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Series 26 > Investment Companies > Flashcards

Investment Companies Flashcards

1
Q

Unit Investment Trust (UIT)

A

Investment company organized under a trust indenture. Have trustees instead of board of directors.

Create a portfolio of debt or equity securities - then sell redeemable interests (units, shares).

UIT is fixed or nonfixed.

Not managed.

Does not trade in the secondary market

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2
Q

Close-end Investment Company

A

Raises capital for its portfolio by common stock offering.
Initial offering, registers a fixed number of shares with the SEC and offers to the public, with prospectus for a limited time.
May also issue bonds and preferred stock.

  • Also called “publicly traded funds”. After initial offering - anyone can buy or sell shares in the secondary market.
  • Supply and demand determine bid and ask price.
  • Only investment company to trade in secondary market.
  • Issues common, preferred and debt securities
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3
Q

Open-end Investment Company

A
  • Issues only common stock.
  • Registers an open offering with the SEC (continuous primary offering).
  • Does not trade in secondary market
  • Sellers received calculated NAV
  • Buyers pay next calculated POP
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4
Q

Mutual Fund Characteristics

A
  • Professional investment advisor manages the portfolio
  • Provides diversification by investing in different companies or securities
  • Allow a min. investment ($500) to open an account.
  • Investor retains voting rights similar to those extended to common stockholders (changes in board, approval of investment advisor, changes in funds investment objective, changes in sales charge/load).
  • **Must offer reinvestment of dividends and capital gains at NAV (without a sales charge), but reinvestments are taxable.
  • Fund may offer various withdrawal plans that allow different payment methods at redemption.
  • Funds may offer reinstatement provisions that allow investors who withdraw funds to reinvest up to the amount withdrawn within 30 days with no sales charge. *Provision must be in prospectus and is available one time only.
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5
Q

Prospectus must contain:

A
  • Fund’s objective
  • Investment policies
  • Sales charge
  • Management expenses
  • Services offered
  • 1, 5, 10-year performance history
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6
Q

Expense Ratio

A

Funds Expense / Average Net Assets

  • Compares the mgmt. fees and operating expenses (including 12b-1 fees), with the fund’s net assets.
  • The expense ratio is calculated by dividing a fund’s expense by its average net assets.
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7
Q

Reinvestment risk is most closely associated with…

A

Call Risk

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8
Q

Current Yield

A

Annual income/current market value

Applies to stocks and bonds. Measurement of the amount of income investor will receive as a percentage of the cost of the investment.

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9
Q

CMO

Collateralized mortgage obligations

A
  • asset backed security
  • pools assets into financial instruments - securitization
  • pool of mortgages structured into maturity classes called tranches.
  • CMO’s backed by Ginnie Mae, Fannie Mae and Freddie Mac pass-through securities.
  • CMO pays principal and interest from mortgage pool monthly, however it repays principal to only one tranche at a time.
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10
Q

T + 1

A
  • All Treasury securities: T-Bills, T-notes, T-
    Bonds
  • All option trades
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11
Q

T + 2

A
  • Corporate Issues (stocks and bonds)
  • Municipal Debt
  • Agency securities (GNMA)
  • GSE securities (FNMA and FHLMC)

-Equity option exercise (allows the person delivering stock time to acquire the stock to be delivered)

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12
Q

Transfer Agent

A
  • responsible for ensuring that its securities are issued in the correct owner’s name
  • canceling old certificates and issuing new ones
  • maintaining records of ownership
  • handling problems relating to lost, stolen, or destroyed certificates.
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13
Q

Calculations for gains or losses for tax purposes?

A

Proceeds - cost basis

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14
Q

Customer New Account Forms must be kept for how many years?

A

6

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15
Q

Advertising the firm has published must be kept for how many years?

A

3

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16
Q

Stock records must be kept for how many years?

A

6

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17
Q

Minute books must be kept for how many years?

A

Lifetime

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18
Q

Traditional IRA

A
  • Withdrawals begin without penalty at 59 1/2. Dist. before that is subject to 10% penalty + regular income tax.
  • The first RMD may be delayed to April 1 of the year after the account holder turns 72. If delayed, they will have to take a second dist. in the same year.
  • Failure to take an RMD by required date, any amount below the RMD amount will be subject to a 50% penalty.
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19
Q

Roth IRA

A
  • 1997 as part of taxpayer relief act.
  • Eligibility to contribute to a Roth IRA is phased out at higher income limits. Earned income.

