3RD EDITION UNIT 6**

Just as margin trading can accelerate gains, it can also accelerate losses. If a stock's value drops, the customer's equity in the account will also drop. If the customer's equity drops below25% of the account's market value, the customer receives a maintenance call (also called a margin maintenance call). The customer is then required to deposit additional assets to bring the equity in the account up to the _____% minimum.

25% minimum.

What is a defined contribution plan?

401 (k) plans

How long does a Roth IRA need to be held to be "qualified" (and what age)?

5 years and 59 1/2 or older

PAYMENTS-CASH VS MARGIN Purchase of 1,000 shares of ABC for $20 Calculate the return when stock goes to $30 Cash Purchase: Customer _____________________ Margin Purchase: Customer _____________________

50%; 100%. Customer experiences 50% return (gain / initial investment: $10,000 / $20,000 = 50%) Customer experiences 100% return (gain / initial investment: $10,000 / $10,000 = 100%)

Which of the following may be purchased on margin and used as collateral? A. Nasdaq Stocks B. Options C. Insurance contracts D. Warrants

A and D

Wrap accounts are accounts for which firms provide what?

A group of services—such as asset allocation, portfolio management, executions, and administration—for a single fee.

What type of agreement must be signed by a customer who wants to open a margin account?

A hypothecation agreement.

What is a defined benefit plan?

A pension plan

What is a qualified account?

A retirement account sponsored by an employer

A 73-year old client in the 25% income tax bracket withdraws $20,000 from her traditional IRA. Based on her life expectancy, the withdrawal should have been $30,000. How much tax will she owe? A) $12,500 B) $5,000 C) $7,500 D) $10,000

A. Failure to meet the required minimum distribution results in a 50% penalty on the shortfall. In this case, she took $20,000 when she should have taken $30,000 so there will be a 50% tax on the $10,000 difference ($5,000 penalty). In addition to that $5,000 penalty, the ordinary income tax on the total amount that should have been withdrawn must also be paid (25% × $30,000 = $7,500). Total tax liability on the withdrawal equals $12,500 ($5,000 penalty tax plus $7,500 ordinary income tax). LO 6.e

Margin Maintenance requirements are set by A) FINRA. B) the SEC. C) the FRB. D) the FBI.

A. Maintenance requirements are set by the governing SRO. FINRA is the best answer of this set. FRB sets the initial margin requirement along with the SRO minimum. The FRB does not set maintenance requirements. LO 6.g

What constitutes a discretionary trade? All trades have three key elements: -An action (buy or sell) -The amount of the trade (shares or dollars) -The specific asset to be traded (what you are buying or selling) These three elements are called the three As of discretion. In addition to these three, there is also an element of time and price.

Action; amount; asset

In a Wrap Account, a BD acts as what?

An Investment Advisor

What is a settlor?

Assets are placed into the trust by a grantor (or settlor): the person who owns the assets.

Your customer purchases 200 shares of Seabird Airlines (the ticker is SBRD) at $30 a share in a cash account. Under Regulation T, the Federal Reserve has set the initial margin requirement at 50%. How much does your customer need to deposit for this trade? A) $3,000 B) $6,000 C) $1,500 D) $2,000

B. This is a cash account. There is no margin borrowing, so 100% of the trade's value must be deposited. 200 shares at $30 = $6,000. LO 6.g

2. As the first purchase in a new margin account, your customer purchases 200 shares of ABC stock at $9 a share. The customer is expected to deposit how much to pay for the trade? A. $900 B. $1,800 C. $2,000 D. $450

B. In a margin account, the minimum depositis the higher of 50% of the purchase price (Regulation T) or the FINRA requirement of $2,000 or 100% of the purchase price if less than $2,000. In this case, the 200 shares at $9 is $1,800, below $2,000, so no borrowing is allowed. LO 6.g

4. Your customer calls and requests that you purchase 300 shares of Seabird Coffee Company. He recently read an article online about the company's new collaboration with Sorag coffee makers and likes the prospects of Seabird. This is an example of A. a solicited trade B. an unsolicited trade C. a discretionary trade D. a suggested trade

