Unit 3: Trading, Accounts, Prohibited Activities

Rule of a Stock Split

the total value of the stock must be the SAME before and after the split. So: If the number of shares goes up, the price per share goes down. If the number of shares goes down, the price per share goes up.

buy-back (repurchase)

when a company buys its own outstanding securities in the open market rather than appealing directly to its investors.

Traditional IRA p.148

-earnings grow tax deferred -some may take a tax deduction on their amount contributions if certain rules are met such as if they dont have other qualified plans like a 401k, the full amt of their contribution is tax deductible but if they do have another plan then their contrib amt deductible is determined by their income level -They can make contribs up to a maximum amt that can change every year determined by IRS tax code as long as the contrib doesn't exceed their earned income -Catch up contrib limit- the max dollar cap is increased by a catch-up amount for those 50+ and older -rolloverse & transfers: can only do a rollover once a yr every 12 mos and must complete within 60 days of withdrawal as they are physically withdrawing the securities however, transfer of funds between two qualified accts have no limits on the number of times per yr they can transfer investments (as long as the asxsets in the accoutns don't pass thru hands of taxpayer because in the acct is where it retains taxs deferred status) because transfers directly from one IRA custodian to another instead of being physically taken out. 10% penalty distributions can happen without penalty after age 59 1/2 and must begin by april 1 before they turn 70 1/2 but before that age of 59 1/2, there's a 10% penalty as well as regular income tax except in (listed p. 149) 50% insufficient penalty distrubtion applies if they havent taken it out by april 1 by turrning 70 1/2 which is applicable to the amt that should've been withdrawn based on IRS life expectancy tables known as RMD and RBD oridinary income taxes apply to the full amount also Known as qualified plans by IRS that allow earnings in the account grow tax deferred A personal qualified retirement account through which eligible individuals accumulate tax-deferred income up to a certain amount each year, depending on the person's tax bracket. Investments can ONLY BE cash and securities such as mutual fund in speculative bonds would be acceptable. gold coins are allowed ONLY IF THEY ARE from a U.S. mint. Collectibles and insurance are NOT acceptable investments. for those not covered by a retirement plan at work, the maximum contribution allowed by the IRS would be permitted and can be deducted on one's tax return. The deduction, however, would be phased out above a certain income level for those who do have a retirement plan at work. The catch-up provision only applies to those age 50 or older. only qualified retirement accounts, such as IRAs, prohibit the use of margin. Annuities, variable or fixed, are in most cases acceptable investments appropriate for IRAs. Deductible For those covered by another qualified plan, the portion deductible is determined by that person's income level. -the tax deduction gradually phases out as the taxpayer's adjusted gross income AGI climbs up. Contributions -may make contributions up to a maximum amount that can change year to year as determined by IRS tax code as long as the contribution does not exceed earned income for the year -the dollar cap is increased by a catch up amount for those 50 and older (these contribution limits may change sometimes annually) Funding investments can be made in stocks, bonds, investment company securities, us minted gold & silver coins, and many other securities CANNOT BE INVESTMENTS FOR AN IRA: collectibles (coins gems art stamps) nor life insurance contrast can be purchased in an IRA life insurance is not allowed with iras but other products such as annuities are Transfer of funds vs. Rollover: Individuals can take the funds and investments in a qualified plan and move them to another qualified plan but they can't do this more than once every 12 months (rollover and must be completed within 60 days of withdrawal) A transfer of funds between qualified retirement accts differs from a rollover because the account owner never takes physical possession of the funds; the money or investments are sent from one IRA custodian to another. There is no limit to the number of times per year a person can transfer investments between custodians, provided the assets in the accounts do not pass thru the hands of the taxpayer. Distributions/withdrawals Can begin without penalty after age 59 1/2 and must begin by April 1 of the year after the individual turns 70 1/2. Distributions before 59 1/2 subject to 10% penalty as well as regular income tax except in event of: death, disability, first time homebuyer, education expenses for taxpayer or their child sppouse or grandchild, medical premiums for unemployed, and medical ex[[emses om excess of defined AGI limits

takeover

purchase of one target company by a buyer/bidder company. _________ is when the buyer goes directly to the target company's shareholders, bypassing the BOD or management to buy.

Benefits of BDs offering to open margin accounts to customers

$$$ -Margin loans *generate interest income for them (the firm)* -Margin customers usually trade larger positions because of increased trading capital which generates *higher commissions for the firm* Extension requests if a margin deposit is late can be made by the broker-dealer but are not required. When made to the firm's designated examining authority (DEA), they may or may not be granted.

A new customer opens a margin account and, upon account approval, does an initial transaction purchasing 100 shares of MJS common stock at $25. How much will the customer need to deposit?

$2000 For the first trade in a newly opened margin account, there must be at least $2,000 in equity. The rule is as follows: transaction greater than $4,000, deposit 50%; between $2,000 and $4,000, deposit $2,000; and if the transaction is less than $2,000, deposit 100% of the purchase price. In this case, the transaction was between $2,000 and $4,000, and so a deposit of $2,000 is required.

Federal and FINRA Margin requirements:

(Memorize) If first purchase is greater than $4,000, deposit 50%; Purchase between $2,000 and $4,000, deposit $2,000; if Purchase is less than $2,000, deposit 100% of the purchase price . The initial deposit and maintenance requirement in a short acct is a min of $2,000 no matter how small the purchase is e.g.A purchase of $3,000 of stock would normally require 50% payment ($1,500) but because it is the initial trade in the account, the $2,000 minimum must be met since 3000 is between 2000 and 4000 If the deposit is late, the BD can either choose to sell out the securities or request an extension. However, for late deposits of less than $1,000, the BD can choose to take no action. p.141

All or None AON

-MUST be executed in their entirety or NOT at all however it doesn't need to be immediately filled in its entirety asap, since orders may be executed piecemeal, until the end of the day (for day orders) or until they can be filled in their entirety (GTC) orders -they can be held until the end of the day (for day orders) or beyond (for GTC orders) until they can be filled in their entirety

Investment Income/ Portfolio Income

-earned from one's investments. Sometimes, called portfolio income -include dividends, interest, and capital gains derived from the sale of securities. -taxed either as A) ordinary income tax rate or B) capital gains tax rate. Examples of Investment income: I) Dividends received from a stock investment II) Interest rterm-9eceived from a bond investment III) The premium kept from an unexercised short put

Freeriding

A customer has purchased a stock and then sold it before paying for the purchase. -prohibited in cash and margin accounts -as a penalty, the account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made.

1. Both FOK and Market at Open Orders 2. FOK order would be canceled/killed

Both _____ and ______ orders are expected to be filled immediately and in their entirety. If unable, a _________order would be canceled.

Backing Away

A market maker provides a firm quote to another broker/dealer then refuses to buy or sell at the price quoted. This is a violation where the market maker is said to be A market maker that does not honor its firm quote is said to be Failure to honor a quote stated as firm is a rules violation called

Can registered representatives share in gains and losses with a customer? What are the rules?

A registered representative may share in gains and losses with a customer, I) provided written permission is first obtained from the representative's principal, II) the investments take place in a *joint account*, and III) the representative's share of the gains and losses is *proportional* to the representative's share of the investment funds. Note: If the customer is an immediate family member of the representative, sharing in gains and losses need not be proportional

Why are stocks NOT taxable?

A stock dividend is payment of additional shares of the issuer to the stockholder rather than payment of cash. The price of the stock is adjusted so that the total value of the outstanding stock is the same before and after the dividend is paid. Stock dividends are thus not taxable.

Which of the following securities are most likely deemed marginable by either the Federal Reserve Board (FRB) or regulatory bodies such as FINRA and the New York Stock Exchange? Exchange-listed stock currently being offered to the public by prospectus Treasury bonds

Although treasury securities are exempt from FRB Regulation T, they are OTC securities approved by the FRB as being good collateral for loans.

401K Qualified Plan

A type of retirement contribution plan that allows an employee to elect to contribute a percentage of salary up to a maxmium dollar limit to a retirement acct each year (a defined contribution) Just like with IRAs, a catch-up contribution for those age 50 and older are also allowed. Contributions are excluded from the employee's gross income and accumulate tax deferred, as do any earnings in the account. Employers are permitted to make matching contributions up to a specified percentage of the employee's contributions. In addition, 401 (k) plans permit hardship withdrawals for situations such as unemployment or first-time homebuyers and can also allow loans against any vested balance.

Account registration

Accounts can be registered in the name of one or more persons, as well as legal entities such as corporations or partnerships. Account registration determines the ownership of the account and who will have control of the investments in the account.

Loan consent form

Allowing one's securities to be loaned to others who want to borrow them for the purpose of selling them short would entail signing a loan consent form. This is optional and need not be signed to open a margin account or any other. A customer has given permission for securities in an investment account to be used for the purpose of other customers who want to borrow them in order to sell those securities short. This would have entailed the customer signing

Define Trading on Margin and what accounts are permitted to trade on margin?

