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FINRA Series 6 > Unit 3: Securities & Tax Regulations > Flashcards

Unit 3: Securities & Tax Regulations Flashcards

1
Q

FINRA objectives

A
  • promotes investment banking
  • provides communication among members
  • enforces Conduct Rules
  • promotes self discipline
  • investigates grievances
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2
Q

Department of Enforcement

A

FINRA divides the US into districts to facilitate its operation

handles trade practice violations within each district

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3
Q

Terms of FINRA membership

A
  • comply with federal securities laws

- comply with FINRA rules and regulations - - - pay dues and other charges

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4
Q

FINRA 4 types of rules

A
  1. Conduct rules: fair and ethical trade practices
  2. Uniform Practice Code: guidelines for broker/dealers when doing business with other broker/dealers
  3. Code of Procedure: how FINRA handles member violations of Conduce Rules
  4. Code of Arbitration Procedure: resolution of disagreements and claims between members and the public
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5
Q

Form U-4

A

to register an associated person with FINRA

name, address, aliases, 5 year residence history, 10-year employment history, and info of any charges, arrests or convictions

*info on marital status and edu background is not required

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6
Q

Fingerprint Rule 17f-2

A

requires that every person who deals with securities certificates, records, or money must have their fingerprints take and filed

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7
Q

Exceptions of registering with FINRA as associated persons or having to pass a qualification exam

A
  1. Foreign Associates: exempt from having to pass a qualification exam
  2. Clerical Personnel and Corporate Officers: do not need to register with FINRA
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8
Q

Form U-5

A

a registered person who leaves one member firm to join another must terminate registration at the first firm on a U-5 firm and reapply for registration with the new member firm on a U-4 form

must file within 30 days of termination date or results in a late filing fee

new firm must get a copy of new employing member firm from the CRD or new employee

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9
Q

Continuing Commisisons

A

a registered representative who leaves a member firm may continue to receive commissions on business placed while employed

only for old business

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10
Q

Yearly information member firms are required to send to their customers

A
  • statement as to the availability of an investor brochure that includes info describing the Public Disclosure Program
  • FINRA Public Disclosure Program Hotline number
  • FINRA website address
  • BrokerCheck contact info
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11
Q

BrokerCheck

A
  • free tool to help investors research current and former FINRA-registered brokers, broker firms, investment adviser firms and representatives
  • obtain online background reports
  • link to additional resources such as educational tools for investors
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12
Q

Central Registration Depository (CRD)

A
  • securities industry online registration and licensing database
  • U-4 and U-5 forms are filed with FINRA’s CRD electronically
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13
Q

Tape Recording of Conversations

A
  • must be maintained for 3 years
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14
Q

Registered Representatives

A
  • assistant officer (to broker/dealers) who does not function as a principal
  • individuals who supervise, solicit, or conduct business in securities
  • individuals who train people to supervise, solicit, or conduct business in securities
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15
Q

Series 6 allows you to sell:

A
  1. open-end investment companies
  2. new issues (primary offering) of closed-end investment companies
  3. variable products

may not transact business in REITs, hedge funds, or exchange-traded funds

-Registered Representatives

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16
Q

Series 7 allows you to sell:

A

almost all types of securities products

may not sell commodities futures unless also have a Series 3 license

  • Registered Representatives
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17
Q

Series 65 allows you to sell:

A

investment adviser representative.. entitles a candidate to sell securities and give investment advice in states that require Series 65 registration

covers Blue-Sky laws

  • Registered Representatives
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18
Q

Registered Principals

A

anyone who manages, trains or supervises any part of a member’s investment banking or securities business

must review every customer order, all customer correspondence and the handling of all customer complaints
(complaint records must be kept for 4 years)

must employ at least 2 registered principals unless it is a sole proprietorship

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19
Q

Series 26 allows you to sell:

A

allows a principal to supervise the solicitation, purchase, or sale of mutual funds and variable annuities

  • Series 6 is prerequisite
  • Registered Principals
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20
Q

Series 24 allows you to sell:

A

allows a principal to supervise the sale, solicitation, and purchase of any security that a Series 7 registered representative is authorized to trade

  • Series 7 is prerequisite
  • Registered Principals
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21
Q

