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Chapter 10 SIE
| Term | Definition |
|---|---|
| Commingling | prohibited practice of combining the funds of the firs with those of its customers |
| Consumer | an individual who obtains products or services from a financial institution, but who usually has no contact with what institution beyond the one-time delivery of products or services |
| correspondence | any written or email messages distributed to either existing customers or to 25 or fewer prospective customers within any 30 calendar day period . It does not need to be approved by a registered principal prior to use |
| Customer | an individual or entity with which a financial institution expects to have a continuing relationship |
| fully paid securities | securities carried in a special cash account or in a margin account in which the customer has made full payment |
| Hypothecation | collateralizing securities, as in a margin or hypothecation agreement, permitting the broker/dealer to pledge them as collateral to a bank or another broker/dealer |
| Margin securities | securities held for a customer in a margin account as defined by Regulation T |
| Money Laundering | the process of making illegally gained proceeds appear legal |
| Retail communication | any written or electronic communication distributed or made generally available to customers or the public. Must be approved in writing by a registered principal of the member firm. |
| Cash account | securities must be paid in full (no margin) They are required for minors & guardianships |
| Reg T | a cash account will be restricted for 90 days if a customer buys and then sells a security without first paying for the purchase. it also requires customers that purchase securities on margin to deposit at least 50% of the value of the securities. |
| options disclosure document (ODD) | in an options account it must be provided prior to the registered options principal approving the account |
| options account agreement | must be signed by the customer within 15 days of the new account approval |
| margin disclosure statement | outlines the risks associated with a margin account and must be provided to the customer prior to, or at the time of account opening, and do so annually |
| call loan rate (margin callcall money rate) | the short-term interest rate charged by banks on loans extended to broker/dealers to fund transactions in a client's margin account. It has a fluctuating interest rate and the broker/dealer will charge a % above this rate to their customers |
| margin call | occurs when the value of the investor's margin account drops and does not meet the maintenance margin requirement. |
| minimum margin equity requirement | requires an investor to make an initial minimum deposit of $2000 or 100% of the purchase price of the securities, whichever is less. |
| Marginable securities | securities that can be purchased on margin. Includes any stock listed on a national exchange or NASDAQ, and certain OTC stocks approved for margin by the Federal Reserve Board |
| commission | broker/dealers are transaction oriented and charge this |
| fee | charged by investment advisers based on a % of assets under management (AUM) for providing a service |
| Coverdell Education Savings Account (ESA) | a trust or custodial account created for the purpose of paying the qualified education expenses of the designated beneficiary. the contributions are NOT tax deductible. allows $2000/year in after tax dollars. |
| Employee Retirement Income Security Act of 1974 (ERISA) | regulates qualified retirement plans by setting minimum standards for retirement plans in private industries. It does not require an employer to establish a retirement plan. |
| Qualified Plans | employer sponsored plans that meet the requirements established by the IRS and ERISA. The dollars invested are often pre-tax, creating a 0-cost basis for the investor. Includes employee-sponsored 401(k) plans |
| Nonqualified plans | may discriminate in the plan offering and do not need IRS approval. The money invested is after-tax dollars, which establishes the investor's cost basis. . All investments grow tax-deferred. |
| Individual Retirement Account (IRA) | retirement accounts established by individuals that provide a vehicle for tax-deferred growth. Contributions must be made in cash from earned income. Contributions can be made regardless of age. |
| Spousal IRA | allows contributions to be made to a nonwage earning spouse if the other spouse has earned income. A married couple younger than 50 may contribute up to a total of $12000 |
| Roth IRA | Contributions are not tax deductible and are made with after-tax dollars. Withdrawals are tax free. Participation in an employer's retirement plan does not affect a person's eligibility. Excellent choice for future ax savings. |
| 401 (k) plans | allow employees to defer a portion of their salaries into a retirement plan, which an employer may match on a dollar for dollar or a % basis. Loans may be permitted under certain circumstances up to 50% of the participant's vested accumulated balance |
| Roth 401(k) plans | employees contribute funds on an after-tax basis. Ability to contribute is not limited by income level. When an employee retires the distributions are tax free if the employee is at least 59.5 and the account has been open for 5 years |
| Individual account | have only 1 owner and the broker/dealer may only discuss the account with & take new order from the owner |
| Joint account | an account that has more than 1 owner. Any owner can issue trade instructions, but withdrawals require every owner's name on the check. |
| Joint tenants with right of survivorship (JTWROS) account | an account that must have at least 2 owners with equal ownership interest. If 1 owner dies, the account bypasses probate. and the survivor inherits the entire account |
| Tenants in common (TIC) account | account that allows unequal ownership with 2 or more owners. When 1 owner dies, the ownership passes to the owner's estate with ownership governed by the decedents will or state law. If a client dies all open orders must be canceled, |
| Tenancy by the Entirety account | account that allows individuals who are married to own property as a single legal entity. Each spouse owns an undivided interest in the property that also includes the right of survivorship |
| Corporate resolution | identifies the individual within the corporation who is authorized to trade on its behalf. |
| partnership agreement | names the individual who is authorized to trade on the partnership's behalf |
| Living trust | created during a grantor's lifetime and is funded with all or part of his property. The assets may be used by the grantor during his lifetime. At death, the property does not pass through probate. |
| Revocable trust | Type of living trust in which the grantor maintains control over the assets and the beneficiaries may receive the benefits. The grantor is authorized to change the trustees & the beneficiaries at any time. |
| Irrevocable trust | Type of living trust in which the grantor no longer owns the assets. The grantor places assets into a trust the he or she cannot rescind or amend. The independent trustee has a fiduciary duty to manage the assets for the benefit of all beneficiaries |