Allows customers to increase their trading capital by borrowing either cash (long margin acct) or borrowing securities (short margin acct) through their BDs (Memorize) Permitted by: -Corporate accounts: only if it's NOT listed as restricted in the corporate charter -Partnership accounts (if NOT listed as restricted in the partnership resolution ) -Both individual and joint accounts -Fiduciary account may only do it IF permission is specifically listed as being allowed in the trust or custodial agreement (phrased opposite from partnership and corp accts that say restricted) CANNOT: Only qualified retirement accounts, such as IRAs and other retirement accounts, cannot do it. Fiduciary accounts such as IRAs (and other retirement accounts) and custodial accounts would generally NOT be permitted to trade on margin UNLESS permission to trade on margin is specifically stated.

Supporting

Associated with those who short put option contracts The act of entering purchase orders in a stock for the purpose of keeping the price from falling below the strike price of put contracts that an investor has written It gives the price a type of artifical encouragement done to prevent the puts from moving in the money and being exercised. ---Choice II would keep the price up, which would protect the holder of a long position; this is known as supporting

Cash Settlement

has trade and settlement occurring on the same day and stocks/bonds sold for cash must be available on the spot and both parties must agree

Which of the following must precede the first trade in an account?

Approval of the new account by a principal All accounts must be approved by a principal before the first trade

Capping C - C

Associated with those who short option call contracts -entering sell orders in a stock for the purpose of keeping the price from rising above the strike price of calls someone is short; this is done so the price stays down, calls won't be in the money, and thus likely to be exercised Protecting a short call option from being exercised by placing sell orders during the day in the underlying stock . ---Choice IV would keep the price down, which would protect the holder of a short call; this is known as ___________. Both constitute

Your customer opens a position at 45 and then closes it later at 47. This represents

Because we do not know if the opening transaction was a buy or a sell , this could be either a 2-point gain or loss. If the opening transaction was a buy, this represents a gain (bought at 45, sold at 47). But if the opening transaction was a sell, this represents a 2-point loss (sold at 45, bought back at 47).

Custodial Accounts for Minors: UGMA Uniform Gift to Minors Act vs. UTMAs Uniform Transfers to Minors Act

Both require an adult to act as a custodian for a minor (the beneficial owner) until the minor reaches age of majority Any kind of security or cash may be given to the account without limitation UGMA: when a minor reaches the age of majority, the property in the account is transferred into the name of this new adult -securities CANNOT be registered in street name (of BD) UTMA: Custodian can withold transfer of property in the account until the new adult reaches 25 (or age 21 in some states) -securities CAN be registered in street name for UTMAs -if person makes gift of securities to a minor under UGMA/UTMA laws, the person is the donor of them and they cannot take back the gift nor can the minor return it. Custodian's abilities: -has full control over the minor;s account and can buy or sell securities, exercise rights or warrants, or *liquidate*, trade or hold securities -can use property in the account in anyway for the minor's benefit but the account is not normally used to pay expenses for raising the child because the parents can incur negative tax consequences RRs must know the following rules of custodial accounts: -An acct may have only one custodian and one minor or beneficial owner -Only an individual can be a custodian for a minor's account -A minor can be the beneficiary of more than one account and a person can serve as custodian for more than one account as long as each account benefits only one minor -the donor of securities can act as custodian or can appoint someone else to do it -unless they are acting as custodians, parents have no legal control over a custodial account or the secs in it In an UTMA account, only one adult can be the custodian for one minor. Joint custodians or joint beneficiaries to a single account are not permitted. Parent as custodian for one of the children Custodian has control over the account and can do each of the following: -exercise right or warrants -liquidate, trade, or hold securities -buy or sell securities Selling short and writing uncovered options may only be effected in a margin account. The _______forbid the establishment of a margin account. Furthermore, these investment strategies, though legal and appropriate in other settings, provides unlimited risk and is inappropriate in an account held for a minor and therefore not permitted.

Commission based accounts vs. Fee-Based Accounts

Commission based- charges commission for each transaction and are better suited for those who do *fewer* transactions each year. Fee-based -Suitable for investors that are *actively trading* at a moderate level -under management, charged a single fee (either fixed dollar amount or percentage of assets) instead of commission based charged for brokerage services. investors must be given disclosure document of what is covered annually before the account can be opened test q Fee-based accounts charging a fixed dollar amount or a percentage of assets under management are more suitable for those doing more frequently trading amount of trading. Commission based accounts charging for each transaction on the other hand are better suited for those who do fewer transactions each year. For fee-based accounts full disclosure of what is covered by the annual fee must be made before the account can be opened.

regular way settlement

Corporate securities T + 2 (trade date plus 2 business days). -also munis and gov agency securities like GNMA fannie mae freddie mac T + 1 federal gov securities (T bills, notes, bonds) and options Same day same trade- Money market securities *FINRA'S UPC Uniform practice code* standardizes the dates and times for each type of settlement

Order of the dividend dates

DERP

Mark the close

Effecting trades at or near the close of the trading day to influence the closing price of a stock is called In this example the buy order at the close is likely intended to push the stock up so that the MM's position in the stock would be marked at a higher price.

SIMPLE IRA

Employee sponsored retirement plan offered by small businesses that employ fewer than 100 people savings incentive match for employers less expensive and less complicated alternative to 401K plans given menu of investment choices such as stock and bond mutual funds -contributions made are pretax and earnings accumulate tax deferred, employers are required to make minimum matching contributions *Like many retirement plans, funds are withdrawn before age 59 1/2 and are subject to a 10% penalty. The maximum contribution amounts are indexed for inflation and a catch up provision is available for participants over the age of 50

Financial institutions such as broker-dealers must report when there is an event, transaction, or series of events or transactions that appear to be questionable to

FinCEN The USA PATRIOT Act requires firms to report to Financial Crimes Enforcement Network (FinCEN) when there is an event, transaction, or series of events or transactions that appear to be questionable. -CIP Customer Identification program to preevnt terroist activities funding and money laundering and to ensure customers are who they say they are via accurate identification

________ is one bus day before the record date because most trades settle regular way T +2, a cust must purchase the stock two bus days before the record date to qualify for the dividend In order to receive the dividend, the stock must be purchased before the _______ IF LATE---if stock is purchased on or after this date, the new owner has purchased the stock without the dividend and is not entitled to receive it FINRA determines this date only (and the rest are determined by BOD)

Ex-dividend date

A 72-year-old customer has a $30,000 required minimum distribution (RMD) calculated to be taken from an IRA. If the customer is in the 20% income tax bracket and only withdraws $25,000 from the account, how much in taxes and penalties will be owed?

Failure to meet the required minimum distribution (RMD) results in a 50% penalty tax on the shortfall. In this case, taking only $25,000 when $30,000 should have been taken leaves $5,000 exposed to the 50% penalty tax. $5,000 × 50% equals $2,500. Note that the IRS will force the distribution of the RMD shortfall ($5,000). In addition to the penalty, the ordinary income tax on the amount withdrawn must also be paid (20% × $30,000 = $6,000). Total tax liability on this withdrawal equals $8,500 ($2,500 penalty tax plus $6,000 ordinary income tax).

BDs and mail

Firms may choose or choose not to hold customer mail when requested to. While holding mail is a courtesy that firms are permitted to extend to customers, the rule does not require them to. The request must be in writing, and the customer must be made aware of any other methods to keep track of account activity. And lastly, the firm must take actions reasonably designed to ensure that a customer's mail is not tampered with or used in a manner that would violate FINRA rules or federal securities laws. If the BD chooses to hold customer mail, once requested to do so in writing the BD must verify at reasonable intervals that the customer's instructions still apply. The rule regarding holding customer mail does not require the BD to request or get SEC or FINRA approval and there is no requirement that the customer make additional requests to continue having the BD hold mail.

USA Patriot Act

Firms must create and maintain records of wire transfers of $3,000 or more (regardless of their destination) -requires financial firms to maintain CIP Customer Identification program to prevent financing of terrorist operations and money laundering and records of ID must be kept and customer names checked against the SDN list maintained by OFAC -Remember that structuring (designing payments under $10,000 threshold) triggers filing of a CTR and suspicious events trigger filing of an SAR

IRA holder's annual Required Minimum Distribution RMD and Required Beginning Date

For traditional IRA-- If distributions don't begin by April 1 of the year after they turn 70 1/2 a 50% insufficient distribution penalty applies. Its applicable to the amount that should have been withdrawn on the basis of IRS life expectancy tables. These are known as the IRA holder's annual required minimum distribution RMD and the required beginning date RBD. Ordinary income taxes also apply to the full amount

Lifetime Records

Form BD (Organizational documents) -partnership articles (if partnership) articles of incorporation (if a corporation) Amendments Minute book (Minutes of directors meetings) Stock certificate books The stock certificate book, also known as the stock book or stock ledger, is a permanent record of a corporation's capital stock and is to be held for the life of the corporation. Minute books showing the minutes of directors' meetings must be kept _____

A customer receives a Regulation T margin call for $3,200. To meet the deposit requirement, which of the following can be deposited?

Fully paid for marginable securities totaling $6,400 in market value When meeting a Regulation T margin call with cash, 100% of the call must be deposited—in this case, $3,200. If using fully paid for marginable securities to meet the call, a deposit totaling twice the amount of the call must be made—in this case, $6,400. This is because securities are only marginable to 50% of their value.

