STC Series 7 Chapter 2 & 3: Customer Accounts & Communication
Which cautionary statement must be included with advertisements including performance indicators?
"Past performance does not guarantee future results and investment return will fluctuate. Therefore, the investor's shares when redeemed may be worth more or less than their original cost. Additionally, current performance may be lower or higher than the data contained in the advertisement."
Describe the type of POA required for the following three activities: (1) Trading, deposits, and/or withdrawals of funds (2) Trades Only (3) Not-Held Orders (for one day)
(1) Full POA (2) Limited POA (3) None
Define & Describe the 3 Types of Joint Ownership Accounts?
- Joint Tenancy with Right of Survivorship (JTWROS) JTWROS accounts are owned by at least two people, where all tenants have an equal right to the account's assets and are afforded survivorship rights in the event of the death of another account holder (often created by spouses). Therefore, if one tenant dies, the ownership of the account will pass to the remaining tenant without being subject to probate. - Tenancy in Common (TEN COM) In a TEN COM account, each owner has a percentage of ownership and, at the time of death, the deceased person's interest passes to his estate. - Community Property Community Property Accounts are essentially the same as accounts that are established as JTWROS, but are only permitted between legally married couples. A Community Property Document must be completed and these accounts are subject to the laws of the state in which the couple resides.
Prior to the settlement date of the initial transaction, a registered representative must also make a reasonable effort (a request must be made) to obtain the following information...?
- Social Security number or taxpayer identification number (TIN) - Customer's occupation and the employer's name and address - Whether the customer is associated with another member firm - Financial information, such as annual income and net worth - Investment objectives
When opening a new account for a customer, FINRA requires the following information to be obtained...?
- The customer's name and residence − Although an account may not be opened with a P.O. box as the address, correspondence may be sent there if a written request is received from the customer - Whether the customer is of legal age - The name of the registered representative who is responsible for the account. If multiple RRs are responsible for the account, a record indicating the scope of each person's responsibilities is required. (This provision doesn't apply to an institutional account.) - If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on its behalf - The signature of the partner, officer, or manager (principal) denoting acceptance of the account
What wording must investment companies include in their advertisements regarding past performance, characteristics/ attributes, and misleading names?
1. "Past performance is not indicative of future results" 2. Positive statements about possible benefits must be balanced with equally prominent statements about risks or limitations. For this reason, funds often disclose that "there's no guarantee that their investment objectives will be met." 3. Finally, these rules prohibit funds from using names suggesting that they have the guarantee or approval of the U.S. government. A name that uses the words guaranteed or insured, or anything similar in conjunction with United States or U.S. government, is considered misleading and deceptive.
What categories does FINRA divide communications into?
1. Correspondence 2. Institutional Communication 3. Retail Communication For exam purposes, part of the challenge is being able to distinguish between the different forms in situational questions.
Types of Qualified Retirement Plans
401(k) plan is a type of qualified plan that depends heavily on employee contributions, rather than being funded by employer contributions. These plans allow employees to save a portion of their salary for retirement on a pre-tax basis (i.e., before income tax is deducted from their paychecks) and the earnings that are generated by their contributions grow on a tax-deferred basis until they are withdrawn from the plan. Once withdrawn, the funds are entirely taxable as ordinary income since the employees have a zero-cost basis. Employers may also choose to match their employees' contributions; however, the employers may establish a vesting schedule for those matching contributions. Employers are permitted, but not required, to allow employees to take loans from their 401(k) plans. The employer determines the details of the loan agreement and the term of the loan is typically five years. The IRS limits the maximum loan amount to the lesser of 50% of the amount vested or $50,000. 403(b) plans are tax-deferred retirement plans that are available to employees of public school systems as well as employees of tax-exempt, non-profit organizations that are established under Section 501(c)(3), such as charitable or religious organizations. These plans are also referred to as tax-deferred annuities (TDAs) or tax-sheltered annuities (TSAs). While a 403(b) plan is technically not a qualified plan, it resembles a 401(k) plan by allowing the participants to exclude the contributions that they make from their taxable incomes (i.e., contributions are made pre-tax) and the earnings grow on a tax-deferred basis. As with a 401(k) plan, the maximum annual contribution amount to a 403(b) plan is determined by the IRS (inflation adjusted). Employers may also make matching contributions for their employees.
Types of Non-Qualified Retirement Plans: 457 Plan?
457 Plan: is a non-qualified, deferred compensation plan. However, it's a tax advantaged defined contribution plan that may be established by state and local governmental employers, including state universities and local school districts, as well as certain non-governmental (non-profit) employers. As with 401(k) and 403(b) plans, 457 plans allow for pre-tax (deductible) contributions to be made by employees; however, the maximum annual contribution amount is determined by the IRS (inflation adjusted). For employees who are age 50 or older, an additional amount may be contributed annually. Unlike 401(k) and 403(b) plans, the contributions to 457 plans are not coordinated among the other plans; instead, they may be set up separately. Another benefit provided by a 457 plan is that the 10% penalty for withdrawals taken prior to age 59 1/2 doesn't apply; however, any withdrawal is subject to ordinary income tax. The following guidelines/restrictions apply to non-governmental 457 plans: - ERISA states that non-governmental 457 plans must be limited to higher compensation employees. Although the level of compensation is not specified by ERISA, it must be based on an ascertainable standard that's set by the employer. These plans are usually restricted to specific classes of employees, such as officers and directors, and are occasionally referred to as Top Hat plans. - Any money invested in a non-governmental 457 plan may not be rolled over into any other type of tax qualified plan. However, governmental 457 plans allow their funds to be rolled over into other qualified plans, such as 401(k) and 403(b) plans, or even IRAs. - Any non-vested money that's contributed to a non-governmental 457 plan must remain as the property of the employer, not the employee. Unlike the contributions made to 401(k) or 403(b) plans, these contributions that are made by the employer are not set aside in a trust for the exclusive benefit of the employee. Therefore, the assets held in these plans are subject to claims by general creditors of the employer.
What are the recordkeeping requirements for client information?
6 years whether it's the original information or updated.
How are hyperlinks considered when included on a firms social media post?
A broker-dealer is permitted to include a hyperlink on its website to an independent third party's content. - In this case, the content is considered to be advertising by the broker-dealer if the broker dealer was either involved in the preparation of the content (entangled) or implicitly or explicitly approved or endorsed the content (adopted). For example, if the securities firm assisted in the press release and then posts a hyperlink to the release, the firm is considered to be entangled and has adopted the content. - If a broker-dealer includes a hyperlink on its website to a generic article on securities, but doesn't mention any specific securities, it's considered educational material and not advertising. - If a firm's website contains a hyperlink to an independent third-party's content, which also contains a hyperlink to another website (secondary link), FINRA doesn't consider this to be advertising. However, the same application applies to stipulate that the content cannot be entangled or adopted by the firm.
What type of communication is email & instant messaging considered?
A challenging aspect to e-mail and instant messages is that they may ultimately be considered correspondence, retail communications, or institutional communications. For example, e-mail that's sent only to registered investment advisers (i.e., institutional investors) is considered institutional communication. E-mail that's sent to 25 or fewer retail investors is considered correspondence, and finally, e-mail that's sent to more than 25 retail investors is considered retail communication.
What is a Fiduciary Account?
A fiduciary is defined as a person who acts on behalf of, and for the benefit of, another person. Examples include executors or administrators of estates, trustees, guardians, receivers in bankruptcy, committees or conservators for incompetents, and custodians for minors. In most cases, fiduciaries are required to provide documentation of their authority.
What defines a Pattern Day Trader? What's the limitation with Pattern Day Trade Account? What happens if you trade more than what's allowed?
A pattern day trader is any customer who executes four or more day-trades over a five-business-day period. Day trading is defined as the purchasing and selling—or the selling and purchasing—of the same security, on the same day, in a margin account. An exception is made for (a) a long position that's held overnight and sold the next day prior to any new purchase of the same security, or (b) a short position that's held overnight and purchased the next day prior to any new sale of the same security. Day-trading buying power is limited to four times the trader's maintenance margin excess, which is determined as of the close of the previous day. If the broker-dealer knows or has a reasonable basis to believe that a customer opening an account or resuming day trading will engage in a pattern of day trading, the firm may impose the special day-trading margin requirements immediately.
