FINRA Series 7 flashcards

Regulation T requires an initial margin deposit of 50% of the short sale proceeds when a customer sells short in a margin account.

• Short sale proceeds = shares × short price
• Initial margin = 50% of proceeds under Reg T
• Maintenance margin on short positions is generally higher percentage-wise as the stock rises

Memory trick: Short sellers still owe half — Reg T's 50% rule applies both ways.

An order requiring immediate execution of all or part of the order, with any unexecuted portion automatically canceled.

• Partial fills are acceptable, unlike FOK
• No portion remains open after the immediate attempt
• Contrast with AON, which can remain working until fully filled

Memory trick: IOC: take what you can get, kill the rest, right now.

A board-approved document authorizing a corporation to open a brokerage account and naming individuals with trading authority.

• Required for corporate/entity accounts
• Identifies authorized signers/traders
• Often accompanied by a copy of corporate bylaws or articles of incorporation

Memory trick: Resolution = the board's 'permission slip' naming who can trade.

An annuity payout option that pays income as long as either of two annuitants lives, with a guaranteed minimum payment period to a beneficiary if both die early.

• Covers two lives plus a guaranteed period
• Lowest periodic payment due to most guarantees
• Straight life offers highest payment but least protection

Memory trick: More guarantees = smaller checks; this option stacks two guarantees.

FINRA Rule 2210 requires that testimonials disclose if compensation exceeding $100 was paid and state that the experience may not represent that of other clients.

• Compensation over $100 must be disclosed.
• Must state the testimonial may not be representative of other clients' experience.
• If given by someone with special expertise, that fact and any conflicts must be disclosed too.

Memory trick: Paid to praise? Say so, and add it might not be the same for everyone else.

Interest on private activity municipal bonds is exempt from regular federal income tax but counts as a tax preference item for alternative minimum tax purposes.

• Issued to finance projects benefiting private entities (e.g., airports, stadiums, toll roads)
• Interest is added back when computing AMTI for AMT calculation
• Can reduce or eliminate tax-exempt benefit for AMT-subject investors

Memory trick: Private roads, public tax trap — AMT investors beware.

When long stock is combined with a purchased put, breakeven equals the stock's purchase price plus the put premium paid.

• Max loss is limited to (stock price - strike) + premium, occurring below the strike
• Max gain is unlimited above breakeven
• The put acts as insurance, capping downside risk

Memory trick: Insurance costs a premium — add it to the price to find breakeven.

Under FINRA rules, a 'written complaint' includes any electronic communication (email, text, social media) alleging a grievance about firm or representative conduct, regardless of resolution.

• Electronic communications qualify as 'written' complaints
• Must be retained and reviewed per Rules 4513 and 4530
• Informal resolution does not eliminate documentation obligations

Memory trick: A text of distress is still a complaint on record.

FINRA aggregates communications sent to retail investors over any rolling 30 calendar-day period; if the cumulative total exceeds 25, the material is classified as retail communication requiring prior principal approval.

• Splitting mailings into smaller batches does not avoid the aggregation rule.
• The 30-day period is a rolling window, not a fixed calendar month.
• Once classified as retail communication, prior principal approval is mandatory.

Memory trick: Don't slice the mail to dodge the scale — 30 days, all counted, no escape.

YTC estimates a bond's return if held until the call date, factoring in the call price, purchase price, coupon, and years to call using the approximate yield formula.

• Formula: [Interest + (Call price − Price)/Years] ÷ [(Call price + Price)/2]
• Used for bonds trading at a premium likely to be called
• YTC is typically lower than YTM for premium bonds
• Call price often above par (e.g., 103 = $1,030)

Memory trick: YTC: 'Coupon minus the call haircut, over the average.'

An optional margin account document authorizing the broker-dealer to lend the customer's margined securities to other customers or firms.

• One of three margin agreement components: credit, hypothecation, loan consent
• Only loan consent is optional
• Distinct from hypothecation, which pledges securities to a bank

Memory trick: Credit sets terms, Hypothecation pledges to bank, Loan consent lends to others.

Preferred stock on which unpaid dividends accumulate as arrears and must be paid in full before any common dividend is paid.

• Missed dividends accumulate as arrears
• Arrears must be paid before common dividends
• Noncumulative preferred does not accumulate missed dividends

Memory trick: Cumulative = 'catches up' before common gets paid.

