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548 terms

Series 6

Series 6 Securities Licensing
STUDY
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Registered Representative
Term regulators use for salespeople
Principals
Managers or Supervisors of Registered Representative
U-4
Application that must be completed and sent to FINRA and SEC.
NO "Free Agent"
License must be held by employer. License is not held by individual.
Packaged goods
Products that RR's are allowed to sell. Mutual Funds, UIT's (new issue), Face Amount Certificate Companies, Closed-end funds (new issue) Variable insurance products with applicable insurance license.
Prohibitted Products with Series 6
Stocks, Bonds, ROW (rights, options, warrants), Closed-end fund (secondary market), UIT's or ETF's (secondary market)
Blue sky laws
Most states require a Series 63 license as well as state specific other licenses to sell products.
Continuing Education
Must complete CE w/in 120 days of 2nd anniversary and then every 3 years thereafter.
CE Grace period
120 days
Annual Compliance Meeting
Broker-Dealer firms are required by FINRA to conduct an annual meeting for all registered personnel.
U5 Form
If you quit current employer must file with FINRA. If you leave the business entirely, your license will be held by regulators for up to 2 years.
Failure of Exam
If you fail your Series 6 exam you must wait 30 days after 1st and 2nd attempts to pass. After that the wait to re-test is 180 days.
Required account opening information
Name, physical address, date of birth and social security number.
RR and principal MUST sign on new account.
Customer who does not provide REQUESTED information
Account may still be opened, but recommendations may not be made. Unsolicited only
Stocks
Equities
Bonds
Debt instruments
Capital Risk
Risk of losing invested money.
Market Risk
Risk that your investment will decline due to overal market conditions.
Non-Systematic Risk
How the news affects your company's stock price.
Selection Risk
You bet on the wrong horse!
Liquidity Risk
The risk that you will need to sell your investment at an inopportune time.
Beta
Used to measure securities volatility. Beta =1 same as the market; Beta - 1 volatility less than market; Beta + 1 more volatile.
Credit (Default) Risk
The possibility that an issuer will be unable to pay back principal/interest.
Interest Rate Risk
Fluctuations in a bond's price due to changes in the general level of interest rates.
Call Risk
The issuer of a bond will pay you back before maturity. Typically done as a refinance - rates are lower, thus the money you get paid back may not be able to be reinvested at as good a rate.
Reinvestment Risk
the possibility that a bondholder will not be able to reinvest their money at an attractive rate.
Inflation (Purchasing-Power) Risk
Inflation (rising prices) means your money will likely buy less in the future. bonds do not protect a customer against inflation. Stocks may preserve your purchasing power.
Currency (Exchange) Risk
encountered by investors in foreign securities. Occurs as the value of foreign currencies fluctuate aginst the U.S. Dollar.
Legislative Risk
A law passes that would impact your investment
Social or Political Risk
Change in government or social unrest in a country would impact your investment.
Capital Preservation
Customer wants VERY VERY safe investment. US government securities or other safe and liquid investment good.
Income
Investor is looking for current return on their investment. Bonds, certain stocks (i.e. public utilities) good choices.
Growth
Do not need a current income. Growth investors tend to be younger and more aggressive. Many concentrate in common stocks.
Speculation
Seeking very large returns and willing to take big risks. Not suitable for most customers. High yield (junk bonds) or specialized sector funds.
Middle Road
Many investors want a mix.
Suitability (not profitability)
Major regulatory concern when making recommendations. RR's can get in trouble for selling a client unsuitable investments.
Telephone Consumer Protection Act of 1991
Cold calls between the hours of 8am and 9pm CUSTOMER TIME only. RR must give their name, name of firm, contact number and reason for calling. If customer requests MUST place their name on a "do-not-call" list for 5 years.
W-9 Form/W-8 forms
W-9 for US residents/ W-8 non- US citizens. Customers who fail to sign forms will be subject to back-up withholding and withheld funds will be sent to IRS.
Customer Identification Procedures (CIP)
Federal rules require a written Customer identification PROGRAM. Must verify the identity of customer (before or after) account is opened.
Customer ID recordkeeping
All ID information must be kept 5 years from account CLOSING. Verifications must be kept for 5 years after record is made.
CIP Notice
Customer must be given written or oral notification that it is requesting information to verify their identities.
Regulation S-P(Gramm-Leach-Bliley)
regarding the handling and sharing of non-public information gathered from customer.
Consumer
Infrequent or one-time user or buyer of a product.
Customer
Ongoing relationship
Non-Public Information
Information that cannot be obtained from any other source than customer.
Reg S-P Requirements
Prepair notices describing firm's privacy policy, Provide an opt-out notice; provide policy annually to customers.
Opt-Out
Consumers MUST be given the ability to opt out of a firms sharing information to non-affiliated 3rd parties. Must be reasonable.
Individual accounts
One person
Joint Tenants
Two or more individuals. Must obtain minimum information on all parties.
Joint Tenants w/Rights of Survivorship
If one owner dies, their ownership interest automatically passes to other owner.
Tenants in Common
No rights of survivorship. Upon death, ownership interest goes to decedants estate. May have un-equal ownership interest.
UTMA/UGMA accounts
Adult as custodian, under child's SSN, all contributions are considered a gift and are irrevocable. NOT JOINT ACCOUNTS. Convert to child when he/she reaches age of majority.
UNIFORM PRUDENT INVESTORS ACT (UPIA) for children's accounts
Should not be overly aggressive (suitable). Must be invested in prudent and diversified manner. Buyer on MARGIN prohibbited.
UTMA/UGMA Taxation
1st $950 tax free, 2nd $950 at "kiddie" rate, all gain above that at parents rates.
Corporate Accounts
Considered to e persons in eyes of law. Required to obtain a copy of corporate resolution to open accounts.
Corporate Accounts - Margin
Corporate charter required.
Limited POA
Buy stock and sell stock
Full POA
Buy/sell stock; Remove money from account; Remove securities from account.
Discretion
When an RR is given in writing and approved by manger.
Time/Price Exception to Discretion - verbal
3 A's 1) Action (buy/sell); 2) Amount (dollars or shares) and 3) Asset (what) 1 TRADING DAY ONLY.
Unsolicited Trades
Trades that are the customer's idea. Must be marked as unsolicited.
Wrap Accounts
A product of an investment advisor. RR may not offer. Series 6 licensed person CANNOT sell a wrap account.
ACAT Transfer
Customer moves account from 1 firm to another. Moved electronically through Automated Customer Account Transfer.
Client Death
all unexecuted transactions be cancelled upon notification of death. Mark account 'deceased" Await instructions from estate.
Undecided Investor
"Park" their funds in a safe investment such as a money-market fund until such a time customer decides what to do with funds.
Frozen Account
Failure to pay for transactions on a timely basis will result in account being "frozen" for 90 days.
Brokerage Account Statement
Must be provided at least quarterly. In accounts with activity - monthly.
Holding clients mail
Allowed for 2 months. 3 Months if the customer is out of the country.
Consumer complaints
Must be in writing. All complaints should be directed to the RR's principal.
Securities Investors Protection Corp. (SIPC)
Non-profit corporation that is funded through member assessments. NOT PART OF US GOV'T. Protection to customers if their broker files bankruptcy.
SIPC Coverage
$500,000 of which no more than $250,000 in cash per account.
Fidelity Bonds
Protects consumer against theft by broker
Cost Basis
The amount of money that was paid for or into a product.
Mutual fund Cost Basis
Original Investment; Additional investments; any reinvestments.
Selling part of a position
Investor can designate which shares are being sold. If no designation use FIFO.
Short term holding period
1 year or less
Long term holding period
1 year plus 1 day or more
Bullish
Wants to buy low/sell high
Bearish
Want price of stock to fall.
Short sell investment
Sell high and buy back at a lower price later. This is stock that you do not own but borrow from a broker. Very risky - stocks MUST be replaced at a later date regardless of price. Bearish.
