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Series 26 > Training Of Representatives > Flashcards

Training Of Representatives Flashcards

0
Q

Underwriter

A

Any person that has purchased securities from an issuer with the intent to resell them.

  • Does not include a brokerage firm that earns a commission on a retail sale to the public.
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1
Q

Describe an Issuer

A

Any person, corporation, government or municipal entity that issues or proposes to issue a security.

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2
Q

The Securities Act of 1933

A

Requires companies that intend to sell securities to the public, register those securities with the SEC by filing a registration statement and providing a prospectus.

  • 20 day cooling off period where no one my solicit sales.
  • Act requires full and fair disclosure of all relevant information through the prospectus.
  • Primary market transactions
  • SEC does not endorse the securities and a disclaimer must be included in the prospectus stating that.
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3
Q

Regulation D- Private Placements

A

Securities that are not sold to the public at large are exempt from registration.

  • They are sold to institutions or high net worth individuals (accredited investors).
  • General advertisements are allowed.
  • If the sale includes non accredited investors general advertisement is not allowed and there is a limit of 35 purchasers.
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4
Q

Accredited Investor

A
  • Any bank, broker dealer or insurance company.
  • Any employee with a benefit plan with $5 million +
  • Any director, executive officer or general partner of the issuer of the securities being sold.
  • Any corporation, partnership or trust with assets of $5 million + that was not formed for the purpose of making “this” investment.
  • Any natural person whose individual net worth or joint net worth with spouse exceeds $1 million at the time of his purchase (residence not included).
  • Any natural person with an income in excess of $200,000 over the last 2 years or $300,000 joint income with spouse.
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5
Q

Interested Person

A
  • Affiliated person of the company excluding certain board members.
  • Member of affiliate’s immediate family including, parent, spouse of parent, child, spouse of child, brother, sister, step and adoptive relationships.
  • Legal council in the last 2 fiscal years
  • B/D registered under SE Act of 1934 that has maintained a relationship with the company during the last 2 years.
  • Anyone that the SEC determines is an interested person.
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6
Q

Investment Company

A

Any issuer engaged primarily in the business of investing, reinvesting or trading securities. 40% of assets are invested in investment securities. (Government securities and securities of companies where the investment company owns a majority stake are not counted as part of the 40% calculation).

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7
Q

Principal Underwriter

A

Chief sales person responsible for the distribution of the investment company’s shares.

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8
Q

Redeemable Security

A

A security that is redeemed upon the holder’s request. No secondary market trading. Refers to mutual funds, variable annuities and unit investment trusts.

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9
Q

Sales Load

A

The difference between the price of a security to the public and the proceeds received from its sale. Minus Trustees fees, custodian fees, insurance premiums, admin expenses and fees for sales activities.

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10
Q

Separate Account

A

The account that holds the funds paid by variable annuity contract holders. The funds are kept separate from the insurer’s general account and invested into a portfolio that matches the contract holder objectives.

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11
Q

Face-Amount Certificate

A

A contract between an investor and an investment company where the investment company issues certificates obligating it to pay a stated amount of money on a specific future date. The investor pays into the certificate in periodic payments or a lump sum.

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12
Q

Unit Investment Trust

A

An investment company that sells redeemable shares in a professionally selected portfolio of securities. Has a board of trustees (no board of directors). May be fixed or non fixed. Proceeds are distributed when they are liquidated or mature. Must maintain secondary market units for liquidity.

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13
Q

Management Investment Companies

A

A company that actively manages securities to achieve a stated investment objective.

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14
Q

Closed End Investment Companies

A

Common stock offering. The company registers a fixed number of shares with the SEC and offers them to the public for a limited time. Funds are traded publicly. After the stock is distributed shares can be bought on the secondary market through exchange or over the counter trading. Supply and demand determine the price. Sold by prospectus in the initial public offering.
* May also issue bonds and preferred stock.

