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Series 66 flashcards
1
Q

FEDERAL / state Law

Definition of Investment Advisor

A

Both: Any person who, for compensation, engages in the business of advising others as to the value of securities or the adivsability of investing in securities or, as part of a regular business, issue analyses or reports concerning securities

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2
Q

FEDERAL

Exclusions from IA

A
  1. Banks
  2. Lawyers, accountants, teachers, engineers
  3. Broker/dealers
  4. publisher of any bona fide newspaper, news magazine, or other publication of general circulation
  5. Any person whose advice relates solely to US gov’t securities
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3
Q

STATE LAW

Exclusions from IA

A
  1. Banks
  2. Lawyers, accountants, teachers, engineers
  3. Broker/dealers
  4. publisher of any bona fide newspaper, news magazine, newsletter or other publication of THAT DOES NOT CONSIT OF THE RENDERING OF ADVICE on the basis of the specific investment situation of each client
  5. Any person whose advice relates solely to US gov’t securities
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4
Q

FEDERAL

Exemptions

A
  1. Private Fund adviser exemption - for advisers with less than $150 million in assets under management for private equity funds
  2. His only clients are ins. comp
  3. Intrastate business only and does not furnish advice with respect to securities listed on any national securities exchange, and do not have any private funds as clients
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5
Q

STATE
Exemptions

A
  1. Private Fund adviser more restrictive!
  2. He has no place of business within the state
    • His only clients are institutions such as investment companies, banks, and trust companies, insurance companies, BDs, and other investment advisers, $1 million or larger employee benefit plans, gov’t agency or instrumentalities
    • He does not direct communications to more than 5 clients in the state (other than above) during the previous 12 mo (de minimis)
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6
Q

FEDERAL

Registration

A
  • File form ADV with the SEC
  • Effective within 45 days
  • No net worth requirements
  • No surety bonds
  • Withdrawal of registration on 60th day
  • Successor firm pays fee
  • No registration of IAR
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7
Q

STATE

Registration

A
  • File Form ADV with THE ADMINISTRATOR/pay initial and renewal fees (12/31)
  • Effective at NOON of the 30th day
  • net worth/surety bond requirements (custody or discretion)
  • withdrawal of registration is on 30th day
  • succesor firm pays NO FEE until renewal
  • registration automatically registers any adviser rep who is a partner, officer, directors, or similar in status
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8
Q

FEDERAL

Recordkeeping

A
  • IA records must be kept easily accessible for 5 years
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9
Q

STATE

Recordkeeping

A
  • Must keep for 3 years for BDs
  • Must keep for 5 years for IA
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10
Q

FEDERAL
Fines/Penalties

A
  • $10,000 and 5 years jail
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11
Q

STATE

Fines/Penalties

A
  • $5,000 and 3 years jail
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12
Q

FEDERAL

Custody of Customer Funds/Securities

A
  • Kept by Qualified Custodian
  • It is custody if securities and/or checks are not returned or forwarded within three days
  • Balance sheet would be required if adviser takes advance feeds or more than $1200, 6 months or more in advance, but not when the adviser maintains custody
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13
Q

STATE

Custody of Customer Funds/Securities

A
  • If not prohibited, with written notice to the Administrator
  • Requires minimum net worth or surety bond of $35000
  • It is custody if the securities or checks are not returned and third-party checks forwarded within 3 business days
  • Balance sheet would be required if adviser takes fees or more than $500, 6 or more months in advance or the adviser maintains custody
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14
Q

FEDERAL

Performance Fees

A
  • Prhibited unless:
    • contract with investment company
    • certain clients with $1 million under management or net worth over $2 million
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15
Q

STATE
Performance Fees

A
  • Same as federal law, EXCEPT must make risk incentive statement and other disclosures
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16
Q

FEDERAL

Statute of Limitations for Civil Action

A
  • Sooner of 3 years after the sale or once year after discovery
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17
Q

STATE

Statue of Limitations for Civil Action

A
  • Sooner of 3 years after the sale or TWO YEARS after discovery
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18
Q

FEDERAL
A “Person”

A
  • natural person or company
  • Includes:
    corp, partnership, association, a joint stock comp, a trust, or any organized group of persons, whether incorporated or not
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19
Q

STATE

A “Person”

A
  • An individual, corp, association, joint stock comp, a trust where the interests of the beneficiaries are evidenced by a securitiy, an unincorporated organization, a gov’t, or a political subdivision of a gov’t
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20
Q

FEDERAL
Filing of Advertisments

A

No filing with the SEC, EVER!

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21
Q

STATE

Filing of Advertisements

A
  • NO filing for exempt securities or trans
  • otherwise, FILE WITH ADMINISTRATOR
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22
Q

FEDERAL
Private Placement Exemption

A
  • Up to 35 nonaccredited investors under rule 506b
  • Excusively accredited investors under rule 506c
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23
Q

STATE

Private Placement Exemption

A
  • Up to 10 offers within the state over a 12 month period
  • accredited = MEANINGLESS
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24
Q

FEDERAL

Assignment of contract

A
  • No assignment of the contract may be made without the CLIENT’S CONSENT
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25
Q

STATE
Assignment of contract

A
  • No assignment of the contract may be made without the CLIENT’S CONSENT
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26
Q

Federal/State

IF A PARTNERSHIP

A
  • If a partnership, the adviser must notify the client of any change in the membership of the partnership
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27
Q

FEDERAL/STATE

Delivery

A
  • FED: The Brochure and Brochure Supplement Rule - 120 days annual delivery
  • STATE: Same, except 48 hour rule
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28
Q

FEDERAL

“Investment Counsel” may not by used UNLESS:

A
  1. principal business is investment advice
  2. substantial portion of his service is providing investment supervisory services (the giving of continuous advice on the investment of funds on the basis of the individual needs of each client)
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29
Q

STATE

IAR =

A
  1. An associated person of an adviser firm (not clerical)
  2. Makes recommendations or otherwise gives advice
  3. Manages accounts of clients
  4. Solicits or negotiates for the sale of advisory services
  5. Supervises any of the above
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30
Q

FEDERAL/STATE

Initials

A
  • May not used initials RIA or IAR on biz cards or letterhead
  • Professional or educational designations are okay
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31
Q

FEDERAL
Insolvency

A

NOT A CAUSE for revocation

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32
Q

STATE

Insolvency

A

IS A CAUSE for revocation

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33
Q

FEDERAL
Registering with SEC

A
  • $110 million or more under management registers with SEC
  • 100-110 can do either
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34
Q

STATE
Registering with State

A
  • Less than $100 million under management registers with the state
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35
Q

Act of 1933

Nonexempt securities

A
  1. corporate stocks and bonds
  2. options
  3. investment company shares
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36
Q

Act of 1933

Exempt Securities

A
  1. Gov’t
  2. State and local muni
  3. Commerial paper (max 270-day maturity)
  4. Bank securities *(not bank holding company securities)
  5. Any interest in a rail road equiptment trust
  6. Securities issued by regulated public utilities
  7. Intrastate (1 state) offerings (Rule 147)
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37
Q

Act of 1933

Exempt Trans

A
  1. Private placements under Reg D (Rule 501 - accredited investor)
    • Institutional investors
    • Exmployee benefit plans over $5 million
    • Insider of the issuer
    • Individual with own or joint (with spouse) net worth greater than $1 million (excluding primary residency) or earnings over $200,000 ($300,000 for joint) and expected this year
  2. File a Form D within 15 days of sale
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38
Q

Act of 1933

Primary Issuer Trans

A
  • must deliver PROSPECTUS
  • Preliminary prospectus (red herring)
    • Contains expected range
    • Does NOT contain price or effective date
      • no orders, no deposits of money
  • ​No highlighting or other alterations with prospectus
  • Rule 482 - Ommitting Prospectus = legal name for typical mutual fund advertisement/tombstone ad
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39
Q

Securities Exchange Act of 1934

A
  1. Created SEC
  2. Antifraud provisions
  3. provided for registration of stock exchanges and BDs (and associated persons)
  4. Grants the FRB the authority to regulate credit (Reg T)
    • Margin Accounts
    • No credit on new issues and options
  5. Defined control person - officer, director, more than 10% shareholder, and immediate family
  6. Form 13F - instituitional investment managers who exercise investment discretion over $100 million or more in certain equity securities
  7. Regulated Transfer Agents and SIPS (systematic invesment plan - regular/equal pay into a MF)
  8. Associated Person - anyone associated with a BD, includuing silent partners and outside directors, but NOT clerical personnel
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40
Q

Investment Company Act of 1940

A
  1. Types of Investment Companies
    • Face amount certificate company
    • UIT (unit investment trust)
    • Management company
      • (MF) Open end - continuous primary offering
      • Closed end - traded on exchanges or Nasdaq
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41
Q

Investment Company Registration Under the Act

A
  • Requirements to register with SEC
    1. Private capitalization of $100,000
    2. Clearly defined investment objective
    3. Annual financial reports to SEC
      • semiannual to shareholders
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42
Q

Structure of Investment Companies

A
  • BOD
    • no felonies or securities-related misdemeanors
    • minimum 40% noninterested
  • Investment Adviser to manage portfolio for a fee
    • 2 year initial contract; renewable annually
    • max 60 day termination
    • MUST BE IN WRITING
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43
Q

Investment Company Restrictions (Management)

A
  • MANAGERS CAN NOT:
  1. Purchase on margin
  2. Sell short
  3. Speculate with options
  4. Have a joint trading account
  5. Purchase anything greater than 3% of shares of another investment company
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44
Q

1940 Inv Comp Act:

12B-1 Fees

For Sales and Promotional Expenses

A
  • Approved by simple majority of non-interested board memebers
  1. Initial approval - By the whole board, independent board and shareholders
  2. Annual renewal and quarterly review: whole borad and independent board
  3. Termination: independent board OR shareholders
  • No higher than .25% if using term “no load”
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45
Q

Insider Trading and Securities Fraud Enforcement Act of 1988

A
  • Using information not available to the public to profit or avoid a loss
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46
Q

Liabilities and Penalities of Insider Trading Act 1988

A
  1. up to greater of $1 million or 300% profit made/loss avoided (civil penalty)
  2. 20 year jail term (criminal penalty)
  3. Both tipper and tippee may be liable
    • RR and BD may be liable
  4. Bounty to informant
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47
Q