Capital Loss
Can deduct $3,000 per year and carryover loss above that amount in $3,000 increments to future tax years.
Non-realized Gain
Paper profit. Account made profit client did not liquidate (sold) their position. Gain is NOT taxable event.
Inherited Securities
Fair maket value on date of decent's death. Always considered long term regardless of how long decedent owned.
Gifted Securities
Fair market value - Donor's value or basis. If donor paid $10,000 for securities then recipients costs basis is same.
Wash Sales
61 day window. 30 prior - date of trade- 30 days after. Applies to the sell and repurchase of substially identical security.
1099
Form used to report loss/gain on investments and filed with IRS.
Zero cost basis
Retirement plans funded exclusively with pre-tax funds. Distributions are taxable at ordinary income rates.
Margin Account
Account set up with brokerage to borrow from to execute trades.
Shares Vote
Not People
Statutory Voting
benefit large shareholders
Cumulative voting
benefits smaller shareholders
Cash Dividends
Typically paid quarterly.
Sales Charge Percentage formula
(POP - NAV)/POP.
(23.95 - 21.22) = 2.
Public Offering Price formula
NAV/(100-Sales charge %)
22.35/(100-5.5 = 94.5) = 23.65
Average Cost
Total $ Invested/# of Shares Purchased
10,000/ 550 = $18.18
Stock Dividends
Company pays dividends in stock rather than cash. Not considered taxable event. Will decrease her cost basis per share.
Stock split
Corporation decides to split stock (2 for 1 etc) this is a strategy to make shares more affordable and to attract new investors. Not taxable event.
Preemptive right
Shareholders often given 1st opportunity to purchase newly available shares.
Authorized shares
Corporate charter will specify the maximum number of shares that are permitted to be sold
Issued shares
Stock that has been purchased by investors and issued.
Treasury Shares
Issuer buys back its stock. Once repurchased has no voting rights and no dividends. Is purchased by the issuer to increase earnings per share.
Outstanding Shares
The difference between issued stock and treasury stock is the amount of shares outstanding. Issued shares - Treasury shares = Outstanding shares.
Par Value for stocks
Nominal value assigned to each share of stock. Used for accounting puposes.
Book Value
Assets - liabilities = liquidation value
Market Value
What your shares are worth today if you choose to sell them.
Growth Stocks
Issued by younger companies and pay little or no dividend. Typically purchased by more aggressive investors with no need of income.
Income Stocks
Pay generous dividends to investors. Typically purchased by older more conservative investor.
Defensive Stocks
(Think sin) Less subject to economic ups and downs. Cigarettes, liquor basic foods, and gasoline.
Cyclical Stocks
Tend to rise and fall with the economy.
Countercylcical Stocks
Does better in bad economic times (think pawn shop).
Seasonal Stocks
Seasonal businesses
Blue Chip
Well known established businesses. Consistently pay dividends.
American Depository Receipts
Facilitate trading of foreign securities in the US Market. US financial institution purchases foreign shares and deposits the securities in an overseas bank. A receipt is issued for stock deposit.
ADR's
Dollar dominated; pay dividends in US $; may be subject to foreign taxation on dividends; are subject to currency (exchange) risk; may lack voting rights.
Preferred Stock
Have potentially unlimited life. Lack the right to vote. Preferential treatment over common shareholders in dividend payouts. Must be paid all dividends before common stocks; In bankruptcy have priority over common stocks.
Preferred Stock Dividends
Fixed. Preferred stocks trade like a bond.
Straight (Non-cumulative) Preferred Stocks
Missed payments do not need to be made up.
Cumulative Preferred Stocks
All missed dividends must be paid up in full before common holders are entitled to any payout.
Adjustable rate stocks
Hybrid.
Participating stock
Holders could potentially receive extra payments above and beyond the stated dividend.
Callable Stock
The issuer has the right to pay back investors and retire the issue at its discretion.
Potential Common Stock - Convertible Preferred
Exchange preferred stock for shares of common stock.
Rights, Options Warrants (ROW)
Rights are shortest term. Very limited time. Give existing shareholders the opportunity to buy more shares.
Options
Gives the one party the right to buy and one party the obligation to sell.
Call Options
Buyer pays seller a premium for this option. This obligates the seller to deliver a certain number of shares at the strike price if asked.
Put Options
Buyer once again pays seller a premium. This time. The buyer has the right to sell the stock at the strike price and the seller is obligated to buy stock if asked.
Why use Options?
Speculation; Protection (hedging); Income generation.
BULLISH
Wants stock prices to go up. Call buyers/Put Writers.
BEARISH
Wants stock prices to go down. Put buyers/Call writers.
Options exist on?
Stocks, indexes (baskets of stocks); foreign currency; debt instruments and commodities.
Options (derivaties)
aka as derivatives
Option buyers
have rights
Option writers
have obligations
Warrants
allow the holder to buy shares at a strike price. Long term some never expire. Used as a sweetener
Guaranty
Remember, there is no "f" in guaranty (funds)
Bond coupon
The bonds annual interest rate. Interest on bonds is paid semi-annually.
Zero Coupon Bonds
Issued at discount from par (face value). Pay no coupon at all. Move (accrete) toward par as it matures.
Registered bonds
Have bondholders name imprinted on the certificate face.
Registered to principal only
Will have physical coupons attached. Must be turned in to be paid.
Book-entry bonds
Do not receive certificates. Principal and interest payments are sent automatically.
Standard and Poors
Bond rating agency
Moody's
Bond rating Agency
Interest rate risk
Affected by interest rates in the economy.
Bond Prices and Bond Yields
Move in opposite directions. Prices up - yield down. Yield up - price down.
Nominal Yield
stated return on the face of the bond.
Current Yield
Current yield = annual interest/current market price.
Yield to Maturity (YTM, Yield or Basis)
Total return at maturity
US Government Securities
US government is (big surprise) the largest debt issuer in the world. Virtually fee of default risk are subject to interest rate risk.
Treasury Bills (Tbills)
Short term securities. 1 year or less. Very safe and highly liquid. Conservative investor.
Treasury Notes (Tnotes)
Medium- term 2 -10 years. Pay interest semi-annually.
Treasury Bonds (Tbonds)
Long term from 10-30 years. Pays interest semi-annually.
Taxation of Treasury Securities
Subject to federal tax but exempt from state and local taxes.
Strips
Government version of zero coupon bonds. No interest is paid but bond moves toward par value as it matures. Accretion creates annual tax liability for "phantom income"
Treasury Receipt
Zero coupon bond backed by the interest and principal of a US Government Tnote or Tbond. Not a direct obligation of US Government issued by a broker dealer.
Government National Mortgae Assoc. (GNMA)
Ginnie Mae purchases mortgages from banks and packages these in pools.
GNMA Pass-through certificate
Investors buy a certificate of the collatoralized pools. The investor will receive monthly principal and interest payments. Guaranteed by the full faith and credit of US Government.
Savings Bond - Non-marketable
Once purchased may not be sold to another investor.
EE Savings bonds
Bought at 50% of face value.
HH bonds
May only be purchased by trading in series EE bonds.
Municipal Bonds
Debt instruments issed by state or local governments. Not subject to Federal (and in some cases state of local) taxation.
Sinking Funds
The bond issuer is required to periodically set aside a portion of the principal. This is done to ensure that the money is available when the bonds mature to repay the investment.
General Obligation (GO) Bonds
Repaid through tax collections. Generally viewed as very safe.
Revenue Issues
Bonds sold to finance specific projects that will collect fees for usage when completed (toll roads, hospitals, etc.) Funds used to repay these bonds are from the collection of usage fees for the completed project.
Industrial Revenue Bonds
Private entity bonds for creating ocommercial projects. Can be subject to alternative minimum tax (AMT).
Corporate Bonds
Bonds issued by privately owned companies. Not tax free.
Secured Bonds
Secured backed by collateral
Debentures Bonds
Think IOU. Backed by issuer's promise to pay.