A notice sent by a broker-dealer to a contra-party when it does not recognize or cannot verify the details of a trade shown on a received confirmation.

• Used for inter-dealer trade discrepancies
• Prompts reconciliation before settlement
• Distinct from customer complaint procedures

Memory trick: DK = 'I Don't Know this trade' — send it back to fix the mismatch.

A joint account registration in which a deceased owner's interest automatically transfers to the surviving owner(s), avoiding probate.

• Bypasses the decedent's will and probate
• Common for spouses
• Contrast with Tenants in Common (TIC), where a deceased owner's share passes to their estate

Memory trick: JTWROS: 'Winner takes all' — survivor gets it, no will involved.

Selling short shares of a security the investor already owns long, typically to lock in a gain; Reg T margin is still required as with any short sale.

• No reduced margin for holding an offsetting long position
• Reg T requirement is 50% of the short sale market value
• Often used for tax/timing purposes, but margin rules apply fully

Memory trick: Locked in the box doesn't unlock the margin requirement.

An exemption to Do-Not-Call rules allowing firms to call existing/former customers for 18 months after the last transaction, or 3 months after an inquiry/application, without checking the Registry.

• Transaction-based EBR lasts 18 months.
• Inquiry/application-based EBR lasts only 3 months.
• Exemption expires; after expiration, the Registry must be checked before calling.

Memory trick: 18 months for a sale, 3 months for a question — after that, check the Registry's list.

The calculated value of a subscription right while the stock still trades with rights attached, found by dividing the market/subscription price spread by (N+1).

• Cum-rights formula: (Market − Subscription)/(N+1)
• Ex-rights formula: (Market − Subscription)/N
• N = number of rights needed to buy one new share

Memory trick: Cum-rights: add 1 to N because stock still carries the right.

Special Memorandum Account (SMA) reflects excess equity in a margin account that can be used to purchase additional securities without new cash, with buying power equal to double the SMA under Reg T.

• SMA is a credit line, not actual cash
• Buying power = SMA × 2 (since Reg T requires 50%)
• SMA is created when equity exceeds Reg T requirement, e.g., from price appreciation or dividends

Memory trick: SMA doubles up — buying power to gear up.

The right of existing common shareholders to purchase newly issued shares before they are offered to the public, preserving their proportionate ownership.

• Protects against dilution of ownership
• Rights are typically short-term and offered below market price
• Rights can be exercised, sold, or allowed to expire

Memory trick: Preemptive = 'pre-empt' dilution of your slice of the pie.

A joint account form where each owner holds a specified, often unequal, percentage of the account with no right of survivorship.

• Deceased owner's share passes to their estate, not the co-owner
• Percentages of ownership can be unequal
• Contrasts with JTWROS, which passes automatically to survivors

Memory trick: 'Common' shares go to the estate, not to the co-owner.

The portion of a customer's net worth held in assets that can be converted to cash quickly without significant loss of value or penalty, used to assess suitability of illiquid investments.

• Excludes home equity and primary residence value
• Excludes retirement accounts due to withdrawal penalties/taxes
• Important for suitability of DPPs, non-traded REITs, and other illiquid products

Memory trick: Only cash-like assets count — house and 401(k) stay locked out.

An IRS rule disallowing a tax loss deduction when a substantially identical security is purchased within 30 days before or after the sale generating the loss.

• 30-day window applies before and after the sale (61 days total)
• Disallowed loss is added to the cost basis of the new shares
• Applies to stocks, bonds, and options on the same security

Memory trick: Wash it, and the loss 'washes into' your new cost basis.

Open buy limit and sell stop orders below the current market are reduced by the amount of a cash dividend on the ex-dividend date unless marked 'do not reduce' (DNR).

• Applies to GTC orders
• Reduces buy limits and sell stops
• DNR instruction prevents automatic reduction

Memory trick: Dividends drop the stock, so open below-market orders drop too — unless DNR says 'don't touch.'

For the first year of FINRA membership, firms must file certain retail communications with FINRA's Advertising Regulation Department at least 10 business days prior to first use.

• Applies specifically to new FINRA member firms during their first year.
• Standard rule for established firms: file within 10 business days after first use for certain categories.
• FINRA may require changes before the material may be used.

Memory trick: New kids on the block file first, wait ten days before they knock.