Describe: Third Party Research Report vs. Independent Third Party Research Report?
A third-party research report is one that has been prepared by an affiliate of the broker-dealer. This form of research report must be approved by a supervisory analyst or an approved supervisory person of the broker-dealer (e.g., general securities principal). Additionally, third-party research must include the following disclosures: - Whether the broker-dealer has received compensation from the subject company within the preceding 12 months, or expects to receive compensation in the upcoming three months for investment banking services related to the subject company - Whether the broker-dealer makes a market in the subject company - Whether the broker-dealer owns 1% or more of the subject company's equity securities - Any other material conflicts of interest For example, in order to provide research on several companies to its customers, a broker-dealer has requested analytical reports from an affiliated analysis-provider. The reports are classified as third-party research reports and must be approved by a supervisory analyst or approved supervisory person of the broker-dealer. An independent third-party research report is one that has been prepared by a person or firm that 1) has no affiliation or contractual relationship with the disturbing member, and 2) makes content determinations without any input from the distributing member or that member's affiliates. Since the distributing broker-dealer has no editorial control over the content of the report, approval by a principal of the broker-dealer is not required. Any required disclosures within the report must be based on the firm preparing the report, rather than the firm that's distributing it. - For example, a broker-dealer that intends to provide information to its interested customers has requested research on the biotech industry from an unaffiliated analysis-provider. If the broker-dealer has no influence or editorial control over the content of the reports, the reports are considered to be independent third-party research and don't require the approval of a supervisory analyst of the broker-dealer.
What are the regulations for changing the account registration or making an internal transfer of securities?
Account Registration Change: Situations may require a change to the registration of an account. This could be the result of death, divorce, or simply the transfer of securities to another individual. Changes may require the following: - Changes resulting from a marriage or divorce require a marriage certificate, divorce decree, or court document. Driver's licenses are usually not acceptable due to the risk of fraud. - In order to add or remove a person from an account, the birth date, social security number, and contact information for the person being added is required. In addition, both parties must sign and submit the appropriate forms. - A principal must approve and document all changes before any transactions are executed in the account. Internal Transfers: There are times when customers may want to transfer securities to another individual's account. When doing so, a stock transfer must be completed and all parties on the account must approve of the transfer.
Describe the MSRB Communication Rules regarding Advertising? Is the Official Statement considered advertising?
Advertisement= any material, other than listings of offerings, published or used in any electronic or other public media, or any written or electronic promotional literature distributed or made generally available to customers or the public. Examples include notices, circulars, reports, market letters, form letters, telemarketing scripts, seminar texts, and press releases concerning the products or services of the member firm. Broker-dealers are prohibited from publishing an advertisement that's false, omits material facts, or is misleading in content. Any advertisements that are related to municipal securities and municipal fund securities (529 Plans) must be approved by a Municipal Securities Principal or a General Securities Principal prior to its initial use. Preliminary and final official statements are not considered advertising since they're either prepared by or for the issuer. However, a summary/abstract of an official statement is considered advertising since the official statement has been altered by a municipal securities firm. As a result of the alteration, the summary of an official statement must be approved by a Municipal Securities Principal.
Describe the Communications Regarding Variable Products: Identification?
All communications with clients must clearly identify the product being described as a variable annuity or variable life insurance policy. Many companies use proprietary names for their products which may inadvertently confuse investors about the product they're buying. For example, if an insurance company issues a variable life insurance policy and calls it the "Still Standing Policy," the company is required to include a statement in its advertising to clearly identify this product as life insurance. However, if the policy was called the "Still Standing Variable Life Insurance Policy," then no additional description is necessary. Since there are significant differences between variable products and mutual funds, presentations to customers should never state or imply that variable products are mutual funds.
Describe the rules for Retail Communication Regarding Collateralized Mortgage Obligations (CMO)? Give an example disclosure.
All retail communications (material distributed to more than 25 retail investors) and correspondence (material distributed to 25 or fewer retail investors) must include the term collateralized mortgage obligation within the name of the product and must disclose that any applicable government agency backing relates only to the face value of the securities, not to any premium paid. Claims about safety, guarantees, product simplicity, and predictability must be accurate and not misleading. Due to their unique characteristics, CMOs may not be compared to any other types of investments, such as certificates of deposit. A statement must be included to indicate that a CMO's yield and average life (expected return of principal) will fluctuate depending on (1) the actual rate at which holders prepay the mortgages underlying the CMO, and (2) changes in current interest rates. The following disclosure is an example of what must be included in all written or electronic retail communications and correspondence, as well as in oral statements in radio/television advertisements regarding CMOs: "The yield and average life being shown considers prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions."
Define & Describe: Wrap Accounts? Who is it most appropriate for?
An account in which one fee—usually ranging from 1 to 3% annually—is charged by a broker-dealer for a number of services being provided. The fee is used to cover administrative, portfolio management, and transaction costs. A wrap account is usually offered by a broker-dealer, but managed by an investment adviser. The appropriate client for a wrap account is a person who is interested in trading frequently
Define an: Institutional Account?
An institutional account is defined as an account of a bank, savings and loan association, insurance company, registered investment company, a registered investment adviser, or any person with total assets of at least $50 million.
Describe the Communications Regarding Variable Products: Guarantees?
An insurance company that issues a variable product will often guarantee some of its features. For example, an insurance company may guarantee that a variable life insurance policy will always have a minimum death benefit if the policyholder continues to pay all the required premiums. These guarantees should not be overemphasized or exaggerated since they ultimately depend on the insurance company's solvency. Material that's provided to clients should never represent or imply that these guarantees apply to the separate account. With the exception of a fixed-account option offered by some companies, neither the principal value of the separate account nor its investment returns are ever guaranteed. Similarly, clients should not be told that the ratings given to the insurance company (AAA, BBB, etc.) apply to the separate account.
Describe transfers & rollovers in work-sponsored plans? What are the tax implications of each?
An investor may transfer funds from one retirement plan to another retirement plan of the same type. For example, from one 401(k) to a new 401(k) without incurring taxes. A transfer is a situation in which plan assets move directly from one trustee to another. There's no limit to the number of these transactions that may be effected annually. An investor may also roll over distributions from qualified retirement plans (e.g., ,a 401(k) plan), into IRAs without incurring taxes. In order to avoid a tax penalty, the rollover must be completed within 60 days and may only be done once every rolling 12 months. Tax Ramifications: a withholding tax of 20% may apply if a person transfers funds from one retirement account into another and receives a check that's made payable to her name (this transfer is considered a rollover). However, withholding tax may be avoided if funds are transferred directly from one retirement account to another and the check is made payable to the new trustee (this is considered a trustee-to-trustee transfer).
Describe the implications for Early Withdrawals from Retirement Plans?
An investor who withdraws money from a retirement plan before reaching the age of 59 1/2 will be required to pay a 10% tax penalty on the amount withdrawn, in addition to being liable for ordinary income taxes on the withdrawal. The amount of the early withdrawal will be added to the investor's taxable income for that year. - For example, a 40-year-old individual who earns $45,000 per year decides to take a $5,000 withdrawal from her retirement plan. She will need to pay a $500 tax penalty (10% of $5,000) for the early withdrawal and her taxable income for that year will be $50,000. Assuming that she's in the 28% tax bracket, this will increase her tax liability by $1,400 (28% of $5,000).
Differentiate between the quiet periods for IPOs vs Follow-On Offerings?
As shown below, the length of the quiet period depends on the nature of the transaction as well as the entity that's issuing the research. - For initial public offerings, the quiet period is 10 days following the offering. This 10-day period applies regardless of whether the broker-dealer is a manager, syndicate member, or selling group member. - For follow-on offerings, the quiet period is three days following the offering. This three-day period only applies to the managers and co-managers of the offering.
Define & Describe: DVP Account & RVP Account?