B. The customer chose this trade and placedit without prompting from the firm or a representative, making it an unsolicited trade. LO 6.h

1. Your customer purchases 200 shares of ABC stock at $9 a share in a cash account. The customer is expected to deposit how much to pay for the trade? A. $900 B. $1,800 C. $2,000 D. $450

B. This is a cash account—100% of the trade must be paid for by the customer. LO 6.g

Your customer, Jim, wants to deposit money into a 529 college savings plan for his great-niece Penelope. He states four reasons why he likes the 529 plan. Unfortunately, you need to tell him he is incorrect on one point. Which of his following points is not considered a feature of a 529 college savings plan? A) The money grows tax deferred. B) If she gets into a good prep school the money can be used for that as well as college. C) She has to use the money by the time she turns 30, so she will not be able to put it off too long. D) The growth can be tax free if used for qualified education expenses.

C. 529 plans grow tax deferred and the funds may be withdrawn tax free if used for qualified education expenses. These plans may be used to fund secondary education (pre-college). There is no age limit on when the funds must be used. LO 6.d

A broker-dealer may extend credit under Regulation T for which of these transactions? A) A mutual fund purchase B) A fixed annuity purchase C) An exchange-traded fund D) The purchase of an IPO at the POP

C. Regulation T governs customer payment and the extension of credit to clients in margin accounts. An exchange-traded fund (ETF) is a security that is eligible for purchase on credit. IPOs and other new issues—such as mutual fund purchases—may only receive loan value (and credit) after 30 days from issuance. Annuities may not be purchased with margined funds.

A margin account allows a customer to borrow a portion of the funds needed to complete a trade. Currently, the required minimum is 50%. Which regulator sets the requirement? A) FINRA B) The OCC C) The FRB D) The SEC

C. The Federal Reserve Board sets the Regulation T requirement. LO 6.g

6. The customer must agree to three specific elements of a trade before the trade's execution for the trade to be nondiscretionary. Which of the following is not required? A. Action B. Asset C. Allowance D. Amount

C. Action, asset, and amount are the three elements. Allowance has no meaning in this context. It was just a good, distracting word that starts with A. LO 6.h

3. When opening a new brokerage account that will allow for margin trading, all of the following forms are required except A. account application B. credit agreement C. consent to loan agreement D. hypothecation agreement

C. The consent to loan agreement is not a regulatory requirement. LO 6.g

Cash Accounts. Corporate stock is purchased in a cash account, and it will settle how? In a cash account, full payment would be required when?

Corporate stock is purchased in a cash account, and it will settle regular way T+2. In a cash account, full payment would be required no later than two business days after T+2—in other words, T+4.

PAYMENTS-CASH VS MARGIN Purchase of 1,000 shares of ABC for $20 Cash Purchase: Customer _____________________ Margin Purchase: Customer _____________________

Customer pays $20,000 for purchase Customer deposits equity of $10,000; borrows the other 50% ($10,000) from BD

Sam Malloy owns a small business and has built a substantial estate both with his business success and his early career as a pro athlete. He would like to begin to move assets out of his estate in a way that will allow him to benefit from the assets, but also allows for an easy transfer to his heirs when he dies. He needs to lower the size of his estate before he passes and hates the idea of a public hearing that is part of probate. Sam should A) place his assets in a transfer on death account. B) create a last will and testament. C) establish a revocable living trust. D) establish an irrevocable living trust.

