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1.1) What is the purpose of this FAQ?

This FAQ is *not* intended as a comprehensive guide to trader status taxation. That is covered in the TradersTaxPlan This FAQ is a fast and easy way to get answers to general questions, many of which are so often misrepresented over the internet

1.2) What is Versus Purchase or VSP?

A method of identifying specific shares of securities to be sold for tax purposes--also called "vs. purchase." If versus purchase is not specifically stated at the time of sale, the IRS deems the securities sold are made on a first-in first-out (FIFO) basis.

Typically, you can have your broker add a memo line to your confirmation statement, per your instructions. For example, if you're selling the 100 shares you bought on March 31, 2008, ask your broker to write on your confirmation that the transaction is a sale "vs. purchase 3/31/08." For online trades, you should immediately follow up with a phone call to specify your instructions.

Exceptions to matching buys and sells on the FIFO basis exist for mutual fund shares (for which taxpayers generally elect to use the rolling average cost basis) and for publicly traded partnerships (for which IRS Rev. Rul. 84-53 requires a rolling average cost basis, referred to as a unified/unitary basis, in the PTP units).

An exception to the exception for PTP units is found in IRS Regs. 1.1223-3(c)(2)(i).  The partner may make an election under Regs. 1.1223-3(c)(2)(i)(C) as follows:  "The selling partner [may elect] elects to use the identification method for all sales or exchanges of interests in the partnership after September 21, 2000. The selling partner makes the election referred to in this paragraph (c)(2)(i)(C) by using the actual holding period of the portion of the partner's interest in the partnership first transferred after September 21, 2000 in reporting the transaction for federal income tax purposes."

1.3) What is a Wash Sale? (SEC definition)

Also known as a accommodation sale or a fictitious sale is a security or commodity that is bought and sold, either concurrently or within a short period of time, to create artificial market activity with the intent to profit from the resulting change in the security's price.  Wash sales are prohibited under Section 4c of the Commodity Exchange Act.

Price Manipulation  Market Manipulation  SEC Prohibitions on Fraud  SEC Administrative Proceeding against Rajan Moondra  SEC v. Kin H. Lee  SEC definition of Wash Sales

1.4) What is a Wash Sale? (IRS definition)

The sale of a security at a loss and the purchase of shares within 30 days while continuing to hold either a long or short open position in the security. The IRS temporarily disallows (defers) such losses for tax purposes. The IRS also extends the wash sale prohibition to closing short sales. See The Wash Sale Rule for more detailed information.

1.5) What are "Cash-Settled Options"?

These are options for which no actual common stock is bought or sold on behalf of the option buyer, rather they can be exercised for cash only at expiration.

1.6) What are "Physically Settled Options"?

These are options for which actual shares are bought or sold when the option is exercised.

1.7) What is the "trade through" rule?

The trade-through rule, which was first instituted in 1975, was designed to make sure investors got the best available price for their stock trade. A market system would not allow one customer to "trade through" an existing order without first matching that order. A customer's order has to be routed to the destination with the best price at the moment the order is entered.

That sounds like a good idea on the surface, but the rule was enacted before electronic markets existed. Though it's moving in the direction of automation, the NYSE is still at heart a manual system, with trades handled by specialists in particular stocks.

Nasdaq, however, is fully automated, so while a quote on a Nasdaq stock is currently executable, a quote on an NYSE stock is considered an indication and not a firm quote.

The trade-through rule as it stands means that if you place an order and the best possible quote is with a particular specialist on the floor of the NYSE, then your broker is required to route your order there. But a NYSE quote is not immediately executable–it's more analogous to an advertised price than an actual price.

Specialists are allowed to hold an order for 30 seconds before either executing it or handing it off to another specialist—and during that time, the price may change.

Executives at the NYSE have defended the trade-through rule, saying it's good for small investors. But Nasdaq members often charge NYSE specialists with bait-and-switch pricing tactics so that orders are routed to the NYSE, then executed at a worse price than what was available at the time the order was entered.

The trade-through rule mandates that when a security is available on more than one exchange, transactions may not occur in one market if a better price is offered on another market. Defenders of the rule portray it as an essential protection for investors, particularly small investors who find it difficult to monitor their brokers’ performance. Opponents argue that its principal effect is anti-competitive; that it protects traditional exchanges – where brokers and dealers meet face to face on trading floors – from newer forms of trading based on automatic matching of buy and sell orders.

The Securities and Exchange Commission (SEC) has proposed new regulations that would modify the trade-through rule, which it describes as antiquated, by allowing investors to “opt out” of the rule voluntarily and by permitting traders on “fast” markets to trade through (that is, ignore) better prices offered on non-automated exchanges. The securities industry is divided on the SEC’s proposal, but there is a consensus that amending the trade-through rule could force dramatic changes in the way stocks are traded, especially on the world’s largest market, the New York Stock Exchange (NYSE). Committees in both the House and Senate have held hearings on this and other market structure issues, most recently in the House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises on May 18, 2004.

1.8) Who are DMMs?

Designated Market Marker (formerly known as a NYSE Specialist) is a participant that has the obligation for maintaining a fair and orderly market in the price and trading of his assigned securities. A DMM works both manually and electronically to facilitate price discovery during the market opening, closing and also during periods of substantial trading imbalances or instability.

1.9) What is the Order Protection Rule - Rule 611?

An upgrade of the trade-through rule passed in 2007.  The Order Protection Rule, aims to ensure that both institutional and retail investors get the best possible price for a given trade by comparing quotes on multiple exchanges. If a better price is quoted elsewhere, the trade must be routed there for execution, and not "traded through" at its current exchange.

1.10) What is the "tick" test?

Prior to July 3, 2007 Rule 10a-1 restricted when a short sale may be executed. Tick-test rules dictated that a short sale could be made only in two situations:

  1. When the price of the particular stock is higher than the last trade price (an uptick)
  2. In a case where there is no change in the last trade price. The previous trade price must be higher than the trade price that preceded it (a zero uptick or zero plus tick)

Rule 200 of Regulation SHO was replaced with rule 201 effective July 3, 2007 or July 6, 2007.

1.11) What is Naked Short Selling?

Naked short selling is selling short without borrowing the necessary securities to make delivery, thus potentially resulting in "fail-to-deliver" securities to the buyer. Naked short selling can have a number of negative effects on the market, particularly when the fails-to-deliver persist for an extended period of time and resulting in a significantly large, unfulfilled delivery obligation at the clearing agency where trades are settled.

This being akin to con job thievery, the SEC allows the well-heeled players on the Street to practice naked short selling with relative impunity.  Consider this: If one were to sell prime real estate, raw acreage, to an investor...  Only to find out later that the seller did not have perfected title to the land (or to make this analogy closer - that the land did not even exist)?  Then when confronted by the bunko squad, offering the excuse "But sir, I was planning to buy the land back after it declined in value."  Nowhere in the world would such a scheme be accepted, rather the perps would be locked up in the hoosgow immediately upon discovery!  But the SEC protects the thieves and actually provides the mechanism that facilitates the activity.

The SEC denied the existence of naked short selling for years.  After many complaints and providing proof of abuse, such as seeing a higher number of shares held short than were actually issued by a publicly trading company for example, it became obvious that the SEC's claims were wrong.  In 2005 Regulation SHO was established to temper this abuse.

1.12) What is Regulation SHO ?

Regulation SHO replaces Rules 3b-3 and 10a-2, as well as certain self-regulatory organization (“SRO”) rules governing short sales, and modifies Rule 10a-1. Specifically, Rule Regulation SHO requires short sellers in all equity securities to locate securities to borrow before selling, and also imposes strict delivery requirements in order to settle short sales. The regulation further includes a temporary rule that establishes procedures by which the SEC may temporarily suspend, on a pilot basis, the current “tick” test and the short sale price test of any exchange or national securities association for specified securities. Regulation SHO also defines ownership of securities, permits the establishment of aggregation units (thereby avoiding firm-wide determination of net long and short positions) subject to certain requirements, and requires broker-dealers to mark sales in all equity securities “long,” “short,” or “short exempt.” Finally, the SEC voted to eliminate the shelf offering exception in Rule 105 of Regulation M under Regulation SHO, thereby prohibiting short sales covered by securities offered off the shelf.

1.13) What is Regulation FD ?

Fair Disclosure, Reg. FD, went into effect August 15, 2000 to address the selective disclosure of information by publicly traded companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information—the issuer must make public disclosure of that information. In this way, the new rule aims to promote the full and fair disclosure. 

1.14) What is Give-Up?

A customer "give-up" is a trade executed by one broker for the client of another broker and then "given-up" to the regular broker; e.g., a floor broker with discretion must have another broker execute the trade.

1.15) What is Give-In / Give-Up Management?

Trades accepted for your clearing account with certain brokers are designated as give-in trades on your daily statement. Information such as the executing firm and other relevant trade identifiers are also noted on each give-in transaction. These services allow clients to maintain relationships with different executing brokers while reaping the benefits of centralized clearing, such as improved risk management, simplified treasury operations, reduced administration, easier trade confirmation and consolidated margin requirements.

1.16) What is Buy Side?

The side of Wall Street comprising the investing institutions such as mutual funds, pension funds and insurance firms that tend to buy large portions of securities for money-management purposes. The buy side is the opposite of the sell-side entities, which provide recommendations for upgrades, downgrades, target prices and opinions to the public market. Together, the buy side and sell side make up both sides of Wall Street.

For example, a buy-side analyst typically works in a non-brokerage firm (i.e. mutual fund or pension fund) and provides research and recommendations exclusively for the benefit of the company's own money managers (as opposed to individual investors). Unlike sell-side recommendations - which are meant for the public - buy-side recommendations are not available to anyone outside the firm. In fact, if the buy-side analyst stumbles upon a formula, vision or approach that works, it is kept secret.

1.17) What is Sell Side?

The retail brokers and research departments that sell securities and make recommendations for brokerage firms' customers.  For example, a sell side analyst works for a brokerage firm and provides research to individual investors.

1.18) What is a Boiler Room?

A place where high-pressure salespeople use banks of telephones to call lists of potential investors (known as a "sucker lists") in order to induce them to purchase speculative securities, sometimes called "the stock of the day" that the firm has a large inventory of, to be unloaded at significant profit to the brokerage.  It is called a boiler room as an analogy to a pressure cooker due to the high-pressure selling.

1.19) What is a Bucket Shop?

A firm that uses aggressive telephone sales tactics to sell securities that the brokerage owns and wants to get rid of. The securities they sell are typically poor investment opportunities, and almost always penny stocks.  It is called a bucket shop because originally these firms might execute trades all day long, throwing the tickets into a bucket. At the end of the day they would sit back and decide which customer accounts to award the winning and losing trades to.

1.20) What is an Accredited Investor?

Generally speaking an accredited investor is someone who earns $200,000 per year or has a net worth in excess of $1 million.

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors." The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  1. a bank, insurance company, registered investment company, business development company, or small business investment company;
  2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
  4. a director, executive officer, or general partner of the company selling the securities;
  5. a business in which all the equity owners are accredited investors;
  6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
  7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

1.21) What is so-called High Frequency Trading?

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors.

1.22) What are Flash Orders and Flash Trading?

Flash orders are also called "step up" or "pre-routing display" orders. The rationale for these order types is simple: Better me than you. They allow a venue to execute marketable orders in-house when that market is not at the national best bid or offer, instead of routing those orders to rival markets. They do this by briefly displaying information about the order to the venue's participants and soliciting NBBO-priced responses. Similar to front-running, if there are no responses, the order can be canceled or routed to the market with the best price.

All four markets with flash orders treat these orders in a similar way. If they get a marketable buy order, for instance, that would otherwise be routed to a market quoting at the NBBO, they flash the order to some or all of their participants as a bid at the same price as the national best offer. Exactly who sees the flash, how that information is conveyed and the duration of the flash vary by market. The maximum allowable time for a flash is 500 milliseconds, or half a second, although most of the markets flash routable orders for under 30 milliseconds.

EXAMPLE: July 15, 2009 Intel had reported robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

1.23) What is Dark Pool Trading?

A Dark Pool Trading system is an internal system which is intended to trade stocks privately with the objective of liquidating large stock positions at lower costs. Many of these systems have evolved into alternative trading systems ATS (Alternative Trading Systems), where liquidity is reported to reside, but cannot be seen with the naked eye. The sources of dark liquidity include, ATS, crossing networks and other dark pools, and unlike traditional liquidity sources such as stock exchanges, trade on these systems and draw their prices from the market, and in most cases do not have any market impact. Thus they may not print their trade details back to the market essentially because regulations do not currently require it.

In the recent past, the financial markets have undergone lot of changes in terms of trading strategies, new product innovations, the regulatory requirements, and a growth in technology have led to increase in trading volumes. Along with the volumes on the exchanges, the trading volumes of the dark pool trading systems are growing every day. Today, there are more than 40 dark pool systems that are operational in US market.

The Dark Pool Trading systems, mainly used by the institutional traders who trade in large volumes, help institutional investors in getting more liquidity and less transaction cost, strategies are not exposed to the markets- less transparency, fund manager strategies are best implemented with the use of algorithmic trading whereby best execution is possible. In spite of these benefits, few issues like inadequate price transparency, regulatory requirements and uniform information access to all kinds of investors are still debatable.

Considering the complexity of these trading systems in terms of technology, speed, functionalities and system performance, it is very important that the functional testing along with the gateways testing and performance testing need to be done.

1.24) What are Expert Networks?