Roth IRA p.149

Have no min required distributions at any age.. The _____IRA has no specific requirement that the participant receive distributions. In all of the other plans, generally, upon reaching age 70 ½, minimum distributions must commence no later than the following April 1. All earnings grow and may be withdrawn tax free as long as there has been an open _______IRA for at least 5 years and the participant is at least age 59½. One may contribute to both a __________ IRA and a ________IRA in the same year, but the combined contribution may not exceed the annual maximum for any plan. RMDS AT age 70 1/2 don't apply to Roth IRAs. The 10% oenalty for distribution before age 59 1/2 is waived for first time homebuyers if they use the funds to purchase a principal residence.

Name examples of accounts opened as cash accounts

IRAs Corporate Retirement accounts Custodial accounts

Trading Authorizations: Limited POA, Full POA, Numbered accts

If a person not named on an account is to have any authority over it, the customer must file written trading authorization with BD giving that person access to the account which usually is a form of power of attorney 2 types: Full power of attorney- allows someone who is not the owner to deposit or withdraw cash or securities and make investment decisions for the owner Entry of orders and withdrawal of assets is allowed ONLY for full POA -custodians, trustees, guardians are often given full power of attorney Limited power of attorney- allows someone to have some but not total control over the account. Document specifies the level of access they have (sometimes called limited trading authorization) allows the entering of buy and sell orders but they CANNOT withdraw assets (only full POAs can). Numbered accounts- customers can open numbered accounts which use a number, symbol, or nominee name instead of their real name. Subject to all customer identification procedures and other associated anti-money laundering rules. Firm must maintain written statement signed by client attesting to ownership of the account.

If beneficiary of a custodian acct dies, the securities in the acct pass to whom?

If the beneficiary of a custodial account (minor) dies, the securities in the account must pass to the minor's estate, not to the parents' or custodian's estate.

UTMA Account

In an UTMA account, only one adult can be the custodian for one minor. Joint custodians or joint beneficiaries to a single account are not permitted. Parent as custodian for one of the children Custodian has control over the account and can do each of the following: -exercise right or warrants -liquidate, trade, or hold securities -buy or sell securities Selling short and writing uncovered options may only be effected in a margin account. The _______forbid the establishment of a margin account. Furthermore, these investment strategies, though legal and appropriate in other settings, provides unlimited risk and is inappropriate in an account held for a minor and therefore not permitted.

Short sale Naked short sale

In order to open a position with_______ the shares to be sold must be borrowed or located to be borrowed first. Not borrowing/locating the shares to be sold first is known as ______________ and is prohibited.

Limited Power of Attorney

allows someone other than the account owner to enter trades, but not to withdraw assets.

Dividends

Income from common stock

Forward split

Increases the number of outstanding shares (If the shares increase, the price per share must go down)

Income from an investment in debt securities is known as

Interest

Wrap account

bills a single fee annually for a group of services that the firm provides such as asset allocation, portfolio management, and executions for a single fee. can be a cash or margin account and like any other be approved for option trading

Coverdell Education IRA vs. Section 529 plans

Key difference: Contributions limits may be reduced or eliminated for higher income tax payers whereas the income level of a donor has no impact on contributions made into a Section 529 plan. *Contributions into a Coverdell ESA are phased out at high income levels for a donor, whereas the income level of a donor has no impact on contributions made into a Section 529 plan*. Coverdell Education IRA The maximum annual contribution to is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Higher income tax payers may have contribution limits reduced or eliminated. -If a student's account is NOT depleted by age 30, the unused funds must be distributed to the individual subject to income tax and 10% penalty or rolled over tax-free into an education IRA account for another child in the same family (only once during any 12mo period) -Distributions are tax free if the funds are used for qualified education expenses Section 529 529 plans are state-sponsored and popular for saving for education. *Remember they are eligible for tax-free distributions for qualified withdrawals*. Ownership of a 529 plan doesn't preclude one from opening a Coverdell account.

What account is most suitable for short selling?

Margin account Investors who choose to sell short eligible securities must satisfy Federal Reserve Board (FRB) margin requirements to do so. The margin requirement is a deposit of 50% of the sale proceeds in the customer's margin account. *Short sales can only be executed thru and accounted for in a margin account

Corporate Actions

Most common: -dividend declarations (both cash and stock) -stock splits (both forward and reverse) -the issuance of rights and warrants in the case of making any adjustments to cost basis, the adjustments are standardized However, unique corporate actions that are not standardized would be M&A, takeovers, spin-offs, tender offers, buybacks, or any of the previous where options contracts are traded on the issuer's securities

What are the ineligible investments and ineligible investment practices for IRAs and any other retirement plans?

NO: -collectibles ( antique gems, rare coins, works of art, stamps) -life insurance NO: -short sales of stock -speculative options strategies -margin account trading ****QUESTION ASK IF TAX EXEMPT MUNIS CAN BE INCLUDED IN AN IRA P.148

Transfer On Death TOD Account

allows the account owner to name a specific beneficiary (or beneficiaries) to receive the account's assets upon death Those named persons may be changed whenever the account holder wishes Although it allows the account to avoid probate (having the will declared genuine by a court because the estate is bypassed), however the assets in the account do not avoid estate taxes.

Opening & Managing Custodial Accounts p.146-147

Opening a Custodial Account: -rep must make sure application contains -custodian's name, the minor's name, and the social security number, and the state the account is registered -NOTE: unlike opening a trust account where documentation of the trustee's authority is required, NO documentation of custodial rights or court certification is required for the person acting as the custodian for a minor. -Securities are registered in the custodian's name NOTE: For UGMAS, the securities can't be registered in street name (name of the BD) but THEY CAN BE for UTMA -secs bought in custodial acct must be registered that show the custodial relationship e.g. Sue Wood for Kate Smith -account contains minor's social security number -any tax liability is that of the MINOR'S and the minor is responsibliity for the taxes on the account but it is up to the parent or legal guardian to see that the taxes are paid term-120 -custodial is a type of fiduciary acct and so, the fiduciary is charged with fiduciary responsibilities in managing the minor's acct: Limitations on handling of investments of custodial accounts & fidicuary accounts: -opened ONLY as CASH ACCOUNTS -CANNOT buy securities on margin or pledge them as collateral for a loan -must reinvest all cash, dividends, and interest in a reasonable tiem. Cash from sales or dividends can be held in non-interest bearing custodial acct for awhile but shouldn't be there idle for long -investment decisions must take into account minor's age and custodial relationship -commodities, naked options, and high risk secs are inappropriate investments -options may NOT be bought in a custodial account because no evidence of ownership is issued to an options buyer NOTE *covered call writing is normally allowed* stock rights or warrants must be exercised or sold Custodian can't delegate away fiduciary responsibility but can grant trading authority and investment decisions to a qualified 3rd party Custodian may loan money to an account but cannot borrow from it -custodian can be reimbursed for any expenses incurred in managing the acct as well as compensation however, if the custodian is also the donor, only reimbursement of expenses is permitted (not compensation) if the minor dies, the securities pass to the minor's estate---not to the parents nor the custodian's estate -if the custodian dies or resigns, a court or the donor of the securities must appoint a new custodian

Margin

amount of equity that must be deposited to buy securities in a _____ account

Capital gains: Short term gains

Profits on positions held 12 months or less are considered short-term gains. If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer's ordinary income.

Cash Accounts

Q: Certain accounts, such as IRAs, corporate retirement accounts, and custodial accounts, must be opened as cash accounts as opposed to margin accounts. Customer pays in full for securities at the time of purchase -Full payment no later than two business days after the settlement date e.g. if regular way settlement (which is T +2) then no later than two days after that which would be T+4 -(individual retirement accounts) IRAs, corporate retirement accounts, and custodial accounts must be opened as ___________________ NOT margin accounts Customers may open a cash account, margin account, or any other account so long as the firm supports that type of an account and an authorized principal approves it. and a customer can open both a cash and margin acct at the same time

wash sale

Quickly repurchasing a security that was just sold for a loss is recognized as having the intention to take advantage of the loss for tax purposes but not lose the income or potential for future gains from the security. This is known as _____________and taking the loss is prohibited. For the loss to be allowed, the investor must wait at least 30 days before repurchase.

Three categories of communication with the public designated by FINRA

Retail Any piece promoting securities services and / or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be pre-approved by a principal before use. Given the intended placements of the piece there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications. Correspondence- any written or electronic communication with the public..... It can be targeted at either account holders or non-account holders of the broker/dealer. The criteria that makes the communication correspondence is that it is distributed to 25 or fewer retail customers within any 30 calendar-day period. Institutional

Special Corporate Action Notice---SEC requires that notice of corporate actions be given for:

SEC requires Special Corporate Action Notice be given for corp actions because they are unpredictable and not regular happenings: I) forward splits or II) reverse stock splits, III) cash dividend payments on stock IV) issuance of rights or warrant offerings NOTE: Unpredictable events: Reverse splits and warrants are not regular happenings, Payment of bond interest is an obligation and therefore not considered a special corporate action notice. Reverse splits and warrants are not regular happenings, and even though some companies have paid dividends regularly, those dividends are not guaranteed and can be halted. Hence, these events would be considered special corporate actions and therefore require notification to the marketplace. *interest payment on a corporate debt security/bond does not require delivery of notice because its an obligation and scheduled* Stockholders must receive notice from the issuer in the event of actions to shareholders, chiefly those that are unscheduled or unpredictable. Some examples are stock splits, dividend payments, and rights or warrant offerings. A scheduled interest payment on a corporate bond thus does not require delivery of notice.

