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Series 10 > Chapter 4 - Investment Companies, Savings Plans, Financial Responsibilities > Flashcards

Chapter 4 - Investment Companies, Savings Plans, Financial Responsibilities Flashcards

1
Q

Investment company act of 1940

A

created investment companies, UITs, and FACCs

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2
Q

Closed vs Open mutual funds

A

closed are issued once and trade in market. prospectus only needed for initial sale
open are issued every time and redeemed with the issuer, prospectus issued every time, must be kept up to date

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3
Q

UIT - owns beneficial interest, not shares

A

fixed UIT, no management (no board of directors)
non-fixed UIT, managed.
variable annuity, for retirement, eventually cash out or annuitize.

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4
Q

Fund sponsor

A

firm that underwrites & registers the fund

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5
Q

Selling Group

A

acts as agent to sell the mutual fund shares

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6
Q

Investment Advisor

A

the one who runs the fund. is selected for two years and then re-elected every year after. earns management fee

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7
Q

custodian bank

A

safeguards funds. can act as transfer agent. earns custodial fees.

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8
Q

Diversified fund - 75/5/10 rule

A

75%+ invested in securities
max 5% in any one investment
max 10% holding of an investments total shares

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9
Q

NAV computation

A

daily mark to market of assets, divided by outstanding shares = share price

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10
Q

no-load funds

A

no sales charge, can be bought at NAV. there is no selling group.

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11
Q

Max Sales Charge

A

8.5% of POP.
POP is typically higher than NAV, it also includes appropriate sales charge.

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12
Q

Payment upon Redemption

A

customers must be paid within 7 calendar days after redeeming shares.

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13
Q

Redemption Fees

A

Funds are allowed to charge redemption fees, but total fees (up-front sales charge & redemption fees) cannot exceed 8.5%

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14
Q

Contingent Deferred Sales Charge (CDSC)

A

The fund can charge fees if the client redeems shares too soon. will have a “vesting” type schedule of fees

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15
Q

A-shares vs B-shares

A

A-shares have initial sales charges
B-shares follow CDSC schedule

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16
Q

IF a fund charges max 8.5% fee…

A

it must offer breakpoints, letters of intent, and rights of accumulation.

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17
Q

breakpoint

A

reduced sales charges for higher dollar amount purchases (investment clubs are not eligible, but households are)

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18
Q

letter of intent

A

if client plans on purchasing more of a fund, they can sign a letter of intent and receive reduced break point fees. can look back on 90 days purchases or look forward 13 months. if money is never deposited, fees will be added back

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19
Q

Market Appreciation and letter of intent

A

If shares appreciate during the letter of intent, the customer must still deposit the agreed upon amount.

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20
Q

rights of accumulation

A

customer is eligible for breakpoints as the accumulate amounts over time. this does include appreciation unlike letters of intent. can use higher of cost or MV (in case the fund has depreciated)

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21
Q

12b-1 fees

A

typically funds cannot charge expenses derived from obtaining new clients/money to the existing shareholders. then 12b-1 fee was created where they can charge some of the costs to shareholders. the logic is if new monies are obtained, the fund will grow and expenses will decrease.

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22
Q

adopting 12b-1 fees

A

must pass majority vote from 1. shareholders 2. board of directors 3. uninterested directors (not affiliated nor receives payments). must be reapproved annually. will reduce max sales charge

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23
Q

terminating 12b-1 fees

A

just need majority vote from either shareholders or uninterested directors.

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24
Q

capital gains distributions

A

if fund sells off appreciated assets, it will have a distribution at EOY. will be taxed as capital gains. funds can also post divs/interest.

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25
Q

cost basis for mutual funds

A

original purchase price PLUS any reinvested divs (already paid taxes on them)

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26
Q

selling dividends

A

strictly prohibited - recommending a client to buy a fund about to pay a dividend or capital gain

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27
Q

Various reductions in max MF fees (without 12b-1)

A

without RoA- 8%
without breakpoint- 7.75%
without both- 7.25%
if service fee- 7.25%

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28
Q

Various reductions in max MF fees (with 12b-1)

A

if also service fee- max 6.25%
if no service fee- max 7.25%
max 12b-1 fee- .75%
to be “no load” max 12b-1 fee- .25%

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29
Q

Share classes and 12b-1

A

A-shares, max .25 12b-1
B-shares, max .5 12b-1
C-shares, max .75 12b-1

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30
Q

A vs B share suitability

A

if large amount and long horizon, choose A-shares.