A demand for additional funds when equity in a margin account falls below FINRA's minimum maintenance requirement (25% of market value for long positions).

• Equity = Market Value − Debit Balance
• Minimum long maintenance requirement = 25% of market value
• Call amount = Required equity − actual equity

Memory trick: Equity dips below a quarter, pay up to restore order.

An account identified by a number or symbol instead of the customer's name for privacy, but requiring a signed written statement of ownership on file.

• Still subject to full CIP/KYC verification
• Requires signed ownership attestation
• Used for privacy, not to hide beneficial ownership from the firm

Memory trick: Hidden name, but ownership must still be signed and named internally.

Reg T requires full payment by settlement date; a broker-dealer may request one extension of up to two additional business days through an SRO before liquidating the position (freeze) or reporting a violation.

• Payment normally due at settlement (T+1)
• One extension of 2 business days is generally allowed
• Failure to pay leads to a frozen account

Memory trick: Settle, then two more days grace — miss it, and the account gets frozen.

A PATRIOT Act requirement that broker-dealers verify the identity of every new customer using specific identifying information.

• Required elements: name, date of birth, address, and ID number
• Applies to every new account, individual or entity
• Separate from suitability/KYC information like investment objectives

Memory trick: CIP = 'Name, Birth, Address, Number' — NOT goals or risk tolerance.

An account in which the representative may choose the asset, action, or amount without contacting the customer each time, requiring prior written authorization and principal approval.

• Time and price discretion alone (same day) does not require written authorization
• Choosing the security is always discretionary and requires written authorization
• A principal must promptly review and approve each discretionary order

Memory trick: Pick the STOCK yourself? Get it in WRITING first.

A bond's annual coupon interest divided by its current market price, reflecting the actual income return based on what an investor pays today.

• Current yield = Annual interest / Market price
• Bonds bought at a discount have current yield > coupon rate
• Bonds bought at a premium have current yield < coupon rate

Memory trick: Discount bonds boost current yield above the coupon.

A REIT must distribute at least 90% of its taxable income annually to shareholders to retain its special tax status (avoiding double taxation).

• 90% distribution required by IRC
• REITs avoid corporate tax if requirement met
• Dividends generally taxed as ordinary income to shareholders
• REITs offer real estate exposure without direct ownership

Memory trick: REITs must give away '90 to stay.'

FINRA requires $2,000 minimum equity to open a margin account, but this requirement cannot exceed 100% of the purchase price of the securities.

• Reg T initial margin is normally 50%
• FINRA's $2,000 minimum is capped at the purchase price if lower
• Small purchases (below $2,000/50%) may effectively require full payment

Memory trick: $2,000 rule never asks for more than the sticker price.

A measure of how frequently an account's holdings are traded, calculated as total annual purchases divided by average account equity.

• Turnover rate above ~6 is generally considered a warning sign of excessive trading
• Churning also requires control by the rep and intent to generate commissions
• Quantitative suitability considers the cumulative effect of transactions, not just single trades

Memory trick: Turnover of 6+ turns heads — regulators start asking questions.

Interest income from GNMA (Ginnie Mae) pass-through certificates is fully taxable at the federal, state, and local levels, unlike direct Treasury securities.

• GNMA is fully backed by U.S. government guarantee
• Not a direct Treasury obligation, so no state/local exemption
• Pass-through payments include both principal and interest

Memory trick: 'Ginnie Mae pays no exemptions — tax hits at every gate.'

Variable life insurance guarantees a minimum death benefit, but cash value is not guaranteed and varies with the performance of investments held in the separate account.

• Minimum death benefit is guaranteed
• Cash value fluctuates with separate account performance
• Policyowner bears investment risk on cash value

Memory trick: 'Death benefit has a floor, but cash value can soar or sink.'

A security must be held for more than one year (one year plus one day) to qualify for preferential long-term capital gains tax rates.

• Exactly one year = short-term
• One year + 1 day = long-term
• Holding period starts the day after purchase

Memory trick: 'One year isn't enough — add a day for long-term.'

A collar (long stock + long put + short call) limits both gain and loss; max loss equals purchase price minus put strike, minus net premium received.

• Protects downside via long put
• Finances put with short call premium
• Max loss = (purchase price − put strike) − net credit

Memory trick: 'A collar locks the stock in a tight range like a leash.'

