Class Notes + Flashcards

Question

STATE Assignment of contract

Answer 1

* No assignment of the contract may be made without the CLIENT'S CONSENT

Answer 2

* If a partnership, the adviser must notify the client of any change in the membership of the partnership

Answer 3

* FED: The Brochure and Brochure Supplement Rule - 120 days annual delivery * STATE: Same, except 48 hour rule

Answer 4

1. principal business is investment advice 2. substantial portion of his service is providing investment supervisory services (the giving of continuous advice on the investment of funds on the basis of the individual needs of each client)

Answer 5

1. An associated person of an adviser firm (not clerical) 2. Makes recommendations or otherwise gives advice 3. Manages accounts of clients 4. Solicits or negotiates for the sale of advisory services 5. Supervises any of the above

Answer 6

* May not used initials RIA or IAR on biz cards or letterhead * Professional or educational designations are okay

Answer 7

NOT A CAUSE for revocation

Answer 8

IS A CAUSE for revocation

Answer 9

* $110 million or more under management registers with SEC * 100-110 can do either

Answer 10

* Less than $100 million under management registers with the state

Answer 11

1. corporate stocks and bonds 2. options 3. investment company shares

Answer 12

1. Gov't 2. State and local muni 3. Commerial paper (max 270-day maturity) 4. Bank securities *\*(not bank holding company securities)* 5. Any interest in a rail road equiptment trust 6. Securities issued by regulated public utilities 7. Intrastate (1 state) offerings (Rule 147)

Answer 13

1. Private placements under Reg D (Rule 501 - accredited investor) * Institutional investors * Exmployee benefit plans over $5 million * Insider of the issuer * Individual with own or joint (with spouse) net worth greater than $1 million (excluding primary residency) or earnings over $200,000 ($300,000 for joint) and expected this year 2. File a Form D within 15 days of sale

Answer 14

* must deliver **PROSPECTUS** * Preliminary prospectus (red herring) * **Contains expected range** * Does **NOT contain price or effective date** * no orders, no deposits of money * No highlighting or other alterations with prospectus * **Rule 482** - _Ommitting Prospectus_ = legal name for typical mutual fund advertisement/tombstone ad

Answer 15

1. Created SEC 2. Antifraud provisions 3. provided for registration of stock exchanges and BDs (and associated persons) 4. Grants the FRB the authority to regulate credit (Reg T) * Margin Accounts * **No credit on new issues and options** 5. Defined control person - officer, director, **more than 10% shareholder**, and immediate family 6. **Form 13F** - instituitional investment managers who exercise investment discretion over $100 million or more in certain equity securities 7. **Regulated Transfer Agents and SIPS** (systematic invesment plan - regular/equal pay into a MF) 8. Associated Person - anyone associated with a BD, includuing silent partners and outside directors, **but NOT clerical personnel**

Answer 16

1. Types of Investment Companies * Face amount certificate company * UIT (unit investment trust) * Management company * **(MF) Open end - continuous primary offering** * Closed end - traded on exchanges or Nasdaq

Answer 17

* Requirements to register with SEC 1. Private capitalization of **$100,000** 2. Clearly defined investment objective 3. **Annual financial reports to SEC** * **semiannual to shareholders**

Answer 18

* BOD * no felonies or _securities-related_ misdemeanors * minimum **40% noninterested** * Investment Adviser to manage portfolio for a fee * **2 year initial contract; renewable annually** * max **60** day termination * MUST BE IN WRITING

Answer 19

* MANAGERS CAN NOT: 1. Purchase on margin 2. Sell short 3. Speculate with options 4. Have a joint trading account 5. Purchase anything greater than 3% of shares of another investment company

Answer 20

* Approved by simple majority of non-interested board memebers 1. Initial approval - By the whole board, independent board and shareholders 2. _Annual_ renewal and _quarterly review_: whole borad and independent board 3. Termination: independent board **OR** shareholders * **No higher than .25% if using term "no load"**

Answer 21

* Using information not available to the public to profit or avoid a loss

Answer 22

1. **up to greater of $1 million or 300% profit made/loss avoided (civil penalty)** 2. **20** year jail term (criminal penalty) 3. **Both** tipper and tippee may be liable * RR and BD may be liable 4. Bounty to informant

Answer 23

1. Insiders who violate insider trading rules may be liable to contemporaneous (at the same time) traders who did not have insider information for **losses sustained** 2. Called _private rights of action_ 3. Penalities & Statute of Limitations * Lawsuits may be inititated **up to 5 years after violation** * Damages as much as the profits made or losses avoided

Answer 24

1. Preemptive authority of SEC 2. Dual registration requirements - eliminated for certain securities and investment advisers 3. CREATED FEDERAL COVERED CLASS OF ADVISERS AND SECURITIES = advisers managing **$100 million or more** may register federally (SEC)

Answer 25

* STATE * Uniform Securities Act

Answer 26

* **Administrator** = official or agency that administers STATE securities laws * Also called: commissioner or secretary

Answer 27

* Admin has power over any offer to buy or sell that: 1. **Originated** in the Admin's state 2. Was **Directed** to the Admin's state 3. Was **Accepted** in the Admin's state * \*Different origin, direct, etc. = multiple admins* * However, the admin does NOT have jurisdiction merely because a check was mailed or a certificate were sent from the admin's state - IT IS ALL ABOUT **\*\*THE OFFER\*\***

Answer 28

* Inspects * Investigates * Subpeonas (people/evidence) * Establishes registration, testing, and fees (66, 7, etc.) * **Denies, suspends, or revokes registration**

Answer 29

* A person = **any entity capable of issuing, dealing in, or investing in securities** and specifically refers to the following: * individuals - natural person * corporation * partnerships * associations * joint stock comps * unincorporated * gov't units (state, counties, school districts, or political subdivisions)

Answer 30

* A dead individual * An individual who has been legally declared mentally incompetent * A minor

Answer 31

* 4 Prong Definition: * an investment of money is made in * a common enterprise * a profit is anticipated * through 3rd party management (MF/not through your own efforts) \> Howey Decision of the US supreme court

Answer 32

* Stock * Bonds, debentures, notes * Options * Certificates of deposit for security (ADR, ADS) * Variable contracts issued by insurance companies (life/annuity)

Answer 33

* Insurance (fixed policies / fixed annuities) * Retirement plans (IRA, Keogh - plan itself is not sec.) * Commodity futures and actual commodities (precious metals) * Collectibles - art, antiques * Currency - largest trading MKT * Condominium used as personal residence (not resort rental)

Answer 34

**\*Person\*** who issues or PROPOSES to issue a security: primary transaction

Answer 35

* person other than issuer: secondary transaction * sold by someone other than issuer (selling used car)

Answer 36

* Person with a place of business in this state engaged in business of effecting securities transactions for accounts of others (brokers/agent) or for own account (dealer/principal)

Answer 37

* BD Definition excludes: * Agents (RR) - state term (work FOR BD) * Issuer * Bank or trust company * person with no office in state who directs offers to existing clients who are not residents of the state * person with no office in state who limits clients to issuers, other BDs, financial institutions

Answer 38

1. Insurance companies and banks 2. Employee benefit plan with assets of at least $1 million 3. Investment Companies

Answer 39

* Supervised person / sales rep (a natural person) * Represents BD in purchase or sales of securities - must register * Represents issuer of non-exempt security or in non-exempt trans - registration required

Answer 40

* ATTEMPT to solicit purchase * Attempt to dispose of securitiy or interest in security for value * Sale of rights, warrants or convertible security is an offer of the underlying stock

Answer 41

* Transfer of value * Bonus of warrants or stock (Ex. Buy X amount, get Y Free!) * Gifts of **assessable** stock (purported)

Answer 42

* Gifts of NON assessable stock (gift of car) * Stock divs or stock split (if no payment) * Bona fide pledge or loan (in short sale - loan of securities) * Act resulting from approved merger or business reorganization

Answer 43

* Payment of PRINCIPAL and INTEREST, or DIVS (not capital gains) promised by a 3rd party (parent comp for a subsidiary debt)