Guaranteed Bonds
Think co-signor. Issuer sells unsecured (no collateral) bonds that are backed by issuers promise to pay as well as another company's promise to pay.
Convertible Bonds
Bonds that can be converted (exchanged) for common stock. Converting debt into equity.
Eurodollar Bonds
Issued outside of US. Pays principal and interest in US dollars. Can pay interest either annually or semiannually.
Mortgage Bonds
bonds that are backed by real estate or land.
Equipment Trust Certificate
Backed by the issuers equipment. Think airlines, trucking companies or construction companies.
Collateral Trusts
Backed by the issuers portfolio of stocks, bonds etc.
High Yield (Junk) bonds
Very risky.
Money market Securities
Short-term maturing in 1 year or less.
Commercial Paper
270 or less - term. Issued by companies to finance their operations. Auto companies and public utilities.
Bankers' Acceptance
Securities used to finance foreign trade.
Negotiable CD's
Banks issue to attract deposits outside their traditional client base. Typically wealthy individuals - usually minimum of $100,000.
Mutual Funds
Open ended - continuous trading. Professionally managed, instant diversification, liquid.
Closed-end Funds
Have many of the same features of Money markets but after the initial IPO are traded on secondary market.
Investment Compaines
3 types: Face amount certificate; UIT's, Management companies
Face Amount Certificate
Similar to EE savings bonds. Debt certificate at discount pricing with a predetermined interest rate.
Unit Investment Trusts (UIT's)
Created by a trust. Have a fixed date when will end. Fixed assets and are supervised not managed. UIT's are redeemable meaning that they may be sold back to the parent organization.
Mutual funds
May only sell shares of common stock to public. Sales charges are levied against mutual fund buyers. They are in %.
Closed end Funds
may sell common, preferred and bonds. Commissions are charged to closed end fund buyers and sellers in Secondary market. These commissions are expressed in $ terms.
Conduit Theory (Subchapter M)
Investment companies distributing a minimum of 90% of their net investment will only be taxed on retained portion.
Regulated Investment Companies
Meet the 90% distribution requirement of the IRS.
Investment Company Act of 1940
Requires that 75% of the IC's total assets be invested as: no more than 5% in any 1 company; Not own more than 10% voting stock of any one company.
Mutual Funds
Are a collection of related entities and has a board of directors. Shareholders elect the board of directors.
25/75 Rule
Federal regulations require that 75% of a board of directors be made up of disinterested (independent) directors who are not employees of the fund and own no more than 5% of the funds shares.
Board of Directors function
Establish investment policy; select and oversee all professionals hired by the fund; establish dividend and capital gain policy.
Investment Advisor
for compensation, engages in the business of advising others. A business or organization.
Release 1A
ABC test; Advise; as a Business, for Compensation.
Portfolio Manager
Individual who works for the Investment Advisor.
Investment Advisory Contract
Initial agreement may run for a maximum of 2 years. After that the contract to be renewed annually by a majority of the disinterested board members.
Management Fees
The Investment Advisor is paid for their services based on a percentage under management. The advisor is paid whether the fund makes money or not. As an incentive for the IA to want the fund to do well - fulcrum fee is used.
Fulcrum Fees
Incentive for the Investment Advisor to do well. Can provide "bonus" or incentive pay if the fund meets certain benchmarks. Must have corresponding penalty if fund does poorly.
Transfer Agent
Keeps track of the paperwork. Cancels/issues shares; Distributes dividends or capital gains, shareholder mailings.
Custodian
Usually a commercial bank that physically safeguards the stocks and bonds held in the funds portfolio. Collection of interest and divident payments.
Distributor/Wholesaler or Sponsor/ Underwriter
Underwriter enters into a contract to sell its shares and is compensated for that.
Compensation
Nobody works for free. 12b-1 fees may be levied against the shareholders each year to help defray costs of distribution.
12b-1 Fees
Levied agains fund shareholders to help deray costs of distribution.
Sales Literature
Distributor/Wholsaler/Sponsor responsible for the preparation of sales literature for a fund. Must submit all sales literature to FINRA wihtin 10 days of 1st use.
Distributor/wholesaler/ sponsor/underwriter Functions
Direct sales to public; markets fund to broker dealers; Prepares sales literature; payment of compensation to dealers.
Money Market Funds
Invest in very liquid, short-term securities such as TBills, Commerical Paper, CD's and repurchase Agreements. Safe place to "park" assets while considering a long term investment.
US Government Funds
The fund invests in securities issued by US government. Miniscule default risk. Not considered a direct obligation of the government. Fund not guaranteed by US Gov't.
GNMA Funds
Government backed mortgages make up these funds. Suitable for investors seeking safety and current income.
Municipal Bond Funds
Funds made up GO and Revenue Bonds issued by state and local governments. Good choice for investors in high tax bracket.
Corporate Bond Funds
Made up of bonds issued by corporations.
Growth and Income Bond Funds
A mix of stocks, public utilities and investment grade corporate bonds.
Balanced Fund
Balance 1/3 Common Stock/ 1/3 Preferred Stock and 1/3 Bonds.
Asset Allocation Funds
Based on investors age.
Equity Income Funds
For investor whose primary concern is income.
Growth Funds
Primarily looking for appreciation of a fund not income.
Aggressive Growth Funds
Rapid Growth in shortest time possible. Substantial degree of risk.
Index Funds
Passively managed portfolio designed to replicate the performance of S&P 500. Consists of same 500 stocks currently in S&P. Lower fees and cost structure.
Sector Funds
Invest in specific industry.
Precious Metals Fund
gold, silver, platinum etc. Hedge against loss of purchase power (inflation)
Option Income
Once stocks purchased, manager will write (sell) call options against the portfolio.
Covered Call Writing
Designed to increase the dividend payout to investors. Makes funds slightly safer.
Foreign Investment Funds
Invest in securities issued in other countries. Dollar denominated. Still subject to currency risk.
International Funds
Exclusively in companies outside of United States.
Global Funds
Entire World
Exchange Traded Funds (ETF)
Designed to compare with traditional mutual funds. Trade on stock exchanges. Low expenses, tax efficient. Every time buy/sell pay commission. Not all have lower expenses.
Fund of Funds
Mutual fund that invests in other mutual funds.
Hedge Fund
Not registered, private investment partnership. Primarily wealthy investors.
Net Asset Value (NAV)
The price a customer would receive when selling
Public Price Offering (POP)
The price a customer pays to purchase.
Forward Pricing
4pm deadline. Before 4 same day after 4 next day.
Class A shares
Front end load
Class B shares
NOT NO LOADS. No free lunch. May be subject to contingent deferred sales charge (CDSC).
Level Load
Fixed percentage fee each year.
No Load 12b-1
12b-1 fees levied. Up to a maximum of .25% per year.
Breakpoints
Lower fees offered at different levels of purchasing.
Breakpoint Sale
When a customer's purchase is close to a breakpoint (discount on fee) and RR does not tell them.
Letter of Intent
13 months. Non-binding. Shares placed in escrow until the amount is met or 13 months passes. If breakpoint not met, escrowed shares are liquidated to cover the additional sales charges.
Rights of Accumulation
Loyalty discount. Can reach breakpoints over time as you invest more or as your fund grows.
Contractural Plan
Fixed payment invested periodically over time. Usually in UIT format.
Front-end Load (1940 Plan)
Federal regulations allow up to 50% of 1st years payments for sales charges.
Spread Load (1970 Plan)
Fund may deduct up to 20% of any individual payment for sales charges as long as the average over 4 years does not exceed 16%.
Refunds (mutual funds)
Investor may cancel the plan within 45 days and receive full refund of all sales charges plus current NAV of any shares purchased, Does not guarantee investor will get all his money back if the plans NAV has fallen.
Spreat load Refund
After 45 days spread load purchaser is only entitled to the current NAV.
Front load Refund
Will receive a partial refund of sales charges as long as he cancels within 18 months. Current NAV.
