Series 66 client investment recommendations Flashcards
It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are
commissions;
markups and markdowns; and
advisory fees for those firms that are also registered as investment advisers.
Which of the following methods of calculating investment returns are discounted cash flow (DCF) techniques?
NPV
Internal rate of return
It is deemed to be an assignment whenever
a majority interest in an adviser changes hands. Pledging a client’s contract is considered to be an assignment.
which form of business is easier to transfer ownership from? Corporate or partnership
Corporate
The required disclosure statement for wrap fee programs must contain
at least the information in Appendix 1 of Form ADV Part 2A, but duplicates need not be provided to clients who have already received the required disclosure on that program from another adviser.
c corp
the only logical choice for a large amount of capital being raised
no flow-through of income or loss
easiest to transfer
form 120
does not require considering the suitability of owners
One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that
The CIP requires the actual date of birth, not just proof of legal age.
Dying intestate means for an estate
that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased.
When does a customer have to receive the OCC Options Disclosure Document?
Before accepting the customer’s first order to trade options covered by the ODD
A GRAT is an estate planning tool designed
pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.
joint tenants by entirety limited to
married couples
S corp
only us residents
limit to 100 investors
no double taxation
passes through gains and losses
key difference between simple trust and complex trust is
simple trust must distribute all of its annual income. Complex trust is not obligated to do so
Simple trusts may not make charitable contributions, and they provide no discretion on income distribution
progressive tax examples
and explanation
income
gift
estate
wealthy families and individuals pay higher taxes
regressive tax
sales tax
fuels tax
Everyone pays the same rate. Impacts lower income families
earned income
salary
wages
self employment income
alimony
commissions
passive income
rent
limited partnership interests
portfolio income
dividends
interest
capital gains
taxation of income
progressive rate dependent upon net taxable amount earned
dividend income reported on
1099div
corporate taxes on dividends received
have a 70% exclusion meaning they pay 30%
corporate tax taxed
as ordinary income
interest on us government direct debt
ordinary income at fed level excluded from state
interest received from mortgage back gov agencies
taxed as ordinary income at fed and state level
interest received from municipal debt
not taxable at fed level
may be nontaxable in state of issuance
default method by irs
FIFO
methods for determining what shares to sell
FIFO
Average cost
share identification
mutual funds use what share selling method
average cost
how much of net loss can be used
3000 per year on ordinary income
wash sale rule
can’t establish identical position with 30 days before or 30 days after
same security
rights or warrants
call option
convertible bonds
all these apply
wash sale total days
61
avoid wash sale for bond if one of the following applies
different issuer
different maturity and coupon rate
taxation on estate
estate tax based on value at death or six months later(form 706)
if valuation is lower
estate taxes due when
9 months after death
maritial deduction for estate
if us spouse- unlimited tax free
non citizen spouse there is limited amount tax free
step up inheritance
stepped us cost basis
no step up for inherited annuties
DNI
distributable net income which is dividends plus interest plus capital gains not reinvested back in trust
Current Social Security requirements are a minimum of
40 covered quarters of employment (10 years)
One of the nice things about life insurance proceeds
even when the death benefit is increased due to separate account performance, it is still free of income tax.
corporations have a 50% dividend exclusion
on dividends received from other companies.
A loss derived from a limited partnership may be offset against income from
A limited partner may use only passive income to offset the loss derived from a limited partnership
Which of the following vehicles make use of the unified estate tax credit
Bypass trust
Generation-skipping trust
Which of the following items are NOT included in the gross estate of a decedent?
Proceeds from a life insurance policy owned by the deceased’s spouse
One popular estate-planning technique is to have life insurance owned by (and premiums paid by) someone other than the insured. In that case, proceeds are generally excluded from the gross estate of the deceased. If the trust was irrevocable, that same benefit might be achieved, but not with one that is revocable.
As long as the grantor has the power directly or indirectly to control the trust,
he is treated as the owner. The grantor may be taxed on trust income if the grantor either actually or constructively receives the income.
Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following
accelerated depreciation.
B)
excess intangible drilling costs.
certain incentive stock options
who is subject to tax with a gift
the donor
A taxpayer must pay the alternative minimum tax in any year that
it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.
