Series 7: Chapters 1-4

Right to vote

- Common stockholders can vote on important issues including election of board members and M&A - Vote on stock splits, not dividends - BOD decides dividends - 1 share = 1 vote

Unsponsored ADRs

- Company does not pay for cost associated with trading in US - A depository bank issues the ADR - Trade in OTC market, quoted on OTCBB or Pink market

Sponsored ADRs

- Company pays depository bank to issue ADR shares in US - Company permitted to raise $ in US, ADR can be listed on NYSE + Nasdaq

Earned (Ordinary) Income

- Compensation one receives for providing goods or services - includes salaries, wages, commissions earned through employment

Social media

- Considered advertising unless exception applies - rules regarding principal preapproval still apply - Firm must also follow all FINRA rules and recordkeeping rules - Post by employees considered interactive content - subject to review and supervision, but NOT approval

Deferred compensation plans (non-qualified)

- Contract between employees and employers where employers agree to pay certain amount to employees at later date and employee agrees to defer receipt of funds - Employer can only include certain employees (discretionary) - Income taxes deferred until employee is likely in a lower tax bracket Funded: plan secured by specific assets that are protected from employer's creditors Unfunded: not backed by assets

Callable preferred stock

- Corporation has the right to repurchased the stock in the future at a specified price - Call price typically higher than par value

Personal asset types

- Tangible assets - real estate, personal possessions - Investments - stocks, bonds, retirement plan,... - Savings - money mkt funds, checking / savings acct

Trusts

- The trustee put in charge of managing assets for a beneficiary - Trustee has legal control of assets but must act in beneficiary's interest To open, RR must obtain: 1. Evidence of trustee's authority to transact business in the account 2. Copy of the trust agreement - legal document that establishes the trust account

Numbered + Nominee accounts

- To protect privacy, clients can trade under nominee names or use an account number instead of their name - Firms are required to maintain records of the beneficial owners of all such accounts

Cost basis of securities

- Total price paid to acquire security including transaction costs (e.g. commissions) - Investor profit/loss calculated as difference between proceeds of sale and cost basis (For tax purposes)

Married tax returns

Married status dependent on status on Dec. 31 in year return is filed - Married filing jointly - more benefits - Married filing separately - usually not as beneficial

Leveraged Buyout

PE firm acquires a company using sub-investment grade debt, putting the company's assets up as collateral for the borrowed $

Corporate interest tax treatment

Federal tax: YES State/Local tax: YES

Blind advertisement

Does not include muni securities BD, but may include the name of the issuer and/or their contact info, and means of obtaining an official statement

Supervision and approval of research reports

Done by a supervisory analyst with Series 16

All CMOs must include following disclosure

"Yield and avg. life being shown considers prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and avg. life. Please contact representative for information on CMOs and how they react to different market conditions"

Reverse stock split

# Shares decreases, cost basis/share increases

Stock Splits

# shares increases, cost basis/share decreases

Time periods for fund advertisements showing average annual total return

- 1 year for investment companies in existence for at least 1 year - 1 & 5 years for investment companies in existence for at least 5 years - 1, 5, & 10 years for investment companies in existence for at least 10 years

Fiduciary accounts

- A Fiduciary is a person who acts on behalf of + for the benefit of someone else, e.g. estate administrators, trustees, guardians, receivers in bankruptcy, etc. - Fiduciaries required to provide documentation of their authority - Uniform Prudent Investor Act (UPIA) - No categorical restrictions on investments, instead focus on investor objectives and appropriate portfolio diversification

Taxpayer ID exception

- A broker-dealer that receives an application to open an account may waive the obligation of obtaining a taxpayer ID number provided the person has applied for, but not yet received, the number. - In lieu of the number, the broker-dealer must retain a copy of the person's taxpayer identification application.

