Latter Parts Flashcards
State “Blue Sky” Laws: What, When Where?
First State Laws Regulating Securities
1911
Kansas
Securities Act of 1938
“PAPER ACT”
PRIMARY MARKET and NEW ISSUES
provided the PROSPECTUS
Securities EXCHANGE Act of 1934
“PEOPLE ACT”
Conduct of Broker/Dealers, Registered Reps
Public Communications
ESTABLISHED SEC
Maloney Act of 1938
Established SROs
Established FINRA
OVERSIGHT, REGULATION, DISCIPLINE
Trust Indenture Act of 1939
DISCLOSURE of BOND issues being secured
Covenants
Protect Bond Holders
Investment Advisor Act of 1940
REGISTRATION, CONDUCT, and ID of FEE-BASED INVESTMENT ADVISORS
Investment Company Act of 1940
Established DEFINITION and OVERSIGHT of MANAGEMENT COMPANIES, FACs, and UITs
Uniform Securities Act (USA) 1956
Model Legislation STATE “Blue Sky Laws”
REGISTRATION and Conduct Requirements
What THREE elements identify a trade as NOT being DISCRETIONARY?
ASSET (xyz shares)
ACTION (buy or sell)
AMOUNT ($ or # of shares)
Who must notify State Admin regarding BROKER DEALER Registration Changes (due to leaving or firing?)
- ) Prior BD
- ) New BD
- ) Agent
Who must notify State Admin regarding INVESTMENT ADVISOR Registration Changes (due to leaving or firing?)
If FEDERALLY REGISTERED: only IAR
If STATE REGISTERED: only INVESTMENT ADVISOR
When does an ADV-W become effective?
30 Days after filing the ADV-W
What is and ADV-W?
The WITHDRAWAL of an ADV
Canadian Broker Dealers are required to Register with ______ AND ______ if accounts are NON_QUALIFIED?
FINRA
and
STATE
You are NOT considered and AGENT if:
- ) Represent the ISSUER ONLY in isolated NON-ISSUER transactions
- ) Representing an ISSUER in transactions with UNDERWRITERS
- ) Representing and ISSUER in transactions w/ other FINANCIAL INSTITUTIONS
* **Essentially, not an Agent if not working with the General Public
Multiple B/D Registrations acceptable if…?
If both B/Ds are OWNED by the SAME COMPANY
ONLY under “COMMON CONTROL”
BDs and RRs EXEMPT from Registration if customers limited to…?
No more than 1 or 2 within 12 Months
Must be UNSOLICITED
IAs and IARs EXEMPT from Registration if customers limited to…?
No More than 5 within 12 months
Solicited OR Unsolicited
“Di Minimus” exemption
Variations in Securities Registration Classifications: Unregistered Exempt
OK
Variations in Securities Registration Classifications:REGISTERED NON-EXEMPT
OK
Variations in Securities Registration Classifications:
UNREGISTERED NON-EXEMPT
ILLEGAL
State Registration of Securities: NOTICE FILING
FEDERAL COVERED SECURITIES (mostly Investment Companies)
Limited State Authority
Opportunity to Collect Revenue
State Registration of Securities: COORDINATION
NON-FEDERAL COVERED Securities such as OTC BULLETIN BOARD or LINK Issues
COORDINATING with SEC
State Registration of Securities: QUALIFICATION
MOST INTENSIVE
Primarily INTRASTATE Offerings exempted from Federal Registration under RULE 147 of the 1933 SECURITIES ACT
FULL Registration process similar to that of the SEC
Rule 147
Exempts INTRASTATE offerings from Federal Registration
From Securities Act of 1933
Federal Covered Securities: ISSUED BY
Investment Companies
US Treasury and Federal Govt Issuers
Municipal issuers (unless located in state where securities are being offered)
Federal Covered Securities: LISTED
On Major US Exchanges and All Securities Senior to them (BONDS, PREFERREDS, RIGHTS, WARRANTS)
Federal Covered Securities: OFFERED
Under Regulation D of the Securities Act of 1933
Securities EXEMPT from Registration and Prospectus Offerings:
US Govt and Govt Agency Securities
Municipal Securities
Issues of Non-Profit Organizations (ex CHURCH bonds)
COMMERICAL paper
Issues of DOMESTIC Banks and Trust Companies
(**NOT Bank HOLDING Companies)
Issues of Small Business Investment Companies
NON-EXEMPT Securities (from Registering under the USA)
OTC sold to the General Public
Options Contracts
Collateralized Mortgage Obligations (CMOs)
Limited Partnerships
TRANSACTIONS that are EXEMPT from REGISTRATION
- Essentially Anything NOT Dealing Directly with the GENERAL PUBLIC.
