Chapter 2 Flashcards
Security issued or guaranteed by the United States; Security issued or guaranteed by any territory or state of the United States; Note, draft, bill of exchange, or banker’s acceptance which arises out of a current transaction with a maximum maturity of 9 months; Security issued by a person organized exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for profits; Security issued by a savings and loan, building and loan, cooperative bank, etc.; Insurance and annuity contracts (not variable contracts!)
Securities that are considered exempt securities not required to register under the Securities Act of 1933
An exempt security is still a security and an offer of exempt securities will often still include:
Offering documents to investors
If it is an exempt security, it is not subject to:
Registration requirements
If it is a security, it is subject to:
Anti-fraud statutes
An investment of money in a common enterprise; With an exception of profits derived through the efforts of other.
An investment contract defined by the Howey Decision
The following investments are not securities:
Fixed annuities; Whole life, term life; Commodities
When the SROs want to change a rule:
It has to be signed off on by the SEC as well
SROs may not allow members to join the association unless:
The members are registered
FINRA, etc., can deny membership to a firm if it lacks financial strength or has engaged in “acts or practices inconsistent with just and equitable principles of trade.”
Statutory Disqualification (Section 15A)
Rule of the Securities Exchange Act of 1934 requires officers and certain employees of member firms to submit fingerprints:
Rule 17f-2 (Fingerprinting)
Is not engaged in the sale of securities; Does not regularly have access to the keeping, handling or processing of: 1. securities, 2. monies, or 3. the original books and records relating to the securities or the monies; and Does not have direct supervisory responsibility over persons engaged in the activities referred to in paragraphs (a)(1)(i)(A) and (B) of this section.
Persons who fit the description of being exempt from the fingerprinting rule
Is engaged exclusively in the sale of shares of registered open-end management investment companies, variable contracts, or interests in limited partnerships, unit investment trusts or real estate investment trusts; Provided, that those securities ordinarily are not evidenced by certificates.
Firms who are exempt from fingerprinting
For the individual who passed out the inside information or war dumb enough to use it, the court can impose a civil penalty of three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication. If that person happened to be “controlled” by somebody else (a boss, the broker-dealer who hired the agent, for example) that “controlling person” could receive a civil penalty of the greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of the controlled person’s violation.
Penalties extracted when the SEC sues an associated person in civil court
A trader who enters an order on the other side of the market at the same time as a trader with inside information enters an order. They can sue traders who act on inside information to recover losses. The maximum penalty is the profit they made or the loss avoided by trading on inside information.
Contemporaneous Trader
Trade their clients’ accounts in exchange for a percentage of the account value. Compensated for providing investment advice. Gets paid more money if the client’s account value rises. Registers either with the SEC or particular states. They use Form ADV and indicate whether they’re registering with the federal regulators or the state regulators. They submit Form U4 applications to the states in which their investment adviser representatives need to be registered, too.
Investment adviser (Portfolio manager)
Hired people to sell the services of the firm or manage customer accounts.
Investment Adviser Representatives
Manage accounts, sell the services of the firm, determine recommendations for clients, make recommendations to clients, supervise those who do any of the above:
Things that consider employees being representatives of an investment advisory firm
Is or holds itself out as being engaged primarily, or proposes to engage primarily in the business of investing, reinvesting, or trading in securities; and if more than 40% of the company’s total assets are tied up in securities investments:
Investment company
A company that is either an open-end or a closed-end fund:
Management company
What are the three types of investment companies:
Management company, Face-amount certificate company, Unit Investment Trust (UIT)
Investment companies submit a registration statement to the SEC. The registration statement has two parts:
Part 1 (N1-A prospectus (Summary prospectus)), Part 2 (Statement of Additional Information (SAI))
Selling securities short (unlimited loss potential), Purchasing securities on margin (high-risk), Selling uncovered options (covered call okay), Participating in joint investment or trading accounts, Acting as a distributor of its own securities (use an underwriter, or a 12b-1 plan), Borrowing or lending money
Must be approved by the SEC. Fund must meet requirements.
If the fund wants to engage in these activities, after meeting requirements and SEC approval, it must disclose the activities and explain the extent to which it plans to engage in them in the prospectus:
Risky activities
An open-end fund can borrow money from a bank but must maintain a:
3-to-1 asset-to-debt coverage
No matter what it says in its registration statement, a fund may never:
Lend money to one of its officers or directors
If they’ve been convicted of any felony or any securities related misdemeanor in the past 10 years:
Statutory disqualification
A representative that can sell anything:
General securities representative (Series 7)
This allows the individual to sell only mutual funds and variable contracts, plus something that seldom gets mentioned: they can also be part of an underwriting for a closed-end fund (done through prospectus.
Limited representative-Investment company and variable contracts (Series 6)
What is the maximum time limit that an individual has to use or renew their license:
2 years
Persons associated with a member who accept unsolicited customer orders for submission for execution by the member. Must pass an examination qualification.
Assistant representative
The individual cannot take or execute trades, send research reports to clients, or accept unsolicited orders from clients:
Things an individual may not do before he becomes a registered representative
The Uniform Application for Securities Industry Registration or Transfer. Representatives of broker-dealers, investment advisers, or issuers of securities must use this form to become registered in the appropriate jurisdictions and/or SROs. Is not transfarable.