At times, clients may use a bank to centralize their bookkeeping and custody, while executing trades through various broker-dealers. Each brokerage firm is instructed to provide the bank with trade details. The bank will either pay the broker-dealer for client purchases or send securities to the brokerdealer for client sales. In order to open a DVP/RVP account, broker-dealers must ask the client to fill out a form which identifies the third party bank or agent being used by the client. DVP= delivery versus payment RVP= receive versus payment. DVP and RVP transactions are settled directly with a third-party agent bank or other custodial financial institution for the client. These transactions are also referred to as POD (payment on delivery) and COD (collect on delivery) and are most often used by smaller mutual funds, institutional accounts, and private, high net worth investors
Describe the suitable investment requirement for fiduciaries for work-sponsored plans?
Based on its fiduciary obligation, the plan manager should seek to maximize the returns for the plan's participants. Investments must be chosen carefully, with conservative investments being considered a priority. Although aggressive derivative strategies are prohibited, certain conservative option strategies, such as covered call writing, are permissible. Since the plan grows tax deferred, the manager should avoid including tax-free investments (e.g., municipal securities) in the plan.
What is Bond Mutual Fund Volatility Ratings? Can I use Bond Mutual Fund Volatility Ratings in Communication? What must be included in the disclosure statement of the sales literature?
Bond mutual fund volatility ratings are descriptions that are issued by an independent third party to measure how sensitive a bond fund's NAV is to changes in economic and market conditions. The evaluation is based on objective factors, such as the credit quality of the fund's individual portfolio holdings, the market price volatility of the portfolio, the funds' performance, and specific risks (e.g., interest-rate risk, prepayment risk, and currency risk). A firm may only use bond volatility ratings in its supplemental sales literature, but not in advertisements that are intended for public dissemination. However, the supplemental sales literature may only be used if a prospectus for the bond mutual fund has been or will be sent to the customer and if the following conditions are satisfied: - The rating may not identify or describe volatility as a risk rating - The supplemental sales literature must incorporate the most recently available ratings - The criteria and methodology used to determine the rating must be based exclusively on objective and quantifiable factors - The entity that issued the rating must provide detailed disclosure on its rating methodology to investors through a web site or toll-free number The sales literature must also contain a disclosure statement that includes the following information: - The name of the rating entity - The most current rating and the date of the current rating - A description of the rating that includes the methodology behind the rating, whether the fund paid for the rating, and the types of risks the rating measures The disclosure statement must also indicate that (1) there's no standard method for determining bond fund volatility ratings, (2) the fund's portfolio may have changed since the date of the rating, and (3) there's no guarantee that the fund's rating will remain the same.
Can BD's promote day trading? If so, what's required?
Broker-dealers are permitted to advertise or promote the benefits of day trading on their website. This advertisement is defined as a retail communication, subject to principal approval and filing with FINRA, and a copy of it must be retained for three years. Broker-dealers must deliver to their customers a special written disclosure document and must post the disclosure on their website in a clear and conspicuous manner.
What type of material should the BD provide to the retail investors about CMOs?
Broker-dealers must offer to provide retail investors with educational material about the features of CMOs and the material must include: - Questions that a CMO investor should ask before investing - A discussion of the structure of a CMO that explains the different types, tranches, and risks associated with each type of security. It's also important to explain to a client that although two CMOs may have the same underlying collateral, their prepayment risk and interest-rate risk may be different. - A discussion of the characteristics and risks of CMOs that details how changing interest rates may affect prepayment rates and the average life of the security, tax considerations, credit risk, minimum investments, liquidity, and transactions costs - An explanation of the relationship between mortgage loans and mortgage securities - A glossary of terms that are applicable to mortgage-backed securities Retail communications related to CMOs must be approved before initial use by a principal and filed with FINRA within 10 business days of first use.
How is the internal review of the communication material handled? How long must a firm retain communications records for?
Correspondence and institutional communications are required to be supervised and monitored by the member firm, but need not be approved by a principal prior to use. However, as a general rule, retail communications must be approved by a qualified principal. This principal approval must be obtained either before the communications are released to the public or before they're filed with FINRA—whichever event comes first. Firms are not only required to maintain a file containing all approved communications for 3 YEARS after the last date of use, but these communications must also be maintained in an easily accessible location for the first 2 YEARS. The file must contain copies of the communications, the dates of first and last use, the name of the approving principal, and the date on which approval was given. In the event that a specific form of retail communication is not required to receive principal preapproval, the name of the person who prepared or distributed the communication must be maintained by the member firm for three years from the date of last use.
What regulations does the Bank Secrecy Act impose on BDs for customer screening upon opening accounts?
Customer Identification Program (CIP): As a part of their AML compliance program, broker-dealers must create a customer identification program in order to verify the identity of any person who seeks to open an account. Firms must also maintain records of information that's used to verify a person's identity and determine whether the person is listed as a known or suspected terrorist or an affiliated organization. Specially Designated Nationals and Blocked Persons List (OFAC SDN List): Firms and their representatives must make certain that they're not doing business with anyone on a list that's maintained by the Treasury Department Office of Foreign Assets Control (OFAC). This list is referred to as the Specially Designated Nationals and Blocked Persons List, or simply the SDN List. - If a firm discovers that one of its clients is on the SDN List, it must block all transactions immediately and inform the federal law enforcement authorities. Broker-dealers are required to exercise special due diligence when opening private banking accounts for foreign nationals. - They're also prohibited from maintaining correspondent accounts for foreign shell banks (i.e., banks with no physical presence in any country). Customer Verification: Under the new regulations, the following minimum information is required to be obtained from a customer (the information is slightly different from what FINRA requires): - Name - Date of birth (for an individual, not a business) Address (For an individual this must be a residential or street address. For other corporate accounts, it must be a principal place of business or local office.) - An identification number: For U.S. citizens: taxpayer ID number (e.g., Social Security number or employer identification number) For non-U.S. citizens: taxpayer ID number, passport number and country of issuance, alien identification card number, or government-issued identification showing nationality, residence, and photograph
Describe the Communications Regarding Variable Products: Liquidity?
Customers who withdraw funds from variable products after a short period often incur significant surrender charges and/or tax penalties; therefore, these products should never be described as short-term, liquid investments. A presentation implying that an investor may easily access her cash value either through loans or other means must also clearly describe the negative impact of early withdrawals. For a variable life insurance policy, all disclosures regarding loans and withdrawals must also include an explanation of the impact that these actions may have on a policy's cash value and death benefit.
Types of Non-Qualified Retirement Plans: Deferred Compensation Plans?
Deferred compensation plans are contracts that are entered into between employers and employees with the employers agreeing to pay a certain amount of compensation to the employees at a later date. The employees agree to defer the receipt of the funds until retirement, disability, death, or termination. One advantage of deferred compensation plans is that income taxes are deferred until a time at which the employee is presumably in a lower tax bracket. Deferred compensation plans may either be funded or unfunded. In a funded plan, the plan is secured by specific assets that are protected from the employer's creditors. An unfunded plan is backed only by the employer's promise. Since deferred compensation plans are non-qualified plans, the employer is able to discriminate and include only selected employees in the plan.
When do you have to file retail communications with FINRA for their review?
Depending on the content of retail communications, some are required to be filed with FINRA 10 business days prior to their first use, while others are required to be filed within 10 business days of their first use. If pre-use filing is required, firms may not use the material until it's in a form that's acceptable to FINRA. For its first year as a FINRA member, a new brokerage firm is required to file with FINRA all broadly disseminated retail communications 10 business days prior to their first use. The term broadly disseminated refers to materials that have been created for generally accessible websites, the print media, or television or radio. FINRA may also require any firm that has had disciplinary issues to file some or all of its communications 10 business days prior to use. Some of the additional forms of retail communications that must be filed with FINRA at least 10 business days prior to their first use include materials that pertain to: - Registered investment companies that include rankings or comparisons which have been created by the investment company itself - Security futures On the other hand, retail communications that pertain to the following products must be filed with FINRA within 10 business days of being published: - Registered investment companies (provided the material doesn't include fund-created rankings or comparisons). This category includes mutual funds, closed-end funds, exchange-traded funds, unit investment trusts, and variable products. - Publicly traded direct participation programs (DPPs) - SEC-registered collateralized mortgage obligations (CMOs) - Any security that's registered with the SEC and derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance, or a foreign currency. This includes publicly offered structured products (e.g., exchange-traded notes [ETNs])
Define & Describe: Discretionary Accounts? What kind of authorization do they have? What's required before each account becomes effective? What's required before each trade?
