamentary *the member needs written authority from the remaining partners before executing any further orders. This written authorization generally takes the form of an amended partnership agreement.

The docs necessary to release the assets of a decedent for a (TIC) acct are:

-certified copy of the death cert -inheritance tax waivers -letters testamentary -affadavit of domicile to the member that shows the decedents estate will be handled under the laws of that state

A registered rep who opens a corporate acct must establish:

-the business's legal right to open an investment acct -an indication of any limits that the owners, stockholders, court or any other entity has placed on the securities in which the business can invest -who will represent the business in transactions involving the acct. -a firm must obtain a copy of the corporate charter as well as a corporate resolution.

Fiduciarys include:

-trustee designated to administer a trust -executor designated in a decendents will to manage the affairs of the estate -administor appointed by the courts to liquidate the estate of a person who died interstate (without a will) -guardian designated by the courts to handle a minors affairs until the minor reaches the age of majority or to handle an incompetent person's affairs -custodian of a UGMA or UTMA acct -receiver in a bankruptcy -conservator for an incompetent person

Account transfers must be completed within..

3 business days of validation. The account is frozen during this time except for options expiring within 7 business days.

Wrap accts

Accts for which firms provide a group of services such as asset allocation, portoflio management, executions and admin for a single fee (generally investment advisory accts.

Margin account

Allows a customer to borrow money for investing. The minimum amount of cash or marginable securities a customer must deposit to buy securities. Before the crash of 1929, margin accts were the normal type of acct opened.

Transfer of Death (TOD)

Allows registered owner of the acct to pass all or a portion of it upon death to a named beneficiary. This acct avoids probate (having the decedents will declared genuine by a court of law) because the estate is bypassed. However, the assets in the acct do not avoid estate tax, if applicable

Discretionary accts

An acct set up with preapproved authority for a registered rep to make transactions without having to ask for specific approval. Authority to decide what security, the # of shares or units and whether to buy or sell. Does not apply to the decisions regarding the timing of an investment or the price at which it is acquired.

If a customer would like to open a custodial UGMA or UTMA account for his nephew, a minor, the uncle A. can open the account provided the proper trust arrangements are filed first B. can open the account and name himself custodian C. needs a legal document evidencing the nephew's parents' approval of the account D. can be custodian for the account only if he is also the minor's legal guardian

B. can open the account and name himself custodian

Securities owned by a donor and given to a minor under the Uniform Gift to Minors Act become the property of the minor A. when the securities are paid for by the minor B. on the settlement date C. when the securities are registered in the custodian's name for the benefit of the minor D. when the donor decides to give the securities to the minor

C. when the securities are registered in the custodian's name for the benefit of the minor

New Account Form

Full name of each customer who will have access to the account ■Date of birth ■Address and telephone number (business and residence) ■Social Security number if the customer is an individual, or tax identification number if the customer is another legal entity ■Occupation, employer, and type of business ■Citizenship ■Whether the customer is of legal age ■Annual income and net worth (excluding value of primary residence) ■Investment objectives ■Bank and brokerage references ■Whether the customer is an employee of another broker/dealer ■How the account was acquired ■Name and occupation of the person(s) with authority to make transactions in the account ■Signature of the principal or branch manager accepting the account

"Know Your Customer" rules

Require representatives to know all essential facts about a customers financial situation, present holdings, risk tolerance, needs and objectives.

What are examples of nonpublic personal info?

SSN, Account balances, transaction history and any info collected through an internet cookie

Hold in street name

Securities are registered in the broker/dealers name and held by the broker/dealer. Although the broker/dealer is the securities' nominal owner, the customer is the beneficial owner.

Transfer and ship

Securities are registered in the customers name and shipped to them

Transfter and hold in safekeeping

Securities are registered in the customers name and the broker/dealer holds them in safekeeping

Partnership agreement

States which of the partners can make transactions for the acct. If the partnership opens a margin acct, the partner ship must disclose any investment limitations. An amended partnership agreement must be obtained each year if changes have been made.

Tenants in Common (TIC)

TIC ownership provides that a deceased tenants fractional interest in the acct is retained by that tenants estate and is not passed to the surviving tenants. Each party must specify a % interest in the acct.

What must new customers be advised before the account is opened?