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31
Q

Late Trading

A

firms that regularly take advantage of the ability to buy MF shares after 4pm close.

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32
Q

Market timing (mutual fund)

A

short-term trading in MFs due to NAV arbitrage. Drives up costs for fund managers and reduces performance of fund. most funds have short term trading restrictions to prevent this.

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33
Q

Written Selling group agreement

A

anyone who joins selling group must sign. it specifies concessions

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34
Q

mutual fund orders

A

must be placed at the fund. firms cannot trade or make a market for mutual fund shares.

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35
Q

redemptions within 7 days of initial purchase

A

concession must be forfeited. reasonable redemption fees can be charged.

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36
Q

“special deals”

A

are strictly prohibited. firms can only be compensated through the agreed upon selling concessions. cannot offer any incentives to sell shares.

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37
Q

Underwriters selecting which firm to do portfolio trades

A

must prioritize best execution. CANNOT pick firm with best sales of their funds.

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38
Q

Prohibited compensation items

A

stock, warrant, options
merchandise/trips
any compensation not stated in prospectus
any item of material value

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39
Q

gifts allowed

A

no more than $100/employee per year
prior approved seminars with appropriate location and expenses covered
occasional meals and events

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40
Q

MF/investment advisors charitable solicitations

A

are prohibited, especially if it is that advisors obligation.

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41
Q

written procedures for charitable contributions

A

must have b/d approval, customer firm approval, can’t be tied to level of business done, all must be reviewed frequently.

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42
Q

soft dollar renumeration

A

came about due to previously high commissions. allowed small b/d’s to stay competitive. can be used for services that benefit shareholders like research, trading software - not rent, etc.

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43
Q

Generic advertising, Rule 135A

A

cannot name security, must have explanatory info on type of product and services. name of b/d and/or sponsors must be listed. if returns are shown, must include total returns.

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44
Q

Rule 156, misleading ads

A

if contains untrue statement or doesnt include necessary facts. applies to any and all communications used to offer securities.

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45
Q

Variable annuity

A

no guaranteed return, so it is considered a security. therefore, prospectus is required.
needs 15-20 yrs of built up period to make economic sense

46
Q

Assumed Interest Rate, AIR

A

the rate of return VA will aim for. not guaranteed

47
Q

Accumulation units

A

similar to shares of mutual fund, but for VA. Must be reinvested unlike MFs, but have NQ tax deferred status.

48
Q

Annuitization

A

when the VA switching from accumulating to paying out.

49
Q

VA sales charge

A

used to be 8.5% like MF, but now charges must be “fair and reasonable”

50
Q

VA suitability

A

rep must have basis:
-customer has been informed of product features
-customer would benefit from one or more of the features
-all of the features are suitable
-customer must understand this is not a mutual fund

51
Q

Annuity exchanges

A

-must consider surrender charges, loss of benefits, subject to increased fees
-client must benefit from new feature
-rep must make reasonable effort to find out if client has had an exchange in previous 36 months

52
Q

Valid reasons for whole life exchange

A

-better coverage at lower cost
-more desirable benefits
-solvency concerns for original policy issuer

53
Q

invalid reasons for whole life exchange

A

-using cash value to pay for new annuity
-creating high surrender charges
-skirting around contestability period
-unfavorable tax consequences

54
Q

in-force ledger

A

to examine current policy when considering an exchange

55
Q

tax free exchange criteria

A

the annuitant and the insured must not change. an annuity exchanged into life insurance is taxable.

56
Q

payment transmission

A

must be promptly sent to insurance carrier for amount due to them.

57
Q

selling agreement insurance carriers

A

written agreement must be in place between b/d and carrier before orders can take place.

58
Q

Lump sum distributions are taxed…

A

LIFO.