Answer 44

* Individuals acting on behalf of and supervised by IAs * acronym = **IAR**

Answer 45

1. BDs = earn commissions or mark-ups by effecting **TRANSACTIONS** in securities for themselves or their clients 2. IA are compensated for giving **ADVICE** * *****When an IA makes a rec to a client, the client calls a BD to execute the trans*

Answer 46

* minimum net cap: NET [A**_B_****C**_D_] **C**APITAL * surety bond: **Custody/Discretion** * Examination (audits): YES * Filing (fees): YES * Transferable: NO

Answer 47

* Minimum Cap: **NO** * Surety Bond: **Discretion (agent only)** * Examination (audits): **NO** * Filing (fees): YES * Transferable: NO

Answer 48

* Minimum Cap: **Net worth** * Surety Bond: **Custody/Discretion** * Examination (audits): **YES** * Filing (fees): YES * Transferable: NO

Answer 49

1. Application 2. Registration Effective date 3. Termination procedures 4. Forms (Form BD \> BD / Form ADV \> AI)

Answer 50

* Application includes 1. Background and history 2. Convictions (10 yrs, ANY felonies; securities-related misdemeanor) 3. Financial condition (BD and IA) 4. Consent to service of process = power of attorney

Answer 51

* From applicant to admin * Must accompany new applications for BDs, agents, IA, IAR * Permanent part of record - don't need to renew * Allows admin to receive legal papers * Approval for investigation

Answer 52

* Not until granted registration by state - noon of 30th day * Not soley on passing exam

Answer 53

* Agent - notification to Admin by both AGENT and BD * IAR - with state IA, IA notifies Admin * IAR - with federal covered IA, IAR notifies Admin * Effective at noon of 30th day, BUT ADMIN RETAINS JURISDICTION FOR 1 YEAR

Answer 54

1. Form of organization (sole prop, LLC part, corp, etc.) 2. method of business (underwriting, FPing, etc.) 3. Registration of BD or IA automatically registers rep (agent or IAR) who s partner, officer or director (active role in biz) 4. Expires dec 31 unless renewed (also applies to agent and IAR) 5. Networth requirement for IAs 6. Sucessor Firms

Answer 55

* Discretion only, no custody of funds/sec. - $10,000 * Custody of funds/sec. - $35,000, unless having custody solely due to: * direct fee deductions (auto bill) * advising pooled investment vechicles subject to annual audit (VA, MF) * Notify admin when below required networth by end of next biz day * file financial report with admin within 1 biz day of notice, including a statement as to the number of clients accounts

Answer 56

* Merger, acquisition, or sale (Comp "A" no longer exists) * New application filed, effective for remainder of year * No additional filing fees

Answer 57

* the security is registered under USA * the security is exempt from reg under the act * the trans is exempt under the act

Answer 58

1. Registered * Coordination OR Qualification 2. Not registered * Exception Sold in an Exempt trans OR prohibited

Answer 59

Notice Filing - "Hey we're covered, coming in to do biz in your state, but you [admin] don't have jurisdiction over us"

Answer 60

* Maturity 270 days or less * Minimum $50,000 denomination (three highest ratings) * Commerical paper

Answer 61

1. US gov't and agencies 2. Munis 3. Canadian gov't (federal and political subdivisions but not corps) 4. Foreign national gov't with diplomatic relations (issued or guaranteed by) 5. Banks, savings institutions, and trust companies 6. Insurance companies (except variable contracts) 7. Regulated public utility companies and common carriers 8. Charitable, religious, and nonprofit organizations

Answer 62

* Exchange-listed securities * any Nasdaq stock * investment companies registered under the Inv Comp Act * Securities or trans exempted under the securities act of 1933 (Reg D private placements)

Answer 63

* Admin may require documents sent to SEC * Quantity of securities being sold in the state (fee) * For federal covered securities, generally investment company securities registered under the Inv. Comp Act 1940

Answer 64

* Coordination of a state registration with federal registration * Registration by coordination is accomplished by filing a registration statement with the admin * 3 copies of latest prospectus filed with the SEC * Copies of articles of indenture, articles of incorporation, and agreements among underwriters (if required by Admin) * Effective at the same time as federal registration if registration is on file for specified period (10-20 days) and if no stop order exists

Answer 65

* Primarly for intrastate issues (but can be used for any registration) * Any info the Admin requests * Effective when declared so by the Admin * Anyone can * **Used for intrastate issues!**

Answer 66

* Filing fees * Effective for 1 year from effective date, if underwriters or the issuer are still attempting to distribute unsold shares, effectiveness of registration may be extended until all shares are sold * may be amended after effective date to increase offerring sale if price and commissions remain unchanged * Admin may require issuer to file quarterly reports * Registration statement may be filed by * THE ISSUER * A BD * AN INTERESTED PARTY, usually a selling stockholder

Answer 67

* For securities; IF in public interest AND IF: * Registration statement is inaccurate, misleading or incomplete * Officer of the issuer has been convicted of a securities-related crime (10 yrs) * Security is subject to count injunction * Offering is deemed fraudulent * Offering expenses or promoter's fees are excessive or unreasonable * Registration has been revoked by the Admin in another state

Answer 68

* Appropriate prior notice * Opportunity given for a hearing * Written findings of fact and conclusions of law

Answer 69

* Before incorporation (promise of seed money) * Max of 10 subscribers and no funds paid in

Answer 70

* Restricted to 10 offers in any 12 consecutive months ither than to institutional clients * No immediate resale except for institutions * No compensation paid on sales to noninstituitional (retail) buyers

Answer 71

(Btwn Issuers and Underwriters) - poing public

Answer 72

* Investment companies * Insurance companies * Banks and trust companies * Employee benefit plans with not less than $1 million in assets (pension or profit sharing trusts) * BDs * Investment Advisers * Individuals meeting the SEC definition of accredited investor NOT considered institutional investors for the purpose of this exemption

Answer 73

* unsolicited nonissuer trans effected through BD; Admin may request proof * Isolated nonissuer trans

Answer 74

* Include those made by an executor, admin, trustee in bankruptcy, sheriff, and so forth

Answer 75

* Misleading or untrue statements * Repeating rumors * promising certain services with no intent to deliver * Not stating (omitting) material info * material facts = used in making investment decisions * Use of inside info * Unsuitable recs * Unique situations * Exercising discretion without authority (Asset, Action, Amount) * Time or price is not discretion (day order) * Commingling * Sharing customer profits or losses * written consent of client and employing BD * Borrowing customer funds or securities or lending money to clients (unless a lending institution * Written complaints * Larger than ordinary commissions (without disclosure) * Guaranteeing results * Soliciting sales or purchases in unregistered, nonexempt securities unless in an exempt trans * Sharing compensation UNLESS with appropriately registered personnel of same or affiliated frims unless authorized otherwise by the Admin

Answer 76

* Person is not deemed to be operating within the state IF: * Site may only make available general info, not specific advice or recs * Communication clearly states that the person may only do business in this state if properly registered or exempt from registration * Personalized follow-up to requests must be handled by those properly registered in the state * Any Agent or IAR MUST: * Disclose identity of BD or IA being represented * BD or IA authorizes activity and has supervisory responsibility

Answer 77

* For persons, if in the public interest AND: * Filing false or misleading application * Any felony or securities-related misdemeanor within the last 10 years * willful violation * Court injunction/admin order * Disciplinary action by other securities authorities within the last 10 years * Dishonest, unethical practice * Insolvency * in case of agents, if liabilities exceed assets or agent cannot meet obligations as they mature * in case of a BD or IA, a formal finding of insolvency is required * Sales reps (agents) not qualified because of training, experience, or knowledge (not solely of lack of experience) * Firm's failure to supervie employees * Failure to pay filing fees

Answer 78

* Out of business (mail returned-no forwarding address) * Legally declared mentally incompetent * Failure to pay filing fees