Net worth vs. income

- A person with high net worth may have modest income but made good investments - A person with high income may be financially irresponsible.

marginal tax rate

- A person's tax bracket based on earned income - highest tax bracket they fall into - US has progressive tax system, tax rises as you get more income

Revocable trust

- AKA "inter vivos trust" - individual has right to make any changes in the trust, even cancelling - Assets do not transfer till death - Does not reduce taxes, but avoids probate when funded prior to grantor's death

Investment adviser accounts

- Client must provide written authorization for the advisor to transact business in the account - Investment advisers that do portfolio management can buy/sell securities for clients on discretionary basis

Variable products communications - identification as an insurance product

- All communications with clients must clearly describe it as a variable annuity / variable life insurance policy - Many companies use proprietary names for products that may confuse investors "still standing policy" - they'd need to provide a disclosure - if "Variable" in the name, no additional disclosure required

Spot-check procedures

- All of written and electronic communications that are created by a member firm may be subject to spot check procedures. - FINRA may request that certain communications be submitted within a time frame that's specified by FINRA's Advertising Department

Regulation of options communications

- All options-related retail communication must be pre-approved by a Registered Options Principal (ROP) - N/A to correspondence- and must at least offer to provide customers w/ ODD - must also be submitted for approval to an exchange or FINRA at least 10 days before initial use if delivered before an options risk disclosure document - If firm issues sales material that is only being sent to existing clients, does not need to be filed since all customers already received the document

Collateralized mortgage obligations - disclosure standards and required education materials

- All retail communications must contain term collateralized mortgage obligation in name of product - disclose that any applicable government agency backing relates only to face value of securities, not any premium paid - claims about safety, guarantees, product simplicty/ predictability must be accurate, not misleading - Do NOT compare CMOs to any other investments

Payroll deduction plans (non-qualified)

- Allow employees to authorize their employer to deduct a specified amount for retirement savings from their paychecks. - - The money is deducted after-tax and may be invested in any number of retirement vehicles at the employee's option. - lower sales charges assessed

Electronic communication networks (ECNs)

- Allow for quoting and trading of exchange-listed securities - Matches buyers and sellers - Allows dissemination of order info, execution during day and after-hours, and - Charge subscribers a fee, only act in agency, not principal, capacity

Marital deduction

- Allows unlimited tax free transfer of property between spouses

Time horizon

- Amount of time available - often applied to achieving goals, figuring the return on investments, setting limits, etc. - usually time before retirement

Retail communications that do NOT require preapproval

- Another firm has previously filed the communications with FINRA, has not been materially altered since - communication was posted on an online interactive interaction forum (social media) - Communication doesnt make financial/investment recommendation, doesnt promote firm's services, not a research report - usually retail communications that don't require pre-approval also don't require filing with FINRA

Authorized shares - common stock

- At time of incorporation, a company authorized to issue certain # shares - initial number of shares is arbitrary, but can only change by a majority vote by shareholders and by revising the corporate charter - Most firms issue fewer shares than authorized, keeping certain amt of stock available for future use

Hyperlinks

- BD includes hyperlink on its website to 3rd party content is permitted - may be considered advertising if BD was involved in preparation of content (entangled) or if they approve/endorse the content (adopted) - link to a general article on securities is considered educational material, not advertising - If link goes to 3rd party site which also has a link, not considered advertising, but 1st BD cannot entangled/adopted

Penny stock disclosure rules

- BD must provide customer with specific penny-stock disclosures: - risk prior to transaction in language specified by SEC - Current quote for the security - Compensation that BD will receive for the transaction - Compensation that RR will receive for the transaction

CRS filing

- BDs file CRS with Central Registration Depository (CRD) - IAs file CRS with Adviser Registration Depository (IARD)

Corporate organization

- BOD - Affiliated directors - Non-affiliated directors - Shareholders

Institutional account

- Bank - Savings and loan association - Insurance company - Registered investment company - Registered investment adviser - a person w/ total net assets >= $50 million *Required/requested info doesnt apply to institutional accounts, only retail

FINRA Definition - Institutional Investors

- Banks, savings and loans, insurance companies, registered investment companies, Registered investment advisers - Government entities and subdivisions - Employee benefit plans. i.e. 403b, 457 plan, other qualified plans with >=100 participants - BDs and their RRs - Individuals/entities with total assets >$50million - Persons acting solely on behalf of these institutional investors

Sole Proprietorship Accounts

- Businesses opened in the name of the individual owner, though may use a different business name - account is held by the individual and vulnerable to the owner's personal creditors

Insiders

- By SEA 1934 - Any director, officer, owner >10% of corp's voting stock and his immediate family members - within 10 days of becoming an insider, must report on SEC form 3 - Insiders required to file form 4 to report any changes in stock position by 2nd business day following the change

