PERSON: Definiton of a Person
Persons," as defined under the Uniform Securities Act as anyone who has legal authority to issue or trade securities
INCLUDING
+Joint Stock Companies
+Partnerships
+Estates
+Unincorporated Businesses.
+Corporations
+Business Trusts
+Trusts
+Associations
ADVISOR: An advisory firm can be formed as
ADVISORY FIRMS CAN BE FORMED AS ANY LEGAL OPERATING ENTITIES including
+Corporation
+Partnership
+Sole proprietorship
+Association of owners
AN ADVISORY FIRM CANNOT BE FORMED AS A
+Broker-Dealer (each must be a separate legal entity)
BROKER-DEALER: A broker-dealer can be formed as a
BROKER DEALER CAN BE FORMED AS A
+Corporation
+Partnership
+Sole proprietorship
+Association of owners
A BROKER DEALER CANNOT BE FORMED AS A
+ Investment Advisor (each must be a separate legal entity)
ISSUER: Definition of an Issuer
An "issuer" is any person who ISSUES or PROPOSES to issue a security.
ISSUER: Trusts
Trusts: Structure is such that there is no Board of Directors (collateral trust certificates, voting trust certificates, certificates of deposit for a security and unit investment trusts)
ISSUER for Trusts is defined as:
The person performing the function
ISSUER: Equipment Trusts
Issuer for Equipment Trusts is defined as:
The 'person' to whom the equipment is to be leased or conditionally sold- which is the corporation.
ISSUER: Fractional Interest in Oil and Gas Programs
Issuer for Oil and Gas Program Fractional Interests:
Oil and gas program fractional interests have no defined "issuer." (since states have been concerned for many years about sales of highly risky oil and gas exploration deals to unsophisticated investors
ISSUER TRANSACTION: Definiton
When an "issuer" sells or redeems securities (either on the sell-side or the buy-side of the transaction), this is termed an "issuer transaction" since the sale of the securities is for the benefit of the issuer (since the issuer receives the proceeds fro
INSTITUTIONAL BUYER: Definiton
Institutional Buyers are:
+Banks
+Savings and Loans
+Trust Companies
+Insurance Companies
+Investment Companies
+Pension and Profit Sharing Plans
+Other Financial Institutions
+Anyone so defined by the State Administrator by rule or order
THEY ARE NOT DEF
BROKER-DEALER: Definition
A "BROKER-DEALER" is defined as a person who:
+Engages in the business of effecting securities transactions for the account of others
+Engages in the business of trading for his own account (known as "proprietary trading" - this is a dealer or market make
BROKER: Definition
When a firm effects trades for the ACCOUNT OF OTHERS, it is a MIDDLEMAN in the transaction and is acting in an "AGENCY" capacity. When a firm effects transactions in an "agency" capacity, this is the same as acting as a BROKER.
DEALER: Definition
When a firm trades out of its OWN ACCOUNT, it is acting in a "PRINCIPAL" capacity in the transaction. When acting in a principal capacity, the firm is considered to be a "DEALER."
If an agent effects securities trades that the broker-dealer DOES NOT know
DEFINITION: Statutory Broker-Dealer
+M&A
A firm that assists in mergers and acquisitions is considered to be effecting a securities transaction. In a merger or acquisition, all of the equity securities of one company are being "purchased" by another company.
+Finder (ClOSE THE DEAL -> FEE -
Broker Dealer EXCLUSIONS
EXCLUSIONS:
NOT IN YOUR STATE (If it does have an office in that state but does not deal with the public it must still register)
NOT DEALING WITH THE PUBLIC
Exclusions apply only if the broker dealer does not have a physical place of business in your stat
Broker Dealer EXCEPTIONS
Broker-Dealers are EXEMPTED from registration if:
+They have no place of business in the State
+Have no more than a "few" clients in that State (most States limit this to 3) within a 12 month period ("de minimis" exemption).
DEFINITION: Agent: Sales Representative
AGENTS are defined as individuals who represent EITHER a BROKER-DEALER or ISSUER (or BOTH) in effecting securities transactions. It makes no difference if the securities that this person trades or sells are exempt or non-exempt.
+Individuals who represent
Registration EXCEMPTION
EXEMPT SECURITIES exempt a BROKER-DEALER from the Act's registration requirements.
Definition of an Agent EXCLUDES
+Sales of specified exempt securities such as Treasury, Agency and Municipal debt (but not all exempt securities);
+Exempt transactions, such as the sale of securities only to institutions or underwriters or private placements as defined under State law;
EXCLUSIONS: Agents of Issuers
EXCLUSIONS ONLY APPLY TO AGENTS OF ISSUERS
Agents of BROKER-DEALERS must always register
These exclusions include:
+Exempt Securities
+Specified exempt transactions (sophisticated investors, financial institutions and underwriters)
+
DEFINITION: Investment Adviser
An individual who:
+Engages in the business of advising others, directly or indirectly (such as through a newsletter), as to the value of securities or the advisability of investing in, buying, or selling securities (securities DO NOT include endowment po
DEFINITION: Federal Covered Adviser
+Investment adviser that manages $100,000,000 or more of assets (Advisers that have between $100,000,000 and $110,000,000 of assets under management have the choice of registering either at the State or Federal level. Thus, SEC registration as an adviser
Federal Supremacy Laws
Because of federal supremacy, the State Administrator cannot require anything of a federal covered adviser that is already covered under the Investment Advisers Act of 1940.
The State Administrator can, however, audit any adviser, federal covered or not,
Blue Sky Laws require registration of
+Broker-dealers
+Agents
+Investment advisers
+Investment adviser representatives
+New Issues
Unless an exemption is available
Unregistered Agents
Unregistered agents cannot trade securities or solicit orders for securities. It makes NO difference if the trading is for a customer account or the firm's own account; and it makes no difference if the securities are exempt or non-exempt.
Individuals tha
REGISTRATION is required when
+The broker-dealer has an office in the state
+The agent is physically located in the state
+Offers of securities are made in the state by the BD
REGISTRATION is NOT required when
+A BD is registered in his or her home State, and is contacting an existing customer in another State where the customer is vacationing and in which the agent is not registered
+BD is NOT physically located in the State and is only dealing with institutio
Can an agent be affiliated with more than one broker-dealer at the same time?
As a general rule, an agent cannot be affiliated with more than 1 broker-dealer at the same time (through a few States do permit so-called "dual registration" where the State Administrator allows the "dual registration"). However, it is permitted for an a
Registration: Do both a BD and an Agent need to be registered to direct business into a state?
To do business in a given state, both the broker-dealer and agent must be registered in that state, unless an exemption is available.
Exclusions include:
Any broker-dealer with no office in the State that deals exclusively with:
+Issuers of the securities
REGISTRATION: EXCLUDED from State Registration: Investment Adviser i.e. FEDERAL COVERED ADVISER
+Advisers that manage $100,000,000 or more of assets
+Advisers that only render advice to investment companies
+Advisers that are not regulated at the State level must register with the SEC only
+A person who gives investment advice relating solely to U.S
REGISTRATION: EXEMPT from state registration: Investment Adviser
Investment advisers that are exempt from registration include advisers with NO place of business in the State who DEAL SOLELY with
+Other advisers
+Broker-dealers
+Insurance companies
+Investment companies
+Financial and institutional investors
+Governmen
DEFINITION: Investment Adviser Representative
+The SEC only requires the registration of the adviser - not its representatives - at the Federal level. Even though State registration is not required for federal covered advisers, each State can (and does) require the registration of any investment advi
DEFINITION: Investment Adviser Solicitor
+No requirement for the solicitor to be registered with the SEC
+State REQUIRES registration of that solicitor - whether the solicitor is representing a Federal Covered Adviser or a State-registered adviser.
-If the solicitor is an employee of the adviser
For registration in a State as a broker-dealer or agent, the following must be filed
+Consent to Service of Process
+Registration Application
+Fingerprints (if there was no Federal CRD filing, most States require fingerprints)
+Application Fee
REGISTRATION APPLICATION: BD or Investment Adviser
+Form of business organization (e.g. corporation, partnership, sole proprietorship)
+Place of business
+Proposed method of doing business
+Qualifications and business history of applicant (including that of any partners, officers, or directors of broker-d
DEFINITION: Consent to Service of Process
The form giving consent to service of process appoints the State Administrator to be the "attorney" for the registrant during registration of a Broker-Dealer.
Is filed only once; no renewal applications
Once this consent is completed, the State Administra
Form ADV
+Investment advisers must update their Form ADV (State registration form) annually within 90 DAYS of fiscal year end, to reflect current and accurate information.
+The Form ADV is stored in the IARD (Investment Adviser Registration Depository) system. It
BD: Potential Registration Requirements
+The Form BD is the broker-dealer application that is used for both Federal and State registration.
+A consent to service of process appoints the State Administrator as attorney for the broker-dealer so that if anyone wants to sue the firm, they can serve
Net Capital
Net Capital is not an additive requirement - it is based on the broker-dealer's principal State where it operates.
+If an investment adviser's Net Worth (actually it is Net Capital, but the rule calls it Net Worth) falls below the minimum requirement set
Surety Bond: Investment Adviser
+Under State law, if an investment adviser will not take custody of a client's funds, there is no surety bond requirement.
+However, if the adviser will take custody, it must have a minimum net worth or minimum surety bond coverage of $35,000.
The Adminis
Surety Bond: BD
To register as a broker-dealer, a surety bond must be posted (typically $10,000); and if the broker-dealer takes custody, a higher bond must be posted (typically $35,000).
The surety bond can take the form of cash, securities or an insurance policy.
+The
Administrator is empowered to
+Conduct an inspection of an investment adviser that opens an office in that State AT ANY TIME.
It makes no difference whether or not the SEC has recently audited that firm.
+Inspect any office of the investment adviser in that State, even if the investme
To register as an agent of a broker-dealer, the Administrator can require
+Posting a surety bond
+Passing a qualification examination ( (may be written or oral)
+Submitting fingerprints and undergoing a background check
+NO NET CAPITAL REQUIREMENT
+Form filed is a U4. CRD and IARD send out renewal statements for each registered
To register as an investment adviser representative, the Administrator can require
+A qualification exam (may be written or oral)
+fingerprint submission.
+There is NO surety bond
+Form Filed is a u4 for registration. CRD and IARD send out renewal statements for each registered person in mid-November, and these must be filed, amended (i
U6
The U-6 Form is filed by regulators when they take disciplinary or legal action against a broker-dealer, agent, investment adviser or investment adviser representative.
This information goes into the CRD (Central Registration Depository) or IARD (Investme
Examples of advertising
+NON-password protected websites
Advertising is a communication to the general public and includes TV, radio, non-password protected websites, billboards, newspapers, magazines, etc.