Answer 79

* Effective 30 days after receipt if no revocation or suspension in process * Disciplinary proceedings may be instituted UP TO 1 YEAR after effective date * Withdrawal on appropriate form * Form ADV-W ~ IA withdrawal * Form BD-W ~ BD withdrawal

Answer 80

1. Enforcement of all antifraud provisions 2. Must give notice of action to be taken * must give opp for hearings * must provide written findings 3. Summary orders to postpone or suspend until final determination is reached * no prior notice or hearing * must hold hearing within 15 days of written request 4. Issue cease and desist order for suspected improper activitiy 1. no prior notice necessary 2. if cease and desist order is ignored - can apply to courts for injunction 5. May proceed against firm if principal is disqualified 6. May not proceed against firm if only agent or IAR is disqualified 7. May investigate and subpeona in any state, whether or not the firm has an office in the state 8. 60-day appeal of order; appeal does not act as a stay unless ruled otherwise by the court

Answer 81

1. Willful violation of the USA 2. Fines to $5000, jail up to 3 years, or both 3. Statute of limitations is 5 years for fraudulent activity

Answer 82

1. Unlawful sale * must be within 2 years of discovery or 3 years of violation, whichever occurs first * court costs and attorney fees but not damages 2. Right of rescission - 30 dayss notice; if buyer receives offer of rescission and fails to accept or reject within 30 days, MAY NOT SUE 3. Rights of advisory client: recovery of advisory fees, losses on recommendations, court plus legal fees minus income received

Answer 83

1. Gives advice on securities 2. As a part of their regular business 3. For which they are compensated for

Answer 84

1. Financial Planners * Individual planners who advises clients to select from among a variety of financial products * Individual who recommends mixture of securities, insurance products, and real estate-comprehensive financial plan * Fees, commissions, or both for investment advice 2. Pension Consultants * Provide advice as well as administrative services * Advise benefit plans on funding, alternative investments, performance evaluation and adviser selection * Eligible to be Federal covered if at $200 million or more 3. Sports and Entertainment Reps * Provide entertainers and sports figures with tax planning, budget, and money management

Answer 85

1. Banks, savings institutions, and trust companies 2. Professionals providing incidental advice * Lawyers, accountants, teachers, engineers (LATE) if advice is incidental to their profession or practice * Subject to registration if they charge specific fees for investment advice 3. BDs if no special compensation * Advice solely incidental to their business * Wrap fee progan will lose this exclusion 4. Publishers (general and regular circulation) * "Market event" driven loses exclusion 5. Federal and State exclusion * FED: Persons advising solely on gov't securities (IA of 1940) * STATE: IAR (USA)

Answer 86

1. Intrastate advisers - clients and office in single state * No advice on listed securities on national exchanges * No clients are "private funds" 2. Foreign private advisers * "Assets under management" (AUM) in the US of less than $25 million * Fewer than 15 US clients * No investment company clients * Does not hold itself out as an IA * No place of business in the US 3. Advisers to venture capital funds 4. Advisers to "private funds" * Issuer is not proposing a public offering of its securities, and its outstanding securities owned by * max 10 investors OR *

Answer 87

1. **De minimis:** No place of business in the state and fewer than 6 retail (ind.) clients in preceeding 12 months 2. No place of business in the state and ONLY deals with institutions, BDs, or other IAs 3. Private fund adviser: Same as SEC, except fund \<101 investors: $1 million with IA or $2 million net worth 4. Federal covered adviser (NSIMA) - bifercated - register with one or the other! admin or SEC

Answer 88

* $110 million and over - **SEC reg** * Under $100 million - **State reg** (with exceptions - registration in 15 days or more states) * $100-110 million (in between) \> **STATE OR SEC reg**

Answer 89

* Buffer of $20 million * Once SEC registered, can remain with $90 million * Manager of registered investment company (any size) * Pension consultant ($200 million is eligible) * Federal covered advisers need not register with states; however, they may be required to pay **FILING FEES(notice file)**

Answer 90

* Individuals surprised by investment advisers 1. Partners, officers, or directors (with active roles) 2. Employees and associates making recommendations, managing accounts, and soliciting advisory services, **but not clerical and administrative personnel** 3. Must register with state even if IA does not!!! * If with a federal covered adviser, only registers in those states where you are maintaining a place of business

Answer 91

* Primary business function is executing transactions in securities * Compensation is earned in the form of commissions and markups (markdowns)

Answer 92

* Individuals employed by broker'dealers to handle their customer orders to buy or sell securities * Separate function from IAR (although many in large firms wear both hats)

Answer 93

* Primary business function is giving advice * Compensation is earned in the form of fees or other charges, generally based on the amount of assets managed

Answer 94

* Individuals employed by investment advisers to give advice to their clients * After an IAR advises a client abut a specific security, the next step is to contact the broker/dealer where that client maintains a brokerage account to give the buy/sell order to an agent

Answer 95

1. Principal business is giving investment advice 2. Render **_investment supervisory services_** = giving continuous advice on the basis of individual client needs

Answer 96

1. Business name 2. Past 5 years business and current affiliations of control persons 3. Educational background 4. Nature of business 5. Balance sheet certified by public accountant 6. Scope of authority over client funds 7. Compensation arrangement 8. Criminal record 9. Portion of business devoted to providing investment advice 10. Registration of an investment adviser AUTOMATICALLY registers, as an IAR, any individual who is a partner, officer, or direictor involved in the advisory business 11. Form ADV Part 1B - (state covered advisers only) 12.

Answer 97

* Update adv form annually * Within 90 days of fiscal year's end * Show assets under management (AUM) to verify continued SEC registration, must have at least $90 million in AUM * Pay appriopriate renewal fees * Change in management, state of location, or form of business requires the IA to **file an AMENDED FORM ADV promptly**

Answer 98

* **Effective noon of the 30th day for USA** * **Effective within 45 days for SEC**

Answer 99

* Effective 30th day for USA * Effective 60th day for SEC

Answer 100

* Updated annually at time of updating amendment * Contains required "disclaimer" (don't approve, just clear)

Answer 101

* (The current brochure) **Before or at the time of entry into an investment advisory contract with that client** * Delivered 48 hours before, or at time of contract, with five business days - right to rescind without penalty (USA)

Answer 102

* ANNUALLY * within 120 days after the end of the fiscal year, if there are material changes in the brochure since LAST annual updating amendment * A free current brochure * A summary of material changes to the brochure including an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure * may be delivered electronically * Ff no material changes (no brochure or summar)

Answer 103

* Balance sheet IF investment adviser requires prepayment fees of more than $1200 ($500 USA), 6 months or more in advance, or custody (USA)

Answer 104

* Material legal or disciplinary action within past 10 years, including fines of $2,500 or more * Prompt ammendment reqiured for material changes

Answer 105

* Investment adviser DOES NOT have to deliver brochure if the advisory clients are limited to: * Investment companies * Impersonal advice (subscriptions) - cost under $500 ($200 USA)

Answer 106

1. Charge a fixed fee for portfolio management, advice and execution 2. Wrap fee brochure based on Appendix 1 of Form ADV Part 2A must be provided in lieu of standard brochure and must disclose that wrap fee may cost more than purchasing securities separately 3. MUST identify whether any of its related persons is a portfolio manager in the wrap fee program and if so, describe the associated conflicts

Answer 107

1. Required DISCLOSURES under the Investment Adviser Act of 1940 and the North American Securities Administration Association's (NASAA) Model Rule on Unethical Business Practice of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers: * Services to be provided * Advisory fee * Formula for computing advisory fee * Amount of prepaid fee returned if contract is terminated * Whether discretion is granted * Assignment only with consent * Notification to clients of changes in advisory partnerships * Written requirement 1. Required under USA 2. Not required under IA Act of 40 3. REQUIRED under IC Act of 40

Answer 108

1. Generally NO performance-based compensation 2. Performance-based compensation is allowed IF * It is for a registered investment company * Any person with a specified minimum amount of assets under management (AUM) or networth of a specified minimum amount * Compensation is based on average value of fund over specified period * Compensation is proportional, compared with standard performance benchmark or index * S&P 500, S&P 100, Wilshire 5000 3. No waiving of fees/refunding for underperformance 4. No profit-sharing arrangement; no rebating commissions on mutual funds