Capital gain or loss

Sale of a security for a price different from that originally paid.

Free credit balance

Sale proceeds that are not reinvested and held in the account at the broker-dealer These funds are available to the customer at any time A customer leaves the sale proceeds from a recent transaction in the account. This amount would be considered _____

Standardized Cost-Base Adjustment for Stockholders

Scheduled, common events such as: dividend declarations, issuance of rights issuance of warrants, forward splits and reverse stock splits are ____________________________

An investor with no existing positions in MMS stock sells 100 shares. This is what type of position?

Short bearish position With no existing positions, this sale transaction would have to be opening a position. Sell to open a position = short = bearish.

Proxy statements

Signing and returning ________________ to a broker-dealer for stock held in street name is enough to get the shares voted as recommended by the issuer's management, as long as the broker-dealer receives _____________ by the 10th day before a shareholders' meeting. If the shares are to be voted in some other way, the investor must specify the desired changes.

contemporaneous trader

Someone who enters into a transaction at the same time as someone else who has and may be acting on inside information is known as a may sue persons who have violated insider trading regulations, and suits may be initiated up to 5 years after the violation has occurred.

What are the partial list of investments allowed for IRAs?

Stocks bonds mutual funds UITs gov securities US gov issued gold and silver coins annuities (a life insurance product that is frequently used as funding vehicles for IRAs but life insurance itself is not allowed but annuities are) covered call writing is permissible investment practice because it does not increase risk

By the SEC definition, when is the latest that payment in full for purchased securities may take place in a cash account?

T + 4 business days Regulation T, which applies to everyone who opens a brokerage account, specifies that payment in full for securities must take place no later than 2 business days after regular way settlement. Since regular way settlement is T + 2, it follows that T + 4 is the latest.

Which of the following are available to participants in a 401(k) plan that are not available to IRA holders? What do the two both have in common?

The 401K has: Hardship withdrawals Loans against the vested balance IRAs have no provisions for either hardship withdrawals or loans. -BOTH IRAs and 401(k) plans offer tax deferral on the earnings, and although the amount is larger with the 401(k), they BOTH offer the catch-up provision for those who are age 50 or older.

Currency Transaction Report CTR

The Bank Secrecy Act requires, among other things, that transactions in currency amounting to more than $10,000 in a single day be reported on a Currency Transaction Report, CTR (Form 112). By keeping deposits under $10,000, the depositor might be engaging in one of the many forms of structuring. That is, structuring deposits in such a way so as to avoid the reporting requirements.A report that must be filed for each transaction in currency of more than $10,000 on a single day by or through a bank. These reports are required in an effort to detect and prevent instances of fraud and money laundering. They must be retained on file together with other records generated in conjunction with them for 5 years The report must be filed within 15 days of receipt of the currency The Bank Secrecy Act requires, among other things, that transactions in currency amounting to more than $10,000 in a single day be reported on a Currency Transaction Report, CTR (Form 112). By keeping deposits under $10,000, the depositor might be engaging in one of the many forms of structuring. That is, structuring deposits in such a way so as to avoid the reporting requirements. -Remember that structuring (designing payments under $10,000 threshold) triggers filing of a CTR and suspicious events trigger filing of an SAR

Breakpoint Sales

an expression that means those sales that are just below the breakpoint. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges.

A customer wanting to open a margin account is told that the securities will be held in "street name". This means that the securities will be registered in?

The name of the BD broker-dealer who is the named or nominal owner the customer still is the beneficial owner retaining all rights of ownership.

A broker-dealer is confronted with margin deposit due but not yet received. The BD can choose to take no action, neither selling out the securities nor requesting an extension, if the amount due is

The required deposit will be 50% of the securities' value. If the deposit is late, the broker-dealer can either choose to sell out the securities or request an extension. However, for late deposits of less than $1,000, the broker-dealer can choose to take no action If the extension request was not granted (denied), the broker-dealer must sell out the securities purchased and freeze the account for 90 days.

The total return on an investment

The sum of income received and capital gain or loss upon sale.

Before borrowing from or lending to a customer, a registered representative must advise the firm in writing and receive written permission What are the two exceptions to the written notice and approval requirement for permitted lending arrangements between customers and RRs?

They are; when both are immediate family members or when the customer is a lending institution and the loan is a standard commercial lending transaction -- then they don't need written notice & approval

Record date

They receive the dividend distribution on the ______ Those who hold the stock on this date receive the dividend distribution

What is included in a notice of corporate action?

Title of the security -the declaration date -the record date -the payable date -(depending on security) the rate of the dividend/amt to be paid/rate of distrib Example: For a cash dividend-- the amount to be paid For a stock dividend- the rate of the dividend (e.g. 10%) For a stock split (forward or reverse) the rate of distribution (e.g., 2:1, 3:2)

Rules for Customer Accounts

To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer a copy of the account record within 30 days of opening the account - upon the opening of the account, -the updating must occur at least once every 36 months (3 yrs) thereafter -, if the customer notifying the firm of changes in any information shown or listed on the account form -Purchasing securities in a frozen account is permitted, but the funds to pay for the purchase in full must be available in the account before the buy order is entered. If a customer notifies a member firm of a change in account information, such as a change in address, marital status, or investment objective, the firm must amend the account information and send it to the customer for confirmation within 30 calendar days. IN SUM: Updated account information must be sent to the customer with 30 days for confirmation upon the opening of the account, at least once every 36 months thereafter, and in the event of the customer notifying the firm of changes in any information shown or listed on the account form.

3 Year Records

Trial Balances: Confirmations Order tickets Advertising Forms U-4 and U-5 regarding the firm's associated persons and fingerprint cards for terminated personnel -The Compliance and Procedures Manual (must be frequently updated) -List of all offices where business is done -Associated persons' compensation records -Subsidiary ledgers such as securities borrowed and securities loaned, monies borrowed and monies loaned, and dividends and interest received -Whether a record retention requirement is six years or three years, the most recent two years must be in a readily accessible location Trial balances usually run at the end of a reporting period to ensure that the firm's credit and debit columns arrive at identical sums must be kept for ___ years after the trial balance was run

Rehypothecation

When a BD pledges customer securities to a bank as collateral for a margin loan, the pledge is known as _____ When a client of a BD purchases stock on margin, in order to finance the loan, the BD _____ the stock to a bank The shares __________________to the bank serve as collateral for the bank's loan to the BD, which is made in accordance with Regulation______ which oversees the process of a bank lending money to BDs based on customer securities __________ as collateral for the loan In a long margin acct customers put up at least half the purchase price of securities, and the broker-dealer firm borrows the remainder on the customer's behalf from a bank. The customer pledges the securities to the broker-dealer, which is known as hypothecating the securities. The broker-dealer then rehypothecates them to the bank as collateral for the margin loan

tender-offer

When a company wants to buy outstanding securities for cash or for cash plus other securities from its stockholders or bondholders e.g. A company wants to repurchase outstanding debt securities it has issued directly from its bondholders for cash

Declaration Date

When a company's board of directors (BOD) approves a dividend payment it is recognized as _________________. BOD also designates the record date and payable date at this time.

Market at Open or market on the close order

When a liquid market exists, buy or sell __________________orders are executed at the best available price immediately (and in its entirety). -these orders are expected to be filled immediately and in their entirety customer is not guaranteed the exact price (but one close to it)

spin-off

When one company sells all of the shares of another it owns,

Corporate Accounts

When opening an account, a firm must obtain a copy of the corporate charter and resolution. -The charter is proof the corporation exists and the resolution authorizes the opening of the account and the officers designated to enter orders Q A BD who opens an account for a corp must establish I any limitations the corporation has placed on account activities II the names of those who will have access to or authority over the account III the legal right of the corporation to open a brokerage account

An investor has been putting aside funds for retirement in a nonqualified variable annuity for over five years. She is now age 66 and takes a lump-sum distribution. How are the earnings taxed?

With a nonqualified annuity, all distributions more than the cost basis will be taxed as ordinary income

Reverse Split

____________ reduces the number of outstanding shares. (Price per share must go up given the number of shares goes down)

Immediate or cancel IOC

______________ allow partial execution, part of the order to be filled, with the unexecuted portion of the order being canceled. -like FOK orders EXCEPT for this order, a partial execution is acceptable -Does NOT need to be immediately filled in its entirety

Even vs uneven split

___________has the number 1 to the left or right: 2:1, 3:1, 1:2, 1:4 and so on _________ does not have 1 in either place: 5:4, 2:3, and so on.

