Series 6 Top off

Special Client Arrangements - Prime Brokerage accounts

- offered by some brokerage firms, involves a clearing firm offering a bundle package of services to sophisticated clients. The firm acts as a centralized location for holding the customers securities positions that are created by serval executing firms which the client trades. - hedge funds, institutions, and high net worth individual clients - the client selects one firm as prime broker to consolidate the bookkeeping. Benefits - enables clients to centralize their clearing and custodial services, they receive one comprehensive report regarding their portfolios. For those who use margin accounts, having one single account lowers the cost of funds

Required and Requested information for opening acct

1. name/residence 2. if customer is of legal age 3. name of rep who is responsible 4. if customer is a coporation, partnership, or legal entity, - the names that the business is be transacted 5. signature of partner, officer, manager accepting account A request must be made for: -Social security number -occupation and employer's name/address -if they are associated with another firm -annual income and net worth -investment objectives All previous info is necessary prior to opening an account. If the customer refuses to supply any info the rep should document the fact they made the effort and was refused

Regulation Best Interest (Reg BI)

2019 SEC adopted a package of rulemakings and interpretations that are designed to enhance the quality and transparency of retail customers' relationships with broker-dealers and investment advisers. Rules bring legal requirements and mandated disclosures in line with investor expectations, while preserving access to a variety of products nd services.

College funding

529 plans, uniform gifts/uniform transfers to minors act (Ugma/utma0), Coverdell education savings

Verification of Client Information

Account information - ensure that a rep has characterized a client's profiles and investment objectively properly. Info collected must be sent to the customer within 30 days of opening. Periodic updates sent at least every 36 months thereafter. Tax information - a rep must request a client's social security number or tax ID number. If they don't, they might have backup withholding. Customers usually are asked w-9 - this certification verifies the info

Non-Financial Considerations

Age, time horizon, investment experience, risk, and social values Age - farther from retirement can tolerate more risk. People nearing retirement are at peak earning potential and risky and long-term investments that may not outlive investments and have fewer opportunities to make up the losses Time horizon - longer the time horizon the more volatility a portfolio can take. Investment experience - insight about customers' ability to understand investment recommendations and the risks. Risk - the chance that investment actual return may be different from the expected return --- risk tolerance - considers finances but also values and attitudes. Social values - how social environment impacts companies in their investment portfolios - human rights, global warming, ethical labor etc..

Reporting Requirements and Limitations on Insiders

As defined by the securities exchange act of 1934 - an insider is any director, officer, or owner of more than 10% of the voting stock of a corporation and his immediate family members. Within 10 days of being an insider a report must be submitted to SEC on form 3. Must report any stock holding the next day on form 4 Trading Limitations - insiders cannot keep short-swing profits in any stock of the corporation for which they are insiders. A short-swing profit is the result of an insider selling their stock at a profit 6 months after it's acquisition. If they also sell it and then within 6 months of the sell they repurchase it at a lower price. Companies could sue them to regain profit. Insiders on certain occasions use a technique called shorting against the box (executing a short sale against the long position that's held elsewhere) to ensure the timely delivery of securities that may be in legal transfer. They may sell covered calls against stock that they already owned but not sell calls uncovered.

General Obilgations

Brokerae firms must fulfill the following 4 obligations under Regulation BI 1. Disclosure - provide certain required disclosures regarding any recommendation made to a retail customer and relationship between the firm and customer before or at the time of recommendation 2. Care - exercise reasonable diligence, care, and skill in making recommendations 3. Conflicts of interest - establish, maintain, and enforce written policies and procedures that are reasonably designed to address conflicts of interest 4. Compliance - establish and maintain enforce written policies and procedures to achieve compliance with BI

Passive income

Category of income derived from a business venture which an investor doesn't have an active role. Limited partnerships could be passive income. Passive income is taxed as the same as earned and investment income. Passive income can only be used to offset other passive income though

Joint Tenancy with Right of Survivorship (JTWROS)

Equal ownership, most common. if one dies than the account will go to remaining tenant without being subjected to probate

Fiduciary Accounts

Fiduciary - person who acts on behalf of or benefit of another person. Executors, administrators of estates, trustees, guardians, receivers in bankruptcy, committees or conservators for incompetents, and custodians for minors. Uniform Prudent Investor Act (UPIA) - acknowledges there should be no categorical restrictions on investments, and focuses on identifying investors' objectives and appropriately diversifying portfolios Trusts - trustee in charge of managing assets for the beneficiary. Legal control but must manage in the best interest of trustee. Must have evidence and a copy of the agreement -- Revocable - has the ability to make any changes, even cancelling it. Assets don't transfer until death. Avoids probate when funded prior to grantors' death -- Irrevocable - once assets are deposited, grantor can no longer modify. Reduces estate tax and avoids probate

Occupations

If someone works for Wells fargo for example and another FINRA regulated company they may be rules and restrictions

Account registration - Forms of account ownership

Individual accounts - opened by and for one person. Only person who may direct activity unless 3rd party authorized.