59
Q

IRA contributions can continue…

A

as long as the individual has earned income

60
Q

prohibited IRA investments

A

insurance policy cash values, term insurance, art and collectibles

61
Q

non-spousal bene IRA

A

-decedent and bene’s name must remain on the account
-must deplete the account in 10 years
-can be depleted however they want
-beneficiary can also “disclaim” IRA, and direct it to someone else

62
Q

Keogh plan (for self-employed)

A

-can contribute up to 25% of earning with $61K cap
-if there are other full time employees (working over 1000 hrs), the must get same percentage contribution
-unlike IRA, it will allow cash value life insurance
-eligible if they have ANY self-employed income, it is ok if they work for corp. full time also

63
Q

ERISA

A

non-discrimination
vesting
plan trustee, fiduciary
b/d, advisors for plan may be compensated

64
Q

ERISA, broker of record

A

b/d who is broker of record for the plan:
-provides info about providers, policies, and investments
-assists with investment education
-assists with communicating info about plan
-is NOT fiduciary

65
Q

prohibited transactions

A

naked option writing, margin transaction, etc. covered call writing is OK

66
Q

defined benefit plan

A

must comply with ERISA
annual contribution set by actuary
contribution is based on projected retirement obligation, not company profitability

67
Q

Other Qualified plans

A

Profit-Sharing Plan (max 25% up to $61K)
Tax-deferred annuities 403b- typically for non-profits. contributions are tax deductible, and earnings are tax deferred
401k- can borrow against, the lesser of 50% value or $50K

68
Q

Non-qualified plans

A

deferred comp- not subject to ERISA or IRS approval. taxes due when comp received, so tax deferred.
Payroll Deduction Savings Plan- money set aside for retirement, but it is taxable now, both employee and employer portions

69
Q

coverdell ESA

A

-to pay for qualified education expenses (includes primary and secondary school)
-beneficiary must be under 18
-annual limit of $2000 per beneficiary (multiple people can create accounts for that person, but the aggregate contributions cannot exceed $2000)
-earnings tax deferred & not taxed if used for qualified expenses; must be used by 30 or r/o to family member.
-phase out limits for high income

70
Q

529

A

-any higher education, vocational school, accredited post-secondary school
-up to 10K/year for education below college level
-lifetime max $10,000 to pay off loans
-refunds due to scholarships incur tax on gains, but not 10% penalty
-subject to MSRB rules because the state is legal issuer
-no income phase out, age limits, contribution limits
-investments can only be changed twice a year

71
Q

529s exempt from 1933 and 1940 Acts

A

-doesnt need to provide prospectus (but MSRB requires Official Statement)
-doesnt need to calc NAV daily
-BOD doesnt need disinterested directors

72
Q

529 taxes

A

-at state level, contributions ARE deductible
-subject to gift tax if over $16,000 or the 1-time contribution of 5x limit

73
Q

529 Donor

A

-funds remain in control of donor
-but are excluded from estate, unless there are excess annual exclusion amounts
-will pay income tax and 10% penalty if used for unapproved expenses

74
Q

529 death of beneficiary

A

-funds can go to estate & subject to estate tax
-withdraw assets, gains taxed as ordinary income, but no 10% penalty
-designate new bene with no tax due if family member of bene - income tax and 10% penalty due if designated to non-family member
-family member = all the way to first cousin plus “step” and “in-laws”

75
Q

recapture

A

when a state claws back and deductions taken in 529 then the resident moves to a new state

76
Q

Periodic Statements

A

grouped together confirms
sent quarterly if on a periodic plan
sent monthly if on a non-periodic plan

77
Q

Rule 15c5-3 Customer Protection

A

Ensure firms have sufficient funds on hand & promptly obtains control of securities.

78
Q

Possession or control of securities

A

if fully paid- must be safe and segregated
excess margin- must be reduced to possession or control

79
Q

considered in possession or control if certificates are in…

A

-custody of firm/clearing
-custody of bank
-transfer under 40 days
-transit under 5 days

80
Q

possession/control for buy-ins

A

fail to deliver must be bought in 10 business days
fail to receive must be bought in 30 calendar days
short differences must be bought in 45 calendar days

81
Q

hypothecation of customer securities

A

margin securities are held in street name, rule 15c2-1 prevents firms from abusing this to get more money on loan with customer securities

82
Q

rehypothecation allowed once…

A

transaction has settled. cannot trade in anticipation of settlement.