Day orders

an order is assumed to be a day order, valid until the close of the trading day it is entered, if it hasn't been executed in full, it is canceled at the close of the day's trading. Note that while market orders should be filled immediately, that is of more important with limit orders

Bullish Positions

anticipating that the security's price will rise, is associated with owning the security—having a long position. owning securities that can be converted into the stock, such as being long calls, rights, or warrants, would also be considered ___________ positions

Pegging

any activity intended to keep the price of a stock from moving this can involve entering either buy or sell orders or both e.g. supporting and capping Matched orders, pegging, and supporting are all prohibited activities meant to manipulate stock prices.

Fiduciary

any person legally appointed and authorized to represent another person, act on that person's behalf, and make whatever decisions are necessary to the prudent management of the account. all investment decisions must be made in accordance with the prudent investor rule, which mandates that only wise and safe investment decisions be made. Speculative positions, such as selling short or writing uncovered call options, are almost always prohibited. Margin trading can only occur if it has been specifically designated as being allowed in the trust documents. Fiduciaries may charge a reasonable fee for their services but may not be compensated based on, or share in, profits. A fiduciary is a person legally appointed to represent another person, and make whatever decisions are necessary to prudently manage owner's account. The investments exist for the owner's beneficial interest, yet the owner has little or no legal control over them. The fiduciary makes all of the investment, management, and distribution decisions and must manage the account in the owner's best interests.

FOK

applicable to limit orders, this is an instruction to fill (execute in its entirety) the order immediately or cancel the order completely. it must be executed COMPLETELY in its entirety

Market order

buy or sell, immediate execution at the lowest (best) available price.

Options Disclosure Document (ODD)

customers are not entitled to an extension of time to meet a margin call If a maintenance call is not met it is the BD who determines which securities to sell, not the customer. firms can increase their in-house margin requirements without advance notice customers can lose more money than initially deposited

What is determined by BOD and what is determined by FINRA?

derp declaration, ex dividend, record, and payable is the order -The BOD determine: declaration, record, and payment - *FINRA/ the exchange determines ex-dividend date*

Discretionary accts vs. nondiscretionary accts

discretionary- can be entered by the RR without the orders being approved first by the customer nondiscretionary no order can be entered without the customers prior approval

Payable date

dividend disbursing agent *sends dividend checks* to all stockholders whose names appear on the books as owners of the record date

Name the marginable securities that are: allowed to be 1)purchased on margin and are also 2)marginable securities that can be used as collateral

exchange listed stocks, bonds Nasdaq stocks OTC issues approved by FRB Warrants (in sum: equities, stocks, bonds, treasuries, OTC issues by FRB, and warrants) NOTE: Corporate securities are NOT exempt from Regulation T Margin Requirements; for corporate securities to be purchased on margin, buyers must meet the requirements of Regulation T

Suspicious Activity Reports SAR

filed to the Financial Crimes Enforcement Network (FinCEN) as required by the USA PATRIOT Act which requires firms to report to finCEN on the suspicious events The threshold for triggering a suspicious activity report (SAR) is at least $5,000 in funds or other assets. Do not confuse this with a Currency Transaction Report (CTR), which is triggered by amounts greater than $10,000. A suspicious activity report must be filed with FinCEN within 30 calendar days of the firm becoming aware of the suspicious activity. The suspected parties may not be informed that they are the subject of an SAR. -Copies of each filing must be retained for five years requies filing of an SAR to remain confidential Act also requires firms to make and retain records relating to $3,000 or more -collect info on name and address of sender and recipient, amount of transfer, name of recipients financial institution, account number of recipient

A broker-dealer's customer will be relocating for a position with a higher salary and bonus potential. This requires

notification to the broker-dealer of the change within 30 days When there are significant changes to the client's status, such as salary and bonus potential as well as change of address, the client should notify the member firm within 30 days.

OFAC The Office of Foreign Assets Control

publishes and maintains a list of known terrorists and drug traffickers and those controlled by them or acting on their behal is available to broker-dealers and other companies in the financial industry. It must be consulted when a firm takes on a new customer and on other occasions.

nonqualified

ordinary taxed at the investor's ordinary income tax rate

Joint Tenants With Rights of Surivorship JTWROS

ownership stipulates that a deceased tenant's interest in the account passes to the surviving tenants JTWROS- *All parties* have *undivided* interest in the account

TIC Account

securities owned by the decedent pass to the decedent's estate—in this case, 50% of the assets. The other 50% is retained by any remaining living parties to the account. TIC- Each party must specify a *percentage* interest in the account UNLIKE JTWROS

4 year record

written customer complaints is the exception to the lifetime, 6 year, and 3 year retention

A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for

$2000 No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met.

Three brothers open a joint account instructing you that if they die, they want the cash and securities in the account to go to the remaining parties to the account. The account should be opened:

*Joint Tenants With Rights of Survivorship* each brother's interest in the account would go to the surviving brother. Although __________accounts may be opened with a TOD designation, that is not the best answer to this question ---that is a feature that would be added to the account. From time to time, you will see questions on the exam where it will be a challenge to choose between two "good-looking" answers. The key is to pick the one that is the most appropriate to the specific question.

Nonstandardized cost base adjustment vs. standardized cost base adjustment

*Nonstandardized Cost Base Adjustment* Examples would include mergers and acquisitions, takeovers, spin-offs, tender offers and buy-backs or repurchases of stock. corporate mergers, takeovers and spinoffs are dealt with in a nonstandardized manner that depends on the individual circumstances *Standardized Cost Base Adjustment* e.g. Dividend, rights, warrants, forward stock splits, reverse stock splits Corporate actions where the adjustments to cost basis are standardized would include cash and stock dividends, even and uneven splits both forward and reverse and the issuance of rights and warrants. Scheduled, common events such as *dividend declarations, issuance of rights and warrants, and forward and reverse stock splits* are accompanied by standardized adjustment of the stock's cost base.

Regulation S-P

*enacted by the SEC* to protect the privacy of customer information deals with nonpublic personal information Privacy requirements Safeguard requirements such as securing desktop and laptop computers and encrypting email to protect customer information -shows obligatio Privacy Notifications must be provided to customers whenever a new account is opened and annually thereafter. requires that if a BD reserves the right to disclose nonpublic personal information to third nonaffiliated parties, it must notify the customer at the time of the account opening and annually thereafter. Means to opt out of the disclosures must be reasonable and easy. Requiring a written request to opt out would not be considered reasonable means under the regulation. The SEC, in Regulation S-P notes examples of nonpublic personal information to include a customer's Social Security number, account balances, transaction history, and any information collected through an internet cookie. A home address would not be considered nonpublic personal information.

Required Disclosure Agreements to Open a Margin Account

- Provide customers with a risk disclosure document on an annual basis which discusses risks associated with margin trading -----Risks:(can't choose which securities can be sold if a maintenance call is not met, can lose more money than initial deposit, not entitled to extension of time to meet a margin call, firms can increase in-house margin requirements without advanced notice) -Mandatory to sign the credit agreement and hypothetication agreement (loan agreement is optional) Must sign: I) the credit agreement and II) the hypothecation agreement III) Loan consent agreement (optional) I) the credit agreement --While the risk disclosure document must be received (and attested to as read) by signing the credit agreement, it need not be signed. II) the hypothecation agreement. - permits the pledging of *customer securities as collateral* for margin loans. -By signing the margin agreement, a customer hypothecates (pledges) the securities to the *BD who then rehypothecates (pledges) them to the bank as collateral* for the margin loan. III) Loan consent form (optional)- if signed, it gives the firm permission to loan the customer's margin securities to other customers or other BDs to for short sales where securities need to be borrowed -The signing of the loan consent agreement allowing one's securities to be loaned to others for the purpose of short sales and it's optional

Regulation T p.141

- Settlement plus 2 additional business days requires it be met within 2 business days of the settlement date S + 2. specifies that payment in full for securities must take place no later than 2 business days after regular way settlement. If regular way settlement T + 2, it would be T + 4 is the latest. Identifies which securities are eligible for purchase on margin and which can be used as collateral for loans for other purchases ________,the initial margin requirement currently at 50%, is set by the Federal Reserve Board (FRB). requires that the call be met within 2 business days of the settlement date, referred to as S + 2. If regular way settlement was T + 2, adding 2 additional business days to the trade date would be T + 4. initial margin requirement is currently 50%. While it has been so for many decades, it can be changed by the Federal Reserve Board anytime it deems appropriate to do so. _________ applies to everyone who opens a brokerage account In the event of late margin deposit, requests for extensions are made by the broker-dealer to the firm's designated examining authority (DEA). While Treasury securities (bills, notes, and bonds) are exempt from Regulation ____ margin requirements, purchases of them on margin are allowed and would be subject to the firm's determination of what the initial margin deposit requirement should be. for corporate securities to be purchased on margin, buyers must meet the requirements of Regulation T. *munis are exempt and so are gov agency issues and treasuries*

Reverse Split

-A type of adjustment - increases a company's share price (stock price). -the number of shares outstanding decreases, but the price per share increases. -As with all adjustments, a shareholder's total position in the stock remains unchanged before and after the action. e.g. The price of a certain stock has diminished over the last several months to the point where it may be delisted by the exchange where it trades.