Estate and Gift Taxes

Individuals may transfer assets or give a gift up to 15k to anyone without incurring gift taxes. If married, 30k. For gifts over 15k the donor is required to pay a gift tax return. If the value of a person's estate exceeds a certain amount, they will have to pay tax. Spouses can gift each other an unlimited amount of things without having to pay gift taxes

Taxation 6 application

Know what's appropriate for each client. A doctor is most likely in high tax bracket so a tax-free bond may be more desirable. Versus, conservative retiree looking for bond income the best may be a U.S. treasury security - very low credit risk

Net worth and liquid net worth

Net worth represents everything a person owns, however a more realistic assessment is liquid net worth. Liquid net worth excludes assets that are not readily convertible to cash such as real estate, limited partnership interests, and stock in small companies

Client relationship Summary (CRS)

New relationship summary that the broker-dealer must provide a disclosure document. Provide retail investors with the information about the nature of their relationship with their financial professional - new retail investors must receive a copy of form CRS by no later than the time they open a broker account, place an order, or receive recommendation for an account time, securities or investment strategy - all existing retail customers will receive CRS forms from early in the summer 2020

Time/Price Exception

Not -held orders- Not considered a discretionary order if the owner indicates the specific security, buy or sell, number or shares, but leaves it up to time or price of execution. Must give written instructions if Not-held order is to remain in effect for more than a day Trades only - limited POA Trades, deposits, withdrawals - Full POA Not-held Orders (for one day) - None

Trading Authorizations

Power of attorney (POA) - authorized can trade the account, the customer may offer full or limited to be permitted to execute trades, additional info and documentation are required. This is if a client wants to assign a third party to have trading authority - family members, attorneys, investment advisers, registered reps Limited vs Full POA limited - can only place orders but not withdrawals Durable POA - allows for third party to still have authority if grantor' becomes incapacitated - mental or health etc..

SEC regulation SP

Privacy of consumer financial information - november 1999 the gramm-leach-bliley act was passed. Required institutions to establish privacy poilcies about customer's info. Notify customers of policies. Give them the option to opt out of any disclosures of non-public personal information being disclosed to third parties Scope of information that must be protected - publicly available information doesn't need to be protected Privacy notice - firms must provide customers wit ha description of privacy policies. Must state the type of personal info the firm collects and categories of both affiliated and unaffiliated third parties to whom their info may be disclosed to -- timing of notice depends on a client's relatipnship. ----- customer - ongoing relatiopnship, consumer is in the providing info part for a potential transaction -- customers are provided the notice at introduction and consumers must be provided the notice before it discloses non-public info Identity theft prevention - FTC red flags rule - the federal trade commission's (FTC) requires financial institutions to create and implement wirtten identity theft program. Must protect, prevent, and mitigate identity theft. Use of Stock holder information for Solicitation - must protect the clients info, if a frim acting a trustee for a corporation uses shareholder information to cold call or prospect it typically is a violation

Types of taxes

Progressive (graduated )- a person with a higher income will pay at a higher percentage than a person at a lower. Examples - income, gift, or estate taxes Regressive - tax is the same regardless of the amount of income. Examples - sales, excise, or social security tax

Sales Contests

Reg BI effectively bans all sales contests, quotas, bonuses, and other non cash compensations that are tied to sales of specific securities or types of securities within a limited period. But compensations based on total sales and growth and satisfaction are allowed.

Suitability

Reg BI serves to supplement FINRA suitability rules, firms are required to comply with both. The difference is a retail customer applies to Reg BI and FINRA covers an institutional customer - a natural personal who has total assets of that at least 50M. Reg BI doesn't establish a dollar limit.

Retail customer

Reg Bi only applies to retail customers. Which is defined as a natural person, or this person's non professional legal representative who: Receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer Uses the recommendation primarily for personal, family, or household purposes - NOT legal representatives or fiduciaries

Recordkeeping requirements

SEC and FINRA require to maintain account info that updated for at least 6 years after the update is made. They must also have them for at least 6 years since the account is closed.