***Distribution of the cost basis is always tax free. Qualified distribution of income or gains in the account are also tax free.

  • For a distribution to be qualified, holder must have held a Roth IRA for at least 5 years before the distribution and the account holder must be age 59 1/2 or older.
  • No RMD
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20
Q

Formula for Premium

A

Intrinsic value (IV) + Time value (TV)

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21
Q

Index Options

A

Nonequity options - underlying instruments are NOT shares of stock.

Allows investors to profit from movements of markets or market segments and hedge against these market swings. (broad-based, narrow-based, or other focus indexes)

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22
Q

Freeriding

A

when securities are purchased and then sold before making payment for the purchase.

  • Prohibited in cash and margin accounts.
  • account will be frozen for 90 days, and no new transactions can occur unless there is cash or marginable securities in the account before the purchase is made.
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23
Q

Matching Orders

A

aka Painting the tape.
one party selling stock to another with the understanding that the stock will be repurchased later (usually same day) at the same price. Makes it look like more activity in a stock than there actually is.

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24
Q

Penalty for overcontribution to IRA?

A

6%

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25
Q

How long do blotters, general ledgers, and stock records need to be maintained?

A

6 years

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26
Q

12b-1 Fee

A

open-end investment company (mutual fund) to levy an ongoing charge for advertising and sales promotional expenses, prospectus. NOT fund mgmt. expenses.

This fee may not exceed .75% (average net assets) and, if above .25%, the fund may not describe itself as no-load.

When 12b-1 fees are being charged, the BOD must be composed of a simple majority of noninterested members.

*Expressed as an annual amount, but charged and reviewed quarterly.

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27
Q

Clearing Agent

A

intermediary between the buy and sell sides of a transaction that receives and delivers payments and securities on behalf of both parties. While some broker-dealers are self clearing (act as their own clearing agent), simply being a broker-dealer doesn’t always include being able to provide the services of a clearing agent.

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28
Q

Institutional Communication

A

any written (including electronic) communication that is distributed or made available only to institutional investors, but it does not include a member’s internal communications.

Institutional sales material is not required to have prior principal approval, however each member shall establish written procedures for the review of institutional communications used by the member and its associated persons by an appropriately qualified, registered principal.

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29
Q

Retail Communication

A

any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period.

-A copy of all retail communication must be filed with FINRA.

  • For a new member firm, the filing must occur at least 10 days before use.
  • For established member firms, the filing must happen within 10 days of first use.
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30
Q

Correspondence

A

any written (including electronic) communication that is distributed or made available to 25 or fewer investors within any 30-calendar-day period.

  • Procedures may allow for pre- or post review by principal.
  • Exempt from FINRA spot checks
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31
Q

The sales charge for Class A shares may not exceed

A

8.5% of the total investment.

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32
Q

Mini-Max

A

Underwriting that sets a floor or minimum (the least amount the issuer needs to raise to move forward with the underwriting), as well as ceiling or maximum on the dollar amount of securities the issuer is willing to sell.

*Best efforts underwriting

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33
Q

Systematic Risk

A
  • Market Risk
  • Interest Rate Risk
  • Reinvestment Risk
  • Inflation Risk
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34
Q

Commercial Paper

A

unsecured (corporations w/excellent credit ratings) debt with a maximum maturity of nine months (270 days- most mature in 90 days).

  • Interest rates are lower than bank rates
  • *Issued at a discount from face value
  • **Primary buyers are money market funds, commercial banks, pension funds, insurance companies, corporations and nongovernmental agencies.
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35
Q

Independently Prepared Reprint (IPR)

A

Article reprint that meets certain standards designed to ensure that the reprint was issued by an independent publisher and was not materially altered by the member.

*A member may alter the contents only to make it consistent with applicable regulatory standards or to correct factual errors.

**Must be preapproved by a principal but exempt from FINRA filing requirements.

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36
Q

Modern Portfolio Theory (MPT)

A

Scientific approach to measuring risk and choosing investments.

  • Calculating projected returns of various portfolio combinations to identify those that are likely to provide the best returns at different levels of risk.
  • Theory is that specific risks can be diversified away by building portfolios of securities whose returns are not correlated.
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37
Q

Capital Asset Pricing Model (CAPM)

A

Used to calculate the return that an investment should achieve based on the risk that is taken; the more risk taken, the higher the returns.