Dollar Cost Averaging
Investors engage in voluntary accumulation plans with a fixed dollar amount periodically.
Getting ouf of Mutual Fund
Mutual funds are required to send a customers liquidation proceeds within 7 calendar days of receipt of the redemption request. All redemptions occur at NAV.
Reinstatement Provision of Mutual Funds
Allows mutual fund investors 30 days replace money that they have previously withdrawn.
Exchanges (Switches)
Fund families allow investors to execute intrafamily exchanges(switches) from one fund to another. TAXABLE EVENT.
Prospectus
A summary document that contains the same information contained in the company's registration statement. Satisfy the requirements of the SEC Act of 1933. Must be filed with SEC.
Prospectus contents
Statement of objectives; Investment policies and restrictions, methods of purchasing and redemption; sales charges and annual expenses; services offered and financial statements.
Prospectus shelf life
16 months.
Disclosure (delivery) of prospectus
most current prospectus at or before the time of purchase.
Omitting Prospectus SEC Rule 482 (Mutual Fund Profile)
Must contain a summary of information found in prospectus; the funds objectives/goals; principal investment strategies, principal risks of fund and a toll-free number so investors can call and obtain prospectus.
Statement of Additional Information (SAI)
Must be furnished upon request.
Generic Advertising SEC Rule 135A
Explanatory information relating to securities of investment company's generally; Explanation of investments companies or services offered; an invitation to inquire for further information.
Mutual Fund Performance in Advertising
SEC Rule 135A either include total return information current to the most recent month ended 7 business days prior to the date of use, or toll-free number or a web site.
12b-1 Fees
cover the direct marketing expenses of the fund such as advertising. Also help cover the costs of distributing. May also be used to pay "trailer" ongoing commissions to RR. Assessed annually.
12b-1 Fees Approval/Renewal/Review
approved by majority of funds board members and majority of outstanding shares. Must be renewed annually (spending quarterly)
Administrative Fees
Cover day-to-day operational expenses of the fund. Legal and accounting costs for services of Transfer Agent and Custodian.
Risk associated with Life Insurance
Insurance Company - Mortality Risk; Expense Risk is that the insurance company may not be able to accurately estimate its cost of doing business; Risk to customer is inflation risk.
General Account
Where insurance companies place traditional fixed, conservative products.
Separate Account
Variable accounts are placed in Separate Account.
Insurance prospectus
Given to variable product buyer berfore purchase that details risks and holdings associated with each sub-account.
Separate account considered "safer" in 1 aspect
Separate account assets are segregated from the general assets of the insurance company, they will remain unaffected by any legal issues, lawsuits or potential bankruptcy.
Variable Life Products
SEC and FINRA consider these a security and are therefore these prducts are subject to regulation. SEC act of 1933; 1934 and the Investment Co Act of 1940.
Outsanding loans against cash value of life insurance
Reduce death benefit proceeds.
Variable Life contract premiums
level throughout lifetime of insured. Invested in separate account. No guarantees. Investors are given choice of options. The rate of cash value is dependent on the performance of the separate account.
Variable Life policy
Potential inflation hedge,
Prospectus Requirement (variable life)
Considered securities. Customer must be furnished with a copy of the prospectus prior to purchase. Prospectus will detail fees and risks as well as investment choices available.
Fluctuating Death Benefit
Variable contract has a fixed premium and a minimum death benefit that is guaranteed. The actual death benefit may exeed the guaranteed. Overperformance of separate account may result in increase in death benefit, Underperformance may reduce death benefit but never below the minimum guaranteed (face amount).
Variable Life Policy Loans
75% of the contract's cash value. If the separate account deteriorates outstanding loans the contract holder will be given limited amount of time (often 31 days) to repay.
Variable Life Insurance Features
Permanent Insurance; Fixed premiums; builds cash value; Invested in separage account; Fluctuating death benefit; guaranteed minimum death benefit.
Variable Universal Life Policies
Hybrid that combines investment choices of a variable life policy with the premium flexibility offered in a universal policy. Customers must be given prospectus.
Variable Policy Calculations
-Value of Assets = Daily
-Cash value of contract = monthly
-Death benefit = annually
Annual report
Insurance company is required to send annual statement. Must also list any policy loans; provide a record of all premium payments made and expenses.
Variable Life Insurance Sales Practices
45 day free look provision and conversion priveledges
Free Look Provision
-45 days from the execution of application
-10 Days frm receipt of policy
All premiums paid will be refunded
Conversion Privilege
2 year window to convert the variable policy to a whole life policy, often without evidence of insurability.
Illustrations
- Projections prohibitted
-rates used in illustration NOT guaranteed
-maximum rate of growth shown is 12% must also show a 0% growth rate.
Taxation of Insurance Products
ash value of variable and traditional products grow on tax deferred bases.Surrender of policy or making a withdrawal may be subject to taxation on earnings, those taking loans generally are not.
Taxation of Death Benefit
- Pass to beneficiary tax free
- Deceased may owe taxes through estate
1035 Tax Exchange
-One insurance product to another or to annuity
-One annuity to another
RR must show "economic benefit" to the client
Viaticals (life settlement)
selling the benefits of a life policy to a 3rd party. Typically to a life settlement company. The viator (owner of life policy) sells the policy. The buyer becomes the new owner of the policy, pays future premiums and collects death benefit when insured dies. Commonly known as the secondary market for life insurance.
Non-Qualified Annuities
Purchased using funds that have already been taxed (after tax or post-tax dollars).
Qualiffied Annuities
Purchased through work sponsored or payroll deducted plans. Purchased with pre-tax dollars.
Accumulation phase
grow on a tax-deferred basis.
Annuitization
Owner annuitizes contract. Gives up ownership rights of annuity to insurance company in return for a promise to pay.
Annuitant
Once the policy is annuitized, the contract holder is known as the annuitant.
Annuties
Designed to provide income for the policyholder during their lifetime.
Fixed annuity
A conservative "guaranteed" annuity. The insurance company offers a guaranteed rate of return. Funds invested in general account. Often purchased by conservative investors. Subject to inflation risk.
Equity Indexed annuity (EIA)
Provides investors a guaranteed minimum rate of return while allowing n opportunity to participate in some of the gains of the stock market, as reflected by an indes (S&P 500) Often carry steep surrender charges for anyone turning in their contract during first 5 to 10 years.
Variable Annuity contract
Most aggressive choice for investors. Separate account. Mix selected by contract holder. Insurance company provides no guarantees. Designed to provide hedge against inflation.
Accumulation Units
Deposits made into the contract are accumulation units
Annuity Units
Once contract annuitized, the accumulation units now referred to as annuity units.
Variable Contract Life Cycle
-Accumulation units grow on a tax-deferred basis
-Contact owner may choose to annuitize
-Accumulation units convert to Annuity units
-Annuitant payouts will fluctuate based on performance of separate account.
Annuity payment options
-Single premium deferred
-Periodic payment deferred
-Single premium immediate
Annuity Units
Remain fixed (value may change) # of units fixed.
Straight Life payout
Promise to pay annuitant for life. Once annuitant dies all payments cease. Any money remaining in account is property of insurance company. Typically the maximum payout amount to annuitant.
Joint and Last Survivor Annuity
Covers the lives of the annuitant and another person. Payments continue until both parties die. Payments usually smaller than straight life.
Life Annuity with Period Certain
Annuitant selects a specific number of years to liquidate account. If the annuitant dies prior to the time frame, the beneficiary will receive remaining payments
Unit Refund Life
Affords the annuitant the ability to name a beneficiary on the account. If annuitant passes away before he receives an amount equal to the value of the annuity units beneficiary receives value of account.
Assumed Interest Rate (AIR)
An arbitrary number expressed in percentage terms that is used by the insurance company to project the rate of growth of the separate account. Remains unchaged throughout the life of the annuity.
No requirement to annuitize
May make periodic withdrawals without annuitizing. Remains in control of account.