Discretionary Account= one in which the RR is the authorized third party. Some firms don't permit registered representatives to accept discretionary authority, while most others will permit the RR to accept only limited trading authorization. If the firm permits discretionary accounts, a principal must accept the discretionary authorization in writing before it becomes effective. Each discretionary order must be approved by a principal promptly (i.e., on the day of the trade) and the account's activity must be reviewed frequently. With discretionary accounts, the authorized third party generally is not required to obtain the account holder's permission prior to executing any transactions. However, if a member firm is selling its own stock to the public and it wishes to place some of the stock in the account of a customer for whom the member firm holds discretionary authorization, it must obtain prior written consent from the customer to execute the trade.
Define: Employee Retirement Income Security Act (ERISA)? What plans does ERISA NOT cover? As a fiduciary
Employee Retirement Income Security Act (ERISA)= a federal law which regulates certain work-sponsored plans. The purpose of ERISA is to prevent the misuse and mismanagement of pension plan funds, especially by the managers of these plans. To accomplish this goal, ERISA sets standards of conduct for all persons who deal with pension plans. In particular, ERISA has established two special categories of persons that are held to very high standards... (1) parties in interest, and (2) fiduciaries Investment advisers that provide services to pension plans are usually considered both parties in interest and fiduciaries. Investment advisers have a fiduciary duty to all of their clients, but this duty is even greater when the client is a qualified pension plan that's subject to the provisions of ERISA. ERISA generally covers all employee benefit plans except government plans, church plans, plans required under both workers' compensation and unemployment and disability insurance laws, and plans established outside the United States for the benefit of non-U.S. citizens. However, ERISA doesn't apply to IRAs and other individual retirement plans that are not established or maintained by an employer
What's the concern with a discretionary account?
Excessive trading—also referred to as Churning! When investigating allegations of excessive trading, the most important element in the process is to examine the investment objectives of the customer, followed by the number and size of transactions. A customer's investment objectives are instrumental in guiding a registered representative's decisions and should always be considered prior to making recommendations. Frequent trading may be acceptable in the account of a day trader, but inappropriate for many other investors. Remember, to determine if there's evidence of churning it's the frequency of trading that matters, not whether the client lost money.
What category does Externally Prepared Research Reports fall into?
Externally prepared research reports that are distributed by broker-dealers will fall into one of two distinct categories: - Third-party research or - Independent third-party research
What type of communication is a firm's social media considered?
FINRA considers a firm's use of social media sites (e.g., LinkedIn, Facebook, and Twitter) as advertising, unless an exception applies. For that reason, the content standards and rules regarding principal preapproval apply. In addition, the firm must comply with all of the other applicable FINRA rules, as well as recordkeeping rules. Although the use of a social networking site is subject to preapproval, posts by employees are considered interactive content and therefore subject to review and supervision, but not approval.
Describe the Communications Regarding Variable Products: Hypotheticals?
FINRA strictly prohibits its member firms from projecting or predicting investment results. However, life insurance companies customarily provide their clients with hypothetical illustrations that assume various rates of return in order to demonstrate how their policies work. Both the SEC and FINRA allow the use of hypothetical illustrations, provided the following guidelines are met: - An assumed rate of return may not exceed 12%. - One of the assumed rates of return must be 0%. - The assumed rates of return must be reasonable based on current market conditions. - The cash values and death benefits must reflect the policy's maximum mortality and expense charges for each of the assumed rates of return. The illustration must also include a prominent statement explaining that (1) its purpose is to show how the performance of the underlying subaccounts could affect the policy's cash values and death benefits, (2) it's hypothetical, and (3) it doesn't project or predict investment results. Generally, the illustration should not compare the hypothetical returns of a variable life insurance policy to another product. However, provided certain conditions are met, comparisons with term policies are acceptable.
Are there any limitations on IB research departments for new issues?
Firms may have internal conflicts between the goals of their investment banking departments and the requirement to provide customers with fair and balanced research. To further delineate investment banking business from research recommendations, rules have been created to establish a quiet period that follows an initial public offering or a secondary offering. During this period, the investment banking client may not be the subject of a research report or public appearance. This provision is designed to prevent an analyst from providing a favorable rating or public appearance simply because her firm was the manager or co-manager of a recent offering for the issuer. Also, during this quiet period, the participating broker-dealers may not publish research reports regarding the subject security and its analysts are not permitted to make public appearances regarding the issuer of the security.
What are the regulations/ exceptions for early withdrawals from an IRA?
For early withdrawals from IRAs, a tax penalty will not be assessed if the withdrawals are used for: - Medical insurance premiums when the owner is unemployed - Expenses related to being a qualified first-time home buyer (limited to $10,000) - Expenses related to the birth or adoption of a child (up to $5,000) - Paying qualified higher education expenses (including tuition, fees, books, and room and board) for the account holder or a member of her immediate family
What are the regulations for RR having Accounts at Other Broker-Dealers and Financial Institutions? Any Exceptions?
For supervisory reasons, member firms are required to monitor the personal accounts that their employees (both clerical and registered persons) open or establish with a firm other than the one at which they're employed. Employees who intend to open outside accounts in which securities transactions may be executed are required to obtain the prior written consent of their firm. In addition, before an outside account is opened, the employees are required to provide written notification to the executing firm of their association with another member firm. This rule also applies to any account in which securities transactions can be executed and in which the employee has beneficial interest, including any account that's held by: - The employee's spouse - The employee's children (provided they reside in the same household as, or are financially dependent on, the employee) - Any related person over whose account the employee has control, and - Any other individual over whose account the employee has control and to whose financial support the employee materially contributes Upon written request, the executing firm is required to send duplicate copies of confirmations, statements, or any other transactional information to the employee's broker-dealer. The requirements of this rule don't apply to accounts that are limited to transactions involving redeemable investment company securities (mutual fund shares), unit investment trusts, variable contracts, or 529 plans.
Can I make a headline that my company is the best performer in a sector?
Headlines or other prominent statements in any form of communication are prohibited from stating that an investment company or investment company family is the best performer in a category unless it's actually ranked first in the category. All retail communications containing an investment company ranking must disclose: - The name of the category (e.g., growth, asset allocation, balanced) - The number of investment companies in the category - The name of the ranking entity - The length of the period (or the beginning and ending date of the period) - The criteria (total return or yield) on which the rankings are based - The fact that past performance is no guarantee of future results - For investment companies that assess front-end sales loads, whether the ranking takes those loads into account - Whether the ranking is based on total return or the current SEC standardized yield - The publisher of the ranking data (i.e., the name of the magazine), and - Whether the ranking consists of a symbol (a star system) rather than a number, and if so, an explanation of the symbol's meaning must be provided (e.g., a five-star ranking indicates that the fund is in the top 10% of all investment companies)
When does FINRA filing need to happen of Television or Video Retail Communications?
If a broker-dealer has previously filed a draft version or storyboard of a television or video retail communications, it must also file the final filmed version within 10 business days of first use or broadcast.
What is the Time/Price Exception? What other name is given to an order with Time/Price Discretion?
If a customer indicate... (1) the specific security (asset) (2) whether it's to be bought or sold (action), and (3) the number of shares or other units to be bought or sold (amount) If those three things are indicated but the client leaves discretion only as to the time and/or price of execution, this is not considered a discretionary order and written authorization is not required. An order with Time/Price Discretion, often referred to as not-held orders, are limited to the trading day for which the order was placed and must be noted on the order ticket. A client must give her RR written instructions if the not-held order is to remain in effect for more than one day.
What step does the RR have to take regarding an account with another BD they previously held before getting hired on with their current BD employer?
If an employee had opened an account prior to the time that he became associated with a broker-dealer, the employee is required to obtain the written consent of his employer within 30 days of the beginning of his employment in order to maintain the account. Also, the employee is required to provide written notification to the executing firm of his employment with another broker-dealer. Once an account has been opened for a member firm employee, the executing firm is not required to obtain the employing firm's approval prior to the entry of each order. However, the employee's activities are subject to any rules or restrictions that have been established by his employing firm.