For a fee, through Expert Networks, stock market traders are introduced to consultants, insiders employed at various public companies, who who will divulge company secrets and other material non-public information to the trader.  Armed with this information the trader can execute trades at favorable prices, before the general public becomes aware of actionable developments with the public companies.

On the surface, the Expert Network and consultants are merely chatting with interested people about the progress or lack of progress within their companies.  But when one considers the level of compensation received and the dollar amounts paid by traders to partake in these casual conversations with corporate insiders, it might beg credulity why a trader would pay so much just for a friendly chat that resulted in no actionable information, including material non-public information. 

1.25) What is clawback?

The recovery of alleged illegal amounts from parties that benefited from the alleged illegal activities of a financial enterprise.

The Government and/or the unknowing Investors who were harmed by the actions can recover money from those who profited, even if the party whom profited was unaware that the financial enterprise with partaking in an illegal activity.

It could be that someday investors such as CalPERS should be facing clawbacks for the substantial gains they have earned over the years from their investments in hedge funds that traded on material non-public information.  In theory they "should have known" that it is unbelievable for any hedge fund to earn astronomical returns year-after-year based solely on honest research, rather than being supplemented with short-term trading based on material non-public information.

1.26) What is ?




2.1) What is a Margin Account?

A margin account is an account you establish at a brokerage firm that lets you borrow from your broker. A margin account lets you take a secured loan against your own portfolio. The advantage is that you do not have to sell any of your portfolio to obtain the cash. Furthermore, you generally have no repayment schedule. You are free to repay the loan at anytime, unless your collateral falls below the required amount. While most traders use the borrowed cash to buy additional securities, you can use it for any purpose. However, the wholly owned securities in your portfolio are collateral for the loan.

2.2) What is a Portfolio Margin Account?

Generally Portfolio Margining replaces (and eliminates) the Reg. T requirements, Pattern Day Trader status and Day Trading Buying Power.  It generally results in a substantial increase in overnight Stock Buying Power, often increasing by a multiple of times larger than under Reg. T.  Generally Option Buying Power is increased by an even higher multiple, rising to the same amount as computed for Stock Buying Power.

Since December 12, 2006 a portfolio margin account is risk-based using the overall maximum risk of loss in the portfolio found by stressing the positions in the portfolio across a range of hypothetical market moves, rather than each individual position in the portfolio.  Initial and maintenance portfolio margin requirements range from about 6% to 15% equity vrs. 50% initial and 30% maintenance for the normal Reg T Margin Accounts.

Portfolio Margin results in various changes to Stocks Buying Power and Options Buying Power and Day Trading Buying Power depending on various minimum account equity values of $25,000, $100,000, $500,000 and $5,000,000.  See these links for more information:


2.3) What is a Margin Call?

A margin call is a demand by your broker for you to deposit cash or fully marginable securities with your broker.

If the value of your collateral falls below the broker's minimum requirement (usually about 30% of the loan), you will receive a margin call by letter, telephone, telegram, or other means, to request additional collateral in the form of cash or fully marginable securities to meet the requirement. However, only a percentage of a security's market value can be used to meet your margin call. If you fail to meet the margin call, your broker is authorized (remember the margin agreement form) to sell the margined securities and any other collateral needed to repay the loan plus interest and commissions. You are responsible for any deficit that may remain after your assets are sold.

2.4) What is an Outstanding Call?

Your account is currently in a Margin Call which generally needs to be satisfied (or covered) immediately, otherwise the broker may liquidate your account, generally starting with selling out the lower priced (riskier) securities.

2.5) What is a "Reg. T" Call?

A "Regulation T Call" is issued when the initial equity for the purchase of a marginable security in your account is below the minimum required by the Federal Reserve Board (currently 25%).  Similarly a "Reg. T Call" is issued if the value of your older securities decline to far, resulting in your account falling below the minimum level required by the Federal Reserve Board (currently 25%).

Your account will go into an Reg. T call if the initial equity for the purchase of a security is below the minimum required by the Federal Reserve Board. If your account goes into a Reg. T call you can meet it by depositing funds, marginable securities, or liquidating fully paid-for securities. In a call your broker may forcibly liquidate your account without prior notice, regardless of your intent to satisfy the call

These are serious calls and need to be covered "immediately."

Part 220--Credit by Brokers and Dealers (Regulation T)

2.6) What is a Fed Call?

A Fed Call is another name for a Regulation T or Reg. T Call.

2.7) What is a Maintenance Call?

A Maintenance Call is issued when the market value of your margined securities, plus any cash balance in your account, less the debit balance of your account, drops below the broker's maintenance requirements (a percentage ratio computed from margin debt balance v. marginable account value).

Your account will go into an maintenance call if its value drops below the broker's maintenance requirements due to changes in the market value of a security or when you exceed your buying power. If your account goes into a maintenance call, you can meet it by depositing funds, selling stock, or depositing securities. In a call your broker may forcibly liquidate your account without prior notice, regardless of your intent to satisfy the call.

2.8) What is a Day Trading Buying Power Call?

If your account meets the minimum equity requirements for day trading and then exceeds the day trading buying power on executed trades this creates a special maintenance margin deficiency.  As a result a day trading buying power call will be issued. Once a day trading buying power call is issued, the day trading buying power is restricted to two times margin maintenance excess for 5 business days unless the call is met earlier. If the Day Trading Buying Power Call is not met within 5 business days, the account will be permitted to execute transactions on a cash available basis for 90 days or until the call is met. Multiple day trading buying power violations may result in a restriction limiting transactions to a cash available basis.

Potentially day trading calls can only be met by depositing cash or fully paid securities, or by selling non-marginable securities.

2.9) What is a "Friendly Loan" used to cover a Day Trading Buying Power Call?

Until the Day Trading Buying Power Call is met by depositing cash, the account remains restricted, pursuant to NASD Rule 2520(iv)(c).

Pursuant to NASD Rule 2520(iv)(e) the cash must be deposited and cannot be withdrawn for a minimum of two business days following the close of business on the day of deposit.

Here's where the "friendly loan" comes into play: Some boutique brokerages have been known to look the other way when an "arrangement" is made between two of their customers to transfer funds from an unrestricted account, into the account with the Day Trading Buying Power Call.  Similarly there are "angels" who, for a reasonable fee, will lend the cash for a few days to accounts to meet their Day Trading Buying Power Call.  If discovered, such "friendly loans" may be subject to NASD disciplinary action under
NASD Rule 2370

You can legitimately accomplish nearly the same thing by taking out an advance on a home equity line of credit, or a cash advance on a Mastercard/VISA.

update 2005: The NASD now accepts the fact that friendly loans are a part of life and should be none of their business.  click here for original source of this statement: In some cases, firms may arrange loans for customers from other sources, and there have been instances of customers making loans to other customers to finance securities trades. A customer that lends money to another customer should be careful to understand the significant additional risks that he or she faces as a result of the loan, and needs to carefully read any loan authorization forms. A lending customer should be aware that such a loan may be unsecured and may not be eligible for protection by the Securities Investor Protection Corporation (SIPC). The firm may not, without direction from the borrowing customer, transfer money from the borrowing customer’s account to the lending customer’s account to repay the loan.

2.10) What is a Day Trading Minimum Equity Call?

If your account has less than $25,000 day trading equity and is identified as a pattern day trading account, a day trading minimum equity call will be issued.

Officially it is said that pattern day trader accounts that fall below the $25,000 minimum equity requirement should consider limiting day trading activities to cash only transactions until the minimum equity amount is reached in order to avoid a Day Trading Buying Power Call.

A Day Trading Buying Power Call (see FAQ 2.8) is issued when you do two or more day trade round trips within one single day and you then in effect have used the unreplenished day trading buying power (by buying the later positions using your regular buying power rather than the unavailable day trading buying power).

2.11) How is Buying Power computed?

Generally computed by taking "Available Funds" and dividing it by some factor.  Normally this is 0.3501 (or 0.30 or even as low as 0.25 which is the mandated federal minimum)) as the factor as applied to "House Surplus Available Funds."  i.e. if you had $100,000 of House Surplus available funds at the beginning of the day, then 100,000/.3501 equals $285,632.67 of Buying Power for the day.  Otherwise 0.50 is the factor as applied to "SMA Available Funds" if this computes a lower number.  i.e. if you had $100,000 of SMA available funds at the beginning of the day, then 100,000/.50 equals $200,000 of Buying Power for the day.  Since $200,000 is less than $285,632.67, your Buying Power would be throttled back or limited to the lower $200,000 number.

Non-marginable securities, such as stock options, have buying power of "Available Funds" less any "Pending Cash Deposits."

2.12) How are "Available Funds" computed?

"Available Funds" is the lower of Special Memorandum Account (SMA) Value or House Surplus.  The House Surplus is the Marginable Equity Values less the Maintenance Requirement.  The SMA is some "mystical" account valuation that generally bears little resemblance to reality.  Usually your SMA exceeds your House Surplus so it doesn't matter much.

SMA increases 100% for all cash deposited to your account and by 50% of net daily changes in securities purchases and sales.  SMA decreases 100% for all cash withdrawals.  Depreciated security values (trading losses) do not lower the SMA account balance, hence over time the SMA tends to climb higher than your House Surplus account balance.

2.13) How is Day Trading Buying Power computed?

Margin Maintenance Excess or SRO Value is used to compute Day Trading Buying Power.  To get to Margin Maintenance Excess or SRO Value one brokerage that I interviewed takes your Marginable Net Equity and subtracts 25% of the value of marginable long positions priced over $1.00 and subtracts 100% of the value of marginable long positions priced under $1.01.

The resulting amount, the Margin Maintenance Excess or SRO Value, is then multiplied by 2 for PDT account values under $25,000 or is multiplied by 4 for PDT account values over $25,000.

Example: $100,000 market value of IBM stock and $30,000 cash for a total account value of $130,000.
Day Trading Buying Power = ($100,000 * 75% + $30,000) * 4 = ($75,000 + $30,000) * 4 = $105,000 * 4 = $420,000.

Trick: Since available cash that is swept into an outside, overnight, money market fund is no longer "cash" nor marginable by these definitions, this sweep action can drastically lower your Day Trading Buying Power. To maintain higher Day Trading Buying Power turn off automatic sweeping of available cash balances.

2.14) What is Free-Riding? (cash accounts and the pattern daytrader overnight positions trap)

Purchasing a security and then selling it prior to actually "paying for" the security (or never separately paying for the security, but rather using the sales proceeds to cover the purchase costs).

A practice in which a brokerage client buys a security in a cash account and sells the same security without putting up money for the purchase, an activity that encourages speculation and violates the credit extension provisions of the Federal Reserve Board. The penalty for free-riding requires that the customer's account be frozen for 90 days

Buying and immediately selling securities without making payment. This practice violates Regulation T.
brokerage account can be flagged as having had a "liquidation violation" and repetitive violations can lead to trading restrictions being placed on the account and even on the tax ID# of the account (meaning it can be a restriction across multiple brokerage accounts).

This trading violation is the result of buying a security in your cash account and then selling the same security without making separate payment on the full purchase price by Settlement Date. This situation is called free-riding because basically it is unauthorized borrowing to pay for a trade.

Trading in a cash account using unsettled sales proceeds (rather than trading in a margin account) or trading in a Pattern Day Trading Account, when overnight open positions are closed out, makes a securities trader particularly susceptible to inadvertently violating the free-riding rule.  A violation often requires a truly immediate cash deposit into the account (i.e. more immediate than even a Reg. T Margin Call), otherwise the account may be restricted when making future securities purchases.

There are tricks to help traders trapped by a free-riding violation and there are rules to prevent the tricks from circumventing the potential restriction: such as transferring available excess cash from the account of another trader (a friend, or even an unknown party who is introduced via the brokerage) to be repaid back immediately once the free-riding issue is settled.  (see "friendly loan," above)

Exception: Trading "when issued" securities.

Exception: Sometimes in a pattern daytrader account an automatic exercise of an in-the-money call option after the close on Friday, can be sold on the following Monday without a free-riding violation.  There may be technical differences between a normal expiration trade date of the 3rd Friday of the month (which expires on the following Saturday) and the weekly Friday expiration dates.

Regulation T of the Federal Reserve Board does not allow investors to buy a security low and sell it high, during the same trading day, and use the proceeds of its sale to pay for the original purchase of the security. The penalty requires that the customer's account remain frozen for 90 days.

Exception: Traders using a Pattern Day Trader account.

2.15) What is Free-Riding? (IPO rule)

NASD Rule 2790 or the old "Hot Issues" Rule and the old "Free-Riding and Withholding Interpretation."

Free-Riding is a practice prohibited by the Securities Exchange Commission and the NASD, in which an underwriter holds back a quantity of Initial Public Offering (IPO) shares in order to subsequently sell them at a higher price.

2.16) What is a "cabinet trade"?

An accommodation liquidations of an out-of-the-money option position. In lieu of closing the position with a "market order" a trader can close the position in a cabinet trade which the brokerage will do as a courtesy, often for zero commission and at a price of a penny for the entire lot (for the entire cabinet) of option contracts held.

In a closing transaction, the Order Book Official will accept limit orders from holders and writers of "out the money" contracts to close the positions at a total premium of $1 per contract ($.01 per share) or even less (as little as $0.000001 per cabinet has been observed). The OBO will match the orders as an accommodation, and report the executed trades to the firm that placed the order. Filing a CEA (Contrary Exercise Advice) is not appropriate, since the customer does not want to exercise the contract. 