Statutory Disqualification of FINRA membership

A
  • disciplinary sanctions by the SEC, another SRO, a foreign financial regulator, or a foreign equivalent of an SRO
  • felony conviction within 10 years
  • not necessarily absolute
  • may be associated with a member
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22
Q

Two types of Continuing Education

A
  1. Regulatory Element:
    - must be completed within 120 days of a person’s second registration anniversary and every 3 years thereafter
    - fail to complete with have registrations become inactive and may not conduct business activities
    - inactive for 2 years = termination
    - military = 27 months until termination
  2. Firm Element
    - for any registered representative who has direct contract with customers in the sale of securities
    - annual written training program
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23
Q

Investment Bank Functions

A
  • help issuers raise money through the sale of securities
  • do not loan money
  • also called underwriters
  • must be FINRA members
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24
Q

Issuer

A

sells securities to raise money

  • file S-1 Registration Statement with SEC
  • blue-skying
  • negotiate securities price and amount of the spread with the underwriter
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25
Q

Underwriter

A

assisters with the registration and distribution of the new security and may advise the corporate issuer on the best way to raise capital

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26
Q

Spread

A

underwriting compensation

  • manager’s fee (smallest part of spread)
  • underwriting fee
  • selling concession (largest part of spread)
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27
Q

Primary Offering

A

IPO - comprised of companies that are raising capital from the public for the first time
Additional issues
- proceeds go to the issuing corp.

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28
Q

Secondary Offering and Split Offering

A

one or more major stockholders sells control stock to the public for the first time
- proceeds go to the stockholder

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29
Q

Firm Commitment Underwriting Agreement

A
  • underwriting agreement
  • most common
  • underwriters commit to buy the securities from the issuer and resell them to the public
  • underwriters assume the financial risk
  1. negotiated underwriting contract: used in corporate issues
  2. competitive bid agreement: standard for new issue offering in the municipal securities market
  3. standby underwriting: standby underwriter unconditionally agrees to buy all shares that remain unsold in an additional issue
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30
Q

Best Efforts Underwriting Agreement

A
  • underwriter acts as agent for the issuing corp.
  • deal is contingent on the underwriter’s ability to sell shares to the public
  • underwriter is acting in an agency capacity with no financial risk
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31
Q

Securities Act of 1933

A

for primary issues of securities

  • regulations enacted in response to the market crash of 1929
  • issuers of nonexempt securities must file registration statements with SEC
  • prospectuses must be provided to all purchasers
  • fraudulent activity is prohibited
  • criminal penalties are assessed for fraud
  • exempt = not required to register with SEC
  • paper act
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32
Q

Blue-Sky Laws (State securities laws)

A
  • require state registration of securities, broker/dealers, and registered representatives
  • Qualification
  • Coordination
  • Notice Filing
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33
Q

SEC registration process

A
  1. Issuer files registration statement with SEC
  2. 20-day cooling-off period when SEC reviews statement and can issue stop order if statement does not contain all the required info
  3. Effective date
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34
Q

Red Herring

A
  • preliminary prospectus
  • used to gauge investor reactions and gather indications of interest
  • must carry a legend printed in red

** final offering price and underwriting spread are not included

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35
Q

SEC Rule 134

A

states that an offering may be promoted without a prospectus if the communication includes:

  • factual info about legal identity and business location of co.
  • brief indication of general type of business of co.
  • info abt. securities being offered, title, amount being offered, ratings, price, maturity, interest, and yield
  • a legend unless accompanied or preceded by a prospectus or indicates where a prospectus may be obtained
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36
Q

Exempt Issuers and Securities from Securities Act of 1933

A
  • US Gov’t
  • US municipalities and territories
  • nonprofit religious, educational, and charitable organizations
  • Commercial paper - maturity less than 270 days
  • Bankers’ acceptances - maturity less than 270 days
  • Securities acquired in private placements - restricted stock
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37
Q

Private Placements

A
  • Regulation D under Securities Act of 1933 allows the offer and sale of securities to accredited investors without registration
  • corp. cannot use general solicitation or advertising to market and # of non-accredited investors is 35
  • corp can advertise as long as they sell exclusively to accredited investors
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38
Q

Accredited Investors

A
  1. an insider at the issuer
  2. a professional, sophisticated, or institutional investor
  3. an individual who meets one of 2 criteria: $1 million net worth or at least $200,000 ($300,000 if married couple) in adjusted gross income for the last two years
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39
Q