Taxation on Non-Qualified disbursements
Since accumulation was paid for with dollars already taxed this portion is tax free. Growth is on tax deferred basis and is taxed as oridinary income rates.
Tax Treatment of annuitized Contract
A combination of principal and earnings in each payout. The principal portion has already been taxed and is returned tax free. The earnings portion is taxable as ordinary income.
Annuities/Capital Gains
Annuities do not create Capital events. The taxable portion will be subject to ordinary income tax rates.
Single distribution non-qualified (already taxed $)
LIFO (last in first out) Entire distribution would be taxable as ordinary income. Eventually, the final invested amount would be returned tax free.
Early distributions from Annuity
10% penalty if taken before age 59-1/2.
Death benefit of Annuity
A portion of the annuity contribution is used to fund a death benefit (resembles life insurance). The death benefit guarantees that the beneficiary will receive at least the original contributions and in some cases substantially more.
Death benefit of Annuity
The death benefit paid is ALWAYS the greater of the original contributions or the current market value. Death benefits do not apply once the contract has been annuitized.
Tax Treatment of the Death Benefit
Do not pass tax free to beneficiary. Cost basis would be tax free growth taxable at ordinary income rates.
Variable annuity inside of IRA
variable annuities can be placed inside traditional mutual fund. Annuities death benefit or guarantee of lifelong income is a reason to do this. The client must be apprised that these benefits will come at the expense of higher fees. The benefit of double tax protection is a FICTITOUS SALES PLOY.
Contributions to retirement plans made with Pre-tax dollars
Reduce your income and your tax liability at time of contribution. Upon distribution the entire distribution is taxable as oridinary income.
RETIREMENT ACCOUNTS/CAPITAL GAIN
Important point - retirement accounts do not receive the benefit of long-term capital gain. Taxed at oridinary income rates.
IRS Tax penalties for traditional IRA's
-10% plus ordinary income before age 59-1/2
-50% of required minimum distribution if not taken by age 70-1/2
-6% penalty if you exceed maximum contribution amount
Employee Retirement Income Security Act of 1974 (ERISA)
Established minimum standards for retirement plans offered by private employers. If plan meets minimum standards considered "qualified" under ERISA.
ERISA
Regulates private sector retirement plans.
ERISA
The overriding concern for ERISA is that the plan be run for the benefit of employees, not the company. Plan must not be discriminatory - ALL eligible employees who meet criteria must be allowed to participate.
Establishment of private retirement plans
Typically set up in some type of trust arrangement. Assets held separately from those of the company.
Eligibility of private plans
Qualified plans must be made avaible to all eligible workers. Full-time status (1000 hours per year); Employed 1 year or more; 21 years old.
Funding private plans
May be funded by employee, employer or a combination of both.
Vesting
Any money invested by employee is always 100% immediately. Contributions by employer often subject to seasoning.
Plan Documentation
Under ERISA all employees must receive documentation concerning their retirement plan.
NON-QUALIFIED Plans
ERISA does not require employers to establish any sort of retirement plan. Some employers choose to create plans that do not meet ERISA standards. Plans may loose most of tax advantages afforded to employees/employers.
Deferred Comensation
Non-qualified plan that allows employees to defer some of their current pay to future years. Typically management and highly compensated employees. In the event of bankruptcy the employee would be general creditor and must wait in line to get paid.
Payroll Deduction Plan
After tax dollars. Typically to purchase U.S. Savings Bonds or non-qualified annuities.
Not Regulated under ERISA
Federal, state and local government workers are note ERISA eligible (e.g, 457 plan, 403b/501c3 plans)
Defined Benefit Plans
Each employee knows the payout that they will receive upon retirement
Defined Contribution Plans
The employee knows the amount of assets being placed in plan but does not know their eventual value. Dependent on the invesemert performance of assets withing the account.
Pension Plan (Defined Benefit)
Mandatory contributions made by employer. Invested as employer dictates and responsibility of employer. Employers MUST make mandatory contributions to these plans.
Profit Sharing (Defined Contribution)
Employer contributes a portion of the firms profit each year. May not make contributions or in unprofitable years.
401(k) Defined Contribution
Employee makes pre-tax contributions through payroll deductions. In some cases employers make matching contributions up to a certain %. $17,000 maximum and employee can contribute for 2012. All benefits are taxable upon distribution.
Roth 401 (k)
A hybrid between traditional 401 (k) and a Roth IRA. After tax contributions.
Catch up Provision
Employees over age 50 can contribute and additional $5,500 to their 401(k) or Roth 401(k).
401(k) Investments
Participants are typically given a selection of investment choices. Responsibility of the employee to allocate his funds inside account.
Taxes on 401(k) Distributions
-Prior to 59-1/2 10% in addition to ordinary income.
-Required Minimum Distribution by April 1st the year account owner turns 70-1/2 50% assessed on RMD amount.
403b and 501c3 Plans (Defined Contribution)
Tax sheltered annuities. Pre-tax contributions. Mirror 401(k). Typically used for employees of:
-Public and parochial schools
-Religious organizations
-Qualified nonprofit organizations such as hospitals an museums.
403b and 501c3 plans taxation
All distibutios are taxable at ordinary income rates.
Acceptable Investments inside Traditional IRA
Stocks, bonds, mutual funds, annuities and U.S. minted coins
Prohibitted investments/strategies for IRA
-Collections (art, stamps, gems etc.)
-Short sales of stock
-Margin trading
-Speculative option strategies
IRA contribution limits
Contributions are only allowed by investors with earned income. 100% of earned income or $5,000 whichever is lesser.
Married couple IRA contributions
Married with only 1 income - $5,000 per spouse held in separate accounts.
IRA holders have until April 15 or current tax years to make contributions.
These contributions may be made up to age 70-1/2.
-Excess contributions carry a 6% penalty for contributions and growth. Excess contribution also loses its tax-deferred status.
Cath Up Provision
Over age 50 are allowed to invest an additional $1,000 per year.
Fully deductibe IRA Contributions
$56,000 or less (single)
$90,000 or less (joint)
Partially Deductible IRA Contributions
-Between $56,000 and $66,000 (single)
-Between $90,000 and $110,000 (joint)
Non-Deductible IRA Contributions
-Over $66,000 (single)
-Over $110,000 (joint)
High Income workers contribution to IRA
In ALL cases, the worker is still allowed to contribute. The more money an individual earns the less likely a traditional IRA contribution may be made on a pre-tax basis.
Capital Gains on IRA's
IRA's and other retirement accounts NEVER receive preferential capital gains treatment. Any tax liability is payable at ordinary income rates.
IRA Distributions
Already taxed dollars returned tax free. Pre-tax earnings are taxed as ordinary income.
Early IRA Distributions
Prior to age 59-1/2 10% penalty for early distribution.
Exceptions:
-Death
-Disability
-Excessive medical expenses
-1st time home purchase
-To fund education
IRA transfer
The account holder never touches the assets. Assets are moved from one trustee directly to another. No tax implication exists.
IRA Rollover
IRA to IRA rollover, the account owner physically takes a check. The check must be deposited in a new IRA within 60 days. Deposited within 60 days there is no tax liability.
Work plan to IRA rollovers
Employer is required to withold 20% and send to IRS. This 20% withholding may be refunded when the customer files next tax return. Only applies to work plan-to-IRA rollovers.
IRS Tax penalties IRA
-Excess contribution 6%
-Premature Distribution 10%
-Failure to take RMD 50% penalty applied to RMD amount not distributed.
Roth IRA
Tax Reform Act 1997. Contributions made with post (after) tax money and may be made after age 70-1/2 for persons still working.
Roth IRA income limits
-$110,000 for single earners
-$173,000 joint filers
Any individual earning more than $125,000 AGI or joint $183,000 AGI are not eligible to contribute this year.
Taxation of Roth IRA
Once the plan has been established for at least 5 years and one of the following have been met NO TAXES ARE DUE on distributions:
-Age 59-1/2
-Disabled
-Death
-1st time home buyer
Roth IRA Required Minimum Disbursement
There is NO requirement to toake minimum distributions from a Roth. Since the government is not expecting tax revenue.