- Between Issuers and Underwriters (Private Placements: State Max 10 persons) Federal Regulation D: No More than 25 NON-ACCREDITED Investors
- Financial Institutions, Banks, Insurance Companies, Investment Companies, Pension and Profit Sharing plans
- Fiduciary Transactions (ex. through executors, administrators, sheriffs, marshalls, bankruptcy trustees, guardians, conservators)
State Admin’s Jurisdiction
A: Affected or Accepted
D: Directed to
O: Originated
O: Offered in
R: Received in
Define CONTUMACY
Failure to comply w/ an order of the State Administrator
Letter of Recission
Offer to REVERSE an inappropriate or illegal transaction with client or to buy back a security and refund fees
- Offer to repurchase for cash, plus interest, minus distributions
- Statement that offer must be accepted within 30 days by the client
- if ACCEPTED, can offset CIVIL liability but not CRIMINAL liability
- if NOT accepted, right to sue FORFEITED by the client
Schedule H
Dictates that Investment Advisor must furnish Wrap Fee Brochure to/for any Wrap Accounts
Illegal Sales Types
- ) WASH SALES
- ) MATCHED ORDERS
- ) SELLING AWAY
- ) Exercising Discretion WITHOUT WRITTEN Authorization
- ) Improper Sharing in Profits or Losses in a client’s account
Advisor Fees must be…?
- REASONABLE and APPROPRIATE
- Disclosed in advance
- Agreed upon by the investor
Commissions in Addition to Fees must be..?
Disclosed to and accepted by investor/client
Performance-Based Fees are NOT ALLOWED except…?
- ) with Registered Investment Companies
- ) Persons with at least $1 Million invested
- ) Persons w/ a Net Worth of AT LEAST $2 Million
Regarding BD Custody of Client Securities, BD must inform Admin if…?
BD DOES or DOES NOT have custody of client securities (either way, they have to let the admin know)
Uniform Prudent Investor Act
- Fair Dealings w/ Customers: “Suitability NOT Profitability”
- “Consider the Character”
Uniform Prudent Investor Act: 3 C’s
- ) Care
- ) Caution
- ) Control
Cross Trades and Principal Trades
If a TRUST has more than one beneficiary, the TRUSTEE must take into account the differing needs of each beneficiary.
ex: Bene #1 is 2 years old
Bene #2 is 30 years old
TRUSTEE must trade for the best interest of each Bene’s best interest, considering time-horizons and proportions of trust accounts to each impartially
4 Elements of Determining SUITABILITY
- ) Financial Condition
- ) Investment Objective
- ) Tolerance for Risk
- ) Investment Experience
Anti-Money Laundering: PLACEMENT
Placement puts the “dirty money” into the legitimate financial system.
$3,000 currency or non-verifiable wire within 24 hrs: PLACE NOTE IN FILE
Anti-Money Laundering: INTEGRATION
In the final step, integration, the now-laundered money is withdrawn from the legitimate account to be used for whatever purposes the criminals have in mind for it.
$5,000 Currency or Non-Verifiable Wire within 24hrs: FILE SUSPICIOUS ACTIVITY REPORT (SAR) WITHIN 30 DAYS
Anti-Money Laundering: LAYERING
Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
$10,000 Currency within 1 biz day: FILE CURRENCY TRANSACTION REPORT (CTR) FILE WITHIN 15 DAYS
Private Right of Action
Right to lawsuit by other investors (contemporaneous traders) harmed by insider trading
Short-Swing Profits
- Gains on Stock held for less than 6 months when sold by an insider
- Profit must be paid back to the corporation and,
- Insider may still be liable for TAXES (DISGORGEMENT)
Insider Trading CRIMINAL Penalties
MAX for INDIVIDUALS: - $5 Million - 20 Years in Prison MAX for CORPORATIONS: - $25 Million Per Violation
What is a MATCHED ORDER?