The Administrator can require filing of advertising and sales literature
Examples of Sales Literature
+PASSWORD PROTECTED website
Sales literature is a communication to a specific audience and includes market letters, research reports, form letters and pamphlets that are broadly disseminated, password-protected websites and scripted speeches about investi
Examples of Correspondence
+Letter to a client
+ e-mails
+Instant messages
Private Placement is defined as
NO MORE than 10 investors
If a filing with the Administrator is found to have material misstatements or omissions,
A correcting amendment must be filed promptly.
Record Retention Rules NASAA
+NASAA does not set rules for federal covered advisers - only the Investment Advisers Act of 1940 applies
+NASAA rules for IAs only apply to State-registered advisers (those advisers with less than $100 million of assets under management).
+Under the NASA
Account records must be posted by state-registered advisers no later than- -and kept for
NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter.
Advisers must retain records for 5 years under NASAA rules (note that this differs from SE
IA Permanent Records
The permanent records are the IA's Articles of Incorporation or Partnership Agreement and Minutes to Board of Directors of Partnership Meetings. These must be retained for the life of the firm and must be retained for an additional 3 years after the firm
SEC record keeping rules
Under Federal law, the retention period for specific records is:
Customer Correspondence: 3 Years
Customer Confirmations: 3 Years
Customer Account Statements: 6 Years
NASAA's Statement on Records Retention for Registered Investment Advisers says advisers
Administrator inspections
The Administrator has the right to inspect books and records of an investment adviser or broker-dealer if either is doing business in that State. The Administrator can inspect these records in any location and in any State, without giving advance notice.
Investment Adviser: Record Keeping and Storage
All advisers must retain the records set by the Administrator - not only advisers that take custody. An investment adviser with offices in multiple states only has to keep records in accordance with the State where the main office is located. Electronic r
If an agent fails to renew his or her license at the end of the year, the
the license expires with no action on the part of the Administrator
The Administrator can deny or revoke an agent's license if
The Administrator can deny or revoke an agent's license if
+The registration application is materially incomplete or if it contains material misrepresentations.
+The Administrator can also require the posting of a surety bond and the passing of an examina
The Administrator is empowered to deny, deny
or suspend the registration of any person who:
+Is insolvent
+Has failed to properly supervise employees
+Has been suspended by an Administrator of another State in the past 10 years
+Has been convicted of embezzlement within the past 10 years
+The Uniform Securities Act sets a 10 year statute of limi
Under the Uniform Securities Act, registration of an investment adviser may be revoked for all of the following reasons
+the adviser's liabilities exceed its assets
+the adviser cannot meet obligations as they come due
+the adviser is declared insolvent
TERMINATION: Investment Adviser Representative
Unlike the requirement for agents of broker-dealers, where both the broker-dealer and the agent must notify the Administrator; in this case only the investment adviser must notify the Administrator.
However, if the representative learns that the adviser h
TERMINATION: Agent
Notification of either association or termination to the Administrator must be made by BOTH the agent and the broker-dealer.
Notice of association or termination of an agent to the Administrator must be made "promptly."
If an agent changes his place of em
Under the Uniform Securities Act, the basic definition of a security is
A security is defined as an investment in a common enterprise for profit, managed by a third party
SECURITIES
Securities that are defined under the Uniform Securities Act include:
Corporate issues
Equity and Equity related
Transferable shares, both common
DEFINITION: Federal Covered Security
Thus, listed securities and investment company securities are only required to be registered with the SEC; they are not required to be registered separately in each State.
Exempt Security
Exempt securities do not have to be registered in a State
However, broker-dealers that sell exempt securities, and their agents, must still be registered in a State
Exempt securities under State law parallel those that are exempt under Federal law, with s
DEFINITION: Sale of a Security
A sale is the contract to sell a security, or an interest in a security for value
Using this broad definition, the following specific rules apply:
A gift of an "assessable" security, where the issuer can assess the owner for additional funds is considered
A guaranteed security is
A guaranteed security is one that is guaranteed as to payment of interest, dividends, or principal by someone other than the issuer.
Any registration statement for a securities offering includes:
Current balance sheet and income statement;
Business description;
Use of proceeds of offering;
Offering Terms;
Legal Opinion;
Accountant's Opinion.
There is no analysis of company profitability in the registration statement as compared to other companies
To increase the offering size of a security
Under USA, a registration statement for a securities offering may be amended after its effective date to increase the amount of securities to be sold (this would be done if there was greater demand than expected).
The offering price and underwriter's comp
Misstatements of material fact in a securities registration are violations of the Act for who?
Under the Uniform Securities Act, omissions or misstatements of material fact in an offering of securities is fraud for everyone who signs the registration documents. These include the:
issuer
officers of the issuer
underwriter
officers of the underwriter
Registration by Filing
Registration by Filing is used by established "seasoned" companies for which there is already substantial trading activity and marketplace information.
+ Method commonly used by "non-issuers" to offer shares in the State.
Registration by Filing becomes ef
Registration by Coordination
Registration by Coordination allows an issuer to use its SEC-registration documents under the Securities Act of 1933 as its registration documents in the State.
When the SEC registration is effective, registration in the State is effective as well (as lon
REGISTRATION: By Qualification
Normally becomes effective 30 days after the date of filing, but if there are omissions or misstatements in the registration documents, the issue may never go "effective" as registration is effective at a date set by the Administrator.
As a condition of registration, the Administrator may require that:
a filing fee be paid to register an issue in the State.
advertising related to the offering be filed.
as a condition of registration by qualification or coordination, any "unusual" consideration paid to a promoter be deposited in escrow for up to 3 years.
The Administrator can require which of the following regarding federal covered securities offered in a State?
The Administrator cannot require registration of federal covered securities in the State (unless the issuer fails to comply with State requirements for these issues). The State can require a notice filing; can require that the documents filed with the SEC
To offer not-for-profit bond issues in any State, the Administrator can:
Require that a Notice Filing be made in the State, along with the filing of sales literature
require that the exemption only becomes effective if the Administrator does not disallow it within a stated time period
disallow the exemption, providing the grou
UNSOLICITED
Unsolicited customer transactions effected through a broker-dealer are exempt under State law.
The broker-dealer effecting the trade must still be registered in the State or must be eligible for an exemption/exclusion if it is not registered in the State.
A private placement under the Uniform Securities Act is defined as an offer to:
The Uniform Securities Act defines a private placement as an offer to no more than 10 persons during any 12 month period.
Private placements are exempt transactions as long as the general public is not solicited and no commissions are paid.
Commissions ma
Pre-Organization Certificate
An offering of pre-organization certificates (that is, ownership in a business that is "starting-up," so it is just being formed and is not organized yet) is exempt under State law as long as the offering is not made to more than 10 investors and no commi
COMPENSATION: Investment Advisers
Investment advisers cannot be compensated based solely on capital gains achieved. The fee arrangement can be based on a percentage of all assets under management.It makes no difference if the basis for the calculation is average net assets over the year;
DEFINITION: Fee only advisers
A "Fee Only" investment advisor is compensated by fees paid by the client only, often tied to the amount of client assets under management.
He or she accepts NO form of commissions, soft dollars, or trailers from brokerage firms or mutual fund companies.
The advisory contract, under NASAA rules, must include
Description of services provided;
Term of contract;
Formula for computing fees;
Amount of prepaid fees to be returned if contract is terminated early;
Assignment of the contract is not permitted unless the customer approves;
Whether the contract grants di
RESCIND CONTRACT: Investment Adviser
Under NASAA rules, the brochure is required to be delivered to clients no less than 48 hours prior to entering into a written or verbal contract to provide advisory services. As an alternative to the "2 day free look," the customer can be given the brochu
Under NASAA rules, within 120 days of fiscal year end, each customer must be sent a
NASAA rules require that within 120 days of fiscal year end, the adviser must send each customer a revised Brochure (Form ADV Part 2A) and Brochure Supplement (Form ADV Part 2B) if there are material changes. Instead of sending the entire Brochure, the ad
CONTRACT: Investment Adviser
Under Uniform State law, advisory contracts can:
only be in writing
allow for prepayment of advisory fees - it is typical to pay 3-6 months of advisory fees in advance
allow the adviser to take custody, as long as this is not prohibited by the Administrat
TAKING CUSTODY: Investment Adviser
An investment adviser is permitted to take physical custody of a customer's monies or securities only if the Administrator does not prohibit this by rule; and if the adviser notifies the Administrator that he has, or will take, custody. In addition, the c
To open a new account for a customer, 4 "critical" pieces of information must be obtained
Customer Name
Customer Address
Date of Birth
Social Security Number
This information must be used to independently verify the customer's identity promptly after the account is opened
If the customer refuses to provide any of this information, the account
ACCT OPENING: Cash acct.
There is no customer signature required to open a cash account - this permits firms to open cash accounts over the phone. On the new account form, the agent who performs the suitability determination and the approving manager must sign; but the customer i
ACCT OPENING: Margin acct.
If a customer wishes to open a margin account, then the customer must sign the margin (hypothecation) agreement, where the customer legally pledges the securities in the account as collateral for the loan from broker to customer
No signature, no margin.
N
Verbal POA
The NASAA Statement of Policy permits oral discretion to be exercised by an investment adviser for up to 10 business days; as long as a written power of attorney is obtained from the customer within 10 business days of exercising such oral discretion. (Pl
Unpaid Position
Grace period: 5 days
If payment is not received, the unpaid position must be sold and the account must be frozen for 90 days.
Many firms call this "putting a CUF" on the account - with CUF standing for Cash Up Front. A customer can make purchases in a fro
A customer trade confirmation must include
+a complete description of the executed transaction (size of trade, security, price of execution); the amount of commission charged; and whether a payment for order flow was made.
Commissions
REFUNDS: When an agent recommends the purchase of a stock, he or she is only allowed to accept the normal commission for the transaction. The agent cannot rebate any commission if the stock decreases in value; nor can the agent accept any larger commissio
Equity indexed annuities (EIAs)
Equity indexed annuities (EIAs) are an insurance product that falls somewhere between a fixed annuity and a variable annuity. They give a return linked to a well-known index, such as the Standard and Poor's 500 Index, but the return is typically capped to
No load
A fund cannot be called "no load" if it charges any type of sales charge, whether it be a front-end load, back-end load, or a contingent deferred sales charge.
A mutual fund (money market funds are mutual funds) can advertise itself as a "no-load" fund if
Testimonials
Broker-dealers are permitted to use testimonials in their advertising. If they are used, it must be disclosed if the maker of the testimonial was paid; and if the maker of the testimonial is presented as an "expert," the maker's qualifications must be sta
Recommending the stock of a publicly traded parent company
This is a conflict of interest that must be disclosed to clients when making a recommendation. The existence of the relationship must be disclosed verbally when making the recommendation; and also must be disclosed in writing prior to completion of the tr
Letters Testamentary
A copy of the death certificate is needed to transfer the assets, along with a copy of the will (letters testamentary, as in "last will and testament") that names the beneficiaries and appoints an executor to carry out the will's instructions.
Chinese Walls to stop information flow must be maintained between:
Investment Banking and Trading;
Investment Banking and Research; and
Investment Banking and Sales (Retail and Institutional).