Simplified Employee Pension (SEP) IRA
Hybrid product designed to be simple and cost-efficient for small business owners.
SEP contributions
Employees open an IRA that is funded by their employer. Employers are allowed to make annual contribution of up to 25% of the employees salary, up to $50,000 per year. Technically non-qualified plans.
SIMPLEs
Designed for small businesses. Employ less than 100. Employees make contributions directly into a SIMPLE IRA up to a maximum of $11,500 under age 50 and $14,000 for 50 or older. Employer contributes matching (up to 3%).
SIMPLEs Employer matching contribution
Employers are only required to match for employees who have contributed into their own SIMPLE plans.
SIMPLEs Eligibility
Employees must have earned at least $5,000 and reasonably expect to earn at least $5,000 for the current year. Those are maximum amounts and can be reduced by employer.
SIMPLEs Taxation
Employees may deduct their contributions from persona taxable income; Employers may deduct matching amount. If Employer is self-employed may take both deductions.
SIMPLEs dates
May be set up between January 1st and October 1st of the calendar year.
KEOGH (HR-10 Plans)
Self employed persons. Qualified plan the employer is allowed to contribute the lesser of 25% of post-contribution income(equal to 20% of earnings) or $50,000 toward his own retirement.
Keogh for employees
Employer is required to contribute for any employees who meet ERISA eligibility standards.
Keogh Earnings
The contribution is calculated based on customer's self-employed earnings only. Money earned as an employee does not count.
Coverdell Education Savings Account
Up to $2,000 per year up to child's 18th birthday. After tax money. Not subject to taxation as long a the distribution is taken prior to age 30 and is usedfor elementary, secondary or higher education expenses.
Coverdell not used for education
Can be transferred to another relative without tax consequence. In the event that the child does not pursue higher education or receives a scholarship.
Coverdell Income limits
-$95,000 individuals phases out
-$110,000 individuals are ineligible to contribute
Joint filers
-$190,000 phase out $220 ineligible
Section 529 Plans
Considered gifts under the federal tax code. No income guidelines
Section 529 Plan contributions
Up to $65,000 in a given year per contributor without triggering tax liability. (that amount is considered 5 years of up to $13,000 per contributor)
Section 529 Plans key concepts:
-Maximum contribution determined by individual plan
-Contributions are non-deductible
-No taxation on earning used for qualified education
-Accounts may be transferred to another relative
-No income limits for eligibility
Securities Exchange Act of 1933
New issue. Primary market. Functions as the ultimate enforcer of federal securities laws.
Securities Exchange Act of 1934
Regulated Secondary trading.
Self-regulatory Organization (SRO)
NYSE and NASD combined in 2007 to create FINRA.
FINRA
Does not have the power to imprison rule breakers.
SEC Act of 1933
Designed to provide new issue investors full and fair disclosure with accurate and balanced information.
Primary Distribution
The sale of new securities.
IPO
First offering to public is called Initial Public Offering.
Closely-held companies
Owned by a small group of shareholders.
Firm Committment Underwriting
The Underwriter(Distributor/Sponsor/Wholesaler) purchases all the securities being sold then resells them at a higher price to public.
Underwriting Spread
The difference between what the underwriter pays for securities and what they sell them for.
Firm Committment
Underwriter acts as principal (dealer)and take on the risk. Less risky for issuer.
Standby Underwriting
Existing shareholders are given the right to buy more stock (usually at a price below the current market price) for a limited time period. The underwriter either finds customers to exercise any rights or may choose to purchase the new shares for its own account.
Best Effort Underwriting
Underwriter sells whatever shares it can. Any unsold shares would be returned to issuer.
All-or-none Underwriting
An Underwriter agrees to try to sell all of shares offered, sales are contingent on all shares being issued. If shares cannot be sold, the deal is cancelled and any funds collected from investors returned.
Mini-Max Underwriting
The underwriter agrees to sell a minimum number of shares. There is also a maximum number of shares available.
Syndicates and Selling Groups
Several broker-dealers share the risk of underwriting a large firm committment deal.
Underwriting Syndicate
Several broker-dealers unite for large firm committment dea.
Managing Underwriter
One firm in the syndicate runs the syndicate and keeps its books. It will receive extra compensation for this job.
Selling Group
In order to sell the offering quickly and efficiently, the syndicate may invite other broker-dealers to participate in the sale of the new issue.
Pre-Registration Period
The time before a company "goes public" or offers securities.
Registration Statement
Filed with the SEC.
-Background information on business
-Proposed amoun of funds to be raised
-Proposed price per share
-Intended use of proceeds
-Accounting statements and other fin. info.
-Risk Factors
Prospecting during Pre-Registration
Prohibitted. Once the registration is close to being filed, the underwriter may seek out other broker-dealers to join them (if firm committment)
Filing Date
The date the registration statement is filed with SEC.
Cooling Off Period
Minimum of 20 days. The offering may not be sold during this time.
The Red Herring
A preliminary prospectus (bordered in red) that may be provided to potential investors.
No Approval Clause
The statement that the SEC requires is displayed on the cover of each prospectus not guaranteeing the contents.
Tombstone Ad
Allowable during cool-off period. Simple ad typically has a black border and describes the nature of the offering and the syndicate members from whom a prospectus may be obtained. As long as it conforms to SEC rules, not considered an advertisement nor a prospectus.
Contents of Tombstone Ad
-Name of Issuer
-Security being offered and the amount
-brief indication of the type of business issuer is in.
-The price of the security
-The names of the underwriters
Indications of Interest
During cooling-off period, RR's may collect names of interested investors. May not accept any money during this time.
Due Diligence Meeting
Just prior to end of cooling-off period all members of the syndicate and selling group are apprised of the key facts about the new issue.
The Effective Date
The SEC will set an effective date for the new issue. Marks the point at which the syndicate will price the offering by setting POP -Public Offering Price.
Post-Registration Date
Syndicate and selling group may complete sales of new offering. Remove Red border from Prospectus.
Exemptions from SEC registration
-US Government (tbills, tnotes, tbonds)
-US Government agencies (GNMA,FNMA,etc)
-Municipal issuers
-Non-profit or religious organizations
Anti-Fraud
There is no exemption from the anti-fraud provisions of the SEC Act of 1933.
Exempt Securites
Very short-term securites with maturity of 270 or less regardless of issuer.
-Commerical Paper
-Bankers' Acceptance
Private Placement and Regulation D
-May not be sold to more than 35 non-accredited purchasers.
-Unilimited number of accredited (wealthy) investors.
-Banks and savings and loans
-Insurance Companies
-Investment Companies(i.e. mutual funds)
-Certain large pension plans
-Wealthy Individuals
Reg D Definition of Wealthy/accredited
-Individual net worth or joint net worth with spouse of more than $1,000,000.
-Income of $200,000 (0r $300,000 jointly with spouse) in each of the last 2 years along with current year.
Restricted Stock
Private Placements are not freely tradable in the secondary market.
Investment Letter
Pertains to Private placement restricted stock. Letter acknowleding that he understands restrictions. Sometimes called "letter stock".
State Registration of Private Placement
State specific.
Uniform Securities Act (USA) State Regulations
- Filing (called notification in some states)
-Coordination
-Qualification
Restrictions on Purchases by Firms and Employees
A brokerage firm is prohibbited from allocating shares of an equity IPO to its own trading account or to another broker-dealers account. The firm is, however, allowed to buy stock in the secondary market. Applies to licensed and unlicensed employees of broker-dealer. Applies to immediate family members as well.
Stabilization
The syndicate is allowed to purchase (manipulate) stock in the secondary market to prevent or retard a decline in it's price. Price must be equal to or less than POP.
New York Stock Exchange (NYSE)
An example of the traditional form of marketplace where buyers and sellers conduct business on a physical floor.
