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Ser 6

FINRA Financial Industry Reglatory Agency
Series 6 for selling investment company securities and variable contracts
security investment instrument that represents ownership (equity) in a company thru a debt obligation with a company
equity represented by a stock, most accessible means of aquiring wealth
debt represented by bonds and notes (more conservative)
t or f Instruments that give enhanced access to securities such as right warrants, and options are considered securities true
common stock indiv investors become owners in company by buying stock in companies
what kind of investment products do insurance companies offer? variable contracts that are classifed as securites
what is an investment company corporation or trust htat pools investors money and then invests money in securities on their behalf
What is the purpose of and investment co? raise capital by selling shares to the public.
Securities Act of 1933 investment co must abide by the requirements it imposes.
what are the different types of investment companies? 1. face amt certificate company (FAC) 2. mGMT iNVESTMENT CO 3. Unit Investment Trust (UIT)
What are the 2 types of UIT's? Fixed and Nonfixed
What are the 2 types of Mgmt Investment Companies? Opend and Closed End
What are the 2 kinds of Open end (mutual fund) Diversified and Nondiversified
What are the two types of closed end Mgmt companies? Diversified and Nondiversified
invest act of 1940 calsifies investment co. into 3 types: 1. face amt certificate co (FAC) 2. Unit investment trusts (UIT) 3. Mgmt investment co
face amount certifiecate co (FACs) contract btwn investor and issuer where the issuer guarantees pmt of stated face amt sum to investor at some set date in future. they pay a fixed rate of return, do not trade on secondary mkt, redeemed by issuer
full-paid face amt certificate if the investor patys for the certificate in a lump sum.
Universal Investment Trusts (UITs) investment co organized under a trust indenture. It functions as a holding co for investors. They have no BOD, financial advisors, or actively managed portfolios
What must happened hen the securities in a UIT protfolio are liquidated? because UIT is not managed all proceeds must be distributed.
Fixed UIT typically purchases a portfolio of bonds and terminates when the bonds in the prot mature.
nonfixed UIT purchases shares of and underlying mutural fund.
What exactly do UIT Mgrs do? purchase other investment company shares or governmanet and municipal bonds. Then they sell redeemale shares or units or shares of beneficial interst (all the same) in their protfolio of securities.
how do trustees of fixed and nonfixed UITs guarantee liquidity to their shareholders? in secondary markets in the units according to the Investment Co Act of 1940
what is the major difference btwn MFund and UIT? Mfund actively traded, UIT no traded, they are fixed trusts. The UIT benefit to the investor is that they own a diversified interest but do not pay a mgmt fee.
how do you redeem UIT Shares (units) must be reeemed by the trust not on the secondary market
Mgmt Investment co most familiar type of invest co. They actiely manage securities protfolio to achieve a stated investment objective.
What is the difference btwn Closed end and Open end Mgmt invest co? a closed end co IPO is limited and open end company uis perpetually offering new shares to the public
What types of products do close end investment co offer? stock, bonds and preferred stock.
what is another term for close end investment co? publicly traded funds
bid price price at which the investor can sell stock
ask price price at which and investor can buy stock
NAV Net asset value, the true value of a stock. Stocks can trade for more than (premium) or less than (discount) the NAV
Open End Investment Co (Mutual Fund) They are able to continuously raise money by selling stock. there is no set amt of stock. Issue not > one class of security (redeem comm stock)& maintain a min asset to debt ratio of 300%.
POP public offering price, any person who wants to invest in the company buys shares directly from the co or its underwriters at this price. A mutual funds POP is the NAV+a sales chrg.
NAV (net asset value) Formula deduct the funds liabilites from its total assets. NAV per share is found by dividing the funds NAV by the # of shares outstanding
redeemable securities the shares of an open end investment co. When investor sells the company redeems at NAV. Co sends investor %% for the shares. So MF capital shrinks but NAV does not fall.
What does an open end Investment co issue common stock only, no debt securites and they are permited to borrow
How is trading different for Open end and close end invest co? open sold and redeemed by fund only and closed may be traded on secondary mkt does not redeem shares.
Open or closed? Trades in the secondary mkt? closed
Open or closed? Investors may purchase fractional shares open
Open or closed? Can issue common stock, preferred stock and bonds closed
Open or closed? Are sold with prospectus during IPO only closed
Open or closed? Issues a fixed # of share? closed
Ex-date is set by the board of directos open
Open or closed? Do not trade in secondary mkt, shares are redeemable open
Open or closed? Price is set by supply and demand. closed
Open or closed? usually called mutual fund open
Open or closed? Selling price is usually includes a sales charge open
What is the 75 - 5 - 10 test? Inv Co Act 1940 says that co that says they are divers. must at least 75% of the funds total assets must be inves in secur by co other than itself or affil no > 5% in invest in 1 issuer, fund may not own > 10% of oustanding voting secur of any 1 issuer.
nondiversified investment co does not meet the 75-5-10 test. An investment co that specialized in one industy is not necessarily a non diversified co.
Specialized funds or sector funds Co that concenterates their assets in an industy or geographic area, such as health care, technology, etc.
hedge funds type of equity security. Does not currently have to register with SEC. It requires that its buyers are accredited investors. Riskier investment policies than mf, sucha as arbitrage and massive short positions
exchange traded funds (ETFs) equity security invests in specific group of stocks in deliberate mimicry of a particular index such as the S&P 500. ETF trades like a stock on the floor of exchange.
What are the expenses to a ETF? they tend to be lower than those of a mutual fund b/c the carge for buys and sells is simply the commission one pays for any trade.
Which is covered in Inv Act of 1940? UIT, FAC, Open end mgmt co or closed end mgmt co? all (d)
Which kind of investment co has no provision for redemption of outstanding shares closed end (b)
What type of Investment co has a fixed portfolio, redeemable shares, and no mgmt fee UIT (C)
how are hedge funds an MF similar? both offer professional mgmt (c)
When must a company register with the SEC? If it is in the business of invest in, holding ot trading secur, 40% or more of assets R invest in secur
What are the min requirements a company must meet to register with the SEC? Must have private capitalization (seed money)at least $100k in net assets, more thatn 100 investors, clear defined investment objectives
t or f If invest co does not have > 100 investors and $100k in net assets in can never register with SEC False! It can still register a public offering with the SEC if it can meet the requirements within 90 days of registration.
once a company clearly defines the investment objective to operate under how can they change it? once defined, the objective may be changed only by a mojority vote of the company's outstanding shares.
What must be the asset to debt ratio for open end investment co to borrow from a ban? 3:1 that is debt coverage by assets jof at least 300%.
What does the invest co have to identify when filing for regist with the SEC? type of mgmt (open or cls), plans of co to raise money, co inten if plans to focus on single indus, plans for inves in real est or commod, chng by vote condit, full name and add all affil ppl, descrip of busin exper of ea offcr and dir dur preceding 5 yrs
How is a investment co like corporate issuer subject to act of 1933's full and fair disclosure rules. A registration stmt which includes the prospectus must be filed with the SEC before securities may be sold to public
Investment co prospectus mf must always be sold with one b/c they are continuous, new secur are always sold with one, close end sold with one at IPO only, finan info in prospec cannot be > 16 mo old act of 1933 requires info to be reasonbly current
Margin the use of money borrowed from a bank through a brokerae firm to purchase securities.
Can a margin be used to purchase Mutual fund shares? no, b/c reg T of the federal reserve board prohibits this
Can MF shares be used as collateral in a margin account? yes so long as they have been fully paid for at least more than 30 days
What are the 2 parts of the registration statement a co must file with the SEC Part 1: the prospectus also calle N-A or summary prospectus and Part 2: doc with info that need not go to all investors but must be avail to public called statement of addit info
What does the disclaimer on the prospectus state? ~these securities have not been approved or disapproved by the SEC nor has the commission passed on the accuracy or adequacy of the prospectus. Not state approve or disappr this offering. any repres to contray is criminal offense
What are some limitations for mutual funds (MF)? buying on margin, selling short, joint investment or trading accts, acting as distributor of its own securities (exct thru underwriter) selling uncoverd options
short selling secur indust that involvs sell shares that are not owned Investors borrow shares from the broker/dealer by putting up collateral in a margin account. the borrowed sh are sold with hope mkt price will fall, buy back shares @ low price to pay back broker.
What changes require a majority vote of the shares outstanding? issuing other securities, purchasing real estate, loans, changing subclassfic. ie, open to close end, changing load ie no load to load, changing NOB, chg inve policy, chg fee or auditors
t or f mf are generally prohibited from using covered option strategies false - prohibited from using naked or uncovered option trading strategies
t or f a majority vote of the outstanding shareholders is required to change the investment objectives of a mf. false - a change in the investment objec of the fund requires a majority vote of the outstanding shares, not shareholders
t or f mf shares may be purchased on margin but cannot be used as collateral in margin accounts false - it is the other way around
t or f open end co. must have more than 100 shareholders and at least $100k of assets before they may operate as an investment co true
t or f mf are required to file registration statements with SEC b4 shares are sold to public true
t or f mf make continuous secondary offering of securities false
t or f open end investment co must maintain a 3:1 debt to asset ratio false it is 1:3 debt to asset ratio
t or f close end co are generally considered mf false that is open end.
5 parties work together to help invest co operate. What are they? 1. BOD 2. investment adviser 3. custodian 4. transfer agent 5. undwerwriter
Investment co board of directors has a CEO, team of officers and BOD. BOD deals with policy and admin matters. they don't mge the invest portfol. elected by shareholders, they define fund type, define fund objective, & approve/hire trx agent, custodian, and invest adviser
Noninterested person in serving on Investment company only connected with the investment co in their capacity as a director. Is not an advisor, tx agent, custodian - at least 40% of directors must be independent or noninterested persons
How much of an invest co BOD can be interested persons no more than 60%, this includes attorneys on retainer, accountants, and any persons employed in similar capacities with the co.
Invest Advisor in an invest co An invest co BOD contracts with an investment adviser or portfolio mgr to invest the cash and securities in the funds protfolio, implement invest stategy and manage day to day trading. Must adhere to objectives in funds prospectus cannot tx their respons
How do invest advsers get paid they earn a mgmt fee which is paid fr the fund's income. the fee is a set annual percentage of portfolio asset value. If they outperform market performance benchmk, they can also get incentives.
how long is an investment advisors conract normally 2 yrs and is usually given by the BOD. the contract is subject to annual approval by BOD or vote of outstanding shares
t or f the adviser must inform shareholders of the tax status of fund distributions true
Investment co custodian this rôle is perfomed by band or broker/dealer. handles most of the invesmtne company's clerical functions. It keeps the securities in custody. With ok of invest co, custod may depos secur in one of the sys for central handling of secur made by FINRA
What are the main responsibilities of the invest co custodian? keep invest co assets segregated at all times, all w/d of assets only under SEC rules, restrict access to certain ppl of invest co
Who normally acts as the investment co custodian? Commercial banks
t or f the custodian periodically audits the fund's assets to assure the assets are properly accounted for true
t or f Income from the fund does not go to the fund custodian false - the custodian is paid a fee from the income fund.
invest co transfer agent issue, redeem; and cancel fund shares, handles fund name changes, send customer confirms and fund distribut, record outstand shares can be same as custodian or separate co. They are pd fee from fund
invest co underwriter also called sponmsor, or distributor, appt by BOD, and receives a fee for selling and marketing fund shares to public. Open end inv co sells shares to Underwrter at NAV as needed
t or f the underwrites cannot maintain inventory of open end shares. true
how is the underwriter paid? by adding a sales charge to the shares NAV when it makes sales to the public
Can a mut fund act as it own underwriter/distributor? no, however there is and exception to this rule for no-load 12b-1 funds.
who can be an underwriter? must be FINRA member firm
Can underwriters bill the fund as an expense? no they may never te treated as an expense to the fund. The are compnesated fr the sales charge they add to the NAV.
t or f all parties that work together in the operation of a mutual fund are paid from the income of the fund? false, all except the underwriter who is paid from a sales charge.
prospetus must be given to investor b4 during solicitaiton for sale of securities. has info on funds objectives, invest policies, charges amd mgmt fees and serices offered. Also has 1, 5, 10 yr past perform hs.
Statement of additional Info (SAI) Unlike prospectus, investors have to ask for this it contains fin stmts to incl: bal sheet, stmt of oprns, income stmt, and portfolio list at time SAI was originated
act of 1940 reqires shareholders to get what at least semiannually? rinancial reports
What do the fin rpts contain that go to the investor? bal sheet, valuation of secur, income stmt, stmt of BOD compensation, & stmt of $ amt secur puchased & sold during period
what additional info is the fund required to provide in the prospectus or annual report? factors that afftd fund perform, line graph coparison of comparable market index, names and titles of persons primarily responsible for fund day to day mgmt
what is the difference btwn annual rps and semiannual rpts of invest co? annual rpt must be audited, semiannual can be unaudited.
typically, what is the largest single expense of a mutual fund? mgmt fee
to change the name of recently married shareholder on her shares of a mfund, who do they contact? transver agent
at what value does mutual funds redeem shares at the NAV
redeemable securities unlike securities, mfunds offer guaranteed marketability, there is always a willing buyer for the shares
t or f many funds offer automatic reinvestment of capital gains and dividen distributions w/o sales charge true
1099 form for investment funds distributed annually explaining investors taxability of distributions
Can you reinstate a mfund once you make a w/d? sometimes, there are provisions that allow investors to reinvest up to the amt w/d'n within 30 days with now new sales charge. This must be in prospectus and is only available 1 time.
t or f mutual funds shareholders own a divided interest in the fund's portfolio false - own undivided interest
t or f a mutual fund shareholer's acct value fluctuates proportionately with the mutual fund's portfolio value. true
t or f the mutual fund's investment adviser is offered a 2 yr contract that is subject to annual approval true
t or f the transfer agent holds the mutal fund's assets for safekeping false - they are held by the custodian
t or f mutual funds issue only one class of common stock true
t or f the reinstatement provision allows reinvestment of w/d funds within 60 days at no load. false - 30 days
t or f to open an acount, most funds require a minimum investment. true - usually 500$ lump sum up front and 25$ additional investment
t or f mutual fund shareholders areallowed to vote on the frequency of dividend distributions false - don't vote on matters of dividends
how do you calculate the value of mfund share? total assets of fund - (minus) liabilities = Net Assets (NA) then / (divide) NA by # of shares outstanding to get NAV.
how often is the NAV of a fund calculated? daily - typically at 4 pm each BD (business day)
When does the NYSE close? 4 PM That is why the NAV of a mutal fund is calculated at this time.
forward pricing the price a mutual fund investor receives whens selling shares. He will get the next calcualted NAV which is calc at 4 pm following the close of the NYSE daily.
public offering price POP purchase price of a fund share.
front end loaded funds the NAV plus and additonal charge called the saled charge. Levied at time of purchase.