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15
Q

Open-End Investment Companies

A

Investment company that does not specify the exact number of shares it intends to issue. It can issue new shares continuously because it registers an open offering with the SEC. Continuous primary offering of shares…must always be sold by prospectus and can never be purchased on margin.

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16
Q

Value of a Mutual Fund Calculation

A

It is calculated once per business day as of market close.

1) Total Assets - Liabilities = Net Assets
2) Net Assets divided by Number of Shares = Net Asset Value
3) Net Asset Value + Sales Charge = Public Offering Price

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17
Q

Describe a Diversified Company

A

Any management company that has at least 75% of its total assets invested where no single investment has more than 5% of the investment company’s total assets and no single investment can have more than 10% of the voting rights. 75-5-10 test.

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18
Q

Minimum Registration Requirement for Investment Companies

A

1) Private Capitalization/seed money of at least $100,000 (90 days to meet this requirement)
2) Clearly defined investment objective. (Can only be changed by majority vote of the company’s outstanding shares..)
3) Agreement to provide semiannual reports to shareholders.

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19
Q

Registration Statements Required by SEC

A

The investment company must:

  • Identify the type of investment company it intends to be. (Opened or Closed)
  • Provide plans that the company might have to raise money by borrowing.
  • Intentions to concentrate investments in a single industry.
  • Plans to invest in real estate or commodities
  • Full name and address of each affiliated person.
  • Description of each officer and director’s business experience over the previous 5 years.
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20
Q

Margin

A

The practice of borrowing money through a brokerage firm to purchase securities. New shares can be purchased on margin after 30 days. Mutual funds cannot be purchased on margin but can be used a collateral after the 30 day holding period.

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21
Q

Statutory Prospectus

A
  • Must contain a risk/return summary with the funds objectives, strategies performance and fees.
  • Bar chart of the fund’s annual returns over the past 1, 5, and10 years or since inception. (Must show the best and worse quarters for the performance period shown).
  • Table comparing the fund’s performance to a securities market index.
  • A risk disclosure that explains the risks of the fund’s as a whole.

It’s filed with the SEC and must be distributed to an investor before or during the solicitation of a sale (unless summary prospectus is used). Can’t be more than 16 months old. Fair and full disclosure.

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22
Q

Required Information for Financial Reports sent to SEC

A

Financial Reports must be sent at least semiannually and 1 of the reports must be an annual audited report with the following.

1) Company balance sheet.
2) Values of all securities in the investment company’s portfolio (portfolio list)
3) Income Statement
4) $$$ paid to BOD, officers and investment adviser.
5) Dollar amount of securities purchased and sold during the period.
6) Discussion giving the basis for BOD’s approval of the investment adviser’s contract.

23
Q

Redemption of Mutual Fund Shares

A

Shares must be redeemed within 7 days of a written or telephone request.

  • Redemption requirement is suspended only when NYSE has an unscheduled closure, NYSE trading has been restricted, an emergency exist, SEC orders a suspension of redemptions.*
24
Q

Tax Qualified Plan

A

Corporate retirement plan that meets the requirements of the Employee Retirement Income Security Act. ERISA

  • Contributions are tax deductible
  • Plan approved by the IRS
  • Plan may not discriminate
  • Tax on accumulation is deferred
  • All withdrawals are taxed.
  • Plan is a trust
25
Q

Non-Qualified Plan

A
  • Contributions are not tax deductible
  • Plan does not need IRS approval
  • Plan may discriminate
  • Tax on accumulation may be deferred
  • Excess over the cost basis is taxed
  • Plan is not a trust.
  • 2 types payroll deduction plans and deferred compensation plans
26
Q

ERISA Guidelines

A
  • Employees must be covered within a reasonable time at least 3 years from the date of employment.
  • Funds must be segregated from corporate assets and prudently invested.
  • Employees contributions are fully vested, employer contributions are vested after a certain time frame.
  • Plan must be in writing.
27
Q

Deferred Compensation Plan

A

An contractual agreement between a firm and an employee where the employee agrees to defer compensation in favor of a payout at retirement.