Insider Trading Act 1988

Misappropriation Theory

A
  1. Insiders who violate insider trading rules may be liable to contemporaneous (at the same time) traders who did not have insider information for losses sustained
  2. Called private rights of action
  3. Penalities & Statute of Limitations
    • Lawsuits may be inititated up to 5 years after violation
    • Damages as much as the profits made or losses avoided
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48
Q

National Securities Markets Improvement Act of 1996

NSMIA

A
  1. Preemptive authority of SEC
  2. Dual registration requirements - eliminated for certain securities and investment advisers
  3. CREATED FEDERAL COVERED CLASS OF ADVISERS AND SECURITIES = advisers managing $100 million or more may register federally (SEC)
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49
Q

USA

A
  • STATE
  • Uniform Securities Act
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50
Q

USA
The Administrator

A
  • Administrator = official or agency that administers STATE securities laws
  • Also called: commissioner or secretary
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51
Q

USA
Administrator Jurisdiction

A
  • Admin has power over any offer to buy or sell that:
  1. Originated in the Admin’s state
  2. Was Directed to the Admin’s state
  3. Was Accepted in the Admin’s state
    * *Different origin, direct, etc. = multiple admins*
  • However, the admin does NOT have jurisdiction merely because a check was mailed or a certificate were sent from the admin’s state - IT IS ALL ABOUT **THE OFFER**
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52
Q

USA Admin’s Function

A
  • Inspects
  • Investigates
  • Subpeonas (people/evidence)
  • Establishes registration, testing, and fees (66, 7, etc.)
  • Denies, suspends, or revokes registration
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53
Q

USA
Definition: Person

A
  • A person = any entity capable of issuing, dealing in, or investing in securities and specifically refers to the following:
    • individuals - natural person
    • corporation
    • partnerships
    • associations
    • joint stock comps
    • unincorporated
    • gov’t units (state, counties, school districts, or political subdivisions)
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54
Q

USA

NOT a Person

A
  • A dead individual
  • An individual who has been legally declared mentally incompetent
  • A minor
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55
Q

USA
Definition: Securities

A
  • 4 Prong Definition:
    • an investment of money is made in
    • a common enterprise
    • a profit is anticipated
    • through 3rd party management (MF/not through your own efforts) > Howey Decision of the US supreme court
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56
Q

Types of Securities

A
  • Stock
  • Bonds, debentures, notes
  • Options
  • Certificates of deposit for security (ADR, ADS)
  • Variable contracts issued by insurance companies (life/annuity)
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57
Q

USA
NOT SECURITIES

A
  • Insurance (fixed policies / fixed annuities)
  • Retirement plans (IRA, Keogh - plan itself is not sec.)
  • Commodity futures and actual commodities (precious metals)
  • Collectibles - art, antiques
  • Currency - largest trading MKT
  • Condominium used as personal residence (not resort rental)
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58
Q

USA
Definition: Issuer

A

*Person* who issues or PROPOSES to issue a security: primary transaction

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59
Q

USE
Definition: Non-Issuer

A
  • person other than issuer: secondary transaction
    • sold by someone other than issuer (selling used car)
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60
Q

USA
Definition: Broker/Dealer

A
  • Person with a place of business in this state engaged in business of effecting securities transactions for accounts of others (brokers/agent) or for own account (dealer/principal)
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61
Q

USA
NOT a Broker/Dealer

A
  • BD Definition excludes:
    • Agents (RR) - state term (work FOR BD)
    • Issuer
    • Bank or trust company
    • person with no office in state who directs offers to existing clients who are not residents of the state
    • person with no office in state who limits clients to issuers, other BDs, financial institutions
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62
Q

USA
Definition: Institutional Investors

A
  1. Insurance companies and banks
  2. Employee benefit plan with assets of at least $1 million
  3. Investment Companies
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63
Q

USA
Definition: Agent

A
  • Supervised person / sales rep (a natural person)
    • Represents BD in purchase or sales of securities - must register
    • Represents issuer of non-exempt security or in non-exempt trans - registration required
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64
Q

USA
Definition: Offer

A
  • ATTEMPT to solicit purchase
  • Attempt to dispose of securitiy or interest in security for value
  • Sale of rights, warrants or convertible security is an offer of the underlying stock
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65
Q

USA
Definition: Sale

A
  • Transfer of value
    • Bonus of warrants or stock (Ex. Buy X amount, get Y Free!)
  • Gifts of assessable stock (purported)
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66
Q

USA
NOT a SALE

A
  • Gifts of NON assessable stock (gift of car)
  • Stock divs or stock split (if no payment)
  • Bona fide pledge or loan (in short sale - loan of securities)
  • Act resulting from approved merger or business reorganization
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67
Q

USA
Definition: Guaranteed

A
  • Payment of PRINCIPAL and INTEREST, or DIVS (not capital gains) promised by a 3rd party (parent comp for a subsidiary debt)
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68
Q

USA
Definition: Investment Adviser

A
  • Individuals acting on behalf of and supervised by IAs
  • acronym = IAR
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69
Q

USA
IA vs. BD

A
  1. BDs = earn commissions or mark-ups by effecting TRANSACTIONS in securities for themselves or their clients
  2. IA are compensated for giving ADVICE
  • ​When an IA makes a rec to a client, the client calls a BD to execute the trans
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70
Q

Licensing and Registration Requirements

BD

A
  • minimum net cap: NET [ABCD] CAPITAL
  • surety bond: Custody/Discretion
  • Examination (audits): YES
  • Filing (fees): YES
  • Transferable: NO
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71
Q

Licensing and Registration Requirements

Agents/IAR

A
  • Minimum Cap: NO
  • Surety Bond: Discretion (agent only)
  • Examination (audits): NO
  • Filing (fees): YES
  • Transferable: NO
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72
Q

Licensing and Registration Requirements

IA

A
  • Minimum Cap: Net worth
  • Surety Bond: Custody/Discretion
  • Examination (audits): YES
  • Filing (fees): YES
  • Transferable: NO
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73
Q

USA

Registration Procedure

A
  1. Application
  2. Registration Effective date
  3. Termination procedures
  4. Forms (Form BD > BD / Form ADV > AI)
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74
Q

USA
Application

A
  • Application includes
    1. Background and history
    2. Convictions (10 yrs, ANY felonies; securities-related misdemeanor)
    3. Financial condition (BD and IA)
    4. Consent to service of process = power of attorney
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75
Q

USA
App - Consent to service of process

A
  • From applicant to admin
  • Must accompany new applications for BDs, agents, IA, IAR
  • Permanent part of record - don’t need to renew
  • Allows admin to receive legal papers
  • Approval for investigation
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76
Q

USA
App - Registration effective date

A
  • Not until granted registration by state - noon of 30th day
  • Not soley on passing exam
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77
Q

USA

App - Termination Procedures

A
  • Agent - notification to Admin by both AGENT and BD
  • IAR - with state IA, IA notifies Admin
  • IAR - with federal covered IA, IAR notifies Admin
  • Effective at noon of 30th day, BUT ADMIN RETAINS JURISDICTION FOR 1 YEAR
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78
Q

BD (Form BD)

IAs (Form ADV)

A
  1. Form of organization (sole prop, LLC part, corp, etc.)
  2. method of business (underwriting, FPing, etc.)
  3. Registration of BD or IA automatically registers rep (agent or IAR) who s partner, officer or director (active role in biz)
  4. Expires dec 31 unless renewed (also applies to agent and IAR)
  5. Networth requirement for IAs
  6. Sucessor Firms
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79
Q

Reg Forms (BD and IA)

Networth Requirements for IA

A
  • Discretion only, no custody of funds/sec. - $10,000
  • Custody of funds/sec. - $35,000, unless having custody solely due to:
    • direct fee deductions (auto bill)
    • advising pooled investment vechicles subject to annual audit (VA, MF)
  • Notify admin when below required networth by end of next biz day
  • file financial report with admin within 1 biz day of notice, including a statement as to the number of clients accounts
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80
Q

USA

Reg Forms - Successor Firms

A
  • Merger, acquisition, or sale (Comp “A” no longer exists)
  • New application filed, effective for remainder of year
  • No additional filing fees
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81
Q

USA
No person can lawfully offer or sell any security in state unless:

A
  • the security is registered under USA
  • the security is exempt from reg under the act
  • the trans is exempt under the act
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82
Q

USA

Nonexempt Securities

A
  1. Registered
    • Coordination OR Qualification
  2. Not registered
    • Exception Sold in an Exempt trans OR prohibited
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83
Q

USA
Fedeal Covered Securities

A

Notice Filing - “Hey we’re covered, coming in to do biz in your state, but you [admin] don’t have jurisdiction over us”

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84
Q

Exempt Short-term Notes/debt obligations

A
  • Maturity 270 days or less
  • Minimum $50,000 denomination (three highest ratings)
    • Commerical paper
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85
Q

Securities Issued by Exempt Issuers

A
  1. US gov’t and agencies
  2. Munis
  3. Canadian gov’t (federal and political subdivisions but not corps)
  4. Foreign national gov’t with diplomatic relations (issued or guaranteed by)
  5. Banks, savings institutions, and trust companies
  6. Insurance companies (except variable contracts)
  7. Regulated public utility companies and common carriers
  8. Charitable, religious, and nonprofit organizations
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86
Q

Other Exempt (from USA) Securities - Federal Covered Securities

A
  • Exchange-listed securities
  • any Nasdaq stock
  • investment companies registered under the Inv Comp Act
  • Securities or trans exempted under the securities act of 1933 (Reg D private placements)
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87
Q

USA

Notice Filing

A
  • Admin may require documents sent to SEC
  • Quantity of securities being sold in the state (fee)
    • For federal covered securities, generally investment company securities registered under the Inv. Comp Act 1940
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88
Q

USA
Coordination

A
  • Coordination of a state registration with federal registration
  • Registration by coordination is accomplished by filing a registration statement with the admin
    • 3 copies of latest prospectus filed with the SEC
    • Copies of articles of indenture, articles of incorporation, and agreements among underwriters (if required by Admin)
  • Effective at the same time as federal registration if registration is on file for specified period (10-20 days) and if no stop order exists
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89
Q

USA
Qualification

A
  • Primarly for intrastate issues (but can be used for any registration)
  • Any info the Admin requests
  • Effective when declared so by the Admin
  • Anyone can
  • Used for intrastate issues!
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90
Q