FINRA Rule 5130

A

anyone with a tie to the securities industry or is financially dependent on a person in the securities industry cannot purchase an IPO of common stock on the first day of trading

40
Q

Secondary Market

A

take place in either:
1. exchanges: where prices are established by auction
or
2. OTC market: where prices are established by negotiation

41
Q

Third Market

A

exchange-listed securities being traded in the OTC market

  • when a security whose principal trading market is an exchange is traded off the floor of that exchange

negotiated

42
Q

Fourth Market

A

market for institutional investors in which large blocks of stock, both listed and unlisted, trade in privately negotiated transactions unassisted by broker/dealers

Electronic Communications Networks

negotiated

43
Q

Position Holding

A

you are either long the security (you own it) or you are short the security (you borrowed it to sell, hoping for a price decline)

44
Q

Trade Confirmations

A

sent to customer no later than the settlement date of a transaction

45
Q

Regular Way Settlement

A

3rd business day following the trade date (T + 3)

  • US gov’t note and bond transactions settle regular way the next business day
46
Q

Cash Settlement

A

same day settlement

if trade occurs before 2pm ET, settlement is due before 2:30

if trade occurs after 2pm ET, settlement is due within 30 minutes

47
Q

Regulation T Payment

A

specifies the date customers are required to pay for purchase transactions

payment is due 2 business days after settlement

Settlement + 2

48
Q

Payment Extensions

A
  • if buyer cannot pay for trade within Regulation T, broker/dealer may request an extension from its designated examining authority (DEA) before the deadline
  • if cannot pay by end of extension, broker/dealer sells the securities in a close-out transaction and account is frozen for 90 days
  • broker/dealer has option of ignoring amounts that do not exceed $1000
49
Q

Declaration Date

A

once co. BOD approves a dividend payment, SEC requires notification at least 10 business days before the record date to establish the ex-date

50
Q

Ex-Date for Corporate Securities

A

Ex-Dividend Date

  • for corporate securities and closed-end funds
  • two business days before the dividend record date
  • customer must purchase the stock three business days before the record date to qualify for the dividend
51
Q

Order of Corporate Dividend Distributions

A

DERP

  1. Declaration
  2. Ex-date determined
  3. Record date which dividend is paid to owners before record date
  4. Payment of dividend to stockholders whose names appeared on the books as of the record date (2-3 weeks after record date)
52
Q

Securities Exchange Act of 1934

A

regulates secondary trading

  • regulates all persons involved in trading securities on behalf of customers and the markets
  • registration of broker/dealers
  • creation of SEC
53
Q

The Maloney Act

A

gave SEC authority to delegate authority to the existing exchanges and to create other SROs to regulate the securities industry as needed

54
Q

Regulation U

A

regulates the extension of credit to customers for the purpose of purchasing securities by banks and other lenders

55
Q

Margin Account

A

investor may use some cash and some credit to purchase securities

margin is the minimum amount of cash or other marginal securities a customer must deposit to buy securities

mutual funds and option contracts can’t be purchased on margin

56
Q

Investment Advisers Act of 1940

A

passed to protect the public against fraud and misrepresentation by investment advisers

required to register with SEC as investment adviser if meet 3 criteria:

  1. gives advice on the purchase and sales of securities for investment purposes
  2. provides investment advice as a regular part of business
  3. is compensated specifically for investment advice

if managing less than $100 million, register w the state
if managing more than $110 million, register federally (if in between, you pick!)

does not include:

  • banks
  • newspapers
  • broker/dealers
  • persons who advice solely on US gov’t securities
  • lawyers, accountants, teachers, engineers (LATE)
57
Q

Investment Adviser Representative

A

associated persons of investment advisers

partner, officer, director of an investment advisor

58
Q

Income Tax

A

salaries, bonuses, commissions, gratuities, dividends, and interest

59
Q

Net invest income

A

Dividends + Interest - Expenses of the fund

pay taxes on this

** DIE, no capital gains

60
Q

Subchapter M - Conduit Theory

A

*** regulated investment companies RIC

triple taxation of investment income may be avoided if qualified as Subchapter M under IRC

a fund must distribute at least 90% of its net investment income to shareholders to qualify

pay taxes only on remaining percentage of earnings

if a fund distributes 89% it must pay taxes on 100% of net investment income

61
Q

Capital Gains Distributions

A

derived form realized gains, actual profit made
- distributed in cash or reinvested