A taxpayer’s marginal tax rate is
the effective tax rate
the rate of taxation on any additional taxable income received
the overall rate paid on the total taxable income.
Which of the following is (are) advantages of irrevocable insurance trusts?
Provide estate liquidity.
Insurance proceeds are removed from the estate of the insured for tax purposes.
A business organized as which of the following pays federal income tax on its income?
sole proprietorship
When an individual remarries, the new spouse is
entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time.
AMT items that need to be added back
accelerated depreciation
certain costs with limited partnerships
local tax and interest on investments that do not generate income
tax exempt interest on private purpose municipal bonds
incentive stock options
gross estate vs adjusted
vs net
gross does not subtract expenses. The adjusted does
Net estate subtracts anything from giving to spouse and expenses
nav and pop for mutual funds
pop is the price it is bought at. NAV is price redeemed at
In an efficient market, bonds are priced so that
NPV=0
That means the bond’s yield to maturity is equal to the current market interest rates for similar bonds.
The CAPM gives us
The expected rate of return
The capital asset pricing model (CAPM) is an investment theory that serves as a model for
pricing securities based on their systematic risk
Used to determine the required rate of return
(MR-RFR)* beta + RFR
Derivatives are generally not appropriate for
highly risk-adverse investors due to the risk and sophistication involved.
Figure out required return and expected return
return of market-rfr *beta
Wrap fee accounts would tend to be most suitable for investors who follow
a tactical approach to investing
Time-weighted returns are used
to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals
Dollar-weighted return
more commonly used for evaluating investor performance.
The total return of a mutual fund is equal to
the return attained by reinvestment of all dividend and capital gains distributions plus unrealized gains or minus unrealized losses
The current yield on mutual funds is calculated by
dividing the annualized yield/pop
Any question asking about the risk-adjusted return is going to be referring to
the sharpe ratio
Actual return-rfr / sharpe ratio
An agent making a sales presentation to a client about a mutual fund’s historical returns is required to explain to the client the difference between the fund’s
current yield and total return.
When comparing to a benchmark, it is common to show various return computations. In connection with the solicitation of investment company shares, it is considered an unfair business practice to discuss returns without fully explaining the difference between current yield and total return.
calculate current yield of mutual fund
annual dividend/pop
The risk premium
It is the amount of total return in excess of the risk-free rate.
The current yield on a stock
dividing the annual dividend rate by the current market price.
You take the dividend payout % of the eps to get the dividend rate.
The dollar-weighted return measures
he internal rate of return (IRR) of a portfolio’s actual performance between 2 dates, including all cash inflow and outflows.
The Sharpe ratio measures a stock’s
excess return earned compared to its total risk.
The yield to maturity of a bond represents the bond’s
internal rate of return (IRR)
The yield to call computation involves knowing
g the amount of interest payments to be received, the length of time to the call, the current price, and the call price
The formula for the Sharpe ratio is
actual return minus the risk-free rate which is then divided by the standard deviation
Which of the following is generally believed to present a more accurate picture of a portfolio manager’s performance?
Time-weighted return
Dollar-weighted is a more reliable measure of how the investor fared
Capital market assumptions for all investors
money borrowed or loaned at rfr use the same info to generate efficient frontier Equal time horizons no transaction costs no inflation
the employer share of the contributions to a traditional 401(k) plan (or any other DC plan) may not exceed
25% of total payroll
What new benefit did the TCJA of 2017 bring to 529 plans effective 2018?
Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition
Under a defined benefit plan, the pension payable is related to
the length of service and usually expressed as a proportion of final earnings. The investment performance of the fund is therefore the least important factor to consider
if money is not used in 529 vs cordeval
529 goes back to doner. Goes to bene for cordeval
An employer wishing to offer a retirement plan with a goal of retaining key employees would probably start with
deferred compensation Because the deferred compensation plan allows the employer to discriminate
Because the income on the UTMAs is not considered to be earned income, the kiddie tax rules apply. Currently (2020 and beyond, but indexed), children younger than 19 having such income in excess of
$2,200 are subject to tax at the parent’s marginal tax rate. That means if the parent is in the 32% income tax bracket, the children’s excess income will be taxed at 32%.
cordeval limit
however, the total contribution to all accounts on behalf of a beneficiary in any year can’t exceed $2,000.