The purchase and sale of the same security by an individual or organized group of individuals with the intention of giving the impression of unusual trading activity in the security. Matching orders is intended to get other investors interested in a particular security, but it is illegal
What is a WASH SALE?
A wash sale is a transaction in which an investor sells a losing security to claim a capital loss, only to repurchase it (or a substantially identical security) again within 30 days of the sale. Some investors use this technique to try to realize a tax loss without limiting their exposure to the security.
What is a CROSS TRADE?
A cross trade is a practice where buy and sell orders for the same asset are offset without recording the trade on the exchange. It is an activity that is not permitted on most major exchanges.
A cross trade also occurs legitimately when a broker executes matched buy and a sell orders for the same security across different client accounts and reports them on an exchange. For example, if one client wants to sell and another wants to buy, the broker could match those two orders without sending the orders to the stock exchange to be filled but filling them as a cross trade and then reporting the transactions after the fact but in a timely manner and time-stamped with the time and price of the cross. These types of cross trades must also be executed at a price that corresponds to the prevailing market price at the time.
What is a PRINCIPAL TRANSACTION?
A principal order, or what is often called a principal trade, is a special type of order carried out by a broker-dealer which involves the broker-dealer buying or selling for its own account and at its own risk, as opposed to carrying out trades for the brokerage’s clients.
BREAKING DOWN Principal Orders
When a broker-dealer is acting on its own behalf, as opposed to brokering transactions for its clients, it must properly denote to the exchange that it is doing so.
There are two primary types of trades: a principal trade and an agency trade. With an agency trade, a broker is trading for the benefit of a client and is compensated by a commission. In the case of a principal trade, a dealer will act as a broker as well, trading from their inventory they charge a spread as a fee.
A natural question arises: why would an entity act as a broker-dealer and trade from an internal inventory of securities? While there is no simple answer, it really boils down to what is in the best interest of a client.
Alpha Equation (then example)
Alpha = R(i) - (R(f) + B x (R(m) - R(f)))
where:
R(i) = the realized return of the portfolio or investment
R(m) = the realized return of the appropriate market index
R(f) = the risk-free rate of return for the time period
B = the beta of the portfolio of investment with respect to the chosen market index
For example, assume a mutual fund realized a return of 15% last year. The appropriate market index for this fund returned 12%. The beta of the fund versus that same index is 1.2, and the risk-free rate is 3%. The fund’s alpha is calculated as:
Alpha = 15% - (3% + 1.2 x (12% - 3%)) = 15% - 13.8% = 1.2%.
Keynesian
Subsequently, Keynesian economics was used to refer to the concept that optimal economic performance could be achieved—and economic slumps prevented—by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered a “demand-side” theory that focuses on changes in the economy over the short run.
KEY TAKEAWAYS
Keynesian Economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions.
Keynes developed his theories in response to the Great Depression, and was highly critical of classical economic arguments that natural economic forces and incentives would be sufficient to help the economy recover.
Activist fiscal and monetary policy are the primary tools recommended by Keynesian economists to manage the economy and fight unemployment.
Put Option
An options contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price and at a predetermined date
Call Option
The option buyer has the right, but not the obligation, to buy a financial instrument at a specified strike price
Corporations generally issue warrants in connection with…..?
Bonds, in order to secure a lower interest rate
Rergarding Municpal Bonds, what rate are capital gains taxed at after holing for 1 year+?
15%
Regarding Municipal Bond, is the interest taxable? If so, in what circumstances?
The interest is tax-free at the Federal level and if it is issued in the same state as the bond holder’s start of residence the interest is entirely tax-free
The sale of a security to an Insurance Company is called…?
a SOPHISTICATED INVESTOR EXEMPTION
Is an Employee Stock Option Plan (ESOP) subject to current taxation?