USA
General Registration Provisions

A
  • Filing fees
  • Effective for 1 year from effective date, if underwriters or the issuer are still attempting to distribute unsold shares, effectiveness of registration may be extended until all shares are sold
    • may be amended after effective date to increase offerring sale if price and commissions remain unchanged
  • Admin may require issuer to file quarterly reports
  • Registration statement may be filed by
    • THE ISSUER
    • A BD
    • AN INTERESTED PARTY, usually a selling stockholder
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91
Q

ADMIN may deny, suspend, or revoke registration

A
  • For securities; IF in public interest AND IF:
    • Registration statement is inaccurate, misleading or incomplete
    • Officer of the issuer has been convicted of a securities-related crime (10 yrs)
    • Security is subject to count injunction
    • Offering is deemed fraudulent
    • Offering expenses or promoter’s fees are excessive or unreasonable
    • Registration has been revoked by the Admin in another state
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92
Q

USA
Order of Admin

A
  • Appropriate prior notice
  • Opportunity given for a hearing
  • Written findings of fact and conclusions of law
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93
Q

USA
Exempt Trans

Preorganization Certificates

A
  • Before incorporation (promise of seed money)
  • Max of 10 subscribers and no funds paid in
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94
Q

USA
Exempt Trans

Private Placements

A
  • Restricted to 10 offers in any 12 consecutive months ither than to institutional clients
  • No immediate resale except for institutions
  • No compensation paid on sales to noninstituitional (retail) buyers
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95
Q

USA
Exempt Trans

Issuer Trans

A

(Btwn Issuers and Underwriters) - poing public

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96
Q

USA
Exempt Trans

With Financial Instituitions (sophisticated/professional investor)

A
  • Investment companies
  • Insurance companies
  • Banks and trust companies
  • Employee benefit plans with not less than $1 million in assets (pension or profit sharing trusts)
  • BDs
  • Investment Advisers
  • Individuals meeting the SEC definition of accredited investor NOT considered institutional investors for the purpose of this exemption
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97
Q

USA
Exempt Trans

NON Issuer Trans (secondary trans)

A
  • unsolicited nonissuer trans effected through BD; Admin may request proof
  • Isolated nonissuer trans
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98
Q

USA
Exempt Trans

Fiduciary Trans

A
  • Include those made by an executor, admin, trustee in bankruptcy, sheriff, and so forth
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99
Q

USA

Prohibited Practices

A
  • Misleading or untrue statements
    • Repeating rumors
    • promising certain services with no intent to deliver
  • Not stating (omitting) material info
    • material facts = used in making investment decisions
  • Use of inside info
  • Unsuitable recs
  • Unique situations
    • Exercising discretion without authority (Asset, Action, Amount)
      • Time or price is not discretion (day order)
    • Commingling
    • Sharing customer profits or losses
      • written consent of client and employing BD
    • Borrowing customer funds or securities or lending money to clients (unless a lending institution
    • Written complaints
    • Larger than ordinary commissions (without disclosure)
    • Guaranteeing results
    • Soliciting sales or purchases in unregistered, nonexempt securities unless in an exempt trans
    • Sharing compensation UNLESS with appropriately registered personnel of same or affiliated frims unless authorized otherwise by the Admin
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100
Q

USA

Prohibited Practices/Internet

A
  • Person is not deemed to be operating within the state IF:
    • Site may only make available general info, not specific advice or recs
      • Communication clearly states that the person may only do business in this state if properly registered or exempt from registration
      • Personalized follow-up to requests must be handled by those properly registered in the state
    • Any Agent or IAR MUST:
      • Disclose identity of BD or IA being represented
      • BD or IA authorizes activity and has supervisory responsibility
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101
Q

USA

Reason for Denials/Suspensions/Revocation of license

A
  • For persons, if in the public interest AND:
    • Filing false or misleading application
    • Any felony or securities-related misdemeanor within the last 10 years
    • willful violation
    • Court injunction/admin order
    • Disciplinary action by other securities authorities within the last 10 years
    • Dishonest, unethical practice
    • Insolvency
      • in case of agents, if liabilities exceed assets or agent cannot meet obligations as they mature
      • in case of a BD or IA, a formal finding of insolvency is required
    • Sales reps (agents) not qualified because of training, experience, or knowledge (not solely of lack of experience)
    • Firm’s failure to supervie employees
    • Failure to pay filing fees
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102
Q

USA
Reasons for Denials, etc.:

Cancellation of Registration

A
  • Out of business (mail returned-no forwarding address)
  • Legally declared mentally incompetent
  • Failure to pay filing fees
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103
Q

USA
Reasons for Denials, etc.:

Request for Withdrawal

A
  • Effective 30 days after receipt if no revocation or suspension in process
  • Disciplinary proceedings may be instituted UP TO 1 YEAR after effective date
  • Withdrawal on appropriate form
    • Form ADV-W ~ IA withdrawal
    • Form BD-W ~ BD withdrawal
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104
Q

USA
Procedures and Penalties

Admin

A
  1. Enforcement of all antifraud provisions
  2. Must give notice of action to be taken
    • must give opp for hearings
    • must provide written findings
  3. Summary orders to postpone or suspend until final determination is reached
    • no prior notice or hearing
    • must hold hearing within 15 days of written request
  4. Issue cease and desist order for suspected improper activitiy
    1. no prior notice necessary
    2. if cease and desist order is ignored - can apply to courts for injunction
  5. May proceed against firm if principal is disqualified
  6. May not proceed against firm if only agent or IAR is disqualified
  7. May investigate and subpeona in any state, whether or not the firm has an office in the state
  8. 60-day appeal of order; appeal does not act as a stay unless ruled otherwise by the court
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105
Q

USA

Criminal Penalties

A
  1. Willful violation of the USA
  2. Fines to $5000, jail up to 3 years, or both
  3. Statute of limitations is 5 years for fraudulent activity
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106
Q

USA
Civil Liabilities

A
  1. Unlawful sale
    • must be within 2 years of discovery or 3 years of violation, whichever occurs first
    • court costs and attorney fees but not damages
  2. Right of rescission - 30 dayss notice; if buyer receives offer of rescission and fails to accept or reject within 30 days, MAY NOT SUE
  3. Rights of advisory client: recovery of advisory fees, losses on recommendations, court plus legal fees minus income received
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107
Q

Investment Advisers Act of 1940/Uniform Securities Act

Definition of Investment Adviser under the 1940 Act/USA-3 Prong Test

A
  1. Gives advice on securities
  2. As a part of their regular business
  3. For which they are compensated for
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108
Q

Inv Act 1940/USA

Release IA-1092 (1987) Expanded definition to include:

A
  1. Financial Planners
    • Individual planners who advises clients to select from among a variety of financial products
    • Individual who recommends mixture of securities, insurance products, and real estate-comprehensive financial plan
    • Fees, commissions, or both for investment advice
  2. Pension Consultants
    • Provide advice as well as administrative services
    • Advise benefit plans on funding, alternative investments, performance evaluation and adviser selection
    • Eligible to be Federal covered if at $200 million or more
  3. Sports and Entertainment Reps
    • Provide entertainers and sports figures with tax planning, budget, and money management
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109
Q

Inv Act 1940/USA

Exclusions from IA definition

A
  1. Banks, savings institutions, and trust companies
  2. Professionals providing incidental advice
    • Lawyers, accountants, teachers, engineers (LATE) if advice is incidental to their profession or practice
    • Subject to registration if they charge specific fees for investment advice
  3. BDs if no special compensation
    • Advice solely incidental to their business
    • Wrap fee progan will lose this exclusion
  4. Publishers (general and regular circulation)
    • “Market event” driven loses exclusion
  5. Federal and State exclusion
    • FED: Persons advising solely on gov’t securities (IA of 1940)
    • STATE: IAR (USA)
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110
Q

Inv Act 1940/USA

Exempt from SEC Registration AS IA

A
  1. Intrastate advisers - clients and office in single state
    • No advice on listed securities on national exchanges
    • No clients are “private funds”
  2. Foreign private advisers
    • “Assets under management” (AUM) in the US of less than $25 million
    • Fewer than 15 US clients
    • No investment company clients
    • Does not hold itself out as an IA
    • No place of business in the US
  3. Advisers to venture capital funds
  4. Advisers to “private funds”
    • Issuer is not proposing a public offering of its securities, and its outstanding securities owned by
      • max 10 investors OR
        *
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111
Q

Inv Act 1940/USA

Exempt from STATE (USA) Registration AS IA

A
  1. De minimis: No place of business in the state and fewer than 6 retail (ind.) clients in preceeding 12 months
  2. No place of business in the state and ONLY deals with institutions, BDs, or other IAs
  3. Private fund adviser: Same as SEC, except fund <101 investors: $1 million with IA or $2 million net worth
  4. Federal covered adviser (NSIMA) - bifercated - register with one or the other! admin or SEC
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112
Q

Federal Covered Advisers

A
  • $110 million and over - SEC reg
  • Under $100 million - State reg (with exceptions - registration in 15 days or more states)
  • $100-110 million (in between) > STATE OR SEC reg
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113
Q

Federal Covered Advisers Include =

A
  • Buffer of $20 million
    • Once SEC registered, can remain with $90 million
  • Manager of registered investment company (any size)
  • Pension consultant ($200 million is eligible)
  • Federal covered advisers need not register with states; however, they may be required to pay FILING FEES(notice file)
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114
Q

Investment Adviser Rep Definition

A
  • Individuals surprised by investment advisers
    1. Partners, officers, or directors (with active roles)
    2. Employees and associates making recommendations, managing accounts, and soliciting advisory services, but not clerical and administrative personnel
    3. Must register with state even if IA does not!!!
      • If with a federal covered adviser, only registers in those states where you are maintaining a place of business
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115
Q

Inv. Adviser 1940 Act

Broker/dealer definition

A
  • Primary business function is executing transactions in securities
  • Compensation is earned in the form of commissions and markups (markdowns)
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116
Q

Inv. Adviser Act 1940

Agents Definition

A
  • Individuals employed by broker’dealers to handle their customer orders to buy or sell securities
  • Separate function from IAR (although many in large firms wear both hats)
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117
Q

Inv. Adviser Act 1940

Investment Adviser (IA)

A
  • Primary business function is giving advice
  • Compensation is earned in the form of fees or other charges, generally based on the amount of assets managed
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118
Q

Inv. Adviser Act 1940

Investment Adviser Representatives Definition (IAR)

A
  • Individuals employed by investment advisers to give advice to their clients
  • After an IAR advises a client abut a specific security, the next step is to contact the broker/dealer where that client maintains a brokerage account to give the buy/sell order to an agent
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119
Q