That the firm is requesting info to verify their identities, this notification may be placed on the firms website, delivered verbally or place on the new account form.

Delivery versus payment (DVP)

The broker/dealer must verify the arrangement btwn the customer and the bank or depository, and the customer must notify the bank or depository of each purchase or sale. In addition, the customer designates whether the broker/dealer should hold or forward any cash balance.

Who is responsible for the taxes on any investment income produced by the acct?

The minor must file an annual income tax return and pay taxes on any investment income at the parents tax rate until the minor reaches the age of 18 or 24 if a full time student. It is still the parents or legal guardians responsibility to see that the taxes are paid

Guaranteed Accts

The rep must get a statement from the customer attesting that no one else has any interest in the 2nd and subsequent accts and that each account unreservedly guarantees the others.

Donor

When a person makes a gift of securities to a minor under the UGMA or UTMA laws.

Trading authorization/ power of attorney

When accts are opened with someone other than the owner having the authority to buy or sell securities on behalf of the owner.

How often must a firm provide a privacy notice describing its privacy policies?

Whenever a new account is opened and annually thereafter.

Equity linked notes (ELN)

a debt instrument where the final payment at maturity is based on the return of a single stock, a basket of stocks or an equity index. They are considered nonconventional structured investments. They can be exchange traded or traded OTC

Community porperty

a marital property classification recognized by some, but not all, states. In these jurisdictions, most property acquired during the marriage is considered to be owned jointly and would be divided at the time of divorce, annulment or death.

Discretionay

a registered rep or other person who has been given written authorization from a customer to make trading decisions for the customer

Fiduciary

a third party who has been legally appointed to prudently manage the account on behalf of another person or entity.

Limited power of attorney (limited trading authorization)

allows an individual to have some, but not total, control over an acct. The doc specifies the level of access the person may exercise. Allows the entering of buy and sell orders but no withdrawal of assets.

Full power of attorney

allows someone who is not the owner of an acct to: -deposit or withdraw cash and securities -make investment decisions for the acct owner

Partnership Acct

an unincorporated association of two or more individuals. Cash, margin, retirement and other types of accts necessary for business purposes.

Non conventional investments (NCI)

are alternative investments that do not fit a common category. Examples: Hedge funds, Distressed debt, and Equity linked notes (ELN). FINRA requires members that sell these products to conduct the appropriate due diligence ex. receive prior written consent before purchasing them.

Numbered Accts

at a customers request, his account may be identified by only a number or symbol. The customer must sign a form certifying that he owns the acct identified by the number or symbol and must supply other info identifying themselves

Cash account

the basic investment account. Anyone who can open an investment acct can open a cash acct. A customer pays in full for any securities purchased. Personal retirement accts, corporate retirement accts and custodial accts must be opened as cash accts. Sometimes called special cash accts.

After a account has opened an update of the account must occur..

Every 36 months thereafter

Are firms required to hold mail?

No, it is done as a courtesy.

Regulatory bodies have rules and special procedures regarding the establishment of accts for certain individuals including:

-Employees of broker/dealers and -Spouses or minor children of broker/dealer employees

3. Three individuals have a tenants in common account with your firm. If one individual dies, which of the following statements is TRUE? A. The account must be liquidated and the proceeds split evenly among the two survivors and the decedent's estate. B. Two survivors continue as co-tenants with the decedent's estate. C. Trading is discontinued until the executor names a replacement for the deceased. D. The account is converted to joint tenants with rights of survivorship (JTWROS)

B. Two survivors continue as co-tenants with the decedent's estate.B. Two survivors continue as co-tenants with the decedent's estate.

What types of account ownership are there?

Individual, joint, corporate and parternship

How long does a firm have to validate or take exception to transfer instructions?

One business day

Registered name

These persons are the acct owners and the only individuals allowed access to and control of the investments in the acct.

Hedge funds

Aggressively managed and unregulated portfolios of investments that uses advanced investment strategies

Joint Tenants with Rights of Survivorship (JTWROS)

JTWROS ownership stipulates that a deceased tenants interest in the account passes to the surviving tenants. All parties have undivided interest in the acct

When opening a custodial acct it must include:

The custodians name, the minors name and ssn and the state in which the acct is registered.

Custodial

a adult who has been designated to act on behalf of a child, who is the beneficial owner of the account