NYSE
Operates as an auction market and routed through specialists who keep the market fair and orderly.
OTC Marketplace
over-the-counter market. Deals are brokered over the phone or internet. U.S. government securities; municipal bonds, corporate debt instruments and some equity issues trade OTC.
Market Makers
Trade in OTC trading market. They pay one price to sellers, charge another to buyers, and earn the profit or "spread" between 2 prices.
Specialist
The person on the floor of the NYSE who is in charge of any given security.
NASDAQ
Best known section of OTC. Electronic trading system.
Backing Away
When a market maker fails to honor its quote is committing a FINRA rule infraction.
NASDAQ 3 tiers
-Global Select (largest companies)
-Global Market (smaller companies)
-Capital Market (smaller companies)
Securities Exchange Act of 1934
Focuses on secondary market.
-Registration and regulation of securities exchanges.
-Registration and regulation of broker-dealers.
-Formation of the SEC
-Trade reporting rules for insiders
-Filing of financial reports by public companies (annual 10-Ks, quarterly 10-Qs)
-against fraud and manipulation in 2dary mkt.
-Customer protection rules
-Proxy solicitation by issuers
-Regulation of credit.
Maloney Act
Passed in 1938 as an amendment to SEC act of 1934. Authorized the creation of SRO which eventually became FINRA in 2007.
Insider Trading
SEC rules prohibit anyone from buying or selling a security while in possession of material, nonpublic information about the issuer.
Prohibition of Insider Trading
Applies to not only those who work for an issuer, but to anyone who is tipped off by an insider.
Insider Trading Penalties
Are severe. SEC will bring a civil suit against the violator, could be assessed a penalty of as much as 3 times the amount gained or loss avoided. This is in addition to giving up any profits earned.
Disgorgement
Being forced to give up any profits earned due to insider trading.
SEC Insider Trading Criminal
The SEC may ask US attorney to file criminal charges. If found guilty a fine up to $5,000,000 and/or up to 20 years in prison.
Chinese Walls
Firms are required to develop procedures to limit flow of information.
Reporting by Insiders
Anyone who becomes a member of one of the following catergories must file a report with the SEC within 10 days. Must file a report within 2 days following any transaction that changes a previously reported position.
What makes someone an Insider
-Members of a company's board of directors
-Corporate Officers
-Owners of more than 10% of any of the issuer's equity securities.
Short Swing Profits
Anyone in the "insider" category is subject to legal action if they earn "short-swing" profits on the issuer's stock. Selling a stock within 6 months of acquisition.
Capping
An investor attempts to prevent the price of a stock from rising.
Pegging
A manipulative activity that attempts to prevent the price of a security from falling.(Stabilization is permitted of a new issue by a syndicate)
Wash Sales
Selling the stock to itself over and over and reporting these as legitimate trades. There is no bona fide change in ownership. This is an attempt to give the illusion of an active market in a thinly traded stock.
Painting the Tape
Same as Wash Sale and have tax consequences for the investor.
Regulation T- Extending Credit to customer
Federal Reserve Board permits brokers to lend up to 50% of the purchase price to customers making a purchase on a margin account. Customers must pay within 5 business days.
Purchasing on Margin
All mutual fund purchases are considered primary market and are not eligible for purchase on margin. These securities may be used as collateral once they have been held in the customer's account for 30 days.
The Investment Company Act of 1940
Created to protect those who invest in companies whose primary business is to invest in other securities on behalf of their shareholders.
Excluded Companies underICA act 1940
-Investment pools with 100 or fewer investments.
-Investment companies whose shareholders include only "qualified" investors.
-Sometimes these exclusive pools are referred to as "hedge" funds.
Minimum Net Worth Requirement
have a net worth of a least $100,000.
Diversified Investment Company
-Condition 1: No more than 5% of its total assets invested in the securities of any 1 corporation.
-Condition 2: investments own no more than 10% of the voting stock of any 1 corporation.
Contract with Investment Advisor and Underwriter(distributor)
Must be approved by a majority of outstanding voting shares and a majority of disinterested board members. Initial agreement may be for a maximum of 2 years, after that renewed annually.
Reports to Shareholders
Annual and semiannual reports are financial report cards. Also must furnish audited annual report to the SEC.
Trust Indenture Act of 1939
Applies to bonds sold by nonexempt issuers, mainly corporations.
-must appoint a trustee to represent bondholders - typically a trust company or a trust department at a bank.
-Must create a written trust indenture which describes the rights of bondholders.
Anti-Money Laundering Rules
FinCEN branch of Treasury Department who enforces rules.
Bank Secrecy Act of 1970/Patriot Act
-BD's msut file CTR form 104 within 15 days if a transaction of more than $10,000 in cash.
Currency or Monetary Instrument Report
More than $10,000 in currency, (traveler's checks, personal checks, business checks etc if physically transported into or out of the U.S.
Wire transfers
BD's must maintain records of wire transfers in excess of $3,000.
Suspicious Activity(Red Flags)
In most cases the RR would file a SAR with their firm who will in turn file with FinCEN.
Telephone Protection Act
Cold calls must be made between 8am and 9pm customer time. Customer must be provided with name, contact information and purpose of call.
Do-Not-Call list
A customer that is called and request to be put on do not call list must be placed on list for at least 5 years.
Conduct Rules
related to the fair and ethical treatment of customers. Also contains rules on the personal activities of RR's.
Uniform Practice Code
Govern member-to-member transactions.
Code of Procedure (COP)
Due process for disciplinary actions against RR's and member firms.
Code of Arbitration
Disputes between member firms or member firms and customers.
Supervision by Principal
Each RR must be assigned to a specific principal who is responsible for him.
Responsibilities of Principals
-Review/approval of new accounts
-Review/approval of all transactions
-Review/approval of customer communications.
-Monitoring outside activities of RR's
-Handling customer complaints.
Advertising and Sales Literature
Must be approved by a principal before they are used.
Correspondence
Written or electronic communication that is targeted to one individual.
Sales Literature
Directed to a specific group of people. BD controls the distribution of this material. Provided to a targeterd audience. Group e-mails or test messages, form letters and brochures are examples of sales literature.
Advertising
Distributed via mass media. BD has no control over who receives this material. TV, radio and newspaper commercials and ads.
Correspondence consists of
- Individual letters
- Individual e-mail or text message
-Written or electronic to less than 25
Sales Literature
-Form letter, email or text to 25 or more
-Research reports
-Telemarketing scripts
-Brochures or circulars
-Market letters
-Reprints or excerpts of previously published articles, if not independently prepared.
Advertising
-Newspaper, magazine, billboard ads
-Television or radio
-Phonebook or yellow pages
-Internet websites
-Video taped presentations
-Motion pictures
FINRA RULES REGARDING CORRESPONDENCE
Require member firms to create a system to supervise both incoming and outgoing correspondence.
Independently Prepared Reprints
Any reprint or excerpt of any article issued by a publisher. Considered Sales Literature.
Institutional Sales Material
Any communication that is distributed or made available only to institutional investors. Banks, Insurance Companies etc.
FINRA Rules Regarding Investment Company/Variable Contract Sales Literature or Advertising
All sales literature and advertising must be approved by a principal prior to use. The firm is required to keep copies for 3 years.
Special Rules for Material
Material pertaining to investment companies, UIT's, or variable contracts must be filed with FINRA within 10 days of first use.
Mutal Fund Rankings in Advertising
May only be used if created and published by ranking entity.
Ranking Entity material required info
-past performance is no guarantee
-front end loads - whether rankings account for
-If ranking is based on total return
-the publisher of the ranking data
-the meaning of a symbol if used
Variable Product Advertising
must specify product as either life insurance or an annuity.Illustration can use 12% for maximum growth as long as it also shows 0 growth scenario.
Maximum Rate of Return in Variable Life Illustration
12%
Communication Recordkeeping Req's
3 Years
Preapproved Sales Literature
Sales literature supplied and is already filed with FINRA. These are "preapproved" communtications and do not need to be resubmitted to FINRA. Still subject to internal principal approval prior to distribution.