Inv. Adviser Act 1940

Investment Counsel Definition

A
  1. Principal business is giving investment advice
  2. Render investment supervisory services = giving continuous advice on the basis of individual client needs
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120
Q

IA Registration Procedures

  1. File Form ADV Part 1 - info includes:
A
  1. Business name
  2. Past 5 years business and current affiliations of control persons
  3. Educational background
  4. Nature of business
  5. Balance sheet certified by public accountant
  6. Scope of authority over client funds
  7. Compensation arrangement
  8. Criminal record
  9. Portion of business devoted to providing investment advice
  10. Registration of an investment adviser AUTOMATICALLY registers, as an IAR, any individual who is a partner, officer, or direictor involved in the advisory business
  11. Form ADV Part 1B - (state covered advisers only)
    12.
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121
Q

IA Registration Procedures

  1. Other required filings
A
  • Update adv form annually
    • Within 90 days of fiscal year’s end
    • Show assets under management (AUM) to verify continued SEC registration, must have at least $90 million in AUM
    • Pay appriopriate renewal fees
  • Change in management, state of location, or form of business requires the IA to file an AMENDED FORM ADV promptly
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122
Q

IA Registration Procedures

  1. Pay filing fees
A
  • Effective noon of the 30th day for USA
  • Effective within 45 days for SEC
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123
Q

IA Registration Procedures

  1. Withdrawal on ADV-W form
A
  • Effective 30th day for USA
  • Effective 60th day for SEC
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124
Q

Investment Adviser Brochure Rules

  1. Brochure is Form ADV Part 2A (describes firm) and Supplement, Form ADV Part 2B (personal)
A
  • Updated annually at time of updating amendment
  • Contains required “disclaimer” (don’t approve, just clear)
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125
Q

Investment Adviser Brochure Rules

  1. DELIVERY to a client or prospective client Required =
A
  • (The current brochure) Before or at the time of entry into an investment advisory contract with that client
  • Delivered 48 hours before, or at time of contract, with five business days - right to rescind without penalty (USA)
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126
Q

Investment Adviser Brochure Rules

  1. Deliver to each client =
A
  • ANNUALLY
  • within 120 days after the end of the fiscal year, if there are material changes in the brochure since LAST annual updating amendment
    • A free current brochure
    • A summary of material changes to the brochure including an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure
    • may be delivered electronically
    • Ff no material changes (no brochure or summar)
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127
Q

Investment Adviser Brochure Rules

  1. MUST include =
A
  • Balance sheet IF investment adviser requires prepayment fees of more than $1200 ($500 USA), 6 months or more in advance, or custody (USA)
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128
Q

Investment Adviser Brochure Rules

  1. Disclosure of =
A
  • Material legal or disciplinary action within past 10 years, including fines of $2,500 or more
    • Prompt ammendment reqiured for material changes
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129
Q

Investment Adviser Brochure Rules

EXEMPTIONS:

A
  • Investment adviser DOES NOT have to deliver brochure if the advisory clients are limited to:
    • Investment companies
    • Impersonal advice (subscriptions) - cost under $500 ($200 USA)
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130
Q

Wrap Fee Brochure

A
  1. Charge a fixed fee for portfolio management, advice and execution
  2. Wrap fee brochure based on Appendix 1 of Form ADV Part 2A must be provided in lieu of standard brochure and must disclose that wrap fee may cost more than purchasing securities separately
  3. MUST identify whether any of its related persons is a portfolio manager in the wrap fee program and if so, describe the associated conflicts
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131
Q

Investment Adviser Contracts

A
  1. Required DISCLOSURES under the Investment Adviser Act of 1940 and the North American Securities Administration Association’s (NASAA) Model Rule on Unethical Business Practice of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers:
    • Services to be provided
    • Advisory fee
    • Formula for computing advisory fee
    • Amount of prepaid fee returned if contract is terminated
    • Whether discretion is granted
    • Assignment only with consent
    • Notification to clients of changes in advisory partnerships
    • Written requirement
      1. Required under USA
      2. Not required under IA Act of 40
      3. REQUIRED under IC Act of 40
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132
Q

INV 40

Compensation Restrictions

A
  1. Generally NO performance-based compensation
  2. Performance-based compensation is allowed IF
    • It is for a registered investment company
    • Any person with a specified minimum amount of assets under management (AUM) or networth of a specified minimum amount
    • Compensation is based on average value of fund over specified period
    • Compensation is proportional, compared with standard performance benchmark or index
      • S&P 500, S&P 100, Wilshire 5000
  3. No waiving of fees/refunding for underperformance
  4. No profit-sharing arrangement; no rebating commissions on mutual funds
133
Q

INV 40

Directed Transactions

A
  1. ADVISER directs client to BD with REASONABLE CHARGES for services performed
  2. CLIENT directs investment adviser to use specific BD
  3. Disclosure required
134
Q

USA STATE

A
  • Less than $25 million = small advisers
  • Mid-size advisers = $25 million, but not $100 million
  • Filing Fee to state
  • De Minimis: Fewer than 6 clients within a year
  • Brochure = all relevant information on ADV 2A and 2B
  • Registration effective: ADV: 30 days
  • Withdrawal: ADV-W 30 days
135
Q

SEC (Federal)

A
  • $110 million or more (large advsiers)
  • Filing fee to state/SEC
  • De Miniminis = Fewer than 15 clients within a year (foreign)
  • Brochure = all relevant info on ADV 2A and 2B
  • ADV: 45 Days
  • ADV-W: 60 Days
136
Q

Fiduciary Responsibility

A
  1. Have reasonable and independent basis for investment advice
  2. Act on client’s best interest
    • Suitability (usually unsuitable - blanket recs)
    • Client’s interests come first
  3. BEST Execution does NOT = lowest commissions; must consider all services being rendered
  4. Recognize limitations of own capabilities
  5. Avoid conflicts of interest:
    • Disclose ownership in recommended product
    • Customer transactions take priority over personal transactions NO FRONT RUNNING
    • Advisers must notify clients if they are a representative of a BD and will recommend purchase of products through that BD to receive a commission
    • Disclose if acting as representative of a BD or ins. comp when implementing financial plan
    • Disclose if recommending products of only the BD or ins. comp with whom they are associated with
    • Disclose amount of compensation when
      • the transaction is through a BD with whom the adviser is associated
      • compensatio is received from an issuer
      • being compensated for the sale of nonsecurities products
    • Disclose personal trades if
      • inconsistent with advice given to client
      • investment adviser benefits from client acting on recommendation
      • No Market Manipulation
        • Arbitrage is not - “taking advantange of a discrepency in prices)
        • capping (topping it off) and pegging (holding price up from going up)
        • wash trades (painting the tape)
        • matched orders
  6. NO UNAUTHORIZED disclosure of confidential client info is allowed UNLESS
    1. client has consented
    2. the info is required by a court of the IRS
    3. joint account with spouse/whoever
137
Q

Disclosure of Capacity

A
  1. Acting as a principal or agent in purchase or sale of recommended securities
    • written disclosure to client before completion of the trans
    • client’s consent before completion of the trans
  2. Agency cross trans - representing both sides of a trade involving an advisory client
    • Client executes a written consent prospectively authorizing these trans
    • written disclosure to client before completion of the trans
    • can’t recommend the trade to both parties
138
Q

Disclosure of Financial Impairment

A
  • Disclosure is requried if the adviser:
    • has discretion
    • has custody over customer funds or securities
    • REQUIRES PREPAYMENT OF MORE THAN $500 (STATE), 6 or + months in advance
    • REQUIRES PREPAYMENT OF MORE THAN $1200 (FED), 6 or + months in advance
139
Q

Investment Adviser Advertising

A
  1. Advertisements include any notice, circular, letter, Website or other written communication addressed to more than ONE person, or any report, chart, or formula used in making investment decisions
  2. ID
    1. name of firm
    2. name of preparer if material is prepared outside the firm
    3. date of first use
    4. ID of info if not current
  3. PAST PERFORMANCE
    1. can be used if the following disclaimer and disclosure are included
      1. no assurance of future results
      2. includes all gains and losses over a minimum of ONE YEAR
  4. Testimonials prohibited (bd can)
  5. Offers of free service permissible (no obligations)
  6. Other advertising prohibitions
    1. implying extensive research facilities when not a fact
    2. misleading or inconsistent clauses and caveats hedge clauses
    3. implying approval of regulators
    4. use of abbreviations RIA or IAR
    5. Use of titles not earned (MBA, JD, CPA, CFP)
    6. lack of disclosure of outside data sources
    7. CHARTS AND FORMULAS = must explain limitations/difficulties
140
Q

Definition:
Custody of Customer Funds/Securities

A
  • Holds customer cash or sec
  • authority to disburse funds from bank account without client’s consent
  • automatic fee payments considered custody
    • *if custody only because of this (above) IA is NOT required to meet the USA’s net worth or surety bonding requirements for advisers with custody
141
Q

Custody of Customer Funds/Sec

Rules

A
  1. USA requires notification to the Admin, unless state law prohibits custody
  2. must be segregated and marked to identify ownership
  3. written notice to client of location and notification of changes
  4. complete and accurate records of deposit and account activity
  5. quarterly itemized statement to customer
  6. use a qualified custodian; if not
    • annual surprise independent audit
  7. If not keeping custody, NASAA requires certificates and funds inadvertently sent returned within 3 biz days (3rd party checks forwarded to 3 party within 3 biz days)
142
Q

Payment for Client Solicitors under IAA of 40

A
  1. Info required of all solicitors
    • Adviser must be registered under 40 act
    • no disciplinary action or pending orders involving finances or dishonesty against solicitor
    • must have written agreement (disclose conflicts of interest)
  2. additional info required inm agreement when payment for other than impersonal advisory services
    • Description of solicitation activities
    • description of compensation arrangement
    • solicitor will comply with the IA Act of 1940
    • Agreement to provide adviser disclosure brochure and solicitor’s disclosure document to customer (disclose if higher cost will result)
    • The IA must receive acknowledgement from the client that the client has receivd the advisor’s and solicitor’s written disclosure doc (RECEIPT)

***Solicitors under the USA who are associated with or employees of the IA MUST REGISTER (IAR)

***Under IA Act 1940, 3rd part solicitors are NOT required to register as an IAR (employees of IA are - NOT 3rd party)

143
Q

IA Reporting Requirements under State/Fed Laws

A
  1. Maintain required books and records (including elect)
    1. readily accessible at principal office for TWO YEARS
    2. may be kept in normally accepted manner (microfiche, digital), provided records can be read and copied
  2. Advisers performaing investment supervisory services must keep separate records
144
Q

Additional Prohibitions:

NASAA’s Unethical Biz, etc.