** taxed based on length of time the fund held the securities and investor’s tax bracket

long-term capital gain: holding period of more than one year, taxed as a capital gain, which is generally lower than ordinary income tax rate for an investor (qualified)

short-term capital gain: holding period of one year or less, taxed at dividend distribution, as ordinary income tax rates for an investor (unqualified)

62
Q

Qualified Dividends

A

taxed at a lower rate

63
Q

Unqualified Dividends

A

taxed at an ordinary rate

64
Q

Form 1099-DIV

A
  • sent to shareholders after the close of the year

- details tax info related to dividend distributions for the year

65
Q

Current Yield Requirements

A

Annual dividend paid/current POP
based on dividend distributions for the preceding 12 months

  • general direction of stock market for the period
  • fund’s NAV at beginning and end of period
  • percentage change in the fund’s price during the period
66
Q

Ex-Date for Mutual Funds

A
  • determined by BOD

- day after the record date

67
Q

Calculation for taxable gains/losses

A

total value of fund shares - cost base (include reinvested distributions because they have been taxed already)

$3,000 of net capital loss may be used as a deduction against ordinary income each tax year

68
Q

3 Accounting Methods

A
  1. First in, First Out (FIFO): cost of shares held the longest is used to calc gain or loss, adverse tax consequences ** IRS assigns this method unless investor chooses diff method
  2. Share Identification: investor keeps tract of the cost of each share purchased and uses this info when deciding which shares to liquidate
  3. Average Cost Basis: shareholder calc av. basis by dividing the total cost of all shares owned by the total number of shares
69
Q

Withholding Tax

A

when an investor neglects to include their tax ID number (SS) the fund must withhold a designated % of the distributions as withholding tax

70
Q

Wash Sales

A

sale at a loss and the repurchase within 30 days before or after

61 days of coverage

71
Q

Cost Basis

A

what was paid to buy the mutual fund share plus reinvested dividends and capital gains distributions

equal to premiums paid on an insurance policy

72
Q

Taxes on Annuity income

A
  • ordinary income tax on earning in excess of cost basis (cost basis not taxed)
  • random withdrawals are taxed using LIFO
  • accumulation and earnings are distributed first
  • plus a 10% penalty for withdrawals and surrender if the annuitant is not yet 59.5 (no 10% charge on death)
  • taxes in first 7-10 years
  • surrender charge: reduced the longer policy is owned
  • no capital gains tax
  • amount withdrawn for a policy loan is not taxable to the policyholder
  • the amount of each month’s annuity payment is considered by IRS as a return of cost basis is determined by the COST BASIS/LIFE EXPECTANCY
73
Q

Negatives of 1035 Exchange

A
  • possible surrender charges on the old policy
  • a new surrender charge period on the new policy
  • possible loss of a higher death benefit that existed on the old policy
74
Q

1035 Exchange

A

life to life (can be made between fixed and variable policies)
annuity to annuity
life to annuity

NOT annuity to life

75
Q

Qualified Retirement Plans

A
  • 401K plan
  • pension and profit-sharing plan
  • defined benefit plan
76
Q

Nonqualified Retirement Plans

A
  • deferred compensation plan

- payroll deduction programs

77
Q

Deferred Compensation Plan

A
  • nonqualified

- employee defers receipt of current income in favor of payout at retirement

78
Q

IRA

A

Individual Retirement accounts

  • anyone who has earned income from work and is under the age of 70.5 can make an annual contribution (Jan 1 to April 15) up to indexed max $5,500 or 100% of earned income whichever is less
  • if excess is contributed 6% tax
  • distributions starting at age 59.5

-taxpayers over age 50 can contribute an additional amount known as catch-up contribution $1,000

79
Q

Investments not permitted for funding IRAs

A
  • collectibles
  • life insurance contracts
  • municipal bonds
  • margin account trading
  • short sales of stock
  • uncovered call options
80
Q

Investments appropriate for IRAs

A
  • stocks and bonds
  • mutual funds (other than municipal bonds)
  • UITs
  • government securities
  • US government-issued gold and silver coins
81
Q