  • The aggreement includes a list of conditions under which some or all of the benefits may be forfeited.
  • It also includes a statement that the employee is not entitled to any claim against the assets of the employer until retirement, death or disability.
  • may be voided if a business suffers a bankruptcy
28
Q

457 Plan

A
  • Deferred compensation plan used by government, state agencies and certain tax exempt organizations.
  • They can discriminate
  • Plans for tax-exempt organizations may only cover highly compensated employees
  • No 10% early withdrawal penalty
  • Distribution may be rolled into an IRA
  • The plan may be structured to provide coverage for independent contractors to the employer.
29
Q

Traditional IRA

A

Anyone with earned income under age 70.5 may open and contribute to an IRA

  • Contributions may or may not be tax deductible based on whether they have another plan at work.
  • Can Contribute up to 100% of earned income to an indexed max, which ever is less.
  • Rollovers can be done once every 12 months and must be completed in 60 days.
  • Withdrawals are taxable at ordinary income, 10% early withdrawal penalty if under 59.5
30
Q

Exceptions to Early W/D Penalty

A
  • Death or permanent disability of the individual
  • Payment of medical expense exceeding 7.5% of income.
  • First time home purchase $10,000 limit
  • Qualified higher education expenses
  • Section 72t
  • Payment of health insurance by an unemployed individual who has received unemployment payments for 12 consecutive weeks.
31
Q

Roth IRA

A
  • Contributions are never tax deductible
  • Contributions are prohibited for tax payers over certain income levels.
  • Distributions are tax free if they occur above age 59.5 and the account has been active for 5 years.
32
Q

Educational IRA

A

Also known as Corverdell Education Savings Account or ESA.

  • Allow after tax contributions (not tax deductible) of up to $2,000 per student up until their 18th birthday.
  • Distributions are tax deferred and tax free if used for education.
  • If not depleted by age 30 the funds must be distributed to the student subject to 10% penalty.
33
Q

Section 529 Plans

A
  • State sponsored, post secondary education savings plans/municipal fund securities.
  • Contributions are made with after tax dollars and maybe $250,000 or more depending on the state. Subject to gift tax.
  • Distributions are federal tax free if used for education, may be subject to state taxes.
  • Amount in a donor’s 529 plan is separate from their estate.
  • If the plan is not used for educational expenses or redesignated to another family member, it remains the property of the donor.
34
Q

Simplified Employee Pension Plans (SEP)

A
  • IRA for self employed persons and small businesses
  • Employees must be 21
  • Employed for 3 of the last 5 years
  • Received a minimum amount of compensation.
  • Employees are fully vested.
  • Employer contributions are tax deductible to the employer
  • Employee contributions are not taxable until withdrawn (pre-tax)
35
Q

Simple IRA

A

Also known as Savings Incentive Match Plan for Employees.
- For sole proprietors or small businesses that do not contribute to any other retirement plan.
-The businesses have no more that 100 employees who earned $5,000 during the last calendar year.
2 choices for employers
1. 2% non elective employer contribution where all employees receive 2% of their compensation
2. A dollar for dollar match up to 3% where only participating employees receive a 3% match from the employer.
- Employee contributions are subject to limits plus the employers contribution.

36
Q

Tax Sheltered Annuities

A

These plans are offered through public school systems (403b) and not for profit organizations (501c) and not for profit religious organizations

  • Contributions are excluded from a participant’s gross income (pre-tax)
  • Employee must be 21 and completed 1 year of service.
  • The plan must be in writing through a plan instrument, trust agreement or both.
  • The employer must send funds to the annuity contract
  • Employer makes no contributions
  • Employee makes not personal contributions, contributions must come directly from employee’s pay check deductions in percentages they indicate.
37
Q

KEOGH (HR-10) Plan

A
  • Intended for self employed individuals, small business or professional practices. Ex independent contractors, consultants, freelancers, pay self employment SS taxes.
  • Schedule C, Form 1040 or Form K1
  • Contributions must be based on income earned from services provided.
  • Business must show a profit
  • Plan must be non discriminatory
38
Q

KEOGH Employee Eligibility

A
  • Full time employees that received compensation for at least 1000 hours of work per year.
  • Tenured employees that completed 1 or more years of continuous employment
  • Adult employees are 21 or older
39
Q

Corporate Qualified Retirement Plans

A
  • Pensions and profit-sharing plans that are established under a trust agreement.
  • A trustee is appointed to act as a fiduciary for the plan and the beneficial owners.
40
Q

Defined Benefit Plan

A

A pension that provides a specified or formulated benefit at normal retirement age.