**Used to calculate a required return based on a risk multiplier called the beta coefficient.

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38
Q

Current Assets

A

include all cash and other items expected to be converted into cash within the next 12 months:

  • cash, money market instruments
  • Accounts receivable - amounts due from customers for goods delivered or services rendered.
  • Inventory
  • Pre-paid expenses
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39
Q

Working Capital

A

Current assets(convertible to cash within a year) - current liabilities (due within a year)

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40
Q

Qualified Dividends are taxed at…

A

long-term capital gains rate

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41
Q

Nonqualified Dividends are distributed as _____, and taxed at _______

A

short-term capital gains and taxed as ordinary income

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42
Q

Net Investment Income (NII)

A

Dividends + interest - expense of the fund.

*Distributed to shareholders as dividends. May be reinvested or taken in cash.

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43
Q

Specialized (Sector Fund)

A

A mutual fund investing primarily in a particular industry. Makes a commitment to invest 25% or more of its assets into a particular industry.

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44
Q

AIR (Assumed Interest Rate)

A

Conservative projection of the performance of the separate account over the estimated life of the contract.

–If Sep. Acct. performance is greater than AIR, next month’s payment is more than this month.

–If Sep. Acct. performance is equal to the AIR, next month’s payment stays the same.

–If Sep. Acct. performance is less than the AIR, next month’s payment is less than this month’s.

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45
Q

Accumulation Units are computed……

A

Daily on a forward pricing basis.

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46
Q

Annuity Unit Values are computed….

A

Monthly based on actual performance versus the AIR.

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47
Q

Immediate Variable Annuity

A

An immediate annuity has no accumulation period. A single lump-sum investment is made, and payments begin immediately, since the investor has purchased annuity units.

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48
Q

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status?

A

60 days

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49
Q

Recommendation for: Preservation of Capital/Safety

A

CDs, money market mutual funds, fixed annuities, government securities and funds, agency issues, investment grade corporate bonds and corporate bond funds.

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50
Q

Recommendation for: Growth

A

Common stock, common stock mutual funds

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51
Q

Recommendation for: Balanced/Moderate Growth

A

Blue-chip stocks, defensive stocks

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52
Q

Recommendation for: Aggressive Growth

A

Technology stocks, sector funds, micro-cap funds

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53
Q

Recommendation for: Income

A

Bonds (corporate, gov’t, municipal, but not zero coupons), REITS, CMOs, agency securities

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54
Q

Recommendation for: Tax Free Income

A

Municipal bonds, municipal bond funds, Roth IRAs

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55
Q

Recommendation for: High-Yield Income

A

Below investment grade corporate bonds, corporate bond funds.

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56
Q

Recommendation for: Income from stock Portfolio

A

Preferred stocks, utility stocks, blue-chip stocks

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57
Q

Recommendation for: Liquidity

A

Securities listed on an exchange, Nasdaq stocks or bonds, mutual funds, publicly traded REITS

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58
Q

Recommendation for: Portfolio Diversification

A

Mutual funds, in general - but specifically asset allocation funds and balanced funds

Equity Portfolios -> add debt
Domestic Portfolio -> add foreign securities
Bond Portfolio -> diversify by region/rating

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59
Q

Recommendation for: Speculation

A

Option Contracts, DPPs, High-Yield bonds, unlisted/non-Nasdaq stocks or bonds, sector funds, precious metals, commodities, futures

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60
Q

Systematic Risks

A

Market Risk, Purchasing Power (inflation) risk, Interest rate risk

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61
Q

Strategic Asset Allocation

A

Proportion of various investments contained in a long-term investment portfolio
*Passive Management Style (conditions for re-balancing are slow and predictable - strategy)

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62
Q

Tactical Asset Allocation

A

Short-term portfolio adjustments that adjust the mix of asset classes based on current market conditions.
*Active Management Style - stock market picking and market timing to outperform market indexes.

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63
Q

Negotiable CDs (Jumbo CDs)

A
  • $100,000 min. - usually issued for $1 million or more.
  • Mature in one year or less
  • Traded in secondary market
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64
Q

Growth Funds

A

Diversified common stock fund - Capital Appreciation is primary goal.

  • Invests in stocks of companies who are growing rapidly who reinvest all or most of their profits for research and development rather than pay dividends.
  • Focused on generating capital gains rather than income.
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65
Q

Aggressive Growth Funds

A

aka Performance Funds.

  • Take greater risk to maximize capital appreciation.
  • Sometimes invest in newer companies with small capitalization (less than $2 billion). *Small Cap Funds
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66
Q

Value Funds

A

Focus on companies whose stocks are currently undervalued. (potential earnings not reflected in stock price)

  • Typically have dividend yields higher than growth stocks.
  • *Considered more conservative than growth funds
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67
Q

Equity (Income funds)

A

Stresses current income over growth.
-Invests in stocks of companies with long histories of dividend payments - utility company stocks, blue-chip stocks, and preferred stocks.