Underwriting
Thus, broker-dealers in the underwriting group, their officers and their employees cannot buy the issue.
They can, however, purchase the shares in the secondary market. A broker-dealer buying IPO shares for its own or for employee accounts is "withholding
In an initial public offering, a member who acted as manager or co-manager CANNOT issue a research report on that company within how many days following the effective date?
A member firm that is underwriting a stock, or that is negotiating with an issuer to underwrite the stock, cannot issue a research report until long after the effective date.
Specifically, the underwriter cannot issue a research report on the underwritten
COMMUNICATION: Internet
The Broker-Dealer (not the Administrator) must retain responsibility for reviewing and approving the content of any Internet Communication by its agents. The complete requirements for an Internet Communication by an agent to NOT be considered an offering
The NASAA rules states that any advertisement from an investment adviser:
cannot contain a testimonial (broker-dealer advertising may, however);
cannot state that any report or research will be provided for free unless this is offered without condition;
cannot represent hat any chart, graph, or device being offered can, by itse
Earning Commission
NASAA prohibits sharing commissions with unlicensed individuals for securities-based business.
Any commissions paid to licensed individuals cannot be shared with unlicensed individuals or entities.
Note that sharing of commissions between licensed individ
The Prudent Man Rule
The Prudent Man Rule does not detail the types of investments to be made, nor does it specify that only securities are permitted investments. When investing under the rule, investments must be managed in the way that a prudent investor would. The use of f
Prudent Investor Act
The "Prudent Investor Act" gives fiduciaries much broader latitude in terms of their ability to allocate trust assets to various investment classes, as compared to the obsolete "prudent man rule" that simply required that investments be of low risk. The c
DEFINITION: Block Trade
A block trade is defined as a trade of 10,000 shares or more.
There is no prohibition on an adviser placing block trades for securities in order to lower execution costs. There is also no prohibition with allocating shares purchased between the adviser's
Hedge Fund Hotels
This question is based on reality. In New York City and other "high rent" locations. Broker-dealers offer so-called "hedge fund hotels," where they offer hedge fund advisers nice office space that they own (on places like Park Avenue) at subsidized or "fr
Regulation SP
EC Regulation SP (Statement of Privacy) requires that customers be informed of the firm's policies and procedures regarding privacy of account information; and the customer must be given the opportunity to "opt out" of any disclosures that the firm might
REPORTS: SAR and CTR
Federal anti-money laundering rules apply to all broker-dealers and investment advisers. If an adviser is only state-registered, these rules still apply
Under the PATRIOT Act, passed after September 11th, 2001, financial institutions are required to have
Churning
The length of time that a customer had an account has no relevance when attempting to determine if churning has occurred. What is relevant is:
whether the active trading is in line with the customer's investment objective;
the character of the customer's
Administrator is empowered to
The Administrator can conduct investigations, take evidence, subpoena witnesses, and can require the production of books, papers, and documents relevant to the inquiry. The Administrator can administer oaths at hearings so that if the person lies, they ca
APPEALS: Administrator
If any person disagrees with a final order of the Administrator, a petition may be submitted to the appropriate court within 60 days after the entry of the order.
The Uniform Securities Act subjects agents and broker-dealers who violate the Act's provisions to all of the following
The Uniform Securities Act provides for:
Civil Liability (basically, pay the money back for violations that are unintentional or that are not too serious);
Criminal Liability (pay the money back for intentional violations and very serious violations); and
What is the maximum dollar fine that can be imposed for criminal liability and criminal violations of the Uniform Securities Act?
The fine that can be imposed for criminal violations of the Uniform Securities Act is $5,000 per offense.
Suits alleging criminal violations of the Uniform Securities Act must be brought within:
Suits alleging criminal violations of the Uniform Securities Act must be brought within 5 years of the occurrence of the alleged violation.
Plaintiff dies
If a customer files suit against a broker-dealer, investment adviser or agent alleging a violation of the Uniform Securities Act and the customer dies, the suit lives on! (Hey, we need to keep the lawyers working!)
Civil Liabilities
Civil liability means that an adviser who violated the Act must repay the customer any advisory fees paid; refund of any losses incurred due to the investment advice; plus interest and attorneys' fees (net of any income received from the investments for t
Voiding a Transaction
A purchaser may void a securities transaction if the trade is contrary to the provisions of the Act. Civil liabilities apply and the purchaser must be paid the original cost of the security plus 6% interest and any attorney's costs by the seller.
Offer of Rescission
If an offer of rescission is made on the inadvertent sale of a non-exempt security that should have been registered under the Act, the offer can only be made prior to the institution of a lawsuit alleging a securities violation. An offer must be made to b
The Administrator vs Federal Covered Advisers and their Representatives
The NASAA Model Rule on Unethical Practices of IAs and IARs, makes it clear that each State Administrator has jurisdiction over investment advisers and their representatives, and also retains jurisdiction over federal covered advisers to the extent that t
Newspaper offer
If an offer is made in a newspaper with a general, regular and paid circulation, it is not considered to be made in the State if the newspaper is not published in the State; or if the newspaper is published in the State, but has more than 2/3 of its circu
NOT Securities
+Futures
+Commodities
+Real Estate
Investment Adviser: Insurance Company EXEMPTION
Under the Investment Advisers Act of 1940, anyone who gives advice about securities only to insurance companies is exempt from registration. The "idea" is that an insurance company is a professional investor that will not tolerate being overcharged by an
The Investment Advisers Act of 1940 EXEMPTS from registration, any person who renders advice about securities to no more than
The Investment Advisers Act of 1940 exempts from registration, an adviser that gives advice to insurance companies. It does not exempt an adviser who gives advice to investment companies (which is true under State law). The Investment Advisers Act of 1940
Under the Investment Advisers Act of 1940, after receiving an investment adviser application, the SEC must grant a registration to an investment adviser; or start a proceeding denying registration, within how many days?
Upon receipt of the ADV filing, the SEC must process the registration.
Within 45 days of the filing date, the registration must be granted; or a proceeding must occur to determine if and why registration is to be denied.
Form ADV Parts 1 and 2 (the "Broch
Form ADV Pt 2
Form ADV Part 2 is broken down into Part 2A and Part 2B, both of which must be given to customers at, or prior to entering into an advisory contrct.
Part 2A gives descriptive information about the advisory firm; and may be used as the document given to po
Form ADV Pt 1
The Form ADV Part 1 filed with the SEC includes the officers of the firm, the States in which the firm is registered, and if the firm is a partnership, a schedule of the partners' names is included; while if the firm is a stock company (privately held) a
Statutory disqualification of an individual from becoming an investment adviser will occur if the applicant or its officers:
has been suspended or expelled from another Self Regulatory Organization;
is the subject of an SEC order suspending or revoking registration;
while associated with a firm caused that firm's suspension or expulsion;
willfully filed a misleading or false ap
Regarding the powers of the SEC, it can
collect evidence, take oaths and subpoena witnesses; it can issue orders denying or revoking Federal registration (but not State registration, but once the SEC boots an adviser out, the State piles on and boots that guy out of State registration as well).
nvestment advisory contracts must
+Be in writing under the Investment Advisers Act of 1940
+Must detail the advisory fee
+Must provide for customer approval if the account is assigned to another investment adviser.
There is no disclosure in the advisory contract of the States in which the
Hedge Clause
Investment advisers have attempted to use contractual language that seeks to limit or entirely avoid civil liability - these are known as "hedge clauses." Generally speaking, such hedge clauses are prohibited. Under both Federal and Uniform State Law, an
An investment adviser wishes to participate in the gains of the accounts that he administers. Under the Investment Advisers Act of 1940, the investment adviser:
The Investment Advisers Act of 1940 prohibits a performance fee unless the customer has at least:
$1,000,000 invested with the adviser; or
a net worth of at least $2,000,000.
The Investment Advisers Act of 1940 allows performance fees to be charged if a c
Under the Investment Advisers Act of 1940, which of the following statements are TRUE about the acceptance of prepaid advisory fees by an investment adviser?
Prepaid advisory fees are permitted, as long as they are detailed in the advisory contract; and there is a refund of such fees if the contract is canceled prematurely. There is no restriction on the amount of prepaid fees that can be accepted - but rememb
Brochure Rule
The SEC states that the "Brochure Rule" applies to both oral and written advisory contracts. Note that this does conflict with the Investment Adviser Act of 1940's requirement that advisory contracts be in writing; but this is a later rule, written by som
Solicitors
If an investment adviser uses and pays a fee to someone soliciting new clients, the adviser must be registered either with the SEC as a Federal Covered adviser or registered with the State.
The solicitor must be registered in the State - there is no SEC r
Customer Disclosure: Financial Difficulty
Investment advisers must disclose to customers any:
prior disciplinary problems;
actions within the past 10 years taken against the adviser where the adviser was convicted; pleaded guilty; or no contest;
securities related violations;
court orders barring
Customer Disclosure: Financial Problems
The adviser must disclose any impaired financial condition that is likely to affect the adviser's ability to meet its contractual obligations; specifically, if the adviser:
takes custody of client's funds or securities;
has discretionary authority; or
acc
If an investment adviser takes custody of customer funds, the adviser must:
If an investment adviser wishes to take custody of client funds or securities, under the Investment Advisers Act of 1940, the investment adviser must deposit customer funds and securities in an account that is separate from the adviser's account. It is pe
Omnibus Acct
Investment advisers that take custody will typically open a brokerage account to hold all customer securities positions. If the investment adviser opens an "omnibus account," then the clients' funds and securities are held together in 1 account, where the
Under the provisions of the Investment Advisers Act of 1940, if an adviser takes custody of customer funds or securities, account statements MUST be sent to the customer:
The Investment Advisers Act of 1940 requires that if an adviser takes custody of customer funds or securities; account statements must be sent to the customer by the adviser at least quarterly.
ADV-E
Under Rule 206(4)-2 covering advisers that take custody of client funds, such advisers must submit to an annual surprise audit by an independent public accountant that verifies the funds and securities held in custody for customers. After completing the e
Investment Adviser Advertising
Under SEC rules, advertisements:
may show past performance, but cannot be deliberate in showing past performance that may favor the investment adviser; also, the general market conditions at the time must be included
cannot use testimonials
cannot show pr
Under the Investment Advisers Act of 1940, copies of all advertising, notices and circulars must be retained if distributed to at least:
The Investment Advisers Act of 1940 requires that copies of advertising, notices and circulars be retained as a record for 5 years if distributed to 10 or more people.
Soft Dollars: IA and BD
Soft-dollar arrangements are where investment advisers direct their portfolio trades (and hence their commission payments) to broker-dealers that give them products and services that help them manage their investments.
The broker-dealers are "paying" for
Agency Cross Transaction
An "agency cross transaction" occurs when an investment adviser recommends that a client buy a security from another client who is selling the same security. If an investment adviser effects an agency cross transaction with the customers, it must: recomme
What records must be kept when investment adviser that takes custody of customer funds are required to be retained under the provisions of the Investment Advisers Act of 1940?