2.17) What is "loss prevention"?

A brokerage must monitor its customer margin accounts for potential "at risk" positions that could result in a full liquidation of the account with a resulting loss to the brokerage for any negative account value.

2.18) What is the Margin Requirement for a Concentrated Account?

Example: When one position comprises greater than 70% of the value of an account the margin requirement for that concentrated position rises from say 30% to 35% due to the risk of having "all your eggs in one basket."  If the one position comprises greater than 90% of the value of an account the margin requirement for that concentrated position rises further to say 40%.

2.19) What are "seg funds"?

1 Segregated Funds are customer funds which are held by futures brokers that back up all the positions its customers hold in the markets.

2.20) What is Cash-up-front?

A requirement for funds on deposit or on receipt in a brokerage office at the time you enter your order. Cash-up-front is required to trade certain types of securities and is also required for all orders placed in accounts that have a cash-up-front restriction imposed on them.

2.21) What is a Side Letter?

A side letter is a special arrangement between a fund and an investor, granting preferential terms, often in a quid pro quo arrangement, often to the detriment of the other investors in the hedge fund. Side Pockets have been used to pocket agreement to hide poor investment decisions, resulting in misleading investors regarding the actual performance. Investors need to be alert to hedge funds giving preferential treatment to other investors.

Specialized software, like Front Arena by Sunguard and Advent Partner, is required to help the hedge funds keep track of their side deals.

2.22) What is a Side Pocket?

A side pocket is a portion of a hedge fund with a liquidity provision that differs from the rest of the fund's capital. It may have its own separate contribution and redemption rules. This is a method for the fund to invest into longer-term illiquid investments including real estate and angel financing of development stage, privately held enterprises.

2.23) What is two and twenty?

Typical compensation structure for a hedge fund manager. That is an annual fee of 2% of the total net asset value of the fund, plus 20% of the net profits realized.  Optionally, a Hurdle is a benchmark that must be exceeded before the 20% kicks-in.  And generally, any losses from prior quarters must be recovered before the 20% kicks-in.

2.24) What is Cost of Carry?

Expenses incurred while a position is being held; for example, interest on securities bought on margin, dividends paid on short positions, and other expenses.

2.25) What is the Carry Trade?

A trade where you borrow and pay interest in order to buy something else that has higher interest. For example, with a positively sloped term structure (short rates lower than long rates), one might borrow at low short term rates and finance the purchase of long-term bonds. The carry return is the coupon on the bonds minus the interest costs of the short-term borrowing. Of course, if long-term interest rates unexpectedly rose (and long-term bond prices fell as a result), the carry trade could become unprofitable. Indeed, if this occurred, there could be a number of investors trying to unwind the carry trade, which would involve selling the long-term bonds. It is possible that this could exacerbate the increase in long-term interest rates, i.e. push the rates even higher.

Carrying over the opportunity to make money by borrowing money at say 1% and then, for example, reinvesting those borrowed proceeds at 2%.

2.26) What is the Currency Carry Trade?

A strategy where an investor borrows in a foreign country with lower interest rates than their home country and invests the funds in their domestic market, usually in fixed-income securities.

There is a risk with the uncertainty of exchange rates. You've still got to pay back the money in a foreign currency. If your domestic currency falls in value relative to the currency you borrowed, then you run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

An example of a "yen carry trade" is borrowing 1,000 yen from a Japanese bank, exchanging the funds into U.S. dollars and buying a bond for the equivalent amount. Assuming that the bond pays more than the amount you must pay the bank for borrowing the funds, and the exchange rate does not move adversely, you will earn a profit.

2.27) Treasury Bonds?

Treasury notes and bonds are securities that have a stated interest rate that is paid semi-annually until maturity. Treasury bonds are long-term investments with a term greater than 10 years.  For example: The 30-Year Bond.

2.28) Treasury Notes?

Treasury notes and bonds are securities that have a stated interest rate that is paid semi-annually until maturity. Treasury notes are long-term investments with a terms of 10 years or less Notes are issued in two-, three-, five- and 10-year terms.

2.29) T-Bills?

T-bills are short-term obligations issued with a term of one year or less. They are sold at a discount from face value rather than making interest payments. The interest therefore is the difference between the purchase price and the price paid either at maturity (face value) or the price of the bill if sold prior to maturity..

2.30) TIPS?

Treasury Inflation-Protected Securities are U.S. Treasury instruments that pay a fixed rate of interest two times a year and they provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

2.31) Treasury FRNs - Treasury Floaters?

Floating Rate Notes are U.S. Treasury instruments that will pay a floating rate of interest two times a year and they provide protection against inflation. Unlike TIPS, the principal does not change with deflation. When a TIPS matures, you will be paid the original principal amount.

2.32) Other Margin Information

NASD daytrading margin FAQ

NASD margin FAQ



3.1) What is a Pattern Day Trader and the PDT rule?

Any account that executes 4 or more round-trip trades within any rolling 5 business day period, provided the number of day trades represent at least 6% of the total trading activity during the 5 business day period.  This rule became effective September 28, 2001.

NASD Rule 2520 (and NYSE Rule 431). Day Trading Margin Requirements:

Day Trading

(i) The term “day trading” means the purchasing and selling or the selling and purchasing of the same security on the same day in a margin account except for:

a. a long security position held overnight and sold the next day prior to any new purchase of the same security, or

b. a short security position held overnight and purchased the next day prior to any new sale of the same security.

(ii) The term “pattern day trader” means any customer who executes four or more day trades within five business days. However, if the number of day trades is 6% or less of total trades for the five business day period, the customer will not be considered a pattern day trader and the special requirements under paragraph (f)(8)(B)(iv) of this Rule will not apply. In the event that the organization at which a customer seeks to open an account or to resume day trading knows or has a reasonable basis to believe that the customer will engage in pattern day trading, then the special requirements under paragraph (f)(8)(B)(iv) of this Rule will apply.

(iii) The term “day trading buying power” means the equity in a customer’s account at the close of business of the previous day, less any maintenance margin requirement as prescribed in paragraph (c) of this Rule, multiplied by four for equity securities.

Whenever day trading occurs in a customer's margin account the special maintenance margin required for the day trades in equity securities shall be 25% of the cost of all the day trades made during the day. For non-equity securities, the special maintenance margin shall be as required pursuant to the other provisions of this Rule. Alternatively, when two or more day trades occur on the same day in the same customer’s account, the margin required may be computed utilizing the highest (dollar amount) open position during that day. To utilize the highest open position computation method, a record showing the “time and tick” of each trade must be maintained to document the sequence in which each day trade was completed.

(iv) Special Requirements for Pattern Day Traders

a. Minimum Equity Requirement for Pattern Day Traders - The minimum equity required for the accounts of customers deemed to be pattern day traders shall be $25,000. This minimum equity must be deposited in the account before such customer may continue day trading and must be maintained in the customer’s account at all times.

b. Pattern day traders cannot trade in excess of their day-trading buying power as defined in paragraph (f)(8)(B)(iii) above. In the event a pattern day trader exceeds its day-trading buying power, which creates a special maintenance margin deficiency, the following actions will be taken by the member:

1. The account will be margined based on the cost of all the day trades made during the day,

2. The customer’s day-trading buying power will be limited to the equity in the customer’s account at the close of business of the previous day, less the maintenance margin required in paragraph (c) of this Rule, multiplied by two for equity securities, and

3. “time and tick” (i.e., calculating margin using each trade in the sequence that it is executed, using the highest open position during the day) may not be used.

c. Pattern day traders who fail to meet their special maintenance margin calls as required within five business days from the date the margin deficiency occurs will be permitted to execute transactions only on a cash available basis for 90 days or until the special maintenance margin call is met.

d. Pattern day traders are restricted from using the guaranteed account provision pursuant to paragraph (f)(4) of this Rule for meeting the requirements of paragraph (f)(8)(B).

e. Funds deposited into a pattern day trader’s account to meet the minimum equity or maintenance margin requirements of paragraph (f)(8)(B) of this Rule cannot be withdrawn for a minimum of two business days following the close of business on the day of deposit.  

3.2) What happens once an account is classified as a Pattern Day Trader?

Pattern day trading accounts must maintain $25,000 in equity to allow unrestricted access to day trading buying power which is generally four times maintenance excess. Pattern day trading accounts with less than $25,000 will have day trading buying power limited to two times maintenance excess. In addition, a Day Trading Minimum Equity Call will be issued in the account. The call will remain open until the equity is raised to $25,000.

Officially it is said that pattern day trader accounts with less than the $25,000 minimum equity requirement should consider limiting day trading activities to cash only transactions until the minimum equity amount is reached in order to avoid a Day Trading Buying Power Call.

A Day Trading Buying Power Call (see FAQ 2.7) is issued when you do two or more day trade round trips within one single day and you then in effect have used the unreplenished day trading buying power (by buying the later positions using your regular buying power rather than the unavailable day trading buying power).

3.3) Does the IRS require a Securities Trader to be a Pattern Day Trader in order to qualify for Trader Status?

No.  The Courts do not have any such requirement. Occasionally an IRS agent doing an examination may disallow trader status on the grounds that the taxpayer is not a "day trader" flipping stocks on a daily basis, but this has no basis in law and should not be a problem if discussed with the examiner's manager,  In the worst case it is generally resolved by going to appeals to have the examiner's position reversed..

3.4) What is a Professional Trader (Subscriber)?

Any account that is not classified as a non-professional.  As a professional the account is usually charged higher fees.  Classification of a non-professional subscriber is any natural person who is not registered or qualified with:

  • The Securities and Exchange Commission (the "SEC")
  • The Commodities Futures Trading Commission
  • Any state securities agency
  • Any securities exchange or association
  • Any commodities or futures contract market or association

A non-professional subscriber is also any natural person who is not:

  • Engaged as an "investment advisor" definition consistent with Section 202(a)(11) of the Investment Advisor's Act of 1940
  • Employed by a bank or other organization exempt from registration under Federal and/or state securities laws

If you do not qualify as a non-professional subscriber, then you are a professional subscriber.


You are considered a professional if:

  1. Your account type is one of the following:
    • Corporate
    • Sole proprietorship
    • Partnership
    • Limited liability
    • Foreign corporate
    • Foreign limited liability
    • Foreign partnership
  2. You are registered or qualified with:
    • The SEC or NASD
    • The Commodities Futures Trading Commission
    • Any state securities agency
    • Any securities exchange/association
    • Any commodities or futures contract market or association
  3. Either of the following circumstances applies to you:
    • You are employed at a bank or any other financial institution that is exempt from securities registration and perform functions that would require registration or qualification if such functions were performed for an organization that was not exempt.
    • You are employed at a non-exempt workplace, but your responsibilities would require you to be registered if your workplace were not exempt.


3.5) Those Professional Trader rules sound complicated.  Can you give me more rules to really make my head spin?

Sure!  Nasdaq vender alerts makes subtle distinctions (primarily looking for who signs the subscription agreement, rather who pays the bill):

Through August 31, 2001 this was their rule:

Vendors of Nasdaq® real-time market data are required to identify the non-professional status of any subscriber for whom they are seeking to pay the lower, non-professional subscription rate for Nasdaq Level 1 ServiceSM.

To qualify for the lower, non-professional rate, an individual subscriber must be able to answer "NO" to all of the following questions:

  • Are you registered with any state, federal, or international securities agency or self-regulatory body?
  • Are you engaged as an Investment Advisor?
  • Are you employed by an organization that is exempt from U.S. securities laws that would otherwise require the individuals’ registration?
  • Is your account either billed or contracted under a business or organizational name?
  • Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer "YES" to any of these questions, Nasdaq considers the person to be a professional and ineligible for the lower fee rate.

According to the Nasdaq Subscriber Agreement and Nasdaq Vendor Agreement, the phrase "non-professional" is defined as follows:

"Non-professional" means, any natural person who is neither: (a) registered or qualified in any capacity with the SEC, the Commodities Futures Trading Commission, any state securities agency, any securities exchange or association, or any commodities or futures contract market or association; (b) engaged as an "investment advisor" as that term is defined in Section 201 (11) of the Investment Advisors Act of 1940 (whether or not registered or qualified under that Act); nor, (c) employed by a bank or other organization exempt from registration under federal or state securities laws to perform functions that would require registration or qualification if such functions were performed for an organization not so exempt. The phrase "Professional Subscriber" means all other persons who do not meet the definition of Non-Professional Subscriber.

See for a more detailed review.

The August 31, 2001 changes are found here (in bold print):

Vendors of Nasdaq® real-time market data are required to identify the non-professional status of any subscriber for whom they are seeking to pay the lower, non-professional subscription rate for Nasdaq Level 1 ServiceSM or Nasdaq Quotation Dissemination ServiceSM.

To qualify for the lower, non-professional rate, an individual subscriber must be able to answer "NO" to all of the following questions:

  • Are you registered with any state, federal, or international securities agency or self-regulatory body?
  • Are you engaged as an Investment Advisor?
  • Are you employed by an organization that is exempt from U.S. securities laws that would otherwise require your registration?
  • Is your Nasdaq Subscriber Agreement signed in a business or organizational name?
  • Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer "YES" to any of these questions, Nasdaq considers the subscriber to be professional and ineligible for the lower fee rate.

The Nasdaq Subscriber Agreement and Nasdaq Vendor Agreement, definition of the phrase "non-professional" did not change.