Margin account advantages for customers- What are the benefits for customers?

-Can purchase more securities with lower initial cash put out -Leverage the investment by borrowing a portion of the purchase price see p.138

6 Year Records

-General Ledger -Blotter -Customer Accounts (Customer new acct forms) -Stock Records -Suspense Accounts -Customer Ledger: where account statements are prepared New account forms filled out when the customer account was opened and stock records showing all the securities held by the firm and where they are held must be kept for____ general ledger- contains accounting records of firm's assets, liabilities, net worth accounts. Firm prepares its financial statements from it. It must be prepared as frequently as necessary to determine compliance w net capital rule but in no event less frequently than monthly blotter- record of original entry. Member maintains blotters relating to the purchase and sale of securities, receipt and delivery of securities, and receipt and disbursement of cash. reflects transactions as of trade date or event date and must be prepared no later than following bus day. stock record-shows all securities held by firm, ownership of those securities, and where the securities are held. Must be posted no later than the bus day after the settlement date Customer ledger- customer statements. Cash accts and margin accts are shown on separate ledgers. Ledgers must be posted no later than the settlement date. Customer account records- customer account records might include the new acct form and margin agreement, if appropriate -record of when someone attained a principal designation must also be kept for ____ years

What securities are not marginable, cannot be purchased on margin, but can be used as collateral after being held for *30 days* (These securities can be Collateral ONLY after being held 30 days)

-Mutual funds -New issues *Collateral only after 30 days

Margin Account

-Payment can be partially made at the time of purchase *In a long margin account, customers put up at least half the purchase price of securities*, and the broker-dealer firm borrows the remainder on the customer's behalf from a bank. The customer pledges the securities to the broker-dealer, which is known as hypothecating the securities. The broker-dealer then rehypothecates them to the bank as collateral for the margin loan. 2 types of Margin Accounts: 1) Long Margin Account: customers buy securities and pay interest on the money borrowed until the loan is repaid *In long margin accounts, customers borrow *money* $ 2) Short Margin Account- customer borrows stock and then sells short, allowing him to profit if its value declines -In short margin accounts, customers borrow *securities -- short-securities* *NOTE ALL short sales must be executed thru and accounted for in a margin account -Margin accounts are not attractive to conservative investors -Collateral: BDs are pledging the customer's securities as collateral for the loan as part of offering these accounts to customers

Anti Money Laundering Which SRO is in charge? Which act requires what?

-Remember that structuring (designing payments under $10,000 threshold) triggers filing of a CTR and suspicious events trigger filing of an SAR *Bank Secrecy Act* puts the *US Treasury Dept* as the lead agency for regulations involved with anti money laundering programs and regulators are now more focused on where the money is going -Firms are required to designate a chief AML officer that does not need to be registered as a representative or principal. 3 stages of money laundering placement (easiest to spot it), layering, integration (commingling) -AML Compliance program: BDs are required to have compliance procedures to detect it and there are red flags such as *structuring*- a customer who designs currency deposits or withdrawals to fall under the $10,000 cash transaction report CTR filing threshold e.g. depositing $1,000 each week for many weeks would trigger an SAR filing SAR -FinCEN is a bureau of the treasury dept that combats money laundering. -*USA Patriot Act *requires firms to report to FinCEN any transaction alone or in the aggregate involves at least $5000 in funds or other assets if the firm suspects it falls within one of the suspicious 4 classes -Firms must file a suspicious activity report SAR within 30 days of becoming aware of the suspicious transactions. Copies of each SAR filing and the related documentation must be retained for 5 years from the date of the filing -Act requires SAR filing to be confidential and person must not be notified even if firm supoeanas them and must notify FinCEN of the request unless disclosure is required by another SRO -US Patriot Act requires firms to make & retain records relating to wire transfers of $3000 or more. Info collected must include name and address of sender and recipient, amount of the transfer, name of recipient's financial institution, and accut # of recipient CTR Currency Transaction Report Bank Secrecy Act requires BDs to report any currency received in the amt of more than $10,000 on a single day. Records related to filed reports must be retained for 5 years and report must be filed within 15 days of receipt of the currency (this rule is part of regulatory effort on money laundering) two fed agencies that deal with it are the Federal Reserve and US Treasury -if anyone designs deposits to fall under the $10,000 radar, its known as structuring and firms monitor for it e.g. 25 $500 deposits to pay for a $12,500 transaction is structuring and an attempt to avoid the filing of a CTR USA Patriot Act requires CIPs Customer Identification Programs to prevent financing of terrorist operations and money laundering. BDs must keep records of identificaiton and check names against SDN Specially Designated Nationals list kept by Office of Foreign Assets Control OFAC which publishes list of entities like terrorists and cartels and when they appear on the SDN their assets are blocked -new customers must be advised that firm is requesting their info to verify their identity and notification can be placed on firm website, delivered verbally, or placed on new acct form p.151

Which of the following corporate actions are designed to allow investors to buy shares of stock under specific, defined conditions?

-Rights offering and -Warrants A Rights offering allows current shareholders to purchase enough additional stock to maintain their proportionate ownership of the corporation, in the event more shares are sold to the public. The shareholders may purchase the stock before the public has access and will purchase the stock at a discount from its market price. Warrants allow the owner to purchase a certain number of shares of stock at a specified price at a specified time later. Splits and stock dividends, the other choices, do not involve the purchase of stock but instead are adjustments to existing stock positions.

Borrowing Sources for Short Sales with Margin Accounts

-Short Sales can ONLY be executed thru & accounted for in margin accounts Borrowing sources: -the member firm executing a short sale on behalf of the customer -margin customers of that member firm -other member firms -Specialized companies known as Stock Lending Firms -Institutional investors *The MOST COMMON source is another customer's margin account but they MUST give permission by signing a III) loan consent agreement

Securities exempt from FRB's Regulation T margin requirements

-US Treasury bills, notes, and bonds -Gov agency issues (Like GNMA) -Muni securities NOTE: While Treasury securities (bills, notes, and bonds) are exempt from Regulation T Margin Requirements, purchases or selling of these exempt securities on margin *are allowed* would be subject to the firm's determination of what the initial margin deposit requirement should be. Firms can impose stricter requirements but they still must follow maintenance requirements by FINRA.

Discretionary orders (rules)

-a record of the order must be maintained a record must be kept of all transactions including ____________ones, and as with all trading activity, it is subject to frequent and systematic review by a designated supervisor or manager. -the order should be included in those required to be reviewed frequently -the order must be identified as or marked __________ Each ________ order must be identified as such at the time it is entered for execution - a principal, officer or a partner of the BD must approve each order promptly and in writing, but NOT necessarily before order entry no order can be entered without the customer's prior approval.

Margin Calls

-can be met with deposits of cash or fully paid for marginable securities -___________ can be met using either cash (100% of the call) or fully paid for marginable securities (twice the amount of the call because securities are only marginable to 50% of their value). Regulation T requires customers to meet inital margin deposit requirements no more than 4 business days after the trade date T +2 plus 2 more If deposits are made using fully paid for marginable securities, they are only marginable to teh extent of 50% of their values tehrefore securities must be valued at twice the amount of the Regulation T margin call p.141 If payment is late, the BD can apply to its DEA for an extension -DEA designated examining authority can be exchange or FINRA and monitors and audits firm for compliance -For introducing BDs who do not clear their own trades, the extension request is made by the clearing firm -if amount is less than $1000, the BD can choose to take no action _if no extension is requested or not granted, on the morning of the 6th business day the firm must sell out the securities purchased and freeze the account for 90 days -if customer wants to purchase securities in a frozen account they must have the funds available in the account to pay for the securities in full

What securities are not marginable, cannot be purchased on margin and CANNOT be used as collateral for a margin loan What securities are NOT marginabe?

-options -*rights* -Non-National Market Securities (NMS) -OTC issues NOT approved by FRB -insurance contracts Option contracts—calls and puts—are among those securities products that cannot serve as collateral for a margin loan and because of that they can't purchased on margin. The unpredictable intrinsic value, diminishing time value, and limited life of options make them bad for securing any kind of loan.