A
  1. The policy permits IAs oral authorization for discretionary accounts for 10 biz days (2 normal weeks) after initial trade
  2. Placing an order to purchase or sell a security for the account of a customer without authority to do so or taking orders from a 3rd party without written 3rd party trading authorization
  3. Charging the customer unreasonable fee: NASAA says that charges must be competitive
  4. entering into or renewing an advisory contract unless in writing
  5. lending to client only when in the lending business or an affiliate
  6. Borrowing from client only when client in lending biz or an affiliate
  7. use of 3rd party reports withut disclosure
  8. use of material non-public ifo
  9. improper use of waivers - can’t waive fees, etc.
145
Q

SEC Authority under 1940

A
  1. May SUBPOENA, seek court injunctions, refer evidence for criminal proceedings, hold hearings, and issue rules rules and orders
  2. Appeal of SEC order must be within 60 days; nappeal to US Court of Appeals by written petition
  3. Civil Penalities - higher for firms than individuals (payment made to the US treasury)
  4. Criminal penalities - fed level $10,000 fine, 5 years imprisonment or both
  5. May suspend up to 12 months
146
Q

Fed & State Regs on IA/IARs
Compensation

A
  1. compensation = ANY economic benefit - received from any source
  2. soft dollars
    • noncashy comp from BD for directed biz
    • ALLOWABLE SOFT DOLLARS:
      1. Research reports
      2. software
      3. service for benefit of clients
      4. seminar reg fees (not travel there)
    • NOT ALLOWABLE:
      • reimbursement for travel expenses to travel seminars
      • furniture, eqpt, non-customer-related services
      • rent
147
Q

Types of Clients

Trust

Estate

A
  1. Trust - trustee manages per terms of trust agreement
    • Follow Uniform Prudent Investor Act
  2. Estate - custodial account directed by an executor or admin (intestate = die w/o a will) on behalf of beneficiaries
148
Q

Types of Clients

Joint

A
  1. Two or more legal persons with control
    1. A MINOr cannot open a joint account with an adult; must be of legal age4 to sign joint account agreement
    2. any owner whose name is on the account has control over assets
    3. checks must be made out in the names of all owners
    4. distribution of money or cert must be ENDORSED by all owners - may be sent to 1 address
    5. TIC - by way of will (DB>estate)
    6. JTWROS - your account co-owner own your assets after death
    7. Transfer of Death TOD (avoids probate) available for ind and JTWROS >avoids probate but not estate taxes
149
Q

Types of Clients

Biz Accounts

Sole proprietorship

A
  1. (tax compute on schedule C of Form 1040) x NO K - no pass through of gain/loss
    1. Unlimited liability
150
Q

Types of Clients

Biz Accounts

Partnerships

A
  • HARD TO TRANSFER
  • an unincorporated association of two or more people
  • Income and losses flow through (Schedule K-1) K - flow through
    • if formed as a limited partnership, management (liability) is assigned to the general partner, limited partners are passive and liability is limited to their investment plus any funds committed to
  • EASY to FORM AND EASY TO DISSOLVE
151
Q

Types of Clients

Biz Accounts

C Corp

A
  • Shareholders’ risk limited to investment
  • Corporation is taxable entity *Form 1120 - no k, no pass
152
Q

Types of Clients

Biz Accounts

S Corps

A
  • Limited liability, taxed like a partnership (k-1) k-pass
  • LIMITED TO 100 SH HOLDERS
153
Q

Types of Clients

Biz Accounts

Limited Liabiility Comp (LLC)

A
  • Limited liability, taked like partnership (k-1) k-pass thru
  • UNLIMITED # OF MEMBERS (rather than sh holders)
154
Q

Financial Status =

A

What is on family’s balance sheet?

What is on family income stateent?

155
Q

Term life insurance

A
  • low premium
  • no cash value
  • does not last to age 100
  • suitable for young buyers with family responsibilities
156
Q

whole life ins

A
  • fixed premium
  • guaranteed cash value
  • guaranteed DB
  • premium to general account
157
Q

variable life ins

A
  • fixed premium
  • no guauranteed cash value
  • MINIMUM guaranteed DB
  • premium to general account for guaranteed min DB, excess > separate account
158
Q

universal life ins

A
  • flexible premium
  • NO guaranteed cash value ^
  • NO min guaranteed DB
  • current and guaranteed minimum interest rate
159
Q

Capital Needs Analysis

A
  • Used to calculate life ins needs
    • assets and liabilities
    • future earnings
    • inflation
      • MARKET VOLATILITY IS NOT A CONSIDERATION
160
Q

Death Benefit

A
  1. To payoff mortgage and other debts
  2. to provide income for survivors
  3. college tuition
  4. estate taxes

(*part of cap needs analysis)

161
Q

Life Insurance

Non-Financial Considerations

A
  1. Attitudes
  2. Future needs (plans for college)
  3. Employment suitability
162
Q

Life Ins

elements of risk tolerance

A
  1. liquidity requirements
  2. investment time horizon - short/long
  3. current investment holdings
  4. attitude toward volatility
163
Q

Financial Goals:
Preservation of Capital

A
  1. Client cannot afford to lose principal
  2. appropriate investments include insured bank CDs and MM funds
  3. client risks loss of purchasing power
164
Q

Financial Goals:
Current Income

A
  • Gov’t, agency, muni, corp bonds
  • bond funds
  • equity income funds
  • preferred stocks
  • common stocks
    • utility
    • blue chips (large cap stocks - less vol/longer)
165
Q

Financial Goals:
Capital Appreciation

A
  • Common stock
  • equity funds for growth
    • small, medium, large capitalization - MOD growth
166
Q

Financial Goals:
Speculation

A
  • Specialized (sector) funds
    • 25% of assets invested in specialized sector of the economy or geographic area
  • options
  • high yield bonds
167
Q

Financial Goals

Diversification

A
  • Asset allocation
    • foreign stock funds
    • tangible assets for inflation protection
168
Q

Fin Goals

Passive Investing

A
  • Index funds; ETFs
    • low cost
169
Q

Fin Goals

College Tuition

A
  • zero-coupon bonds (STRIPS) maturing whe tuition is due
  • Coverdell ($2000 max), Sectio 529 ($14000 /p/yr - can pay lump for 5 yrs every 5 years)
170
Q

Fin Goals

Retirement Planning

A
  • Social Security
  • Pensions
  • annuity, IRA, etc
171
Q

Fin Goals

Disability

A
  • client should address disability income before assuming investment risk
    • worker’s comp
    • social security
    • disability ins
172
Q

Fin Goals

Tax Planning

A
  • tax deferral
  • tax-free income
  • trusts
    • simple - MUST DISTRIBUTE DNI ANNUALLY (ALL INCOME)
    • complex - may retain income
    • revocable/irrevocable trust
    • testamentary trust (will)
173
Q

Asset Allocation

A
  • Spreading portfolio funds among different asset classes
    • cash and cash equivalents
    • fixed-income investments
    • equities
      • domestic (global funds - INCLUDES US)
      • foreign (international funds - DO NOT include US)
    • tangible assets
      • real estate
      • precious metals
174
Q

Types of Asset Allocation

  1. Strategic Asset Allocation
A

LONG TERM

  • Passive investment strategy
  • Portfolio mirrors index
  • periodic rebalancing
  • buy and hold
  • low investor costs
175
Q

Types of Asset Allocation

  1. Tactical Asset Allocation
A

SHORT TERM

  • Active management strategy
  • undervalued purchased/overvalued sold
  • current market conditions
  • market timing
  • high trans cost
176
Q

Growth Portfolios

A
  • Earnings grow faster than similar comps/overall market
    • Generally HIGH PEs
    • Looking for earnings momentum
    • low dividend payout ratio
    • likely to trade at higher end of 52-week trading range
      • Think common stock
      • Buy around resistance
177
Q

Value Portfolios

A
  • Undervalued or out-of-favor securities - sometimes considered contrarian
    • generally LOW PEs
    • Higher div pay out
    • focus on financial statements
      • hidden value may include “rainy day” fund
    • Likely trade at the LOWER END (around support) of 52-week trading range
178
Q

micro cap

A
  • Size: $50 million - 300 milli0on
  • Benchmark: N/A
179
Q

Small Cap

A
  • Size: >$300 million - $2billion
  • Benchmark: Russell 2000
180
Q

Mid Cap

A
  • Size: >$2billion - $10billion
  • Benchmark: S&P 400
181
Q

Large Cap

A
  • Size: >$10billion
  • Benchmark: S&P 500
  • less volatile, long term
  • mod growth/risk
182
Q

market capitalization =

A

(CMV/ per share) X # of shares outstanding

183
Q

Dow Jones Industrial (DJIA)

A
  • 30 large-cap stocks
  • price weighted
184
Q

S&P 500

A
  • 500 large cap stocks
  • market value or cap weighted
185
Q

NYSE Composite Index

A
  • All NYSE-listed stocks
  • market value or cap weighted
186
Q

Russell 2000 Index

A

*small cap benchmark

  • 2000 small-cap stocks
  • market value or cap weighted
187
Q

EAFE

A
  • Europe, Australasia, and Far east
  • market value or cap weighted
188
Q

Wilshire 5000

A
  • Broadest indicator of US equities market
  • ~5600 stocks, flexible
189
Q

Indices from smallest to largest

A
  1. DJIA (smallest)
  2. S&P 500
  3. NYSE
  4. Russell 2000*scBM
  5. EAFE
  6. Wilshire (largest)
190
Q

Low Trans cost strategies

Buy & Hold

A
  1. can be used with many different styles (results in lower maintenance costs)
  2. Lower capital gains taxes
191
Q

Low Trans cost strategies

Indexing

A

doesn’t believe can beat mkt

  • Low trans costs
  • Lower management fees
192
Q

Funding Techniques

Dollar Cost Averaging

A
  • Ave cost lower than avg price
  • investing the same dollar (fixed) amount in intervals (monthly)
193
Q

