SERIES 65 GLOSSARY

Question 1

12B-1 Fees:

Answer 1

Sometimes a mutual fund tacks on charges to pay for its selling overhead generated by its sales force. The industry calls these charges “12b-1 fees” or “distribution fees.” A mutual fund would deduct these charges, typically 0.5 percent per annum, on a daily basis

Question 2

401(k) Plans :

Answer 2

These are corporate retirement plans where an employee-participant elects to defer part of his salary, with the deferred part going into the person’s retirement plan account. These plans appeal to employing companies that wish to minimize their contributions towards the retirement plans of their employees.

Question 3

403(b) Plans:

Answer 3

Retirement plans are allowed by IRS for employees of public schools, employees of tax-exempt organizations, and religious ministers. A 403(b) plan was formerly known as a tax-sheltered annuity (TSA). However, today 403(b) plans are not limited to annuities. A public corporation may not set up a 403(b) plan. Nor are they intended for employees of the federal government.

Question 4

457 Plans:

Answer 4

These are deferred compensation plans that offer tax deferral until monies are withdrawn. They are intended for employees of local and state governments.

Question 5

529 Plans:

Answer 5

These plans allow a contributor to build up a tax-advantaged fund to pay for university/college education expense for a lucky young person. Also for expenses at private schoos for grades K-12. A donor makes contributions to a 529 plan with after-tax dollars. Irs considers earnings generated to be tax-free, not merely tax-deferred, assuming that the student uses the proceeds for education expenses at a college or university, or at a private school for grades k-12, the latter being limited to $10,000 distribution per student per year. In addition, the Secure Act of 2020 allows paying off $10,000 of a beneficiary’s student loans, using funds from a 529 plan. Furthermore, according to the Secure Act of 2020, monies in a 529 plan can now pay off education debt of the beneficiary’s siblings, up to $10,000 per sibling. A 529 plan can also pay for student apprenticeships, i.e., a combination of classroom instruction and on-the-job training.

Question 6

Accelerated Cost Recovery System (ACRS):

Answer 6

A method of accounting for depreciation. The amount of depreciation is greater in earlier years, thus the name “accelerated.”

Question 7

Acit Test:

Answer 7

a formula to see if a corporation has enough LIQUID ASSETS TO COVER ITS CURRENT LIABILITIES. The formula is quick assets (i.e., current assets minus inventories and minus other questionable assets) divided by current liabilities. Another name for “acid test” is the “Quick Ratio.

Question 8

Agency Capacity:

Answer 8

A brokerage firm may act either as an “agent” or “principal” in its securities business. When it acts as an agent, it stands in the middle between a customer who purchases and another person who sells. The brokerage firm is acting as an agent in this example. See Commissions. See Principal Capacity. See Agency Cross Transaction.

Question 9

Agency Cross Transaction:

Answer 9

This occurs when an advisory firm executes trades, which it has recommended, for two clients, one who buys and the other who sells. It does this through its brokerage affiliate. The brokerage affiliate acts as an agent and collects two commissions. In addition, the advisory firm earns an advisory fee. There are serious conflicts of interest inherent in this arrangement.

Question 10

Agent:

Answer 10

A term used in the model Uniform Securities Act (.S.A.) to designate a registered representative who acts on behalf of a brokerage firm in executing buy and sell orders for clients. See Dealer.

Question 11

Alpha:

Answer 11

this measures the beta-adjusted percentage gain of a stock portfolio or mutual fund, minus the risk-free rate, as compared to the return of a passively managed portfolio, such as an index fund. See Index Fund. The formula for alpha is [return of portfolio minus risk-free rate] minus beta * (Return Index minus risk-free rate)].

Question 12

Alternate Investments:

Answer 12

other than plain vanilla stocks and bonds, alternate investments include limited partnerships, exchanged-traded notes (ETNs), leveraged funds, inverse funds, structured products, and viatical/life settlements.

Question 13

AML:

Answer 13

stands for anti-money laundering under the Bank Secrecy Act. See Anti-Money Laundering.

Question 14

Annuities:

Answer 14

issued by life insurance companies, the basic premise of all annuities is that the annuity will periodically pay an amount of money to the annuitant until death. See Fixed Annuities. See Variable Annuities. See Equity Indexed Annuities.