Fiduciary Accounts

-person other than the owner initiates the trades ex. trust account (trusts are the most common type) and custodian account -money or securities is placed in trust for one person, often a minor, but someone else manages the accounts. The manager or trustee is a fiduciary -investments exist for the owner's beneficial interest yet owner has little or no legal control over them. -The fiduciary makes all of the investment, management, and distribution decisions and must manage the account in the owners best interests NOTE the fiduciary may not use the account for their own benefit but they may be reimbursed for reasonable expenses for managing the account -beneficial owner's social security number is used on the account -opening a fiduciary account requires court ceritication of the individual's appointment and authority -an account for a trustee must include a trust agreement detailing the limitations placed on the fiduciary RULES RR MUST KNOW FOR THIS ACCT: The RR for a fiduciary account must follow thes rules: -proper authorization must be given, as the necessary court documents must be filed with and verified by the BD -speculative transactions are generally not permitted -margin accounts are only permitted if authorized by the legal documents establishing the accounts -the prudent investor rule requeires fiduciaries to make wise and safe investments -many states publish a legal list of securities approved for fiduciary accounts -a fiduciary may not share in an accounts profits but may charge a fee for services

Marginable Securities

-securities that can be used as collateral in a margin account (in sum: equities, stocks, bonds, treasuries, OTC issues by FRB, and warrants) -Equities, exchange listed stocks, Nasdaq stocks, bonds (as well as treasury bonds), OTC issues approved by the FRB and warrants are ________ securities -Although treasury securities are exempt from FRB Regulation T, they are OTC securities approved by the FRB as being good collateral for loans--> so treasury bonds would be _________ securities according to FRB and FINRA and NYSE

discretionary account

-the customer can continue to enter orders themselves. -A trading authorization or limited power of attorney, NOT full power of attorney is required. -The customer is legally bound to accept all trades done by the party given the ___________ -churning, excessive trades done only for the purpose of generating commissions, is never permitted. to prevent this possibility a designated supervisor must review all trading activity frequently. the customer's prior approval is not required the customer may still enter their own orders.

1) BUY MARKET ORDER: Buy 1,000 Shares of XYZ at MKT 2) SELL MARKET ORDER: Sell 1,000 shares XYZ at MKT 3) BUY LIMIT ORDER: Buy 1,000 shares of XYZ at 32 4) SELL LIMIT ORDER: Sell 1,000 shares of XYZ at 32

1) Executed immediately to buy at the best (lowest) available price 2) Executed immediately to sell at the best (highest) available price) 3) Buy at 32 or better meaning buy at 32 or lower/cheaper 4) Sell at 32 or better meaning sell at 32 or higher

Qualified Plans

ALL: 100% taxable when assets are distributed, 10% penalty on distriibutions before age 59 1/2, earnings accumulate tax deferred for all Traditional IRA 1 Key) phase out schedule for tax deductible contributions 2 Key) Contains RMDs RMDS -tax deductions can be taken on the contributions e.g. if person doesn't have another qualified plan like a 401k then the full amount of their contrib is tax deductible but for those that have another qual plan, the amt deductible is determined by their income level and the tax deduction gradually phases out as their AGI adjusted grgoss income climbs -make contributions up to a maximum amount that can change every year determined by IRS tax coode (as long as their contribution doesn't exceed earned income) but the max cap is increased by a catch up amount for those 50+ and older Roth IRA 1 Key) phase out schedule for contributions tied to AGI -- their income (not tax deductible based like traditional) 2 key)NO RMDs in roth ira -Contributions are NOT deductible on one's tax return unlike traditional IRA -RMDs at age 70 1/2 don't apply to Roth IRAs -10% penalty for distributions before age 59 1/2 is waived for first-time homebuyers if they use the funds to purchase the house -allow after tax contibutions up to a max allowed limit per year and contributions to other IRAs when combined w contributions to Roth IRA cant exceed the max annual allowable limit -earnings are not taxed as they accrue or when they are distributed from an account as long as the money has been in the account for 5 taxable years and the owner has reached age 59 1/2 SIMPLE IRA -contributions are made pretax -the max contribution amounts are indexed for inflation and a catch up provision is available for people over 50 yrs old 401K -have a hardship provision allowing for withdrawals and can allow loans against any vested balance -defined contribution- the employee decides a percentage of salary up to a max limit to contribue to acct each year -catch up provisions for those 50 + older are allowed -contributions are excluded from their gross income -employers bosses are permitted to make matching contribus up to a specific percentage of their employee's contribs 403b- tax sheltered annuity plan for school employees tax sheltered annuities plans like the 403b for 501c charities too -funded by employee salary deferrals and the deferred amount is exclujded from their gross income and a written salary reduction agreement must be done w/ employer & employee *Distributions are 100% taxable and a 10% penalty is applied to distributions before age 59 1/21

FINRA Margin Requirements

Customers must deposit a minimum amount for their first purchase in a margin account Regulation T states a deposit of 50% of the mkt val of the purchase is required and FINRA rules state that the initial deposit cannot be less than $2000 Customer is required to deposit the greater of the Regulation T requirement (50%) or the FINRA minimum. Exception occurs when customer's initial purchase is less than 2,000. If client's initial transaction is a short sale, they must deposit 2000 regardless of the trade's size. Memorize: -*If customer's first purchase in a margin account is greater than $4000, deposit 50%* -*If it is between $2000 and $4000, deposit $2000* -*If it is less than $2000, deposit 100% of the purchase price*

Pump and Dump

Efforts to push up the price of stock one owns by soliciting buy orders from customers so that the stock owned can be sold later at a higher price is a violation commonly known as One form of securities fraud where an effort is made to push up the price of a stock that is currently owned by soliciting buy orders so that the stock can be sold later at a higher price is known as is the act of inflating (pump) the price of an owned stock by perpetrating false and misleading positive rumors, in order to sell the stock at a higher price later. Generally the shares owned are first accumulated at lower prices before the misleading information is doled out to the investing public registered representatives buy shares for their own accounts and then tout the stock to customers in the hopes that the customers' buying will drive the stock price higher. The reps then sell their personal positions for an illicit profit at the customers' expense.

An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place?

Rights will be distributed to existing stockholders with an exercise price lower than the current market value Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30-45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.

People will be actively soliciting proxies, and the corporation plans to send out up-to-date material on the proposals to shareholders to permit them to make informed decisions. Who must review this material before it is sent out?

SEC If proxies are to be solicited in what is known as a proxy contest, the corporation must send out written material to the shareholders. *The SEC imposes this requirement* and further requires that it be given the material to review before it is sent to the shareholders.

Def of Short Sales

Selling short involves selling shares not yet owned This is permitted. When selling short, investors are borrowing the shares to be sold, which must be replaced later by buying them. Investors who sell short are bearish, hoping the shares go down in value so that they can be purchased later at a lower price than they were initially sold for. When selling short, an investor is OPENING a position (a short position).

Covered

Selling short requires borrowing or locating the shares to be borrowed first. These shares, because they have already been located to be borrowed, are known to be ______________once these shares are sold short.

Hypothecation (pledges) Regulation U

_______________ of cust securities as collateral for margin loans The customer _______________the securities to the broker-dealer, which is known as ________________the securities. The broker-dealer then ___________________them to the bank as collateral for the margin loan. ____________ agreement must be signed by a cust who wants to open a margin account ----permits the pledging of customer securities as collateral for margin loans. Stock in a client's margin account is ______ to the BD. In order to obtain funds to carry the margin loan, the BD ______________________ a portion of the stock to a bank. Firms can commingle one cust's securities with another cust's securities for ______ if custs have given specific permission via signing the _____________agreement Stock in a client's margin account is hypothecated (pledged) to the broker-dealer. In order to obtain funds to carry the margin loan, the broker-dealer rehypothecates a portion of the stock to a bank. The shares pledged to the bank serve as collateral for the bank's loan to the broker-dealer, which is made in accordance with *Regulation U* (not T). Hypothecation is agreed to in the margin account agreement. The customer agrees to pledge the securities to be purchased on margin to the broker-dealer so that the broker-dealer can then pledge them to a bank as collateral for the margin loan.

Rights (preemtive rights or subscription rights)

are issued to current stockholders in the event more stock is sold. This allows them to purchase the new stock at BELOW the current market price for a period of 4 to 6 weeks before the stock is offered to the public... ---Hence, they are short term. -Short term, given to existing shareholders, allows one to purchase shares BELOW current market value Three actions they can take: -allow stock rights to expire unexercised -exercise stock rights -sell stock rights for a short-term capital gain or loss (sell them in the secondary market) rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public., with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30-45 days). IN SUM: the rights may be exercised in whole or in part, sold on the open market in whole or in part, allowed to expire in whole or in part, or some combination of these

Trade Confirmation

are required to include many details about the trade and the securities including: -trade date - description of the security - CUSIP number, -commissions (NOT markups or markdowns) and more. Commissions for agency transactions are shown on confirms but NOT markups or markdowns charged in principal transactions. In a bond trade, the par value of the bond purchase (or sale) is confirmed, NOT the number of bonds. If the security has one, the applicable Committee on Uniform Securities Identification Procedures (CUSIP) number is included. IN SUM: Trade confirmations include but not limited to: the trade date, description of the security, CUSIP number, commissions (not markups or markdowns) and more. There is no obligation for the firm to print the bond credit rating on the trade confirmation.

Cash dividends are taxed as either nonqualified or qualified: Qualified Dividends

are taxed at a rate lower than the investor's ordinary income tax rate applied to the investor's tax bracket. That rate thus depends on current provisions of the IRS tax code and the investor's ordinary income tax bracket.