Required disclosures - retail communications

- Cannot say an IC is the BEST unless it is actually ranked #1 RC containing a ranking must contain following disclosures: - Name of category (growth, asset allocation, balanced) - # investment companies in category - name of ranking entity - length of period (or beginning + end date) - Criteria (i.e. total return/yield) rankings are based on - Past performance does not guarantee future results - if IC takes a front-end-load, whether ranking takes load into account - If ranking is based on total return or current SEC standardized yield - Publisher of ranking data - Whether ranking consists of symbol rather than number, and explanation of symbol

Cash dividends - tax issues

- Cash dividends taxable in year they are received by the shareholder - Must pay tax on full amount of all cash dividends received, even if subsequently invested with issuer

Corporate Dividend Exclusion

- Corporations owning <20% of distributing corporation can exclude 50% of dividend income from corporate income - if own 20%+ of distributing corporation, can exclude 65% of total dividends from tax -REIT dividends do not qualify - Not all mutual fund dividends qualify either - must inform corporate investor whether or not

Variable products communications - liquidity

- Customers who withdraw funds from variable products after a short period may have to pay a surrender charge and/or tax penalty - Variable products should never be described as short term or liquid investments - must disclose impact that loans and withdrawals may have on policy's cash value and death benefit

Series K Preferred Stock

- Depository shares, represent larger basket of issuer's preferred stock - Wide range of par values - Generally no voting rights - Dividends are non-cumulative, but qualified for tax purposes -> taxed at max rate of 20%

Passive income

- Derived from business venture an investor does NOT have an active role in (i.e. an LP) - passive income taxed same as ordinary, but passive losses can only offset other passive income/gains, not earned or portfolio income

Penny stocks - account approval procedures

- Determine penny stocks are suitable for customer based on financial situation + investment objectives - Deliver a written statement to customer regarding suitability determination - Obtain manually signed and dated copy of the statement from customer

Variable/adjustable rate preferred stock

- Dividend rate adjusts under a predetermined formula based on a benchmark (i.e. T-Bill rates) - Market price of variable preferred typically more stable than fixed preferred

Dividends on foreign securities

- Dividends and interest paid foreign securities like ADRs may be subject to withholding tax by country from which they are paid - Amount of foreign tax paid can be deducted against income or applied as credit against US income tax, but investor still owes US income tax on net dividend

Variable products communications - guarantees

- Do not overstate guarantees (i.e. minimum death benefit) since they ultimately depend on insurance company solvency - Aside from fixed account offered by some companies, neither principal value nor investment returns of a separate account are ever guaranteed - do not tell clients that ratings (AAA,BBB) given to the insurance company apply to the separate account

Non-governmental 457 plans (non-qualified)

- ERISA - must be limited to higher compensation employees like officers, directors etc. AKA "Top Hat Plans" - any money invested may not be rolled over - this does not apply to governmental 457 which can be rolled over - Non-vested money contributed must remain property of the employer, not the employee - assets held are subject to claims by general creditors of the employer

Regulation Best Interest (Reg BI)

- Enhance quality + transparency of retail customers' relationships with BDs and IAs - retail customer entitled to advice in their own best interest, not of the firm, and not just suitable

Tender offer

- Entity offers to buy a corporation's shares to acquire control of the company - price offered usually at a premium to mkt price - A customer may not tender shares that he's short since the stock was temporarily borrowed and doesn't belong to the customer

Substantially the same - wash sale rule

- Equity securities that are "substantially the same" apply: i.e. Stocks, rights, warrants, convertible bonds, convertible preferred, or call options - Bonds with different issuer, coupon, or maturity will not be considered substantially the same, but purchased and sold with only different accrued interest amt. does not count

Liquid net worth

- Excludes illiquid investments like real estate, LP interest, stock in small companies, etc. - RR must consider liquid NW to accurately evaluate financial situation

Misleading fund names

- Fund names that are likely mislead investors not allowed under investment Company Act - I.C. that has a name suggesting it focuses on a specific type of security/industry must invest at least 80% of its assets in those securities - "ABC stock fund" -> 80% assets invested in stocks - Also applies to country, region, etc. - Cannot use "guaranteed" or "insured"

Profit-sharing plans (non-qualified)

- Funded by employers, allow for discretionary annual contributions from company profits - good for business w/ unpredictable cash flows because you can skip out on bad years - Employer contributions are tax-deductible, grow tax deferred, but max annual contribution determined by IRS