A municipal bond backed by the full faith, credit, and taxing power of the issuer, commonly used for non-revenue-producing projects like schools.

• Backed by taxing power (property, income, sales taxes)
• Typically requires voter approval
• Used for schools, roads, general government projects

Memory trick: 'GO bonds are backed by the taxman's grip.'

The maximum loss on a short (uncovered) put is limited to the strike price minus the premium received, multiplied by 100, occurring if the stock falls to zero.

• Max loss = (strike − premium) × 100
• Max gain = premium received
• Breakeven = strike − premium

Memory trick: 'Selling a put means catching a falling knife down to zero.'

Equipment leasing direct participation programs generate income from lease payments but carry the risk that equipment may become obsolete or have lower residual value than projected.

• Income generated from lease payments on equipment
• Key risk: obsolescence and residual value uncertainty
• Illiquid investment appropriate for income-seeking, risk-tolerant investors

Memory trick: 'Leased equipment ages — yesterday's crane is tomorrow's scrap.'

The annual inflation adjustment to a TIPS bond's principal is taxed as ordinary income each year, even though the investor doesn't receive the cash until maturity.

• Principal adjusts with CPI
• Adjustment taxed annually as phantom income
• Coupon interest is also taxable federally (exempt from state/local tax)

Memory trick: 'TIPS tax the ghost of gains not yet in hand.'

Non-traded REITs are not listed on an exchange, resulting in limited liquidity, infrequent valuations, and restricted redemption options for investors.

• No secondary market/exchange listing
• Redemption programs often limited or suspended
• High upfront fees and commissions common

Memory trick: 'Non-traded means no trading — your money's locked in the building.'

Money market mutual funds traditionally seek to maintain a constant $1.00 NAV per share by investing in short-term, high-quality debt instruments.

• Governed by SEC Rule 2a-7
• Retail and government funds use amortized cost to maintain $1 NAV
• Institutional prime/muni funds must use floating NAV

Memory trick: 'A buck a share, safe to spare' — money funds keep it at $1.

For a long position in a margin account, equity is the current market value of the securities minus the debit balance (the amount borrowed from the broker).

• Equity fluctuates with the market value of the securities.
• Debit balance remains constant unless adjusted.
• Used to determine if a margin call is triggered.

Memory trick: Equity is what's left after you pay off your loan, no matter how the stock moves.

Debt securities issued by the U.S. Treasury that provide protection against inflation. Their principal value adjusts with the Consumer Price Index (CPI), and interest payments are made on the adjusted principal.

• Principal adjusts with CPI.
• Interest rate is fixed, but interest payments vary with principal.
• Phantom income is a potential tax consideration.

Memory trick: TIPS are your 'Inflation Protection Shield' for government bonds.

For a strategy involving a long stock position and a short put option, the maximum loss occurs if the stock price falls to zero. It is calculated as the stock purchase price minus the premium received for the put.

• This is a moderately bullish to neutral strategy.
• The short put generates income but obligations if stock falls below strike.
• The investor's primary risk is the decline in the value of the long stock.

Memory trick: You own the stock, you sold a promise if it drops. If it drops to zero, you lose your stock money, but keep the promise money.

The highest profit an investor can make from a covered call strategy, occurring when the stock price rises to or above the strike price of the sold call option.

• Strategy involves buying stock and selling a call option on that stock.
• Maximum profit is limited to the strike price minus the stock purchase price, plus the premium received.
• Profit is realized if the stock is called away at the strike price or expires out-of-the-money.

Memory trick: Covered Calls: Covered stock, Cash premium, Capped upside.

An options strategy involving owning the underlying stock and simultaneously buying a put option on that stock to protect against a decline in its price.

• Used to hedge an existing long stock position.
• Provides downside protection (a 'floor') for the stock.
• Allows for unlimited upside potential if the stock increases in value.
• Cost is the premium paid for the put.

Memory trick: Puts Protect Portfolios: Buying puts puts a floor on losses.

Under Regulation T, the minimum initial margin requirement for a short sale is 50% of the market value of the shorted securities, with a minimum of $2,000 for transactions under $4,000.

• Market value of short sale is the proceeds from selling borrowed shares.
• Investor must deposit cash or fully paid securities to meet margin.
• Margin accounts allow for leverage but increase risk.