Funding Techniques

Income Reinvestment

A

yr reinvested = yr taxable

  1. Mutual Fund programs (reinest at NAV)
  2. Dividend reinvestment plans (DRIPS)
    • ​Offered from issuers to shareholders
    • sometimes discounted
    • reduced or no commissions
  3. Interest on interest savings accounts
  4. taxation
    1. currently taxable
    2. 1099
194
Q

Time Value of Money

Future Value

A
  • What will an investment made today at a given rate be worth at some point in the future?
  • Reflects COMPOUND rate of return
  • Factors taken into consideration:
    • initial capital
    • time capital will remain invested
    • anticipated rate of return
    • unknown is ENDING (FUTURE) value of the inital capital if assumptions are met
195
Q

Time Value of Money

Present Value

A
  • How much needs to be invested today at a given rate to equal a specified value at a point in the future?
    • Factors taken into consideration:
      • Future Goal
      • Time to reach goal
      • anticipated rate of return
      • unknown is TODAY’S (PRESENT VALUE) - the required contribution to reach the goal (what to deposit)
196
Q

Rule of 72

A
  • Approximate formula for doubling investment
    • 72 / return percentage = years to double
      • 72 / 6% = 12 yrs to double
    • 72 / # of years = percentage needed to double
      • 72 / 5yrs = 14.4% to double
197
Q

Internal Rate of Return

IRR

A
  • the discount rate that results in a net present value of zero for a series of future cash flows
  • YTM of a bond reflects IRR
  • Expressed as percentage, not dollar amounts
    • $10,000 @ ?% x 10 yrs = $25,000
198
Q

Net Present Value (NPV)

A
  • Difference between an investment’s: *present value of future revenue and *its cost
  • USED BY CORPS to determine feasibility of capital investments
  • Positie NPV = desirable
  • more important to maximize NPV than IRR
199
Q

Time-weighted Returns

A
  • Used to evaluate the performance of portfolio managers
  • DOES NOT REFLECT CASH IN OR OUT OF THE ACCOUNT
200
Q

Dollar-weighted Returns

A
  • Used to evaluate the individual’s account performance
  • REFLECTS $CASH IN & CASH OUT OF ACCOUNT
  • think dollar-$-does include cash in/out
201
Q

Total Return

A
  • Profit + Income / Cost Basis(money spent)
  • (difference between $ bought/sold) + yrly div / initial money spent
202
Q

Holding Period Return

A
  • Profit (-bought/+sold difference) + divs (for holding period) / initial money spent (cost basis)
203
Q

Annualized Return

A
  • Ex. Investor purchased stock @ $20 and sold it 3 mo later for $21
  • Annualized return would be if this was done for the entire yr
  • 30 mo = 1 quarter so return X 4 = annualized return
204
Q

After tax return / yield

A

muni bond equivalent (tax free eq)

  • Investor owns a security with annual taxable return of 10%
  • He’s in 30% bracket
  • = 10% of par (1000) = $100 > $30 goes to tax, $70 left
  • 7% after tax (10% - 3%= 7%)
    $100 - $30 = $70 a yr
205
Q

Inflation-Adjusted Return

Real Return

A
  • Sec provided 8%
  • Inflation rate is 3%
  • 5% (the differene) = REAL RETURN >what the investor actually made
206
Q

Expected Return

A

Compounds

  • An investor is told there is a 20% change that an investment will return 10%; 30% chance it will return 2% and 50% chance it will return 6%
  • Expected return?
    • 20% of 10% = 20 x 10%
    • 30% of 2% = 30 x 2%
    • 50% of 6% = 50 x 6%
207
Q

Efficient Market Hypothesis (EMH)

A
  • All investors have equal access to the same mkt info
  • can’t beat the mkt; JUST THROW DARTS/random walk theory
  • Three forms
    1. Weak: info everyone knows (price/volume) TECHNICAL ANALYSIS
    2. Semi-strong: info available with some effort (company financials, economic factors)
  • *FUNDAMENTAL ANALYSIS**
    1. Strong - info available to INSIDERS; still no benefit
208
Q

Monte Carlo Simulation

A
  1. Runs hundreds or thousands of trials based on varying factors such as
    • rates of return on investments
    • inflation rates
    • interest rates
  2. Measures probabilities of meeting specific objectives and goals under varying conditions and circumstances
209
Q

Dividend Models

  1. Discount Model
A
  • Method to value the common stock of a company that is based on the present value of the EXPECTED FUTURE DIVS
210
Q

Dividend Models

  1. Growth Model
A
  • Method to value the common stock of a company on the basis of assumed CONSTANT GROWTH OF DIVS IN FUTURE
211
Q

Measures of Central Tendency

A
  • How likely are we able to get that (our goal) of return?
    1. Mean
      • *Arithmetic mean - SIMPLE AVERAGE/best to use
      • Geometric mean - always LOWER (unless all returns are equal)
    2. Median: line up in order (high to low); in the middle of the set
    3. Mode: most frequent
    4. Range: Highest/lowest - difference btwn
212
Q

Modern Portfolio Theory

A
  • DIVERSIFY by using the securities with a LOW OR NEGATIVE correlation, thereby reducing portfolio volatility
213
Q

Correlation

A
  • Positive Correlation: 2 securities prices move in a similar direction
  • Negative Correlation: (-1 / inverse) Prices of 2 securities move in opposite direction
    • Adds diversification to portfolio
  • Perfect Correlation: (+1) Parallel movement (index funds)
  • Zero Correlation: (0) No discernable pattern
214
Q

Riskn Measurements

A
  1. Correlation
  2. Beta
  3. Standard Deviation
  4. Alpha
  5. Sharpe Ratio
  6. Duration
  7. Discounted Cash Flow
215
Q

Beta

A

High Beta - growth stock

  • Measure of stock’s co-movement RELATIVE TO BENCHMARK
  • Measures systematic risk: risk associated with market in general; not the risk that pertains to a specific security
216
Q

Standard Deviation

A

Low = better, more consistent performance of stock

  • Measures volatility of investment COMPARED TO SAID INVESTMENT’S PAST RETURNS
  • Standard deviation measures security’s dispersion of returns versus its historical performance (mean)
  • SD measures total risk (systematic risk + nonsystematic risk)
    • Systematic risk = Beta
  • ***Used in computing Capital Market Line 66.67% of time
217
Q

Alpha

A
  • Compares Actual Return to the Expected Return
    • If Higher = Positive alpha
    • If Lower = Negative alpha
    • If Same = Zero alpha
218
Q

Sharpe Ratio

A
  • Measures Risk Adjusted Return/Some adjustment for SD*
  • *Sharpe Ratio =**
  • [Actual Return - Risk-free Return (t-bills)]
    ————-divided by —————————-
    (Standard Deviation)
  • Likelyhood investment will exceed riskfree rate
  • Post on Efficient Frontier Chart
  • *Measures amount of return per unit of risk taken*
  • HIGHER SHARPE RATIO = BETTER
219
Q

Duration

A

How long does it take for a bond to pay for itself?

  1. Measures volatility of bond prices by weighting the time the bond interest takes to pay for bond
  2. HIGHER DURATION = means higher bond volatility (high dur = long time to pay for itself = long term = more volatile)
  3. Zero coupons: Duration = Maturity
  4. CONVEXITY IS A MORE SOPHISTICATED MEASUREMENT OF SENSITIVITY TO INTEREST RATE CHANGES - not always straight line
220
Q

Discounted Cash Flow

A
  • Used to value DEBT SECURITIES (bonds)
    • Take the income payments scheduled to be received over a given future period and adjust that for TIME VALUE MONEY
    • HIGHER FLOW (DCF) = MORE valuable investment
221
Q

Systematic Risks

A
  1. Market Risk
  2. Interest Rate Risk
  3. Inflation Risk/Purchasing power risk
222
Q

Non-systematic Risks

A
  1. Business Risk
  2. Credit Risk
  3. Regulatory Risk
  4. Legislative or Political Risk
  5. Liquidity Risk
  6. Soverign Risk
223
Q

Market Risk

A
  • Systematic
  1. Risk that overall market will affect individual securities adversely regardless of company’s circumstances
  2. CANNOT BE DIVERSIFIED AWAY
224
Q

Business Risk

A
  • Nonsystematic
  1. Risk that a business will fail or perform poorly as a result of specific characteristics of company or industry in which it operates
  2. CAN BE DIVERSIFIED AWAY
225
Q

Interest Rate Risk

A
  • systematic risk
    1. ​Risk that a change in interest rates will affect a security adversely
226
Q

Inflation Risk

A
  • AKA Purchasing power risk
  • systematic
  1. Erosion of a dollar’s buying power
  2. Fixed dollar investments (bonds) are affected MOST
  3. TIPS OFFER PROTECTION (protect, don’t beat inflation)
227
Q

Credit Risk

A
  • AKA Risk of default
  • nonsystematic
  1. ​MINIMIZE through higher rating
  2. Applies to debt securities, not equity
228
Q

Regulatory Risk

A
  • nonsystematic risk
  1. Vulnerability to adverse changes in regulations
  2. *FDA, EPA, EEOC, etc.
229
Q

Legislative/Political Risk

A
  • nonsystematic
  1. Vulnerability to adverse legislation
  2. Tax law changes
230
Q

Liquidity Risk

A
  • nonsystematic risk
  1. Speed or ease of converting investment into CASH
  2. Virtually nonexistent with listed/Nasdaq securities and mutual funds - not gonna be a problem to sell (liquidate) > gonna be a bid!
231
Q

Soverign Risk

A
  • nonsystematic
    1. Risk that a gov’t coud default on its debt (sovereign debt) or other obligations
232
Q

Opportunity Cost

A
  • Rate given up on one investment to invest in another
233
Q

Qualified Retirement Plans

A
  • Contributions currently tax deductible
  • Approved by IRS
  • CANNOT discriminate
  • Tax on accumulation deferred
  • ALL WITHDRAWALS TAXED
  • Plan operates as trust
234
Q

Nonqualified Retirement Plans

A
  • Contributions NOT deductible
  • IRS approval not required
  • CAN discriminate (executives)
  • Accumulation may be tax deferred
  • Excess over cost basis TAXED
  • Trust not required
235
Q

Nonqualified Plans

A
  • Individual - Annuities
  • Biz
    • Deferred Compensation: Retain key employees
    • Payroll Deduction
236
Q