Back end load sales fees that are levied at time of redemption
level load or 12b-1 fees taken from investor acct as ongoing quarterly charge
no load no sales fee
what events can have an effect on the change of a funds Net Asset Value (NAV) mrkt value of securities incr or decreas, fund recv's or distributes dividends, fund recv's interest or distributes capital gaines, liabilities decline or increase
when activities do not change Mutual fund NAV? Mgr buys or sells securities, funds issues shares, fund redeems shares
What is a mutual funds maximum sales chage based on? Public offering price (POP). FINRA prohibits its mbrs from assessing charges > 8.5% of POP. Unless sold thru a contractual plan then it is 9% of POP.
In the secondary market what fees do the investor pay when buing into cloed end funds? they pay the broker commission or pay a mark up or markdown or discount (below) relative to the their NAV
How do funds/fees for an open end fund work? They are embedded in the POP or other fees. Sales expen include commissions for the manageing underwriter, dealers, borkers, and reg rep. and also advertising.
Mutual fund distributors use 3 different methods to collect the fess for sales of shares what are they? Front end loads, (diff btwn POP and NAV), Back end Loads (defferred) and 12b-1 sales chagres (asset based fees)
What is the most common way of paying for the distribution services that an underwriter provides? Front end loads
When is a back end load paid? when the investor surrenders or redeems mutual fund shares. This is a declining percwentage charge that is applied to the proceeds of any shares sold that yr. Usually designed to drop to 0 after a designated holding period such as 6-7 yrs.
how often are 12b-1 fees assessed? quarterly
what percentate is the highest a mutual fund can charge for a 12b-1 fee? .75% of a fund's net assets per yr.
How are 12b-1 fees approved and when must be approved initially and reapproved at least annuall by majority of outstanding shares, BOD and directors who are noninterested persons.
What is a mususe of No-Load terminology? a fund that has a deferred charge or 12b-1 fee of more that .25%
What 3 votes are used to implement 12b-1 fee approval? majority of outstanding shares, BOD, and noninterested persons of Board
Termination of 12b-1 fees requires what 2 votes? majority of outstanding shares and noninterested mbrs of board
what charges are covered by 12b-1 fees advertising, sales lit, prospectuses
POP = 10.50 & NAV = 10 what is the sales charge and sales chage percentage 10.50- 10 = .50 (charge) .50/10.50 = 4.8% (Percentage)
what is the back end load trying to help the investor to do? invest long term b/c when the investor redeems he is charged a sales charge. However, if they leave it in there long term (6-7 yrs) often the fee have declined to 0%.
NAV 20, POP 21 what is sales charge percentage 20-21 = 1 sales chrg, 1/21 = 4.76%
Assume NAV 20 and sales chage of 5% what is POP 20/(100-5)= 21.05 = POP
formula for sales charge and sales charge % when you have POP and NAV pop - nav = sales charge then sales charge/POP = %.
What is the maximum of POP over the NAV? not greater than 8.5% over the NAV for an open end fund.
No load funds Mutual funds that do not impo9se a sales chagre at all. 12b-1 companies may advertise themselves as no-loead funds if their 12b-1 fees is .25% or less.
t or f 12b-1 fees are levied quarterly and reviewed annually true
t or f an open-end fund's NAV may not be less than its POP false
t or f a back-end load is often called a CDSC true
t or f 12b-1 fees may not exceed .25% of average net assets. false
t or f closed-end funds generally have higher yields than open-end funds false
What kind of stocks are used for a growth objective common stock that has growth as primary or 2ndary objective.
What kind of investments are used for an income objective Bonds, preferred stock,a nd blue-chip stocks are used to provide income to mfunds with income objectives
growth funds invest in co who are growing rapidily. these comp tend to reinvest all or most of profits for research and development rather than pay dividends.
What is the main focus of a growth fund? generating capital gains rather than income
Blue-chip or conservative growth funds invest in established and more recognized companies to achievegrowth with less risk these are sometimes called large cap funds > &0 billion
Agressiver growth funds also called performance funds. willing to take greater risk to max capital appreciation. some invest in newer co with small cap < $5 billion called sm cap fundfs.
Mid cap funds somewhat less aggressive and have capitalization between $5 - $10 billion.
Income funds stresses current income over growth. Objective accomplished by investeing in stocks of comp with long history of dividend pmts, such as utility co stocks, blue-chip stocks, and preferred stock.
Option income funds invest in securities which options can be written and earn premium income from writing options. May also earn capital gains from trading options at a profit.
growth and income fund (combination fund) may attempt to combine onjectives of growth and current yield by diversifying its stock portfolio among company showing long term growth potentioal and co paying high dividends
specialized sector funds have min of 25% of their assets invested in their specialties. offer high appreciation potential and pose higher risks to investor.
special situation sunds also called value funds buy securites of co that may benefit from change in co or the economy.
belended/copre funds stock funds with a protfolio made of different classes of stock. may incl blue chip and hi risk potential rtn grow stocks or both growth and value stocks. purpose is to diversify while owning a single fund.
index funds invest in securities to mirror markwet index, such as s&p 500. buys and sells securities in manner that mirrors the composition of selected index
why are mgmt fees typically lower in index fund than other funds? b/c there is little turnover of stocks.
foreign stock fund invest mostly in the securities of companies that have main business outside US. Primary objec tive is long term capital appreciation.
International funds invest in securities of foreign contries
worldwide funds invest in securities of US and foreign countries
balanced funds also known as hybrid funds, invest in stocks for appreciation and bonds for income. can use different types of securities according to formula the mgr may adjust to reflect mkt conditions.
asset allocation funds split investmenst btween socks for growth, bonds for income and mmkt insruments or cash for stability.
Dual porpose funds closed-end funds that meet 2 object 1 investors seeking income buy income shares and get all the int ang dividends the funds port earns. if want cap gains they buy gains shares and get all gains on portf holdings tech they are closed-end but track indes
Bond funds have income as their main invest objective. Some funds invest solely in investment grade corp bonds. Others invest only in gob issues (safer).
corporate bond funds used by investors for high current income. b/c of > risk these funds give higher yields to investors than gov and muni bond funds.
tax exempt funds invest in muni bonds or notes that give income exempt from fed inco tax.
tax free funds can invest in muni bonds and tax-exempt mmkt instruments
Us government funds purchase securites issued by the US treasury or an agency of US government.
fund of funds mfund that invests solely in other mutual funds. they can be pure growth, pure income, or a mix of the 2.
funds of hege funds mf that invest in hedge funds.
what are some of the disadvantages of funds of hedgefunds shares are neither traded nor readily redeemable unless the fund itself offers to redeem them. Not easily liquidated then. expensed and risks also tend to be higher than those of other types of mfunds. Customers must be made aware of these drawbacks.
Money Market funds usually no-load, open-end mfunds that serve as temporary holding tanks for investors who are moste concerned with liquidity.
no load means investors pay no sales or liquidation fees.
how is interest on Money mkt funds computed computed daily and posted monthly.
what is the largest expense to investors who invest in Money market fund mgmt fee.
what is the NAV of money mkt fund set for? $1 per share.
according to the SEC what must be on the Money Mkt fund prospectus? 1. not insured by Gov ad investor has nor guarantee fund will be able to keep stable NAV 2. investmnts limited to securities with remain maturities of =or< 13 mo but avg maturing w/in 90 days 3. invesmnts limted to min risk securities
Beta measuring the volatility of a security of portfolio in comparison with the market as a whole.
what does a Beta of "1" mean? a security's price will move in direct correlation with the market.
what does a beta greater than 1 mean? a security is more volatile than the market
what does a beta less than 1 mean? a security will be less volatile than the market
Investor wants growth what type of fund does he need? stocks
Investor wants income what type of fund does he need? bonds
Investor wants safety of principle what type of fund does he need? government bond funds
Investor wants tax relief what type of fund does he need? municipal fund
Investor wants immediate liquidity what type of fund does he need? money mkt fund
Investor wants to maximize current income what type of fund does he need? corporate bond fund
what kind of funds are good for investors who are young and aggressive and want growth and not afraid to take risks technology fund, aggressive funds or small cap funds
Investor wants equity income what type of fund does he need? preferred stock and utility stocks
Investor wants to keep pace with inflatio what type of fund does he need? stock portfolio
top down quantitaive risk mgmt based on general mkt conditions, interest rates, and price trends in the general economy to guide the portfolio purchases and sales.
bottom up Quantitative risk mgmt based on direct assessments of a stock's performance in a universe of 3,000 or more stocks and the characteristics of the comp of invest interest itself.
can risk be eliminated? no only managed
defensive strategies have growth or incoem as objective, but safety of principal is top priority. these protfolios invest in blue chip stockswith moderate or low volatility and AAA or gov bonds
aggressive stategies want to max invest rtns by accepting higher risks. this includes highly volatile stocks, securities on margin and using put and call options.
balanced investment strategies most investos adopt a combination of agressife and defensife strategies when making decisions about the securities in their portfolios. This portfolio has securities of many types.
according to securities laws, how far back must the fund disclose avg total returns? 1, 5, and 10 yr periods or since inception if less than 10 yrs. performance must reflect full sales loads with no discounts.
funds expense ratio relates the mgmt fees and operating fees to the funds net assets - stock funds are generally 1 - 1.5% while bond fundsa are generally .5 - 1%
what factors are included in calculated a mutual fund's expense ratio BOD stipend, investment adviser fee, custodian fee and tfrnsfer agent fee.
formula for mfund expense ratio fund expenses/avg net assets
what is the largest part of the expense ratio investment advisory fee
which has higher taxes short term capital gain or long term? short
Portfolio turnover ratio the costs of buying and selling securities, including commissions or mark-up or mark-dwons are reflected in turnover ratio (100% ratio means fund replaces the fund annually) this ratio reflects the funds holding period. the lower the % the long the hold X
what services do mfunds offer retirement accts, invst plans, check writing, tele transfers, conversion priv, combo invest priv and w/d plans.
voluntary accumulation plan allows a customer to deposit reg periodic investments on a voluntary basis. offers flex while encouraging the investor to create savings habits. Once acct is open contribution frequency is flexible
Dollar cost averaging invests identical amounts at a regular interval. allows investor to invest in more shares when prices are low and few shares when prices arehigh.
how do you determine the average price per share and average cost per share when dollar cost averaging? If investor inves $600 for 4 mo. and the price per fund share ranges from 20,24,30,40 then the cost would be the total $2400/#of shares 90 (600/amt ea mo total). price per share would be total share price 114/4 the number of investments made.
when is dollar cost averaging effective? when the average cost per share is less than the average price per share
contractual plan companies periodic pmts plans for invesmtnet in mutual funds could be purchased from unit investment trusts. Investor would get 2 prospectuses, 1 for contr co itself and 1 for mutual fund the co would purchase.
what were the advantages of an investor going through a contratual plan co? they could avoid mutual fund's initial investment requirement, & second they could buy plan completion ins from an ins co. if invest died b4 completion ins co would give the remaining pmts to the plan in lump sum. It would buy shares and give to benefic
How long is the mandatory free look period for investors in contractual plans? must ge given 45-day free look period to w/d from the plan.
1940 co Contractual Plans 9% sales chrg over life of contract, 50% of any pmt for sales chrg, 0-45 days termination rfnd NAV +all sales chrg, 45-18mo NAV+sales chrg over 15%, >18 mo NAV only, plan complet shares sent to invest or bene
1970 co contracutal plans 9% over life of contrac sales chrg, 20%of any pmt but 4 yr avg not > 16%, 0-45 days NAV+Sales chg, 45-18 mo and beyond NAV only, pan completion, shares sent to investor or bene
what are the number of days in contractual plan free look period 45
Max avg sales charge that can be w/d over the first 4 yrs of a spread-load act plan 16
the act that allows a fist year sales charge of 50% Front end load act
Sales charges in excess of this percentage of the investment amt must be rtned after 45 days but before the end of 18 mo under an Act of 1940 contractual plan 15%
Plan co must send the free-look letter within this number of days 60
Max sales charge % in the first year under Act of 1970 plan 20%
After this number of months, the refund under an Act of 1940 plan is NAV 18
Max sales charge % over the life an Act of1940 or Act 1970 contractual plan 9%
t or f all mutual funds offer w/d plans false, but those that do may offer plans that inclued fixed dollar, fixed percentage, or fixed time plans
fixed dollar plan customer gets periodic w/d of fixed dollar amt. The fund liquidates shares to send them the sum
fixed percentage or fixed share plan fixed number of shares or a fixed percentage of the account is liqyuidated each period
pixed time plan customers liquidate thir holdings over a fixed period of time.
what must reps never do when discussing a w/d plan with a customer? 1. never promise guar ROR 2. tell investor it is possible to run out of $$ if they overwithdraw 3. tell investor during down mkt it is possible to exhaust acct if w/d even small amt. 4. never use charts or tables unless SEC approves
t or f mutual fund w/d plans are not guaranteed in any way. Chjarts and tables regarding w/d plans must be cleard by the SEC b4 use. true
t or f dollar cost avging results in lower avg cost per share true
t or f mosre shares are purchased when prices are lower in dollare cost averageing true
t or f in dollar cost avg, sales lit, dollar cost avg cannot be rreferred s avging the dollar true
Public offering price POP is the same as the ask price, this is what you would pay per share to be in a mfund. It is the NAV plus sales charge
Nave Chg this is the listing in the paper for the sales chare on a mutual fund
NL this is the listing in the paper if there is no sales charge on a mutual fund. It stands for No Load.
how do you figure the sales chage percentage on a mutual fund that has a .65 sales charge and a a POP of 14.44 and a NAV of 13.79? sales charge/POP = .65/14.44 = 4.5%
standard and poor's stock guides include summaries of mutual funds for the year. you can use it to evaluate mutal funds
In the Standard and Poor's table what do the letters G, I, S, R stand for under Principle objective? G-growth; I-income; S-stability; R-return on capital
What are the types of funds on Standard and poor that start with c, b, bd, cn, cv, fl, h, l, p, sp, tf c-common; b-balanced; bd-bond; cn-canadian; cv-convertible; fl-flexible; h-hedge; l-leverage; p-Preferred; sp-specialized; tf-tax free
what does the min unit stand for on the standard and poor report? min initial purchase of shares
what does the cas and equivalents stand for on the standard and poors report? rncl cash and recv'bles, short term gov securities, and other m mrkt instruments less current liabilities. these are part of the total net assets
what does the current worth fo $10k show you on the Standard and Poor's report? shows the gauge of funds performance over several years starting with $10k this column has the current value of that same $10k
what does the NAV per share show you? the current NAV per share and the current POP
NAV FORMULA net assets/shares outstanding
annuity insurance product to provide retirment income. Annuity refers to a stream of pmts guaranteed for some period of time, the life of the annuitant, until annuitant reaches a certain ager, or specific # of yrs
what is guaranteed on an annuity? the stream of pmts itself, not the amount
how much is the penalty if early withdraw is taken from an annuity? When is a early w/d 10% in addition to income tax, early w/d is any time before age of 59 1/2
fixed annuity investor pays premiums to the insurance co. that are invested in co. general acct. Ins co is then obligated to pay a guaranteed amt of payout (normally monthly) based on how much was paid in.
why do you not need a securites license to sell annuities? because the insurance co. give a guaranteed ror the risk is on the ins co therefore this is not a security and only a life license is needed to sell annuities.
purchasing power risk significant risk associated with fixed annuities. the fixed pmt thqt the annuitant receives loses buying power over time due to inflation. (375$ in 1960 would have been ok but in 1980 this was not enough money)
Equity Index Annuities (EIAs) fixed annuity, credits interest to the investors acct based on particular stock index such as the S&P 500. If index does not do well, the annuitant is credited with a specified fraction of groth of the index typically 89-90% of the growth.