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68
Q

Blend/Core Funds

A
  • Contains different classes of stock (ex. blue-chip and high risk/high-potential return growth stocks.
  • Growth/Value mgmt. styles are used.
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69
Q

Index Funds

A

Invest in securities that mirror a market index (either broad - S&P 500, or narrow -transportation index).

*Trades that take place are triggered by a change in the index - so generally has lower mgmt. costs.

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70
Q

Balanced Funds (hybrid funds)

A

invest in stocks for appreciation and bonds for income.

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71
Q

Target-Date Funds (life cycle funds)

A

Designed to help manage investment risk - with a target date in mind of when the investor anticipates needing the money ex. retirement)

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72
Q

Principal-Protected Funds

A

Offers guarantee of principal, adjusted for fund dividends and distributions, on a set future date (maturity) - while providing higher returns - via high return asset classes such as equities.

  • Lock-up Period: if you sell shares in the fund prior to the end of the “guarantee period” (5-10 years) ….you lose the guarantee on those shares.
  • Mixture of bonds and stocks: invests in zero-coupon bonds and other debt securities AND stocks and other equity investments during guarantee period.
  • No new contributions during guarantee period.
  • Front-end load; high expense ratio
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73
Q

Class C Shares

A

Level Load and also back end load. 1% CDSC, 0.75% 12b-1 fee and a 0.25% shareholder services fee.
*Appropriate for investors with short time horizons; become too expensive if investing for more than 4-5 years.

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74
Q

Dollar Cost Averaging

A

Allows investor to purchase more share shares when price is low and fewer shares when prices are high.

*Results in a lower cost per share than the average price per share.

75
Q

Index Annuity

A

Market participation but with a guarantee against loss.
-Pays interest based on performance of market index (S&P 500).

  • Participation Rate: The participation rate can be as high as 100%, meaning the account is credited with all of the gain, or as low as 25%. Most indexed annuities offer a participation rate between 80% and 90%—at least in the early years of the contract.
  • Cap Rate: A typical cap of 12% in a year the index increased by 30%….your gain would still be capped at 12%
  • Usually have longer surrender charge periods.
76
Q

Transfer Information Form (TIF)

A

Form that facilitates the transfer of securities from one trading account to another at a different brokerage firm or bank.

  • has 1 day to validate the securities listed on the TIF
  • Within 3 days after validation, the carrying firm must complete the transfer of the account.
77
Q

How long should trade confirmations be retained?

A

3 years

78
Q

For an owner to be paid a dividend, his name should be recorded on the stock record book of the issuer’s transfer agent by the:

A

Record Date

79
Q

Required Approval: Institutional Communication

A
  • No preapproval of principal.

- if procedures do not require review, must have provision for training on use of inst. comm.

80
Q

Required Approval: Retail Communication

A

Preapproval of principal is required.
25 or more retail investors within 30 days.

81
Q

Required Approval: Correspondence

A

Pre- or post-review of by principal.
25 or fewer retail investors within 30 days.

82
Q

Required Approval: Public Appearance

A

Preapproval may be required but is not mandated.

  • Scripts, slides, handouts or other written (including electronic materials) used in public appearance are retail communications - preapproval.
  • Must have procedures
83
Q

Required Approval: IPR

A

Preapproval required if the communication meets the definition of retail comm.

84
Q

Required Approval: Research Reports

A

Approval requirements depend on whether it is defined as institutional, retail or correspondence.

85
Q

Mutual Fund Sales Charge

A

POP - NAV

86
Q

What brings about a change in the NAV of a mutual fund?

A
  1. The fund pays a dividend.

2. The portfolio increases in market value.

87
Q

The over-the-counter market could be characterized as what type of market?

A

The OTC market is an inter-dealer market.

88
Q

Ex-date

A

The first date on which a security is traded that the buyer is not entitled to receive distributions previously declared.

89
Q

Dividend Distribution

A
  • The declaration date is the day on which the board of directors announces the dividend.
  • The ex-date or ex-dividend date is the trading date on (and after) which the dividend is not owed to a new buyer of the stock. The ex-date is one business day before the date of record.

***If you buy a stock one day before the ex-dividend, you will get the dividend. If you buy on the ex-dividend date or any day after, you won’t get the dividend.