83
Q

Securities Information Center (SIC)

A

designee of SEC for reporting lost or stolen securities. must inquire to SIC who will check whether firms have reported lost securities unless received from issuer, Fed, already inquired, already belong to customer, or transaction under $10,000

84
Q

Stolen or Counterfeit securities

A

must be reported to SIC and Transfer Agent within 1 day of discovery. FBI must be notified promptly

85
Q

Missing Securities

A

reported to SIC and Transfer Agent within 1 day after securities missing for 2 days.

86
Q

Found securities

A

everyone must be notified within 1 day

87
Q

Employee fingerprinting

A

everyone except outside directors and clerical personnel

88
Q

SIPC coverage

A

$500,000 per customer, but no more than $250,000 cash. customer is determined by SSN.

89
Q

if brokerage firms fails..

A

trustee appointed to sort out claims. customers will have fill out form. if registered in customer name, securities will be fine. street name is pro rata. SIPC funds the balance. anything above SIPC levels, customer becomes general creditor of b/d

90
Q

Rule 17a5 required reports

A

-annual audit by CPA
-customers must be sent audited balance sheet and net capital within 105 days of YE
-additionally send an unaudited semi-annual balance sheet and net capital
-customer is anyone with cash/securities at firm or effected transaction within a month of issuing.

91
Q

Life Records

A

Articles of Incorp or Partnership Agreement
Minutes of Board Meetings or Partnership Meetings
last 2 years readily available

92
Q

6 year records

A

-General Ledger, P&S, Cash/Disbursements, Stock received/delivered, customer statements, stock record.
-last 2 years readily available
-records must be kept “current”: 1. ledger 10 days after month-end 2. blotters next business day 3. customer accts & stock record by settlement date

93
Q

Wire transfer record

A

if over $3,000 must record all identifying info

94
Q

General retention roles

A

if no rule, default to 6 years. complaints are kept for 4 years due to 4 year exam cycle.

95
Q

net capital if carrying customer accounts

A

$250K - clearing or general securities firm

96
Q

net capital w/ out customer accounts

A

$50K if securities are accepted and forwarded
$5K if securities are not accepted
“fully disclosed” firm

97
Q

Acceptable debt levels

A

8:1 AI/NC 1st year
15:1 AI/NC after 1st year

98
Q

Adjusting NC for securities differences

A

Short diff - reduce NC
Long diff - do not add NC

99
Q

Form CTR

A

must be reported to FinCEN any deposits over $10,000 (or ones structured under limit) within 15 days of event.

100
Q

SAR

A

suspicious activities must be reported to FinCEN within 30 days of event

101
Q

securities delivered without additional documentation

A

require inquiry to SIC

102
Q

Bene of both 529 and coverdell

A

is allowed

103
Q

no load vs pure no load

A

no load = 12b-1 .25% or less.
pure no load = no 12b-1
both can still charge management fees, these are not regulated by FINRA.

104
Q

REITs are required to distribute…

A

at least 90% of their net investment income

105
Q

non-tax qualified retirement plan

A

refers to variable annuity

106
Q

cost of distributing a mutual fund (compensating sales force) can be funded from…

A

up-front sales charges, cdsc, or 12b-1 fees

107
Q

class exemption for party-in-interest and pension plan

A

given to broker-dealer who sells to pension plans so they can be compensated.

108
Q

open-end management company selling shares

A

they are sold at POP, which is defined as “the next computed NAV (plus appropriate sales charge)”

109
Q

selling shares at a discount to the POP is…

A

only acceptable if a member is selling to another member.

110
Q

to sell variable annuities…

A

must be registered with FINRA, pass series 6 or 7, AND be registered with state insurance commission

111
Q

customers who buy an ETF are still sent

A

a prospectus or product description since it is an investment company

Series 10 (5 decks)

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