D. An irrevocable living trust will accomplish his goals. The assets in a revocable trust remain part of his estate as do the assets in a TOD account and a will. Also, a will must be probated. LO 6.c

A registered representative placing trades in a customer account must have discretionary authority if they choose which of the following aspects of the trade? A) The action to be taken and the asset to be traded B) The action to be taken, the asset to be traded, and the amount of the trade C) The asset to be traded and the amount of the trade D) The action to be taken, the asset to be traded, or the amount of the trade

D. In order for a trade to be considered discretionary the representative needs to choose any one or more of the three aspects of the trade (asset, action, or amount). It does not require more than one aspect, so the best response to the question is Action, Asset, or Amount. Any response that includes "and" suggests more than one of the "A"s needs to be controlled and is not accurate. LO 6.h

5. Your customer, Cleveland Brown, would like you to be able to place trades in his account as and when you think best. In order to trade on a discretionary basis in Brown's account, you will need authorization from which of these?I. FINRA II. A principal III. The customer IV. The state administrator A. I and II B. I and III C. I and IV D. II and III

D. Adding discretion to an account requires written authorization from the customer and a firm principal. LO 6.h

Is discretion granted to the representative or the BD?

Discretion is granted to the representative, not the BD. If the representative should pass away or leave the firm, that authority ends.

Custodial accounts can be margin accounts, true or false?

False

Life insurance policies may be purchased in an IRA, true or false?

False

A rollover is when a customer withdraws and takes possession of IRA assets and then returns the assets back to an IRA (or other qualified account) within two months, true or false?.

False. 60 calendar days. A rollover is when a customer withdraws and takes possession of IRA assets and then returns the assets back to an IRA (or other qualified account) within 60 calendar days.

Fee-Based vs. Commission-Based Accounts An alternate way of charging for trading is a fee-based account. In a fee-based account, the customer pays a set fee, either monthly or quarterly, for all trading in the account. The fee may be a set fee for every account, although a fee based on a percentage of the account's value is most common. A fee-based account would be appropriate for customers that trade infrequently, true or false?

False. A fee-based account would be appropriate for customers that trade frequently. This sort of account would not be appropriate for a customer that buys and holds securities with little trading.

Contributions to a Roth IRA are deductible from current income for tax purposes, true or false?

False. Contributions to a Roth IRA are not deductible from current income for tax purposes.

If a corporate charter is silent as to margin, then margin is not allowed, true or false?

False. If silent on the matter, it's allowed

Durable POA continues with the death of the grantor, true or false?

False. It continues with the incapacitation of the grantor. All POA cease with death.

Roth IRAs are subject to the same RMD requirements as other accounts, true or false?

False. You can leave it in there until you die. You paid taxes on it already.

How do you calculate gain on an investment (using gain and initial investment)?

Gain divided by initial investment. Example: stock goes from $20 to $30 (ten dollar gain). 10/20=50%

If the customer's first purchase in a margin account is greater than $4,000, deposit what amount? If it is between $2,000 and $4,000, deposit what amount? If it is less than $2,000, deposit what amount?

If the customer's first purchase in a margin account is greater than $4,000, deposit 50% (Regulation T requirement). If it is between $2,000 and $4,000, deposit $2,000 (FINRA minimum). If it is less than $2,000, deposit 100% of the purchase price (FINRA minimum).

In a cash account, a customer pays when?

In a cash account, a customer pays in full for any securities purchased. Payment is expected by the end of the day on the settlement date.

How does a long margin account work?

In a long margin account, customers purchase securities and pay interest on the money borrowed until the loan is repaid.

How does a short margin account work?

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

What's the difference between a long and a short margin account?

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

Which joint account is common for married couples?

JTWROS

What are the two types of margin accounts?

Long and short.

________________ is the amount of equity that must be deposited to buy securities in a margin account. ________________ refers to securities that can be used as collateral in a margin account.

Margin/Marginable. Margin is the amount of equity that must be deposited to buy securities in a margin account.?? Marginable refers to securities that can be used as collateral in a margin account.

Fee-Based vs. Commission-Based Accounts Most customer accounts are...?

Most customer accounts are commission based, meaning that a commission is charged for each transaction.

Distributions before age 591⁄2 are subject to a 10% penalty, as well as regular income tax. There are exceptions to the penalty (but not the taxes) if the distribution is due to: ?? death of the owner; ?? disability of the owner; ?? a first-time homebuyer's purchase of a principal residence (up to $10,000); ?? education expenses for the taxpayer, spouse, child, or grandchild; ?? medical premiums for unemployed individuals; or ?? medical expenses in excess of defined AGI limits.