Question 15

Annuitize:

Answer 15

when the insurance company starts to pay monies to an annuitant, it is said that the annuity begins to “annuitize”. See Annuity Units.

Question 16

Annuity Units -

Answer 16

after a person instructs an insurance company to annuitize an annuity, the insurance company will compute so many annuity units and credit those to the annuitant’s account. Depending on the value of each annuity unit, the annuitant will receive so much money in periodic payments. For example, Henry’s account is credited with 500 annuity units. This month, the insurance company values each annuity unit at $4,00. Thus, this month, Henry will receive a check for $2,000. See Annuitize. See Annuity Units.

Question 17

Anti-Money Laundering:

Answer 17

rules and regulations under the Bank Secrecy Act, designed to prevent criminals from escaping taxes and hiding ill-gotten gains. See FinCen. See AML.

Question 18

Assessable:

Answer 18

there are some investment contracts whose terms allow the general partner or manager to levy future assessments or charges on investors. This assessment requires that investors put up additional money. Be careful before investing in an investment or scheme where there is a possibility of a future assessment. Make sure you know what you are signing!

Question 19

Asset-Backed Securities:

Answer 19

these are bonds that have backing of certain assets, such as auto loans, and credit card receivables. An investment bank will group these receivables into a package, and then sell bonds and other debt instruments, backed by these packages. See Securitization. See also Collateralized Debt Obligations.

Question 20

Auditor Disclosures:

Answer 20

the reports of auditors giving their opinions of a company’s financial statements. These include non-qualified opinions, qualified opinions, adverse opinions, and disclaimer of opinion.

Question 21

Authorized Stock:

Answer 21

when a corporation files for its incorporation in a state, it lists the number of shares that it wishes to authorize. the corporation can then issue shares up to the number authorized. See Issued Shares. See Outstanding Shares. See Treasury Shares.

Question 22

Bank Secrecy Act:

Answer 22

the platform for anti-money laundering laws and regulations, applying to financial firms, (but not yet applying to investment advisory firms), although FinCen has proposed rules that would apply to advisory firms in the near future. See FinCen.

Question 23

BCP:

Answer 23

stands for business continuity plan. The SEC requires that every investment advisory firm registered with it have a business continuity plan in its manual of supervisory or compliance procedures that allow a firm to remain in business and fulfill its fiduciary obligations to clients. See Business Continuity Plan.

Question 24

Benchmarks:

Answer 24

these are usually well-known indexes on stocks or bonds that are used to measure the performance of an investment adviser for his/her clients.

Question 25

Best Interests of Retail Customers:

Answer 25

In Regulation Best Interest, the SEC requires that both investment advisory firms and brokerage firms, registered with the SEC, put the best interests of their customers ahead of the personal interests of their securities professionals. Under this regulation, firms must deliver a copy of their Form CRS to each retail customer or prospective customer opening an account or receiving a recommendation.

Question 26

Beta:

Answer 26

a measurement of the price volatility of a stock or mutual fund in relation to the whole market. Stocks with betas of less than one are less volatile and less risky than the average of the whole stock market. Investments with negative betas react in an opposite manner from the stock market, meaning if the market goes up, they go down, and vice versa.

Question 27

Blind Pool:

Answer 27

An offering of new shares of a company that has no stated business, no earnings, no history. An investment in such shares is throwing good money into a speculative, unknown, and untested scheme.

Question 28

Brady Bods:

Answer 28

these were bonds issued in the late 1980s by developing countries to replace troubled loans that they owed to megabanks. The bonds were named after the then U.S. Secretary of the Treasury, Nicholas Brady.

Question 29

Brochure for Wrap Fee Clients:

Answer 29

Part 2A Appendix 1 is the “brochure” for clients of an investment advisory firm who participate in a wrap fee program sponsored by the advisory firm. See Part 2A Appendix 1.

Question 30

Brochure Rule:

Answer 30

the SEC requirement that federal investment advisers give clients a copy of Part 2A of their Form ADV. Part 2A contains information about the adviser and his/her business practices, such as how much an adviser has under management, his or her methods of securities analysis, how the adviser arranges for brokerage trades to be executed, etc. See Part 2A Form ADV.