Participation rate the rate at with a Equity Index Annuity (EIA) annuitant would receive if the index it is tied to does not do well. If the index does poorly, the annuitant may receive the EIA;s min guaranteed return -- typically 3 or 4%.
If there is an EIA with a participation rate of 80% and a min of guar. rate of 3% and the index growth is 9% what would they rec'v or if the index was 1% what would they rec'v? if 9% index they would receive 7.2% (80%*9%) or if 1% index they would rec'd their 3% min
margin, spread and admin fees issuers of annuities levy these fees to offset risk
variable annuities these are used to keep pace with inflation. The investor not assumes the investment risk instead of the ins co. Now this is considered a security. Must be sold with a prospectus and life and securities license.
how are payments made for a variable annuity? still make monthly but they are invested into a separate account of the insurer. This is separate from ins co general funds because it is invested differently. Invest incl stock, bonds, mfunds. objective is to match or exceed inflation
are annuitants pmts into their annuity after-tax or pre-tax dollars? both are after tax dollars
how long is income guaranteed for variable and fixed annuity? both are for life
combination annuity investor invests in both the general and separate accounts which provides for guaranteed pmts as well as inflation protection
what regulates Mutal funds and annuities? Act of 1933, act of 1934 investment co act of 1940, investment advisers act of 1940
what are the difference in fees btwn a mutual fund and a variable annuity? fees for mfund go to protfolio mgr and fees for a variable annuity go to a separate acct mgr.
do mfunds and varibale annuities function the same? yes, investors each own a proportionate share of securities and the value of their shares rise and falls based on the performance of the securities in the separate acct for VA and the same is true for a mfund.
directly managed this is if the investment mgr is responsible for selecting the securites to be held in the separate account. and must be managed under the Invest co act of 1940 as and open end mgmt investment co.
indirectly managed if the investment mgr of an ins co passes the protfolio mgmt responsiblilty to another party, the separate acct is indirectly managed
what are the 2 main features that make mutual funds and variable annuities different? VA offers the advantage of guaranteed lifetime income and the earnings on dollars invested inot variable annuity accumulated tax deferred.
what is the biggest reason that ins co, banks, brokerage firms, sell annuities because of the unique tas feature, earnings accumulate tax deferred.
what are the rights of an investor who has purchased a variable annuity? they have the right to vote on changes in investment policy and for the investment adviser
how are variable annuities and mutual funds alike? they are regulated by investment comp act of 1940 and they are managed
what most significantly affects the value of an annuity units in a variable annuity (VA)? the fluctuation of securities held in the separate account
Variable annuity have to register with all what organizations FINRA, state insurance dept, SEC
what does a variable annuity contract guarantee? fixed moertality expense, fixed admin expense
How are separate accts similar to mfunds? may diversify portfolios of common stock and give investors voting rights
how can pmts be made to an annuity? single lump sum, monthly,m qurtly, or annual basis
single premium deferred annuity annuity purchased wih a lump sum, but pmt of benefits is delayed until a later date selected by the annuitant.
Periodic pmt deferred annuity allows investmens over time. Benefit pmts for this type of annuity are always deferred until a later date selected by annuitant
bonus annuities direct financial benefits are somtimes offered with what is called bonus annuit. they incl enhancement of buyer's premium, with the ins co ocntrib an additional 3-5% to the premium pmt.
what are the 2 phases of a variable annuity? 1. accumulation phase 2. annuity phase
accumulation phase of a variable annuity the growth phase
annuity phase of a variable annuity the payout phase
accumulations units or annuity units is the contract owner's interest in the separate account it is called one or the other depending on what phase the annuity is in
what does it mean to annuitize a contract by the annuuitant the accumulation of units he has purchased over time will be converted into annuity units, whose number becomes one of the factors used to calculate his payout each month of his retirement
What are the pmt options for reveiving funds from an annuity? randomly, lump sum, or recieve monthly income
what department determines the amount of the value for the annuity units and the amount of the 1st mo pmt? the actuarial dept.
What else does the actuarial dept do when the establish the 1st moh pmt? they establish the assumed interest rate of the annuity. It only applies of the investor annuitizes
The mo pmt on an annuitized acct will vary based on separate acct performance compared to AIR. What rules apply to this? 1. if separate scct is > AIR, nxt mo pmt is > this month 2. If sepacct is = to AIR, nxt mo pmt stays same 3. if sep acct is < AIR, nxt mo pmt with be less
An investor is in the annuity period of the annuity. During the present mo, they rec'v a chk < prev mo. Why? the acct performance was less than the assumed interest rate
What are the different ways to rec'v money from an annuity? What are they called? Surrender, death of annuitant and annuitization
Surrender of an annuity the annuitant may simply cash in his annuity. At this point, he will be liable for the income tax on the growth plus 10% penalty on the growth if he is under the age of 59 1/2.
What happens in the case of the death of an annuitant? if during the accumulation period, the death benefit kicks in, his beneficiary is guaranteed either the total value or the total amount invested whichever is >. The bene is liable for income tax on any growth. The amount paid is incl in in estate taxes
What are the different options called for payout of an annuity? life annuity, life annuity with period certain, joint life with last survivor annuity, and unit refund option
Life annuity straight life or life only the ins co will pay the annuitant for life. When the annuitant dies, there are not continuing pmts to beneficiary. Money remaining in acct reverts to insurer.
Life annuity with period certain this insures that a minimum number of pmts are made even if annuitant dies. for example 10-20 yrs. they are guaranteed income for life, but if they die w/in certain period of time a named bene rec'vs pmts for remainder of period
joint life with last survivor annuity this options guarantees pmts over 2 lives. (often used for spouses) If one were to die the other would continue to rec'v pmts but in a lesser amt.
Unit refund option for an annuity payout a min # of pmts are made upon retirement, if value remains in the account after the death of the annuitant, it is payable in lump sum to beneficiary
Which of the annuity payout options typically pays the larges monthly income? Life only: there is no bene, so pmts cease after death and money remaining reverts to insurer
Which of the annuity payout options typically pays the smallest monthly income? Joint life with last survivor: there is a cost in the monthly income amt for the guarantee on 2 lives.
deferred annuity delays distributions until the owner elects to receive them
accumulation unit determines an annuitant's interest in the insurer'sseparate account during accumulation stage of an annuity
monthly pmt of an annuity performance of a separate account determins the value
joint and last survivor annuity annuity pmts continue as long as the annuitants is alive
Immediate annuity contracts starts to pay the annuitant immediately following its purchase
AIR (assumed interest rate) forms a basis for projected annuity pmts but is not guaranteed
separate account holds funds paid by variable annuity contract holders
life income with period certain if the annuitant dies before a specified time expires, pmts to to the annuitan's named bene
Whole life insurance (WLI) known as cash value ins, privides protection for the whole life of an individual. the benefit payable is the face amount remains constant, and premiums are set at time of issue and supossedly remain level.
cash values whole life combines death benefit with and accumulation or savings element. It increases yrly. The insurer invests in conservative investments (bonds, real estate, mortgage loans)
Where are traditional life insurance cash value money reserves held, in what acct/ in the insurer's general account
how is variable life ins different thatn whole life ins? The insurance premiums and not invested in the general account rather in a separate account in whose investments the insured has some choice. Common stock, bonds, mm and so on. this is to allow the investor to assume risk & get protec against inflation
how does the death benefit work with Variable life insurance policies? there is a minimum guaranteed death benefit. the death benefit may increase above the min amt depending on the investment results bu can never fall below.
t or f any life ins policy that is guaranteed is invested in insurers general account true
Scheduled premium or fixed premium (VLI) contract issuedwith min guaranteed death benefit, (prem for som variable life contracts are flexible)death benefit is determined at issue
Universal variable life insurance (UVL) type of variable life ins with flex premiums and flex death benefit. Prem are invested only in separate account and there is only a variable death benefit (though some have guaranteed sm amts) ins has option to increase or decrease premiums
how are charges and expenses paid on variable life and universal life ins policies? out of the growss premium or from the separate account - they must be reasonable and described in the contract when and how they are collect is important b/c it affects how much goes in separate acct
what charges for VLI & ULI are deducted from the gross premium? (S.A.S) sales load, admin fees, and state premium taxes
t or f VLI AND ULI admin fees are repetitive monthly false, they are generally a one time fee associated with the cost of procerssing the application
what are some deductions that are made from the separate account for VLI and ULI? mortality risk fee (cost of insurance) expense risk fee and investment mgmt fee
mortality risk fee covers the risk that the policyowner may live for a period shorter than assumed.
expense risk fee for UIL and VLI covers the risk that the costs of adminstering the policy may be greater than assumed
how often is the variable portion of the variable life insurance calculated the guaranteed min is set and does not change, the variable part however is recalculated annually while the cash value is computed monthly.
How often are unit values calculated on a cash value policy? daily
What is the min percentage that must be made available of the insured's cash value? 75% after the policy has been in place for 3 yrs.
what is the interest rate to borrow your own money on a cash value policy? it is state in the policy
What happens if there is an extreme deline in cash account value occuring during the loan's term? policyowner is liable for maintaining a positive net cash value in the account. It acct goes negativem, the insured has 31 days to deposit enough into his account to make it positive. It he fails to do so the insur co can cancel the contract.
how do you get the full cash value of a cash value life insurance policy surrender it
If the cash value policy owner dies with a loan outstanding what happens? the death benefit is reduced by the amt of the loan
Contract Exchange of VLI Variable life ins can be exchanged for Whole life in early stage of the contract not to be less than 24 months. (fed law) all things stay same, death benefit, premium -- no medical underwriting is necessary
What is the max sales charge for a fixed premium VLI contract may not exceed 9% of pmts to be made over the life of contract. (life contract = 20 yrs or life expectancy)
VLI refund provisions must extend a free look period to policyowner for 45 days from the execution of the application or for 10 days from the time the owner receives the policy, whichever is >. Owner may terminate policy and receive back all pmts made
How long is the refund provisions extended for with cash policies? two years from issuance. the insurer must refnd the cash value (value after insurer rec'vs redemption notice) plus all sales charges deducted in excess of 30% 1ST YR, 10% 2ND YEAR, only the cash need be rfnd afte.
how do voting rights work for cash value policies? holders rec'v 1 vote/$100 of cash value in sep acct.
how do voting rights for variablew annuaties and mfunds work? 1 vote/unit (share).
sales charge % of premium kept if cancelation is in the second year? 10%
min % of cash value that must be available for a policy loan after 3 yrs? 75%
number of months contrach exchange provision must be place for a variable life to whole life policy 24
max sales chage allowed over life of variable life contract 8%
features a stated premium (whole life, Variable or universal) Whole, and Variable
always has some guaranteed death benefits (w,v,or universal) whole, variable, universal (small amt)
features a guaranteed cash value (whole, variable or universal) whole
cash value not guaranteed (w, v, u) v, u
policy loans available (w, v, u) w, v, u
FINRA Financial Industry Reglatory Authority--founded in july 2007. This is a self regulatory organiz. (SRO) broker dealers may apply for membership in FINRA. FINRA reports to SEc.
What is the purpose and objectives of FINRA? promote invest bnk and securities business, standardize industry, provide commo btwn mbrs and btwn gov and other agencies, enforce rules to prevent fraud, promote self discipline amoung mbrs, investigate grievances btwn public and mbrs & btwn mbrs
How is FINRA Oroganized into districts in the united states, each district elects committee to administer rules.
Department of Enforcement (Enforcement) handles trade practices complaints within FINRA districts.
What does the FINRA do? it is made up of mbrs of the board of governors, and manages the FINRA's national affairs
How is FINRA funded? By assessments of member firms, registered reps and applicants and annual fees.
What do FINRA annual fees include basic mbrship fee, assessment based on gross income, fee for ea principal and reg.rep, and charge for ea. branch office
What happens if you fail to pay FINRA fees/ can result in suspension or revocation of membership
Are reps abel to use the FINRA name? not in any manner that suggest that FINRA endorsed a member firm. Members may use the prhase "Member of FINRA" as long as the firm places no undue emphasis on it.
How can you lable anything with the FINRA name? FINRA's name may not be more prominent than the name of the representative firm.