Use OF FINRA and SIPC names
May be used in phone book ads, business cards and on letterhead as members only. No endorsement or approvals.
Bank Broker-Dealer Advertising
Must be prominent in advertising:
-Securities not FDIC insured
-Securities or products not guaranteed by financial institution.
-Securities products are subject to investment risks including loss of principal invested.
Prohibbited Transactions
-Breakpoint sales
-Selling dividends
-Unauthorized trading
-Unsuitable recommendations
-Churning
-Front running
Churning
trading that is excessive in size or frequency in regard to the customers objectives and financial resources. Profitability is not a factor.
Front-Running
Trading ahead of a customer is prohibitted. A customer gives you a large order that is going to affect the price of a security once it hits market.
Commingling
When a broker/dealer or RR combines their securities and/or money with clients.
Outside Business Activity
RR's who engage in any outside business for compensation must provide prior written notice to their firms. Volunteer work not included.
Private Securities Transactions
Selling Away is an RR is involved in a private deal outside of their employer. RR's at a minimum need to notify their superiors and in some cases receive written permission.
RR Opening an Account at Another Firm
-Notify the employing B/D of intent to open account.
-Disclose to RR that their employer will be notified.
-Furnish copies of account statment to B/D upon request.
Payments to Non-Members
RR's are prohibitted from paying compensation to any individual who is not FINRA licensed.
Retired Members Compensation
Allowed to be paid continuing commissions on bona fide contracts in place at retirement. Does not permit a retired RR to solicit new business.
Rebates
RR's are not permitted to return some of the commission or sales charge to a customer.
Gifts
B/Ds and RRs are not permitted to give gifts in excess of $100 per person per year if the gift is given in relation to the business relationship.
Business Entertainment
Not included in the gift catergory.
Special Deals with Underwriters
RRs are prohibbited from taking additional compensation from a mutual fund underwriter that is not disclosed in the prospectus.
Firm-Sponsored Contests
Allowable as long as the product suite being covered be broad and not steer business to a particular product.
Sharing Profits and Losses with Customer
Is permissible if:
-RR has prior written permission from firm
-RR makes monetary contribution to account
-Sharing is proporational to RR's contribution
-RRs obtain customers written permission.
Fidelity Bonds
Protect customer in the event of theft or embezzlement.
Uniform Practice Code
Settlement and good delivery issues. Another deals with the payment of dividends.
Firm-To- Firm Settlement
Settlement rules apply to firms, not customers. Not RegT. This deals with firms settling (paying) each other.
Customer Payment Under Reg T
under Act of '34. A customer is required to pay for his transaction within 5 business days. Lates pays result in 90 day freeze of accounts.
Reg T Settlement Date
Settlement date + 2 business days. Based on trade date.
Ex-Dividend Rule
This determines who gets paid an upcoming dividend.
Declaration Date
The date that the issuer informs the marketplace of an upcoming dividend.
Record Date
This is the date that an investor must be officially on the books as an owner to earn the dividend. You purchase stock 3 or more business days prior to the Record date so that the trade will be settled (paid for) by the Record date.
Ex-Dividend Date
Is the 1st day the stock trades ex(wihthout) a dividend. If you buy a stock on or after the ex-dividend date, you will NOT get the upcoming dividend.
Code of Procedure
Think COP. Enforces rules.
Hearing
Respondent has 25 days to respond upon receipt of complaint.
Hearing Panel findings
Within 60 days after receiving all the evidence, the Hearing Panel will announce its findings.
Acceptance, Waiver and Consent (AWC)
If FINRA considers a minor rule violation the respondent may agree to waive their right to a hearing and appeal and sign an AWC. The maximum penalty is censure and no more than $2,500 fine.
Penalties
-Censure (reprimand)
-A fine (unlimited amount)
-Suspension
-Expulsion of a member firm from FINRA
-Bar a rep. from associating with a member firm (shunning or blackballing)
-Any other fitting sanction
Appeals
Respondents that wish to appeal a Hearing Panel decision must do so within 25 days of decision.
National Adjudicatory Council (NAC)
Hearing Panel Appeals are heard by NAC. Appeals of NAC decision are made to the SEC, and the SEC's decision may be appealed to a federal court then supreme court.
Code Of Arbitration
Office of Dispute Resolution. For disputes between member firms; member firms and their RRs; and member firms and their customers.
Arbitration Agreement
A customer who signs this agreement gives up their right to take dispute to court.
Arbitration Decision
Is Final and binding on both parties. No appeal process. Monetary awards must be paid within 30 days.
Arbitration statute of limitations
Only events that have occurred less than 6 years can enter into arbitration.
Simplified Arbitration
For amounts of $50,000 or less.
COP and COA "Double Jeopardy"
COA usually involves monetary dispute, COP governs sanctions for rule breakers. Rule breakers could be subject to both for the same violation.
Mediation
Informal, voluntary process in which an impartial person trained in facilitations works the the parties to create their own solution. Mediation is non-binding.
4 Phases of the Business Cycle
Expansion, Peak, Recession and Trough
Inflation
The general rise in the level of prices. Too many dollars chasing too few goods.
Recession
General contraction in economic activity. 2 consecutive quarters of decling Gross Domestic Product (GDP).
GDP
The value of all goods and services produced within the US whether by US companies or foreign companies located in the US.
Disinflation
A reduction in the rate of inflation. Prices are still rising, but at a slower rate.
Deflation
A decline in the general level of prices. Prices actually fall.
Inflation Risk
Especially tough on those on a fixed income.
Hedgint Against Inflation
An investor looking for a potential hedge would purchase variable insurance/annuity products or precious metals funds.
Stagflation
Inflation in a stagnant economy.
Keynesian Economic Theory
Congress and the President
The government exerts this influence through government spending and taxation.
-in a recession increase government spending to stimulate economy.
-In an overheated economy the government would reduce spending.
Monetary Economic Theory (Monetarism) FederalReserve Board
Controlling the economy by controlling money supply
Federal Reserve Board
Acts as the central bank of the U.S. Supervising and regulation banking institutions; maintaining the stability of the financial system. The Fed is responsible for the nation's monetary policy.
Fed and Interest rates
When the Fed increases the money supply - rates fall. When the Fed decreases money supply - rate rise.
Why does Fed "Tighten or Ease"
-Sustainable economic growth
-Stable prices
-Full employment
The Reserve Requirement
The percentage of deposits that banks must retain in their vaults or on deposit at the Fed. When the Fed raises the reserve requirement there is less money to loan out.
When the Fed decreases the reserve requirment, there is more money available to loan.
The Multiplier Effect
Like steering a supertanker: a small shift can have a huge effect.
The Discount Rate
The Fed acts as the bankers' bank. Member banks can borrow money on a short term basis from the Fed. The rate the Fed charges banks is called the Discount rate.
Fed Funds
Most volatile. Bank to bank loans. Most fed fund loans are overnight. Rate is set by supply and demand.
Open Market Operations
Most frequently used. The Fed buys and sells US government securities in the open market.
Federal Open Market Committee
Members of the Federal Reserve Board and some bank presidents. Meet periodically to examine wheter to increase or decrease or maintain.
Margin Rules
Regulations T, U, X. Regulates the amount of credit extended for the purchase of securities.
Moral Suasion
Speech (jawboning) by the Chairman of the Federal Reserve Board has tremendous impact on the market.
Prime Rate
The interest rate banks charge their best corporate customers for short term loans.
Call Money Rate
The interest rate charged by banks on loans to B?D's against margin stock collateral.
The Market For Foreign Currency
Trading in foreign currencies, occurs mainly between large banks in major international financial centers. Is not governed by SEC.
US Importers
Prefer Strong US dollar
US Exporters
Prefer Weak US Dollar.
Ad Valorem Tax
A method of assessing taxes on property or goods (real estate etc.)