What is a: Trust? What's required to open up a Trust Account? Types of Trust Accounts? Pros/Cons of Each?
In a trust, one person (the trustee) is put in charge of managing the assets for the benefit of another (the beneficiary). The trustee has legal control of the trust assets, but must manage it in the interest of the beneficiary. To open a trust account, an RR must obtain the following: - Evidence of the trustee's authority to transact business in the account - A copy of the trust agreement—the legal document that establishes the trust account The level of control that the individual (creator) has over the assets in the trust is determined by the type of trust - whether it's revocable or irrevocable. - Revocable - Also referred to as a living or inter vivos trust, the individual has the ability to make any changes in the trust, even cancelling it. The assets don't transfer until death. This type of trust doesn't reduce taxes, but does avoid probate when funded prior to the grantor's death. - Irrevocable - Once assets are deposited into the account, the grantor is no longer able to modify or cancel the trust. This type of trust reduces the donor's estate taxes and avoids probate.
Why provide a standard for public communication?
In their efforts to protect the public, regulators have strict rules governing the use of advertising, sales literature and other means of promoting the products and services of broker-dealers. These include: - Providing a basis for evaluating investments, being fair and balanced, and being based on fair dealing and good faith - Not containing false, exaggerated, or misleading claims - Being clear and balanced as to the risks and potential benefits - Being considerate of the audience to which the communication is directed - Not predicting or projecting performance, or implying that past performance will be repeated
Define an Insider? What are the SEC reporting requirements of an insider?
Insider= 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 becoming an insider, a person is required to report to the SEC on Form 3. An insider is required to file Form 4 to report any changes in his stock position by the second business day following the change.
What are the trading limitations of an insider?
Insiders are not permitted to keep short-swing profits in any stock of a corporation for which they're insiders. A short-swing profit is the result of an insider selling her stock at a profit within six months of its acquisition. For violations of the rule, the corporation may sue for recovery of the profit (a process that's referred to as disgorgement). This restriction also applies if an insider sells stock that was held longer than six months and then, within six months of the sale, repurchases it at a lower price than the previous sale price. Insiders are not permitted to sell short the stock of the company for which they're insiders. Insiders may write (sell) covered calls (i.e., selling calls against stock that they already own), but may not sell calls that are uncovered. On the other hand, corporations may not sell calls on their own stock under any circumstances.
Are there any exceptions to the penalty for early withdrawals from a retirement plan?
Investors who are under the age of 59 1/2 will not be subject to a tax penalty for early withdrawals from a retirement plan if any of the following exceptions apply: - The account owner becomes disabled - The account owner dies and the money is withdrawn by the beneficiary - The withdrawals are set up as a series of substantially equal periodic payments that are taken over the owner's life expectancy - The money is used to pay certain medical expenses that are not covered by insurance
What are Required Minimum Distributions (RMDs)?
Investors who wait too long to begin taking withdrawals from their traditional IRAs may also incur a tax penalty. The IRS will levy this penalty if the investor doesn't start taking withdrawals by April 1 following the year in which the person reaches the age of 72. (The age was increased from 70 1/2 to 72 as a result of the passage of the SECURE Act in 2019.) Please note that this RMD provision doesn't apply to Roth IRAs (since Roth IRAs are funded after-tax).
Describe trading authorization with limited vs full POA? What does the RR require before allowing POA trade authorization? Describe: Durable vs. Regular POA? What happens upon death of Grantor?
Limited Trading Authorization: permits the authorized person only to place orders for the account, but not to make withdrawals. Full Trading Authorization: in addition to placing buy and sell orders, the authorized person is able to withdraw money and securities from the account. In either case, the broker-dealer must receive written trading authorization that's signed by the account owner prior to permitting the authorized person to trade the account. The firm should also obtain the signature of each authorized person and the date that the trading authority was granted. Regular POA: terminates if the grantor becomes incapacitated. Durable POA: the third party's power to manage another person's financial affairs continues even if that person becomes incapacitated. Either type of POA is terminated in the event of the grantor's death.
Describe the Use of Investment Companies' Rankings by Ranking Entities (e.g., Morningstar) in Retail Communications?
Members firms may not use investment company rankings in retail communications other than (1) rankings created and published by ranking entities, or (2) rankings created by an investment company or an investment company affiliate, but based on the performance measurements of a ranking entity. A ranking entity is defined as an organization that provides the public with general information about an investment company, is independent of the investment company and its affiliates, and has not been hired by the investment company or its affiliates to assign the fund a ranking (e.g., Morningstar).
Does the requested information list before settling a trade apply to every client?
No! Requested information doesn't apply to institutional accounts and accounts in which the transactions are limited to non-recommended investment company shares (e.g., mutual fund shares).
Describe: Non-Qualified, Employer-Sponsored Retirement Plan?
Non-qualified retirement plans are not required to meet ERISA standards regarding employee coverage, contribution limits, and vesting. Although employers may not deduct contributions made, the income contributed to these plans will accumulate on a tax-deferred basis until withdrawn. Rather than being made available to all employees, non-qualified plans are designed to meet the specialized retirement needs for key executives and other select employees. These plans are exempt from the discriminatory and top-heavy requirements which apply to qualified plans.
Describe Rule 482 Regarding Communication with Investment Companies? What must the 482 advertisement include? What if it includes performance? What if it shows annual return?
Omitting Prospectuses (Rule 482)= Under specific conditions, there are investment company advertisements that may be published because they technically meet the definition of a prospectus. These advertisements are referred to as omitting prospectuses. This form of prospectus omits in part or summarizes the information that's contained in the statutory prospectus. As was true of tombstone advertisements, this form of prospectus may not contain an application to invest. Essentially, Rule 482 is the primary advertising rule for mutual funds and, in particular, mutual fund performance may be included in the advertisement if specific standards are followed. A 482 advertisement must disclose: - That investors must carefully consider the investment objectives, risks, charges, and expenses of a mutual fund before investing. - That the prospectus contains these details about the mutual fund. - That the prospectus should be read carefully before investing. - The source from which an investor may obtain a prospectus. If a 482 advertisement includes performance information, it must disclose: - That the performance data being quoted represents past performance and that past performance doesn't guarantee future results. - That an investment's return and principal value will fluctuate; therefore, when shares are redeemed, they may be worth more or less than their original cost. - Either a toll-free phone number or a website from which an investor may obtain performance data that's current to the most recent month-end. - Whether a sales load or other non-recurring fee is charged, the maximum amount of the load or fee and, if not reflected, that the performance data doesn't reflect the sales load deduction. For fund advertisements that show average annual total return, they must present the following time periods: - One year for investment companies in existence for at least one year - One and five years for investment companies in existence for at least five years, and - One, five, and 10 years for investment companies in existence for at least 10 years
Define & describe: SEC Rule 156 for Investment Company Sales Literature?
Once an investment company's registration is declared effective, it may use written sales materials, provided the materials are accompanied by, or preceded by, a current prospectus. Any sales literature that's used by an investment company must meet the standards of SEC Rule 156. Under Rule 156, sales literature is defined as any communication that offers to sell or induces the sale of shares in an investment company. This includes all written materials, as well as anything prepared for television, radio, or the Internet. Communications between issuers, underwriters, and dealers may also be considered sales literature if there's a reasonable expectation that the materials may be directed to prospective investors, or that the information contained in these communications may be given to investors in the course of selling the fund's shares. Rule 156 states that it's unlawful for an investment company to sell its shares using sales literature that's materially misleading. Sales literature is considered materially misleading if it: - Contains an untrue statement of a material fact or - Omits a material fact that's necessary to prevent the statement from being misleading Whether a particular statement is misleading is determined by the context in which it's made. Sales literature may be misleading if it fails to properly explain, qualify, or limit the claims that it makes about the investment, or fails to mention the importance of general economic or financial conditions. Funds must also ensure that all of their sales literature is current, complete, and accurate.
Describe the regulations regarding Options Communication?