Form U4
On the Form U4, the individual will not need to disclose his/her:
Marital status or education
The form used to terminate a registered representative:
Form U5
When an agent leaves one broker-dealer to work at another firm, the broker-dealer fills out a U5 within:
30 days of the agent’s termination date
Within what time does the representative have to provide a copy of the U5 filed with the CRD to the hiring broker-dealer?
2 business days of the request
A place that maintains information on all persons registered with FINRA, including information on customer complaints and disciplinary history.
Central Registration Depository (CRD)
They supervise registered representatives, review correspondence and other communications going out to investors, approve every account, initial order tickets, handle written customer complaints, and make sure there’s a written supervisory manual for the office to use to stay in compliance with regulations. Must take the Series 26 examination.
Principal
Relating to principals, each member must have at least:
2 principals
Requires registered representatives to participate in a training exercise that must be completed within 120 days after a person’s second registration anniversary, and every three years thereafter. If the rep does not complete the exercise, his registration can become inactive. This exercise is transferable to another firm.
The Regulatory Element
It’s completed annually. Member firms design a written training program that is interactive and covers the following topics: Regulatory requirements that apply to business performed; Suitability and ethical sales practices; Overall investment features and related risk factors.
The Firm Element
How does FINRA determine how much member firms must pay in fees
Fees are based on the number of registered representatives employed by the firm, and the number of branch offices the firm has
Use of the FINRA name:
Members cannot use the FINRA name in anyway that might falsely imply that FINRA has endorsed them
No member who is a principal underwriter may sell variable contracts through another broker-dealer unless:
The broker-dealer is a member, and there is a sales agreement in effect between the parties
An agreement between a principal underwriter and a broker-dealer involving variable contracts must provide that the sales commission be returned to the insurance company if the purchaser terminates the contract within:
Seven business days
Member firms can only sell variable annuities if the annuity/insurance company (_____) pays out when clients surrender their contracts.
Promptly
Associated persons may not accept compensation from anyone other than the member firm. The only exception here is if there is:
An arrangement between the individual and the other party that the member firm agrees to
Associated persons may not accept securities from somebody else in exchange for selling variable contracts.
True
Gifts that do not exceed an annual amount per person fixed periodically by the Association, and that are not preconditioned on achievement of a sales target. The gift limit is $100; An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment that is neither so frequent nor so extensive as to raise any question of proprietary and is not preconditioned on achievement of a sales target; Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member.
The only non-cash compensation that can be offered or accepted by an associated person
Member firm shall maintain records of all compensation received by the member or its associated persons from offerors. The records shall include:
The names of the offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of non- cash compensation received
The firm can give you non-cash compensations or selling variable contracts, but:
They can’t compensate you more for selling one variable contract over another
Regarding sales agreement, if the other dealer is not a FINRA member, they would:
Have to pay the full public offering price
What makes the sales charges excessive?
8.5% of the public offering price is the maximum sales charge
If the fund does not offer breakpoints and the rights of accumulation that satisfy FINRA:
The fund cannot charge 8.5%
No member shall withhold placing customers’ orders for any investment company security so as to profit himself as a result of such withholding. Also, member firms can only purchase investment company shares either for their own account or to fill existing customer orders.
Withhold orders rule
Broker-dealers cannot decide to sell particular investment company shares based on how much trading business the investment company does or would consider doing through the firm. May also be called pay-to-play.
Anti-reciprocal rule
“On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus.” Must appear on the front of a confirmation and in at least 8-point type.
A transaction involving the purchase of shares of an investment company that imposes a deferred sales charge when the investor redeems the shares
If a customer buys mutual fund shares but then redeems them within (_____), any compensation earned by the broker-dealer and the registered rep must be returned to the underwriter.
Seven business days
US Treasury securities, which include T-bills, T-notes, T-bonds, I-bonds, and STRIPS, pay interest that is taxed at:
Ordinary income rates, but only at the federal level
Capital gains are taxable at the:
Federal level
Municipal securities pay interest that is tax-exempt at the:
Federal level
A municipal bond issued out of state is taxable at:
State and local levels
A municipal bond issued out of the city but within the same state is taxed at:
Local level
A municipal bond that is issued in the same city and state are:
Tax exempt at the local, state, and federal level
Corporate and agency bonds pay interest that is:
Taxable at all three levels: Local, State, and Federal
Issued originally at a discount. Also called original issue discount bonds (OIDs). Taxed annually, but receive par value at maturity. Report interest each year on 1099 OID even though individual hasn’t collected any interest yet.
Zero-coupon bonds
Tax on qualified dividends is:
15%
Low-bracket investors pay no taxes, but people in the highest tax bracket pay:
20%
Companies that pay dividends after they’ve paid their taxes on the profits they made.
Qualified dividends
Pass through 90% of their net income to the shareholders! but the shareholders pay ordinary income tax on those dividends.
REITs (Real Estate Investment Trusts)
If you buy $1,000 of GE stock in 1993 and you sell that stock for $15,000 in 2013, you have “realized a capital gain” of:
$5,000
If you end up with more (capital) gains than losses for the year, then you have a:
Net capital gain
Long-term capital gains are taxed at:
Maximum (currently 15%, or 20% in highest tax bracket)
Begins the day after the trade date and stops on the day the stock is sold.
The holding period
Short-term capital gains are taxed at:
A higher rate
Long-term capital gains are taxed at:
A lower rate
All the money the investor has put into the thing up to this point:
Cost basis
If you buy a share of XYZ at $10, and then the price of the stock is trading at $50, but you haven’t sold yet. What is this called:
Unrealized capital gains
