Incorrect questions Flashcards
What is a deferred compensation plan?
nonqualified, funded with after tax dollars, do not require immediate funding
for highly compensated individuals
allow tax deferral until funds are received
assets of employer until distributed, participants can lose it if employer dissolves
According to Reg BI, when can ‘advisor’ be used?
when one is registered as an agent of a BD AND an IAR of an IA
What is taxation like for limited partnerships?
flow-through entity, all profits and losses are taxed to individual limited partners and the business pays NO TAX on its income
What is probate?
administering deceased person’s will or estate of a person without a will. There are fees associated with court costs, lawyers, etc.
holding assets as community property, JTWROS, TOD avoid probate
What are differences between the NYSE and Nasdaq?
NYSE: DMM, centralized, auction
Nasdaq: multiple market makers per stock, decentralized dealer market, more liquidity
What is the Sharpe Ratio and what does it measure?
actual return-risk free return/standard dev.
higher sharpe ratio means that an investment offers more return per risk unit
What is the Dividend Discount Model?
The current value of a stock should reflect its future dividends discounted to present value. If current price is less than discounted value, it is considered a bargain
Mostly valuable for REITS, utilities, and other companies that pay consistent dividends
What is the Consent to Service of Process?
It appoints the State Administrator as the attourney for handling noncriminal complaints. Required for State Registration
What is the IA de minimis exemption?
IA Act of 1940: IA does not have to register in a state if they have no place of business there and if there are less than 6 resident retail clients there in the past 12 months
Institutional clients ( banks, insurance companies, mutual funds, or other financial institutions) do not count
ONLY APPLIES TO IAS, NOT B/DS
What securities are exempt under the USA?
Government/Gov-related
* us gov
* munis
* foreign gov with diplomatic relations with us
* agency (GNMA, FNMA, FHLMC)
* public utilities regulated by state/fed
* railroad and common carriers
Bank/Financial Institutions
* issued by banks/savings/trust companies(companies must be regulated at state/fed level)
* credit unionsunsurance companies (except variable contracts)
Non-Profits/Charities
* religious(church bonds) educational, charitable
Commercial paper/Short-term debt
* maturity of 9mo/270 days or less
* working capital purposes
* rated highly
Employee Benefit Plans
* pensions/profit-sharing
* stock purchase, savings plans
Exchange Listed
* federally covered, listed on major exchanges
* investment companies (Open end mutual fund, closed end, uits)
Not subject to state registration or state advertising filing laws
What transactions are exempt under USA?
- secondary market trades, occasional
- unsolicited
- institutional investor transactions
- private placements (no more than 10 non-institutional in the state in 12 mo, no solicitation/ads)
- fiduciary transactions
- transactions between issuers and underwriters as a firm commitment
- intrastate offerings (rule 147 and USA)
- pre-organization (<10 subscribers)
When does an agent’s registration become effective according to the USA?
at noon on the 30th day after filing the application
According to the USA, who is a person?
any legal entity (individuals, business entities) but NOT a minor, deceased, or incapacitated person
What is a surety bond and when is it required?
financial guarantee to ensure compliance, some states allow a cash/securities deposit instead
* B/Ds may need one as part of state registration process (carrying min net cap $250k, introducing firms $50k, market makers $100k) Indebtedness ratio: liabilities cannot exceed 15x net capital: aggregate indebtedness/net cap
* Agents need to post bond if they have discretionary authority or custody of funds
* IAs may need a bond if they have custody, have discretion, and do not meet min net capital requirements ($35k for custody, $10k for discretionary auth only)
Who is exempt from registering as an agent under the USA?
- person representing muni issuer and selling securities to the public (since securities are exempt)
What are the differences in fed and state laws surrounding Private placements
Fed: Reg D of Securities Act of 1933- may not be offered to more than 35 non-accredited investors
USA: transaction involves </= 10 persons with no limit on institutional accounts
commissions may not be paid for soliciting noninstitutional buyers, noninstitutuional buyers are purchasing for investment purposes, not for resale
What are the ADV forms besides part 1, 2 and 3, and when are they required?