All qualified retirement plans must be established under
a trust agreement
which qualified retirement plans have tax benefits
401k and defined benefit
Employees of public schools can legally maintain
403b and 457
A payroll deduction plan is a retirement plan
not subject to eligibility, vesting, or funding standards as required by ERISA plans
A supplemental executive retirement plan (SERP) is
a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees.
You cannot use UTMA (or UGMA) money for
food, clothing, and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, and sports league registration, would be permitted.
Who is obligated for the payment of taxes in an UTMA account?
Although in practice the taxes are usually paid by the parent or legal guardian, they are the responsibility of the beneficial minor (child).
which account can the beneficiary not be changed,
UTMA account
529 and tax
Section 529 plan withdrawals are exempt from federal income tax if used for the right expenses. In almost all cases, if the plan is one operated by your state of residence, it will be exempt from your state’s income tax. But, if you elect to contribute to a plan operated by another state, more than likely, any withdrawals will be subject to your state’s income tax. Because the plans are state operated, the maximum contribution limits are set by each state.
Which child custodial account allows virtually any kind of asset including real estate
utma
ERISA rules only apply to
private sector
most commonly used to calculate the total benefit to be paid to the employee in the defined benefit pension plan.
The final salary at retirement and the length of service
A special rule under Section 529 allows
the donor to load front-end load contributions and avoid paying gift taxes. Five years’ worth may be used under this method (5 × $15,000 = $75,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $150,000.
Two of the primary ways in which nonqualified corporate retirement plans differ from qualified retirement plans is
that contributions are not exempt from current income tax and they need not comply with nondiscrimination rules that apply to qualified plans
A signed loan consent agreement permits a firm to
loan out a customer’s margin securities.
Which of the following securities can legally be purchased on margin?
Warrants, but not rights, may be purchased on margin if the underlying stock is traded on the NYSE or the Nasdaq. No insurance product is marginable and the same is true for options. LEAPS are option contracts that are marginable, but the question would have to specify that the contract was a LEAPS.
contains the authorization for the Fed to regulate the use of credit in the securities business.
The Securities Exchange Act of 1934
Any order ticket submitted by an agent for execution at a broker-dealer will always include
the account number, the agent’s name, and that of the BD.
The hypothecation agreement gives permission
to the broker-dealer to pledge a customer’s margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker-dealer on the basis of the loan value of these securities.
The Securities Exchange Act of 1934 gives the SEC the power to
make, amend, and rescind rules; issue cease and desist orders; administer oaths; conduct investigations; take evidence; and subpoena witnesses, books, and records. The Commission may seek temporary or permanent restraining orders (injunctions) from the courts, file civil suits, or refer evidence to the attorney general for criminal prosecution.
A margin account that contains both long and short stock positions is known as
mixed margin account
An agent of a broker-dealer has a client who lost her job but will be starting a new job in 3 weeks. The client is in need of $900 for the 3-week gap. Under what circumstances may the agent arrange a loan for the client?
Loans may be made to clients if the person making the loan is in the lending business. Broker-dealers are permitted to lend money against securities held in client’s portfolios. This is known as a margin loan. In fact, with $5,000 in the account, current regulations would permit a loan of up to $2,500.
another word for maintance call
house call
The Securities Exchange Act of 1934 defines a market maker is
a dealer who, with respect to a security, holds himself out as being willing to buy and sell that security for his own account on a regular or continuous basis
The current minimum maintenance levels set by the SROs
25% equity in a long margin account and 30% equity in a short margin account
An exchange specialist is
a dealer on the New York Stock Exchange who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks
Stock prices in the over-the-counter market are determined by
negotiation
Under the Securities Exchange Act of 1934, which body regulates the extension of credit for nonexempt securities?
federal reserve board
The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket?
Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order
Which of the following has the power to close a stock exchange for up to 90 days?
sec
Current yield for any security is always computed on the basis of the
current market value.
open end vs closed end in terms of nav in relation to ask
open ask can never be less than nav
closed end can have ether one be higher.
are hedge funds regulated or unregulated
unregulated
Rights and warrants values comparison
)
rights have intrinsic and time value while warrants only have time value.