Capital Gains

associated with the sale or exchange of property including securities. The category of __________ taxation is broken down into long term _______ and short-term_______

Limit Order

buy or sell, limits the acceptable purchase or selling price paid or received for the securities

Seller's option

cant take place sooner than trade date plus 3 bus days T + 3 occurs after regular way so it can't occur any sooner than the day after regular way For customers who want to sell securities but can't deliver the physical securities in time for regular way settlement. The contract lets a customer lock in a selling price for securities without having to make delivery on the second business day instead, the seller can settle the trade as specified in the contract and the trade can be settled on any date from the fourth business day through the contract date, as long as buyer is given a one day written notice. Buyer's option contract works the same way with buyer specifying when settlement will take place.

Customer Account Statements

customers must be alerted to report any inaccuracies or discrepancies promptly customer statements must be sent at least quarterly, activity or not Any activity in an account—transactions, dividends and interest, stock splits or dividends—will trigger the requirement to send a monthly statement. customer statements containing penny stocks must be sent monthly, even if no activity occurred in the account If there is no activity, statements are only required quarterly. -To ensure that info obtained from each new customer is accurate, firms must furnish to each customer, within 30 days of opening the acct, a copy of the acct record and include a statement that customer should mark any corrections on the records and return it along with a statement that the customer should notify the firm of any future changes to info in the acct record so that accurate and current records can be maintained -if customer should ever contact the firm with any changes, the firm must furnish the customer with an updated account record within 30 days of receipt of the notice of change. This account updating must occur at least every 36 months thereafter -changes in employment, financial status need to be made to an account record along with changes in investment objective Account Statement shows: -*All activity in the account since the previous statements* -*Securities positions, long or short* -*Account balances, debit or credit* -net amount - obtained on purchases by adding expenses (commission and postage) to the principal amt confirmation must also show the capacity in which the BD acts (agency or principal) and the commission in cases where BD acts as an agent if customer has cash balance/free cash balance firm may hold it in the account but statement must advise customer that these funds are available on request Statements must be sent to customers at least quarterly--- if there is activity in the account in any given month or if penny stocks are held in the account then the statement must be sent that month

Churning

excessive transactions done solely for the purpose of generating commissions. Unnecessary transactions entered into for the purpose of generating commissions with no regard for profitability constitute can result from both excessive number and excessive size of transactions. Excessive trading in a customer's account to generate commissions rather than to help achieve the customer's stated investment objectives is an abuse known as ______. This can occur in both discretionary and nondiscretionary accounts

nontrade confirmations/3rd party activity notices

firms req to send confirms of activity in accts even when its not trade related or when its initiated by a 3rd party p.157 e.g. foreign bank account wiring to US and back-- confirm of the deposit/withdrawal is sent when deposit or withdrawal of a stock ceritficate is made (its not trade related) but customer receives confirmation of the acitivty customer w an outside money manager handling their money can execute thru a BD and manager withdraws his fee quarterly in advance and each time he takes a fee, a confirm is sent from the BD indicating that speicifc third party activity occurred and was logged

Partnership accounts

is an unincorporated association of two or more individuals must complete a partnership agreement stating which of the partners can make transactions for the account if the partnership opens a margin account, they must disclose any investment limitations An amended partnership agreement (similar to a corporate resolution) must be obtained each year if any changes have been made

Short sellers

limited profit potential and an unlimited loss potential Short sellers are bearish—wanting to see the stock go down in value. Because stock could only go down as far as zero, the profit for a short seller is limited to the difference between the price the stock was shorted at and zero. By contrast, the risk for a short seller is that the stock goes up in value and there is no limit to how high the stock might rise, giving the short seller potentially unlimited losses.

For margin transactions taking place through introducing broker-dealers, those who do not clear their own transactions, extension requests are

made by the clearing firm Broker-dealers who are self-clearing will make their own extension requests. For those that are not self-clearing, known as introducing broker-dealers, the extension request must be made by the clearing firm.

Warrants

may be issued at any time and allow the holder to purchase the stock at a price ABOVE the current market, for a period of typically 2 years or more. -----Hence, they are long term. -long term, bundled with other securities, allows someone to purchase shares at a price that is ABOVE the current market value at a time they were issued - sometimes attached to bond issues to improve the marketability of bond. Note that while the exercise price is higher than the current market value when the _________are issued, it is hoped that the exercise price will be below current market value when ______________ eventually exercised. The hope with ___________, of course, is that the market price will rise above the exercise price before it expires.

Capital Gains: Long term gains

positions held longer than 12 months, the gains are considered long term and taxed at a more favorable rate. If the asset is held for more than a year, the gain is considered to be a long-term and is taxed at a favorable long-term rate.

Proxy solicitation

permissible to be solicited. The SEC requires a company to give stockholders information about the items to be voted on and allow the SEC to review this information before it sends the proxies to shareholders. Any entity wishing to solicit proxies to vote a stockholder's shares must register with the SEC.

trade confirmation

printed document that confirms a trade, its settlement date, and the amount of money due or owned to the customer for each transaction, a customer must be sent or given a written confirmation of the trade at or before the completion of the transaction--- settlement date includes: trade date account number RR internal ID number (or AE number) BOT (bought) or SLD (sold) Number (or quantitiy) description yield cusip price amount trade date- day on which the transaction is executed (the settlement date is usually the 2nd business day after the trade date) account number- branch office number followed by an acct number RR internal ID number (or AE number)- acct exec's identification number BOT (bought) or SLD (sold)-a customer's role in a trade Number (or quanitity) -number of shares of stock or the par value of bonds bought or sold for the customer description - speicific securitiy bought or sold for the customer yield- indicates that the yield for callable bonds may be affected by exercise of a call provision CUSIP- applicable committee on uniform securities identification procedures, if any price- price per share for stock or bonds before a charge or deduction amount- price paid or received before commissions and other charges (referred to as extended principal for municipal sec trans) commission- added to buy transactions; subtracted from sell transactions completed on agency basis Commission will not appear on the confirmation if a markup or markdown has been charged in a principal transaction

Investment Strategy under KYC

refers to information that can lead to suitable recommendations for a customer's investments in securities. Though many invest in assets that are not securities, such as real estate or art, not being securities, the term investment strategy does not apply to these assets. The definition of "investment strategy" does not include non-security investments such as commodities or fixed annuities. The term does apply to recommendations to invest in (buy), hold, or sell specific securities, as well as specific market sectors; trading, both long or short-term; or divesting of any asset or investment to make funds available to purchase securities. The term "investment strategy" applies to recommendations to invest in, hold, or sell specific securities. When making recommendations, both financial and nonfinancial items in a customer's profile should be considered.

Business Continuity Plan BCP

required to be reviewed annually by a principal of the firm Prompt customer access to funds and securities Data backup and recovery (hardcopy and electronic) Alternate physical location of employees if needed FINRA requires that member firms provide at least two names of individuals who will act as emergency contacts as a part of their ________________. The rule requires that both of these persons be principals. The rule requires that at least one of the contact persons be a registered principal. If a member designates a second emergency contact person who is not a registered principal, this person must be a member of senior management who has knowledge of the firm's operations. A member with only one associated person shall designate as a second emergency contact person from outside of the firm (e.g., the member's attorney, accountant, or clearing firm contact).

403(b) Qualified Plan

retirement plan available to employees of public educational institutions. Employees of colleges, universities, elementary schools, and secondary schools are eligible to participate if they are at least 21 years old and have completed one year of service -set up as tax-sheltered annuities, these plans are funded by elective employee's gross income, and earnings accumulate tax deferred until distribution. For these plans, a written salary reduction agreement must be executed between the employer and the employee. As with other qualified plans, distributions are 100% taxable and a 10% penalty is applied to distributions before 59 1/2 Besides 403(b) plans for employees of educational institutions, tax-sheltered annuities are also available for employees of tax-exempt organizations 501(c)(3) and religious organizaitons

Telephone Consumer Protection Act TCPA

solicitation defined as initiated for the purpose of encouraging the purchase of, or investment in property, goods, or services Any solicitation made must occur between 8:00 am and 9:00 pm in the recipient's time zone (NOT the callers). Firms must maintain a Do-Not-Call list, and the act exempts calls made on behalf of tax-exempt nonprofit organizations and calls made to parties with whom the caller has an established business relationship. exempts calls made to parties with whom the caller has an established business relationship or from whom the caller has prior express permission or invitation to call, call made on behalf of a tax-exempt nonprofit organizations or not made for a commercial purpose and those made for legitimate debt collection purposes. Calls made unsolicited for the purpose of prospecting new clients or to solicit sales of securities products or services of broker-dealers are covered by the Act.

GTC orders

valid until executed or canceled. Any _______________orders left unexecuted are automatically canceled on the last business day of April and the last business day of October. -If the customer wishes to have the order remain working beyond those specific days, the customer must re-enter the order.

commission rule pn trade principal vs agent

we acted as principals in this trade". When the firm does that, there is no commission; there is a markup (in the case of a buy) or a markdown (in the case of a sell). In this instance, the actual price of the stock would have been lower than $50 per share and the BD marked it up to $50. (e.g., price of $49.50 with a .50 markup = $50) " When the firm is acting as an agent however, commissions are always disclosed.

Frontrunning

when an investment professional places an order for his own account or one that he controls ahead of other orders that are so large that they will likely move the market in an attempt to gain from the price movement is an illegal activity known as