Options Disclosure Document (ODD)—also referred to as the Characteristics and Risks of Standardized Options—is the brochure that offers investors a description of the options market and discusses the relevant terminology, tax implications, transaction costs, margin requirements, and trading risks. Investors must be provided with a copy of the ODD either at or before their options account is opened. All options-related retail communication must be pre-approved by a Registered Options Principal (ROP); however, this pre-approval requirement doesn't apply to correspondence. Instead, options correspondence is subject to the same review and general supervision requirements that apply to all forms of communication with the public. In addition to ROP approval, all options-related retail communications that are used prior to the delivery of the options risk disclosure document must be submitted for approval to an exchange (e.g., the CBOE) or to FINRA at least 10 calendar days prior to initial use. However, if a firm issues sales material that's only being sent to existing clients, it will not need to be filed since all existing clients would have already received the options disclosure document. Since options advertising is a form of retail communication, a member firm must at least offer to provide customers with the options disclosure document. For any options‐related retail communications that discuss projections, they must be preapproved by a ROP and preceded or accompanied by an options disclosure document.
Types of Non-Qualified Retirement Plans: Payroll Deduction Plans?
Payroll deduction plans allow employees to purchase life insurance, mutual funds, and variable annuities by having after-tax deductions taken from their paychecks. Although not required, employers may match employee contributions. The sales charges assessed are often lower than what the employees would pay if they purchased these products individually
As a RR, can I "like" content on a social media post?
Posts by customers, or any other third party, are referred to as third-party posts. These third-party posts that appear on either the firm's or its employees' social networking pages or sites are not considered advertising unless the firm becomes entangled or has adopted the third-party content. Examples include the broker-dealer or its employees paying or soliciting the third-party posts or sharing ("liking") the third-party posts. If the firm or employee solicited, paid, shared ("liked") these comments which are posted on social media, they're subject to FINRA's advertising rule. Broker-dealers and their employees are prohibited from posting to a third-party website using social media that it knows or has reason to know contains false or misleading content.
What's a prime broker?
Prime brokerage clients include hedge funds, institutions, and high net worth individual clients. Prior to prime brokerage, these clients were required to open separate accounts at each executing brokerdealer that they used. For all trades that were executed, the broker-dealers would then provide confirmations and statements to the client. The client would ultimately be required to combine the information it received from its various accounts to understand its overall position. In a prime brokerage arrangement, a client selects one firm as its prime broker to essentially consolidate the bookkeeping process. The client still uses several broker-dealers for reasons such as their execution capabilities, research services, and access to IPOs, but all trades are ultimately handled through an account that's maintained with its prime broker. Prime brokerage provides several benefits to large, sophisticated, active customers. It enables clients to centralize their clearing and custodial services, and allows them to receive one set of comprehensive reports regarding their portfolios. For those customers who use margin accounts, the concentration of margin positions in one single account lowers the client's cost of funds. The clearing firm acts as a centralized location for holding the customer's securities positions that are created by several executing firms through which the client trades.
Under the industry's Know Your Customer rules, RRs cannot make recommendations prior to...?
Prior to having a solid understanding of their customers' financial status, investment experience, investment objectives, and attitudes toward risk
Describe in depth: SEC Regulation SP? Regulation itself, type of material protected, privacy notices, customers vs. consumers.
Privacy of Consumer Financial Information Act established in 1999 which requires institutions that are engaged in certain financial-related activities to (1) establish privacy policies with regard to information they collect regarding customers (2) notify customers of those privacy policies, and (3) give customers the right to opt-out of any disclosures of their nonpublic personal information to certain third parties (i.e., customers may instruct the financial institution that their information may not be disclosed to unaffiliated third parties). The SEC adopted rules to implement these privacy requirements under Regulation SP which applies to all broker dealers, investment companies, and SEC-registered investment advisers. Regulation SP is protecting a customer's non-public, personal information which includes information obtained from the customer or from customer lists that are created from personally identifiable information (i.e., personal financial and account information). However, disclosure of a customer's publicly available information is not restricted under the regulation. Under Regulation SP, firms must provide their customers with a description of their privacy policies (a privacy notice). Among other things, these privacy notices must state the types of personal information that the firm collects and the categories of both affiliated and unaffiliated third parties to whom the information may potentially be disclosed. The timing of the notice depends on the client's relationship with the firm. Regulation SP divides clients into two categories—customers and consumers. A customer is a person who has an ongoing relationship with the firm. A consumer is a person who is in the process of providing information to the firm in connection with a potential transaction.Firms must initially provide every customer with a privacy notice at the time the relationship is first established. Thereafter, they must follow up with an updated version of this notice annually. For consumers, a firm must provide a privacy notice before it discloses non-public, personal information to any unaffiliated third party. However, if the firm doesn't intend to disclose any consumer information to an unaffiliated third party, then a notice is not required to be provided. The notice must disclose to customers-consumers that they have the right to opt out of having their information shared with unaffiliated third parties and the process for opting out. The opt out method being used by a broker-dealer must be reasonable. Acceptable methods include electronic responses or a toll-free telephone number for customers to call; however, requiring a customer to write a letter is unreasonable.
Types of Non-Qualified Retirement Plans: Profit-Sharing Plans?
Profit-sharing plans are funded by employers and allow for discretionary annual contributions from company profits. If the company is not doing well, the employer may skip that year's contribution entirely. The decision as to whether contributions will be directed to the plan is made by the board of directors of the employer. Ultimately, providing this employee benefit may have a positive impact on an employer's ability to recruit and retain quality employees. If a company does decide to contribute funds to the plan, it must allocate these funds to the employees in accordance with a predetermined formula. Generally, each participant receives a certain percentage of his salary. For example, if a company decides to contribute 10% of each employee's salary for one year, then an employee earning $30,000 will receive a $3,000 contribution. Companies with unpredictable cash flows may find profit-sharing plans work well with their business. - Limitations on Contributions: The employer contributions are tax-deductible and the earnings grow on a tax-deferred basis; however, the maximum annual contribution amount is determined by the IRS (inflation adjusted).
What's considered a public appearance? Describe the mandatory disclosures for public appearances?
Public Appearance= any conference call, seminar, or public speaking engagement being delivered to 15 or more persons or one or more representatives of the media by means of a radio, TV, or print media interview in which a research analyst makes a recommendation or offers an opinion concerning an equity security. The justification for including TV and radio interviews as public appearances is to assure that adequate disclosures are made. A television interview is considered a public appearance regardless of the number of persons who are interviewing the analyst. However, an internal meeting is not a public speaking engagement and is not considered a public appearance. The disclosures that are required during public appearances, including television and radio interviews during which predictions may be made, include: - Whether the subject company is an investment banking client of the member - Whether the analyst (or a member of the analyst's household) has a financial interest in the security that's the subject of the report (subject security - Whether the member firm has 1% or greater ownership of the outstanding stock of the subject compan - Whether the analyst or any member of the analyst's household is an officer, director, or advisory board member of the subject compan - Any material conflict of interest about which the analyst or member firm knows or has reason to know
What are the regulations to be considered a Qualified, Employer-Sponsored Retirement Plan? What are their benefits, if established correctly?
Qualified retirement plans meet both IRS and ERISA requirements and receive favorable tax treatment. To be qualified, a plan must be established in writing and must adhere to the following standards: 1. Eligibility Requirements: The plan must cover all employees who are age 21 or older and have worked for the employer for at least one year. For purposes of determining full-time employment, working 1,000 hours or more during the year equates to full-time. 2. Vesting: This is the schedule under which employees' rights to receive the benefits contributed to a plan by their employers gradually become guaranteed based on their years of service. At a minimum, all participants must be either fully vested after five years or 20% vested after three years with full vesting after seven years of service. However, employees are always 100% vested in the contribution they have made to a plan on their own behalf. 3. The Investment of Contribution and Determination of Benefits: The investment of plan assets, as well as other plan activities, is governed by strict fiduciary guidelines. If established correctly, a qualified plan will provide the following benefits: - Pre-tax contributions: Employer contributions to a qualified plan are generally able to be made on a pre-tax basis. In other words, no income tax is paid on the amounts contributed by employers until the money is withdrawn from the plan. Also, employee contributions are made on a pre-tax basis. - Tax-deferred growth: Investment earnings (e.g., dividends and interest) on all contributions are tax deferred; therefore, income tax is not paid on the earnings until the money is withdrawn from the plan. - Payments received at retirement may qualify for special tax treatment.