Memory trick: Shorting stock means borrowing, and Reg T says you have to put up 'Half' the value, or at least 'Two Grand' to start.

Direct Participation Programs (DPPs) are generally illiquid investments, meaning there is no active secondary market for units, making them difficult to sell quickly or without significant loss.

• Common characteristic of most DPPs.
• Units are not easily transferable.
• Investors must be prepared to hold the investment for the long term.
• Risk is particularly high with raw land due to lack of income.

Memory trick: DPP Risks: Don't Participate Poorly, Prepare for Problems.

The cash value of a variable life insurance policy is held in a separate account and fluctuates based on the performance of the underlying investment options chosen by the policyholder.

• Tied to separate account performance (no guarantees).
• Policyholder chooses investment sub-accounts.
• Can be accessed via loans or withdrawals.
• Offers potential for greater cash value growth but also investment risk.

Memory trick: Variable Life: Values Vary with Investments, Vital for protection.

The breakeven point for a strategy involving buying stock and simultaneously selling a put option is the stock's purchase price minus the premium received from the put.

• This is a moderately bullish strategy.
• The investor profits if the stock price stays above the breakeven.
• Selling the put generates income, lowering the effective cost of the stock.

Memory trick: Long Stock, Short Put: Lower your cost, Limit your loss.

An options strategy involving buying both a call and a put option on the same underlying asset with the same strike price and expiration date.

• Profits from significant price movement in either direction.
• Used when volatility is expected but direction is uncertain.
• Maximum loss is the total premiums paid.

Memory trick: A long straddle is like buying tickets for both the up and down rollercoaster, hoping for a wild ride.

For municipal bonds bought at a discount in the secondary market, the discount must be accreted annually. Both the annual interest income and the accreted amount are generally federal tax-exempt.

• Accretion increases cost basis annually.
• No phantom income is created for tax-exempt bonds.
• If sold prior to maturity, any gain above the accreted basis is a capital gain.

Memory trick: Buying a muni cheap in the secondary market means both the coupon and the 'catch-up' discount are usually tax-free hugs from Uncle Sam.

Any written or electronic communication distributed to more than 25 retail investors within any 30-calendar-day period that includes hypothetical illustrations of investment performance requires specific FINRA filing and principal approval.

• Applies to communications with 25+ retail investors.
• Must be filed with FINRA at least 10 business days BEFORE first use.
• Requires principal approval BEFORE first use.

Memory trick: Retailers Ponder Hypotheticals 10 Days Early.

The amount a client receives upon surrendering a variable annuity, calculated as the current account value minus any applicable surrender charges.

• Surrender charges typically decline over a period (e.g., 7-10 years).
• Charges are applied to the current account value.
• Withdrawals also have tax implications (LIFO for non-qualified).

Memory trick: Surrendering an annuity means your current value takes a hit from the surrender fee, like an early exit penalty.

An investment company that continuously issues new shares and redeems existing shares at their Net Asset Value (NAV). They are professionally managed and offer diversification.

• Shares are bought from and sold back to the fund directly.
• Priced once per day at NAV.
• Offer professional management and diversification.
• Most common type of investment company.

Memory trick: Open-end: Open to buy/sell at NAV, Always managed.

Any written or electronic communication distributed to 25 or fewer retail investors within any 30-calendar-day period.

• Maximum of 25 retail investors.
• Must be approved by a principal prior to use or reviewed AFTER use, as per firm's WSPs.
• No FINRA filing required for correspondence.

Memory trick: Correspond with 25 or less, Retail is more, Institutional is for Pros.

The taxable equivalent yield for a municipal bond, considering both federal and state taxes, is calculated by dividing the municipal yield by (1 - combined federal and state tax rate).

• Municipal bond interest is generally exempt from federal income tax.
• It may also be exempt from state and local taxes if issued in the resident's state.
• Used to compare tax-exempt municipal bonds with taxable corporate bonds.

Memory trick: TEY helps you see if a tax-free apple is better than a taxable orange, especially when you're paying both federal and state taxes.

For a credit call spread, the maximum profit is the net credit received when the strategy is established, which occurs if both options expire out-of-the-money.

• Strategy involves selling a lower strike call and buying a higher strike call.
• Bullish to neutral outlook.
• Profit is received upfront and kept if stock stays below the lower strike.

Memory trick: Credit Call: Get Credit, hope stock stays below Call.