FINRA policies fall into 4 sets of rules, what are they? Conduct Rules, Uniform Practice Code, Code of procedure, code of arbitration procedure
FINRA Conduct Rules set out fair and ethical trade practices that mbr firms and their reps must follow when dealing with the public
FINRA Uniform Practice Code Established the Uniform trade practice, including settlement, good delivery, ex-dates, confirmations, and other guidelines for broker/dealers when they do business with other member broker/dealer firms.
Code of Procedure Describes ho FINRA hears and handles member violations of the conduct rules
code of arbitration procedure governs the resolution of disagreements and claims between mbrs, registered reps and the public; it addresses monetary claims
What mbrship broker standards are in place for FINRA? application is done on form BD, and the applying firm agrees to: comply with assoc rules and regs, comply with fed security laws, and pay dues, assess, and other charges
Offic e of supervisory jurisdiction (OSJ) Each office reg with FINRA (branch office) where business is done. this is anyplace where investment bnking or security business is done.
Who does FINRA consider an associated person? anyone associated with a FINRA mbr frim who intends to engage in the investment banking or securities business must be registered with FINRA as an associated person. Person must be sponsored by firm, must verify employ for past 3 yrs, and attest to char
what is form U4 used for? to register an associated person with FINRA
What info is included on U4 name, address, 5 yrs residence, 10 yr employment hx, info on charges, arrestst, convictions, relate to invest business
what if an applicant has a yes answer to arrests questions on U4? A detailed explanation must be given on the DRP (disclosure reporting form)
Do you need information about marital status and education on the U$ no
What if information on your U$ changes? you are required to file a amended form with the CRD (central registration depository) no later than 30 days after the member becomes aware of changes
If a person is suspended by a mbr or is subject to in house discipline action involoving the w/h of commission or a fine in excess of $2500, do FINRA need to be notified? Yes, if in excess of $2500
What is rule 17f-2 for? fingerprint rule, requires that every person who deals with securities, records or money must have their fingerprints taken and filed.
Who are exempt from having to register with FINRA as associated persons and therefore do not need to pass a qualification exam? foreign associaties, clerical personnel and corporate officers
How are foreign associates treated with FINRA noncitizens who conduct business outside the US must be registerd with FINRA but are exempt from having to pass a qualif exam
how are clerical personnel and corporate officers treated by FINRA? they need not register with FINRA. b/c they are not involved with the mbr's investment banking business registration is not necessary
What is the U5 form used for? When a registered mbr with FINRA leaves one firm and joins another they must terminate regist at first firm using U5 form and reapply for regis with new firm using U4
What is the firms repsonsiblity with FINRA if they termainate an individual? They are to file a u5 with the CRD w/in 30 days. they must also provide a copy to the fomer employee within 30 days. In not they will be fined. Must give reason for termination
Can an associate still transact business if they leave the firm theya re operating under? no, they must be associated with a broker/dealer. A rep license is no longer effective upon leaving the firm.
When is it necessary for FINRA to be notified by the mbr firm if any associated person in the firm's employment? disciplinary actions tatken by: nat securities exchange or authority, clearing corp, commodity futures mkt or fed or state reg commission
Once an associated person is terminated, how long is the firm suject to complaints filed against them? 2 yrs
If there is an ongoing federal securies investigation, can the mbr firm termainate the rep? no, not until after the person in investigation or disciplinary action is resolved
Who do the files belong to if a rep decides they are going to leave and go to anothe firm? The belong to the firm not the rep.
Where else must a rep register in order to do business in securities? They must also register with the state securities administratior in each state in which they intend to do business.
What must be provided to the customer of security funds at least once every calendar year? The FINRA public disclosure program hotline #, the FINRA Website address and a statement as to the availability of an investor brochure that includes info describing the public disclusure program.
Can you find any complaints on persons registered with FINRA? yes, the CRD(entral regis depository) maintains info on all persons regis with them. You can get this infor by calling and 800 #.
t or f a wife of a deceased rep may continue to rec'v commissions based on a verbal agreement with the former employer false
t or f a foreign rep is not required to getister with FINRA if it engages in business with a US citizen false
t or f a member firm is required to investigae the background and character of any person it may hire true
t or f a firm that terminates a registered rep must file a U-5 form true
t or f if a rep is registered with FINRA, state registeration is not necessary. false
t or f t or f a mbr firm's clerical staff must register with FINRA false
t or f broker/dealers may not use the phrase member of FINRA or any sales literature they prepare false
Series 6 license invest co/variable contracts limited rep license allows a rep to sell open-end investment co, new issues and closed-end investment co and variable products. This can also be a prerequisite for the series 26 exam
what can someone sell with a series 6 license invest trusts, face amt certif, open end co shares, primary offerings, and closed end co shares
what CANNOT be sold by and rep with a series 6 license? REIT's (real estate investment trusts), exchanged traded funds (ETS), limited partnerships, direct participation programs and closed end invest co in secondary mkt transactions
Series 7 General securities license allows a reg rep to sell almost all types of securities products. A general securities rep may not sell commodities futures unless he has a series 3 license
Series 65 Uniform Investment adviser Law Exam is designed to qualify candidates as investment adviser reps and entitle the successful candidate to sell securities and give investment advice in state.
Registered principals anyone who manages or supervises any part of a members investment banking or securities business must be registered as a principal.
How many registerd principals must each member have unless it is a sole proprietorship, it must employ at least two registered principals
Who handles security complaints against a registered rep? the principal, if a rep rec'vs on in the mail they must be sure it it forwarded to proper person
Series 26 investment co products/variable contracts limited principal license entitles a principal to supervise the solicitaiton, purchase or sale of mutual funds and variable annuities. Must already have the series 6
t or f officers and partners do not have to be registered as principals? false - both must register as principals
What are the reasons FINRA would reject and indiv applying for registration? expeled from other SRO, under SEC order denying, suspending, or revoking regis, or barring them from association with a broker/dealer or been found to be cause of of another broker/deal being expelled or suspended, felony, misem involv secur w/in 10 yr
what are the continuing education requiremeents for a reg rep? all reg reps are subject to contin ed and must periodically complete regulatory element and a firm element
Continuing ed regulatory element must be completed w/in 120 days of the reps 2nd registration anniversary and every 3 years thereafter. will not be able to conduct business if fail to complete. if after 2 yrs still not done they are terminated
Continuing ed firm element members firms must design a written training program that is interactive and covers the following: reg requirement that apply to reps, suitability and ethical sales practices, overall invest features and related risk factors
Annual compliance review (Meeting) purpose: discuss compliance issues. all reps and principals must attend, venue must ensure that all may get questions ansered in timely fashion. questions and answers must be recorded and made avail to all, can be done via web,
What if you fail a FINRA EXAM? There is a 30 day waiting period to retake the exame. After 3rd attempt, there is a 6 week waiting period.
When a rep goes from one firm to another, must he retake the exam? No, there is a 2 year period during which reassociation will not require retaking the exam. Once the 2 yrs is up, even by one day, the exam must be retaken.
what is the min # of principals a firm must have? 2
a securities firm limiting it sales to mutual funds and variable contracts of ins must have at least one person holding this seriew to manage and supervise series 26
the number of days a borkjer/dealer has to notify FINRA of a rep's termination 30
A felony conviction w/in this number of yrs can disqualify an individual from reg with FINRA 10
Specifies how violations of the conduct rules are handled Code of procedure
ensures that trade practices between members are consistent Uniform practice code
Governs the resolution of disputes between members of FINRA Code of Arbitration procedure
Open to broker/dealer registered with the SEC FINRA Membership
how are securities bought and sold? either as new issues from a corp, municipality or fed gov or in the secondary market between investors
Investement bank a securites broker/dealer that specializes in underwriting new issues.
what do investmant bankers actually do? advise corp on best way to raise capital, rase capital for issuers by distributing new securities, buy securities from issuers and resell them to public, help issuers comply with security laws
t or f investment bankers are sometimes called underwriters true
t or f all underwriters/investment bankers must be register with FINRA true
who is the issuer when selling securities the party sellign the securities to raise money
what must the issue do in order to sell securities? file an s-1 with SEC. this is regis form for company and it includes info on the security and corporation and its officers The SEC will review during 20 day cooling off period, also file regis stmt with state of sale, negot price and spread for underwrit
Blue skying issuing corp registers with the state that it intends to sell securities in.
Underwriting compensation to Investment bank/underwriter known as the spread the price at which underwriters buy stock differs from the price at which they offer the shares to public. Issuer gets underwritten proceeds. the price invest pays is pub offering price. the spread the diff btwn 2 is mgrs fees, undrwrtng and sell fees
what is the largest part of the IPO underwriting fee the selling condession
what is the smallest part of the IPO underwriting fee mgmt fee
IPO (Initial Public Offering) The new issue of stocks is comprised of companies that are raising capital from the public for the first time.
Additional issues (public offerinmg) the additional issue market is made up of new securities being offered to the public by companies that are currently publicly traded
Secondary offering one or more major stockholers sells control stock to the publick for the fist time. the proceeds of the offering belong to the stockholder not the issuer
split offering or combined distribution a public offering where the proceeds are split and distributed to the issuer (primary offering) and major stockholders (secondary offering)
What is a due diligence meeting used for by the underwriter and the issuing company b4 an IPO? to establish the level of risk?
Firm Commitment themost commonly used type of underwriting contract. Under its terms the underwriters (investment bankers) commit buy the securities from the issuer and resellthem to the public. underwriters assume risk if unable to resell to public
there are 2 ways a firm commitment can be done, what are they? 1. by negotiated underwriting contract or 2. competitive bid arrangement
negotiated underwriting contract used by most corporations the issuer selects an underwriter and they negotiate the conditions of the underwriting contract
Competitive bid arrangement the standard for new issue offering in the municipal securities market. The underwriting contract is awarded to the underwriter who presents thje most competitive bid or lowest interes cost to the issuer.
What is a syndicate and who is it used by? The managing underwriter may share the risk with other broker/dealers by forming a syndicate. he may also hire salework from skilled broker/dealser who form a selling group.
standby underwriting considered a firm commitment type of underwriting. They undonditionally agree to buy all shares that remain undold in an additional issue. They also would assume the risk
Best efforts arrangement the underwriter acts as agent for the issuing corporation. the deal is contingent on the underwriters ability to sell shares to the public. The underwter sell as much as possible w/out liability for what remains unsold.
all or nothing underwriting unless all the issue is sold to the public the underwriting is canceled and all money is returned to the investors
assists na issuer in determinging what securities to issue Investment banker
underwriter acts as an agent for the issuer and attempts to sell as many shares as possible Best efforts
compensation paid to underwriters in a ndw issue Spread
Underwriter acts as principal and takes liability for undold shares firm commitment
Securities acof 1933 associated with new issues, underwriting, registration stmt, prospectuses, and primary mkt. came about b/c of stock mkt crash of 1929.
nonexempt issues New securities that are subject to Securities Act of 1933 requirements
exempt securities arenot subject to Securities act of 1933 requirements
t or f prospectuses must be provided to all purchaser of new, nonexempt security issues for full; and fair disclosure under the Securities act of 1933 true
Federal covered securities Securities listed on the major exchanges and the Nasdaq as well as investment companies registered under the Investment company act of 1940. State registration is not required, most sts require the filing of a notice that issuer will sell, may be a fee
Blue skying the issue registering the new issuing of securities at a state leven
Securites Act of 1933 regulates federal regist of new issues with the SEC
20 day cooling off period after an issuer files registration stmt with SEC there is a 20 day period. During this time, SEC reviews the securit's registration stmt and can issue a stop order if stmt in not correct
What are the 3 phases of new issue underwriting? 1.Issuer files regis 2. cooling off period 3. effective date offering period begins
t or f no one may solicit sales during the cooling off period, but indications of interest may be solicited with a red herring true
red herring this is the prelim prospectus and is used to gauge investor reactions and gather indications of interest. Must have a legend in red that statement has been filed but not yet effective
tombstone advertisements during the cooling off period, sales of security and related activ are prohibited. However you may use tombstones which are in financial riodicals, offer info, they do not offer a sale. issuers are not required to post but may do so if they wish
t or f indications of interest are allowed to be gathered during cooling off period true
t or f tombstone advertisments can be published during cooling off period true
t or f saled literature is sent to future clients during cooling off period false
t or f during cooling off period, post dated checks are accepted false
t or f during cooling off period, redherrings are provided to po9tential customers true
t or f during cooling off period, orders are taken false
final prospectus when the regis stmt is effective the issue will amend the prelim prospectus and add final offering price and the underwriting spread
t or fa a copy of the final prospectus must precede or accompany all sales confirmations true
what must be included in prospectus? description, price, selling discounts, offering date, use of proceeds, desription of underwriting, stmt of possib of price be stablelized, hx of business, risks, decrip of mgmt, finan info, legal opinion, SEC disclaimer, SEC review,.
t or f anything that says the SEC approves or disapproves an issue of securities is wrong. true
t or f a preliminary prospectus may be used to obtain indication of interest form investors true
Can a person who buys a security sue the issuer for any reason yes, if the issuer provided false information, he may sue those who signed registration statement, directors and partners, acountants, appraisers, or other profess who said contrib to reg stmt or even the underwriters
The securites act of 1933 provieds for waht specific exemptions from federal registration provisions? US gov, US municipalities, nonprofit religious, educational, and charitable orgs, public utilities that are regulated by state or fed, commercial paper < 270 days, bankers acceptance <270 days, securites aquired in private placements (restricted stock)
private placements Reg D under the Securites act of 1933 allows the offer and sale of securiteis to accredited investors (not > 35) w/out registration under the act
accredited investor and insider at the issuer, a professional, sophisticated or institutional investor, or an indiv who meets one of the two criteria 1. at least $1 mill net worth or at least $200k in income for the last 2 yrs with good prospects of reaching that level agn
FINRA Rule 5130 (old NASD Rule 2790) applies to IPO's of common stock. prohibits mbr firms from selling a new common stock to any acct where restricted person have a beneficial interest.