Spousal Beneficiary of IRA

A
  • spousal rollover.. amt of inheritance is rolled over into the spouse’s own IRA within 60 days and not more than once per year, 10% penalty if withdrawal under 59.5
  • or continue to own IRA as beneficiary.. no 10% penalty for withdrawals before age 59.5, but need to take distributions when deceased would have taken them
82
Q

Roth IRA

A
  • same contribution amounts as IRA
  • contributions are nondeductible (after-tax)
  • contributions can be made over the age of 70.5
  • withdrawals at any age
  • if initial contributions are less than 5 years from withdrawal subject to ordinary income taxes plus 10% penalty
  • 10% penalty if owner is under 59.5 and withdraws
83
Q

Coverdell Education Savings Accounts (CESAs)

A

allow after-tax contributions of up to $2,000 per student per year for children until their 18th birthday

tax free distributions as long as funds are distributed prior to the beneficiary’s 30th birthday and used for qualified education expenses

84
Q

Section 529 Plans

A
  • state sponsored, post secondary education plans, municipal fund securities
  • funded with after-tax dollars and earnings grow tax-deferred
  • no age limitations for contributions or distributions
  • contributions limited to indexed max. amt. $14,000 per year per donor
  1. prepaid tuition plans
  2. college saving plans
85
Q

Money-Purchase Plans

A
  • qualified defined contribution plans
  • any employer that meets funding requirements may offer the plan
  • employer contributes a specified fraction of employees compensation up to an indexed max
86
Q

Simplified Employee Pension Plan (SEP)

A
  • qualified plan that offers ease of administration to small-business owners
  • employer makes contributions on employees behalf up to 25% of salary, up to indexed max.

employees eligible:

  • 21 +
  • worked for employer for 3 years
  • received min. level of compensation in the current year
87
Q

Savings Incentive Match Plans for Employees (SIMPLEs)

A
  • retirement plans for businesses with no more than 100 employees that have no other retirement plan in place
88
Q

Self-Employed Plans

A
  • Keogh plans
  • qualified plans for self-employed persons who have any kind of self-employed income
  • nonincorporated
  • contribute 25% of net earnings up to indexed max.
  • dividends, interest, and capital gains are tax deferred
  • lumpsum distributions are allowed

employees eligible:

  • 21 +
  • have worked at least 1,000 hours in the year
  • have completed one or more years of continuous employment
89
Q

Self-Employed 401(k) Plan

A

flexibility, high contribution limits, penalty-free loans

90
Q

403 (b) Plans

A

form of tax-sheltered annuity available to employees of public educational institutions, private schools, tax-exempt organizations and religious organizations

  • eligible if 21 + and have completed one year of service
91
Q

Corporate Retirement Plans

A
  1. defined benefit (high-income employees near retirement receive larger contributions)
  2. defined contribution (money-purchase plans, profit-sharing plans, 401k, roth 401k)
92
Q

Required Distribution Date

A

by April 1 of either

  1. year after age 70.5
  2. year after retirement from employment with the employer maintaining the plan
93
Q

Employee Retirement Income Security Act of 1974 (ERISA)

A
  • applies only to private secor plans (corporate) only
  • established to prevent abuse and misuse of pension funds
  • eligible if over 21, one year of full-time service (1,000 hours)
  • nondiscrimination
  • vesting
94
Q

Securities Investor Protection Corporation (SIPC)

A

protects customers from risk of broker/dealer bankruptcy only

  • covered to max. of $500,000, with cash claims not to exceed $250,000
  • firms required to purchase blanket fidelity bond of min. $25,000 to protect employee loss or theft of customer securities
  • value of customer claims based on market value on the date a federal court is petitioned to appoint a trustee
95
Q

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)

A
  • penalties for insider trading and securities fraud
  • tippers/tippees of nonpublic information
  • penalties up to greater of $1 million or 300% of profits made or losses avoided & possible 20 years in prison
96
Q

Regulation S-P

A
  • Gramm Leach-Bliley Act
  • requires firms to maintain adequate safeguards to protect customer information from unauthorized access or use
  • may not disclose nonpublic personal info to a nonaffiliated third party unless proper disclosures are made
  • simple way to opt out
  • disclosure of privacy policy sent annually

FINRA Series 6 (6 decks)

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