What are the regulations for RR who give Seminars?
RRs often engage in seminars in an attempt to increase their client base. When conducting a seminar, RRs must make a record of the date, topic, and sponsor of the seminar. Ultimately, member firms need this information for supervisory purposes.
What do you, the RR, need to open up a corporate account whether cash, margin, or options?
Registered representative must be assured that the person opening the account is authorized to do so. This is evidenced by means of a corporate resolution. The resolution is a document created by the board of directors which appoints one or more persons to operate the account. (Note: the customer is the corporation, not the person opening the account.) If a corporation intends to open a margin or options account, a copy of the corporate charter must also be obtained. The charter is the document that certifies whether the corporation is authorized to have such an account.
How do firms go about retail communication approval?
Remember, many retail communications must be approved prior to first use by an appropriately approved and qualified registered principal (typically a Series 24 or Series 9/10 registered person). A Supervisory Analyst, who is qualified with a Series 16 registration, may approve research reports concerning debt and equity securities as well as other research-related communications. Certain other forms of retail communications must be approved by supervisors who have specific registrations. For example, any communication that pertains to options will require the approval of an options principal (a Series 4 registered person). In the following circumstances, retail communications don't require principal pre-approval: - Another firm has previously filed the communications with FINRA and it has not been materially altered. - The communication was posted on an online interactive electronic forum (social media). - The communication doesn't make a financial or investment recommendation, it doesn't promote the firm's products or services, and it's not a research report. This last exception applies to most routine communications between registered representatives and their customers and to market letters since they're not considered research reports. Although they're not required to be pre-approved, firms must still monitor these retail communications in the same way that they handle correspondence. Generally, if retail communications are not required to be pre-approved, then they're also not required to be filed with FINRA.
Describe the mandatory research report disclosures?
Research report disclosures may not be written in reduced typeface and must appear on the first page of the publication (or must refer to the page on which they appear). However, if a member firm publishes a report that makes recommendations on six or more subject companies, the report may clearly and prominently direct the readers as to where the required disclosures may be found in either an electronic or written format. The mandatory research report disclosures must include the following information: - Whether the analyst (or a member of the analyst's household) has a financial interest in the securities of the subject company (i.e., holds shares, warrants, or options contracts of the subject company) - Whether the firm has ownership of the subject security and whether such ownership is 1% or greater of the outstanding stock of the subject company. Ownership must be determined as of the end of the month directly preceding publication of the research report and allow for a 10-day calculation period. If the report is published less than 10 days from the end of the month, a member may ascertain ownership based on the second-most-recent month. - Whether the firm makes a market in the subject security - Any material conflict of interest about which the analyst or member firm knows or has reason to know - Whether the member firm has received compensation for investment banking activity from the subject company during the 12 months preceding publication, or expects to receive or seek compensation in the three months following publication - Whether the analyst or any member of the analyst's household is an officer, director, or advisory board member of the subject company In addition to making disclosures about conflicts of interest, research analysts are also restricted in their communications with issuers. Generally, research analysts can only contact issuers to verify factual information. Research analysts are prohibited from sending their price targets to issuers before releasing them publicly and asking an issuer to edit a research report.
Define the SEC Rule 15c2-12: Municipal Securities Disclosure?
SEC Rule 15c2-12 assists an underwriter in meeting its obligation to have a reasonable basis when recommending a municipal security. According to this rule, an underwriter: - Must obtain and review an official statement prior to bidding for or purchasing the securities. The official statement must be considered to be in final form by the issuer at that time. Since the following information might not yet be known, it can be omitted: *Offering price, interest rate, selling compensation, aggregate principal amount *Principal amount per maturity, delivery dates, ratings, and identity of the underwriter(s) - Must send to customers the most recent copy of the preliminary official statement, if any, within one business day of request (for negotiated offerings) - Must contract with the issuer to receive sufficient quantities of the final official statement within seven business days after the agreement to purchase, offer, or sell the securities
What type of communication is a personal social media account considered?
Since preapproving the content being posted is challenging, many member firms prohibit their employees from using certain social media sites for business purposes. The use of personal social media sites by firm employees for non-business-related communication is not considered advertising and is therefore not subject to FINRA rules. - For example, a post regarding a local charity event or a hyperlink to the securities firm's website to access an article on how the firm is helping to raise money for disaster victims is not advertising since there's no mention of the broker dealer's business. - If a member firm employee posts or links to business-related communication on his personal social networking page, this is considered advertising and is subject to rules. If the employee posts on his personal social media site and promotes his firm's business expertise and experience and also solicits inquiries from customers, this is subject to applicable FINRA rules.
Describe: Sole Proprietorship Accounts?
Sole proprietorships are businesses that are often opened under the name of the individual owner, although they may use a different business name. Regardless of the naming, the account is held by the individual and vulnerable to the owner's personal creditors.
If I've opened up an individual account, can my spouse enter a trade in my account?
Spouse is NOT authorized to execute trades in the account unless he has granted third-party trading authorization to the spouse.
What are FINRA rules for required signatures upon opening new accounts?
Standard brokerage CASH accounts? Only the approving principal must sign a new account form. Although many broker-dealers have internal house rules that require customers' signatures, industry rules do not require clients to sign a new account form when opening a cash account. Option or Margin Account? Signatures are required!
Describe the Federal Trade Commission's (FTC) Red Flags Rule?
The Federal Trade Commission's (FTC) Red Flags Rule requires many financial institutions, such as banks and broker-dealers, to create and implement a written Identity Theft Prevention Program. The program must be designed to detect, prevent, and mitigate identity theft. Each firm must have policies and procedures that address the appropriate actions to take if identity theft is suspected and/or detected. The intent of the rule is to assist firms in quickly spotting suspicious activities (red flags) with the goal of preventing the theft of their clients' assets. All of the policies and procedures that are found under these programs must be referenced in a firm's Written Supervisory Procedures documentation.
What's excluded from FINRA filing requirements?
The following types of communications are not required to be filed with FINRA: - Correspondence and institutional communications - Retail communications that have been previously filed with FINRA's Advertising Department and are being used without material changes - Retail communications that don't make a financial or investment recommendation and don't promote a product or service of the member firm. This broad category is also exempt from the principal pre-use approval requirement and includes: *Recruitment advertising *Advertising that relates to changes in a broker-dealer's name, personnel, electronic or postal address, ownership, office, business structure, officers or partners, or telephone number * Advertising that relates to a merger with or acquisition by another member firm - Retail communications that simply identify a member firm's national securities exchange symbol, identify a security for which the member is a registered market maker, or identify that the member firm offers a specific security at a stated price - Tombstone advertisements, mutual fund profiles, and prospectuses that have been filed with the SEC - Press releases that are made available only to the media - Any reprint or excerpt of an article or report that's issued by a publisher, provided the publisher is not affiliated with the member firm or issuer of the securities that's being mentioned in the reprint and neither the member firm nor the issuer of the securities that's being mentioned in the reprint has commissioned the reprint - Communications that simply refer to types of investments as part of a listing of products and services that are offered by the member firm
Describe in depth the taxation of retirement plans?
There are three distinct phases of taxation in each of these plans —contributions, growth of investment, and distribution. Retirement and education savings plans are not subject to preferential, long-term tax rates and any portion of the distribution that's taxable will be taxed at the same rate as the person's ordinary income. Taxation of Contributions: Contributions to these plans are generally made on a pre-tax basis. If the contribution is made pre-tax, it means that the funds are removed directly from the client's gross income and will not count as part of her taxable income. For example, if a client earned gross income of $100,000 per year, but made pre-tax contributions of $10,000, the IRS will tax her only on the $90,000 of net income. In effect, the client is avoiding income taxes on the $10,000 in the year in which it's earned. On the other hand, if a client makes an after-tax contribution, it means that the funds were taxed prior to the contribution being made. The tax implications will differ based on how the contributions have been made. In the pre-tax scenario, the contributions had not yet been taxed; therefore, these funds will be taxed at the time of withdrawal. If a plan is funded solely with pre-tax contributions, it's said to have a zero-cost basis (i.e., the funds have not yet been subject to tax). However, if the contributions are made post-tax, these contributions are considered a part of the plan's basis and may be withdrawn without being subject to tax. Taxation of Income and Trading Events During the Plan's Life: The plan investments may generate income in the form of dividends and/or interest. Also, clients may decide to buy and sell various investments within the plan. From a tax standpoint, none of these events matter since all activity within these plans is tax-sheltered (tax-deferred). Taxation of Distributions: As described earlier, distributions of pre-tax monies are typically taxable at ordinary income rates as will all of the income and trading profits that occurred over the life of the plan. All distributions of post-tax monies will be free from taxation since these funds have already been taxed. To summarize, the general rule of thumb is that: 1. Post-tax contributions are not taxed upon distribution 2. Pre-tax contributions are taxable at ordinary rates upon distribution 3. All account earnings (i.e., interest, dividends, and trading profits) are taxable at ordinary income tax rates upon distribution
Describe: Unincorporated Association Accounts?