-The date of record is the day on which the company checks its records to identify shareholders of the company. An investor must be listed on that date to be eligible for a dividend payout.

90
Q

What type of investment accounts must be opened as cash accounts?

A
  • Personal retirement accounts (individual and tax-sheltered annuities).
  • Corporate retirement accounts
  • Custodial accounts (UGMA, UTMA)
91
Q

The death benefit of a variable life policy must be calculated at least:

A

Annually

92
Q

What fees are no-load funds permitted to charge?

A
  • purchase fees
  • exchange fees
  • account fees
  • redemption fees

*permitted to pay its annual operating expenses, but 12b-1 fees or separate shareholder service fees cannot exceed .25%.

93
Q

Class C shares are appropriate for what type of investors?

A

Those who have short term horizons (would be expensive to own if investing for more than 4-5 years).

94
Q

The cash value of a variable life policy must be calculated at least:

A

Monthly

95
Q

FINRA Rule 2330

A 
Recommended purchases and 1035 exchanges of deferred variable annuities, and recommended initial subaccount allocations.
Must inform customer:
-potential surrender period and charges
-potential tax penalties (sell or redeem prior to 59 1/2)
-mortality and expense fees
-investment advisory fees
-potential charges and features of rider
-market risk
96
Q

What types of investments are most at risk for purchasing power (inflation) risk?

A

Any fixed return security - bond, fixed annuity, preferred stock.

97
Q

What types of investments are most at risk for interest rate risks?

A

Debt (bonds, bond funds) and preferred stock.

*These all have inverse relationship to interest rates.

98
Q

Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at

A

NAV (net asset value)

99
Q

Bonus Annuity

A
  • Bonus variable annuities tend to have higher annual fees

- Bonus variable annuities generally have longer surrender charge periods.

100
Q

Code of Procedure

A

FINRA’s formal procedure for handling trade practice complaints involving violations of conduct rules.
*The Department of Enforcement is the first body to hear and judge complaints.

101
Q

One bond point is worth

A

$10

Ex. An investor purchased a corporate bond for 97 3/8. If the bond is sold for 99 3/8, the investor has a profit of: $20

102
Q

How are prices arrived at in the securities markets?

A

By auction in the exchanges.

By negotiation in the OTC markets.

103
Q

Calculate the POP

A

NAV / (1 - sales charge)

104
Q

Pricing Mutual Fund Shares

A
  1. Total assets - liabilities = net assets of the fund
  2. Net Assets / Shares Outstanding = NAV
  3. NAV + SC = POP
105
Q

How to calculate the value of interest in the separate account?

A

multiply the number of accumulation units by the value of each unit.

Example: 1,000 accumulation units valued at $5 each = $5,000.

106
Q

Simplified industry arbitration

A

used in disputes between member firms or their associated persons when the amount in dispute does not exceed $50,000. If the dispute involves a customer, then it goes to simplified arbitration.

107
Q

How much of an investment company’s assets must be invested in securities before it must register with the SEC as an investment company?

A

At least 40%.

108
Q

Who sets a mutual fund’s ex-date?

A

The fund’s board of directors

109
Q

Three major dates in the process of a dividend distribution:

A
  1. The declaration date is the day on which the board of directors announces the dividend.
  2. The ex-date or ex-dividend date is the trading date on (and after) which the dividend is not owed to a new buyer of the stock. The ex-date is one business day before the date of record.
  3. The date of record is the day on which the company checks its records to identify shareholders of the company. An investor must be listed on that date to be eligible for a dividend payout.
110
Q

Once a member has been advised by FINRA that special supervisory procedures are required, the firm has ____ days to implement them by tape recording, and must maintain the procedures for ___ years.

A

60 days

3 years

111
Q

Sales Charge for variable contracts….

A

may not exceed 9% of the payments made over the life of the contract (20 years)

112
Q

SEP IRA

A

(SEP IRA)Qualified retirement plan designed for employers.
Pretax Contributions are made to IRA by employer. Up to 25% of an employee’s salary, up to an indexed max. (more than other IRA’s).

**Employee must be at least 21, worked for employer for 3 of the past 5 years.

113
Q

Defined Benefit Plan

A

Promises specific retirement benefit calculated by retirement age, years of service, and compensation level achieved.

*Amount of contribution is determined by the plants trust agreement and uses actuarial calculations (investment returns, future interest rates, etc.)

114
Q

Section 457

A

NONqualified. Retirement plan for state and gov’t workers.