Answer 109

1. ADVISER directs client to BD with REASONABLE CHARGES for services performed 2. CLIENT directs investment adviser to use specific BD 3. Disclosure required

Answer 110

* Less than $25 million = small advisers * Mid-size advisers = $25 million, but not $100 million * Filing Fee to state * De Minimis: Fewer than 6 clients within a year * Brochure = all relevant information on ADV 2A and 2B * Registration effective: ADV: 30 days * Withdrawal: ADV-W 30 days

Answer 111

* $110 million or more (large advsiers) * Filing fee to state/SEC * De Miniminis = Fewer than 15 clients within a year (foreign) * Brochure = all relevant info on ADV 2A and 2B * ADV: 45 Days * ADV-W: 60 Days

Answer 112

1. Have reasonable and independent basis for investment advice 2. Act on client's best interest * Suitability (usually unsuitable - blanket recs) * Client's interests come first 3. BEST Execution does NOT = lowest commissions; must consider all services being rendered 4. Recognize limitations of own capabilities 5. Avoid conflicts of interest: * Disclose ownership in recommended product * Customer transactions take priority over personal transactions NO FRONT RUNNING * Advisers must notify clients if they are a representative of a BD and will recommend purchase of products through that BD to receive a commission * Disclose if acting as representative of a BD or ins. comp when implementing financial plan * Disclose if recommending products of only the BD or ins. comp with whom they are associated with * Disclose amount of compensation when * the transaction is through a BD with whom the adviser is associated * compensatio is received from an issuer * being compensated for the sale of nonsecurities products * Disclose personal trades if * inconsistent with advice given to client * investment adviser benefits from client acting on recommendation * No Market Manipulation * Arbitrage is **not** - "taking advantange of a discrepency in prices) * capping (topping it off) and pegging (holding price up from going up) * wash trades (painting the tape) * matched orders 6. NO UNAUTHORIZED disclosure of confidential client info is allowed UNLESS 1. client has consented 2. the info is required by a court of the IRS 3. joint account with spouse/whoever

Answer 113

1. Acting as a principal or agent in purchase or sale of recommended securities * written disclosure to client before completion of the trans * client's consent before completion of the trans 2. Agency cross trans - representing both sides of a trade involving an advisory client * Client executes a written consent prospectively authorizing these trans * written disclosure to client before completion of the trans * can't recommend the trade to both parties

Answer 114

* Disclosure is requried if the adviser: * has discretion * has custody over customer funds or securities * REQUIRES PREPAYMENT OF MORE THAN $500 (STATE), 6 or + months in advance * REQUIRES PREPAYMENT OF MORE THAN $1200 (FED), 6 or + months in advance

Answer 115

1. Advertisements include any notice, circular, letter, Website or other written communication addressed to more than ONE person, or any report, chart, or formula used in making investment decisions 2. ID 1. name of firm 2. name of preparer if material is prepared outside the firm 3. date of first use 4. ID of info if not current 3. PAST PERFORMANCE 1. can be used if the following disclaimer and disclosure are included 1. no assurance of future results 2. includes all gains and losses over a minimum of ONE YEAR 4. Testimonials prohibited (bd can) 5. Offers of free service permissible (no obligations) 6. Other advertising prohibitions 1. implying extensive research facilities when not a fact 2. misleading or inconsistent clauses and caveats hedge clauses 3. implying approval of regulators 4. use of abbreviations RIA or IAR 5. Use of titles not earned (MBA, JD, CPA, CFP) 6. lack of disclosure of outside data sources 7. CHARTS AND FORMULAS = must explain limitations/difficulties

Answer 116

* Holds customer cash or sec * authority to disburse funds from bank account without client's consent * **automatic fee payments considered custody** * **\*if custody only because of this (above) IA is NOT required to meet the USA's net worth or surety bonding requirements for advisers with custody**

Answer 117

1. USA requires notification to the Admin, unless state law prohibits custody 2. must be segregated and marked to identify ownership 3. written notice to client of location and notification of changes 4. complete and accurate records of deposit and account activity 5. **quarterly itemized statement to customer** 6. use a qualified custodian; if not * annual surprise independent audit 7. If not keeping custody, NASAA requires certificates and funds inadvertently sent returned within 3 biz days (3rd party checks forwarded to 3 party within 3 biz days)

Answer 118

1. Info required of all solicitors * Adviser must be registered under 40 act * no disciplinary action or pending orders involving finances or dishonesty against solicitor * must have written agreement (disclose conflicts of interest) 2. additional info required inm agreement when payment for other than impersonal advisory services * Description of solicitation activities * description of compensation arrangement * solicitor will comply with the IA Act of 1940 * Agreement to provide adviser disclosure brochure and solicitor's disclosure document to customer (disclose if higher cost will result) * The IA must receive acknowledgement from the client that the client has receivd the advisor's and solicitor's written disclosure doc (RECEIPT) \*\*\*Solicitors under the USA who are associated with or employees of the IA MUST REGISTER (IAR) \*\*\*Under IA Act 1940, 3rd part solicitors are NOT required to register as an IAR (employees of IA are - NOT 3rd party)

Answer 119

1. Maintain required books and records (including elect) 1. readily accessible at principal office for TWO YEARS 2. may be kept in normally accepted manner (microfiche, digital), provided records can be read and copied 2. Advisers performaing investment supervisory services must keep separate records

Answer 120

1. The policy permits IAs oral authorization for discretionary accounts for 10 biz days (2 normal weeks) after initial trade 2. Placing an order to purchase or sell a security for the account of a customer without authority to do so or taking orders from a 3rd party without written 3rd party trading authorization 3. Charging the customer unreasonable fee: NASAA says that charges must be competitive 4. entering into or renewing an advisory contract unless in writing 5. lending to client only when in the lending business or an affiliate 6. Borrowing from client only when client in lending biz or an affiliate 7. use of 3rd party reports withut disclosure 8. use of material non-public ifo 9. improper use of waivers - can't waive fees, etc.

Answer 121

1. May SUBPOENA, seek court injunctions, refer evidence for criminal proceedings, hold hearings, and issue rules rules and orders 2. Appeal of SEC order must be within 60 days; nappeal to US Court of Appeals by written petition 3. Civil Penalities - higher for firms than individuals (payment made to the US treasury) 4. Criminal penalities - fed level $10,000 fine, 5 years imprisonment or both 5. May suspend up to 12 months

Answer 122

1. compensation = ANY economic benefit - received from any source 2. soft dollars * noncashy comp from BD for directed biz * ALLOWABLE SOFT DOLLARS: 1. Research reports 2. software 3. service for benefit of clients 4. seminar reg fees (not travel there) * NOT ALLOWABLE: * reimbursement for travel expenses to travel seminars * furniture, eqpt, non-customer-related services * rent

Answer 123

1. Trust - trustee manages per terms of trust agreement * Follow Uniform Prudent Investor Act 2. Estate - custodial account directed by an executor or admin (intestate = die w/o a will) on behalf of beneficiaries

Answer 124

1. Two or more legal persons with control 1. A MINOr cannot open a joint account with an adult; must be of legal age4 to sign joint account agreement 2. any owner whose name is on the account has control over assets 3. checks must be made out in the names of all owners 4. distribution of money or cert must be ENDORSED by all owners - may be sent to 1 address 5. TIC - by way of will (DB\>estate) 6. JTWROS - your account co-owner own your assets after death 7. Transfer of Death TOD (avoids probate) available for ind and JTWROS \>avoids probate but not estate taxes

Answer 125

1. (tax compute on schedule C of Form 1040) x NO K - no pass through of gain/loss 1. Unlimited liability

Answer 126

* HARD TO TRANSFER * an unincorporated association of two or more people * Income and losses flow through (Schedule K-1) K - flow through * if formed as a limited partnership, management (liability) is assigned to the general partner, limited partners are passive and liability is limited to their investment plus any funds committed to * EASY to FORM AND EASY TO DISSOLVE

Answer 127

* Shareholders' risk limited to investment * Corporation is taxable entity \*Form 1120 - no k, no pass

Answer 128

* Limited liability, taxed like a partnership (k-1) k-pass * LIMITED TO 100 SH HOLDERS

Answer 129

* Limited liability, taked like partnership (k-1) k-pass thru * UNLIMITED # OF MEMBERS (rather than sh holders)

Answer 130

What is on family's balance sheet? What is on family income stateent?