Traditional IRA

A
  1. Contribution limits
    • 100% earned or up to limit ($3500 max) - plus catch up for 50+ older (EGTRRA - Economic Growth and Tax Relief Reconciliation Act of 2001)
  2. Spousal IRA: additional contributions with same limit may be made for spouse with little or no earned income
  3. CONTRIBUTION DEADLINE IS APRIL 15 OF THE YEAR FOLLOWING THE CONTRIBUTION YEAR
  4. Earnings grow tax deferred
  5. Rollover - Get check, then reinvest (not direct)
  6. Transfer - direct, trustee to trustee
  7. Penalties
    1. Excess - 6%
    2. Early (before 59 1/2) - 10%
    3. Insufficient distributions (after 70 1/2) - 50%
    4. Exceptions:
      • ​death
      • disability
      • qualified education expenses
      • first time purchase of primary residence ($10,000 max)
      • health ins for unemployed
      • equal payments for life expectancy/Rule 72
  8. Nonallowable Investments
    • US gold and solver coins (American Eagles) ARE allowed
    • Real estate is allowed
      • Neither contributor or lineal family may derive immediate benefit (spouse, parents, children, grandchildren)
  9. Taxation
    1. ​Ordinary income
    2. Proportionate if some contributions were after tax (already taxed)
237
Q

Roth IRA

A
  1. Contribution limits (same) - 100% earned income or limit of $3500
    • May have ROTH & Traditional - does not double limit
  2. Contributions not allowed for those exceeding earnings limits
  3. Contributions made with after tax dollars -
    NEVER TAX DEDUCTIBLE
  4. Earnings may be withdrawn tax-free if a qualified distribution =
    • Qualified Distribution =
    • Account has been established for 5 years
    • And 1 of the following:
      • Age 59 1/2 yrs
      • Death or disability
      • First time home purchase
  5. No required distrubition at 70 1/2
  6. Contributions may be made after 70 1/2
  7. MINOR MAY BE NAMED AS BENEFICIARY
238
Q

403(B) Plans

A
  1. Available for employees of 403 (b) orgs / 501 (c) orgs = public schools, qualified nonprofits such as churches and hospitals
  2. Funded through pretax salary reductions (tax deferred)
  3. EMPLOYER MAY MAKE CONTRIBUTION
239
Q

Qualified Plans (Employer Sponsored)

A
  1. Keogh (HR-10)
  2. Defined Benefit Plan
  3. Defined Contribution Plans
240
Q

Keogh HR-10

A
  • Qualified
  • Self-employed
  • Nonincorporated aka small biz
241
Q

Defined Benefit Plan

A
  • Qualified
  • Traditional Pension Plan
    • Older people like these!
  1. Provides defined benefit at retirement based on
    • Age
    • Years of service
    • Earnings
  2. Sponsor (employer) bears investment risk! EMPLOYER has fiduciary responsibility, not rep
242
Q

Defined Contribution Plan

A
  • Qualified
  • Younger people like these!
  1. Money Purchase Pension Plan:
    • Annual employer contribution FIXED
    • EMPLOYEE BEARS INVESTMENT RISK!
  2. Profit-Sharing Plan: employer contribution may be decreased or skipped or increased on the basis of corporate profits
  3. 401K Plan
    • Deductible by both employee & employer
    • Reduces income tax for employees who contribute, but not FICA and FUTA
    • Top-heavy testing for key employees (not highly compensated employees)
    • Safe harbor plan avoids testing if contributing with immediate vesting (what $ employer puts in), whether non-elective or matching
    • Distribution can be rolled over into traditional IRA or into a ROTH IRA
    • Self-employed may also use solo 401K to maximize contributions
    • Participants MAY Borrow
      • Pay back with interest through payroll deduction
        *
243
Q

ERISA

Requires:

A
  1. Eligibility
    • 21 yrs +
    • 1 yr working there
    • 1000 hrs service
  2. Funding - funds employer puts in
  3. Vesting - funds you put in you have rights to - do not forfiet
  4. Reporting
  5. Beneficiary
  6. Fiduciary Responsibility
    • No self-dealing
    • No acting with parties with adverse interest
    • No compensation on personal trans
  7. Party in Interest
    1. Any fiduciary of the plan
    2. the employer
    3. An employee org whose members are covered by the plans (unions)
    4. Service Providers (legal, accounting, trustee/custodial, recordkeeping)
    5. A “control” person of any of the above - owns more than 10% of stock, etc.
    6. Lineal descendent of above (not #3)
244
Q

ERISA
Investment Policy Statement - Section 404 (A)

A
  1. Recommended, NOT REQUIRED, plan document detailing acceptable investments and investment strategies
    • Investment objectives and policies
    • Investment selection criteria (but not acutal investments)
    • Monitoring procedures and performance
    • Determination for meeting future cash flow needs
  2. Not the same as the DOL’s Summary Plan Description (SPD)
245
Q

ERISA stands for

A

Employee Retirement Income Security Act

246
Q

ERISA
Safe Harbor Provisions - Section 404 (c)

A
  • Liability of the trustee
  1. Investment selection
    • At least 3 investment alternatives
  2. Independent counsel
    • Employees choose their own investments
  3. Communication
    • Information available upon request
      1. Prospectuses, financial statements
      2. Risk and return characteristics of investments
247
Q

Educational Funding

Educational IRA/Coverdell ESA

A
  1. Contributions may be made by anyone, Can be a non-parent, including the beneficiary, but total annual max contribution per child is $2000
  2. After tax contribution
  3. Contributions may be made up until 18th bday of child
  4. Contributors must fall under certain earnings limits
  5. Earnings withdrawn for QUALIFIED EDUCATION EXPENSES before the beneficiary reahes age 30 are tax-free
    • qualified = all ed (vs. 529 = just post/college)
248
Q

Educational Funding

Section 529 (Qualified Tuition Plans [QTPS]) - College Savings Plans

A
  1. After-tax contributions/non deductible
  2. NO AGE LIMIT for contributions or withdrawals
  3. Earnings accumulate tax deferred and are tax-free when withdrawn for college ed expenses (post secondary)
  4. NO EARNINGS LIMITATIONS ON CONTRIBUTIONS (vs. cover)
    • States may offer state income tax free withdrawals or deductions for contributions or tax credits
  5. Non-qualified withdrawals subject earnings to tax plus 10% penalty
  6. Pre-paid tuition plans
  7. College savings plans:
    • States set max contribution limit - NO FED LIMITS
      • ​Subject to gift tax rules
        • 5 year multiple gift exclusion
      • Donor retains control
  8. These are muni fund securities and require delivery of an official statement or offering circular (not a prospectus)
  9. Treated as parental assets when student applies for financial aid - better for student than if their assets
249
Q

Adjusted gross income (AGI)

A
  • Amount of income that will be subject to tax
  • Gross income from all sources minus certain contributions to an IRA and net capital losses
250
Q

Alternative minimum tax (AMT)

A
  • An alternative tax computation that adds certain tax preference items back into adjusted gross income
  • If the AMT is HIGHER than regular tax liability for the year, the regular tax amount by which the AMT exceeds the regular tax are paid
251
Q

Arbitrage

A
  • the simultaneous buying and selling of the same security in 2 different markets to take advantage of a temporary price disparity
  • NOT considered market manipulation - aka it’s OK to do!
252
Q

Assessable stock

A
  • A stock that is issued below its par or stated value
  • Issuer and/or creditor have the right to “assess” the shareholder for the deficiency
  • All stock issued today is nonassessable
253
Q

Bank holding company

A
  • A holding company whose primary asset is a commercial bank
  • Not exempt from SEC reg
254
Q

Bona fide quote

Bona fide pledge/loan

A

NOT A SALE

255
Q

Bypass trust

A
  • A trust that is funded with property in an amount equal to the exemption equivalent of the transfer tax credit amount applicable to the decendent ($3.5 million in 2009); thus the property is not subject to federal estate tax
  • ~generation skipping tax
256
Q

Capital Asset

A

All tangible property, including securities, real estate, and other property, held for long term

257
Q

Cease and Desist Order

A
  • Used by the Admin when it appears that a registered person has or is about to commit a violation
  • MAY BE ISSUED WITH OR WITHOUT A PRIOR HEARING
258
Q

Constant Ratio Plan

A
  • An investment strategy in which the investor maintains an appropriate ratio of debt to equity securities by making purchases and sales to maintain the desired balance
259
Q

Consumer Price Index (CPI)

A
  • A measure of price changes in a “market basket” of consumer goods and services used to identify periods of inflation or deflation
260
Q

Demand Deposit

A
  • DDA
  • Refers to a type of account held at banks and financial instituitions that may be withdrawn at any time by the customer.
  • The majority of such accounts are checking accounts, although many now include savings accounts in the definition as well
261
Q

Demutualization

A
  • process through which a member-owned company becomes a shareholder-owned company
262
Q

Disgorgement

A
  • The forced giving up of profits made through illicit activity, insider trading
263
Q

Divident Exclusion Rule

A
  • AN IRA provision that permits a corp to exclude from its taxable income 70% of divs received from domestic and qualifying foreign preferred or common stock
264
Q

Dodd-Frank Bill

A
  • general term by which the Wall street reform and Consumer protection act of 2010 is known
  • considered to be the most significant legislation impacting the securities industry since the 1930s
265
Q

Donor

A
  • Person who makes a gift of money or securities to another
  • Once the gift is donated, the donor gives up all rights to it.
  • Gifts of securities to minors under the UGMA provide tax advantages to the donor
266
Q

Durable power of attorney

A
  • Doc giving 3rd party trading authorization
  • Full or limited authority
  • For someone who survives mental or physical incompetence (but not death)
267
Q

EPS

A

Earnings (divs, etc)

outstanding shares

268
Q

Economic Risk

A

The potential for international developments and domestic events to trigger losses in securities investments

269
Q

effective tax rate

A
  • Overall rate paid on a taxpayer’s total taxable income
  • Always less than marginable tax rate
270
Q

Employee Stock options

A
  • Form of employee comp
  • available to acquire issuer’s stock
  • 2 forms: 1) nonqualified (NSO) 2) incentive (ISO)
271
Q

Enjoined

A

Subject to a mandatory injunction, prohibitionary injunction, preliminary injunction, or a temporary restraining order issued by a court of competent jurisdiction

272
Q

ETFs

A

may be sold short and bought on margin

273
Q

Federal Covered Investment Advisor

A
  • A person registered, or excluded from the definition, under the Investment Advisers Act of 1940
274
Q

Federal Covered Securitis

A
  • Listed on major US exchanges/Nasdaq
  • Investment companies registered with the SEC
  • Private placement sec.
275
Q