  • Deferred compensation - earnings grow tax deferred and all withdrawals are taxed at the time of distribution.
  • Employees may defer up to 100% of their compensation, up to an indexed contribution limit.
115
Q

Credit Risk (Financial or Default Risk)

A

A risk associated with default of a debt security.

Long term bonds involve more credit risk than short-term bonds.
Can check Moody’s or S&Ps bond ratings

116
Q

Violation of Rule 34b-1, the Name Rule, would happen if the fund didn’t have at least what percentage of its assets invested in government securities?

A

80%

117
Q

A contractual plan company is what type of investment company?

A

A contractual plan company is a unit investment trust that purchases mutual fund shares for its customers on a contractual basis.

118
Q

Profit-sharing retirement plan

A

Contributions are required only when the company makes a profit.

It must be nondiscriminatory.

They operate under a trust agreement.

119
Q

Changes that require a majority vote of the shares outstanding include

A
  • Issuing or underwriting other securities
  • Changes in borrowing by open-end co.
  • Changing subclassification (e.g., from open-end to closed-end or from diversified to nondiversified)
  • Changing sales load policy
  • Changing the nature of business
  • Changing investment policy (e.g., from income to growth or from bonds to preferred stock).
120
Q

The cost basis of mutual fund shares includes

A

The total cost, including sales charges, plus dividends or capital gains reinvested in the fund.

121
Q

Diversified Company

A

75-5-10 test.
‘Must have 75% of total assets invested so that securities of any one issuer are not great than 5% of total assets, and not more than 10% of the outstanding voting securities of any issue held.

122
Q

Form BD

A

Used to register a broker-dealer with the SEC. A change to information contained in it, must be changed promptly.
**must be accompanied by:
-new member assessment report
-new member contact questionnaire
-Form U-4
-Fingerprint cards for each associated person
-check for fee

123
Q

Branch Office Registration (Form BR)

A

Firms must register each of their branch offices with FINRA, NYSE and states that required branch registration.
-File Form BR on WebCRD within 30 days of opening a new branch office.

124
Q

(Form BR) Membership Interview

A

Applicant has 60 days to respond to FINRA’s initial request letter for information or documentation.
-Within 30 days of receipt of this info, FINRA can make subsequent request for information.
-Prior to a decision on the application, the FINRA examiner will schedule a membership interview and may schedule a pre-membership examination.

125
Q

Investor Protection and Education

A

Each member firm that holds customer funds or securities must annually:
-Provide a statement as to the availability of an investor brochure that includes information describing the Public Disclosure Program.
-The FINRA Public Disclosure Program Hotline number
-The FINRA website address
-BrokerCheck contact information

126
Q

FINRA Membership Fee

A

-Membership fee for each registered person
-Firm pays a separate ANNUAL ASSESSMENT based on gross income generated from activity in the OTC and/or NYSE markets.

127
Q

Form BD-W (resignation of members)

A

Voluntarily terminate. Must file Form BD-W electronically.
-Resignation will not take effect until 30 days after receipt and all indebtedness due has been paid in full, and no complaint/action is pending.
*subject to FINRA jurisdiction for 2 years after

128
Q

The requirements for a fidelity bond are based on the firm’s

A

member’s minimum required net capital or $100,000, whichever is greater.

Only those firms that are required to be members of SIPC (and many mutual fund/variable annuity broker-dealers are not) have fidelity bond requirements.

129
Q

The financial statement in a prospectus must not be more than how old?

A

16 months

130
Q

After its first year in business, a broker-dealer’s maximum ratio of aggregate indebtedness to net capital may not exceed

A

The SEC allows broker-dealers that have been in business for more than one year to carry debt equal to 1,500% of their net capital.

For new broker-dealers, debt may not exceed 800% of net capital.

131
Q

Net Capital

A

Net Worth + Subordinated Debt = Total Available Capital - Nonallowable assets = Tentative net capital - Haircuts = Net Capital

132
Q

Carrying (clearing) broker-dealers

A

Hold customer monies and securities
(mails confirms, statements, etc. and customers write checks to the carry bd)

133
Q

Introducing (fully disclosed) broker-dealers

A

May receive customer assets but must promptly transmit these assets to a carrying member.
-Must have NC of $50,000 if receive customer assets
- best efforts or all-or-none underwriting.

**Introducing BD’s that do not receive customer securities have an NC requirement of $5,000.

134
Q

Mutual Fund broker-dealers

A

act as agents for customers and transact business in investment company shares and variable annuities.

