Differentiate Account Types - Series 7

1. What is the FINRA minimum maintenance margin requirement for short equity positions?

   At least $30\%$ equity in the account (house may require more). This higher equity requirement for short positions accounts for unlimited loss potential, ensuring sufficient coverage against adverse price movements.

2. What is a restricted account in the context of margin trading?

   An account with equity below Reg T; buying power is reduced until met. Equity falls below Regulation T's 50% but above maintenance levels, restricting new purchases to prevent further under-margining.

3. What is a house call in a margin account?

   Call based on firm maintenance requirement above FINRA minimum. Firms impose higher internal standards than FINRA minimums to manage risk, triggering calls when accounts fall below these elevated levels.

4. What is the primary difference between an individual account and a joint account registration?

   Individual has one owner; joint has two or more co-owners. Individual registration limits control to one person, while joint allows shared ownership and decision-making among multiple parties.

5. Which option approval level is required for spreads and combinations?

   Options Level 3 (spreads/straddles/combinations). These multi-leg strategies require higher approval due to increased complexity and risk management needs in offsetting positions.

6. Which option approval level is required for covered call writing?

   Options Level 2 (covered call writing). Covered calls involve lower risk due to underlying stock ownership, fitting this intermediate approval for income-generating strategies.

7. What is the defining feature of a cash account regarding payment and settlement?

   Securities must be paid in full by settlement; no borrowing permitted. This ensures full payment without credit extension, aligning with cash account rules that prohibit borrowing for securities purchases.

8. What is the defining estate feature of tenants in common (TIC) registration?

   No survivorship; decedent's interest passes to the estate/probate. TIC structure preserves individual inheritance rights, directing shares through probate to heirs rather than automatic survivorship.

9. What is the tax characteristic of a Roth IRA regarding contributions and qualified withdrawals?

   Contributions are after-tax; qualified withdrawals are tax-free. After-tax funding allows earnings to grow tax-free, promoting retirement savings with tax advantages on qualified distributions.

10. What is the defining survivorship feature of JTWROS registration?

    Decedent's interest passes to surviving owner(s) outside probate. JTWROS facilitates seamless asset transfer upon death, avoiding probate delays and costs for efficient estate planning.

11. What is Regulation T initial margin requirement for buying securities on margin?

    Customer must deposit at least $50\%$ of the purchase price. Regulation T mandates this to limit leverage risk by requiring substantial customer equity in initial margin transactions.

12. What is the key control feature of a trust account registration?

    Trustee controls the account under the trust document for beneficiaries. Trust registration separates legal control from beneficial interest, adhering to trust terms for asset management and distribution.

13. What is the special memorandum account (SMA) used for in a margin account?

    A line of credit tracking excess equity for future purchases/withdrawals. SMA captures appreciation or excess margin, providing flexible credit for additional trading or cash needs without new deposits.

14. Which option approval level is required to buy calls and puts in a customer account?

    Options Level 1 (purchases of calls and puts). This entry-level approval allows basic long option strategies, suitable for customers new to options with limited risk exposure.

15. What is the tax characteristic of a traditional IRA regarding contributions and withdrawals?

    Contributions may be tax-deductible; withdrawals are taxed as ordinary income. This structure provides upfront tax benefits while deferring taxation until retirement, encouraging long-term savings.

16. What is the FINRA minimum maintenance margin requirement for long equity positions?

    At least $25\%$ equity in the account (house may require more). FINRA sets this threshold to maintain adequate equity cushion against market declines in long positions, with firms able to impose stricter standards.

17. What is a cash-secured (covered) put in terms of account position requirements?

    Short put with sufficient cash to buy $100$ shares per contract at strike. Cash reserves ensure ability to fulfill put assignment, reducing risk to the difference between strike and market price.

18. What is a margin call and what action is required of the customer?

    Demand to meet margin requirement by depositing cash or marginable securities. It enforces margin requirements by requiring prompt deposits to restore account equity and comply with regulatory standards.

19. What is the required minimum distribution (RMD) age under current rules?

    RMDs generally must begin at age $73$. This age triggers mandatory distributions to ensure taxable income realization and prevent indefinite tax deferral in retirement accounts.

20. What is the minimum deposit to open a margin account under FINRA rules?

    $2,000$ minimum deposit (or $100\%$ of purchase if less than $2,000$). FINRA establishes this to ensure customers have adequate capital for margin trading risks, while allowing full funding for smaller transactions.

21. What is a covered call in terms of account position requirements?

    Short call with long $100$ shares of the underlying per contract. Ownership of underlying shares offsets the short call's obligation, limiting risk to opportunity cost rather than unlimited losses.

22. What is the defining feature of a margin account compared with a cash account?

    Customer may borrow from the broker-dealer using securities as collateral. Margin accounts allow leveraging borrowed funds for larger positions, using purchased or existing securities as loan collateral under Regulation T.

23. What is the early distribution penalty for most IRA withdrawals before age $59\frac{1}{2}$?

    $10\%$ penalty plus ordinary income tax (unless an exception applies). The penalty discourages premature access to retirement funds, preserving savings integrity unless qualified exceptions like education apply.

24. Which option approval level is required for uncovered (naked) option writing?

    Options Level 4 (uncovered writing; highest risk). Uncovered writing exposes unlimited risk, necessitating the highest approval level for experienced customers with substantial resources.

25. What is the key suitability document delivered when an options account is approved?

    The Options Disclosure Document (ODD). The ODD outlines options risks and mechanics, ensuring informed consent and regulatory compliance upon account approval.

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