The rule as stated April 20, 2007:

Distributors of NASDAQ® real-time market data are required to identify the non-professional status of any subscriber for whom they are seeking to pay the non-professional subscription rates. NASDAQ is reiterating its guidance on existing NASDAQ Rules and policies and is offering further clarity on the ability to classify non-commercial organizations as non-professionals in certain instances.

Definition of Non-Professional:
Per the
NASDAQ Subscriber Agreement, "non-professional" means any natural person who is not:

  1. registered nor qualified in any capacity with the SEC, the Commodities Futures Trading Commission, any state securities agency, any securities exchange or association or any commodities or futures contract market or association;
  2. engaged as an "investment advisor," as that term is defined in Section 202(a)(11) of the Investment Advisors Act of 1940 (whether or not registered or qualified under that Act)

Please note that the phrase "professional subscriber" applies to all other persons who do not meet the definition of non-professional subscriber.

To qualify for the lower, non-professional rate, an individual subscriber must be able to answer "NO" to all of the following questions:

Question Discussion
Is the NASDAQ Subscriber Agreement signed in the name of a business or commercial entity? Because a non-professional subscriber must be a natural person, the NASDAQ Subscriber Agreement1 must be signed by an individual.
If the NASDAQ Subscriber Agreement1 is signed in the name of a business or commercial entity, it is considered professional use.
Is the subscriber a subcontractor or independent contractor? Because subcontractors and independent contractors are deemed to be extensions of the firm rather than natural persons, they are considered professionals.
If the subscriber is a subcontractor or independent contractor or has a business relationship with the firm, it is considered professional use.
Is the subscriber a securities professional? If the subscriber is:
  • registered with any state, federal or international securities agency or self-regulatory body.
  • engaged as an Investment Advisor.
  • employed by an organization that is exempt from U.S. securities laws that would otherwise require registration?
Any use by a securities professional is considered professional use.
Is the subscriber using or planning to use NASDAQ data for any reason other than personal use? Any use of data for business, professional or other commercial purpose is not compatible with non-professional status, even if the commercial use is on behalf of an organization that is not in the securities industry.


  • Are you registered with any state, federal, or international securities agency or self-regulatory body?
  • Are you engaged as an Investment Advisor?
  • Are you employed by an organization that is exempt from U.S. securities laws that would otherwise require your registration?
  • Is your Nasdaq Subscriber Agreement signed in a business or organizational name?
  • Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer "YES" to any of these questions, Nasdaq considers the subscriber to be professional and ineligible for the lower fee rate.

The Nasdaq Subscriber Agreement and Nasdaq Vendor Agreement, definition of the phrase "non-professional" did not change.


3.6) Does the IRS require a Securities Trader to be a Professional Trader (Subscriber) in order to qualify for Trader Status?

No.  The Courts do not have any such requirement. Occasionally an IRS agent doing an examination may disallow trader status on the grounds that the taxpayer is not a "day trader" flipping stocks on a daily basis, but this has no basis in law and should not be a problem if discussed with the examiner's manager,  In the worst case it is generally resolved by going to appeals to have the examiner's position reversed..

3.7) What is Nasdaq Level I ServiceSM ?

This is the quote that is published as the "real-time quote" real-time bid/ask quotes for securities trading on the Nasdaq stock market. This type of access does not disclose who is bidding or asking for the stock, and it does not show the "size" or how many shares they are looking for.

3.8) What is Nasdaq Level II ServiceSM ?

This provides real-time access to the quotations of individual market makers along with the order size behind the quoted price. This level of access also gives the name of the market maker looking to trade the stock. It allows traders to see what market makers are showing the most interest in a stock and to identify the patterns for each market maker.

3.9) What is Nasdaq Level III ServiceSM ?

This is a trading service consisting of everything in Level II plus the ability to enter quotes, execute orders and send information. This service is generally restricted to NASD member firms that function as registered market makers. Level III allows you to enter bid/ask quotes as the trades are being executed right in front of you. It is the fastest way to execute a trade and is typically found only on the trading floors of brokerage firms and market makers.

3.10) What are Tape A securities (A/NYSE)?

These are NYSE-listed securities.

3.11) What are Tape B securities (B/Regional AMEX)?

These are AMEX and Regional exchange-listed securities.

3.12) What is the Consolidated Tape?

This is Tape A and Tape B taken together.

3.13) What are Tape C securities (C/Nasdaq)?

These are stocks listed on the NASDAQ Exchange or NASDAQ Small Cap Market.  It is overseen by the OTC/UTP Operating Committee.

3.14) What is a Prop Trader (the real deal)?

Proprietary Trader.  One who is involved with transactions with a securities firm that affect the firm's accounts (or his own linked account within the firm) but not affecting the accounts of the firm's clients.

Strictly speaking a prop trading firm is one where you would trade the firm's capital (and only their money). But today the most common so-called "prop firms" are ones where you put up $5,000, $10,000 or more and then you trade using 10:1 or 20:1 intraday leverage.  These are also called "trading arcades" by (the) Hoi Polloi.

3.15) What is a Prop Trader ("arcade trading")?

Called "trading arcades," because these so-called "prop firms" push you to churn your account, so that they can make their money off the commissions.  If you are profitable they also take a percentage of your profits, but that's just an added bonus to them.  Commissions are their main income.

3.16) What is a Quant Trader?

Quant Traders use quantitative trading strategies for a mathematical or mechanized approach in identifying patterns in stock price behavior.  Hedge Funds and Proprietary Trading desks at Wall Street firms are often involved, using technology analysis (price and volume driven) or fundamental analysis (estimate revisions, growth, etc.)



4.1) What is "Ticker Spam"?

A tactic by web-savvy publicists involves loading a news release up with dozens, or even hundreds, of company ticker symbols to increase the number of places online the release will be seen. For example with MSFT or DELL in news release (even if the story has absolutely nothing to do with Microsoft or Dell) millions of shareholders in these two broad based stocks will be forced to see the news release.

This "ticker spamming" results in news release archiving on Yahoo!, Bloomberg, AOL and online brokerage sites. It also makes investors angry when they have to wade through headline after headline of unrelated copy before finding the news that really matters to them.

4.2) What is a Controller?

A controller refers to a person within an organization that takes care of the company’s financial accounts. The word controller originated from the ‘countreroller’ that refers to the person responsible for keeping ledger accounts. The title controller is usually given to an individual who works in a private organization. In today’s business terminology, controllers are usually referred to as ‘finance controllers’ who basically perform the same functions as a controller where they manage the financial accounts of a business and ensure that the quality and accuracy of financial reporting of the company are maintained up to standard.

4.3) What is a Comptroller?

Comptrollers perform very similar tasks to a controller. A comptroller, however, may hold a higher ranking position in the organization and holds a higher level of responsibility. The title comptroller is usually given to an individual who works in a government organization and holds similar responsibilities to a controller. The work of a comptroller usually starts once the financial accounts have been prepared and passed over by the company’s accountant for review by the comptroller to ensure accounts are prepared according to various accounting and quality standards. They may also be responsible for overseeing budgets and comparing how actual numbers are similar to or vary from budgeted amounts.

Controller vs Comptroller
As can be seen from the descriptions above, comptroller and controllers perform very similar tasks in the organization and almost the same to one another. The major difference lies in the type of organization each one performs. A comptroller usually works for a government organization, whereas a controller will usually work in a private business. Further to this a comptroller is perceived to be of higher ranking than a controller and is involved in the internal costs and profits, whereas a controller will be more involved in the costs and profits created at the final stage of the product/service.

What is the difference between Controller and Comptroller?

  •  The words ‘comptroller’ and ‘controller’ are closely related to each other in the field of finance, and refer to finance personnel who conduct activities similar to one another.
  •  A controller refers to a person within an organization that takes care of the company’s financial accounts.
  •  Comptrollers perform very similar tasks to a controller. A comptroller, however, may hold a higher ranking position in the organization and holds a higher level of responsibility.
  •  The major difference lies in the type of organization each one performs. A comptroller usually works for a government organization, whereas a controller will usually work in a private business.

4.4) What is Channel Stuffing (legal)?

Channel stuffing is when a supplier encourages a wholesaler or retailer to increase its inventory. One technique is a temporary wholesale price discount that creates an incentive for the retailer to forward

4.5) What is Channel Stuffing (illegal)?

Illegal channel stuffing is when a supplier encourages a wholesaler or retailer to appear to increase its inventory. One technique is to agree to simultaneously buy back the inventory at a price higher than the price it was sold for as an incentive for the customer to play along.

4.6) What is Bill and Hold (legal)?

As described by the U.S. Defense Logistics Agency:
This method allows today’s cost-conscious customer to take advantage of the savings of a non-depot shipment within the needed response time. In clothing and textiles, the manufacturer produces the item, is paid for his product, and then places it into DLA-owned inventory. The vendor receives orders only for what is on hand at his location, eliminating the guesswork often encountered under a quick-response (QR) contracting technique. Orders are shipped from the contractor’s depot directly to the customer. Contractor locations operating under bill and hold are exempt from the depot surcharge, which saves the customer money. Shipments from vendors are under a four-day delivery requirement, which equals the current depot delivery time.

4.7) What is Bill and Hold (possibly misleading)?

As described by the Journal of Accountancy:
One of the most common schemes is the bill-and-hold sales transaction. While it's not necessarily a GAAP violation, it's often associated with financial frauds and calls for deeper investigation. The SEC says that all of the following conditions must be met for revenue recognition to be appropriate:

  • The risks of ownership must have passed to the buyer.
  • The customer must have a commitment to purchase, preferably in writing.
  • The buyer must request the bill-and-sale transaction and substantiate a business purpose for it.
  • A fixed delivery date must exist.
  • The seller must not retain any significant specific performance obligations.
  • The goods must be complete and ready for shipment and not subject to being used to fill other orders.

4.8) What is Bill and Hold (illegal)?

GAAP requires that revenue recognition be based on whether the revenue is realized or realizable and earned. Revenues commonly are recognized at the time of sale, usually meaning delivery. Because revenue recognition on bill-and-hold transactions departs from this general practice, the auditor must know how and why a company maintains that using this method is justified. In recent enforcement actions, the SEC said a transaction must meet all of the following conditions to justify revenue recognition:

 The risks of ownership must have passed to the buyer.

  •  The company must have from the customer a fixed commitment to purchase, preferably in writing.
  • The buyer—not the seller—must have requested the transaction and must have a substantial business purpose for a bill-and-hold deal.
  • There must be a fixed delivery date that is reasonable and consistent with the buyer's business purpose.
  • The seller must not retain any significant specific performance obligations, such as an obligation to assist in resale.
  • The goods must be complete and ready for shipment and not subject to being used to fill other orders.
  • The exhibit, a confirmation request letter, is an example of how the independent auditor can confirm whether a transaction meets the revenue-recognition conditions.

The SEC has emphasized that the above is not a simple checklist. A transaction might meet all the criteria and still fail the revenue-recognition guidelines. The following factors also must be considered:

  • The date the seller expects payment and whether the seller has modified its normal billing and credit terms for the buyer.
  •  The seller's past experiences with bill-and-hold transactions.
  • Whether the buyer has the expected risk of loss in the goods' market value.
  • Whether the seller's custodial risks are insurable and insured.
  • Whether Accounting Principles Board Opinion no. 21, Interest on Receivables and Payables (on discounting the related receivable), applies.
  • Whether the business reasons for the transaction have introduced a contingency to the buyer's commitment.

4.9) What is Shipped in Place?

Customers sometimes request that goods that are ready for delivery be "shipped in place" due to their inability to accept delivery at that time. In such a situation, the customer generally pays for the goods upon shipment in place and the seller treats the goods as delivered. Is revenue recognition appropriate in such cases?

Generally revenue recognition is not appropriate unless the customer has taken title to the goods and assumed the risks and rewards of ownership

In other words, shipment in place will be sufficient delivery for revenue recognition purposes if it was done at the customer's request and the parties' rights and obligations after shipment in place are identical or similar to what the would be had actual delivery been made.

4.10) What is Pretexting?

A controversial data-gathering technique. Pretexting is the act of pretending to be someone who you are not by telling an untruth, or creating deception. The practice of pretexting typically involves tricking a telecom carrier into disclosing personal information of a customer, with the scammer pretending to be that customer.

It's illegal. The Gramm-Leach-Bliley Act outlaws unauthorized attempts to gain personal nonpublic financial information. (Lawyers disagree on whether the ban applies to phone records.) Phone providers view pretexting as illegal and sue those who attempt it. This is why many investigators say they've stopped the practice. A bill in the California State Senate could make the offense a state crime punishable by up to a year in jail.



5.1) I am single and file form 1040.  If I decide to start trading for a living as a sole proprietor, how do I tell the IRS I'm going to file under Trader Status and when must I tell them?

You tell them by filing a Schedule C along with your form 1040.  You usually need to do that by April 15th of the following year.

5.2) Ok, so I'm going to start filing under Trader Status as a sole proprietor, how do I now tell the IRS I'm going to use the mark-to-market method of accounting right from the start and when must I tell them?

You tell them by filing an election statement attached to either form 1040 or form 4868 no later than April 15th of the year in which you started trading.  e.g. the previous year's tax return. The election statement must be clear that it applies to your securities trading or your commodities trading (or both your securities trading and your commodities trading).

5.3) Hold on!  What if I only decided to start trading  as a sole proprietor after April 15th?

Then you may file under Trader Status and take all the deductions allowed against your income.  But you may not use the mark-to-market method for this, your first calendar year of trading, unless you somehow had the foresight to file the mark-to-market election with the IRS by April 15th.