YES.
Unlike an Incentive Stock Option Plan, an ESOP is a NONQUALIFIED stock option plan. Therefore the difference between the stock option price and the stock’s current market price at exercise is considered taxable income.
What method of calculating the cost basis of mutual fund shares sold requires accurately recording each share transaction and accounting for individual shares sold?
SHARE IDENTIFICATION METHOD
Under this specific method, the investor keeps track of the cost of each share purchased and identifies the specific shares to be liquidated (ie the shares purchased on a given date at given cost)
Dollars distributed from a life insurance policy prior to death are withdrawn assuming_______?
FIFO
Define DISCOUNTED CASH FLOW
NET PRESENT VALUE is the discounted rate at which the net present value of all cash flows and final market value of an investment becomes zero. Internal rate of return is the value of an investment by factoring the total of all cash inflows and outflows and their timing, discounted to a required rate of return. The Sharpe ratio is a measure of return in relation to RISK.
According to the Uniform Securities Act, investment advisor advertising must…
…Not violate the Investment Advisors Act of 1940.
The formula for GDP is…?
Consumer, government and business spending plus exports minus imports.
GDP is a measure of our total National output of goods and services
Are municipal bonds for Convention Centers tax exempt?
NO.
Convention Center bonds are not designated for a public purpose; therefore, they are not tax exempt
What is disintermediation?
Large Scale movement from the short to the long end of the yield curve.
It occurs when investors leave the uncertainty of short term rates and lock in the long term rates
Advertising provisions of the USA state that offers to sell a security fall under the jurisdiction of the state which the offer….?
ORIGINATED
With respect to a FAMILY LIMITED PARTNERSHIP (FLP), the courts provide protection from a firm’s creditors only when?
Only when an FLP has been determined to be a legitimate business entity and not established for credit protection only.
Family members may form and operate a partnership, but courts generally look closely at the structure of a family business before recognizing it as a partnership to make sure it wasn’t formed solely for credit protection.
Are PRIVATE PLACEMENTS Exempt?
YES.
They are not subject to any registration process
When an agent terminates an association with a broker/dealer who must notify the Administrator?
BOTH the agent and the firm must promptly notify the ADMIN
To be eligible for a Health Savings Account, an individual must be covered by a…?
High-Deductible health plan
When must form ADV-E be filed?
Within 120 days of the audit
Form ADV-E must be filed by the auditor of an IA with custody of clients’ assets within 120 days
Which class of mutual fund shares is appropriate for an investor who will need to redeem his shares in 18 months?
CLASS C SHARES
Class C shares are LEVEL-LOAD shares that are PURCHASED at NAV and have a CDSC that lasts for only one year, allowing the investor to redeem the shares in 18 months without incurring a CDSC
In order to comply with FinCEN’s AML initiative, broker/dealers are required to ….?
Designate an AML compliance officer.
In a custodian account, the responsibility for tax liabilities from from dividends, interest income, and capital gains belongs to the…?
MINOR
Define the EFFICIENT MARKET HYPOTHESIS
Markets are efficient; no one can gain an advantage by using analysis or trends
What is another term for Feasibility Study?
An ENGINEERING REPORT
What is the purpose of a Transfer on Death (TOD) account?
To bypass probate
When is a policyholder allowed to surrender a variable annuity contract?
During the accumulation period
Which Govt Entity issues certificates that pay monthly interest?
Ginnie Mae (GNMA)
What’s the difference between CPI and noncore CPI?
CPI excludes Food and Fuel
Discount Bond’s hierarchy of value (highest to lowest)
YTC
YTM
CY
Nominal Yield (coupon)
Net Present Value represents…?
The discount rate at which the net present value of all cash flows and final market value of an investment becomes zero.
Which efficient market hypothesis rejects both technical and fundamental analysis?
STRONG hypothesis
When must an advisor become FEDERALLY registered?
Advisors must register when assets exceed a certain amount
Efficient Market Hypothesis states that…?
Markets are efficient with respect to value and pricing