Answer 131

* low premium * no cash value * does not last to age 100 * suitable for young buyers with family responsibilities

Answer 132

* fixed premium * guaranteed cash value * guaranteed DB * premium to general account

Answer 133

* fixed premium * no guauranteed cash value * MINIMUM guaranteed DB * premium to general account for guaranteed min DB, excess \> separate account

Answer 134

* flexible premium * NO guaranteed cash value ^ * NO min guaranteed DB * current and guaranteed minimum interest rate

Answer 135

* Used to calculate life ins needs * assets and liabilities * future earnings * inflation * MARKET VOLATILITY IS NOT A CONSIDERATION

Answer 136

1. To payoff mortgage and other debts 2. to provide income for survivors 3. college tuition 4. estate taxes (\*part of cap needs analysis)

Answer 137

1. Attitudes 2. Future needs (plans for college) 3. Employment suitability

Answer 138

1. liquidity requirements 2. investment time horizon - short/long 3. current investment holdings 4. attitude toward volatility

Answer 139

1. Client cannot afford to lose principal 2. appropriate investments include insured bank CDs and MM funds 3. client risks loss of **purchasing power**

Answer 140

* Gov't, agency, muni, corp bonds * bond funds * equity income funds * preferred stocks * common stocks * utility * blue chips (large cap stocks - less vol/longer)

Answer 141

* Common stock * equity funds for growth * small, medium, large capitalization - MOD growth

Answer 142

* Specialized (sector) funds * 25% of assets invested in specialized sector of the economy or geographic area * options * high yield bonds

Answer 143

* Asset allocation * foreign stock funds * tangible assets for inflation protection

Answer 144

* Index funds; ETFs * low cost

Answer 145

* zero-coupon bonds (STRIPS) maturing whe tuition is due * Coverdell ($2000 max), Sectio 529 ($14000 /p/yr - can pay lump for 5 yrs every 5 years)

Answer 146

* Social Security * Pensions * annuity, IRA, etc

Answer 147

* client should address disability income before assuming investment risk * worker's comp * social security * disability ins

Answer 148

* tax deferral * tax-free income * trusts * simple - MUST DISTRIBUTE DNI ANNUALLY (ALL INCOME) * complex - may retain income * revocable/irrevocable trust * testamentary trust (will)

Answer 149

* Spreading portfolio funds among different asset classes * cash and cash equivalents * fixed-income investments * equities * domestic (global funds - INCLUDES US) * foreign (international funds - DO NOT include US) * tangible assets * real estate * precious metals

Answer 150

LONG TERM * **Passive** investment strategy * Portfolio mirrors index * periodic rebalancing * buy and hold * low investor costs

Answer 151

SHORT TERM * **Active** management strategy * undervalued purchased/overvalued sold * current market conditions * market timing * high trans cost

Answer 152

* Earnings grow faster than similar comps/overall market * Generally HIGH PEs * Looking for earnings momentum * low dividend payout ratio * likely to trade at higher end of 52-week trading range * Think common stock * Buy around resistance

Answer 153

* Undervalued or out-of-favor securities - sometimes considered contrarian * generally LOW PEs * Higher div pay out * focus on financial statements * hidden value may include "rainy day" fund * Likely trade at the LOWER END (around support) of 52-week trading range

Answer 154

* Size: $50 million - 300 milli0on * Benchmark: N/A

Answer 155

* Size: \>$300 million - $2billion * Benchmark: Russell 2000

Answer 156

* Size: \>$2billion - $10billion * Benchmark: S&P 400

Answer 157

* Size: \>$10billion * Benchmark: S&P 500 * less volatile, long term * mod growth/risk

Answer 158

(CMV/ per share) X # of shares outstanding

Answer 159

* 30 large-cap stocks * price weighted

Answer 160

* 500 large cap stocks * market value or cap weighted

Answer 161

* All NYSE-listed stocks * market value or cap weighted

Answer 162

*\*small cap benchmark* * 2000 small-cap stocks * market value or cap weighted

Answer 163

* Europe, Australasia, and Far east * market value or cap weighted

Answer 164

* Broadest indicator of US equities market * ~5600 stocks, flexible

Answer 165

1. **DJIA (smallest)** 2. S&P 500 3. NYSE 4. Russell 2000\*scBM 5. EAFE 6. **Wilshire (largest)**

Answer 166

1. can be used with many different styles (results in lower maintenance costs) 2. Lower capital gains taxes

Answer 167

*doesn't believe can beat mkt* * Low trans costs * Lower management fees

Answer 168

* Ave cost lower than avg price * investing the same dollar (fixed) amount in intervals (monthly)

Answer 169

*yr reinvested = yr taxable* 1. Mutual Fund programs (reinest at NAV) 2. Dividend reinvestment plans **(DRIPS)** * ****Offered from issuers to shareholders * sometimes discounted * reduced or no commissions 3. Interest on interest savings accounts 4. taxation 1. currently taxable 2. 1099

Answer 170

* What will an investment made today at a given rate be worth at some point in the future? * Reflects COMPOUND rate of return * Factors taken into consideration: * initial capital * time capital will remain invested * anticipated rate of return * unknown is ENDING (FUTURE) value of the inital capital if assumptions are met

Answer 171

* How much needs to be invested today at a given rate to equal a specified value at a point in the future? * Factors taken into consideration: * Future Goal * Time to reach goal * anticipated rate of return * unknown is TODAY'S (PRESENT VALUE) - the required contribution to reach the goal (what to deposit)

Answer 172

* Approximate formula for doubling investment * 72 / return percentage = **years** to double * 72 / 6% = 12 yrs to double * 72 / # of years = **percentage** needed to double * 72 / 5yrs = 14.4% to double

Answer 173

* the *discount* rate that results in a net present value of zero for a series of future cash flows * YTM of a bond reflects IRR * Expressed as percentage, not dollar amounts * $10,000 @ ?% x 10 yrs = $25,000

Answer 174

* Difference between an investment's: \*present value of future revenue and \*its cost * **USED BY CORPS to determine feasibility of capital investments** * _Positie NPV_ = desirable * more important to maximize NPV than IRR

Answer 175

* Used to evaluate the **performance of portfolio managers** * DOES NOT REFLECT CASH IN OR OUT OF THE ACCOUNT

Answer 176

* Used to evaluate the **individual's account performance** * REFLECTS $CASH IN & CASH OUT OF ACCOUNT * think dollar-$-does include cash in/out

Answer 177

* Profit + Income / Cost Basis(money spent) * (difference between $ bought/sold) + yrly div / initial money spent

Answer 178

* Profit (-bought/+sold difference) + divs (for holding period) / initial money spent (cost basis)

Answer 179

* Ex. Investor purchased stock @ $20 and sold it 3 mo later for $21 * Annualized return would be if this was done for the entire yr * 30 mo = 1 quarter so return X 4 = annualized return

Answer 180

*muni bond equivalent (tax free eq)* * Investor owns a security with annual taxable return of 10% * He's in 30% bracket * = 10% of par (1000) = $100 \> $30 goes to tax, $70 left * 7% after tax (10% - 3%= 7%) $100 - $30 = $70 a yr

Answer 181

* Sec provided 8% * Inflation rate is 3% * 5% (the differene) = REAL RETURN \>what the investor actually made

Answer 182

*Compounds* * An investor is told there is a 20% change that an investment will return 10%; 30% chance it will return 2% and 50% chance it will return 6% * Expected return? * 20% of 10% = 20 x 10% * 30% of 2% = 30 x 2% * 50% of 6% = 50 x 6%

