FINRA Continuing Education

• An RR who does not follow the procedures for opening a new IRA account
• An RR who fails to gather and submit all required paperwork, including an Adoption Agreement, before trading in an IRA account is allowed to begin
• An RR who does not take his client’s investment objectives and risk tolerance into consideration before recommending a product
Learning Objectives
• The difference between Traditional IRAs, Roth IRAs, and SEP IRAs, and catch-up contributions
• Account approval, purpose of Adoption Agreement
• Suitability analysis importance

SEP IRA
• It is a defined contribution plan
• The employer may contribute to the plan
Structured products
• May be listed on a national exchange
• They have fixed maturities
• May offer access to investments in markets that are not readily available to retail investors
• They generally include an embedded option agreement
• Principal value will fluctuate prior to maturity
• Adan may not be able to sell the note prior to maturity
Catch-up contributions
• MAY be spread throughout the year
• Have a specified dollar amount
• Retirement plan participants who are 50 years of age or older may take catch up contributions
• 401 (k) plan participants must make catch up contributions through elective deferrals
• Owners of traditional or Roth IRA’s can make catch up contributions until the due date on their tax return
Adoption Agreement
• To authorize the broker-dealer to administer the IRA
• To certify Adam’s eligibility to open the IRA
Successfully open account
• Understand all the requirements necessary to open the IRA
• Followed procedures for opening accounts, including collecting the Adoption Agreement
New account opening
• Client’s name and physical address
• Taxpayer identification number for U.S. persons
• Name of RR responsible for the account
Before client’s first trade
• Client’s occupation
• The name of the client’s employer
Valid basis for a complaint
• Adam places an order, but Simon calls 3 days later to say it wasn’t executed
• The price on Adam’s confirmation is different from what Simon told him over the phone
• Adam lost market opportunity because he was never told an Adoption Agreement was needed
Before recommendation of structured products
• Adam’s limited investment experience
• The source of funds for the investment
• Adam’s desire to increase his retirement savings
Customer Identification Program
• B/D are responsible for establishing CIP procedures
• The customer’s identification is verified prior to the first trade
• Tax identification number
• Customer name
• Date of birth
• Obligation begins at the beginning of the customer-broker relationship
• Handling special instructions for the customer’s account
• Conducting reasonable due diligence
• Maintaining the essential facts about the customer
Joint Tenants with Rights of Survivorship
• The account information can be accessed by both husband and wife
• Trades in the account can be entered by husband or wife
• The other owner owns the assets when the one account owner dies
Tenants in Common
• The decedent’s interest in the account becomes part of that tenant’s estate
• The account is controlled by 2 or more individuals
• Each tenant has trading authority in the account
529 custodial account
• The custodian makes the investment decisions for the child
• The funds in the account can be spent on anything for the child’s benefit
• The transfer of control occurs when the child reaches the age of majority
• The account proceeds can be used for any purpose
• The age of majority varies from state to state
529 Plan
• The beneficiary may be changed from one family member to another
• The funds can be used to pay for college tuition
529 Plan contributions
• The plan contribution limits are determined by each state’s plan
• The investment earnings from the account are excluded from gross income if certain conditions are met
Margin Account
• Interest rates may vary when borrowing money to purchase stock on margin
• Customers can borrow money to purchase securities on margin
• Securities in a margin account are used as collateral
Margin Risk
• Customers can lose more than what was originally deposited in the account
• Broker-dealers can sell securities in a customer’s account to cover a margin call