135
Q

Office of Supervisory Jurisdiction

A

-Order execution or market making
-Formation or structuring of public offerings or private placements
-Custody of customer funds or securities
-Final approval of new accounts
-Review and endorsement of customer orders
-Final approval of retail communications
-Supervision of activities of members at branch offices

136
Q

FINRA Rule 5130

A

Prohibits member firms from selling a new common stock issue to any account in which restricted persons have a beneficial interest.

Restricted persons:
-Any FINRA member BD
-officer, director, general partner, associated person, or an employee of a member
-Portfolio managers
-Any person owning 10% or more of a member firm -includes immediate family.

137
Q

Fidelity Bonding

A

FINRA rules require a member firm to secure fidelity bonding insurance.
Minimum coverage is 120% of the net capital requirement or $100,000, whichever is greater.
-Must review coverage annually.

138
Q

Department of Enforcement complaint response time

A

25 days

139
Q

Customer account information is updated every

A

36 months

140
Q

FINRA Rule 4530

A

Member must report to FINRA within 30 days whenever the member or associated person:
-violates securities law
-subject of customer complaint - theft, forgery, misappropriation of funds.
-Denied registration or expelled by securities, insurance, SRO organization
-Indicted for, convicted, pleads guilty for any offense other than traffic
-Defendant in securities/commodities civil litigation or arbitration
-Association with any person subject to statutory disqualification status

141
Q

Trade Confirmation Approval

A

Customer must be sent or given a written confirmation of the trade at or before the completion of the transaction (settlement date).
Order tickets must be approved by a principal no later than the trade date, but orders are not required to be approved before they are entered

142
Q

Trade Confirmation must contain

A

-Whether the member acted as a agent or principal
-Whether the member acted as a dual agent (represented the buyer and seller)
-the source and amount of commission in an agency trade
-whether a control relationship exists between the issuer and member
-Deferred sales load, if any.

143
Q

Focus II for Carrying Firm

A

-Due within 17 days of months end and quarters end, or within 2 business day of termination of membership.
-Annual audited report due within 60 calendar days of fiscal year end.
-Unaudited semiannual report and annual audited report sent to customers.

144
Q

FinCen Form 12

A

records large cash transactions, and must be retained by a broker-dealer for 5 years.

145
Q

SEC Rule 17a-5

A

a general securities broker-dealer must prepare a trial balance MONTHLY

146
Q

Conduit Theory of Taxation

A

A means for an investment company to avoid taxation on net investment income distributed to shareholders. If a mutual fund acts as a conduit for the distribution of net investment income, it may qualify as a regulated investment company and be taxed only on the income the fund retains.

**a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is taxed only twice (at the corporate level and at the individual level) and avoids taxation at the fund level.

147
Q

Investment Adviser Exclusions

A

-Banks and bank holding companies
-Publishers of newspaper, magazine
-BD’s whose investment advice is incidental to business and does not receive special compensation for the advice.
-Advisement solely on US gov’t or agency securities
-Lawyers, accountants, teachers, engineers

148
Q

N1-A registration form must contain

A

a provision to provide semiannual reports to shareholders, one of which must be audited.

Part 1 is also called an N1-A prospectus

149
Q

A FINRA member firm’s fees are based on which of the following?

A

Number of registered representatives
Number of branch offices

150
Q

Regulatory Element of continuing education must be completed…

A

Annually

151
Q

According to SEC rules, a statement for an inactive account should be sent to each customer

A

Quarterly

152
Q

Under the Code of Arbitration Procedure, how much time does a client have to submit a claim against a registered representative or member firm?

A

6 years

153
Q

12b-1 plan must initially be approved by

A

-majority of outstanding shares
-majority of the BOD
-majority of the noninterested directors

154
Q

12b-1 plan must be terminated at any time by

A

-majority of the non-interested directors
-majority of the outstanding shares

155
Q

Securities Exchange Act of 1934

A

It regulates the secondary market.
It requires registration of broker-dealers with the SEC
created the SEC and mandated the creation of SROs
(the people act)

156
Q

Securities Act of 1933

A

(Paper Act) Regulates new issues

157
Q

Changes that require a majority vote of outstanding shares

A

-changes in borrowing by open-end companies
-issuing or underwriting other securities
-changing sub classification (eg. open end to close end or diversified to non diversified)
-changing sales load policy
-changing the nature of the business
-changing investment policy

158
Q

Investment adviser contract

A

-approved initially by majority of outstanding shares and noninterested BOD

-initial max term of 2 years - may be extended on an annual basis by approval of BOD OR majority vote of the shares