Answer 183

* All investors have equal access to the same mkt info * can't beat the mkt; JUST THROW DARTS/random walk theory * Three forms 1. _**Weak**:_ info everyone knows (price/volume) **TECHNICAL ANALYSIS** 2. **_Semi-strong_**: info available with some effort (company financials, economic factors) * *FUNDAMENTAL ANALYSIS** 3. Strong - info available to INSIDERS; still no benefit

Answer 184

1. Runs _hundreds or thousands of trials_ based on varying factors such as * rates of return on investments * inflation rates * interest rates 2. Measures **probabilities of meeting specific objectives** and goals under varying conditions and circumstances

Answer 185

* Method to value the common stock of a company that is **based on the present value of the EXPECTED FUTURE DIVS**

Answer 186

* Method to value the common stock of a company on **the basis of assumed CONSTANT GROWTH OF DIVS IN FUTURE**

Answer 187

* How likely are we able to get that (our goal) of return? 1. Mean * **\*Arithmetic mean - SIMPLE AVERAGE/best to use** * Geometric mean - always LOWER (unless all returns are equal) 2. Median: line up in order (high to low); in the middle of the set 3. Mode: most frequent 4. Range: Highest/lowest - difference btwn

Answer 188

* DIVERSIFY by using the securities with a **LOW OR NEGATIVE** correlation, thereby reducing portfolio volatility

Answer 189

* _Positive Correlation_: 2 securities prices move in a similar direction * _Negative Correlation_: (-1 / inverse) Prices of 2 securities move in opposite direction * **Adds diversification to portfolio** * _Perfect Correlation_: (+1) Parallel movement (index funds) * _Zero Correlation_: (0) No discernable pattern

Answer 190

1. Correlation 2. Beta 3. Standard Deviation 4. Alpha 5. Sharpe Ratio 6. Duration 7. Discounted Cash Flow

Answer 191

*High Beta - growth stock* * Measure of stock's co-movement **RELATIVE TO BENCHMARK** * Measures systematic risk: risk associated with market in general; not the risk that pertains to a specific security

Answer 192

*Low = better, more consistent performance of stock* * Measures volatility of investment **COMPARED TO SAID INVESTMENT'S PAST RETURNS** * Standard deviation measures security's dispersion of returns versus its historical performance (mean) * **SD measures total risk (systematic risk + nonsystematic risk)** * *Systematic risk = Beta* * *\*\*\*Used in computing _Capital Market Line 66.67% of time_*

Answer 193

* Compares _Actual Return_ to the _Expected Return_ * **If Higher = Positive alpha** * **If Lower = Negative alpha** * **If Same = Zero alpha**

Answer 194

* Measures Risk Adjusted Return/Some adjustment for SD* * *Sharpe Ratio =** * [Actual Return - Risk-free Return (t-bills)] -------------divided by ---------------------------- (Standard Deviation) * Likelyhood investment will exceed riskfree rate * Post on **Efficient Frontier Chart** * \*Measures amount of return per unit of risk taken\* * ***_HIGHER SHARPE RATIO = BETTER_***

Answer 195

How long does it take for a bond to pay for itself? 1. Measures volatility of bond prices by weighting the time the bond interest takes to pay for bond 2. **HIGHER DURATION = means higher bond volatility** (high dur = long time to pay for itself = long term = more volatile) 3. Zero coupons: Duration = Maturity 4. **CONVEXITY IS A MORE SOPHISTICATED MEASUREMENT OF SENSITIVITY TO INTEREST RATE CHANGES** - not always straight line

Answer 196

* Used to value DEBT SECURITIES **(bonds)** * Take the income payments scheduled to be received over a given future period and adjust that for TIME VALUE MONEY * **HIGHER FLOW (DCF) = MORE valuable investment**

Answer 197

1. Market Risk 2. Interest Rate Risk 3. Inflation Risk/Purchasing power risk

Answer 198

1. Business Risk 2. Credit Risk 3. Regulatory Risk 4. Legislative or Political Risk 5. Liquidity Risk 6. Soverign Risk

Answer 199

* **Systematic** 1. Risk that overall market will affect individual securities adversely regardless of company's circumstances 2. CANNOT BE DIVERSIFIED AWAY

Answer 200

* **Nonsystematic** 1. Risk that a business will fail or perform poorly as a result of specific characteristics of company or industry in which it operates 2. CAN BE DIVERSIFIED AWAY

Answer 201

* **systematic risk** 1. Risk that a change in interest rates will affect a security adversely

Answer 202

* AKA Purchasing power risk * **systematic** 1. Erosion of a dollar's buying power 2. Fixed dollar investments (bonds) are affected MOST 3. _TIPS_ **OFFER PROTECTION** (protect, don't beat inflation)

Answer 203

* AKA Risk of default * **nonsystematic** 1. ****MINIMIZE through higher rating 2. Applies to debt securities, not equity

Answer 204

* **nonsystematic risk** 1. Vulnerability to adverse **_changes in regulations_** 2. \*FDA, EPA, EEOC, etc.

Answer 205

* **nonsystematic** 1. Vulnerability to **adverse legislation** 2. Tax law changes

Answer 206

* **nonsystematic risk** 1. Speed or ease of converting investment into CASH 2. Virtually nonexistent with listed/Nasdaq securities and mutual funds - not gonna be a problem to sell (liquidate) \> gonna be a bid!

Answer 207

* **nonsystematic** 1. Risk that a gov't coud default on its debt (sovereign debt) or other obligations

Answer 208

* Rate given up on one investment to invest in another

Answer 209

* Contributions currently tax deductible * Approved by IRS * CANNOT discriminate * Tax on accumulation deferred * ALL WITHDRAWALS TAXED * Plan operates as trust

Answer 210

* Contributions NOT deductible * IRS approval not required * CAN discriminate (executives) * Accumulation may be tax deferred * Excess over cost basis TAXED * Trust not required

Answer 211

* Individual - Annuities * Biz * **Deferred Compensation:** Retain key employees * **Payroll Deduction**

Answer 212

1. Contribution limits * 100% earned or up to limit ($3500 max) - ***plus catch up for 50+ older (EGTRRA - Economic Growth and Tax Relief Reconciliation Act of 2001)*** 2. Spousal IRA: additional contributions with same limit may be made for spouse with little or no earned income 3. CONTRIBUTION DEADLINE IS APRIL 15 OF THE YEAR FOLLOWING THE CONTRIBUTION YEAR 4. Earnings grow tax deferred 5. Rollover - Get check, then reinvest (not direct) 6. Transfer - direct, trustee to trustee 7. Penalties 1. Excess - **6%** 2. Early (before 59 1/2) - **10%** 3. Insufficient distributions (after 70 1/2) - **50%** 4. **Exceptions:** * ****death * disability * qualified education expenses * first time purchase of primary residence ($10,000 max) * health ins for unemployed * equal payments for life expectancy/Rule 72 8. Nonallowable Investments * US gold and solver coins (American Eagles) ARE allowed * Real estate is allowed * *Neither contributor or lineal family may derive immediate benefit (spouse, parents, children, grandchildren)* 9. Taxation 1. Ordinary income 2. Proportionate if some contributions were after tax (already taxed)

Answer 213

1. Contribution limits (same) - 100% earned income or limit of $3500 * May have ROTH & Traditional - does not double limit 2. *Contributions not allowed for those exceeding earnings limits* 3. Contributions made with after tax dollars - NEVER TAX DEDUCTIBLE 4. **Earnings may be withdrawn tax-free if a qualified distribution =** * Qualified Distribution = * Account has been established for 5 years * And 1 of the following: * Age 59 1/2 yrs * Death or disability * First time home purchase 5. **No required distrubition at 70 1/2** 6. **Contributions may be made after 70 1/2** 7. MINOR MAY BE NAMED AS BENEFICIARY

Answer 214

1. Available for employees of 403 (b) orgs / 501 (c) orgs = **public schools, qualified nonprofits such as churches and hospitals** 2. Funded through pretax salary reductions (tax deferred) 3. EMPLOYER MAY MAKE CONTRIBUTION