The records that must be retained by an investment adviser that takes custody of client funds are:
Cash receipts and disbursements
Securities received and delivered
Customer account statements
Customer trade confirmations
Purchase and sales blotter (daily
LEADS: Aside from retaining a copy of the letter, under the provisions of the Investment Advisers Act of 1940, the investment adviser MUST keep:
The adviser must retain copies of all communications sent and received from customers.
For communications sent to more than 10 persons, the adviser is not required to keep a record of the names and addresses of the persons to whom it was sent.
For communi
Under the Investment Advisers Act of 1940, records MUST be retained for:
The Investment Advisers Act of 1940 requires that records be maintained for 5 years. Note that NASAA has the same 5 year rule for State-registered advisers. (Also note that broker-dealer record retention rules are set under the Securities Exchange Act of
Violations of the Investment Advisers Act of 1940 are punishable by:
Violations of the Investment Advisers Act of 1940 are punishable by fines of up to $10,000; and up to 5 years in jail.
Market Timing Services
There are advisers that specialize in offering market timing services (of about 8,000 SEC registered advisers, there are 200 or so of these firms). They are considered to be "in the business" of giving investment advice for a fee and must register.
Under the Investment Advisers Act of 1940, to determine if a person is "in the business" of giving investment advice,
To be "in the business" of giving investment advice, this must be a regular activity of the firm or person; and the advice must be rendered about securities; and that person must be compensated for giving such advice.
A person is "in the business" of givi
COMPENSATION: Investment Adviser
Compensation" to an investment adviser can basically be received in any form - it includes fixed fees, hourly fees, fees based upon assets under management, prepaid fees; and any compensation received from anyone else in connection with that investment a
Who's included in Investment Adviser Definition
Specifically included in the definition of an investment adviser that must register with the SEC under IA-1092 are pension consultants and advisers to entertainers and athletes. Advisers to issuers are not specifically included - but they would be require
The Securities Act of 1933
The Securities Act of 1933 is the Federal law that regulates the issuance of new securities.
The Securities Act of 1933 was enacted to prevent fraud in the sale of new issue securities to the public.
It requires that any non-exempt new issue security be r
The Securities Exchange Act of 1934
The Securities Exchange Act of 1934 is Federal legislation aimed at preventing manipulation and fraud in the secondary (trading) market.
The Securities Exchange Act of 1934 requires that each national securities exchange register with the SEC. Such exchan
Uniform Securities Act.
State securities laws are established by the Uniform Securities Act.
Underwriter
Firms that handle new issue distributions for issuers are underwriters. The underwriter can either act as a principal or agent in the underwriting.
A firm commitment underwriting obligates the underwriter to buy the issue from the issuer -the underwriter
Agent: New Issue
A BEST EFFORTS underwriting means that the underwriter acts as agent, using its best efforts to sell the issue to the public, taking no liability. For this, it earns an underwriting fee on each share or bond sold.
Principal: New Issue
A firm commitment underwriting obligates the underwriter to buy the issue from the issuer -the underwriter takes full financial liability.
Registration Statement
The registration statement must be filed with the SEC before any activity involving the issue can take place.
Included in the registration statement is the general character of the business; the uses of the proceeds of the offering; audited financial stat
Permitted Activities Prior to Filing Registration Statement
+If an issue is not exempt from registration, then the issuer must file a registration statement with the SEC.
+Prior to filing the registration statement with the SEC, the issue cannot be
-offered
-advertised
-sold
-recommended
by the issuer or the under
20 day cooling off period
During the 20 day cooling off period, the issue may not be
+offered
+advertised
+recommended
+sold
However, the distribution of a Preliminary Prospectus (known as a "red herring" due to the disclaimer in red on the cover that "this is not an offer") to in
Red Herring
+Preliminary prospectus
An indication of interest is taken during the 20 day cooling off period before a new issue's registration is effective. The issue may never "go effective" and the indication can be canceled by the underwriter. Thus, the underwriter
Liability for Misstatements of Fact on New Issues
Liability for omissions or misstatements of material fact in a registration statement or prospectus rests with every person who signed the documents or who gave an opinion related to the documents. Thus, officers of the issuer (who sign the registration s
Deficiency Letter
An SEC "deficiency letter" indicates that there is not adequate disclosure in the registration documents filed under the Securities Act of 1933 to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow the reg
Delivery of Final Prospectus
Delivery of prospectuses cannot be accompanied by promotional material of any type. The only information that can accompany a prospectus would be a "tombstone;" or information that has been filed with the SEC - such as audited financial reports.
Rule 504
Covers offerings of up to $1,000,000.
For such very small offerings, the rule does not specify required investor disclosures, and does not place any limit on the number of investors. Also, there is no audit requirement for the issuer's financial statement
Rule 505
Covers offerings of more than $1,000,000 to $5,000,000
The rule requires limited disclosures and can only be offered to 35 non-accredited investors; AND to an unlimited number of accredited investors. While there is no Federal registration required, the S
Rule 506
Covers offerings of more than $5,000,000
This is the private placement rule used by pretty much everyone. The rule requires detailed disclosure to investors, similar to that required in a prospectus. The offer can only be made to a maximum of 35 non-accre
PRIVATE PLACEMENT: UNIFORM SECURITIES ACT
Under the Uniform Securities Act, a private placement is
+An offering to NO MORE than 10 persons
+No advertising is permitted
+No commissions can be paid for selling the issue
REG D: PRIVATE PLACEMENT UNDER THE SECURITIES ACT OF 1933
REGULATION D: REG D: PRIVATE PLACEMENTS: RULE 501-506
Regulation D allows a non-exempt issue to be "privately placed" WITHOUT a registration statement being filed with the SEC and WITHOUT a Prospectus requirement.
This is an "exempt transaction" - thus if
Rule 147
Intrastate offerings
Federal laws only apply to interstate offerings. If all of the activity takes place within 1 state (intrastate), only State law applies.
Under Rule 147 - Intrastate Offerings - if all of the activity takes place within 1 state (intras
Regulation A
Small dollar offerings
An issuer can sell up to $5,000,000 of securities within a 12-month period and be exempt from registration.
Regulation A under the Securities Act of 1933 gives an "EZ" registration method to issues of no more than $50,000,000.
The i
SEC Commissioners
The SEC has 5 commissioners appointed by the President of the United States, with the advice and consent of the Senate.
Each commissioner is appointed for a term of 5 years.
No more than 3 commissioners can be from 1 political party.
During his or her ter
Definition of Market Maker
A dealer is a principal, or market maker in a transaction, selling the security out of its inventory; or buying a security into its inventory.
A broker is an agent in a transaction, matching a buyer of a security with a seller of that security.
OTC firms
Under the Securities Exchange Act of 1934, all of the following are defined as "securities information processors
Securities Information Processors collect, process, and distribute quotes or trade reports for securities in non-exempt securities. (e.g., the OTCBB, Pink Sheets and each exchange's TRF - Trade Reporting Facility)
Excluded from the definition are general
Under the Securities Exchange Act of 1934, registration with the SEC as a broker-dealer may be revoked if the broker-dealer fails to:
Under Section 15 of the Securities Exchange Act of 1934, member firms that deal in non-exempt securities must register with the SEC, as must their sales-related employees.
Member firms must comply with:
minimum net capital requirements
Firms must have min
Which ratio would be used to measure the financial leverage of a broker-dealer?
The ratio of debt to net capital is a leverage measure for a broker-dealer, with maximum limits set under the 1934 Act.
"Leverage" is the use of debt in the capital base of a business. The standard measure of leverage for a business is the Debt to Equity
Broker-Dealer Custody
Part of being a broker-dealer is the inherent ability to take custody of a customer's funds and securities. So called "clearing" broker-dealers hold customer funds and securities.
Customers can either have their fully paid securities held in custody by th
TRADING: Majority Shareholder
Thus, the Act defines an "insider" as an officer, director, or 10% shareholder of the issuer.
Insiders are prohibited from trading based on "material non-public information."
In the 1950s, the SEC expanded the definition of an insider through Rule 10b-5 -
10K
The 10K is a corporation's annual audited financial statements.
Issuer filings with the SEC are made available to the public immediately upon receipt
10Q
The 10Q is a corporation's quarterly unaudited financial statements.
Issuer filings with the SEC are made available to the public immediately upon receipt
8K
The 8K is a corporation's special report of significant events, such as a change in the board of directors, a merger or a divestiture.
Issuer filings with the SEC are made available to the public immediately upon receipt
13d Filing
Anyone who accumulates a 5% or greater holding in an issuer's stock must make a public announcement of the holding.
This is done by filing a 13d report with the SEC within 10 days of crossing the 5% threshold if that person intends to exercise control of
13g filing
A 13g filing is required with the SEC by anyone who accumulates 5% or more of a company's stock that intends to remain a passive investor.
The 13g must be filed within 45 calendar days of year-end.
13G reports are filed by "passive" investors that purchas
13f Filing
Investment managers who exercise discretion over the accounts of customers who collectively hold $100,000,000 or more of equity securities must file the 13F report within 45 days of the quarter ending where the $100,000,000 dollar limit was reached.
Under the Securities Exchange Act of 1934, the power to set margins on securities is given to the:
he Securities Exchange Act of 1934 gave the Federal Reserve the power to set margins on non-exempt securities.
The Federal Reserve wrote 2 important regulations:
Regulation T - controls the extension of credit on securities by brokers.
Regulation U - cont
Regulation T
Regulation T - controls the extension of credit on securities by brokers.
Regulation U
Regulation U - controls the extension of credit on securities by banks.
MARGIN PURCHASES
NYSE, AMEX (NYSE-MKT) and NASDAQ listed issues are marginable. These are actively traded stocks.
The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. In contrast, the futures mar
Loan Value
The "loan value" of a security is the amount that may be borrowed against the position under the margin rules as set forth under Regulation T of the Federal Reserve for non-exempt securities. For example, if a security has a Regulation T requirement of 60
Investment Company Act of 1940
Under the Investment Company Act of 1940, corporations are required to register with the SEC as investment companies, and be sold with a prospectus if they have:
initial net assets of $100,000 or more; and/or
100 shareholders or more
Under the Investment
Open-end management companies (mutual funds)
Open-end management companies (mutual funds) cannot:
buy securities on margin;
sell short (which requires margin);
have a Board of Directors consisting of more than 60% of so-called "affiliated persons" - that is, individuals who work for the fund or who,
closed-end investment company
The initial offering of closed-end management company shares is made under a prospectus; then the books of the fund are closed to new investment and the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they a
Diversified Investment Company
A "diversified" management company is a fund that complies with the "75/5/10" Rule. A diversified fund must have:
at least 75% of its assets invested in securities;
no more than 5% of the fund's assets invested in a single issuer;
no single holding repres
Investment Company
An affiliated person of an investment company is an officer, employee or 5% shareholder of the investment company.