• Broker-dealers may sell securities to meet a margin call without first notifying the customer
Margin Requirements
• Broker-dealers may need to liquidate a stock held in a customer’s account if the customer fails to satisfy a margin call
• Broker-dealers may raise margin requirements for certain volatile positions held in a customer account
• Customers are required to deposit a minimum of $2,000, or, if less, 100% of the purchase price of the initial transaction
Tolerance for investment risk
• Household expenses
• Age
• Goals and objectives
RR’s Consideration of an Ethical dilemma
• The firm’s code of conduct
• How ethical principles apply to the RR’s conduct
• Consulting with the RR’s supervisor
Ethical principles
• Doing no harm to the profession
• Maintaining confidentiality
• Fairness to the customer
Municipal Finance Professional
• Any RR who is both a municipal securities professional and a supervisor of an associated person who is primarily engaged in municipal securities underwriting
• An individual in an executive position up to and including the CEO of a broker-dealer that is engaged in municipal securities business
• An RR who is primarily engaged in municipal securities underwriting
Pay-to-Pay violation
• Equipment valued at $500
• Office space valued at $750
• A cash contribution of $1,000
How often can an MFP contribute up to $250 to a political campaign?
• Once per election cycle
Conflict of interest with political contributions
• Does it appear that something is expected in return for the contributions?
• Are the contributions permissible according to the Big Deal Securities’ code of conduct
• Should my supervisor be consulted for guidance before soliciting contributions?
Code of conduct subjects
• Political contributions
• Entertainment policy
• Harassment and intimidation
Likely a breach of a broker-dealer’s code of conduct
• An undisclosed trading account
What could be considered an outside business activity?
• An investment-related activity that is exclusively charitable
• An engagement as a director of a publicly-held company
What Outside Business Activities (OBA) that could result in a conflict of interest?
• An OBA that benefits from the solicitation of clients of the RR’s broker-dealer
• An OBA involving investment management for a non-profit organization which is a client of the firm
• An OBA in which the RR’s activities are perceived by clients to be endorsed by the firm
Golf outing
• Can give the appearance that someone expects a quid pro quo from the candidate
• It appears that someone’s coworkers violated the firm code of conduct
• It could be deemed to be a political contribution
Which gifts would violate industry gifts and gratuities rules?
• A spa weekend at a resort
• A $1,000 wedding gift
Permissible under industry gifts and gratuities rules
• Giving a client an umbrella with the firm’s logo imprinted on it
• Buying a client a $10 breakfast at a local diner
What MUST be reported on an RR”s Form U4?
• An outside business activity
• A written complaint about missing funds
Typically on a Form U4
• Employment history and outside business activities
• Bankruptcy filings, liens, and judgments
If an MFP makes a political contribution in excess of $250 to a candidate for whom he is entitled to vote and who may influence the awarding of municipal business, for how long is the RR’s broker-dealer prohibited from engaging in the municipal securities business?
• Two years
Which of the following actions may a broker-dealer take with a whistleblower?
• Ensure that there is no retaliation against the whistleblower
Which of the following violations would a whistleblower at a broker-dealer be likely to report?
• Fraud
• Conflicts of interest
• Money laundering
Form U-5 purpose
• To terminate the registration of an individual in the appropriate jurisdictions and/or self-regulatory organizations
Institutional Exemption
• The customer must indicate that it is exercising independent judgment in evaluating recommendations
• The customer must meet the regulatory definition of an institutional client
• The broker dealer must have a reasonable basis to believe that the customer can independently evaluate investment risks
Alternative Investments
• They may hedge market risk by using complex trading strategies
• They may be illiquid and not publicly traded
• They may be sold to institutional investors