Answer 215

1. Keogh (HR-10) 2. Defined Benefit Plan 3. Defined Contribution Plans

Answer 216

* Qualified * Self-employed * Nonincorporated aka small biz

Answer 217

* Qualified * Traditional Pension Plan * *Older people like these!* 1. Provides defined benefit at retirement based on * Age * Years of service * Earnings 2. **Sponsor (employer) bears investment risk!** EMPLOYER has fiduciary responsibility, not rep

Answer 218

* Qualified * Younger people like these! 1. _Money Purchase Pension Plan:_ * Annual employer contribution **FIXED** * **EMPLOYEE BEARS INVESTMENT RISK!** 2. _Profit-Sharing Plan:_ employer contribution may be decreased or skipped or increased on the basis of corporate profits 3. _401K Plan_ * Deductible by both employee & employer * Reduces income tax for employees who contribute, but not FICA and FUTA * Top-heavy testing for key employees (not highly compensated employees) * Safe harbor plan avoids testing if contributing with immediate vesting (what $ employer puts in), whether non-elective or matching * Distribution can be rolled over into traditional IRA or into a ROTH IRA * Self-employed may also use solo 401K to maximize contributions * Participants MAY Borrow * Pay back with interest through payroll deduction *

Answer 219

1. Eligibility * 21 yrs + * 1 yr working there * 1000 hrs service 2. Funding - funds employer puts in 3. Vesting - funds you put in you have rights to - do not forfiet 4. Reporting 5. Beneficiary 6. Fiduciary Responsibility * No self-dealing * No acting with parties with adverse interest * No compensation on personal trans 7. Party in Interest 1. Any fiduciary of the plan 2. the employer 3. An employee org whose members are covered by the plans (unions) 4. Service Providers (legal, accounting, trustee/custodial, recordkeeping) 5. A "control" person of any of the above - owns more than 10% of stock, etc. 6. Lineal descendent of above (not #3)

Answer 220

1. Recommended, NOT REQUIRED, plan document detailing acceptable investments and investment strategies * Investment objectives and policies * Investment selection criteria (but not acutal investments) * Monitoring procedures and performance * Determination for meeting future cash flow needs 2. Not the same as the DOL's Summary Plan Description (SPD)

Answer 221

Employee Retirement Income Security Act

Answer 222

* *Liability of the trustee* 1. Investment selection * At least 3 investment alternatives 2. Independent counsel * Employees choose their own investments 3. Communication * Information available upon request 1. Prospectuses, financial statements 2. Risk and return characteristics of investments

Answer 223

1. Contributions may be made by anyone, Can be a non-parent, including the beneficiary, but total annual max contribution per child is $2000 2. After tax contribution 3. Contributions may be made up until 18th bday of child 4. Contributors must fall under certain earnings limits 5. Earnings withdrawn for QUALIFIED EDUCATION EXPENSES before the beneficiary reahes age 30 are tax-free * qualified = all ed (vs. 529 = just post/college)

Answer 224

1. _After-tax_ contributions/non deductible 2. **NO AGE LIMIT** for contributions or withdrawals 3. Earnings accumulate **tax deferred and are tax-free** when withdrawn for college ed expenses (post secondary) 4. **NO EARNINGS LIMITATIONS** ON CONTRIBUTIONS (vs. cover) * States may offer state income tax free withdrawals or deductions for contributions or tax credits 5. **Non-qualified withdrawals subject earnings to tax plus 10% penalty** 6. Pre-paid tuition plans 7. _College savings plans:_ * States set max contribution limit - **NO FED LIMITS** * Subject to gift tax rules * 5 year multiple gift exclusion * Donor retains control 8. These are **muni fund securities** and require delivery of an **official statement or offering circular** (not a prospectus) 9. *Treated as parental assets when student applies for financial aid - better for student than if their assets*

Answer 225

* Amount of income that will be **subject to tax** * Gross income from all sources minus certain contributions to an IRA and net capital losses

Answer 226

* An alternative tax computation that adds certain tax preference items back into adjusted gross income * If the AMT is HIGHER than regular tax liability for the year, the regular tax **amount by which the AMT exceeds the regular tax are paid**

Answer 227

* the simultaneous buying and selling of the same security in 2 different markets to take advantage of a temporary price disparity * NOT considered market manipulation - aka it's OK to do!

Answer 228

* A stock that is issued below its par or stated value * **Issuer and/or creditor have the right to "assess" the shareholder for the deficiency** * All stock issued today is nonassessable

Answer 229

* A holding company whose primary asset is a commercial bank * Not exempt from SEC reg

Answer 230

NOT A SALE

Answer 231

* A trust that is funded with property in an amount equal to the exemption equivalent of the transfer tax credit amount applicable to the decendent ($3.5 million in 2009); thus the property is not subject to federal estate tax * ~generation skipping tax

Answer 232

All tangible property, including securities, real estate, and other property, held for long term

Answer 233

* Used by the Admin when it appears that a registered person has or is about to commit a violation * MAY BE ISSUED WITH OR **WITHOUT A PRIOR HEARING**

Answer 234

* An investment strategy in which the investor maintains an appropriate ratio of debt to equity securities by making purchases and sales to maintain the desired balance

Answer 235

* A measure of price changes in a "market basket" of consumer goods and services used to identify periods of inflation or deflation

Answer 236

* DDA * Refers to a type of account held at banks and financial instituitions that may be withdrawn at any time by the customer. * The majority of such accounts are checking accounts, although many now include savings accounts in the definition as well

Answer 237

* process through which a member-owned company becomes a shareholder-owned company

Answer 238

* The forced giving up of profits made through illicit activity, insider trading

Answer 239

* AN IRA provision that permits a corp to **exclude from its taxable income 70% of divs received** from domestic and qualifying foreign preferred or common stock

Answer 240

* general term by which the Wall street reform and Consumer protection act of 2010 is known * considered to be the most significant legislation impacting the securities industry since the 1930s

Answer 241

* Person who makes a gift of money or securities to another * Once the gift is donated, the donor gives up all rights to it. * Gifts of securities to minors under the UGMA provide tax advantages to the donor

Answer 242

* Doc giving 3rd party trading authorization * Full or limited authority * For someone who survives mental or physical incompetence (but not death)

Answer 243

Earnings (divs, etc) ------------------------------- outstanding shares

Answer 244

The potential for international developments and domestic events to trigger losses in securities investments

Answer 245

* Overall rate paid on a taxpayer's total taxable income * Always less than marginable tax rate

Answer 246

* Form of employee comp * available to acquire issuer's stock * 2 forms: 1) nonqualified (NSO) 2) incentive (ISO)

Answer 247

Subject to a mandatory injunction, prohibitionary injunction, preliminary injunction, or a temporary restraining order issued by a court of competent jurisdiction

Answer 248

may be sold short and bought on margin

Answer 249

* A person registered, or excluded from the definition, under the Investment Advisers Act of 1940

Answer 250

* Listed on major US exchanges/Nasdaq * Investment companies registered with the SEC * Private placement sec.