Ristricted person FINRA MBR broker/dealer, offer, direct or general partner, associated perso9n or employee of a mbr, their immediate family, any other broker, finders and fiduciaries act on behalf of the mging underwrter, ptfolio mgrs, and anyone owning 10% or > of firm
over the counter stock and bond trades take place on exchanges ona through a ntionwidenetwork of broker/dealers. OTC is a place in which unlisted securites (not listed on any exchange) trade.
market the exchange on which securities are traded.
secondary market the exchange that securities are bought and sold
exchange market consistes of the national exchanges, such as the NYSE, and the various regional exchanges such as the Boston, Chicago and Cincinnatie Exchanges, the Pacific Exchange and Phili Stock Exchange.
what is the difference btwn national exchange and regional exchange? regional list stocks and bonds of local interest in their areas. The national exchanges list securities of national trading interest.
double-auction markets exchange mkts operate this way. Floor brokers compete amon ghemselves to execute trades at prices most favorable to the public
plus tick when a floor broker representing a buyer executes a trade by taking stock at a current offer price higher than the last sale (market up)
minus tick when a selling broker accepts a current bid price below the last sale price
third market exchange listed securities being traded in the OTC. Broker/dea;ers regoster as O TC market makers in listed securities arrange 3rd mkt transactions.
fourth market a market for institutional investors in which large blocks of stock, both listed and unlisted, trade in privately negotiated transactions unassisted by broker/dealer. The Networks for these trans are call ECNs
ECN Electronic Communications Networks -- Instinet and Island are examples of this. They trade large blocks of stock in privately negotiated transactions.
who makes trades through the 4th market, what kind of clients? institution, investment co, insurance co, large employee benefit plan, or bank
where is OTC located no central mktplace. Trading occurs over the phone and computer networks and in trading rooms across the country
how does OTC pricing system work? works thru anmd interdealer network. Registered market makers compete among themselves to post the best bid and ask prices. OTC is a negotiated mkt
What happens when they market makers raise bid price and lover ask price? raise bid price will attrack sellers stock will increase and a lower ask will attrack buyers stock will decline
who post the current bid and ask prices? market makers. The best price public can buy (best ask) and best price public can sell (best bid) this is called inside market
how are the prices determined of securities listed on an exchange determined by auction
how are the prices determined of securities in OTC? determined by negotiation
where are gove and muni bonds listed? they are unlisted and trade in the OTC market
brokers agents that arrange trades for clients and charge commissions. They do not buy shares buy simply arrange trades
dealers or principals buy and sell securities for their own accounts this is often called position trading. When sell from own inventories, dealers charge markup not commission.
net price when the price to the client incluedes a dealer's markup it is called the net price
long in a security you own it
short in a security you borrowed it to sell hoping the price would decline
how are security orders filled? Broker may act as client agent and find a seller of the securities or Dealer may buy the securities fromm the market maker, mark up the price and resell them to the client or dealer can sell out of own inventory with a markup
t or f a firm may not act as both a broker and dealer in the same transactions true
how are brokers and dealers compensated? brokers by commissions and dealers by markup or markdowns
t or f a broker/dealer may act as an agend or as a dealer in a transaction true
t or f the fefinition of a restricted person under FINRA Rule 5130 formerly NASD rule 2790, includs close friends of restricted person false
t or f the exchange market is often called the first market true
t or f OTC securities prices are established through negotiation true
t or f bOTH COMMISSIONS AND MARKUP/MAKRDOWNS must be disclosed to teh customer false only commissions
What must be done when a trade is completed? an execution report must be filled out.
What does the trade confirmation say? printed doc that confirms the trade, its setlement date and the money due from or owed to the customer. Customer must be given confirmation of the trade at or before the completion of the trans the "settlement date"
Uniform Practice Code (UPC) standardizes the dates and time for each security trade settlement.
Regular Way Settlement Regular way settlement for most securities transactiosn is the 3rd busniess day following the trade date (T+3) -- Weekends are not counted in the days
what are the settlement periods for gov notes and bonds and for Money Mkt tansactions? gov notes and bonds settle next day and M Mkt settle same day. (regular settlement)
cash settlement or same day settlement requires delivery of securities from the sellfer and payment from buyer the same day. Cash trade occurs no later than 2:30 EST if trade was done by 2:00. If after 2:00 settlement is done in 30 minutes.
Regulation T specifies the date customers are required to pay for purchase transactions. Under Reg T, pmt is due 2 BD after settlement. Therefore, on a reg trade, customer pmt is due five business days after the trade date.
What happens if a buyer cannot pay for a trade within the designated time frame under Reg T? the broker may request an exten from its designated examining authority (DEA). If buyer still cannot by the pay by the end of the exten, broker sells the securites in a close-out transaction. then acct is closed for 90 days must have cash next time.
how long is the grace period for buyers that cannot pay for their securitis 2 days under reg T giving the firm time to correct the problem and if necessary request and extension
Regular way settlement for corporate securities Third business day after trade
Max amt that may be ignored by broker/dealer w/out the need to sell-out under Reg T $1000
the lengths of tiem for which frozen account status is imposed 90 calendar days
full pmt is due in a cash account under reg T S+2
Settlement of cash trades Same day
dividend dept collects and distributes cash dividends for stocks held in street name. also handles registered bond interest pmts, stock divid, stock splits, rights offerings, warrants, and special distrib to corp SH or Bholders
Transfer Agent dividends are disbursed on the paybale date by the transfer agent. Corp may have own agent or agent may be a bank or trust employee that keeps track of Sholders & disburses dividends when declared.
declaration date when a co's BOD approves a dividend pmt, it also designated the pmt date and the dividend record date. Company must notify FINRA w/in 10 business days of record date.
ex-dividend date (you don't get dividend if you buy on this date) the SRO posts and ex-date on the basis of the dividend record date. the exdate is 2 BD before the record date.
to qualify for a dividend when must the investor purchase a security? they do not own the stock until the settlement date, therefore three business days after the trade date.
dividend reocrd date the stockholder of record as of the record date receive the dividend distribution
payable date two or three weeks after the record date, teh dividend disbursing agent sends dividend checks to all stockholders whose names appeared on the books as of the record date.
first date on which a security trades without entitling the buyer to receiver a previoulsy declared distribution Ex-date
Good Delivery describes the physical condition of signatures on attachemtn to and denomination of the certificates involved in a securities transaction. must be accompanied by a properly executed uniform deliv ticket.
security act of 1933 regulates primary issues
security exchange act of 1934 regulates secondary issues -- People and Places Act, reg all ppl invlolved in trading securities on behalf of customers and mkts, where the trading takes place. reg margin acct
t or f although certain securities are exempt from registraion requirements of securities act of 1933, no security is exempt from Sec Act of 1934 true
What does the Sec Exchange Act of 1934 address? Creation of SEC, reg of exchanges, reg of cr by FRB (fed reserve brd), reg of bork/deal, reg of insider trading, reg of trading activ, reg of client accts, customer protection, reg of OTC, know your customer rule, net capital rule
t or f each exchange must file registration stmts with SEC under Securities exchange act of 1934 true - they much submit bylaws, constitution, articles of incorp. and notify SEC if their rules change as soon as adopted.
Do comp that trade on the exchange and OTC need to register with SEC? yes, a SEC registered comp must file annual audited reports informing the SEC of its Financial status and provide otehr info
The Maloney Act of 1938 gave SEC authority to delegate authority to the existing exchanges and to create other self-reg orgs (SRO's) to regulate the securites industry as needed.
Regualation T regulates credit to customers by brokers/dealers (margin accts)
Regulation U regulates credit to customers by banks and other lenders (margin accts)
when can securities be used as collateral as long as they have been held for 30 days. The effect of this is that although mutual funds hsares may be used as collateral in a margin acct they may never be purchased on margin.
Investment advisers act of 1940 passed to protect public against fraud and misrepres by investment advis. The act requires firm to regis with the SEC as an investmetn adviser if they meet standards of: give advice to purch secur, tells public that is business, is paid for inves advice
t or f persons who advise solely on US government securites are excluded fro investment adviser act of 1940 true
who are the incidental professionals that are not bound to the Investment advisers act of 1940 (L.A.T.E.) Lawyers, Attorneys, Teachers, engineers -- these indiv may talk about security advice by in a different manner than pure investing
Why are some Broker/dealers exempt from the investment advisers act of 1940 if the firm does not charge specifically for giving advice. If a mbr frim were to set up a financial planning op and charge separatey for service the firm would be considered an investment adviser.
t or f an investmen adviser managing less than $25 mill in assets muist register with the state(s) true 25-30 mill they have the option to register witheither state or SEC If register with SEC they are exempt from State but must still pay st filing fees and give notice
investment adviser representatives associated persons of investment advisers. Any partner, officer, or director of an investment adviser. or any person controled by investment adviser except clerical.
t of f anyone who receives a fee for investment advising myst register under the Investment adviser act of 1940 with the SEC true
tax bracket the percent tax due on the next dollar the indiv will receive. Referred to as you marginal income tax bracket.
alternative min Tax requires income from certain specified tax preference items to be taxed if income exceeds and indexed max, the purpose is to ensure that wealthy persons and corps pay at least some tax.
how often do mutal funds pay dividends ususally on a qrtly basis
net investment income (given to shareholders as dividends) includes grose investment income--dividend and interest income from securities held in the portfolio--minus operating expenses. Advertising and sales expenses anr not incl in op expenses.
Net income formula dividens+interest-expenses of the fund
what is the max income tax on qualified dividends? 15% - your 1099 will have the amt that is qualified
the conduit theory triple taxes of invst income (corp, mfund and then invstor all taxed)can be avoided if mfund is under subchap M of IRC (internal rev code) if mfund is a conduit (pipeline) for distrib of income. then only $$ mfund retains is taxed.
how much must and mfund distribute under the Subhapter M to avoid taxation? 90% to shareholders. the other 10% they must pay taxes on.
realized gain securities have been sold and there is an actual gain and taxaholders must pay taxes on them.
Long term capital gain if the mfund has held the security for more than 1 year and taxed at long term capital gain rate.
How often can a long term capital gains distribution be made? not more than once per yr
t or f unrealized profits are not taxable true - if you own a home you paid $25k for and now it is worth $50k you are not taxed on the worth unless you sell it and make that $$.
If an investor reinvests his capital gains, how are the new shares he buys with them sold to him? At NAV, meaning that he does not have to pay the sales load.
ordinary income the income that is recv'd form dividends form stock and interest from bonds
capital gains income from the sle of securities at a profit; when securities are bouthgt low and sold high, captial gains are realized
t or f a portfolio's unrealized gains are taxable to mfund shareholders false
capital gains distributions are typically paid quarterly false - annualy
t or f mfunds captial gains distributions are taxable to shareholders as short term cap gains false
t or f Mutual funds pay dividends to shareholders from net invest income true
t or f IRC subchapter M requires a fund to distribute a min of 90% of its net invesmtne income to avoid taxation as a corporation on what it distributes true
t or f Funds that comply with IRC Subchapter M are considered registered investment companies false - they are considered regualted companies not registered
t or f reinvested dividend distributions are not currently taxable to shareholders false
Form 1099 classifies mutual fund distributions to shareholders true
fund yield formula yearly di vidend paid/current offereing price (POP)
how is total return calculated in reference to dividends and capital gains? this is acchieved is dividends and capital gains dstributions were reinevested
abc mfund distributed $1 dividends and $1 cap gains this past yr. Nave is 19.50 and POP is 20.00 what is current yeild af abc shares? $1 dividends/$20 POP or current offering price = 5%
t or f the ex-dividend date for mfund is set by BOD. (unlike that of securities) true
when is the narmal ex-dividend date for mfund normally, the date is the day after the record date.
Selling dividends A registered rep may not encourage investors to pruchase fund shares of a mfund before a distribution because of tax liabitily. This is a violation of FINRA rules.
why are selling dividents prohibited? b/c the investor is immediately taxed on distributions received and the value of the shares is reduced by the dividend distributed--so not only are investors subject to taxation, they have also experienced an immediate depreciation in share value
cost basis the amount of money invested on which taxes have been paid. Upon liquidation, cost base represents a return of capital and is not taxed again.
Formula for calculating gain or loss on a mutual fund shares Total value of fund shares - cost base = taxable gain or loss
Investor bought shares for $10 and redeemed for $15. Reinvested dividend of $1 and cap gains of .50 what is the investors cost basis and captial gain? cost bases is found by addinn init cost and reinvested amts (10+1+.50=11.50) then Gain or loss is found by Total val share - cost basis 15-11.50 = $3.50 this is total gain per share
how do you find tax liebility for capital gains and lossess? add all cap gains for the yr, then add all cap losses. Then they offset the totals to determine the net capital gain or loss for the year. Net losses are deductible against earned income up to $3000.
What if an investor has a net capital loss of $10k and only $3k can be deducted from the invest earned income per yr, what can be done with the remain $7000? it can be carried forward to the next yr indefinitley.
what are teh 3 different accounting methods an investor may choose when liquidating shares? FIFO, Share identification or average basis - if investor fails to choose FIFO will be used by the IRS
FIFO acct method first in first out, when shares are sold, the cost of the shares held the longest is used to calculate the gain or loss. In a rising market this normally creates adverse tax consequences
Share identification acct method investor keeps track of the cost of each share purchased and sued this information when deciding which shares to liquidate. He then liquidates the shares that provide the desired tax benefit
average basis acct method investor calculates avg basis by dividing the total cost of all shres owned by the total number of shares. Cannot change decision to use this method without consent of IRS.
what is the policy if the investor neglects to include their tax ID number when purchasing mutual funds shares, th The fund must withhold 28% of the distributions to the investor as a withholding tax.
FMV fair market value-property is either stepped up or down at the time of owner's death when the property is inherited.
Corporate Dividend exclusions Corporations that invest in other corps. stock may deduct 70% of dividends received from taxable income. -- NO EXCLUSION EXISTS FOR INDIVIDUALS
Is there taxation if shares are sold within the family of mutual funds? yes, though there is no sales charge, the iRS considers a sale to have taken place, and if a gain occurs, the investor is taxed. This tax can be significant and investors sb aware
Wash Sale the sale of mfund shares and the repurchase of shares within 30 days, it covers 30 days before and 30 days after a total of 61 days
regulated investment companies funds that comply with subchapter M (conduit theory)
t or f dividends and captial gains are taxable whether reinvested or taken as cash true
cost basis formula mutual fund shares cost+reinvested dividends and captial gains distributions
t or f when a shareholder dies, his shares are assigned a cost basis equal to the value of the shares on the date of death. true
t or f the conduit theory refers to a favorable tax treatment available to investmen companies true
your client owns shares in open-enmd invest co. bid $10, ask 10.80. dividends over past 12 mor are .60. what is the current yield? .60annual dividend/10.80 POP
what factors are used to determine tax due on a capital gains distribution of a mutual fund 1) the length of time the fund held the securities and 2) investestors tax bracket
What 3 ocassions are variable annuities taxed? 1) cashed in 2) scheduled pay-out 3) when deaht benefit take effect
Variable annuities are purchased with pre tax or after tax dollars and what does this mean? after tax dollars and this means that the money is already taxed and is not taxed again once it comes out.