  • Benefit maybe a fixed dollar amount ($1,000 per month for life) or a percentage (70% of salary for life).
  • Contributions are based on an actuarial calculations based on age, years of service and salary.
  • Benefit is paid reguardless of investment performance therefore the plan sponsor assumes the investment risk. 401a
41
Q

Defined Contribution Plans

A
  • A written trust agreement determines the amount going into the plan
  • Account balance depends on the total contributed, interest, increase in value, and dividends earned.
  • Participant assumes the risk.
  • Examples profit-sharing plans, money-purchase plans, thrift plans, 401k and stock plans
42
Q

401K Plans

A
  • Plan participants direct their employer to contribute a percentage of their salary.
  • Contributions are made with pre-tax dollars through payroll deductions
  • Employer may match contributions
  • Can be established by any for-profit corporation.
43
Q

Roth 401K

A
  • Require after tax contributions
  • Tax free withdrawals over age 59.5 (no 5 year rule)
  • Employer can match but employer’s funds must go into a regular 401k taxable at ordinary income.
  • No income limits and RMD required
44
Q

Self Employed 401K Plan

A

Also know as individual k or solo 401k plans.

  • Allow sole proprietorships to set up and contribute to a 401k.
  • Business owner or spouse can set up the plan
  • No full time employees other than the business owner and spouse.
  • Loans may be taken from the account with no adverse tax consequences.
  • Highest possible contribution level
45
Q

Profit Sharing Plan

A
  • A percentage of the corporation’s profits are contributed to the plan.
  • Plan may have large contributions in high profit periods and no contributions in low profit periods.
  • Contributions are not mandatory.
46
Q

Whole Life Insurance

A
  • The policy has a level premium
  • Death benefit and cash value is guaranteed for the life of the policy
  • It is not considered a security, no license required.
  • Invested in General account
  • Insurer assumes the risk
47
Q

Variable Life Insurance

A
  • Fixed scheduled premium invested in both the General and Separate Account.
  • Cash Value not Guaranteed and determined monthly
  • Guaranteed minimum death benefit plus variable
  • Need Insurance and securities license
48
Q

Universal Variable Life

A
  • Has a flexible premium which can be adjusted.
  • Premiums are placed in the separate account.
  • Cash value not guaranteed
  • Death benefit has no guaranteed minimum and is adjustable.
  • Insurance and security license is required.
49
Q

Charges Deducted from Premium

A

Adminstration fee, sales load, state premium taxes.

50
Q

Charges Deducted from Separate Account

A

Mortality and expense risk fee and investment management fee.

51
Q

Loans on Insurance Products

A
  • A VLI allows loans based on the cash value.
  • The insured can only borrow a percentage of the cash value.
  • At least 75% of the cash value must be made available after the policy has been enforced for 3 years.
52
Q

Contract Exchange

A

A policy owner may exchange from a VLI to a WL contract. Cannot be exchanged within the first 24 months.

53
Q

Sales Charges for Life Insurance

A

They may not exceed 9% for fixed premium Variable Life Insurance. After 20 years, no further sale charges.

54
Q

Refund Provisions

A

Free look is 45 days from the excution of the policy or 10 days from the time the owner receives the policy (which ever is longer).

  • 2 year refund where cash value and fees greater that 30% in the first year and 10% in the second year are returned to the client.
  • After 2 years only the cash value is returned sales charges are kept.

Series 26 (5 decks)

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