Non-traded REIT
• They may have lock-up periods
• They may have high front-end and other associated costs
Endowment Funds
• Withdrawals from an endowment fund can be used for ongoing operations or other purposes
• They are often used by non-profit entities like universities, hospitals, and churches
• They are funded by donations, which are tax-deductible for donors
Exchange Traded Notes
• They are not registered under the Investment Company Act of 1940
• They incur annual fees
Why would an alternative investment have a lock-up period?
• To enable portfolio managers to keep less cash on hand
• To support the investment strategy of the fund
• To prevent losses due to forced sales made to meet the cash requirements of existing investors
Which of the following are important considerations for ETN investors?
• The creditworthiness of the issuer
• The liquidity of the secondary market
• They may be leveraged and volatile
Return on investment
• It is a popular and versatile performance measure
• It is expressed as a percentage or a ratio
• It is a measure used to evaluate the performance of an investment
Which could have a lock-up period?
• A hedge fund
• A non-traded REIT
Qualified Institutional Buyer (QIB)
• A savings and loan with a net worth of $35 million

Concentration limits
• Percentage of investments held in alternative investments
• Percentage of an investor’s liquid net worth
Advantages of investing in a non-traded REIT
• They pool the capital of numerous investors
• When interest rates are low, they may offer attractive yields
Alternative investments
• They may have lock-up periods, concentration limits, and high fees
• Most are held by institutional investors or accredited, high-net-worth individuals
• They are usually complex, may be illiquid, and may be subject to limited regulation
Cooling off period in investment contract
• It allows either party to release themselves without penalty
• It allows both parties to do further research on the contract
• It allows either party to release themselves from the obligation
Which investments would have a subscription agreement?
• A hedge fund
• A non-traded REIT
Things investors should know before purchasing a non-traded REIT
• Should a non-traded REIT go public, it may trade at a price which is lower than its current valuation
• The initial investment is not guaranteed and may increase or decrease in value
• Reinvested dividends are generally subject to the same redemption policies as the original investment
Information in the subscription agreement
• The subscriber’s tax identification number
• The address of record for the subscriber
• The subscriber’s financial status
How may a broker-dealer provide a client with the ability to release themselves from an investment contract in an alternative investment?
• By offering investments with a cooling-off period

customer accounts outline

Cash account

·        Total equity=Market value + cash + money market funds

·        customer can hold Stocks/bond certificates

·        safekeeping, street name, Broker/dealer can hold customer stock/bond certificates

·        firm can NOT hypothecate, lend securities or danger the ownership of stocks/bonds

·        b/d MUST Keep securities separate and safe

A purchase of stock done regular way in a cash account shall be paid for on what day?

·        3 business days after trade

·        regular way-3 business days

·        cash transaction, same day

customer accounts outline

Seller’s/buyer’s options delivery a.k.a seller’s option delivery

·        Customer does not want to deliver or does not want to pay for securities regular way

·        Seller can delivery late 5-60 days

·        Sellers can deliver  early

New issues

·        Pay for completely when purchase

Mutual funds/variable annuities

·        Pay for completely when purchase

Uniform Gifts to Minors Act or Uniform Trust to Minors

·        Margin-NOT allowed

Trust document

·        Can decide NO margin purchases

Private placements and limited partnerships

·        No margin

Cash account

·        Total equity=Market value + cash + money market funds

customer accounts outline

Cash account

·        Pay for all of purchase

Margin account

·        Borrow $ for part of trade

Settlement date

·        Different date based on type of delivery

Same day delivery,cash trade,cash delivery

·        Transaction settles that day

·        Transaction complete by 2:30pm EST

Regular way delivery settlement date

T+3

·        FINRA sets dates

·        third day after trade date

·         transfer of securities-stock,bonds,municipal bond,exercising stock (equity) options

 

T+1

·        next business day

·         transfer of $, government securities

·        Trading options-stock,interest,interest rate, foreign currency

·        Exercise index options

·        Exercise interest rate options

·        Writer gives $ to buyer of option that is exercised

Options and margin outline

Options and margin

·        Can NOT buy option on margin if expires < 9 mo

·        Pay 100% of options premium-on margin, off margin

·        LEAPs, options >9mo, deposit 75% of option cost

·        LEAPs, loan value=25%

Selling options

·        Write covered calls

·        If covered, no margin

·        Naked, uncovered options-there is initial margin requirement

·        Margin call, a % of market value

Suppose an investor buys 10 70 calls for a premium of 8. How much must the investor deposit?

·        8x100x10=8000

Marking to the market

·        Securities valued at day’s closing price

·        Broker/dealers use it to make sure customer’s have enough equity in margin account

·        Minimum maintenance level, broker/dealer tells customer to deposit more $ or stock

·        Stock loan, broker/dealers borrow stock from other broker/dealers-have to keep some $ to pay for borrowed stock

·        Marking to market, all margin accounts, in long and short accounts, anytime there are borrowed securities

Under which of the following circumstances will the broker/dealer firm mark to the market for the customer’s account?