| Uniform Gifts to Minors Act (UGMA) | Gifts and transfers are limited to bank deposits, securities, and insurance policies. It is an irrevocable account to benefit a minor and no margin is allowed. |
| Uniform transfers to Minors Act (UTMA) | Any kind of asset, including real estate, can be transferred into this type of account. It is an irrevocable account to benefit a minor and no margin is allowed. |
| Trade confirmation | must be given or sent to customers at or before the completion of the transaction or settlement. Copies of confirmations must be kept on file for 3 years. |
| Account statement | must be sent once every calendar year. It must contain a description of any securities positions, money balances, or account activity & must be sent to each customer whose account had a security position, money balance, or account activity |
| Business Continuity Plans (BCP) | a written plan approved by senior management to identify procedures to help the member meet its obligations to customers in emergencies or significant business disruptions & to address existing relationships with other broker/dealers & counterparties |
| Customer Protection Rule | Provides for the establishment of a reserve account for the protection of customers. Broker/dealers are further required to obtain and maintain possession or control of all fully paid & excess margin securities belonging to their customers. |
| Depository Trust and Clearing Corporation (DTCC) | a clearing corporation for clearing and settling transactions, but also provides custody services for securities. It automates & streamlines the clearing process. |
| Regulation S-P | clients accounts must be kept confidential, written policy must be provided annually |
| Public participation | Part of public appearances, refer to participation in seminars, radio or tv interviews, or other public speaking activities |
| Independently prepared reprints | include any reprint of an article or its excerpt issued by a publisher not affiliated with the member using the reprint, or to any report concerning a registered investment company prepared by an independent entity. Considered retail communications |
| Customer complaints | It is each member's responsibility to keep in each office of supervisory jurisdiction a file of all of these that have been written. They must retain these records for 4 years. |
| Institutional sales communications | any written or electronic communication that is directed only toward institutional investors, such as banks, thrifts, savings and loans, insurance companies, mutual funds, & other broker/dealer. Must be reviewed or approved by a registered principal. |
| telemarketing (telephone solicitation) | a telephone call or message directed toward an individual with whom the marketing organization has no relationship, for the purpose of encouraging the purchase or rental of, or investment in property, goods or services. |
| Reasonable basis suitability | The investment or strategy must be reasonable. The member or associated person must perform due diligence to understand the risks & rewards associated with the security or investment strategy to determine if its a suitable recommendation |
| Customer specific suitability | the recommendation must be based on info provided by the customer & match the customer's individual investment profile. |
| Quantitative suitability | a series of recommended transactions even if suitable when viewed separately, must not be excessive or unsuitable in terms of the customer's overall investment profile. |
| Determining suitability | requires a registered rep to obtain client info such as investment objectives, experience, time horizon, age, financial situation, other investments, tax status, liquidity needs & risk tolerance |
| Risk tolerance | the degree of uncertainty that investors can tolerate with regard to a negative change in the value of their portfolio |
| Regulation Best Interest (Reg BI) | Imposes an obligation on broker/dealers and registered representatives or associated persons to act in the best interest of individual retail customers at the time recommendations are made. Rule applies when recommending securities transactions |
| Disclosure | provide material terms of the relationship, fees, and conflicts of interest |
| care | exercise reasonable diligence, care and skill in making recommendations |
| conflicts of interest | establish, maintain and enforce policies and procedures reasonably designed to identify, disclose, and eliminate material THIS related to recommendations |
| Complaince | establish maintain, and enforce policies and procedures to ensure this. |
| Customer Relationship summary (Form CRS) | Required to be provided to every new or prospective retail investor, includes services offered by the firm, fees & costs, conflicts of interest, required standards of conduct associated with the services offered, legal/disciplinary history of the firm, |
| Know Your Customer (KYC) Rule | Involves gathering information about customers by asking specific questions, many of which are related to suitability, including investment objectives, experience, time horizon, age, financial situation, other investments, tax status, & liquidity needs |
| Write once, read many (WORM) | Books and records must be created in this format. It cannot be modified once it is written, |
| =Placement | inserting the illicit funds into the monetary system |
| Layering (or structuring) | moving funds around to obscure an audit trail |
| Integration | making laundered funds available to a criminal party |
| Financial Crimes Enforcement Network (FinCEN) | bureau of the US treasury dept. formed in 1990. Oversees & implements policies to detect & prevent money laundering & terrorist financing & enforces the Bank Secrecy Act |
| Bank Secrecy Act of 1970 (BSA) | Designed to help identify the source, volume and movement of currency transported into or out of the US, or deposited in financial institutions. Requires financial institutions to maintain records of financial transactions & report suspicious transactions |
| Currency Transaction Report (CTR) | If a firm receives more that $10,000 in currency from a customer in a 24 hour period, they must file this with the US Treasury's FinCEN within 15 days. |
| Suspicious Activity Report (SAR) | If a firm receives currency or nonverifiable funds of $5000 within a 24 hour period, they must file this within 30 days. The firm is not allowed to disclose this action to the subject party. |
| USA PATRIOT Act (Uniting & Strengthening America by Providing Appropriate Tolls Required to Intercept & Obstruct Terrorism) | Reviewed homeland security, addresses several social, economic & global initiatives to fight & prevent terrorist activities. Required banks, broker/dealers & several other financial institutions to establish new anti-money laundering (AML) standards. |
| Customer Identification Program (CIP) | Implements standards for properly identifying customers in the account opening process. |
| Office of Foreign Asset Control (OFAC) | administers & enforces economic & trade sanctions based on US foreign policy and national security goals against targeted foreign countries & regimes, terrorists, & international narcotics traffickers, |
| Specially Designated Nationals (SDNs) | individuals & companies owned or controlled by, or acting on behalf of targeted countries. Includes terrorists & drug traffickers. |
Created by:
emulligan