Regulations
What type of Customer Accounts does Regulation T mainly Cover?
Margin Accounts
What is the difference between Traditional retirement accounts versus Roth retirement accounts?
Traditional Retirement accounts (Defined Contribution Plans, and Defined Benefit Plans) are tax deferred. The contributions are not subject to tax until the money is withdrawable.
Roth Accounts - The contributions are tax at the time of the contribution. That means the earning can be withdrawn tax free if qualified. (not before 59 1/2/before the 5 year waiting period from time of opening)
What is required on a Brokerage New Account Form?
Answer -
Customers Name, Address, whether customer is of legal age, the representative who handled it and the principal signature
note - customer signature not required on New Account Form
What events are reportable to FINRA on a U4 and whose responsibility is it to report these events?
U4 changes must be amended within 30 days of the events and reportable events include
Employee violated any securities law,
subject of customer complaint alleging theft (FINRA only states a customer complaint as a written one!)
Indicted/Convicted/Plead guilty to any criminal offense beyond minor traffic violations
This feature allows an issuer to pay a bond at a premium to end interest payments early or allow an investor to receive something they have a right to or obligation for.
a Call.
A Callable bond allows an issuer to call a bond early to pay their high interest debt. It usually done when interest rates fall.
A Long Call is an option that gives the investor a right to buy stocks at the strike price, with a short call being a seller who will have the obligation to sell the stock at the strike price.
What are the deposit requirements for long and short positions under regulation T?
Regulation T requires 50% deposit on the purchase of long or stock positions. - Remember it is based on the price of the stock at the time of purchase, does not matter what happens by end of day.
Note - Margin accounts have other deposit requirements besides whats stated in Regulation T.
$1 - $2,000 = Minimum deposit it 100%
$2,000 - $4,000 = Minimum deposit is $2,000
How are US Treasury bonds versus Muni Securities taxed?
US treasury bonds are taxed at the federal but not state taxes.
Municipal bonds are not taxed at the federal level but are "subject" to state/local taxes unless the buyer is a resident of that state/muni.
What is a Margin Account and What is required to open one?
Margin account allows a customer to use leverage (debt) to increase returns (or losses).
To open a
Margin Agreement is needed - (set rules between broker/dealer and cusotmer)
Hypothecation Agreement - allows broker firm to sell securities if minimum maintenance is not kept.
Credit Agreement
Loan Consent Agreement
Credit Disclosure Agreement
Margin Risk Disclosure
Customer signature is required!
What form must be sent to an FINRA and employee after termination and how long can there credentials be valid after leaving?
U5 form has to be sent to the employee in 30 days and to FINRA.
Credential are valid for 2 years, unless employee enrolls in the Maintaining Qualification Program that can extend it to 5 years. Has the employee take the annual regulatory and firm element.
Also active military service leaves the person in inactive status, until 90 days after return from duty.
This feature allows a investor to return their bond to the issuer. This is usually done in a rising interest rate environment. This has a similar name to an option that gives the investor another right to something.
A put.
A puttable bond allows an investor to return their bond to the issuer prior to maturity. This is done in a rising interest rate environment where the investor can reinvest their money for higher interest rates.
A Long put option give the holder the right to sell stock at the strike price, with a writer of the put (short put) having the obligation to buy at strike price
Under the Securities Act of 1933, What does Regulation A do?
A) Makes Intrastate Offerings exempt from federal registration
B) Makes Private Placement offerings exempt from federal Registration
C)exempts small offerings of no more than $75 million from registration
D) exempts companies companies who sell securities oversees and not in the US
C) exempts small offerings of no more than $75 million from registration with the SEC
What are the differences between short term and long term capital gains?
Short Term holding period - 12 months or less - taxed at ordinary income
Long Term Capital gains - 12 months or more - 15% for lower earners, 20% for higher earners
Gains/losses are not realized until sold!
When adding options trading to a new account, which of the following steps are in the correct order?
A. Principal approval, determine suitability, first trade, signed option application
B. Signed option application, determine suitability, principal approval, first trade
C Determine suitability, first trade, principal approval, signed option application
D. Determine suitability, principal approval, first trade, signed option application
Correct answer D
Determining suitability is the first step. Then the options principal approves the account. Trades can happen after principal approval. A signed option application must be returned within 15 days of approval.
How does FINRA distinguishes communications with the public?
Correspondence = 25 or fewer retail investors
Retail Communication = more then 25 retail investors/ includes retail and institutional mixed.