Taxation

Tax implications must be taken into account when making recommendations to customers. should not be the sole factor when making recommendations

Customer Screening

The bank secrecy act (BSA) is the primary U.S. anit-money laundering (AML) law and was amended to include certain provisions of the US patriort act to disrupt terrorist financial networks Customer Identification program - part of AML compliance program. Broker-dealers must create a CIP in order to verify identities - in case their a terrorist etc.. Individuals on governmental lists - firms and reps must make certain that they aren't doing business with anyone on a list maintained by Treasury department office of foreign assets control (OFAC). OFAC identifies known and suspected terrorists, other criminals, and pariah nations. Customer verification - identity must be verified within a reasonable period. - name, DOB, address, identification number Taxpayer ID Exception - broker-dealer that receives an app to open an account may waive the obligation of a taxpayer ID provided the person has applied for, but not yet received the number. While waiting on the number they must retain a copy of the person's taxpayer identification application Record Retention - maintain records of methods used to verify a customer's identity for 5 years following the closing the account

Account Registration Changes

These results come from death, divorce, or simply transferring securities to another individual May require: -marriage certificate, divorce decree, or court document. Drivers licenses aren't accepted because of potential fraud - to remove from the account - birth date, social security number, and contact info for person added - principal must approve and comment all changes before any transactions

Dividend income

This form of investment income is paid to owners of equity securities. Dividends may be paid in cash or additional shares of stock, each form of payment is treated differently for tax purposes Cash dividend - typically paid out quarterly or semiannually. Taxable in the year of receipt Stock dividend - paid in the form of additional shares. Not taxable at the time of receipt. Rather than it being declared as additional income, the stockholder must adjust the cost basis per share of her position in the stock

Marginal Tax Rate

a person's marginal tax represents the tax rate that would apply to any additional dollars of taxable income earned. U.S. Tax system is aggressive so a person's tax rate rises as a person rises two ore more tax brackets. Ex. if a person income falls in to three brackets he would pay 10% for first portion, 12% for second, and 22% for the third and marginal tax rate would be 22%

Special Tax Treatment for Qualifying Cash Dividends

a qualified dividend is a dividend is taxed at the same rate as long-term capital gains rather than at an investor's ordinary rate. Most dividends from U.S. companies are qualified. Except real estate investment trust (REIT)

institutional account

account of bank, savings and loan associating, insurance company, registered investment company, registered investment adviser, or any person with total assets of at least $50M

Wrap Accounts

an account in which one fee - ranging 3% annually, charged by a broker-dealer for a number of services. Used to cover administrative=, portfolio management, and transaction costs. offered by a broker-dealer, but managed by an investment adviser - for people interested in trading frequently

Sole proprietorship Accounts

business that are often opened under the name of the individual owner, but can be in a different business name. owner is subject to creditors'

Account restrictions

certain restrictions may need to be placed on a customer's account, maybe conflicts of interest that don't allow the individual to establish long or short positions in certain securities or the client may fail to pay or deliver securities on a timely basis The Federal reserve board (FRB) requires payment be made before purchases in cash and margin accounts within 2 business days of the settlement (S+2), which is no more than 4 business days after the trade date (t+4). payment extensions can be granted by FINRA. if no payment is made and no extension granted, the position is closed o the 3rd business day following settlement. Resulting in the account being frozen for 90 days, in which payment or delivery must be obtained prior to accepting an order

Earned Income

compensation a person receives for providing goods or services and includes salaries, commissions, and wages earned through employment. It is taxed by the customers tax bracket - considered the marginal tax rate

Community property accounts

essentially same as JTWROS but only permitted between legally married couples

Discretionary account

firm is also required to maintain a record of manual signature of each named natural person and the date they were authorized to exercise discretion

Interest income

form of investment income derived from the ownership of certain debt securities (bonds). The tax treatment of interest that's received by investors differs according to the bond issuer. Issuers - corporations, U.S. gov, municipalities corp - Yes, federal taxation. Yes local and state tax U.s. gov - yes federal taxation, no state and local Municipalities - no to federal, depended on issues of state if local and state tax applies

Titles

if you don't have the proper certifications, series 65 or 66 you can't use advisor or adviser in title

Numbered and Nominee Accounts

in order to protect privacy, clients can trade under nominee names or use an account number - firms still have to hold records of owners of accounts

Investment income

income derived from investments. Important to understand the local, state, and federal tax consequences of each type of investment income.

Alternative Minimum Tax (AMT)

introduced as a method of calculating tax liability to ensure that wealthy individuals who derived income from certain types of investments pay at least a specified minimum amount of taxes - some taxpayers are required to adjust taxable income based on their investment in assets that produce certain tax-preference items. municipal bonds, various depreciation expenses, variety of events from owning limited partnership interests

Speculation

investment objective that seeks investments that have potential for above-average returns. Has a higher risk. Day trading, hedge funds, small micro-cap stocks Reps need to make sure they have sufficient finances, understand the risks, have portfolios with less risky investments

Capital Gains

investment sold for greater value than cost basis. If investment is held for 1 year or under, it's considered short term and taxes as ordinary income. If it's been held for more than one year, the gain is considered long term and taxed at the maximum rate of 20%

Preservation of capital

investors concerned with the potential loss o capital will invest in securities that provide safety. Achieving a return is the goal they just prioritize the preservation of capital - don't want to put principal at risk

Current income

investors looking for steady income, usually invested in bonds, preferred stocks, and fixed annuities. Downside is they usually provide little if any growth.