·        When the market changes and more margin is required

·        When market value changes

·        Customer must deposit more $

Margin account

·        $2000 minimum requirement

·        If purchase price under $2000, customer must deposit all of price

·        If purchase $2000-$3,999 deposit $2000 minimum

·        If $4,000, deposit $2000

Government bond

·        No Reg T requirement

·        Minimum maintenance requirement 5% of principal

Municipal bonds

·        Maintenance requirement:15% of par value or 25% of market value-pick lower one

Same day substitution

·        Can buy one stock, sell a stock same day and use sale proceeds to pay for purchase

·        Sell more than buy, keep all proceeds. If restricted-follow retention requirement-keep 50% of excess sales price

New issues

·        Can NOT buy on margin

Loan value

·        Amount of $ a broker/dealer can loan on a fully paid for margin-allowed security

·        To buy stock, deposit equity-money or stock

Buying power

·        Amount of securities a customer can buy

Buying power=Money or (SMA)/ Reg T

margin outline

Short account

·        For selling stock short

·        Opening sale, sell stock before buy shares

·        Closing purchase, buy stock back, cover short sale

·        Profit when price decreases

·        Credit balance, sale proceeds

·        When borrowed stock sold, customer must deposit Reg T to increase credit balance

·        SMV (Short market value)=Credit balance (Cr) – Equity (E)

·        SMA = Equity –(Market value x 50%)

Short account SMA increase

·        Market value decrease

Short account SMA neutral

·        Market value increase

·        Stock value decrease because of stock dividend/stock split

Long account SMA increase

·        Market value increase

An investor has a short margin account with 3 different stocks in it. If one of the stocks goes down in value, what happens to the equity of the short account?

·        Equity increases

·        Market value go down, equity go up

Short account minimum maintenance requirement

·         Minimum maintenance = Short market value (SMV) x 30%

Short account Maintenance Margin call

·        Maintenance Margin call= Credit (Cr)/130%

·        Market value increase, equity decrease

·        Minimum maintenance is 30%

·        Credit balance can not < 130% of market value

·        Investor shorted stock, don’t want stock increase because investor pays > for stock

Minimum Maintenance vs. Maintenance Margin call

·        Minimum Maintenance, market value neutral, credit balance go(es) down

·        Maintenance Margin call, credit balance neutral, market value go(es) up

·        SMA=Equity – (SMVx50%)

·        MM= SMV x 30%

·        Maintenance Margin call = Credit balance/130%

An investor has a short margin account with a market value of $80,000 and a credit balance of $130,000. At what point would there be a FINRA maintenance call for the account?

·        130/130%=$100,000

 

maintenance call chart, maintenance requirement long account, minimum maintenance chart, Reg T chart

FINRA maintenance requirement long account

·        Customers must keep 25% of market value in account

·        FINRA sets minimum maintenance requirements

·        Reg T only sets amount needed for initial purchase not balance that must be in account later

·        Broker/dealer firms require 5-10% above FINRA to protect themselves

·        Maintenance margin call (MMC) =Dr/75%

·        Minimum maintenance=MVx25%

·        SMA=Equity – (LMV x 50%)

·        Minimum Maintenance= LMV x 25%

Equity can decrease

·        Debit balance increases

·        Customer borrows $-use all/part SMA

·        Market value decreases, stock price decreases

An investor has a long margin account with a market value of $88,000 and a debit balance of $40,000. What is the FINRA minimum maintenance for the account at its present position?

·        $22,000

·        25% present market value

·        88,000x25%=22k

	Reg T Call	Minimum Maintenance	Maintenance Call
When maintenance call applies	when investors buy short/sell short	withdraw$ from long or short account,equity drop	long: bear, short:bull
Calculate long account	MVx50%	MVx25%	Dr/75%
Calculate short account	MVx50%	MVx30%	Cr/130%
minimum amount allowed in account	$2000-FINRA. Not The Fed's Reg T	Long: $2000 short:$2000 or $5 per share	N/A. need to deposit $