Institutional communication = only sent to institutional investors
Public Appearance = interviews/seminars. subject to post use review and principal approval.
Records must be kept for 3 years
These strategies allow for a customer to minimize their risks.
Hedge strategies
Long Position/Long Put - in event your stock falls in price, you have the right to sell at a strike price, limit how far it can fall.
Short Position/Long Call - In event of rising prices, you can buy at strike price, limit how much the stock can rise for this position
What is Regulation D under the 1933 Act and the differences between Rule 506 B and 506 C?
Regulation D governs private offerings. If it is not sold to the public then, it does not need to be registered with the federal government. Limited to accredited investors.
Rule 506 B - allows up to 35 non accredited investors while rule 506 C offerings can only be made to accredited investors.
Your customer is a resident of Las Vegas, Nevada. Which of the following debt issues would generate interest that would be taxable to your customer at the state level but not taxable at the federal level?
A. GNMA certificate
B Clark County, Nevada, general obligation bond
C Las Vegas Hotels, Inc., debenture
D Nevada City, California, Municipal Water District revenue bond
Answer
D - Nevada City, California, Municipal Water District revenue bond
Because Muni Bonds are tax free at the federal level and only take free at the state level if the buyer is a resident of that state. (Customer was resident of Nevada).
What are the three components to FINRA suitability process for Customers?
Reasonable Basis Obligation - Firm and the Rep understands the risks of the strategy and determine it is good for anyone/anywhere
Customer Specific - It suitable for the specific customer based off
- Customer Age, Time Horizon, Liquidity, Risk Tolerance, Tax Status, Investment experience and Goals.
Quantitative - The number of recommended security transacation is not excessive according to the Broker/Dealer
What are the differences between a Fixed and Variable annuity? Who are Annuities not suitable for?
Fixed - Insurance Product - contributions placed in general funds of insurance account - Guaranteed a fixed monthly payment for life, period certain, or period certain with survivorship or lump sum upon annuitization.
Variable - securities product - contributions can be monthly, Quartley, random - return in based off market performance - placed in seperate account of the insurance company.
Annuities are generally not suitable for seniors, those with higher risk tolerance, those who haven't maxed out their 401ks or lower income earners.
Denise Broker has recommended a long put. What would be her maximum gain on the transaction?
A) Strike Price - premium paid
B) unlimited
C) premium paid
D) premium recieved
A) strike price - premium paid
Max gain on long put (bearish stance) is if the market price reaches 0, minus the premium paid. This is also the Break even amount (same as a short put)
This regulation governs to use of nonpublic personal information that customers give to broker dealers.
1. Regulation M
2. Regulation SHO
3. Regulation S-P
4. Regulation B I
Correct answer 3. Regulation S-P
1. Regulation M governs market manipulation's that only allows stabilizing bids.
2. Regulation SHO states that every order to sell must be marked long or short
4. Regulation B I states broker dealers and associated persons act in retail customers best interest.
A Husband and wife both work, earning $150,000 each. Both are aged 45 and are covered by an employee sponsored qualified retirement plan. what is the maximum deductible contribution that can be made to an IRA in 2024?
A) 0
B) $3,000 each
C) $6,000 each
D) $7,000 each
a) 0
This is because they are already covered by a qualified plan, where we assume that they max out their contributions to those account. They then wont receive any deductible amount when they put it into an IRA.
Secondly, deductions phase out around $75,000 earned income for individuals, $140,000 for couples.
What recommendations are not suitable for Seniors and what extra steps are needed to protect seniors or those with Diminished capacity?
When a senior is opening an account, a Registered Representative must make a reasonable attempt to get information for a trusted contact.
If financial exploitation is suspected, the account can be suspended for 15 business days. If it becomes an investigation by the law, it can be further suspended up to 55 business days. The Registered Representative only needs a reasonable suspicion of exploitation (no physical proof required)
What is the maximum political contribution of a municipal finance professional? (MFP). What happens when this rule is violated
A municipal finance professional can only contribute $250 to a politicians election campaign in an election they are entitled to vote. If they contribute more, or in an election where they are not entitled to vote, this can lead to a 2 year ban on their employer from doing business with that muni issuer.
A customer sell short 200 shares of ABC stock at $60 and sells 2 ABC puts @ 4 on the same day in his margin account. The customer is a
A) protective put writer
B) covered put writer
C) bullish put writer
D) aggressive bull
B) covered put writer
shorting stock and writing put is a covered put strategy because the writer will need to purchase stock anyway to close out their short position. The strategy produces income for the writer (premium) and is best done in a neutral market.