The management company's Board of Directors cannot consist of more than 60% of these affiliated persons.
Mutual funds are obligated to send
investment adviser contract
The investment adviser contract, under the Investment Company Act of 1940, must be renewed annually by either a majority vote of the management company's Board of Directors; or a majority vote of the outstanding shares.
Investment Companies: 12b-1
SEC Rule 12b-1 allows management companies to charge against total net assets, an annual fee for the cost of soliciting new investors to the fund.
Only mutual funds (open-end management companies) have sales loads and 12b-1 distribution fees. Closed-end f
DEFINITION: Derivative
A "derivative" is a contract that has its value based on the price movement of a reference asset - so its value is "derived" from the underlying asset.
Option contracts, futures contracts and forward contracts are all derivatives.
CMOs (Collateralized Mor
Call Holder
The holder of a call option has the right, but not the obligation, to buy the underlying security at a fixed price, good until the expiration of the contract.
The holder pays a premium to the writer of the contract for this right.
The holder can choose to
European Style Option
The CBOE introduced European style options when it started trading index options in 1979. Index options were aimed at institutional portfolio managers, who didn't want to be worried about an unintended exercise.
European style options can only be exercise
Commodities futures contracts
Commodities futures contracts are "standardized," which makes them easier to trade.
Each exchange has its own contract for a standard size (quantity) and quality of the commodity (the exchange sets the different varieties or grades that can be delivered a
Forward contracts
Forward contracts are custom contracts for delivery of an underlying asset at a fixed price on a future date that are negotiated between buyer and seller.
Forward contracts are issued OTC and there is very limited trading - thus it may not be possible to
hedge fund
A hedge fund is a private investment fund that uses sophisticated investment strategies and leverage to enhance returns but also takes on higher levels of risk.
Hedge funds are typically limited to 99 investors so they do not have to register as investmen
real estate limited partnership
Limited partnership interest are not liquid - most partnership agreements place restrictions on transfer. The ideal structure for a partnership is to generate losses for tax purposes (in a real estate program, through mortgage interest and depreciation de
Direct participation program
Limited partners are passive investors who have no say in the management of the enterprise. Thus, experience of the limiteds has no relevance to the success of the program. General partners, however, manage the program for the limiteds. Their level of exp
AMT
The "Alternative Minimum Tax" is another way of computing income tax.
If the regular tax computation shows an unusually low tax amount for the investor's income because of an overage of deductions that were taken by the investor; then the AMT computation
Fixed Annuity
PENALTY BEFORE AGE 59.5
TAXABLE
FIXED: RISK BORNE BY INSURANCE COMPANY
REGULATED AS INSURANCE PRODUCT
Annuity contract contributions are not tax deductible, so the original contribution of $10,000 represents dollars that were already taxed. Any earnings i
Variable Annuity
MARKET PARTICIPATION
TAX DEFERRED GROWTH
EARNINGS TAXABLE B/C NONDEDUCTIBLE
VARIABLE life insurance was derived from WHOLE life insurance.
Variable life is a whole life product and was developed from the whole life design with the added feature of investm
Perpetuity Payment
A perpetuity is "perpetual payment" - so it is an annuity that goes on forever.
For example, if a customer invests $1,000,000 at 6% annual interest, this will provide a "perpetuity" of 6% of $1,000,000 = $60,000 per year without eating into the principal
AIR
AIR stands for Assumed Interest Rate. It is a conservative estimate of annual return needed for the insurance company to maintain a constant annuity payment amount. The AIR is chosen by the customer at the beginning of the payout period, based on an inter
Variable Annuity Contract Types
The variable annuity contract holder can choose from the following annuity payment options:
Life Annuity: pays only for that person's life
Life Annuity - Period Certain: pays for that person's life, but if that person dies before a stated time period (say
Bonus Credit
When a variable annuity contract offers a "bonus credit," the company matches any customer payment made into the contract with an extra payment of anywhere from 1-5% of the amount paid. Since this customer is paying $20,000, the bonus credit of 3% means t
Equity Indexed Annuities
Equity Indexed annuities are an insurance product and are currently not defined as a "security."
They give a return tied to the performance of the Standard and Poor's 500 Index, but this is subject to an annual cap of typically 7-9%. Thus, in a year of sh
Term Life Insurance
Term life insurance is a "pure" insurance product with no investment component that pays a fixed death benefit.
The premium amount is fixed for the term of the policy and at the end of the term, the policyholder can renew at an increased rate (since morta
Whole Life Insurance
+Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than
Universal Life Insurance (UL)
+Universal life is a "permanent" insurance policy, meaning that it cannot be canceled as long as the premium is paid.
+In contrast, term life is only good for the term of the policy and the insurer does not have to renew.
Universal life policies break apa
Variable Life Insurance
Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than
Life Insurance Loans
Taking a loan is never a taxable event (if this were true, every time you borrowed on MasterCard, you would be taxed!). Because the cash value in a "cash value" life insurance policy (whole life) represents earnings that have never been taxed, when a poli
REGISTRATION: Life Insurance and Financial Planning
To prepare customer financial plans for a fee, the individual must be licensed as an investment adviser representative in the State, but this does not cover life insurance! To sell life insurance, a separate State life insurance license is needed.
Net Worth
The formula for Net Worth is:
Total Assets - Total Liabilities
A corporation's Net Worth is the theoretical net liquidation value of the firm
Net Worth is the owners' (both common and preferred shareholders) value in the enterprise
Net Working Capital
The formula for Net Working Capital is:
Current Assets - Current Liabilities
Current Assets are all assets that will become cash within 1 year, and include cash, marketable securities, accounts receivable and inventories
Current Liabilities are all bills
Current Ratio
The formula for the Current Ratio is:
Current Assets / Current Liabilities
This is a measure of the corporation's liquidity.
Current Assets are all assets that will become cash within 1 year, and include cash, marketable securities, accounts receivable an
Quick Ratio
Quick Ratio
the formula for the Quick Ratio, is:
Current Assets - (Inventory + Prepaid Expenses) / Current Liabilities
This is a measure of the corporation's liquidity; and is a more stringent test than the Current Ratio.
Current Assets are all assets tha
Surplus Capital
If a corporation sells stock at a price above par value, the par value received is shown on the balance sheet as "par value," while the excess funds are credited to the corporation's capital surplus account. Retained earnings and earned surplus are differ
Debt/Equity Ratio
The Debt / Equity ratio is the ratio of the company's outstanding debt to common stockholder's equity. It measures the leverage of the company. A highly leveraged company is at greater risk of the inability to pay its debt service when times are bad. All
Dividend Yield for a Stock
The formula for Dividend Yield for a Stock is essentially the same as that for Current Yield for a Bond.
The formula for Dividend Yield is:
Annual Income/Current Market Price per Share
Dividend Payout Ratio
The dividend payout ratio looks at the portion of a company's earnings for common that was paid out as a common dividend.
For example, if a company has earnings for common of $4 and it pays out a $1 common dividend, then its dividend payout ratio is $1 /
Footnotes
The footnotes to a company's financial statements details the company's accounting policies (for example, when revenue is "booked;" how inventories are valued) and give additional supporting detail that adds "color" to the numbers presented in the income
Corporate Liquidation
In a corporate liquidation the priority of claim to assets is: secured bondholders, unsecured bondholders, preferred stockholders, common stockholders.
Cyclical Stock
The performance of cyclical stocks follows the business cycle. In times of GDP expansion, they do well; in times of recession, they do poorly. Their earnings and stock prices follow the economic cycle. The classic cyclical stocks are home building, automo
Defensive Stock
The performance of cyclical stocks follows the business cycle. In times of GDP expansion, they do well; in times of recession, they do poorly. The classic cyclical stocks are home building, automobile manufacturers and durable goods producers. All of thes
Growth Company
Growth companies are characterized by high price-earnings ratios and low dividend payout ratios. Mature companies are characterized by low price-earnings ratios and high dividend payout ratios.
Top Down Approach to Investing
One who uses the "top down" approach to investing looks at the overall economy to identify sectors that appear to have the best growth potential.
Once identified, investments are made in those specific sectors in the hopes of achieving the greatest potent
Bottom Up Approach to Investing
A portfolio manager that uses a "bottom up" approach looks for exceptional specific investments before considering overall economic conditions and their effect on investment returns. The philosophy here is that these exceptional companies, and their stock
ROI
Return On Investment (ROI) measures the initial investment and shows how well it performs.
The annual cash flows generated by the investment are averaged, and divided by the original amount invested.
The formula to find ROI is:
(Average Annual Cash Flow /
Total Return
otal return takes into account the:
total amount of income (dividends or interest) from the investment; and
capital gains (or capital losses) on the investment;
divided by the amount invested
Total return is presented before tax. Since each customer is in
Real Rate of Return
The "real" rate of return excludes the effect of inflation on the return.
It is the actual rate of return achieved on the investment minus the inflation rate:
Nominal rate- Inflation rate
Standard Deviation
The variability of an investment's return.
Standard deviation is a measure of the variability of returns from an investment. The higher the standard deviation, the higher the return the investment must give to compensate for the risk of varying returns. S
Geometric Mean vs. Arithmetic Mean
Arithmetic mean return is simply the average annual return of an investment over its time horizon.
For example, if an investment has a 3-year life, one would take each year's return, add them together and divide the total by 3 to get the arithmetic annual
Risk Free Rate
Fed Funds Rate
The "risk free" rate of return is simply that return provided by a "riskless" investment. Treasuries are viewed as a "risk free" investment, since they are backed by the U.S. Government and have shown minimal variability of return over the
Risk Premium
The "risk premium" is the excess return that an investment gives over the "risk-free" rate of return. Money market instruments are considered to be almost riskless, so their rate of return approximates the "risk-free" rate of return.
The Sharpe Ratio
The Sharpe ratio measures the incremental rate of return over the risk free rate achieved in a portfolio relative to the standard deviation (volatility) of the portfolio. If the ratio is positive, then there is a real benefit - extra investment return - f
Expected Return
Expected return assigns a probability percentage to each possible rate of return for that asset class; multiplies the probability by the possible rate of return; and then "sums these up" to get the "expected" rate of return - which may vary higher or lowe
TIPS Payout
TIPS (Treasury Inflation Protection Securities) are issued with a fixed coupon that does not change.
In Year 1, this bond will pay 4% of $1,000 par = $40. At the end of year 1, because inflation was 5%, the principal amount of the bond is adjusted to 1.05
After-tax Yield
The after-tax yield is = 5% (100% - 35%) = 5% x .65 = 3.25%.
Annual Percentage Return
Investment A has been held for 2 months and then sold at a gain; while Investment B has been held for 4 months and then sold at a gain. To compare them, their returns must be annualized. Dollar weighted return is another name for Internal Rate of Return.