Answer 251

Renew Reg calender year accounting

Answer 252

* IRS form used for the computation of estate tax * Must be filed within 9 months of death unless exension has been obtained

Answer 253

* US Gift (generation skipping transfer) filed under this

Answer 254

* The IRS form used to file individual income tax * **Schedule C of the form 1040 is used to report business income for sole proprietorships**

Answer 255

* IRS form used by ESTATE and TRUSTS to report their income for tax purpose

Answer 256

* The info return filed by a _Partnership or LLC_ * Because income and losses flow through to owners, **the entity pays no tax**

Answer 257

* The tax return filed by corps * S is for "S" Corps

Answer 258

* Form used by investment advisors to register with the SEC or the state * Consists of **2A** (describes firm) and 2B (describes personnel @ firm) may be used to meet the brochure requirement

Answer 259

Filed when engaging in a Reg D private placement

Answer 260

* Direct committment between one buyer and one seller for a specific commodity * Because forward contracts are direct obligations between a specific buyer and seller (unlike futures and options, they are **NOT STANDARDIZED**) * Not easily transferred / **ILLLIQUID** * No price lock in, just lock in btwn buyer and seller

Answer 261

* Exchange traded obligations for a specific commodity * A buyer goes long, or establishes a long position, and is **obligated to take delivery of the commodity** on the future date specified * A seller goes short, or establishes a short position, and is **obligated to deliver the commodity** on the future date specified * Seller open to unlimited risk if he does not own commodity * May be highly leveraged

Answer 262

* 2+ form to conduct business * does not requre docs for formation * general partners jointly liable

Answer 263

* A form of bypass trust that is designed to have assets pass to grandchildren (or great-grandchildren) in order to "skip" a generation of estate tax

Answer 264

* An individual or org that gives assets to a beneficiary by transferring fiduciary duty to a 3rd party trustee that will maintain the assets for the benefit of the beneficiary

Answer 265

* A trust that requires that **the grantor be taxed on income produced by trust property if trust income is distributed** to the grantor or to the grantor's spouse * Trust income **discharges a legal obligation of the grantor** or grantor's family * Grantor retains _power to revoke or amend the trust_

Answer 266

* Has at least $1 million in assets under management (IA) * Networth of $2million+ * Applies: (held jointly/with spouse) * Performance-based fees allowed

Answer 267

* Comp that invests in and manages other corps * Control can occur through ownership of 50% or more of the voting rights or through the exercise of a dominant influence * ~can be called parent org

Answer 268

Investment advisory services that **do not purport to meet the objectives or needs of _SPECIFIC_ individuals or accounts**

Answer 269

1. wages & taxes 2. Secured claims (mortgages) 3. Secured liabilities (bonds) 4. Unsecured liabilities (debentures) \>General creditors 5. Subordinated debt 6. unsubordinated debt 7. preferred 8. common

Answer 270

* An amendment enacted in 1938 to broaden Section 15 of Sec. Act of 1934 * Provided for the creation of a self-regulatory organization fo the specific purpose of supervising the OTC market

Answer 271

* Simultanesouly entering IDENTICAL (or nearly identical) buy and sell orders for a security to create the appearence of active trading * Violates anti fraud provisions of 34

Answer 272

* **Unsecured** * promissary note (debt) * Issued with a minimum face value or **$100,000** * Evidences a _time deposit of funds_ with the issuing bank * **Guaranteed by bank**

Answer 273

street name (kept in BD name) not actual owner, but name is linked to sec.

Answer 274

* Related to money, operating for pecuniary profit

Answer 275

* A contract between an individual and an employer, a labor union, a gov't entity, or another institution that provides for the distribution of pension benefits at retirement

Answer 276

* investment advisory fee based on a share of capital gains or capital appreciation of a client's assets. * A fee based on % of assets under management is NOT A PERFORMANCE BASED FEE \> ok to do if not a high net inv.. etc. * Fee may only be charged for high net worth ind

Answer 277

prohibited action

Answer 278

closed end investment comp

Answer 279

* Premature distributions that are taken pursuant to a qualified domestic relations order, or QDRO, are exempt from the 10% penalty * A QDRO is a court issued order that gives someone the right to an individual's qualified plan assets, typically an ex (or soon to be ex) spouse * QDRO is usually issued in the course of divorce proceedings or to satisfy child support obligations * Applies only to assets in a qualified EMPLOYER retirement plan - not IRA or a SEP

Answer 280

* The amount that traditional and SEP IRA owners and QUALIFIED plan participans must begin withdrawing from their retirement plans by April 1 following the year they reach age 70 1/2 * Exception: Still employed * RMD amounts must be distributed by Dec 31st that year and each subsequent year

Answer 281

* Person who inherits or is entitled under the law to inherit property upon termination of the estate of the former owner * Usually this occurs due to the death or termination of the former owner's life estate

Answer 282

* What's left after corp pays divs * earned surplus * reinvested earnings

Answer 283

Intrastate issues = exempt (from reg and prospectus with SEC)

Answer 284

* A provision in a regulatory schme that provides protection against legal action *if procedures are followed* * Applies to * **_Section 28e of 1934 Act:_** describes those research and brokerage activities that may be received by an investment adviser in exchange for directed brokerage transactions * **_Section 404c of ERISA:_** describes what a fiduciary of a qualified plan must do to minimize personal responsibility * **Top-heavy 401k** concerns are minimized if the employer covers all employees with immediate vesting

Answer 285

* Form supplied by partnership, LLC, or S Corps to owners indicating their proportionate share of income/losses to be reported on their Form 1040 tax return * **partnership, LLC, S** * *no C/LP*

Answer 286

* **Deferred comp plan** * used by **employees of a state**, political subdivision of a state, and any agency or instrumentality to the state * can be offerred to employees with certain tax-exempt organizations (hospitals, charitable orgs, unions) * **BUT NOT CHURCHES** * ind contractors can be covered under these plans

Answer 287

* An agent engaging in private securities trans WITHOUT the BDs knowledge or written consent * violates NASAA

Answer 288

* **person that supplies prop for trust** * trust prop also referred to as its principal or corpus * syn = donor, grantor, maker, trustor

Answer 289

* NONqualified * employers with 25 or fewer employees * tax deferred

Answer 290

* Noncash compensation received by an IA from a BD, generally in exchange for directed brokerage trans * MUST ALWAYS BE DISCLOSED and should come under the safe harbor provisions of section 28

Answer 291

* person contracted or employed by an IAto bring in advisory biz * If employee = MUST REG * If contracted = doesn't reg, but must not be statutorily disqualified from reg - **subject to terms of written agreement betwen the IA and solicitor**

Answer 292

practice of continually changing one's mind, attitude, or opinion

Answer 293

* A trust created as a result of instructions from a deceased's last will and **testament**

Answer 294

max = .75 no load can't exceed .25 (25 basis pts)

Answer 295

applicants are entitled to their entire plan benefits within a certain time limit if no longer employed there

Answer 296

* indicates that the regulator intends to bring an enforcement action against an individual or biz * if notice is against a publicly traded comp = usually has the effect of **depressing current MKT price**

Answer 297

Federal 5% Beneficial owners of a class of security (registered under 1933) - required to file a report with the issuer, SEC and securities market where they trade within 10 days of any trans that results in 5%+

Answer 298

* 1934 * requires any institutional investment manager that uses the mail or any means of INTERSTATE commerce in the course of biz and that exercises investment discretion over an equity portfolio with MKT value on the last trading day in any of the proceeding 12 mos of $100 million oe more in 13f securities * MUST FILE FORM 13F WITH SEC QUARTERLY WITH 45 DAYS OF THE END OF EACH QUARTER

Answer 299

* passive investor with beneficial ownership exceeding 5% of any registered sec can file form G * files this instead of 13D

Answer 300

* of 1934 * requires executive officers, directors, and greater than 10% stockholders (control persons) to file trans reports before the end of the 2nd biz day following the day on which a trans has been executed

Answer 301

* Person subject to investigation ignores subpeona = can lead to jail time * this term defines this type of disobedience

Answer 302

1. Barbell * Investor purchases bonds maturing in 1 or 2 years and an equal amount maturing in 10 or more yrs * Looks like a barbell 2. Ladder * Rungs at set intervals from bottom to top * Bonds are all purchased at the same time but mature at different times (like steps on a ladder/interval) * short maturities come due, they are reinvested and now become the long term ones 3. Bullets * To hit a target (college) * can capture current int rates as they change rather having the entire portfolio locked into one rate

Answer 303

* Individual account plan, such as a Sec.401(k) * Plan participants are given the opportunity to exercise meaningful, independent investment control over the assets in their accounts. In such a plan, the plan fiduciaries (e.g. plan administrator and the plan trustee) are provided with a "safe harbor" for liability for losses resulting from decisions made by the plan participants. * To qualify as a "404(c) plan" the plan participants must be given certain minimum investment information and **at least three core alternative investment options**, each of which is **diversified**.

Class Notes + Flashcards

(328 cards)