Earnings on a variable annuity are taxed how? they are taxed as ordinary income and must be withdrawn first if the account is not annuitized.
t or f if the funds of an annuity are w/d vey early there is no extra pentalty from the ins co. false - the ins co will livy its own penalty over and above the federal penalty of 10% 94 age 59 1/2 Typically after 7 yrs the ins co reaches a $0 penalty -- known as contingency deferred sales charge.
level sales charge annuitys sales charge paid in the beginning or at purchase or at the time of each periodic pmt
t or f an annuity should be presummed non qualified unless specifically stated otherwise true
what does a non qualified annuity mean? they are purchased with after tax dollars
investor paid $100k for annuity and worth $150k. what is the cost basis and what amt is taxable upon w/d? cost basis = contributions = $100k The taxable amt is the earnings.
exclusion ratio the relationship between the annuitized withdraws are the cost basis (what you actually put in that is not taxable) and growth and accumulation (taxable).
how is the amount of the annuity pmt determined to decide how much cost basis (non tax) and growth (taxable) money is paid? by dividing the annuity owner's cost basis by the life expectancy.
if a investor had a $100,000 annuity and was expected to live 20 yrs how much would his yearly cost basis be? $100k/20=$5000
formulay for monthly annuity pmt annuity owners cost basis (how much they put in)/annuitants life expectancy
how are growth and accumlation withdrawn from and annuity (what accounting method)? LIFO (last in first out)
t or f there is only ordinary income tax on distributions from annuities and retirement plans no capital gains taxation at all. true
t or f a death benefit that is paid to the benificiary of a life insurance policy is exempt from federal taxation as income. true, however the full amount of the death benefit can be included in the estate of the deceased policy owner for federal estate tax purposes
what is the 1035 exchange form used for with a Variable annuity It allows tha owner of an annuity or vaiable life policy to exchange their policy without tax liability--it can also be used to trans life ins to annuity but not visa versa
what are the possibe disadvantages a rep should point out when trans funds using the 1035 form for annuities? 1) possible surrender charges forold annuity, 2) new surrender charge period begins on new annuity 3) possible loss of a higher death benefit that existed on the old annuity
t or f policy death benefits are taxable as income to beneficiaries false
t or f policy death benefits are excleded from the estae of the deceased policy owner false
t or f the cost basis of an insurance policy is equal to the premium paid true
t or f a 1035 exchange from and insurance policy to and annuity is not permitted false
t or f a 1035 exchange can be made btwn fixed and variable policies true
t or f when a policy is serrendered, any earnings in excess of the cost basis are subject to taxation as captial gains false - these would be ordinary income
t or f the amt w/d for a policy ln is not taxabale to the policyholder true
What are the 2 different retirement plans offered in the US? qualified and non-qualified--both allow earnings to grow tax deferred
qualified retirement plan allow pretax contributions to be made to the plan, approve by IRS, may not discriminate, all w/d taxed, plan is a trust, must b in writing, tax on accumlation deffered
nonqualified retirement plan may be contributed to only with after-tax money, contr not tax deduc, not IRS approve, plan may decrim, execess over cost taxed, not a trust, must be in writing, tax on accumulation deferred
nonqualified deferred compensation plan agreement btwn a comp and employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. It assumes that payee will be in lower tax bracket at retirment
t or f nonqualified deferred compensation plans are allowed to be provided for board members of a corp? false becasue they are not considered employees
What happens if the business fails and the employee was part of the nonqualified deferred compensation plan The employee would be a creditor with the corporation and have to fight to rec'v their funds. Also if employees leaves corp, they would forfiet benefits if they leave b4 retirement
Payroll deduction retirement plans allows employees to authorize their employer to deduct a specified amt for retirment savings from their paychecks. money is deducted after taxes and invested as the employee wishes.
Section 457 retirement plans nonqualified retirement plans set up by state and local gov and tax-exempt employers. They function as deferred compensation plans. Employees may defer up to 100% of their compensation.
t or f payroll deduction plans are nonqualified true
A corporate profit sharing plan must be in what form? a trust
IRA individual retirement acct, anyone with earned income can contribute up to $5000 per yr,
earned income income from work, wages, salaries, bonuses, commissions, tips, alimony
t or f income from investments is not considered earned income true
What is the penalty for an individual who applies more than $5000 to their IRA in one calendar yr? 6% excess contribution penalty applies to the amt over the allowable portion.
Can ppl with a non working spouse contribute additional funds in an IRA? yes up to $10k per yr but it must be set up in 2 separate accts - this is know as SPOUSAL IRA CONTRIBUTION and is only available for couples who file a joint return
How much can tax payers over the age of 50 contribut to their IRA extra each yr? $1000
When do contributions of earned income have to cease at the age of 70 1/2
tions to IRA deductable? yes, if the investor is not covered by a qualified employer plan or in the case of defined benefit plan is ineligible for coverage, if covered only decutible if AGI (adjus gross incom) falls w/in a certain guideline
At what age MUST an indiv w/d funds from an IRA? by April 1 of the yr AFTER the indiv turns 70 1/2
an indiv may w/d funds at 59 1/2 if b4 then incurs a 10% penalty fee as well as income tax except in what circumstances death, disability, 1st time home buyer, education exp for self, child, spouse or grandchild, med prem for unemployed indiv, med expenses in excess of AGI Limits
what is the penalty for an indiv that does not take their distrib by 70 1/2 50% inssufficient distribution penalty (OUCH)
What kind of investments are not permited to fund IRA? collectibles, life ins contracts, municipal bonds, short sales of stock, options or margin trading
are life insurance products or annuities allowed in an IRA? while life ins is NOT allowed, annuities are.
what types of investments are allowed with IRA? stocks, bonds, mfunds, unit invest truest (UITs), gov securities, US gov issued god and silver coins, annuits
IRA rollover occurs when an IRA acct owner takes temp ownership of IRA accts funds when moving the acct to another custodian. may be done 1x per yr & msut be complete in 60 days,
when the employee takes possession of the funds, how much is withheld? 20%, they can then request it back on their income tax return. They can avoid the withholding altogether by if distribution is made paybable directly to new custodian.
IRA transfer occurs when the account assets are sent directly from one custodian to another and the acct owner never takes possession of the funds. there is no limit to the amt of tranfers that can be made during a 12 mo period.
roth IRA after tax $$, %5k per single/$10k per couple, accumulate earning tax deferred, distrib are not taxable, must be open at least 5 yrs and investor must be at least 59 1/2,
what are the exceptions to the penalty for taking an early w/d from a roth IRA? death of owner, first time home purchase, total disability
coverdell education savings accoutns (CESAs) like roth ira's were created in 97', allow after tax contrib up to $2k, distrib are tax free for educaton - prev known as education IRA's
t or f contributions to a roth IRA are tax deductable false - they are not deductible
how long can you make contributions to a coverdell education savings plan for children under 18, must cease after child's 18th birthday
t or f the child must use his education account before the age of 30 true
what if the child does not use his education account for college? the money is distributed to the child but must be taxed as ordinary income.
what are the 2 kinds of 529 education plans? 10 prepaid tuition plans and 2) college savings plans
prepaid 529 plan allows donors to lock in current tuition rates by paying now for the future education costs.
college savings 529 plan this is the more popular college savings plan, may be set up in more than 1 state, made with after tax dollars, periodic pmts, or lump sum
t or f earnings in a 529 educational acct are not taxed true, as long as the funds are used for qualified educ purposes and b4 the child reaches the age of 30
Money-purchase plans simplest of the qualified defined contrib plans. Any employer that meets funding requirements may offer such a plan. the employer contrib a specified fraction to the employee's comp to indexed maximum.
simplified employee pension (SEP) a qualified plan that offers ease of admin to small business owners. employees open iRAs and the employer makes contrib on their behalf. Employee contrib may be made also
how much is an employer allowed to contrib to an employee SEP on their behalf 25% of employee's salary up to an indexed max each yr. employee must be 21, worked for employer for 3 of past 5 yrs and has rec'f at lst min sal for the past yr
Keoh plans also called HR-10 plans are qualified plans intended for self-employed persons and owner-employees of unicorporated businesses or professional practices who file schedule C, such as doctors or lawyers. Must be able to show a gross profit to qualify,
what is the max contribution to a keogh plan? 100% of postconrtibution income up to an indexd max. may make contrib till 70 1/2,
t or f Employers must make contribution into Keogh plans of their eligible employees in an amt equal to their own postcontribution percentage. true - ex if employee makes $100k and contrib $20k and keeps $80k he contrib 25% (20/80k) and the employer must give 25%.
what makes an employee elegible for a Keogh plan hve worked at least 1000 hrs in the yr, have completed one or more yrs of continuous employment and at least 21y/o
can a keogh plan invest in Term insurance or collectables no, this is just like and IRA
What is the penalty for excess contribution on a Keogh plan 10%
Self-employed 401k plan may be set up by a business with no full time employees--only the owner, spouse.
what kind of businesses can use a self-employed 401(k) plan? sole proprietorship, partnership, C Corporatio, S corporation or limited liabitity corporation
403(b) plans this is a form of Tax-shletered annuity (TSA) avail to pub eduacators, priv schls, tax-exmpt orgs (501(c)(3), and relig orgs. must be 21, comp 1 yr of service, funded by employee defer, earning accum tax free. must have a written sal reduction agree
Corporate retirement plans have 2 categories what are they? defined benefit and defined contribution plans
Corporate defined benefit plan promises a specific benefit at retirement and is determined by a formula involving typical retirement age, years of svc and compensation level achieved. may be used by firms that favor older key employees
corporate defined contribution plans easier to admin than defined bene plans, current contrib amt is specified by the plan, benefit at retirement is unknown. ex. 5% of salary. Profit sharing is also a popular form of a defined contrib plan
what is the most popular form or retiement plan 401k, they are defined contrib plan allows employ to contrib a % of salary. Contrib are excluded from Gross income and grow tax deferred.
t or f 401(k) plans allow certain hardship w/d's true
Roth 401(k) plans requires after tax conrtibutons and allows tax free w/d. No income limitations like a Roth IRA, employer may match but their match must go in a traditonal 401(k).
t or f If an employee is still working at the age of 70 1/2 they do not have to take the mandatory w/d out of a traditional 401(k) IRA true -- hmmm...not required until after you retire.
what is a nonqualified plan in which an emplyee authorizes reg reductions from his check payroll deduction plan
specifies the total amount an employee will rec'v at retirement defined benefit plan
qualified retirement plan for self-employed individuals and unicorporated businesses Keogh Plan
IRA contributions made for a nonworking husband or wife Spousal IRA contributions
A qualified plan that specifies and employer's annual funding Defined contribution plan
employees receive for retirement purposes a protion of profits from a business profit sharing plan
Movement of funds from one retirement plan to another, generally within a specified period of time Rollover
nonqualified retirment plan in which an employee delays receipt of current compensation, generally until retirement deferred compensation plan
plan meeting the standards set forth by the ERISA qualified plan
t or f correspondence does not need to be approved by a reg principal unless it is goigoing to more than 25 ppl. t true
t or f correspondence needs to be approved if it is going to existing retail customers withing an 30 calendar day period and makes any finan or invest recommedations true
t or f sales literature always requires a principal approval true
how are incoming written correspondence complaints to be handled in a mbrs office? there must be a supervisor designated to identify and handle all correspondence.
what are the recording keeping requirements for all advertising, sale lit and independly prepared reprints (IPR)? seaparate file including the names of ppl preparing and approving their use, must be kept for 3 yrs. A sep file must be kept for correpsondence
is there a record keeping requirement for outgoing electronic securities business correspondence? yes, it is also 3 yrs. One way to do this is require a copy of all email to go to a central mailbox for review and recordkeeping.
how long must be correpondence be kept in relationship to its add or campaign? It must be kept 3 yrs from the end. Ex. if the campaign is from Jan 1,10 till Mar 1, 10 you must keep it till Mar 1, 13
postfiling advertising, sales literature, and IPR relating to investment companies must be filed with FINRA w/in 10 days of first use
prefiling New FINRA mbrs and other mbrs who have not filed advertising previously must file alls advertisments with FINRA advertising/investment co reg dept for a period of 1 yr. filing must be done 10 days before use and must include actual or anticipated date
t or f if FINRA believes a mbr's advertising or sales lit has departed from acceptable standards, it can mandate prefiling of any communications with the public. true
certain types of communciation are excluded from filing with FINRA and spot checks requirements, what are they? info related to changes in mbrs name, personnel, local, business struc, officers, phone or teletype numbers, or concerning a merger or aquisition by another member
t or f an established mbr firms investment co advertising material must be submitted to FINRA'S advertising dpt before it it used false
t or f a principal of the firm must approve all sales lit withing 10 days of the first use false
t or f new firms are required to file all advertising materal and sales lit with FINRA advertising department 10 days before use false - only advertising not sales lit
t or f mbr firm investment co advertising material and sales lit is not subject to spot checks false
t or f memos stamped for Internal Use Only must be approved by a principal before distribution false
what are the 2 maind problems that conduct rules address when protecting the public omissions and distortions of material facts
does sales lit need to have mbrs name, and the perosn or firms that prepared it and the date? Yes, all must be present
disclosure requirments proposals that incl specific recommend must have reasongalbe basis to spt the recommend, mbr must give upon rqst infor that sps the recommendation. recommendations made be supported by past performance so long as it is not slantd, unsuit recomnd r prohib
t or f any statement of past performance must remind the the reader that past performance does not guarantee future resulst. true
testimonials use of celebrities and those who can influence the public must not mislead that the past performance indicates future erformance. If a firm pays a fee then the mbr must disclose that fact
free service it is unprofessional to use offers of free service if the respondent must assume obligations of any type. Reports, analysis, or other services offered to the public must be furnished entirely free w/o obligation
t or f recruitment advertisments are the only form of advertising not required to disclose the identity of the member firm. true--may send a resume to PO Box 54321
t or f it is permissible to omit facts in advertising and sales literature true -- only material facys must be disclosed
t or f testimonials in investment company advertising are prohibited false
t or f firms are not allowed to offer free services false
t or f the price of the recommended security must always be disclosed at the time the recommendation is made true
va recommendation showing past perform must incl all recommend made of similar securities w/in the past 6 months false- 12 months
SEC Rule 156 established additional guidelines for mfunds sales lit. Any investment co sales lit that omits material facts contains untrue, stmts, or is misleading is illegal.
what makes sales lit misleading? wrong rpts of invest perform, predic of future income based on past, claims about skill of co mgmt, exagg of backgrounds of officer and directors, omissions of shortcomings, info rptd out of contxt, distort comparisions, only tell bene, omit finan posit
t or f spoken workds are considered part of the comp sales literature true
t or f in sales presentations the upside of the investment opportunity can be slightly more emphasized than the downside false
Are representatives allowed to mark on the prospectus to prospective buyers no, reps are prohibited from marking or highlighting
SEC Rule 482 When invest co advertise ROR addtional info is required, performance date must also be current. The rule assumes that data tot he most recent calendar quarter is current
If avg annual return is included in advertisement what years must be included? 1, 5, 10 yrs or since inception if new. This must be updated quaterly.