Question 31

Business Continuity Plan:

Answer 31

The SEC requires that every investment advisory firm registered with it to have a business continuity plan or BCP in its manual of supervisory or compliance procedures. The purpose of a BCP is to assure that an advisory firm remains in business and fulfills its fiduciary obligations to clients, in spit of some natural disaster or other calamity. See BCP

Question 32

C Corporation -

Answer 32

a regular corporation, such as General Motors Corp. Unlike a direct participation program, it does not pass through any tax benefits to shareholders. See S Corporation. See Direct Participation Program

Question 33

Calls-

Answer 33

an option that gives the buyer of the call the right to purchase stock or some other asset at a specified price. The holder of a call will profit if the price of the underlying stock goes u. When a person writes a call, he/she becomes obligated to sell a stock or some other asset at a specific price. See Puts See Options

Question 34

Capital Asset Pricing Model (CAPM)-

Answer 34

this is an approach to evaluating prices of individual securities by comparing the expected return of one stock to its market risk, using beta, and taking into account the risk-free return of a T-bill. See Beta. See Negative Correlation.

Question 35

Capital Gains:

Answer 35

When a taxpayer sells a stock or other asset for more than he paid, a capital gain results. Capital losses may offset capital gains. A taxpayer may “net” (i.e., subtract) capital gains from capital losses. If Beth has realized $6,000 in capital gains and $10,000 in capital losses, she may net the two, and arrive at a net capital loss of $4,000. Net capital losses can be used to offset a taxpayer’s ordinary income u to $3,000 per year.

Question 36

Capital Market:

Answer 36

The market for long-term debt securities, such as bonds, and mortgages, as opposed to the “money market,” the market for short-term debt securities. See Money Market.

Question 37

Capitalization:

Answer 37

refers to the total amount of monies (i.e., capital) raised by a corporation when it issues stock, and bonds, and when it retains earnings from its businesses. Capitalization includes bonds, preferred stock common stock, paid-in surplus, and retained earnings. Paid-in Surplus. See Retained earnings.

Question 38

Capping:

Answer 38

illegal attempts to put a lid on the price of a stock or other security. This is a good example of market manipulation. It violates the Securities Exchange Act of 1934. But really, it’s hard to fathom how any one person could successfully keep the price of a stock from rising in today’s volatile market. See Market Manipulation.

Question 39

Cap Rate:

Answer 39

Many index annuities also have ap rates, which are the upper limit on allowing an annuitant to reap the gains of a bullish move in the markets. So if the cap rate is 10 percent but the underlying index moves up 30 percent, with a participation rate of 80 percent, the annuitant cannot gain more than 10 percent on his annuity. See Participation Rate. See also Equity Index Annuities.

Question 40

Care Obligation of Reg B1:

Answer 40

Every brokerage that makes a recommendation to a retail customer must make sure that it or its representative arrives at that recommendation after taking care to exercise reasonable diligence into the characteristics of the product or account, its drawbacks as well as benefits, and be assured that the product will be for the best interest of the client.

Question 41

Cash Flow:

Answer 41

to arrive at a simplified calculation of “cash flow,” add non-cash charges or expenses, such as depreciation and depletion, to net income. Non-cash charges or expenses don’t require a corporation to write a check. A more complete formula of cash flow is EBITDA – earnings before interest, taxes, depreciation, and amortization. EBITDA shows earnings, or cash taken in, before paying interest on bonds, taxes, and the non-cash expenses of depreciation and amortization. See EBITDA.

Question 42

Certificate of Deposit (CD):

Answer 42

A short-term money market instrument issued by banks. See Money Market.

Question 43

CFTC:

Answer 43

The commodities Futures Trading Commission. It has governmental authority to regulate markets in commodities and futures.

Question 44

Chained CPI (C-CPI) :

Answer 44

The Tax cuts and Jobs Act of 2017 made government payments that have an automatic inflation adjustment utilize chained CPI. This C-CPI assumes that if one consumer product increases in price, consumers will look for, and purchase, a cheaper substitute. Thus C-CPI does not automatically rise when certain goods increase in price. See CPI.

Question 45

Cheap Stock:

Answer 45

this is a stock of a new issue that is offered at a sizeable discount from the public offering price. Usually awarded to promoters or underwriters to reward them for their services. Here is an example. GHI /corp. issues new common shares at $20 per share. It sells 1,000 shares to Joey, a promoter, for $1 per share. Joe gets cheap stock. See Promoter.