Time Weighted Average
Time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested).f
It reflects the growth that would be achieved from a 1-time investment into the fund an
Dollar weighted average
Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that
Required Rated of Return
The RRR (Required Rate of Return) is the minimum return that an investment must offer in order for someone to decide to buy it. Assume that the RRR is 10%. If the security actually offers a return of 12% (the Internal Rate of Return, which is the same as
...
he compound or future value of an investment is dependent upon the amount of time the investment is held and the interest rate earned over the investment's life.
The future value is the original principal amount plus any interest accrued during the specif
Hedging with Index Options
Index options can be used to hedge a portfolio. If index puts are bought, then a drop in the market lowering the portfolio's value will be offset by a gain in the value of the index puts. This strategy hedges against market risk, also known as systematic
Beta
Beta measures volatility of a stock (or in this case, a mutual fund share) to the volatility of the market as a whole, as measured by the Standard and Poor's 500 index. The greater the beta, the more volatile the stock. High beta stocks, since their price
Risk Adjusted Yield
The portfolio has generated a 12% return by taking on extra risk (beta of 1.2 is .2 above the market risk level of 1). If we divide the return by the beta, the market return for the portfolio would be 12% / 1.2 = 10%. Any investment that yields less than
Alpha
Alpha" measures the portion of an investment's return arising from "stock specific" risk - that is, the portion of the return that is not variable with the market as a whole. Thus, market risk is taken out of the equation.
"Alpha" compares the "excess re
Monte Carlo Simulation
Monte Carlo simulation is a computer generated simulation that allows one to evaluate the impact of economic changes in several variables simultaneously using long investment time frames.
By using Monte Carlo simulation, a range of expected outcomes can b
CAPM
CAPM (Capital Asset Pricing Model) attempts to find the Expected Return of an Investment by breaking the return down into 2 components. These are the Risk-Free Rate of Return and the Risk Premium.
The basic CAPM formula is:
Risk Free Rate + Risk Premium
T
Efficient Market Theory
Efficient market theory basically states that markets are efficient at pricing stocks, and that over a long time frame, an investor cannot outperform the market. It is the economic argument used for index funds. There are 3 "forms" of efficient market the
stock equilibrium
When a stock has found its equilibrium price in the market, this means that the spread between bid and ask is non-existent and active trading is taking place between buyers and sellers at that price. In such a market, because there is very active trading,
When borrowing money, the interest rate charged measures the:
The interest rate charged on loans is the "cost" of money. The higher the interest rate, the higher the "cost" of borrowing money, and vice-versa.
Net Present Value
Net Present Value discounts the projected cash flows from an investment using the current market interest rate. The initial cash flow is negative - the price paid for the security. The ensuing cash flows are positive - the semi-annual interest payments re
Bond price change
The customer bought this 2-year bond at par with a coupon rate of 10%. If market interest rates rise to 12%, then the present value of the bond's cash flows will fall as follows (rounded):
Year 1: $100 / 1.12 = $89.29
Year 2: $1,100 / (1.12)2 = $876.91
To
Duration
Duration is a measure of bond price volatility. Bonds with low coupons have large duration numbers; as do bonds with long maturities. These are the bonds that exhibit the greatest price volatility in response to market interest rate movements.
IRR
IRR" is the rate of return that makes the present value of inflows equal to the present value of outflows.
When looking at IRR for an investment, it is the discount rate that makes the net present value of the investment's cash flows equal to "0." Becaus
Rule of 72
The "Rule of 72" can be used here. To find the number of years that it takes to double an investment's value, divide the yield into 72. 72 / 7.20% = 10 years to double in value. This question tells us that the investment was made 10 years ago, during whic
Market Risk
Is this one special or not?! When investors like stocks, they buy them and stock prices rise. When investors don't like stocks, they either sell them or don't buy them and prices fall. This is market risk. Business risk is the risk that a negative event,
Investment Grade
The lowest investment grade rating is BBB. BB and B ratings are considered to be medium grade while CCC, CC, and C are all speculative with C rating being the most speculative.
Inflation Risk
Of the choices given, real estate offers the best protection against purchasing power risk (inflation risk). When there is inflation, the prices of real assets tend to inflate as well, hence they give inflation protection. In contrast, long term bonds and
Current Yield
The formula for current yield is:
(Annual Income / Market Price)
If a fixed income security's price increases in the market so that the security is trading at a premium to par, then its current yield will decline. This has no effect on the nominal yield.
Discount Bond
to lowest is:
Yield to Maturity (Highest)
Current Yield
Nominal Yield (Lowest)
Therefore, nominal yield is lower than current yield (Choice I) and current yield is lower than yield to maturity (Choice III).
Yield to maturity is highest for a discount bond
Premium Bond
This one is worded in a tricky manner. For premium bonds, the relationship of yields from highest to lowest is:
Nominal (Highest)
Current Yield
Yield To Maturity (Lowest)
Therefore, nominal yield is higher than current yield (Choice II) and current yield
Yield to Call
If a bond is called prior to its maturity date, then the yield to call will differ from the yield to maturity
If a discount bond is called prior to its maturity date (an unlikely event), then the annual capital gain component of the yield to maturity form
Market capitalization
Market capitalization is: Number of outstanding shares x Common share price.
Outstanding stock of a company is: Issued stock - Treasury stock
Treasury stock represents shares that have been bought back and retired by the company. It makes no difference wh
Market Cap Levels
A Micro Cap (Market Capitalization) stock is one with a market cap of up to $300 million.
A Small Cap stock is one with a market cap between $300 million and $1 billion.
A Mid Cap stock is one with a market capitalization between $1 billion and $5 billion
EAFE Index
The EAFE Index stands for Europe, Australasia, and the Far East. It consists of companies of developed countries in these areas - so these are all companies outside of North America. Investing in an EAFE ETF would give the customer international exposure.
The Russell 2000 index
The Russell 2000 index consists of 2,000 small capitalization issues. The Value Line Index consists of some 1,700 stocks followed by the Value Line Investment Survey, spread among NYSE, AMEX (NYSE-MKT) and NASDAQ issues. The Dow Jones Averages consists of
Sector Rotating
Sector rotating" is an active investment strategy that seeks to use the economic cycle as the basis for making investment decisions. For example, when the economy is entering a recession, funds are allocated to defensive utility and consumer staples stoc
passive rate
The "passive" rate of return is that achieved by investing in an appropriate index fund. Here, the benchmark index has a 13% rate of return - this is the return that any passive investor could achieve by investing in an index fund that mimics that index.
Active Rate
Active asset managers select investments into a portfolio in an attempt to exceed the return provided by a "benchmark" portfolio (such as a comparable index fund).
The "Active Return" is the excess return that the manager can achieve over the return given
Asset Class
Asset allocation theory says that allocating assets among a selection of asset classes based on investment objectives and risk tolerance provides needed diversification. These allocations are rebalanced periodically (typically at least annually) based on
Strategic Allocation
Strategic asset management is the setting of the investment "strategy" under an asset allocation scheme. Tactical asset management is the permitted variation to the established strategy, to take advantage of market opportunities.
Dollar cost averaging is
Dynamic asset allocation
Dynamic asset allocation is really just another name for "Tactical Asset Allocation." Once the basic asset allocation percentages are set in a portfolio composition using strategic asset allocation (this sets the basic "strategy" based on the client's inv
Active/Passive
The terms "active" and "passive" are most often used when looking at the management of a stock portfolio. An actively managed portfolio has its investments selected by a professional manager; whereas a passive portfolio has a composition that is matched t
Buy and hold
Buy and hold is the oldest and simplest portfolio strategy. If interest rates are stable, then interest rate risk for a bond portfolio is minimized, and the risk of rising interest rates hurting stock valuations minimizes market risk for stock portfolios.
Value
Value investors select stocks that they believe are good values - that is, underpriced in the market.
Undervalued stocks are identified by looking at Price/Earnings ratios, Price/Book Value ratios, etc. and finding stocks that are "low" in these measures,
Growth
Growth investors select investments based simply on growth in earnings or growth in market price; on the assumption that these will always be the best performing investments. Value investors invest in undervalued companies - as measured by low Price/Earni
Momentum
Momentum investors believe that stocks that show positive earnings momentum (e.g., higher than expected earnings) are more likely to continue to surprise investors (in a good way) and that will lead to a stock price rise. Conversely, they believe that sto
global investing
Global investing is the spreading of investments in countries across the world - with the emphasis on making investments in countries that are likely to experience faster rates of growth.
Emerging Market
An emerging markets fund is a type of growth fund (growth investing) that invests in companies in rapidly growing countries (e.g., a "BRIC" Fund - Brazil-Russia-India-China). Investing via a mutual fund structure provides diversification (which reduces in
Tax Advantaged Investments
Municipal bonds offer interest income that is free of federal income tax and free of state and local income taxes when purchased by a resident of that state. Thus, they offer a tax benefit. Direct investment in real estate permits the owner to deduct depr
Contrarian
Contrarian Investing
A "contrarian" is a person that goes against the conventional wisdom. Thus, when the market is rising rapidly, the contrarian believes that it is ready for a fall and will sell; and when the market has declined precipitously, the cont
DRIPS
Dividend Re-Investment Plans (DRIPs)
"DRIP" stands for "Dividend Re-Investment Plan."
DRIPs are plans offered by corporate issuers that give shareholders the ability to reinvest cash dividends paid by the company in additional shares of that company. This
IPS
A portfolio composition is selected for a client which reflects his or her investment objective, risk tolerance, liquidity needs, time horizon, etc.
This is documented in a statement of investment policy (also abbreviated the "IPS" - Investment Policy Sta
inside market
The "inside market" is the high bid and low ask. These are the best prices at which to trade. Stocks are purchased from a dealer at the dealer's ask price - and paying less to buy is better - so the low ask of $7.70 is the best price at which to buy. Stoc
Specialist
A Specialist cannot exercise discretion over price or time of execution, and therefore cannot accept a not held order. Specialists accept market, limit and stop orders for execution.
block trade
A trade of 10,000 shares or more is a block trade (as in a large block of stock). Such a trade is large enough to strongly influence the market price of a stock, so these are often handled outside of computerized execution systems to avoid a market price
Trading ahead
Trading ahead" is a specific NYSE violation where a Specialist (DMM), rather than matching a customer who wants to sell at the market to another customer who wants to buy at the market, "trades ahead" and instead, buys the security from the seller into t
Regulation T
Regulation T of the Federal Reserve Board controls the extension of credit on securities from broker to customer. Regulation U of the Federal Reserve Board controls the extension of credit on securities by banks.
cash account
Any security, whether marginable or not, can be purchased in a cash account as long as 100% of the purchase amount is deposited. In a margin account, marginable securities can be purchased by putting up the 50% Reg. T. margin percentage (or more than this
Totten Trust
A "Totten Trust" is an account that can be opened at a deposit taking institution, where the beneficiary is named on the account. It is the same idea as Transfer On Death (TOD) registration at a brokerage firm.
The owner controls the account, can use the
Tenants by Entireties account
another name for a joint account with rights of survivorship. Each tenant 100% owns the account; if one dies, the remaining tenant(s) 100% own the account.