If a yield is advertised what are the rules? it must be a current yield and be calulated according to procedures and the base period must reflect 30 days.
why doe SEC Rule 482 permit the Omitting prospectus because the rule technically considers the advertisement a prospectus.
Rule 498 Summary Prospectus summary prospectus may incl an application investors can use to buy the fund's shares. this is a standard summary of key info of full prospectus.
t or f a client that buys shares on a basis of summary prospectus must be able to access a statutory prosectus either online or by calling 800 #. true story
what must be included in summary prospectus fund name, fund class, ticker sypbol, and if fund is in exchange traded fund (ETF) identif of the principal US market where itis traded
rule 498 requires that a legend appear on the cover pg that refers to the summary nature of the prospectus and the availability of the funds statutory prospectus. must have toll fr # or webiste. must also have risk/ror; fees, objective, strategies, mgmt, organiz
What should be done when broker recommends funds use charts, reveal source of charts, sep dividens from captial gains when talking, not talk about safety in compared to other security, reveal funds highest fees
why do mfunds offer periodic pmts? to offer dollar cost averaging
if periodic pmts is advertised for a mfund what else must be with it? must say, profit not assured, do not provide protection agnst losses, plans involve continuous investments regardless of mkt fluctuatuions, investors should consider their financial ability b4 investing
t or f all outgoing customer correspondence that does not contain any sales or product recommendation must be reviewed and endorsed by a principal true
t or f advertising, sale lit, and instituional sales lit must be approved by a principal before use false - reviewed not approved, it is Independently prepared reprints that need approval
t or f a principal must approve all public communication true
t or f copies of advertising ans sales literature must be retained for 3 yrs from last use true
t or f advertising and sales literature related to investment comp must be filed days within first use false 10 days after
t or f any adverrtising filed y firms that have not previously filed any advertisments with a SRO must be done days before true
a testomonial used by a mbr firm must state what? qualif of person, past perform does not indicate future, if compensation was paid to person for his testimony
What forms of written communication must be approved by a principal? letter to sent to 30 prospective customers with advice about stock,
what are some things to consider when communicating about Variable annuities and variable life? clr state not mfund, not short term b/c of fees,
What does a rating of A or A+ from A.M. Best mean in the Insurance industry? That the ins company has substantial ability to meet their claim obligations
what changed the issuance of single premium life ins policies? the tax law changes of 1986
t or f in general, variable life product performance can not be compared to other investment products true - but it is allowed to be compared to a term ins product to demonstrate the concept of tax-deferred growth resulting from investment in the variable product
what is the statute of limitations against a broker/dealer? client may sue fi he believes that broker used deceptive practices in sale of securities. Mus sue w/in 3 years fo the manipulative act and w/in 2 yrs of discovery of the deception.
telephone consumer protection Act of 1991 (TCPA- administered by FCC (Fed Communications Comm)used to protect consuemrs from unwanted telephone solicitaitons.
What does the Telephone consuemr protection act require co to have a "do not call list" with its own maintenance pro0cedures, train reps to use list, record clients that do not want us to call agn, ensure cold call clients of co name, add and #, only btwn 8 am - 9 pm,
how long is a clients request to be on the do not call list good for? 10 yrs
how ofter does the do not call list have to be updated? every 31 days
Waht calls are exempt from the do not call list? ppl caller has business relationship, made on behalf of tax-exempt nonprofit org, not made for commercial purpose and made for legitimate debt collection.
Can a telemarketer be sued for violating this act? yes under the TCPA of 1991 consumbers, businesses and state authorities may sue telemarketers.
how are Mfunds able to be marketed? 1. fund to undwrtr to dealer to investor, 2. fund to underwiter to invstor 3. fund to investor (strt from fund to investor) this is a no-load fund. fund pays all expenses 4. sales at the POP
Who can get discounts from mfunds? only member firms of FINRA may get discounts from POP and then only if they have a written agreement
What do investment co have to do to qualify for the maximum 8.5% sales charge? breakpoints (scale of delcineing slaes charges based on the amt invested) and right sof accumulation
t or f automatice reinvestment of distributions at NAV must be included as a feature for all mfunds true - reinvestments must be allowed at NAV and not be charged an addtional rate to reinvest a clients money.
Mutual fund classes the primary difference between classes of shares is costs associated with each class. the share class to recommend will always be the class that results in the lowest sales charge to the client
class A Shares typically chareg a front-end sales charge, also called a front end load.
why are class A shares generally less than Class C or Class b? they impose an asset-based sales charge, the 12b-1 fee, but it its generally less than the 12b-1 fee imposed by other classes.
how does the 12b-1 fee work? if it were a fee of .15 (15 cents on $100) this would be $15 on a $10,000 investment.
breakpoints sales charge discounts from the front end load. often allowed with class A shares
t or f if a jfund offers breakpoints they can decide whether they would like it to be in the prospectus or not? false, it must be in there - also the SEC requres the info be avail. on the web,
t or f shares pruchased in the same fund family are eligible to be aggregated to qualifey ofr breakpoint discounts even if investments are held at different broker/dealers true
who is eleigible for breakpoints? marrieds, pratents with minors, corps.
t or f the more money you invest the greater the reduction of the sales charge. true
breakpoint sale making or seeking higher commisions by selling investment co shares in dollar amt just below the point at wwhich the sales charge is reduced.
letter of Intenet (LOI) a perosn who plans to invest more money with the same mutual fund company may immediately decrease his overall sales charges by signing a letter of intent. $$ must be invested w/in 13 months.
backdating the letter a fudns often permits a customer to sign a letter of intent as late as the 90th day after an initial purchase. however is they sing a LOI 60 days fter purchase, then they will only have 11 months to submit the remaining funds to qualify for the breakpnt
rights of accumulation like breakpoints, allow an investor to qualify for reduced slaes charges. the major difference are that rights of accum avail for subsequent $ but not the initial, allow investor to use all $ to qualify for breakpnts, and have not time limits.
exchange privileges within a family of funds allow an investor to convert an investment in one fund for an equal investment in antoher in the same family of funds. Often with no addit sales charge.
class B shares do not charge a front end slaes buit they do impose an asset based 12b-1 fee great than the imposed on Class A shares
Class C Shares do no have front end sales charge at purch so 100% money invested. small charge often is sold w/in a short time (usually < 1 yr) they also have 12b-1 asset based fee like blass B. fee does not reduce over time. Good for sht term inv b/c less sales chrge
What class of shares should you recommend to clients in general $50k or > with long term to invest - Class A; Less than $50k and long term (5+ yrs) - Class B; less than $50k and short time (< 5 yrs) - class C.
what is the only mfund shares type that have front end loading class A - up to 8 1/2%
What is the only mfund shares type that hve break points Class A
How long does a mutal fund have to redeem shares once it recives a written requrest? 7 days
What must be with a written request to sell mutual fund shares? a signature guarantee
At what price are mutual fund shares redeemed? NAV which must be calculated at least 1 X per business day.
When is it allowed for a redemption of mfund shares to be suspended? NYSE is closed other than customary, NYSE trading is restricted, emergency exists that would make disposal of securites owne by comp not practical, SEC has ordered suspension of redemp for the co security holders
what happens to redeemed mfund shares? they are destroyed b/c mfunds is like a continuous public offering. They can not be resold to other owners. An investor receives new shares.
how often are 12b-1 shares charged? and how often are they approved charged quarterly and approved annually.
t o f a fund may only charge 8.5% salesload if it offers breakpoints and rights of accumulation true
what happens if purchased mfund shares are cancelled w/in 7 days> any fees earned by the rep must be returned to the underwriter.
FORMULA a customer purchased mutual fund shares with a NAV of $7.82 and an 8% sales charge. She paid what amt for the sales charge 100%-8% = 92% 992% is the offering price. So 7.82/.92 = $8.50. (POP). $8.50-7.82 = .68
T of F breakpoint advantages are onl available to persons not groups or clubs true and trusts and corporations are considered persons.
what acct information is needed on a new acct form? full name, address, #, ssn, occupation, employer, citizenship, dob, income, net worth, objectives, bank, are they a broker, how acct aquired, name of broker, signatures of reps, and principal
t or fl customers signaute is not required on new acct form true
What is the difference in using a W-9 for and and W-8 form for new accts/ US citizens use a @-9 and non US citizens us a W-8 form.
Customer Identification Program (CIP0 A FIRM MUST TAKE REASONBALE STEPS to establish the identity of a customer. A copy of the person's DL or passport is sufficient. Must also check with the Treasury department to ensure they are not on know terorists list.
what are the different types of account investment ownership? individual, joint, corporate and partnership.
trading authorization or power of attorney. accts may be opened with someone other than the owner having the authority to buy and sell securities.
what are the primary types of trading authorziation? discretionary, custodial, and fiduciary
discrationary trading authorization a registered rep has been given written authorization from customer to maketrading decisions for the customer
custodial trading authorization a competent adult has been designated to act on behalf of a child, who is the beneficial owner of the acct
fiduciary trading authorization a thrid party has been ligally appointed to prudently manage the account on behalf of another person or entity
who may open a mfund acct? generally, any competent person of age may open acct. Any perosn declared legally incompetenet may not.
can other ppl get statements for the customers acct? yes, if they state it in writing
Can the member firm hold the customer's mail for any reason? yes, they can hold it up to 2 months if the customer is traveling in US and for up to 3 mos if traveling abroad
what things must be considered when opening an business acct by the rep? does business have legal right to invest, what type of securites my they invest in, who will represent business in transactions for acct, a copy of legal docs must be kept on file.
is there special consdiderations if one company opens an acct for another broker form another firm? yes, RINRA and other SRO require that the carrying firm either get written permission for the account from or provide written notification to the employing firm. they must tell the client that his employer will be notified.
if a FINRA member opens an accout with someone other than their employer, can their employer request a copy of their transactions? yes, in fact they can request more than one copy
when does the brokers employer need not be notified when they open an acct with another firm? when the acct is limited to trading redeemable investment co securities.
single account individual acct, has one beneficial owner. The acct holder is the only person who can ctrl investments and request distributions
Transfer on Death (TOD) acct also called POD or pay on death, this allows the acct holder to specify who is to recv the acct on his death and avoid probrate but not estate taxes.
joint acct two or more adults are named on the acct as co-owners. must sign jt acct agreement. must be designed as tennants in common (TIC) or jt tenants with right of servivor. (JTWROS)
TENANTS IN COMMON (TIC) ownership provides that a deceased tenants fractional interest in the account be retained by that tenant estate and not passed to the surviving tenant.
joint tenants with right of servivorship ownership stipulates that a deceased tenant's interest in the acct passes to the surviving tenant. These accts must have TOD provisions.
what is the difference in rights of tenants between Tenants in common and Joint tenants with right of serviv.? JTWROS all parties must have = undivided interests and TIC interest may be unequal.
full power of attorney allows someone whois not the owner of an acct to depos or w/d and make investment decisions for the acct owner.
limited power of attorney allows an indiv to make only trading decisions.
what happens to the POA when the client dies? the POA is null and void
discretionary account acct set up with preapproved authority for a registered rep to make transactions w/out approval. can buy or sell assets and decide the amount.
how does a customwer give discretionary power over an acct only by filing a trading authorization or a limited POA with the broker/dlr. customer may still act on his own too.
What rules govern discretionary accts? ea acct order must be identified, principal must approve, record must be kept of all trans, no excessive trading, mgr must review ofter for churning
uniform Gifts to Minors Act (UGMA)and Uniform Transfer to Minors Act accounts require an adult or a trustee to act as custodian for a minor (the beneficial owner)
t or f an order is discretionary if any one of these are missing Action, Asset, Amount true
UGMA Donor when a person makes a gift to a minor under the UGMA laws Donor may not take back the gift.
custodian assets given to a minor through an UGMA acct are managed by a custodian until the minor reaches the age of majority. The custodian has full control over the minors acct and can buy, sell or hold securities and exercise rights or warrants
what are the rules for UGMA accounts acct may have only 1 custodian and 1 child, minor may be bene of more than 1 acct, donor of securities may act as custodian, unless parents are custodians they have no legal right,
what is needed on the app for the UGMA acct/ custodians name, minor's name and ssn, and the state in which the UGMA is registered
how are securities registered for the minor of an UGMA acct? in the custodian's name for the benefit of the minor, "joan Smith for Becky Smith" When minor b/c adult the securites will be resgistered in the name of the new adult.