5.4) What?  But that isn't fair!

I agree, it is not fair.  It is simply the law, as it now stands.

5.5) So I file under Trader Status as a sole proprietor for the first year, how do I then elect to use mark-to-market for a following year and when must I tell the IRS?

You tell them by filing an election statement attached to either form 1040 or form 4868 no later than April 15th of the year which you will start using the mark-to-market method and you also file two copies of form 3115; one with your form 1040 by April 15th of the next year and at the same time, one with the National Director's office.

5.6) You keep mentioning trading as a "sole proprietor."  What if I use a separate entity, does this make any difference?

The rules are basically the same for trading through an entity, with one notable exception:  If the entity (or taxpayer) was not required to file a federal income tax return for the taxable year immediately preceding the election year (the year before the year security trading started), then the requirement to file the mark-to-market election along with the tax return for the year before the election is waived.  In lieu of that an appropriate election is filed in the taxpayer's own files, and then when the first federal income tax return is filed, the election is attached to that tax return.

5.7) What is UBTI?

The Unrelated Business Taxable Income tax is imposed on the unrelated business taxable income of most exempt organizations. The purpose of the tax is to prevent unfair competition by exempt organizations that could use their tax exempt status to gain an advantage over taxable businesses. Gross income subject to the tax consists of income from a trade or business activity, if the business activity is not substantially related to the organization's exempt purposes and is regularly carried on by the organization. The deductions directly connected with the business income as well as specified modifications are taken into account in determining unrelated business taxable income. The tax is imposed at the corporate or trust income tax rates, depending upon the legal form of the exempt organization.

Capital Gains, dividends, interest, rents, royalties, and similar payments are normally excluded from the scope of the unrelated business income tax, but such investment income is subject to tax if derived from a controlled entity or from debt-financed property e.g. use of margin debt.

There is an annual deduction that offsets the first $1,000 of UBTI.  The tax on such income is called unrelated business income tax (UBIT).

Tax-exempt organizations include Self-Employed 401(k) Plans, IRA's, Keogh Plans and other retirement plans.


UBTI is an acronym for Unrelated Business Taxable Income. UBTI generally occurs when a plan generates income from operating a business, acquiring or improving property through debt financing, or certain partnerships from which the plan owns an interest.  Refer to IRC § 512(a) (1).

UBTI is income generated by a trust when engaging in business activity that is unrelated to its general purpose. Self-directed IRAs were created for long term investing, and when it purchases an asset that produces income unrelated to the intent of the “plan” then that income is subject to taxation – which means your IRA will be paying taxes on profits generated from your business purchase.

UBTI is subject to Unrelated Business Income Tax or UBIT. UBIT is a very steep and complicated form of taxation. Much like Federal Income Taxes, UBIT is set to a laddered schedule. However it is compressed on much tighter levels. In 2005, UBIT is taxed at the following rates:

  • $0 - $2,000 = 15%
  • $2,000 - $4,700 = 25%
  • $4,700 - $7,150 = 28%
  • $7,150 - $9,750 = 33%
  • Over $9,759 = 35%

UBIT was implemented to keep the playing field even between plans that open businesses and the typical small business owners. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT mitigates that risk for the typical business owner.

UBIT is one of the most complicated areas of taxation in the Internal Revenue Code. It is imperative you seek professional help to make sure you do not incur any severe tax penalties.

5.8) What is UDFI?

The Unrelated Debt Financed Income tax is imposed on the unrelated debt financed income of most exempt organizations. The purpose of the tax is to prevent unfair competition by exempt organizations that could use their tax exempt status to gain an advantage over taxable businesses. Gross income subject to the tax consists of income from an activity that creates income through the use of debt or leverage. The deductions directly connected with the debt financed income as well as specified modifications are taken into account in determining unrelated debt financed income. The tax is imposed at the corporate or trust income tax rates, depending upon the legal form of the exempt organization.

There is an annual deduction that offsets the first $1,000 of UDFI/UBTI.


UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1).

For example: Your self-directed IRA purchased a piece of raw land in 1999 for $100,000 using a non-recourse loan with 50% down. In 2004, you sold that same piece of property to a developer for $200,000. Your IRA had secured a 50% loan to value (LTV) on the property, and let’s assume that you never paid down any principle because it was an interest only note. Fifty percent of the profit would be subject to UBIT because it was generated by money that was not related to the self-directed IRA.

As a side note – UDFI does not apply if the debt is paid off 12 months prior to the sale of the property. If the self-directed IRA can pay off its loan early – it may not have to pay UBIT at all! If you are intending to purchase assets inside a self-directed IRA using debt-financing, please consult with a competent tax advisor.

5.9) Can an IRA account be a type 2 "Margin Account" or must it be a type 1 "Cash Account"?

There is no SEC law or regulation making IRA Margin Accounts illegal.  There is no DOL law or regulation making IRA Margin Accounts illegal.  There is no IRS law or regulation making IRA Margin Accounts illegal.

In spite of this, many retail brokerage houses do not allow margin accounts for IRAs and other retirement plans.

One big reason for this is that SEC staff opinions erroneously informed brokerage houses that it was illegal, per the IRS. The SEC punctuated this by prosecuting Ameritrade/Datek in 2002 with a fine in the amount of millions of dollars allegedly for this offense.

It was typical bureaucratic confusion. The facts are that the Ameritrade fine was for allowing free-riding in cash accounts (not necessarily IRA accounts).

The SEC had allowed their non-tax-experts to go off and publish "staff opinions" that said the IRS outlawed margin borrowing. (but they had misread the gobbledy-gook words in the IRS regs) spent about 12 months or so "battling" on a professional level with the SEC until they agreed to retract all "staff opinions" that said the IRS outlawed margin accounts. I then also continued the "battle" to get the SEC to publish a firm retraction and correction of their prior error (and not just quietly withdraw the staff opinions).

But understandably to "save face," they would not do so until the IRS affirmatively told them that the documentation package I had put together for them got an official IRS blessing.

Unfortunately the IRS has many other projects on their plate and they have kept putting off this low-priority SEC request.

5.10) What is a Federal Tax Lien?

A federal tax lien (pronounced "lea-en" similar to the 2nd syllable in the word "alien") is the U.S. Government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after the IRS:

  • Assesses your liability;
  • Sends you a bill that explains how much you owe (Notice and Demand for Payment); and
  • You neglect or refuse to fully pay the debt in time.

5.11) What is a Tax Levy?

A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. Whereas, a levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.

5.12) What is the U.S. Code?

The United States Code is most all of the laws of the United States of America.  The tax laws are the Internal Revenue Code which is also know as "Title 26" as contained with the U.S. Code.   You may search the U.S. Code here:



6.1) What are the Pink Sheets?

Named for the color of the paper originally used for the daily listings of bid and ask prices for over-the-counter stocks along with a list of brokerages making a market.  In generaly usage this is most particularly referring to those where a price is not listed elsewhere.

In 1999 these unlisted quotations became available via the EQS or Electronic Quotation Service, an Internet-based, real-time quotation service for OTC equities and bonds for market makers and brokers.

6.2) What are the Yellow Sheets?

Similar to the pink sheets, except the prices listed are for taxable corporate bonds and other debt. A daily bulletin from the National Quotation Bureau which provides updated bid and ask prices for over-the-counter corporate bonds along with a list of brokerages which make a market in those bonds.

6.3) What are Blue Sheets?

Named for the color of the paper originally used to provide the SEC with detailed information about trades performed by a firm and its clients. The information includes the security's name, the date traded, price, transaction size, and a list of the parties involved.

6.4) What is the Beige Book?

Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis, published eight times per year.

6.5) What is a Green Shoe?

A "green shoe" is the underwriter's option to buy additional shares (usually 15%) at the offering price from the company selling new shares. During the 1920's a new share offering by The Green Shoe Company was the first time underwriters received an option to buy more shares at the offering price.

6.6) What is Breaking Syndicate?

The ending of the syndicate of investment bankers (underwriters) involved in the distribution of a new issue of securities (IPO). Upon the breaking of the syndicate, the individual members are free to trade the securities in the secondary market without price restrictions.

If the secondary market sees a price drop and the underwriters are unable or unwilling to support the price (purchase back shares as principal or as agent) this is called "Breaking Syndicate."

6.7) What is a White Shoe?

It is slang for broker-dealers who are strongly against hostile takeover practices.

Also "white shoe" is a person employed in corporate finance. At the turn of the century those in corporate finance were among the hoity-toity of society who were able to wear white shoes since they never did anything that would get them dirty.

Similarly it refers to the hoity-toity who wore the white buck shoe as a fashion requirement within elite social organizations in the 1950s. Even the haughty Consuls of Ancient Rome wore white shoes.

6.8) Who are the Hoity-Toity?

Pronounced "hoy tea toy tea" is a term used by Hoi Polloi with distain to refer to haughty pretentious people or pejoratively of the bourgeoisie.

6.9) Who are (the) Hoi Polloi?

Pronounced "hoi-puh-LOI" (also sometimes misspelled as Hoi Poli) are the common people, très vulgar, the plebians (Ancient Rome), the proletariat (K. Marx), the proles (G. Orwell), déclassé & déclassée, the peons and scrubs, the homies, basically all us schmucks not born with the silver spoon in the mouth.

6.10) CTA?

Commodity Trading Advisor.  An individual or firm which advises others about buying and selling futures and/or futures options.

6.11) CPO?

Commodity Pool Operator.  When an entity is used for trading it may be required to register with the Commodities Futures Trading Commission (CFTC) as a pool operator.  The rules are relaxed if the number of investors is less than 15 and the total amount of money involved is less than $400,000.

6.12) CFA®?

Chartered Financial Analyst® certification.

6.13) CMT?

Chartered Market Technician certification.

6.14) PM?

Portfolio Manager.

6.15) PDT?

Pattern Day Trader.

6.16) DBA or d/b/a?

"Doing Business As"  Using a pseudonym.  Using a name for a business or operation that does not include the legal name of its proprietor, the names of all partners, or the official registered name of the entity that owns it.

6.17) TBA?

"To Be Announced", "To Be Ascertained", "To Be Arranged" or "To Be Advised" at a later point in time.

6.18) TBC?

"To Be Confirmed" at a later point in time.

6.19) TBD?

"To Be Determined", "To Be Decided" at a later point in time.

6.20) TBR?

"To Be Released", "To Be Reviewed", "To Be Revealed" at a later point in time.

6.21) A&R?

A&R stands for "artists and repertoire," but many musicians joke that A&R stands for "attitude and rejection."

6.22) JBO?

Joint Back-Office.  Section 220.7(c) of Regulation T authorizes the creation of JBO arrangements. These JBO arrangements permit "a creditor [to] effect or finance transactions of any of its owners if the creditor is a clearing and servicing broker or dealer owned jointly or individually by other creditors." 12 CFR 220.7(c).

Arthur Levitt , Chairman of the U.S. Securities and Exchange Commission September 16, 1999 said:
When day-trading firms are organized as LLCs and individual day traders contribute to the firm's capital, the day traders are permitted to trade using the firm's capital. These LLC firms typically participate in joint back office ("JBO") arrangements, which allow them to enhance their borrowing power.  JBO arrangements have become popular because they allow day-trading firms to receive preferential margin treatment from their clearing firms. Specifically, a day-trading firm that participates in a JBO arrangement can receive credit from its JBO clearing firm on "good faith" terms. As a result, the customer margin requirements found in Regulation T and SRO rules do not limit the extension of credit to a JBO participant. Rather, credit can be extended for up to 100 percent of the purchase price of the securities. As discussed below, the SROs have proposed revisions to their rules that would make these JBO arrangements more difficult to use.

Because of the borrowing power permitted by JBO arrangements, the leverage of day-trading firms organized as LLCs is limited only by the net capital rule. This essentially allows firms to leverage their position 6 to 1, rather than the 2 to 1 leverage allowed day traders under SROs' rules.

General rules:

1. Each JBO participant must be registered as a broker-dealer pursuant to Section 15 of the Securities Exchange Act of 1934 and subject to the capital requirements prescribed by Rule 15c3-1 therein; and shall not be eligible to operate under the provisions of SEC Rule 15c3-1(b)(i).

2. Each JBO participant must meet and maintain a minimum account equity requirement of $1,000,000 with each clearing broker-dealer where a JBO account is carried. If equity is below $1,000,000 the carrying organization must issue a call for additional funds or securities which shall be obtained within five business days. If funds or securities sufficient to eliminate the deficiency are not received within 5 business days, the carrying organization must margin the account in accordance with the requirements prescribed for a customer in Regulation T and Exchange Rule 12.3.

3. Each JBO participant must meet and maintain the ownership standards established by the clearing broker-dealer; and

4. Each JBO participant must employ (or have access to) a qualified Series 27 principal.

6.23) ROT?

Registered Options Trader engage in market making on the Floor of the exchange.