ADV-E (examination): IA maintaining custody of funds, independent public accountant suprise audits annually, ADV is given to accountant to submit to regulators with audit report
ADV-H (hardship): extension for filing an amendment in circumstances beyond their control
ADV-W (withdrawal): filed by advisors that want to withdraw registration to register with different regulator (state reg-> FCA
What is ADV Part 1?
basic info on IAs business, ownership, regulatory
filed when registering with SEC or State Administrators
Annual Update filed annually
Amendments filed promptly (30 days)
Part 1A: general info
Part 1B specific to state-registration
What is ADV Part 2?
business practices, conflicts of interest, fees
required at time of registration, given to clients and prospective clients
filed annually
Part 2A: Firm Brochure- services, fees, compensation,
2B: brochure supplement- adviser’s personnel info
What is ADV Part 3?
Form CRS, help clients understand the relationship in plain language
filed with registration
updated annually
provided to retail clients
When must an IA register with SEC vs State Administrators?
AUM>$110m register with SEC and notice file with states
$100m<AUM<$110m: state or SEC
(if aum exceeds $110m form ADV-W must be filed with state and refile ADV with fed
AUM<$100m: state only
if registered in 15 or more states, they can register as FCA (SEC reg)
How long is Form 144 good for, and how much restricted stock can be sold?
Under Rule 144, someone who intends to sell restricted or control securities must file Form 144,which is good for 90 days
over 90 days, they can sell greater of 1% total shares outstanding or average weekly trading volume over the past 4 weeks
According to FINRA, what is an institutional investor?
large entities that purchase securities using pooled money, or any account with total assets of at least $50m
Who is considered an accredited investor?
financial institutions, pensions, development companies, and individuals who’ve attained CFP, S7, S65 designations
entities with $5m in assets
individuals with net worth of $1m or make $200k/yr for the last two years ($300k if married)
What is market capitalization?
Issued stock-treasury stock=outstanding stock(share price)
What is SEC Rule 10b-18?
safe harbor, when an issuer buys its own stock in the secondary market, it can only use one B/D on any given day
price of purchases cannot be higher than the highest independent bid or last independent transaction price, whichever is higher
When would an IA be exempt from registration requirements of IA Act of 1940?
- managing: private (hedge) fund with AUM<$150m
- Section 3(c)(7) are hedge funds that limit purchasers to qualified clients
- Section 3(c)(1) are hedge funds that have 100 or fewer owners
- Both section 3 cs must have aum<150m
What is a hedge clause?
when an advisory contract attempts to limit liability for negligence or misconduct
conflicts with fiduciary duty to act in best interest
SEc prohibits hedge clauses
What is the Brochure Rule?
advisors can provide a disclosure brochure at the time they enter into contracts
delivered at or before entering into an advisory contract
48 hours before contract is signed, or client must be given 5 business days to rescind without penalty
offer updated brochure within 120 days of fiscal year end if there are material changes
What are rules about assigning client’s contracts?
IA may not assign contract to another IA without client’s consent. Assignment includes acquisition of the majority of adviser’s stock by another entity
When a BD is suspended, what happens to the agents?
agents’ registration is no longer in effect. But if an IA’s registration is suspended, IAs are not affected
When is an offer made in a state under the USA?
if it originates in the state or is directed to another state
What is a restricted stock?
stock that has not been registered with the SEC (Reg D private placement)
must be held for at least 6 months if the issuer is SEC-reporting, or **one year **if the issuer is non-reporting
After that period, it can be sold on an exchange in accordance with Rule 144, limiting number of shares in a 90 day period
What are Reg A securities?
offerings must be filed with administrator, exempt from SEC registration but must register with state
What is a bypass trust?
most common use is to pass assets from parents to their children upon death of second parent
What are grounds for statutory disqualification?
final order: revocation of insurance license
convictions of felony or securities-related misdemeaner over last 10 years
What is GAAP?
Generally Accepted Accounting Principals
standards that us companies use to create financial statements so that companies can be easily compared, making fundamental analysis easier
Under the USA, what is statute of limitations and criminal/civil penalties?
three years of occurance or two years of discovery, whatever comes first
up to 5 years
criminal: $5k fine, 3 years prison, up to 5 years after occurance
civil: cost plus interest minus income received on sale
Under the 1933 act, what are penalties and liabilities?
criminal: fine up to $10k, imprisonment for up to 5 years