Fiducuiary Responsibility B/C costodians are managing $$ for others they must exercise special care in selecting investments, may be opend & mng'd as cash only accts, no margin, all proceeds must be reinvested in a reasonable time, future, options or other high risk inv r prohibit
Uniform Prudent Investor Act of 1994 says that in determining liability for losses, investmens are compared to what a oprudent investor would have done under similar circumstances.
when may a custodian of an UGMA acct be reimburssed for expenses he may be reimbursed for any reasonble expenses he incures in managing the account uless they are asos the donor
what are the differences between UTMAs and UGMAs? unlike UGMAs UTMAs may hold real estate and there fore offer greater investment choice, UTMA accounts may also be delayed in tranfering in many states until the age of 21-25.
t or f gifts to UGMA and UTMA accts can be of any size but if they are over the max allowable amount the donor must pay a gift tax true
Rule 8210 member firms and their personnel are required to cooperate in any investigation conducted by FINRA including giving info virbally or in writing or making records available.
private securities transaction any sale of securities outside an associated person's regular business and his employing mbr. Also know as "selling away"
what must an associated perosn who wishes to enter into a private securities transaction do first? give written notice to his employer, give details of proposed trans, give details of his role in trans, & disclose if he has rec'vd or will rec'v any compensation for the trans
t or f if an associated perosn enters into a private transaction for compensation and their employer approves their participation then their employer must supervise during trans true
t or fal transactions that associated person enters into on behalf of immediate family members and for which the associated perosn rec'vs no compensation are excluded from the definition of private securites transactions. true
passive investment limited parnership unit or mutual funds shares purchase. not considered outside employement or business activity.
what are some examples of vilation the fair dealing rules? recomm invest. unsuitable for clients financ situation and risk tol, short term traidng of mfunds, fake accts, unauthorized trans, purchases that are incosistent with clients ability to pay, forgery, or ommission of material facts
churning excessive trading in a client's acct to generate commissions, rather than to help achieve clients stated investment objectives.
FINRA Rule 3220 Can not recieve any gifts to include gratuities in excess of $100 in any claendar yr
selling dividends it is wrong to recomm investor buy mfund shares just b4 dividend distrib.
breakpoint sale (THESE ARE PROHIBITED) client must know where the breakpoints are when purchasing mfunds. It is unethical and violates conduct rules to allow client to pay higher sales fees b/c he did not not about the breakpoints
What types of lending arrangements are available for investment activity? 1. immediate family 2. business lending customer (bank) 3. both reps of same firm 4. have persona relationship 5. have a business relat other than broker-customer relationship
what must be done first before a rep loans money to a client other than family or bank? get written permission from firm
can an adviser use investment reports yes, so long as they identify where the reports came from
Investment co directed brokerage arrangements Prohibits FINRA mbrs from favoring the sale of investment co shares based on commissions it has or will rec'v. for providing portfolio exicution svc for the invest comp.
who is considered an immediate family member? parents, mother & father in law, husband, wife, children and aly relative to whom the officer or employee in quesiton contributes financial support.
is it okay for an agent and customer to have a joint acct? yest as long as it is approved in writing by the mbr firm
matching or matched buy-sell orders transactions intenede to portray an artificial mkt for a stock and re stictly prohibited.
Painting the tape arranging for a deceptively large volume of trades to generate the illusion that there is more interest in a particular security than there really is.
capping consists of selling simply to keep the price belowa certain level. (prohibited)
supporting consists of buying simply to keep the price above a certain level (this is actually lawful with new issues only)
pegging buying and selling to keep the price within a certain range.
front running the unethical business practice of a broker/dealer or one of its reps placing a personal order ahead of a previously rec'vd customer order. most often occurs when large firm order is placed to move the market.
encouraging a purchase below the amount that would qualify for a reduction is sale is called? breakpoint sale
Omitting these in a recommendation violates disclosure requirements material facts
Encouraging a customer purchase just before a distribution is called selling dividends
churning is also called excessive trading
A prohibited practice w/out the broker/dealer's knowledge and consent selling away
what is the penalty for a person convicted of willfully violating federal securities regulations or of knowingly making false or misleading statements in a registration doc can be fined up to $1 million, sentenced to prison for up to 10 years, or both. the max fine is $2.5 mil for other than natural person (broker/dealer)
NAC National Adjudicatory Council If a member firm does not comply with FINRA's investigation about one of their reps, this council after 20 days written notice, has the right to suspend mbr and revoke the greistration of any associated person.
Code of Procedure this was created by the NASD to deal with alleged violations of SRO rules and federal securities laws.
how long does the respondent (defendent) have to respond to a complaint to the Hearing Officer? 25 days - answers must specifically admit, deny, or state defendent does not have enough info. if not answered in 25 days another ltr sent and 14 more days are given or a guilty plea is entered
t or f if a complain is filed against rep, it is not unusual for the person's designated supervisor to be charged for failure to supervise true
Offer of settlement a form of plea bargain initiated by the accused, while acceptance, waiver and consent is a form of plea bargain initiated by the prosecution (FINRA)
what is the max penalty for a NAC Minor Rule Violation (MRV)? $2500 and /or a leter of cnesure
if an associeated person is suspended can he still work for the member at all say like a clerk? no, that person may not remain associated in any capacity incl admin during the suspension period. however if a principal, it is possible to just suspend supervisory duties.
What are the steps to take if either party is displeased with the decison of a charge can make an appeal to NAC w/in 25 days of the decision. If NAC does not solve, it can be appealed to the SEC and then on to the federal court system.
code of arbitration procedure offerwes participants a easy method of settling disputes at a cost that is lower than formal procedures. mbrb vs mbr, mbr vs. rep, or rep vs rep
t or f with abritration decisions are final--no appeals are allowed. true
rule 3110 customer arbitration agreement usually found in new acct form states, lang must be easy to read, time limets on some issues for arbitration but may still go to court,
can customers and firms file arbitration against each other? customers can against firms but firms cannot against customers
where is arbitration filed? with the Director of Arbitration of FINRA
how long does the respondent have to respond to arbitration? 45 days to both the director and the claimant, if they fail to respond, the director can bar them from entering any matter, arguments or defenses at the hearing--the claiment has 10 days to reply to respondent and director (this is the discovery period)
mediation before any hearing convene, if both parties agree, they can work together and work out a settlement. this is facilitated by a mediator.
simplified arbitration any dispute involving
How long do monetary awards for penalties have to be paid? 30 days of decision date. after this time it will begin to accrue interest as of the decision date. These awards are made publicly available by FINRA
statute of limitations no claim is eligible for submission to arbitration if 6 yrs or more have elapsed from the time of the event giving rise to the claim.
who handles complaints Code of procedure or Code of arbitration? COP code of procedure
who handles disputes between members code of procedure of code of arbitration? code of abritration
t or f in the absence of a signed arbitration agreement, customers can still force mbr firms to arbitration, but mbr firms cannot force customers to arbitration true
t or f in customer simplified arbitration, a panel of three arbitrators reviews all the evidence and renders a binding decision. false--1 arbitrator
t or f the statute of limitations for submission of a claim to arbitratrion is 6 years true
t or f under the Code of Arbitration, a respondent to a statement of claim must respond to the director of arbitration and the claimant w/in 45 days. true
number of days to begin an appeal of a decision to NAC 25
number of callendar days to respond to a compaint notice 25
number of dayus to pay an arbitration award 30
number of days to schedule a prehearing conference 21
US Patriot Act of 2001 establishe the US treasurey dpet as the lead agency for developing regs in connection with anti-money laundering programs and requires broker/dealers to establish iunternal compliance procedures to detect abuse.
what is the purpose of the Partiot act to see where money is going and to prevent clean money from going to dirty places
Customer ID Program (CIP) verify new customer identity, maintain records for identity, does person appear on list of know terrorists -- need name, address, ssn, or for non us passport, aliend id, or other gove issued doc with photo.
what steps can be taken if an indiv would like to open an account and they do not yet have ssn but they have already applied for it? the frim must obtain the number withing a reasonable period and the acct card must be marked "applied for".
Suspicious Activity Report (SAR) filed when the identity of an individual can not be completed. must also be filed involving trans of $5000 or more when financial behavior appears commercially illogical and serve no apparent purpose.
Currency transaction reports (CTRS) under the bank secrecy act, currency trans depos or w/d's of more than $10k must be reported to the treasury department financial crimes enforcement network (FinCen) on form 104 info is required on both the transmitter and the recipient
t or f if a customer were to pay for a $12k mfund purchase with 24 $500 postal money orders, a FinDEN form 104 must be filed. true
What other trans action other than currency over $10k must be reported on CTR? any electronic fund transfer (wire tranfer) in excess of $3000.
money laundering hiding and legitimizing proceeds derived from illegal sources. The funds take on the appearance of having been generated in a legal fashion
3 stages of money laundering placement, layering, and Integration
Placement of moeny laundering the stage when funds are moved into the system. it is the most vulerable to detection
Layering of money laundering stage when a confusing set of transactions is conducted to make the origine of the fudns unclear.
Integration of moeny laundering stage whent eh funds are invested in legitimate enterprises
Office of Foreign Assets Controls (OFAC) US Treasury office maintains a list of indiv and entities viewed as a threat to the US. Thos on the list of Specially Designated nationals (SDNs) are subject to specific gov sanctions
how long to you have to report blocked SDN transaction to OFAC? withing 10 days of the occurence.
t or f OFAC requires financial institutions to designate a compliance officer of the firm to be responbile for monitoring OFAC regs and to oversee blocked funds. true
t or f filing a CTR is required for any trans over $10k false, any currency trans over $10k
t or f filing a SAR is required fro any trans of $10k or more false,$5000 or more
t or f the us Treasury OFAC can require a mbr to block the trans of certain indiv but may not prevent the fin institution from doing business with that person false, can block and prevent business too
t or f the three stages of moeny laundering have been identified as placement, layering and integration true
what should be done at a very minimum before recommending any investment to a customer? make a reasonbable effort to obtain ifno concerning the customer's financial status, tax status, and investment objectives
Alternative min tax (AMT) Congress enacted the alternative min tax to ensure that hi-income taxpayers do not excape federal income taxes.
what certain items that receive favorable tax treatment must be added back into taxable income for the AMT and incle what? accel depreciation on prop after 1986, certain costs with limited partnerships prog like research costs, local tax and interest on invest, tax exempt interest on private purpose mini bonds iss after 08/7/86, stocdk options in excess of strike price
tax preferenced items items that must be added back in for the purpose of the alternative min tax computation
nonfinancial investment considerations age, marital st, children, employement, educ needs, health care needs, risk tolerance, attitude about invest, tax status
What are some basic financial objectives customers have when investing? preservation of capital, additional income and captial growth
capital growth refers to an increase in an investments value over time. the most common growth oriented investment are stock and stock mutual funds
Income investments add additional income. corp bonds, mini bonds, gov and agency securities, income oriented mfunds, and some stocks incl real estate invest trusts (REITs)and utilities, money mkt funds, and annuities
cyclical stocks durable goods like refrigerators, cars and heavy equip
what is special about a muni bond? it is a tax-free investment. they are not suitable for retirement accts. Why buy tax free that will become taxable as soon as it is withdrawn.
what are the caqtegories used in portfolio diversification? speculative stocks and stock options, growth, and safety
speculative stocks and stock options low rated debt securities, precesious metal, commoditieis and futures, speculative limited partnerships, speculative mutual funds
growth category of investment smal cap stocks, stock options, nonbank grade bonds, growth oriented limited partnerships, growth stock mutual funds, commodities funds, variable annuities
safety category of investment cash, money mkt, cd's, U S tres securities, ban grade corp and mini bonds, blue-chip stocks, bond mutual funds.
liquidity can be sold quickly at the face amount or very close to the face amount.
speculation try to earn much higher than average returns in exchange for higher than average risks. Investors who are interested in spec may be interested in tech, cyclical, and growth stocks which are expect to grow rapidly
what is the best investment tool for preservation of capital/safety government securities, ginnie maes
what is the best investment tool for Growth common stock, common stock mutal funds, blue chip stock, defensive stocks, tech stock, sector stock, cyclical stocks
what is the best investment tool for liquidity money market funds
what is the best investment tool for portfolio Diversification equity, bonds, treasuries, money market
speculation small cap, cyclical stocks, preferred stock, hedge stock
what is the definition fo term growth? incease in the value of an investment over time. Growth can come from the increase in the value of the security, the reinvestment of distributions or both.
why are penny stock not a good liquide investment? they are often illiquid b/c there is a limited secondary market
what is the best invest. for mo income? zero coupon bond, growth stock, sma cap mfund, or GNMA mfund GNMA mutual fund
unsolicited trades when a customer wants a trade that the rep did not agree with, it will be marked undolicited
systematic risks those risks that affect all investments
nonsytematic risks those that affect some and not other investments
Business Risk some business fail for lack of mgmt or b/c of recession. If bankrupt they pay creditors and if any is left then their share holders
Inflation risk also called purchasing pwoer risk, this is the effect of continually rising prices on investments. If bond yiels less than infation, money has less purch power
capital risk potential for an investor to loe all his money under circumstances either related or unrelated to issuer's financial strength.
timing risk the risk to an investor of buying or sellign at the wrong time and incurring losses or lower gains
interest rate risk referes to the sensitivity of an investment's price or value to fluctuation in interest rates. The term is generally associated with bonds and preferred stocks b/c their prices change with shift in rates
reinvestment risk when interest rates decline, it is difficult for bond investors to invest the proceeds from maturities and calls to maintain the same level of income without increasing their crdit or market risks
market risk risk that investors may lose some of their principal duei to price volatility in the overall market (also non as systematic risk)
nonsystematic risk company specific risk. this is the risk that a particular investment will perform poorly. Having a diversified protfolio offsets this risk.
t or f bond prices fluctuat with changing interest rates. as bond yields go up, bond prices go down and vice versa. true
credit risk also called financial risk or default risk involves the danger of losing all or part of one's invested principal through and issuer's failure.
t or f long term bonds inovolve more credit risk thatn short term bonds because of the increased uncertainty that results from holding bonds for many years. true
who are the 2 best services to rate bonds Moody's and Standard and Poors
liquidity risk the risk that a client might not be able to sell and investment
legislative risk Congress has the power to change laws affecting securities. This risk that a change in law might affect investments adversely is called legislative risk or polictical risk
call risk the risk that a bond might be called before maturity and investors cannot reinvest their principal at the sqme or higher rate of return.
currency risk the risk that changes in the rate of exchange will adversely affect the investment. if buying foreign, the investor will lose if the UD dollar appreciates agains the foreign currency and profit if the US dollar declines.
Created by: tnl on 2011-03-05

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