Former ROTs trading from off-Floor become subject to the following rules and requirements not generally applicable to ROTs:

  • Off-Floor traders are subject to the SEC Net Capital Rule 15c3-1 and are required to maintain minimum net capital of at least $100,000 at all times. The Net Capital Rule contains provisions on capital withdrawals, haircuts, undue concentration charges, subordinated loans and notification for certain events that do not apply to most ROTs.
  • Off-Floor traders become subject to filing quarterly FOCUS Reports and, in the interim months, a Net Capital Computation. In addition, off-Floor traders are required by SEC Rule 17a-5 to have an annual audit performed by an independent accountant.
  • To take advantage of the greater leverage available, some off-Floor traders establish a Joint Back Office ("JBO") facility with their clearing firm1. While this facility can exempt the JBO participant from Regulation T margin requirements on positions, Amex Rule 462 (h) requires that the JBO participant maintain at least $1 million equity in an account at the clearing firm. Failure to do so for more than five consecutive days will cause the JBO participant to become subject to Regulation T margin. JBO participants, moreover, are required to have a qualified Financial and Operational Principal associated with the firm to ensure that the firm is aware of and complies with all of the pertinent rules and requirements.

6.24) RIA?

Registered Investment Adviser.

6.25) IAR?

Investment Adviser Representative.  IARs work for RIA firms.

6.26) TICK?

This is the net change of all NYSE stocks on an uptick minus all NYSE stocks on a downtick. Plus or minus 1000 tends to be an extreme reading.

6.27) TRIN?

The TRIN (also know as the Trading Index and the ARMS Index) was invented by Richard Arms in the 1970s. It is calculated as follows:  (Advancing issues / Declining issues) divided by (Advancing volume / Declining volume).  If the index is above one, the average volume of stocks that fell on the NYSE was greater than the average volume of stocks that rose.  If the index is below one, then the converse is true.  We watch the direction TRIN is moving to indicate the overall trend of the market. For example, if the TRIN goes from .80 to 1.00, this would indicate selling is coming into the market.

6.28) DSRO?

Designated Self Regulatory Organization.

6.29) SRO?

Self Regulatory Organization, i.e. not regulated directly as a government agency.  NASD is a SRO.

more often it is used to mean: Standing Room Only

6.30) NASD?

The National Association of Securities Dealers also known as the NASD, is the regulatory body primarily responsible for the regulation of persons involved in the securities industry in the United States. The Securities and Exchange Commission delegated this responsibility to the NASD. The NASD is a Self Regulatory Organization, or SRO, in that it is not directly a government agency.

All firms dealing in securities that are not regulated by another SRO such as the Municipal Securities Rule making Board, the MSRB, are required to be member firms of the NASD. Also, persons licensed to make securities transactions with the public are known as registered representatives.

6.31) CFTC?

Commodity Futures Trading Commission is the federal regulatory agency established by the CFTC Act of 1974 to administer the Commodity Exchange Act.

6.32) CME?

Chicago Mercantile Exchange.

6.33) FCM?

Futures Commission Merchant is a merchant involved in the solicitation or acceptance of commodity orders for future delivery of commodities related to the futures contract market.  A futures commission merchant is able to handle futures contract orders as well as extend credit to customers wishing to enter into such positions. These include many of the brokerages that investors in the futures markets deal with.

6.34) RFC?

Regulated Futures Contracts are approved by the Commodity Futures Trading Commission.

6.35) DTC?

Depository Trust Company is the central depository for the brokerage community where stock and bond certificates are deposited or transferred by the broker participants. The main function of DTC is to clear and settle stock trades and to provide custody of securities in an automated environment. For every trade, there is a buyer and a seller. DTC provides an efficient and safe way for the buyer and seller to exchange securities electronically and in a centralized location eliminating the need for physical stock certificates and time for transit.

DTC is a member of the Federal Reserve system, owned by the Depository Trust and Clearing Corporation (DTCC). DTCC, in turn, is owned by several banks, brokerage houses and trading exchanges.

6.36) DDT?

Digital Delivery Terms:

Delivery vs. Payment - the delivery of securities in exchange for an asset, usually money.

Delivery vs. Receipt - the delivery of securities in exchange for a signed receipt for the securities.

6.37) EFP?

Exchange for Physical or Exchange of Futures for Cash- A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously. Also called AA (Against Actuals) or Ex-Pit transactions.

6.38) TOD?

Transfer On Death.  A natural person may hold accounts as TOD so that upon their demise the account bypasses probate and bypasses their will.  JTWROS and Tenants in the Entirety may also have TOD accounts.

6.39) JTWROS?

Joint Tenants with Rights of Survivorship.  When one party dies the account bypasses the decedent's will going directly into the survivor's ownership.

6.40) FAFSA?

Free Application for Federal Student Aid.

See Section 2 - Student Status for rules when parent's tax return is necessary.
Dependency Status Worksheet - Worksheet - Federal Student Aid

Is FAFSA really due in February?  You should try to file as soon after January 1st as possible because the "powers that be" need to work on your application.  But the fact is that you can submit the application on an honest, best efforts basis (for example, using the prior year's data as a guide) and then amend the submission at a later time.  FAFSA calls amending the application "making corrections" to the application, and they allow such corrects to be made as much as a full year after the initial due date. It is generally most advisable though to have the final amended numbers submitted prior to the start of the semester.

6.41) EULA?

End-User License Agreement  A legal contract between the manufacturer and/or the author and the end user of an application or software program. This agreement generally tells how the software can and cannot be used and any restrictions imposed (e.g., most EULA’s of proprietary software prohibit the user from sharing the software with anyone else).

The EULA also is often referred to as the software license or user license.

6.42) UGMA?

Uniform Gifts to Minors Act which has been superseded by the Uniform Transfers to Minors Act (UTMA) in some States.

6.43) UTMA?

Uniform Transfers to Minors Act.  This is a trust like any other trust except that the terms of the trust are set in the state statute instead of being drawn up in a trust document.

6.44) UTMA regret?

The most common reason for regret over a custodial account is a realization that the child may not handle a large sum of money in a mature way at the age when control passes. When your child is 8, you imagine he or she will be a thoughtful young adult when the account passes to the child's control. Ten years later you realize that your child still has a lot of growing up to do.

The second most common reason for UTMA regret is learning how the account will affect eligibility for financial aid. Often the original motivation for the account was college savings. Ironically, using UTMA to put college savings in your child's name can make it more difficult to finance higher education, because the financial aid formula in effect imposes a penalty for assets owned by the child.

There's a third reason for UTMA regret. Sometimes the parents put a good chunk of money into the account and then find that they need it. Maybe they're trying to come up with a down payment for a new home. Possibly they've simply run into hard times. It's hard to stare a legitimate financial need in the face knowing the cash you need is sitting right there in the child's account.

Another problem that sometimes comes up: parents set up an account for one child and now there are other siblings. If the parents do not have enough wealth to establish comparable accounts for the younger brothers and sisters, they're likely to regret having made the oldest child so wealthy.

Finally, I sometimes hear from people who simply had no idea what an UTMA account was until after they set it up. They thought it was a way of designating a future gift, which they could change at any time before control passed to the child. No one told them they were making a current, irrevocable gift when they transferred cash or other assets to the account.

6.45) PWBA?

Pension and Welfare Benefits Administration under the U.S. Department of Labor.

6.46) EBSA?

Employee Benefits Security Administration.  The Pension and Welfare Benefits Administration (PWBA) has changed its name to the Employee Benefits Security Administration (EBSA). The agency has a new Web site address,  and a new address for electronic inquiries, exemption procedures:

6.47) PIPEs?

Private Investments in Public Equities.  Typically these are private placements of unregistered securities.  Observation: After years (decades actually) of telling the SEC in detail about abuses with PIPEs and how the unregistered securities were used to do naked shorting or a virtual shorting-against-the-box -  which in some cases started a short-selling death-spiral making the PIPEs investors rich at the expense of the general public, finally the SEC on March 14, 2006 caught up with and gave a token fine to three hedge funds and their portfolio manager (Business Week, March 27, 2006, page 12).   White paper report

6.48) CIL?

Cash-In-Lieu (of fractional stock shares).  During a distribution to shareholders at large, a shareholder might receive cash-in-lieu of physical delivery if the item to be delivered is unavailable or less than a whole unit is required by the contract. An example of the latter would be a cash-in-lieu payment for a fractional share due in a stock dividend distribution.

6.49) CUSIP?

Committee on Uniform Security Identification Procedures. The number consists of nine characters (including letters and numbers) that uniquely identify a company or issuer and the type of security. A similar system is used to identify foreign securities (CUSIP International Numbering System).

6.50) ACAT?

Automated Customer Account Transfer Service (ACATS) is the National Securities Clearing Corporation's (NSCC) central processing system for the fully automatic, electronic transfer of positions and accounts between brokerage firms that are both participants of the NSCC's ACAT program.

6.51) CC&R?

Covenants, Conditions and Restrictions are the governing documents that dictate how a homeowners association operates and what rules the owners and/or their tenants and guests are subject to. These legal documents might also be called the bylaws, the master deed, the houses rules or another name. These documents and rules are legally enforceable by the homeowners association, unless a specific provision conflicts with federal, state or local laws.

6.52) F9 Monkey?

A job description in the credit derivative industry.  These particular employees simply had to press "F9" on their keyboard after entering some basic information and the results of sophisticated algorithms would appear on their computer monitors, even if the employee had little or no idea or understanding about what was going on to support to computations.
When the financial crisis hit and the markets crashed, these users would keep pressing F9 over and over and get numbers that were totally unexpected. They'd sit in bewilderment and ask: "How can we have lost so much money?"   "What happened?"

6.53) SIP?

Securities Industry Processor consolidates and disseminates all securities prices for the Nasdaq.

6.54) DDoS?

Distributed Denial of Service is where an extremely large number of computer systems are coordinated and used to target a single computer system with the purpose of overloading it and thereby causing a denial of service to the users.

6.55) BCP?

Business Continuity Plan details how, in the event of an internal or external threat, employees will stay in touch and keep doing their jobs when faced with a disaster or emergency, such as a fire at the office or a DDoS cyber-attack.

6.56) COOP?

Continuity Of Operations Plan; Continuity of Operations; Continuity Operations Continuing Capabilities are other names for BCP.

6.57) more...

Financial Management, Analyst, and Planning Designations




7.1) ARM?

Adjustable Rate Mortgages. A mortgage loan where the interest rate on the note is periodically adjusted based on an financial index.

7.2) LIBOR?

London Interbank Offered Rate (pronounced LIE-bore) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR is the opposite of the London Interbank Bid Rate (LIBID).

7.3) Prime lending rate?

Originally this was the rate of interest at which banks would lend money to their most favored customers, those with the highest credit rating. Since approximately December 2008 the prime rate is about 300 basis points above the federal funds rate.  The lending rate since then has dropped much lower than the prime rate.

7.4) Federal funds rate?

The rate that banks charge each other for overnight loans made to fulfill reserve funding requirements.  The Federal Open Markey Committee (FOMC) meets eight times per year to set a target for the federal funds rate.

7.5) A-paper?

A-paper is a term to describe a mortgage loan for which the asset and borrower meet the following criteria:

  • In the United States, the borrower has a FICO credit score of 680 or higher
  • The borrower fully documents his income and assets
  • The borrower's debt-to-income ratio does not exceed 35%
  • The borrower has funds on hand amounting to two months of mortgage payments after closing
  • The borrower puts in a down payment comprising at least 20% equity

Meeting the above characteristics, can result in an A-paper loan with the lowest cost and interest rate.

7.6) Alt-A?

Alternative A-paper.  The Alt-A product is primarily credit-score driven, as its borrowers don’t have proof of income from traditional employment. The Alt-A loan alleviates the challenges associated with due diligence, such as providing income verification and documentation of assets. On the flip side, for this convenience, borrowers do pay a slightly higher interest rate, usually from a quarter-point to a half-point higher than traditional, fully documented loans.

Similar to: "stated income" "
SISA - stated income, stated assets" "no doc" or euphemistically as "liar" loans.

7.7) Subprime?

Credit extended to people who would otherwise not be able to have access.  The lending practice lets in borrowers who would otherwise be excluded: the young, the discriminated-against, the people without a lot of money in the bank to use for a down payment.

7.8) NENQ?

Non-Escalating Non-Qualifying assumable mortgage loan with a "subject to" provision that allowed a buyer of the property to assume the liability to repay the balance on the mortgage loan.

If you have the home in the name of an LLC or other entity, this entity should be listed as an "Additional Interest" (NOT the ‘Additional Insured‘ in most cases – there is a blurry legal difference in these terms that actually matters). All property and liability coverages should carry over to the entity listed as the ‘Additional Interest’ while, in many cases, only liability protection extends to "Additional Insureds." Also most carriers will not allow a policy for personal residential property to be issued with a commercial or corporate entity as the Primary Insured. 

7.9) FICO?

Fair Isaac Corporation's popular credit-score that is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person, which is the likelihood that the person will repay his or her debts. A credit score is primarily based on credit report information, typically sourced from credit bureaus / credit reference agencies: Experian, Equifax and TransUnion.

7.10) PITI?

Monthly residential mortgage payment of Principal & Interest, real estate Tax escrow and Insurance.

7.11) D/E (Debt/Equity)?

Debt-To-Equity ratio.  In real estate lending, this measures the relationship between the amount of debt owed (the mortgage loan(s)) and the property value.  As an example: buying a property for $500,000 with $100,000 cash down payment and a $400,000 mortgage loan, yields a D/E of 80%  ($400,000/$500,000)

7.12) DTI?

Debt-To-Income ratio.  PITI/GrossIncome = DTI.  Lenders consider this ratio when qualifying a potential borrower.

7.13) The 28/36 Rule (front-end and back-end ratios)

Two debt-to-income ratios (DTI) typically used by homeowner mortgage lenders when the D/E is between 70% and 80% (paying 20% to 30% down).  The front-end ratio, computed by your monthly cost to carry the home (mortgage principal & interest, real estate tax escrow and insurance or PITI) should not exceed 28% of your gross monthly income. Your back-end ratio, computed by your total monthly debt service (including PITI plus all other debt payments) should not exceed 36% of your gross monthly income.