Tax relief

investors with substantial incomes that are subject to high marginal tax rates. Search for investments to provide tax relief. municipal bonds, annuities, traditional IRA's, employer retirement plans that are tax deferred. Look for tax credits and deductions

Accounts at other Broker-Dealers and Financial institutions

member firms are required to monitor the personal accounts of employees that are opened at a frim other than they were at. The firm and employees have to follow special rules Employee requirements- must obtain the prior consent of their firm, and provide written notification to the executing firm of their associating with another member firm --- Related and other persons - applies to any account in which securities transactions can be executed in which the employee has a beneficial interest, including those held by: - employee's spouse, children, any individual or a related person whose account the employee has control Previously Opened accounts - if employee has a previous account then they must obtain the written consent of new employer within 30 days to keep the account Executing Broker-Dealer Requirements - executing firms must provide duplicate copies of confirmations, statements. all transactional info Exemptions - the requirements of this rule doesn't apply to accounts that are limited to transactions involving redeemable investment company securities (mutual fund shares), unit investment trusts, variable contrast, or 529 plans

Joint accounts

more than one owner, can both initiate activity. Sometimes there are required for both to be present - like transferring securities

Investment Adviser accounts

most registered with SEC or one state and referred to RIA's - registered investment advisers. Buy and sell securities on a discretionary basis. RIA may open one account with a broker-dealer that contains all of it's advisory clients assets or can have each individual client set up a separate account with a broker-dealer and have the client provide the adviser with third-party trading authorization

Approving Customer Accounts

must be approved in writing by a registered principal. Type of securities being pursued determines who the principal is.

Predispute Arbitration Clause

new account forms contain a clauses that obligates customers to submit all disputes with their rep or firm to binding arbitration. If arbitration clauses are included in teh form - it's required to appear in certain format with certain wording Disclosures: - Arbitration is final and binding on the parties - the parties are waiving their right to seek remedies in court, including jury and trail - prearbitration discovery is generally more limited and different - not required that arbitrators award include factual findings or legal reasoning - panel of arbitrators includes a minority or arbitrators who were affiliated with securities industry

Unincorporated Association accounts

opened in the name of the owner, which can be a business name. Ownership of account is subject to creditors' claims

Capital reserve

people should establish a cash reserve of at least of 3 months of fixed expenses. If cash reserve isn't available capital reserves should be kept in a safe, liquid investments accounts like money-market accounts

Retirement funding

people who retire in mid 60s need a portfolio to last at least 20 years or more.

Corporate accounts

rep must be certain that the person opening the account is authorized to do so. Need a corporate resolution which is a document created by the board of directors which appoints one or more persons to the account Corporate resolution and corporate charter Cash account trading - yes, no Margin Trading - yes, yes Options trading - yes, yes

Required signatures

standard brokerage accounts - only approving principal signature is needed - opening a new cash acct signatures aren't required but margin accounts they are

Deferred Income

the earned income in an account which requires that taxes be paid at a later date. The earnings in retirement plans, annuities, and other accounts aren't taxed currently but set for a later date. Taxed at the individual's tax bracket

Taxation of investment income

the manner in which income is taxed is often a function of the source of that income. Most earned, passive, deferred, and investment income is taxed as ordinary income which is based on an individual's tax bracket

Partnership accounts

to open an account, a member firm must collect info from each general/managing partner. Name, address, citizenship, and tax identification. A partnership agreement specifies who is authorized to execute transactions.

Internal transfers

transferring securities to another individual's account. a stock transfer must be completed and all parties must approve

Filing Tax returns

unmarried = single, if they are the head of the household and have dependents they may file as head of household - qualifies for lower rates and higher standard deduction Married - jointly or separately - more tax benefits for separately

Discretionary Accounts

when a rep is the authorized third party, it's referred as a discretionary account. Some firms don't permit this, while others will allow it in with limited trading authorization. If m=permitted a principal must accept the discretionary authorization in writing before it's effective. Each discretionary order must be approved on the day of the trade with activity reviewed frequently. Excessive trading (churning) is an area of CONCERN. Then one must examine the goals of customers and review the trades being made. When a third party manages a discretionary account, usually authority isn't needed when executing transactions unless they are wanting to buy stock in the company the third party works for

Capital Losses

when an investment is sold at less than cost basis. 1 year or under short term, over 1 year is long term also - capital losses are not taxes, weigh gains against losses and find a net capital gain or loss

Meeting Fiduciary Obligations

when investments are involved for a 3rd party, sometimes the rep needs to look at the 3rd parties portfolio