CHAPTER 6 Flashcards
(30 cards)
Municipal Fund Securities and what board are they subject to?
529 Plans
Local Government Investment Pools (LGIPs)
ABLE Accounts
What must 529 plans be accompanied by?
Official Statement (similar to prospectus)
Two Types of 529 Plans
Prepaid tuition
- Covers only tuition
- Hedge against inflation
- Specific institution
College savings
- Investment selected by donor
- Can beat inflation
- Can lose value
529 Plan Details
No max contribution (some states have levels)
Gift taxes apply for contributions, can front load for first 5 years
Assets remain in donor’s control
Funds can be used for college and pre-college (up to $10k)
Withdrawals tax free if for college (room and board, books for college savings)
Grow tax free or tax deferred
Can transfer to related beneficiary
Rollovers are permitted from state to state once every 12 months
LGIPs
Local governments establish these to provide other government entities with short term investment vehicle. Formed as a trust where municipalities can purchase shares or units in the LGIP’s investment portfolio
Operate similar to a MM but are not one. Permitted to maintain a $1 NAV, promoting liquidity and minimum price volatility
Not required to register with SEC, not subject to their rules. Sponsored by a state and considered a muni security. Regulation varies state to state
No prospectus, still need information statements, investment policies, and operating procedures. Management fees detailed.
Investors in LGIPs are other government entities, NOT retail investors
ABLE accounts
Beneficiary and owner are same person
Only available to someone with serious disabilities and onset of disabilities must have started before 26
Account can be established at any age, but disability needs to have started before 26
Only 1 account per person.
Contributions can be made by any person, not deductible (some states give deductions)
Have a max annual contribution limit
Growth is taxed deferred and withdrawals and income are tax free
Partnership taxation
Partnerships are tax reporting but NOT tax paying, partners or investors report that
Is a LP interest a type of security?
YES
General vs Limited Partners
General partners have some level of management, ownership can be unequal, profits distributed per share, unlimited liability.
Limited partners have no managerial responsibility and cannot have it, limited liability, can lose if participate, income is passive.
Another name for LP
Direct Participation Program
DPP
Buying a LP interest public vs private
Public purchase a bunch of investors, you get a prospectus
Private purchase less buyers you get a private placement memorandum for disclosure
Order for liquidation of LP
Secured Creditors
General Creditors
Limited Partners
General Partners
Points to remember about LPs
Most common industries are real estate, energy (oil and gas), and equipment leasing
Often experience losses
Losses pass through to investors and can offset passive income from other sources
DPPs use depreciation and depletion to reduce taxable income, reduce taxable income without impacting cash flow
Benefits and Risks of LPs
Pros
Investment managed by GP
Limited liability
Flow through of income and expenses (depreciation)(passive losses are a pro to offset other passive income)
Cons
Business risk
Liquidity risk
Audit/recapture risk of tax benefit
Liquidity risk for LPs
Any transfer of LP requires permission of GP. Assume LP will hold it to the very end, can be highly illiquid
Audit/Recapture tax benefit
If IRS audits a partnerships, the changes flow through to LPs who then have to pay penalties/interest on any underpaid taxes
REITs
Trusts that invest in real estate and mortgages, structured like a closed end fund but ARE NOT considered an investment company as they do not hold securities
Equity REITs (commercial property)
Mortgage REITs (mortgages)
Hybrid REITs (both)
REIT tax benefits
Shareholders receive dividends from investment income or capital gains distributions
Investors buy shares or certificates or the REITs
Conduit tax theory (subchapter M) and can avoid triple taxation
- Need to distribute 90% of NII and 75% of income needs to come from real estate
NOT considered DPPs because they do not transfer losses
Public vs Private REITs
Public - registered with SEC, all disclosure requirements
Private - Not registered with SEC, not the same disclosure requirements, subject to greater risk, difficult to price and have far less liquidity
ETFs
Trades like a stock similar to closed-end investment companies but registered as open end or UIT
Intraday pricing
Can be purchased on margin and sold short (mutual funds cannot)
Expenses are lower than MFs, management fee low
ETFs do not actively trade within the fund resulting in greater tax efficiency than MFs (MFs usually have cap gain distributions, ETFs do not)
Commission every time you buy or sell
No sales charges on ETFs
Pros/Cons of ETFs
Pros
Pricing and ease of trading (not using forward pricing)
Margin
Operating costs
Tax efficiency (only tax consequence really when you sell for CG)
Cons
Commissions
Market influences on price (may buy above NAV or may sell below NAV)
ETNs
Unsecured debt securities issued by banks or financial institutions that track the performance of a particular index but is not invested in that index.
Bond like instruments with stated maturity date but do not pay interest and offer no principal protection.
ETNs investors get a cash payment linked to performance of an index minus management fees, when note expires.
Exposed to market risk AND default risk (biggest risk)
Limits to size of ETN issues
Can be very illiquid, can sometimes trade on exchanges
Who is responsible for tax consequences of a limited partnership?
The investors
Tangible Drilling Costs are:
Can be depreciated and have some salvage value at the end of the program