These accounts are opened in the name of the owner, which can be a business name. The ownership of the account is subject to creditors' claims
Types of Non-Qualified Retirement Plans: Employee Stock Ownership Plans (ESOP)?
These are employee benefit plans in which the company contributes its stock or money to purchase its stock to the plan. The stock generally comes from retiring or departed employees. When an individual retires, he or she usually doesn't receive stock, but the cash equivalent of the value of the stock.
Define & Describe: Institutional Communication?
This category includes any type of written or electronic communication that's distributed or made available only to institutional investors, but doesn't include a member firm's internal communications. FINRA defines institutional investors as: - Banks, savings and loans, insurance companies, registered investment companies, and registered investment advisers - Government entities and their subdivisions - Employee benefit plans, such as 403(b) and 457 plans, and other qualified plans with at least 100 participants - Broker-dealers and their registered representatives - Individuals or entities with total assets of at least $50 million - Persons acting solely on behalf of these institutional investors Under FINRA rules, a member firm must establish policies and procedures that are designed to prevent institutional communications from being forwarded to retail investors. One acceptable method is placing a legend on the communication stating "For Use by Institutional Investors Only." If a member firm becomes aware that an institutional investor (e.g., another broker-dealer) is making institutional communications available to retail investors, the firm is required to treat future communications to that institutional investor as retail communications. Internal communication that will not be sent to either institutional or retail investors should be marked "For internal use only." If communication is being sent to registered representatives (RRs) of a different broker-dealer, those RR are considered institutional investors and communication should be marked "For institutional use only." If a broker-dealer or its RRs distribute institutional communication to its retail investors, all communications being sent to that brokerdealer should be considered retail communication.
Define & Describe: Retail Communication?
This category is defined as written or electronic communications that are distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who doesn't meet the definition of an institutional investor. Retail communications are the broadest category and include both advertising and sales literature. All materials that are prepared for the public media in which the ultimate audience is unknown are considered retail communications including: - Television, radio, and billboards - Magazines and newspapers - Certain websites and online interactive electronic forums, such as chat rooms, blogs, or social networking sites (assuming retail investors have access to these sites) - Telemarketing and sales scripts - Independently prepared reprints (e.g., newspaper or magazine articles) that are sent to more than 25 retail investors
Describe what's required to open up a: Partnership Account?
To open an account for a partnership, a member firm must collect certain information from each general (managing) partner. This information includes their name, address, citizenship, and tax identification number. A partnership agreement must be created which will specify the partners who are authorized to execute transactions on behalf of the partnership. For record-keeping purposes, member firms are required to maintain a copy of the partnership agreement in the account file.
What's the Predispute Arbitration Clause?
Today, many new account forms contain a clause that obligates customers to submit all disputes with their RR or their firm to binding arbitration. If arbitration clauses are included in the form, industry rules require them to appear in a certain format with specific wording. If a firm elects to include a predispute arbitration clause in its new account form, it must be highlighted and must be preceded by the following disclosures: - Arbitration is final and binding on the parties. - The parties are waiving their right to seek remedies in court, including the right to a jury trial. - Prearbitration discovery is generally more limited than, and different from, court proceedings. - It's not required that the arbitrators' award include factual findings or legal reasoning, and any party's right to appeal or seek modification of rulings by the arbitrators is strictly limited. - Typically, the panel of arbitrators includes a minority of arbitrators who were or are affiliated with the securities industry. Immediately before the signature line, there must be a highlighted statement that the agreement contains a predispute arbitration clause. A copy of the agreement must be given to the customer and the customer must acknowledge its receipt either directly on the agreement or on a separate document.
Define & Describe: Correspondence?
Traditionally, correspondence has been viewed as any communication being sent to one person. However, FINRA's current definition is more precise. Correspondence is defined as written or electronic messages that are sent by a member firm to 25 or fewer retail investors within any 30-calendarday period. The 25 or fewer investors may be any type of retail client (i.e., existing or prospective). The typical delivery methods include physical (paper) written letters, text messages, and e-mail.
Describe the 2 types of Custodial Accounts?
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) Under the UGMA/UTMA, an irrevocable gift of cash or securities is given to a minor by an adult donor. An adult custodian is appointed to act as a fiduciary for the minor. There may be only one custodian and only one minor per account and the custodian may also be a donor. Although there's no limitation on the amount of gifts that may be given, taxes may be due from the donor if certain dollar thresholds are exceeded (currently $16,000 per year). Most custodial accounts are registered in the name of the custodian for the benefit of the minor. For ease of trading, an account opened under UTMA may allow for street name holding. The account is opened under the minor's Social Security number and the minor is responsible for paying taxes on any income generated in the account. Provided the custodian is not the donor of the assets in the account, a custodian may receive a fee for managing the account. Due to an amendment to the Uniform Prudent Investor Act (UPIA), a custodian is permitted to authorize investment discretion to a competent third party (e.g., an RR or investment adviser representative). As with most fiduciary accounts, UGMA accounts may NOT be margin accounts.
What disclosures are required when selling Municipal Fund Securities?
When preparing advertising related to municipal fund securities (529 plans), certain disclosures must be provided. Chief among these are statements that: - Advise the investor to consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing - Explain that more information about municipal fund securities is available in the issuer's official statement - Identify the firm as an underwriter of one or more of the issues of municipal fund securities if the firm publishes the advertisement and will supply the official statement - The official statement should be read carefully before investing When advertising Section 529 college savings plans, a statement should be included to advise the investor to consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in that state.
When opening up a joint account, do only I need to sign? If withdrawing from a joint account, could I get the check made out to only myself? What information do I need in joint accounts for tax purposes?
When signatures are required (e.g., to transfer securities), all owners are normally required to sign and any check made payable to the account may only be drawn in joint names (as the account is titled). Be aware that although background information is collected on each owner, all tax reporting data is listed under one designated tax ID number that belongs to only one of the account owners.
With each filing made to FINRA, what else needs to come along in terms of approval?
With each filing that's made to FINRA, a member firm is required to provide the name, title, and Central Registration Depository (CRD) number of the registered principal who approved the retail communications along with the date on which the approval was given.
Can clients trade with #'ed accounts?
Yes but the member firm must maintain record regarding the beneficial owners of all such accounts.
Are the research reports created by the research department subject to FINRA communication rules?
Yes, the information barriers that separate research and investment banking departments must be reinforced through the supervision of these areas, including a member's written supervisory procedures. A member firm's investment banking department is restricted from exercising any control over its research department, particularly as it relates to the preparation of research reports. The supervision and approval of research reports must be conducted exclusively by supervisory personnel in the research department. These supervisors are required to hold a Supervisory Analyst (Series 16) designation and are responsible for approving research reports prior to their distribution. Review and approval mechanisms, which provide a member firm's investment banking department or any other non-researched department with review or veto power over research reports, are strictly prohibited. At times registered representatives may prepare reports for distribution to their customers. Although an RR may not hold the Research Analyst designation, these reports are still considered research reports and must follow the same review and approval requirements. To prevent the misuse of confidential information, communications between research and investment banking departments and other non-research departments are severely limited. Communications are prohibited if they're not related to information verification or are not being conducted to avoid conflicts. The details of these prohibitions must be included in a firm's written supervisory procedures.