-Termination no more than 60 days written notice

159
Q

Non-supervisory branch offices must be inspected

A

Once every three years

160
Q

6 Year Records

A

-Blotters (Journals, Day Books)
-General Ledger
-Stock Ledger
-Customer Ledger
-Customer Account Records
-Designated Principals

161
Q

3 Year Records

A

-Most all records
-FOCUS IIA
-Trial balances - prepared monthly
-Forms U4 and U5
-Fingerprint cards
-Confirmations of trades
-Order tickets
-Security and cash loan records
-Failed to receive and failed-to-deliver
-Long and short security differences

162
Q

Lifetime Records

A

-Stock Certificate Book
-Partnership Agreement or Articles of Incorporation
-Minutes of Board or Partnership Meetings

163
Q

Trade Blotter

A

Daily records of all activity - including cash received and disbursed, securities received and delivered, and identification of securities bought and sold that day. **does not contain client information, net capital or settlement dates.

**Blotters must be posted no later than the 1st business day following the activity. (6 year record)

164
Q

Exception reports must be kept for

A

18 months

165
Q

Compliance and Procedure manuals must be kept for

A

3 years after any changes

166
Q

Form BD and any amendments must be retained for

A

Lifetime of the firm

167
Q

Customer Complaints

A

-retained for 4 years
-Complaint file must have resolution and endorsed by a Principal
-Member firms must electronically file with FINRA - within 15 days of the end of each calendar quarter

168
Q

Arbitration: Investor (customer) cases

A

-$50,000 or less -simplified arbitration; FINRA appoints 1 arbitrator
-$50,000-$100,000- FINRA appoints 1 public arbitrator - unless parties agree on 3.
-over $100,000 -FINRA appoints 3 public arbitrators

169
Q

Arbitration: Industry cases - Brokerage Firms

A

-$50,000-$100,000 - non-public arbitrator
-Over $100,000 - 3 non-public arbitrators

170
Q

Arbitration: Industry cases- Between Brokers or Between Brokers and Brokerage Firms

A

-$50,000-$100,000 - public arbitrator
-Over $100,000 - mix of 3 non-public AND public arbitrators

171
Q

Time limit for submission of arbitration

A

6 years or more from the time of event

172
Q

General Securities Firms

A

-Also operate as clearing broker-dealer
-$250,000 minimum Net Capital OR 1/15 of AI, whichever is greater

173
Q

Minimum Net Capital for Introducing BD that receives funds or securities

A

$50,000

174
Q

Minimum Net Capital for Introducing BD that DOES NOT receive funds or securities

A

$5,000

175
Q

Minimum Net Capital for mutual fund dealer that accepts wire orders

A

$25,000

176
Q

Minimum Net Capital for mutual fund dealer that accepts subscription orders only

A

$5,000

177
Q

Subordinated loan

A

Loan made to the firm for net capital purposes. Lender agrees not to be paid back if doing so will cause the firm to fall below current capital requirements.

178
Q

Terms of Subordinated Loan Agreements

A

-Minimum term of 1 year
-must be in written form, binding all parties
-Specific amount
-Must specify that lender’s claims are subordinate to all other claims
-Meet FINRA standards - must be approved prior to becoming effective (generally filed 10 days prior)

179
Q

Focus IIA for Fully Disclosed Firms

A

-Due within 17 days of quarter’s end or within 2 business days of termination of membership.
-Due within 60 calendar days of fiscal year end.

180
Q

Eligibility Proceeding for statutorily disqualified person

A

-Filing form MC-400 (individual); MC-400A (member firms)
-$1500 filing fee
-Decision rendered by Dept. of Member Regulation
-Review and approval by National Adjudicatory Council (NAC)

181
Q

Class A Shares

A

-Offer breakpoints, letters of intent, rights of accumulation and combination privileges.
-Front end sales load, not to exceed 8.5%
-Most suitable for investors with large amounts to invest and long time horizon.

182
Q

Class B Shares

A

-Sold at NAV
-Back end load- sales charge levied when shares are redeemed- CDSC
-May have 12B-1 fee up to 0.75% of net assets per year
-After 6-8 years, Class B shares usually convert to Class A
-suitable for investors with small amount to invest, long time horizon

183
Q

Class C Shares

A

-Sold and redeemed at NAV
-Level load - 12b1 fee up to 0.75% for life of account
-May have back-end load, but levied only in first year
-Most suitable for investors with short time horizon

Series 26 (1 decks)

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