Next

Customer accounts that are not part of a retirement plan are what?

Nonqualified accounts

Which 4 securities do you always pay 100%? Not on margin?

RIMO. Rights IPOs Mutual Funds Options

Cash and Margin accounts are governed by what?

Reg T

Under Reg T, full payment for cash (or margin) accounts would be no later than what?

T+4. Two business days after the settlement date (T+2)

Describe what happens in a joint account when one person dies:

TIC: decedent's portion passes to his estate JTWROS: Passes to surviving tenant

Both a traditional and Roth IRA offer tax deferred growth, true or false?

TRUE.

Joint accounts are one of two types--what are they?

Tenants in common or Joint tenants with right of survivorship

What is hypothecation?

The pledging of customer securities as collateral for margin loans (BD keeps some stock as collateral)

Customer Sam Spade calls you and places an order to buy 100 shares of Falcon Studios stock. He further instructs that you may choose the time and price at which to place the trade. Spade has provided you all three of the "A" elements: the action (buy), the amount (100 shares), and the asset (Falcon stock). Is this trade is discretionary?

This trade is not discretionary.

TOD stands for what?

Transfer on Death (beneficiary)

A trust must specifically allow for 'margin' in order to open an account with margin, true or false?

True

An account with a beneficiary (TOD) bypasses any estate and will, true or false?

True

Discretionary trades must be approved by a principal promptly after entry, true or false?

True

If a trust/fiduciary account is silent as to margin, then margin is not allowed, true or false?

True

In a joint account, checks must be made payable to the names in which the account is registered, true or false?

True

Nonqualified distributions of income or gains from a Roth IRA are taxed as ordinary income and subject to a 10% penalty, true or false?

True, however remember that distributions of the cost basis money are always tax free.

Covered call writing is permissible because it is a conservative way to generate investment income within an IRA, true or false?

True. However, certain investment practices are also considered inappropriate for IRAs or any other retirement plan: ?? Short sales of stock ?? Speculative option strategies ?? Tax-exempt municipal securities ?? Margin account trading

__________ (UGMA or UTMA) accounts allow for real estate to be titled in custodial name; UGMA or UTMA accounts do not.

UTMA accounts allow for real estate to be titled in custodial name; UGMA accounts do not.

Francis Dunbar calls you and says, "I have $10,000 sitting in my account. I want you to take that money and purchase a great technology company into my account." Is this a discretionary trade?

Yes it is. Here, Dunbar identified the action (buy) and the amount ($10,000), but the asset was not clearly identified. If the representative decided on the stock to buy and placed the trade without further information from the customer, this would be a discretionary trade.

2. If three individuals have a tenants in common (TIC) account with your firm and one individual dies, then A. the two survivors continue as cotenants, along with the decedent's estate B. the account must be liquidated and the proceeds split evenly between the twosurvivors and the decedent's estate C. trading is discontinued until the executor names a replacement for thedeceased D. the account is converted to joint tenants with right of survivorship

a?

3. A corporation opening a brokerage account must present all of the following documents except A. a new account form B. an authorization from the state department of corporations C. a copy of the corporate charter D. a resolution of the board of directors

b?

4. A trust formed during the grantor's lifetime that may be modified only by the original grantor is normally called A. an irrevocable living trust B. a revocable living trust C. an A-B trust D. a life insurance trust

b?

An individual opens an account with your firm. She tells you that upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others, but she does not want to incur any significant legal expense. You would suggest that the account be opened A. as a joint account with right of survivorship B. as a joint account with tenants in common C. as an individual transfer on death (TOD) account D. under a discretionary power

c?

5. Which of the following investments would not be allowed in a custodial account? A. Covered call options B. Small-company stocks from an emerging market C. Blue-chip stocks D. Uncovered call options

d?

A trust that is funded by a will or some other estate process where the assets are placed in the trust after the owner has passed away is called a what?

decedent's trust.