December 31st

A

Renew Reg

calender year accounting

276
Q

Form 706

A
  • IRS form used for the computation of estate tax
  • Must be filed within 9 months of death unless exension has been obtained
277
Q

Form 709

A
  • US Gift (generation skipping transfer) filed under this
278
Q

Form 1040/schedule C

A
  • The IRS form used to file individual income tax
  • Schedule C of the form 1040 is used to report business income for sole proprietorships
279
Q

Form 1041

A
  • IRS form used by ESTATE and TRUSTS to report their income for tax purpose
280
Q

Form 1065

A
  • The info return filed by a Partnership or LLC
  • Because income and losses flow through to owners, the entity pays no tax
281
Q

Form 1120 and 1120S

A
  • The tax return filed by corps
  • S is for “S” Corps
282
Q

Form ADV

A
  • Form used by investment advisors to register with the SEC or the state
  • Consists of 2A (describes firm) and 2B (describes personnel @ firm) may be used to meet the brochure requirement
283
Q

Form D

A

Filed when engaging in a Reg D private placement

284
Q

Forward Contract

A
  • Direct committment between one buyer and one seller for a specific commodity
  • Because forward contracts are direct obligations between a specific buyer and seller (unlike futures and options, they are NOT STANDARDIZED)
  • Not easily transferred / ILLLIQUID
  • No price lock in, just lock in btwn buyer and seller
285
Q

Futures Contracts

A
  • Exchange traded obligations for a specific commodity
  • A buyer goes long, or establishes a long position, and is obligated to take delivery of the commodity on the future date specified
  • A seller goes short, or establishes a short position, and is obligated to deliver the commodity on the future date specified
  • Seller open to unlimited risk if he does not own commodity
  • May be highly leveraged
286
Q

General Partnership

A
  • 2+ form to conduct business
  • does not requre docs for formation
  • general partners jointly liable
287
Q

Generation skipping trust

A
  • A form of bypass trust that is designed to have assets pass to grandchildren (or great-grandchildren) in order to “skip” a generation of estate tax
288
Q

Grantor

A
  • An individual or org that gives assets to a beneficiary by transferring fiduciary duty to a 3rd party trustee that will maintain the assets for the benefit of the beneficiary
289
Q

Grantor Trust

A
  • A trust that requires that the grantor be taxed on income produced by trust property if trust income is distributed to the grantor or to the grantor’s spouse
  • Trust income discharges a legal obligation of the grantor or grantor’s family
  • Grantor retains power to revoke or amend the trust
290
Q

High net worth individuals

A
  • Has at least $1 million in assets under management (IA)
  • Networth of $2million+
  • Applies: (held jointly/with spouse)
  • Performance-based fees allowed
291
Q

Holding company

A
  • Comp that invests in and manages other corps
  • Control can occur through ownership of 50% or more of the voting rights or through the exercise of a dominant influence
  • ~can be called parent org
292
Q

Impersonal Investment Advice

A

Investment advisory services that do not purport to meet the objectives or needs of SPECIFIC individuals or accounts

293
Q

Liquidation Priority

A
  1. wages & taxes
  2. Secured claims (mortgages)
  3. Secured liabilities (bonds)
  4. Unsecured liabilities (debentures)
    >General creditors
  5. Subordinated debt
  6. unsubordinated debt
  7. preferred
  8. common
294
Q

Maloney Act

A
  • An amendment enacted in 1938 to broaden Section 15 of Sec. Act of 1934
  • Provided for the creation of a self-regulatory organization fo the specific purpose of supervising the OTC market
295
Q

Matched orders

A
  • Simultanesouly entering IDENTICAL (or nearly identical) buy and sell orders for a security to create the appearence of active trading
  • Violates anti fraud provisions of 34
296
Q

Negotiable CD

A
  • Unsecured
  • promissary note (debt)
  • Issued with a minimum face value or $100,000
  • Evidences a time deposit of funds with the issuing bank
  • Guaranteed by bank
297
Q

Nominee =

A

street name (kept in BD name)

not actual owner, but name is linked to sec.

298
Q

pecuniary

A
  • Related to money, operating for pecuniary profit
299
Q

Pension Plan

A
  • A contract between an individual and an employer, a labor union, a gov’t entity, or another institution that provides for the distribution of pension benefits at retirement
300
Q

Performance-based fee

A
  • investment advisory fee based on a share of capital gains or capital appreciation of a client’s assets.
  • A fee based on % of assets under management is NOT A PERFORMANCE BASED FEE > ok to do if not a high net inv.. etc.
  • Fee may only be charged for high net worth ind
301
Q

PE =

A

CMV / EPS

302
Q

proscribed

A

prohibited action

303
Q

publicly traded fund

A

closed end investment comp

304
Q

Qualified Domestic Relations Orders (QDROs)

A
  • Premature distributions that are taken pursuant to a qualified domestic relations order, or QDRO, are exempt from the 10% penalty
  • A QDRO is a court issued order that gives someone the right to an individual’s qualified plan assets, typically an ex (or soon to be ex) spouse
  • QDRO is usually issued in the course of divorce proceedings or to satisfy child support obligations
  • Applies only to assets in a qualified EMPLOYER retirement plan - not IRA or a SEP
305
Q

Required Minimum Distribution (RMD)

A
  • The amount that traditional and SEP IRA owners and QUALIFIED plan participans must begin withdrawing from their retirement plans by April 1 following the year they reach age 70 1/2
  • Exception: Still employed
  • RMD amounts must be distributed by Dec 31st that year and each subsequent year
306
Q

Remainderman

A
  • Person who inherits or is entitled under the law to inherit property upon termination of the estate of the former owner
  • Usually this occurs due to the death or termination of the former owner’s life estate
307
Q

Retained earnings

A
  • What’s left after corp pays divs
  • earned surplus
  • reinvested earnings
308
Q

Rule 147

A

Intrastate issues = exempt (from reg and prospectus with SEC)

309
Q

Safe harbor

A
  • A provision in a regulatory schme that provides protection against legal action if procedures are followed
  • Applies to
    • Section 28e of 1934 Act: describes those research and brokerage activities that may be received by an investment adviser in exchange for directed brokerage transactions
    • Section 404c of ERISA: describes what a fiduciary of a qualified plan must do to minimize personal responsibility
    • Top-heavy 401k concerns are minimized if the employer covers all employees with immediate vesting
310
Q

Schedule K-1

A
  • Form supplied by partnership, LLC, or S Corps to owners indicating their proportionate share of income/losses to be reported on their Form 1040 tax return
  • partnership, LLC, S
  • no C/LP
311
Q

Section 457 Plan/~403b

A
  • Deferred comp plan
  • used by employees of a state, political subdivision of a state, and any agency or instrumentality to the state
  • can be offerred to employees with certain tax-exempt organizations (hospitals, charitable orgs, unions)
  • BUT NOT CHURCHES
  • ind contractors can be covered under these plans
312
Q

Selling away

A
  • An agent engaging in private securities trans WITHOUT the BDs knowledge or written consent
  • violates NASAA
313
Q

Settlor

A
  • person that supplies prop for trust
  • trust prop also referred to as its principal or corpus
  • syn = donor, grantor, maker, trustor
314
Q

SEP

A
  • NONqualified
  • employers with 25 or fewer employees
  • tax deferred
315
Q

Soft Dollar Compensation

A
  • Noncash compensation received by an IA from a BD, generally in exchange for directed brokerage trans
  • MUST ALWAYS BE DISCLOSED and should come under the safe harbor provisions of section 28
316
Q

solicitor

A
  • person contracted or employed by an IAto bring in advisory biz
  • If employee = MUST REG
  • If contracted = doesn’t reg, but must not be statutorily disqualified from reg - subject to terms of written agreement betwen the IA and solicitor
317
Q

Tergiversation

A

practice of continually changing one’s mind, attitude, or opinion

318
Q

Testamentary trust

A
  • A trust created as a result of instructions from a deceased’s last will and testament
319
Q

12b1 fees

A

max = .75

no load can’t exceed .25 (25 basis pts)

320
Q

vesting

A

applicants are entitled to their entire plan benefits within a certain time limit if no longer employed there

321
Q

Wells notice

A
  • indicates that the regulator intends to bring an enforcement action against an individual or biz
  • if notice is against a publicly traded comp =
    usually has the effect of depressing current MKT price
322
Q

Schedule 13D

A

Federal

5% Beneficial owners of a class of security (registered under 1933) - required to file a report with the issuer, SEC and securities market where they trade within 10 days of any trans that results in 5%+

323
Q

Section 13 (f) filings

A
  • 1934
  • requires any institutional investment manager that uses the mail or any means of INTERSTATE commerce in the course of biz and that exercises investment discretion over an equity portfolio with MKT value on the last trading day in any of the proceeding 12 mos of $100 million oe more in 13f securities
  • MUST FILE FORM 13F WITH SEC QUARTERLY WITH 45 DAYS OF THE END OF EACH QUARTER
324
Q

Schedule G

A
  • passive investor with beneficial ownership exceeding 5% of any registered sec can file form G
  • files this instead of 13D
325
Q

Section 16 Filings

A
  • of 1934
  • requires executive officers, directors, and greater than 10% stockholders (control persons) to file trans reports before the end of the 2nd biz day following the day on which a trans has been executed
326
Q

Contumacy

A
  • Person subject to investigation ignores subpeona = can lead to jail time
  • this term defines this type of disobedience
327
Q

fBond Strategies

A
  1. Barbell
    • Investor purchases bonds maturing in 1 or 2 years and an equal amount maturing in 10 or more yrs
    • Looks like a barbell
  2. Ladder
    • Rungs at set intervals from bottom to top
    • Bonds are all purchased at the same time but mature at different times (like steps on a ladder/interval)
    • short maturities come due, they are reinvested and now become the long term ones
  3. Bullets
    • To hit a target (college)
    • can capture current int rates as they change rather having the entire portfolio locked into one rate
328
Q

ERISA Sec.404(c) Qualified Plan

(self-directed plan)

A
  • Individual account plan, such as a Sec.401(k)
  • Plan participants are given the opportunity to exercise meaningful, independent investment control over the assets in their accounts. In such a plan, the plan fiduciaries (e.g. plan administrator and the plan trustee) are provided with a “safe harbor” for liability for losses resulting from decisions made by the plan participants.
  • To qualify as a “404(c) plan” the plan participants must be given certain minimum investment information and at least three core alternative investment options, each of which is diversified.

Series 66 (1 decks)

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