Unit 3: Securities & Tax Regulations Flashcards

Question

Underwriter

Answer 1

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

Answer 2

underwriting compensation - manager's fee (smallest part of spread) - underwriting fee - selling concession (largest part of spread)

Answer 3

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

Answer 4

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

Answer 5

- 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

Answer 6

- 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

Answer 7

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

Answer 8

- require state registration of securities, broker/dealers, and registered representatives - Qualification - Coordination - Notice Filing

Answer 9

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

Answer 10

- 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

Answer 11

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

Answer 12

- 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

Answer 13

- 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

Answer 14

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

Answer 15

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

Answer 16

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

Answer 17

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

Answer 18

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

Answer 19

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)

Answer 20

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

Answer 21

3rd business day following the trade date (T + 3) - US gov't note and bond transactions settle regular way the next business day

Answer 22

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

Answer 23

specifies the date customers are required to pay for purchase transactions payment is due 2 business days after settlement Settlement + 2

Answer 24

- 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

Answer 25

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

Answer 26

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

Answer 27

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)

Answer 28

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

Answer 29

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

Answer 30

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

Answer 31

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

Answer 32

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)

Answer 33

associated persons of investment advisers partner, officer, director of an investment advisor

Answer 34

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

Answer 35

Dividends + Interest - Expenses of the fund pay taxes on this ** DIE, no capital gains

Answer 36

*** 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

Answer 37

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)

Answer 38

taxed at a lower rate

Answer 39

taxed at an ordinary rate

Answer 40

- sent to shareholders after the close of the year | - details tax info related to dividend distributions for the year

Answer 41

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

Answer 42

- determined by BOD | - day after the record date

Answer 43

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

Answer 44

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

Answer 45

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

Answer 46

sale at a loss and the repurchase within 30 days before or after 61 days of coverage

Answer 47

what was paid to buy the mutual fund share plus reinvested dividends and capital gains distributions equal to premiums paid on an insurance policy

Answer 48

- 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

Answer 49

- 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

Answer 50

life to life (can be made between fixed and variable policies) annuity to annuity life to annuity NOT annuity to life

Answer 51

- 401K plan - pension and profit-sharing plan - defined benefit plan

Answer 52

- deferred compensation plan | - payroll deduction programs

Answer 53

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

Answer 54

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

Answer 55

- collectibles - life insurance contracts - municipal bonds - margin account trading - short sales of stock - uncovered call options

Answer 56

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

Answer 57

- 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

Answer 58

- 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

Answer 59

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

Answer 60

- 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

Answer 61

- 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

Answer 62

- 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

Answer 63

- retirement plans for businesses with no more than 100 employees that have no other retirement plan in place

Answer 64

- 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

Answer 65

flexibility, high contribution limits, penalty-free loans

Answer 66

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

Answer 67

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

Answer 68

by April 1 of either 1. year after age 70.5 2. year after retirement from employment with the employer maintaining the plan

Answer 69

- 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

Answer 70

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

Answer 71

- 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

Answer 72

- 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