7.14) 33/45 mortgage loan ratios

Two debt-to-income ratios (DTI) typically used by homeowner mortgage lenders when the D/E is less than 70%.  The front-end ratio, computed by your monthly cost to carry the home (mortgage principal & interest, real estate tax escrow and insurance or PITI) should not exceed 33% of your gross monthly income. Your back-end ratio, computed by your total monthly debt service (including PITI plus all other debt payments) should not exceed 45% of your gross monthly income.

FHA ratio limits can be 31/43
FHA Energy Efficient Mortgage, stretch ratio limits can be 33/45
VA ratio limits can be 41/41 (referred to only as 41% for VA loans)
USDA ratio limits can be 29/41

FHA rules / Qualified Mortgage rules, starting in 2013/2014, cap the DTI ratio at no higher than 43% for borrowers with a FICO score under 620

7.15) Dodd-Frank?

Dodd-Frank Wall Street Reform and Consumer Protection Act became law in 2010. Among other things, the Act called for the creation of the Qualified Mortgage (QM) rule (effective January 2014).

7.16) QM?

The Qualified Mortgage rule. Starting on January 10, 2014 a set of rules intended to result in safer home loans.  Consumer Financial Protection Bureau (CFPB) announced that QM loans “generally will be provided to people who have debt-to-income ratios less than or equal to 43%. This cap on debt ensures consumers are only getting what they can likely afford.”

7.17) QRM?

The Qualified Residential Mortgage rule is to protect investors from faulty packaging of a mortgage loan when it is delivered to the secondary mortgage markets.

7.18) ATR?

The Ability To Repay rule requires most lenders to determine the borrower's ability to repay a mortgage loan.

7.19) Freddie Max allowing assets to benefit the DTI?

Under Freddie Mac’s guidelines assets may be considered for DTI. Freddie Mac requirements:

  1. Add up all of the borrower’s eligible assets.
  2. Multiply the total asset number by 70% (0.7).
  3. Subtract the amount of money needed to close the loan (closing costs, prepaid interest, down payment, etc.).
  4. Divide the remaining amount by 360 months.

If the lender’s underwriter decides that the result, when added to the borrower's monthly income, meets basic income-eligibility requirements, the borrower may be eligible for a mortgage loan.

7.20) FDIC?

The Federal Deposit Insurance Corporation is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

7.21) SIPC?

Securities Investor Protection Corporation.  The cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC.  Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

7.22) ACH?

The Automated ClearingHouse Network is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system governed by the NACHA OPERATING RULES which provide for the interbank clearing of electronic payments for participating depository financial institutions. The Federal Reserve and Electronic Payments Network act as ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH entries.

NEACH [knee~each] is the New England Automated ClearingHouse is an example of one of the
ACH Associations  including: NACHA, ALACHA, EastPay, EPN, GACHA [Gotch Ya], MPX, MACHA, MIDWEST, NWCHA, Payment Central, PRO, SHAZAM, SOCACHA, SFE, SWACHA, TACHA, The Payments Authority, UMACHA, VISA, WACHA and WesPay.

7.23) ACH credit?

ACH Credit is a banking term that applies to the electronic transfer of funds in which you, the customer, initiate the transaction by instructing your bank to transfer funds from your bank account to Payee on your behalf.

7.24) ACH debit?

ACH Debit is a banking term that  applies to the electronic transfer of funds in which you authorize the Payee to initiate a withdrawal of funds from your bank account for the amount to be paid, via an electronically debit.

7.25) Regulation D, Section 204.2(d)(2)?

Federal Deposit Insurance Corporation (FDIC) and Federal Reserve Board (FRB) rule governing savings accounts.

Federal Reserve Board's current definition (October 2009):
...the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle … to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order or instruction, or by check, draft, debit card, or similar order made by the depositor and payable to third parties.

Federal Reserve Board's definition prior to 2009:
...the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle . . . to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order, or instruction, and no more than three of the six such transfers may be made by check, draft, debit card, or similar order made by the depositor and payable to third parties.

7.26) Post-Dated?

Refers to a check which bears a date in the future.  A check delivered now with a written date in the future, so that it cannot be cashed until that date.

Banks are allowed to cash a check while it is still post-dated in certain circumstances, pursuant to § 4-401(c) of the Uniform Commercial Code.

7.27) Ante-Dated or Back-Dated?

Refers to a check which when written by the maker was dated at some point in the past.  A date given to an event or a document that is earlier than the actual date.  This is legal to do in certain circumstances pursuant to § 3-113 of the Uniform Commercial Code.

7.28) Certified Mail?

Used to comply with the Timely Mailed/Timely Filed rule.

7.29) Rule of 72?

An investment at a particular interest rate will double in a certain number of years. You can easily determine how quickly your investments will double simply by dividing 72 by the interest rate that you anticipate receiving in a given investment. For example, an investment that will yield 10% per year will double approximately every 7.2 years (72/10 = 7.2). A 12% yield would mean your investment doubles every 6 years (72/12 = 6).

7.30) Rule of 78?

Method to accelerate the amortization of simple interest, other than by straight simple month-to-month interest on the declining principal balance.  This does not really differ in the long-run as long as the loan is paid off timely, month-to-month from the beginning until the scheduled final payment.  Otherwise, the interest taken is higher than simple in the earlier months of the loan and is less than simple in the final months of the loan. 

78 = 1+2+3+4+5+6+7+8+9+10+11+12  (for the number of months in a year).  Example: on a 60 month car loan the first month's amortization is more heavily loaded as being 60/1830ths of the total of the interest as computed using straight simple interest assuming a full-term normal payoff.  (hint: shortcut to get the number 1830 is as follows: (60/2)*(60+1)).  The next month's amortization is 59/1830ths and so on until the last month is 1/1830ths.

This method can also be referred to as "the sum of the year's digits."

In 1992, the U.S. Congress outlawed the use of the "Rule of 78" formula in closed-end loans longer than 61 months. Whether a lender can apply the method to installment loans of five years or less is a matter of state law. Many U.S. states prohibit the practice.

7.31) ATF?

Alcohol, Tobacco, and Firearms.  The United States federal agency that regulates via licensing, the sales, possession, and transportation of firearms, ammunition, and explosives in interstate commerce.  Its responsibilities include the investigation and prevention of federal offenses involving the unlawful use, manufacture, and possession of firearms and explosives, acts of arson and bombings, and illegal trafficking of alcohol and tobacco products.

In 1968, with the passage of the Gun Control Act, the Alcohol and Tobacco Tax Division (ATTD) of the IRS changed its name to the Alcohol, Tobacco, and Firearms Division, but was still a part of the IRS.  This is when it first began to be referred to by the initials "ATF."

7.32) BATF?

Bureau of Alcohol, Tobacco and Firearms. In 1972, President Richard Nixon signed an Executive Order creating a separate Bureau of Alcohol, Tobacco, and Firearms within the Treasury Department.

7.33) BATFE?

Bureau of Alcohol, Tobacco, Firearms and Explosives  The Homeland Security Act of 2002 created created the Department of Homeland Security and shifted ATF (and its investigative and regulatory inspection functions) from the Treasury Department to the Justice Department. The agency's name was changed to the "Bureau of Alcohol, Tobacco, Firearms and Explosives" in recognition of the agency's role in explosives regulation and enforcement; the Bureau retained, however, the use of its original acronym, "ATF", for all purposes.

7.34) OSS?

Office of Strategic Services formed during WWII as an intelligence agency for USA national security purposes and was then disbanded after the war on September 20, 1945.

7.35) CIA?

Central Intelligence Agency formed after WWII, in 1946/1947 to replace the OSS.

7.36) FinCEN?

Financial Crimes Enforcement Network is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat money laundering, terrorist financiers, and other financial crimes, including informing the IRS about possible unreported taxable income.

7.37) SAR?

With the Suspicious Activity Report Program FinCEN requires a SAR report to be filed by a financial institution when the financial institution suspects: insider abuse by an employee; violations of law aggregating over $5,000 or more where a subject can be identified; violations of law aggregating over $25,000 or more regardless of a potential subject; transactions aggregating $5,000 or more that involve potential money laundering or violations of the Bank Secrecy Act; computer intrusion; or when a financial institution knows that a customer is operating as an unlicensed money services business.

7.38) White Plastic?

A term given to any piece of plastic used inappropriately as a bank credit card. Normally, a blank piece of plastic embossed and encoded with a stolen account number is used for fraudulent cash withdrawals at ATM machines or with cooperation by merchants.

White plastic is also being used in a scheme called "shoulder surfing" which either involves setting up a video camera or person to record individuals using an ATM. The camera is focused on the PIN pad to capture a customer's PIN or is accomplished by merely standing in a position to see what you type. At the end of the day or periodically, suspects retrieve discarded receipts from around the ATM which contain the account number and time of transaction. Once the criminal has both the PIN and the account number, they can produce a duplicate card.

White plastic is also used to describe a type of cyber fraud, such as a scheme to defraud a bank card plan.  A merchant working in collusion with someone else submits phony sales drafts to a processing bank and then splits the sales draft income with the person supplying the account numbers that were charged.

Such frauds can be committed by a lone thief or merchant or can be as involved as international counterfeiting and distribution syndicates.  One example was a coordinated international ATM scam done one day in February 2009 that netted $9MM from 130 ATMS machines in 49 different cities around the world.

7.39) Monetizing the debt?

In the United States, and in many other countries, the government does not have the right to issue new currency to pay its bills – it must instead finance the deficit by issuing new bonds and selling them to the public to acquire the necessary money to pay its bills. However, if these bonds do not end up in the hands of the public, the only alternative is for them to be purchased by the central bank. For the bonds not to end up in the public hands the central bank must conduct an open market purchase. This action by the central bank increases the monetary base through the money creation process. This process of financing government spending is called monetizing the debt. Monetizing debt is a two step process where (1) the government issues debt to finance its spending, and (2) the central bank purchases the debt from the public and the public is left with high powered money.

Said another way, this is the printing of money to buy your own national debt. In other words, The Federal Reserve is buying its own debt by creating new money out of thin air. The impact of this is inflation. To explain, if you have $100,000 in the bank, and it’s the only $100,000 in the world, than that $100,000 becomes very desirable, and hence very valuable. If the government goes out and creates another $100,000, your $100,000 is now worth only about half of what it was worth before. This is the essence of inflation. Each new dollar the Government creates reduces the value of the previously existing dollars you hold, and continue to receive as your income.

7.40) Quantitative Easing?

QE is when the Federal Reserve buys bonds with the intent to to lower interest rates in order to stimulate a severely ailing economy, and as a result the price of those bonds increases.

QE1 was announced November 24, 2008 and mortgage bond buying started January 1, 2009.  On March 18, 2009 the level was raised to $1.25T until the end of QE1 on March 31, 2010.

QE2 was publicly discussed on October 1, 2010 and Treasury bond buying started November 3, 2010, continuing through June 30, 2011. The plan included purchasing $75B of longer-term Treasuries each month.

QE3 was announced September 13, 2012 to continue at least through mid-2015. The plan including purchasing $40B of mortgage-backed securities each month.

QE4 was announced December 12, 2012 to overlap QE3 with an additional $45B of long-term Treasury securities (making it a total of $85B of monthly purchases, but also see Operation Twist, below). QE4 itself is similar to the 2nd phase of Operation Twist. No end date to QE4 was announced, prompting pundits to name this QE4-Ever

On May 22, 2013 the Federal Reserve commented that QE may be ending, saying that a number of participants have expressed a willingness to reduce QE in June 2013.

7.41) Operation Twist?

Operation Twist was a Federal Reserve program started between QE2 and QE3 - running from September 2011 through June 2012 to further help stimulate the economy. Operation Twist was the nickname for this plan of buying $40B per month in longer-term Treasuries and simultaneously selling some of the shorter-dated issues it already held in order to bring down long-term interest rates. The term “Operation Twist” was first used in 1961 – in a reference to the Chubby Checker song – when the Fed employed a similar policy.

Operation Twist was expanded and raised the monthly purchases from $40B to $45B, during June 2012 and to continue until December 2012, effectively overlapping on QE3 a bit; for a total of $85B in monthly purchases.

7.42) Sequestration?

In the U.S government since enactment of the Balanced Budget and Emergency Deficit Control Act of 1985 - is the employment of automatic, across-the-board spending cuts in the face of annual budget deficits.  It is the permanent cancellation of budgetary resources by a given percentage applied against all programs, projects, and activities within a budget account.

Various government programs and activities and congressional wages are exempt from sequestration or have special rules carved out for them regarding the application of a sequester.

Also reference the Pay As You Go Act of 2010 and the Budget Control Act of 2011.

8.1) What is a "Pure Trust"?  I read in a book I paid $35 for on the internet that if I set up a Pure Trust for a cost of $2,500 that I will eliminate all my taxes, legally and completely!