Sole Proprietorship
To form a sole proprietorship, one simply goes into business. There are no legal filings with the State. Of course, the sole proprietor does have unlimited liability, but this is not an issue for this customer. Setting up a C or S Corporation or a Limited
C Corporation
+A C Corporation must compute net income or loss at the corporate level and pay tax on it.
+C Corporations are chartered in a state
+Any distributions to shareholders are made from after-tax income and are then taxed AGAIN at the shareholder level.
+Unlim
S Corporations
+S Corporations are chartered in a State
+S Corporations, sole proprietorships and general partnerships are all not taxable entities. Each item of income and loss from these flows through onto the owner's tax return and is only taxed at the owner level.
H
When comparing C Corporations to S Corporations:
+C Corporations are chartered in a State
When comparing C Corporations to S Corporations:
C Corporations can have an unlimited number of shareholders; S Corporations can only have a maximum of 100 shareholders.
C Corporations can issue preferred stocks an
General Partnership
A General Partnership is formed when 2 or more persons form a business under a general partnership agreement.
Like a sole proprietorship, there is no requirement to file the partnership agreement with the State - though some States recommend that the agre
LLC
LLCs are neither a corporation nor a partnership.
They are formed as a business entity that gives the "flow-through" benefit associated with S Corporations but without the 100 shareholder limitation.
Also, the LLC owners may take a management role without
General Partners
The general partner is the key executive; makes management decisions such as deciding which investments to make; and either manages the program or oversees a manager. The GP collects a management fee for these duties and assumes unlimited liability.
Family Limited Partnership
Family limited partnerships are used for estate tax planning, where the family members are the partners of the venture.
Typically the parents are the general partners who contribute assets to a trust over which they control - the children are the limited
Trust
A Trust account is a legal entity formed in the state.
A trustee is appointed to manage the assets for a beneficiary under the terms set forth in the Trust Agreement.
The Trust Agreement is prepared by an attorney for the customer.
To open a trust account
Grantor
The "settlor" or a trust is the person who grants property to the trust for the benefit or one or more beneficiaries. The settlor is also called the grantor, donor or trustor.
The trustee is appointed by the settlor to manage the assets of the trust in th
Trustee
Trustees must act in the best interests of the beneficiaries of the trust and must conform to the "Prudent Man" rule.
The trustee must invest and manage trust assets solely in the interest of the beneficiaries
If the trustee has 2 or more beneficiaries, t
non-revocable trust
A "non-revocable" trust is a trust which cannot be changed or canceled once it is set up without the consent of the beneficiary.
Contributions cannot be taken out of the trust by the grantor.
Irrevocable trusts enable a person to give money and assets awa
Revocable Trust
A trust that may be changed or canceled by its grantor or by another person is a "revocable" trust.
This type of trust does not avoid estate taxes (as an irrevocable trust does).
Income in a revocable trust is taxed at the grantor's tax bracket (since the
Fiduciary
An executor that assumes responsibility for managing the assets of an estate is required to carry out his duties with utmost care - this person is a fiduciary.
The executor must act in the best interests of the estate and must oversee all legal, accountin
Per Capita
Per capita" is Latin for "by the head." What this means is that each named living beneficiary gets an equal share of the estate.
For example, A and B are adult children named in the will to share "per capita" in the estate. B predeceases the testator, le
Legal List
A state-approved list of securities that can be purchased by commercial banks, savings and loans, pension plans, and for fiduciary accounts.
This list typically consists of conservative, high-grade bonds and preferred stocks.
Non-Financial Consideration
Ethical investing means that the customer uses his or her environmental, religious, or political views as the basis to include or exclude specific stocks or industries from his or her investment possibilities. This is a type of "non-financial" considerati
Suitability
Part of a suitability determination is making inquiry about the customer's "tax status." The higher the customer's income, the higher the tax bracket, making Choice C true. A customer's state of residency is important (Choice D, though "State" is not ment
income statement
The income statement of the client reflects income (wages, commissions, bonuses, dividends, interest on investments) and expenses (living expenses, taxes, interest paid on loans on a mortgage, insurance expenses, etc.).
The cash value of whole or universa
Personal Possession
A "personal possession" of a customer is an item that is typically kept in the customer's home. These include furniture, artwork, jewelry, clothing, etc.
This is basically an "insurance" definition for items that would be covered under a personal possessi
amount that is available for investment in a portfolio is:
Both the automobile and home are long-term assets with loans against them - these are excluded from assets that can be invested. Even though there is equity in these long-term assets, it is not liquid and thus not part of the available funds for investmen
capital need
A "capital need" means that a specific sum of money is needed at a future date to meet an upcoming need or obligation. For example, a capital need might be the need to pay for a kid's college; the need to accumulate enough money to make a down payment on
Insurance Approach
An "insurance approach" to a customer's capital needs analysis factors into the investment plan the fact that if the client dies prematurely, then the plan may not be fully funded and the client's beneficiaries may suffer as a result. In such a case, life
Earned Income
Earned income includes wages, salaries, tips, bonuses, royalties for books and self-employment income. Social security payments and alimony payments are "transfer payments" that are taxed at the same rate as earned income, but they are not defined as such
Portfolio Income
Portfolio income (and loss) is defined as dividends and interest received; offset by any interest expense paid on funds borrowed to buy the investments that generated the income; and other expenses involved with holding those investments (such as a safe d
Passive Income
Passive income (and loss) is defined as income and expenses from real estate investments and limited partnership (tax shelter) investments.
Passive income and loss is defined as that derived from real estate investments and limited partnership investments
Taxes: Dividends
The maximum tax rate for cash dividends received from corporate stock investments is reduced to 15% for individuals with income under $400,000 ($450,000 for couples). If income exceeds these levels, the rate is increased to 20%.
By taxing these cash distr
Taxes: Capital Gains
A short term capital gain (or loss) is a gain or loss upon disposition of an asset held for 1 year or less.
Short term capital gains are taxed at ordinary income tax rates; the maximum rate is 39.6%.
Under Internal Revenue rules, a capital gain (or loss)
Offsetting Capital Gains / Losses
Each year, capital gains and losses arising from the disposition of all assets must be "netted" against each other.
If there is a net capital gain (either long or short term), this is taxable that year.
If there is a net capital loss, this is deductible f
TAXES: Sale of a Residence
The tax code permits the first $250,000 of capital gain from the sale of a personal residence to be excluded from tax for an individual ($500,000 for a married couple).
To qualify, the residence cannot have been rented out for more than 3 of the preceding
Adjusted gross income
Adjusted gross income on a tax return includes all sources of taxable income, including wages, commissions, royalties, alimony, social security payments, pension plan payments (except for payments attributable to the cost basis in non-qualified plans), in
Cost Basis
When stock is purchased, a "cost basis" is established for tax purposes.
Any capital gain or loss will be determined by deducting the "sale proceeds" when the stock is sold from this cost basis.
The "cost basis" for stock is the price paid for the stock,
Stock dividends and stock splits
Stock dividends and stock splits received are not "taxable events."
When a stock dividend or stock split is "paid"; the issuer sends extra shares to the stockholder, with each share having a reduced real value.
For tax purposes, the cost basis of the stoc
specific identification of shares
If a stock position has been acquired incrementally, that is, purchases have been made in smaller lots over a period of time, the tax code allows the "specific identification" of shares when that stock is sold.
By using specific identification, the taxpay
Stock Option Grants
Stock options granted to an employee are not taxable unless the options are exercised and the stock purchased via the exercise is subsequently sold.
The difference between the exercise price and the sale price is a capital gain, and the tax rate applied d
TAXES: Are mutual fund distributions taxable?
Whether a shareholder reinvests capital gains and dividends or does not reinvest, the shareholder must report them for income taxes.
Taxation of mutual fund distributions is based on the length of time that the fund held the underlying securities.
All fun
Estate and Gift Taxes
Estate and gift taxes are imposed when a person dies, leaving a taxable estate; or when a gift is given from 1 person to another.
The estate or the donor is responsible for paying the tax due (since they have the money!)
The tax rate increases progressive
Gift Tax
The first $14,000 of a gift (other than to a spouse) is excluded from tax in 2016. Any amount above this is subject to gift tax, to be paid by the donor. Since the gift to both the son and the daughter was valued at $22,000 each, the amount above the gift
Estate Tax
An unlimited marital exclusion applies to spouses when 1 party dies. Thus, if a husband dies, no estate taxes are paid at that point by the surviving spouse. When that person dies, the estate is subject to tax, with an estate tax exclusion on the first $5
TAXES: Taxable Income of a Corporation
Dividends received from any investments (domestic or foreign), and gains on any asset held for investment are taxable. Please note, however, that part of dividends received by corporate investors are subject to an exclusion from tax. Any interest income r
Trust Taxation
To form a trust, a tax identification number for the trust must be obtained and an annual tax filing on Form 1041 is required.
limited partnership
An investor in a limited partnership establishes a "tax basis" that sets the limit for permitted tax deductions.
The beginning basis is the amount invested, plus that partner's share of any debt assumed by the partnership.
For example, if an investor puts
determine tax filing status
When filing a tax return, a "filing status" must be chosen. There are 5 possible filing statuses:
Single;
Married Filing Jointly;
Married Filing Separately;
Head of Household;
Qualifying Widow(er) With Dependent Child.
Determination of marital status is b
Personal Bankruptcy
A home is an asset included in the bankruptcy estate. Typically, the home is sold for less than the amount of the outstanding mortgage - and the entire proceeds of the sale go to pay off the mortgage, with any remaining unpaid principal balance discharged
ERISA
Retirement plan trustees, plan investment advisers and plan administrators all owe a fiduciary responsibility to the plan participants. Remember, they are being paid for their work by the plan and they must act in the best interests of the plan participan
Settlor
The "settlor" function of an ERISA plan is to make the business decisions for the plan. These include:
choosing the type of plan or plan options;
amending the plan or changing plan options;
requiring employee contributions (e.g., a 401(k) plan);
terminati
Coverdell
+Any adult can open a Coverdell for a child (as long as the adult's income is not too high), and the maximum annual contribution of $2,000 is not tax deductible.
+The account builds tax-deferred
+The maximum permitted contribution per beneficiary into a C
UTMA
There is no tax deduction for contributions to UTMA (Uniform Transfers to Minors Act) accounts.
In UTMA accounts, the earnings are taxed each year
If earnings in a UTMA account are used to pay for qualified education expenses, they are still taxed.
UTMA a
529
529 plans are termed "municipal fund securities" because they are State established plans that allow for contributions that are invested in designated mutual funds.
There is no tax deduction for contributions to 529 accounts - all contributions are made w
Defined Benefit Plan
A defined benefit retirement plan is a corporate sponsored plan that promises a "defined benefit" amount to each plan participant.
The "defined benefit" amount is based upon the employee's earnings just before retirement.