The pure trust scam has been around for decades, but with the internet the pitch has become more wide-spread. The IRS has a few links which verify that most pure trusts are scams: link #1 and link #2 (formerly link #2b) and link #3.   Many of the other trusts being promoted that are not actually scams do not eliminate income taxes as the trustee is usually lead to believe pdf file of IRS publication #2193 and pdf file of IRS publication #4310.  Well designed trusts can be very useful, especially for wealthy individuals, but trusts do not eliminate taxes the way the pure trust promoters suggest they do.

pdf file for filing requirements for "pure trusts"

Tax protestor Hall of Fame

Dirty dozen tax scams

Financial Crimes Enforcement Network

US Treasury - Law Enforcement

23 Frivolous Arguments to Avoid When Filing a Return or Claim for Refund

Debunking Conspiracy Myths

The Tax Protester FAQ

For some reason, people feel compelled to send us e-mail to argue about the legitimacy of these "pure trust" theories. Well don’t, because we just don’t care. As shown at this link, IT DOESN’T MATTER whether you are right or wrong because even if you are right (you're not) these theories aren’t going to help you anyhow, since no court will recognize these theories and they will not stop the IRS from levying taxes, fines, and sanctions, or from seizing your property. The only thing which matters to us is whether or not stuff works, and these theories have proven "in spades" that they don't



8.2) Well okay, I wasn't sure about those pure trusts anyway  How about forming Nevada Corporations? These have to be all they say, especially when used to avoid State of California taxes, right?

Nevada Corporations have many beneficial purposes, just like corporations formed elsewhere can be beneficial.  But as far as many claims of tax avoidance that are often associated with corporations formed in Nevada, much of it does not hold true for people who do not actually live in Nevada but who at the same time want to use and control the assets held by the corporation.  

8.3) Joseph R. (Joe) Banister, a former IRS Criminal Investigation Division Special Agent learned of serious constitutional questions relating to the federal income tax and the federal banking and monetary systems. Mr. Banister’s expertise in the fields of accounting, finance, taxation, and law enforcement enabled him to inform people about the legality of the US Income Tax System.  Clearly Banister and others like him (Irwin Schiff comes to mind) wouldn't say these things if they were not true!

These guys are referred to as "Tax Protestors" by the government.  Whether they have valid arguments and whether people who interpret what they have to say as meaning that they do not have to pay federal income tax is besides the point.

Let's re-read that one more time: Whether the federal income tax system is legal or not is besides the point!

Let's assume that these so called "Tax Protestors" are not a bunch of charlatans looking to peddle their books, tapes and seminars for their own profit.  Rather, just for the sake of argument, let's assume that they are well-meaning patriots looking to help all of us stop paying unnecessary or even illegal federal income taxes.

The fact is that no matter how accurate these Tax Protestor theories are, if you do not pay your federal income taxes, by using any of the arguments promoted by these guys, the government (and that includes the IRS, the US Court system and our elected lawmakers in Washington, D.C.) will not be swayed and your life will become a living hell!

If by using any of these Tax Protestor theories you don’t report your federal income taxes on properly prepared tax forms, the IRS will come in to assess taxes based on whatever information they can find.  They'll add in penalties and interest and then they'll garnish your wages, take backup withholding from your securities sales (that's on the gross sales amount, not on the net gain), and seize all your available assets to pay for it all. You can then go into court to fight a battle thinking that you are 100% correct, and there you will find that no matter how many years of your life you devote to fighting, there is a 100% chance that the court will never agree with you and you will lose everything you have.  THAT'S the point.

Grand Jury Indicts Anti-Tax Author
LAS VEGAS, March 24, 2004 - A federal grand jury indicted an anti-tax author and two others Wednesday for helping thousands of taxpayers file bogus returns.

Irwin Schiff, who wrote "The Federal Mafia: How It Illegally Imposes and Unlawfully Collects Income Taxes," argues there is no legal requirement to pay income taxes. Government lawyers have been pursuing civil actions to bar him from selling his book and holding tax seminars.

"There is no magic way out of paying taxes," said Eileen O'Connor, assistant U.S. attorney general for the tax division in Washington, D.C.

Prosecutors say the three were responsible for nearly 5,000 tax returns that fraudulently reported no income. These "zero returns" included zeros on every line related to income and expenses and often claimed a full refund of all federal taxes withheld or paid.

The evidence presented at trial proved that Schiff evaded the payment of more than $2 million in taxes he owed the IRS between 1979 and 1985. And that Schiff concealed income he earned from Freedom Books, in part, by using offshore bank accounts and conducting financial transactions through secret "warehouse" banking services. The evidence also showed that Schiff used debit cards issued by offshore banks to obtain funds he transferred offshore, that he opened bank accounts using multiple tax identification numbers and that he concealed his wealth by hiding his assets through the use of nominees.

Schiff is currently serving a 12.5 year sentence for his October 2005 conviction of conspiring to defraud the United States and aiding and assisting in the preparation of false income tax returns.  In September 2008 an additional 11 months was added for 15 counts of criminal contempt relative to Schiff's unruly behavior during the trial.  In October 2008 a federal court in Las Vegas issued a permanent injunction barring Schiff and his former associate, Cynthia Neun, from preparing federal income tax returns for others and from promoting Schiff’s fraudulent "zero tax" plan or other tax-fraud plans. The court order makes permanent a restraining order and preliminary injunction entered against the two notorious tax defiers in 2003.

Trial Date Set For Former IRS Criminal Investigator
Joseph Banister is a former IRS Criminal Investigation Division Special Agent. After years of researching the income tax code, Banister came to the conclusion that the government was misapplying the tax code to the majority of Americans. This highly trained CPA and valued IRS criminal investigator presented his findings to his superiors all the way to Washington, DC and asked them to dispute his findings.

On November 18, 2004, Banister was arrested on a federal indictment accusing him of tax crimes. He pleaded not guilty in U.S. District Court, posted bond and was released. The indictment ties Banister to a co-defendant, Walter A. Thompson of Redding, California who has also been indicted regarding his stand on withholding taxes. Thompson refused to surrender to federal authorities, but instead fled and ended up with a high speed chase on Interstate 5 in Northern California. Thompson is considered a flight risk and denied bail.

Both Banister and Thompson appeared in court on December 1, 2004, at the U.S. District Court in Sacramento, California for a status conference. Thompson was in an orange jump suit and shackled in chains with his hands chained to his waist. Judge William B. Shubb granted Thompson's request to represent himself, but also appointed a federal public defender for Thompson to assist in his defense.

List of IRS related Civil and Criminal Actions - 2003

List of IRS related Civil and Criminal Actions - 2004

List of IRS related Civil and Criminal Actions - 2005

List of IRS related Civil and Criminal Actions - 2006

US Department of Justice:

IRS Tax Seizure Auction website:

U.S. Marshals:

U.S. Marshals: Seizure Auction websites:

Joseph R. (Joe) Banister Interview


8.4) Is there anything to this new "Straw Man" theory that, for example, John Q. Smith does not need to pay taxes assessed by the IRS against JOHN Q SMITH because the words in all uppercase letters must be referring to some other legal entity and not to John Q. Smith?

Actually, I've never heard of this crazy idea before, but the IRS is already attacking this as a frivolous tax evasion scheme:

Rev. Rul. 2005-21

Notice 2005-30

Special Report - Frivolous Arguments and Associated Penalties


8.5) What about Securities Traders, using a partnership and claiming a tax deduction involving "notational principal contracts"?

The IRS shut this scam down as well.  IRS Notice 2002–35 The Internal Revenue Service and the Treasury Department have become aware of a type of transaction, described below, that is used by taxpayers to generate tax losses. This Notice alerts taxpayers and their representatives that the tax benefits purportedly generated by these transactions are not allowable for federal income tax purposes.

In general, the transaction involves the use of a notional principal contract (“NPC”) to claim current deductions for periodic payments made by a taxpayer (“T”) while disregarding the accrual of a right to receive offsetting payments in the future. The NPC has a term of more than one year. Under the NPC, T is required to make periodic payments to CP at regular intervals of one year or less based on a fixed or floating rate index. In return, CP is required to make a single payment at the end of the term of the NPC that consists of a noncontingent component and a contingent component. The noncontingent component, which is relatively large in comparison to the contingent component, may be based upon a fixed or floating interest rate. The contingent component may reflect changes in the value of a stock index or currency. T may fund its obligation to make periodic payments in whole or in part by borrowing funds from a lender, who may be CP. In addition, T may engage in other transactions, such as interest rate collars, for purposes of limiting risk with respect to the NPC transaction. T may engage in short-term trading activity in securities with a view to establishing a trade or business. T may also engage in the transaction through a partnership, in which case instead of T, the partnership may engage in some or all of the activities described above. T will likely enter into an agreement with CP to terminate the NPC prior to the scheduled payment date of CP’s payment. T deducts the ratable daily portion of each periodic payment for the taxable year to which that portion relates. However, T does not accrue income with respect to the nonperiodic payment until the year the payment is received. T intends to report as capital any gain it realizes upon the termination of the NPC.

The Service may impose penalties on participants in these transactions or, as applicable, on persons who participate in the promotion or reporting of these transactions, including the accuracy-related penalty under section 6662, the return preparer penalty under section 6694, the promoter penalty under section 6700, and the aiding and abetting penalty under section 6701. Transactions that are the same as, or substantially similar to, the transaction described in this Notice 2002–35 are identified as "listed transactions" for purposes of § 1.6011–4T(b)(2) of the Temporary Income Tax Regulations and § 301.6111–2T(b)(2) of the Temporary Procedure and Administrative Regulations. See also § 301.6112–1T, A–4. It should be noted that, independent of their classification as “listed transactions” for purposes of §§ 1.6011–4T(b)(2) and 301.6111–2T(b)(2), such transactions may already be subject to the tax shelter registration and list maintenance requirements of §§ 6111 and 6112 under the regulations issued in February 2000 (§§ 301.6111–2T and 301.6112–1T, A–4), as well as the regulations issued in 1984 and amended in 1986 (§§ 301.6111–1T and 301.6112–1T, A–3). Persons required to register these tax shelters who have failed to register the shelters may be subject to the penalty under section 6707(a), and to the penalty under section 6708(a) if the requirements

IRS Bulletin 2002-21, may 28, 2002, see page 26 (page 992)

8.6) Is there a difference between Tax Avoidance and Tax Evasion any longer?

The answer has been getting muddier recently:

Is it good planning for Avoiding Taxes or is it Illegal Tax Evasion?

8.7) What is BOSS?

Bond and Option Sales Strategy ("BOSS"). Transactions involving the distribution of encumbered property in which taxpayers claim tax losses for capital outlays that have, in fact, been repaid to the taxpayer. Notice 99-59, 1999-2 C.B. 761 (Dec. 10, 1999); Notice 2003-76, 2003-49 I.R.B. 1 (Nov. 7, 2003).

Bond and Option Sales Strategy is a tax shelter that the IRS banned in December 1999 saying that the tax treatment created artificial losses to offset legitimate gains.  In this scheme, taxpayers and promoters use a series of contrived steps in an attempt to generate tax losses to offset income from other transactions.

8.8) What is Son of BOSS?

Son of BOSS. Transactions in which losses are generated as a result of artificially inflating the basis of partnership interests. Notice 2000-44, 2000-2 C.B. 255 (Aug. 14, 2000).

Son of Boss is a spinoff of an earlier shelter known as BOSS, for bond and option sales strategy. Under Son of Boss, buyers used financial products such as currency options to create bogus losses that offset their gains from selling stock options or business assets.

The IRS announced that use of a grantor trust in conjunction with the so-called son-of-BOSS shelter (a shady reincarnation of the original Bond and Option Sales Strategy deal, itself a shelter transaction of questionable merit) would be treated as evidence of criminal fraud.

8.9) What about Ed Brown vs. IRS?

May 24, 2006.  Did the Browns get into big trouble when they stopped making payments on their home mortgage (because the balance owed was down to zero)?  Ed Brown v. IRS  Interview

Lesson learned - don't mess with the IRS because if you do, eventually they will make your life miserable.

Ed Brown v. IRS  Standoff

Ed Brown v. IRS  News Conference June 18, 2007

The Browns say are willing to pay whatever they are bound by law to pay, they ask only that they are shown the law. In fact, they have offered $1,000,000 in commercial property if anyone could "Show Ed the Law". Instead The Law came on Thursday, June 7, 2007, claiming this million dollar property as their own, not exactly what Ed had in mind. The Browns have been inside their home for the past few months, they say they will stay in their home, and will fight to the death if they have to.

In 1994 The couple began writing the IRS asking to see the Law that obligates them to pay a Federal Income tax, and for two years they received no answers. In 1996 they informed the IRS that they would no longer be paying their taxes. They are willing to die, and the government would rather kill them then show them the law.

October 18, 2007 - Teams of federal law enforcement officers, including members of the United States Marshals Service (USMS), the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), and the IRS Criminal Investigation Division, concluded their search of the Plainfield, NH, property formerly owned by Edward and Elaine Brown. The search and collection of evidence -- including the rendering safe of a large number of improvised explosive devices (IEDs) -- was a painstaking process that lasted almost two weeks.

The Brown’s home and dental building have been seized, secured, posted, and are in the custody of the Treasury Department. The property will proceed through the usual asset forfeiture process and may ultimately be sold to satisfy the judgment imposed by the Court.r>


8.10) What is a Fraud Technical Advisor (FTA)?

IRS revenue officers look to an FTA if they suspect that tax fraud exists in a case being worked on. It is then determined if there is a "Firm Indication of Fraud" and if so the civil proceedings must end and a criminal investigation may begin.  The law such that a criminal proceeding may not covertly investigate the taxpayer.

District Fraud Coordinator (DCF);  National Fraud Program (NFP); Fraud Referral Specialist (FRS); Criminal Investigation Division (CID); IRS Fraud Manual.


  F. A. Q.

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