Such plans generally require full
defined contribution plan
A defined contribution plan specifies a fixed percentage of income (up to maximum permitted amounts) that is contributed annually by either the employer or the employee.
The annual contribution amount is fixed (either in dollar or percentage terms); and t
Money purchase retirement plan
a defined contribution retirement plan that specifies a fixed percentage of income or fixed dollar amount to be contributed into the plan annually.
Money purchase plans are qualified plans under ERISA that are really a variation of a defined contribution
PROHIBITED: ERISA
ERISA specifies prohibited transactions between the plan trustee and so-called "parties-in-interest." A "party-in-interest" is any fiduciary, counsel or employee of the plan; or any employer whose employees are covered by the plan. The prohibited transact
Pension Benefit Guaranty Corporation
Pension Benefit Guaranty Corporation (PBGC) provides insurance for defined benefit plans formed under ERISA that are terminated (typically due to the closing of a company) that have an unfunded pension liability.
PBGC will cover pension benefits to a plan
Municipal bonds in IRAs
Municipal bonds are not suitable for tax deferred accounts such as pension plans and IRAs. These accounts are already tax deferred, so putting taxable investments in them that generate a higher rate of return than municipals is appropriate. Furthermore, t
PROHIBITED: Pensions and Retirement Plans
Pension funds and all retirement plans cannot trade on margin; only cash accounts (fully paid positions) are permitted. They can buy securities fully paid, can buy puts on fully paid positions and can sell calls against fully paid positions for premium in
Calculating Withdrawal Timeframes
If a sum of money is invested and is earning interest and during this time frame, withdrawals of funds are being made in even amounts, the exact time frame over which the account will be fully depleted can only be calculated using a financial calculator,
IRA
Under age 50: $5,500
Above age 50: $6,500
Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2016 is $5,5
PENALTY: IRA
If an individual contributes more than the permitted amount to an IRA, there is a 6% excess contributions tax applied for each year that the "extra" money stays in the account.
If an individual takes a premature distribution from an IRA (defined as a dist
IRA Assets Held in an Estate
The IRS requires that when an IRA account is left to a beneficiary, as long as distributions have not commenced, the payout from the account must be made based on the life of the "designated beneficiary."
This is the beneficiary with the shortest expected
CONVERSION: IRA
A Traditional IRA can be converted into a Roth IRA. This is done as a "rollover" and, if the contributions previously made into the IRA were deductible; then tax must now be paid on these amounts (but no penalty tax is imposed). The benefit of converting
ROTH IRA
Unlike Traditional IRAs, Roth IRA contributions can continue after age 70 1/2, as long as that person has earned income - but remember that Roth IRA contributions are not deductible. Thus, Choice B is true and Choice A is false. And unlike Traditional IRA
401k
401(k) plans are employer sponsored qualified defined contribution plans. They are not defined benefit plans.
401(k) plans are different than other types of plans because the employee "chooses" to participate and decides the contribution to be made. Any c
Safe Harbor 401(k)
A safe harbor 401(k) relieves the employer of having to perform annual benefits testing. This required annual testing for traditional 401(k) plans shows that the plan does not favor highly compensated employees (a so-called "top-heavy" plan).
To get the s
ERISA Rule 404(c) Application
Rule 404(c) permits a 401(k) plan to offer investment options to its participants. It requires that the plan sponsor offer at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that wh
403b
403(b) plans are defined contribution money purchase plans established by not-for-profit entities such as universities or hospitals.
The plans are essentially similar to 401(k) plans, but instead of being established by a for-profit company, the plan is e
457
A 457 plan is similar to 401(k) and 403(b) plans, except that it can only be established by government employers (and certain non-profit employers).
These are non-qualified plans because they are discriminatory. They generally are only available, as an ad
TAXES: Death
All IRA assets are included in one's gross estate - it makes no difference if it is a Traditional IRA or a Roth IRA. The beneficiary who receives the Roth has no tax liability - it is the estate that pays the tax due.
Stocks and bonds held in individual o
Fiduciary Obligation
Investment advisers have a fiduciary obligation to their customers. They must always act in the customer's best interests and must always take the same side of a trade as the customer. It is for this reason that if an investment adviser recommends a secur
Fraudulent Promissory Notes
Legitimate promissory notes are marketed to sophisticated, corporate investors that have the ability to thoroughly research the company issuing the notes and determine whether the issuer will be able to repay principal and interest.
However, there have be
INVESTMENT ADVISER: Lending to a customer
An investment adviser is NOT permitted to lend money to a customer, unless the investment adviser
+does so through an affiliated "regulated lender."
+An affiliated broker-dealer is regulated under Regulation T and can lend money to a customer;
+as can an
INVESTMENT ADVISER: Sharing in gains and losses
Investment advisers are PROHIBITED from being compensated based on a percentage of gains and losses in an account.
The Investment Advisers Act of 1940 allows performance fees to be charged if a customer is wealthy ($1,000,000 of assets with the firm or a
Which statements are TRUE regarding the post-registration requirements of the Uniform Securities Act?
Post-registration requirements are for
+broker-dealers
+investment advisers
This portion of the Uniform Securities Act DOES NOT apply to their AGENTS.
Post-registration requirements cover such things as
+maintaining books and records
+making required fili
The Uniform Securities Act allows the Administrator to make, amend, or rescind any provision of the Act
The Uniform Securities Act allows the Administrator to make, amend, or rescind any provision of the Act, if the action is NECESSARY and IN THE PUBLIC INTEREST.
TIPS: Calculate Bond Value
TIPS are Treasury Inflation Protection Securities. The bonds are issued at par with a lower interest rate than conventional Treasury bonds. In return, the principal amount is adjusted upwards for inflation, with the inflated principal amount paid at matur
INVESTMENT ADVISER: CHART
If an investment adviser uses a performance chart to promote itself, it MUST disclose that
+A chart, in and of itself, should not be used by a customer to measure performance, or to decide whether to invest to with the adviser.
+The chart must be accompan
Dollar Cost Averaging
DIFFERENCE BETWEEN AVERAGE COST PER SHARE AND AVERAGE COST
The average cost per share is: $2,400 (TOTAL AMOUNT INVESTED) /47.9 shares (TOTAL NUMBER OF SHARES PURCHASED) = $50.10 per share. This is the NAV at which the customer would breakeven.
Note, in co
NASAA has the power to set record retention rules for a State-Registered Adviser that cover...
+Communications to 2 or more persons
+E-mails to clients
+Trial balances
+General ledger
Can a husband or brother open an account for a family member?
A third party is prohibited from opening an account in someone else's name. The customer must open the account personally or sign the new account form to open the account. To allow a third party to trade in a customer's account, the customer must open the
Statutory Investment Adviser
An individual is a registered representative with a broker-dealer. With the broker-dealer's approval, when not working for the broker-dealer, this individual prepares financial plans at night, at no fee to the customer. The individual recommends that any
DEFINITION: Accredited Investor
Rules 501-503 define who is an accredited investor and who is a "sophisticated" investor under Reg D.
Individuals are accredited if
+They have $200,000 of annual income per year
+A net worth of at least $1,000,000. An individual that has $1,000,000 of sec
INSURANCE: Capital Needs Analysis
+A Capital Needs Analysis determines the amount of capital that a person needs to have at retirement in order to meet their anticipated standard of living. Most people need less income in retirement than at other stages of life. A "typical" capital needs
Money Purchase Retirement Plan
Variation of a DEFINED CONTRIBUTION plan under ERISA
+Qualified plan under ERISA
+Employer sets up the plan and contributes a fixed percentage of each employee's income annually (capped at 25%, up to $53,000 maximum in 2016)
+No employee contributions to
INVESTMENT ADVISER: Prohibited Practices
PROHIBITED:
+Testimonials in investment adviser advertising.
+Oral advisory contracts are NOT permitted under the IA40 - they MUST be in writing. The "Brochure Rule" makes this confusing as it requires delivery of the "Brochure" at, or prior to, entering
Fiduciary Responsibility
When recommending a security to a customer, an investment adviser must disclose any conflicts of interest (for example, the executing broker that will receive a commission for handling the recommended transaction is an affiliate of the investment adviser)
Complaints
SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways
+The firm may keep a written record of each customer complaint and its resolution, including customer name, address, account number, date of receipt of complai
Selling Away
If this agent were to direct his customers to the venture capitalist, he would be "selling away" from his firm - that is, putting his customers into a security that his firm doesn't know about in a transaction that the firm is not supervising. Such privat
REGISTRATION: Foreign Jurisdiction
Provision regarding violations of the law of a foreign jurisdiction is set at a 5 year statute of limitations.
The Uniform Securities Act sets a 10 year statute of limitations for domestic securities related violations as a cause for denial of registratio
Internet Laws
Since the internet can be viewed from anywhere, Uniform State Law gives a safe harbor to having to register in a State if the following legend appears on the site
+"The broker-dealer agent or investment adviser representative may only transact business in
When is State registration not required
The Uniform Securities Act states that registration of a security is not required if
+the issue is exempt
+the issue is non-exempt but is offered in an exempt transaction; or
+the issue does not fall under the definition of a security
+the issue is a fede
IA 40: EXEMPT
Under the Investment Advisers Act of 1940, anyone who
+gives advice about securities only to insurance companies is exempt from registration.
The "idea" is that an insurance company is a professional investor that will not tolerate being overcharged by an
The difference of EXEMPT from registration between
+Investment Advisers Act of 1940
and
+Uniform Securities Act
The Investment Advisers Act of 1940 exempts from registration, any person who renders advice about securities to no more than 15 PERSONS within a 12 MONTH period.
The Uniform Securities Act (State law) 'de minimus' exemption states that if an adviser with
Under NASAA, investment advisers must update their ADV filing made with the State
Under NASAA rules, investment advisers must update their Form ADV (State registration form)
+ANNUALLY, within 90 DAYS of FISCAL YEAR END, to reflect current and accurate information and MUST SEND the updated Form ADV to its clients WITHIN 120 days OF YEAR
Adjusted Gross Income
Adjusted gross income on a tax return includes all sources of taxable income, including
+wages
+commissions
+royalties
+alimony
+social security payments
+pension plan payments (except for payments attributable to the cost basis in non-qualified plans)
+i
Newspaper Offering
For a newspaper offering to come under the jurisdiction of the State Administrator, it must be PUBLISHED in the State, and have AT LEAST 1/3 of its circulation in that StatE during the last 12 months.
Since this is a "local" newspaper, the offer is only m
Internal Rate of Return
The internal rate of return of an investment is the implicit interest rate that discounts the cash flows generated by the investment to a value of "0." This is the true "yield" of the investment, considering the time value of money.
When comparing DOLLAR-WEIGHTED AVERAGE return to TIME-WEIGHTED AVERAGE return for a mutual fund investor
TIME-WEIGHTED AVERAGE RETURN is used by MUTUAL FUNDS on their PERFORMANCE CHARTS to show average annual investment returns. It measures how well the fund manager performed in increasing the dollars that have been invested. Additional cash moving into the