Capital losses

- Generated when an investment is sold for a lower value than its cost basis - capital losses netted with capital gains -> no max $ limitation on this

Investment goal: Growth

- Greater risk, greater reward, outpace inflation - common stocks, mutual funds

SEC Rule 15c2-12: Municipal Securities Disclosure

- Helps underwriter obtain reasonable basis to recommend a muni security: - Must send customers most recent copy of preliminary official statement within one business day of request (negotiated offerings) - Must contract with the issuer to receive sufficient quantities of final official statement within 7 business days after agreement to purchase, offer, or sell the securities - must obtain and review official statement before bidding for/purchasing securities. The OS is considered in final form so may omit: 1. offering price, interest rate, selling compensation, aggregate principal amount 2. principal amount to maturity, delivery dates, ratings, underwriter identity

Use of IC rankings in Retail Communications

- If IC uses a ranking symbol rather than a number to show a ranking, must be explained (doesnt apply to a reprint/excerpt that is not affiliated with the firm)

Durable POA

- If grantor becomes incapacitated, durable POA must be in place for another to exercise discretion in the account - Either type of POA terminated when grantor dies

Identifying shares sold

- If not specified/designated, use FIFO to determine position being sold, affecting the P&L - You can designate which purchase you want to use

Fiduciary Responsibility

- Investment advisors have fiduciary duty to all clients, but even greater when client is a qualified pension plan subject to ERISA - Under ERISA, a fiduciary = any person who has discretionary authority

Transfers and Rollovers

- Investors may transfer funds from one retirement plan to another of the same type without tax - Investors may roll over distributions from qualified retirement planes (401k, etc.) to IRAs without tax - may be done only once/every rolling 12 months - A withholding tax of 20% may apply if a person transfers funds from one retirement account into another and receives a check payable to their name - may be avoided if funds are transferred directly from one account to another and check is payable to new trustee

Account restrictions

- May be placed to prevent conflicts of interest with buying/shorting certain securities - FRB requires payment for purchases in cash + margin accounts within 2 business days of settlement (S+2 or T+4) - If no payment made and no extension granted, account is frozen for 90 days, and payment / delivery must be obtained prior to each order

Investment company rankings in retail communications

- May emphasize ranking compared to peers in retail communications - Rankings entail

Research report disclosure - placement / formatting

- May not be written in reduced typeface - must be on first page of publication Unless: - recommendation is of 6+ companies, where the report must clearly state where the disclosures will be

Social values in investing

- Maybe have a preference for types of companies you invest in - i.e. ESG, etc. - RR must explain that this may necessitate exclusion of certain investment strategies

Partnership accounts

- Member firm must collefct info from each general/ managing partner: - Name - Address - Citizenship - T.I.N - Member firms also required to maintain a copy of the partnership agreement in the account file

Consolidations or transfers

- Most classic: M&A - issuer substitutes one security for another - merger/consolidation where securities of one corporation are exchanged for those of another - transfer of assets from one corporation to another - stock splits, reverse stock splits, changes in par value -> Not considered reclassifications

Retail communication - approval

- Must be approved prior to first use by an appropriately qualified and approved registered principal (Series 24, 9/10) - A supervisory analyst (Series 16) may approve debt/equity research reports and other research-related communication - other retail communications may require specific principal licenses depending on what they are

Required Minimum Distribution (RMD)

- Must start taking withdrawals from IRA by April 1 following year when you turn 72 or you get a tax penalty - does not apply to Roth IRA

NYSE and Nasdaq-listed securities

- NYSE listed - Every security gets one designated market maker (DMM) - Nasdaq-listed: Can have multiple market makers, considered a negotiated dealer market

Bond mutual fund volatility ratings - additional disclosure statement

- Name of rating entity - most current rating and date of the current rating - description of the rating that includes methodology behind the rating, whether fund paid for it, and risks measured by it Also: 1. no standard method for determining bond fund volatility ratings 2. fund's portfolio may have changed since date of the rating 3. no guarantee that fund's rating will remain the same

Netting Gains and Losses

- Net gains and losses to determine tax treatment - If you have LT gains and ST losses, need to apply the losses to the gain before 20% tax treatment applies - Max of $3000 capital loss can be used as a deduction against ordinary income; thereafter, unused losses can be rolled forward to the next year against capital gains or income

OTC Equities

- Not listed on either a physical or electronic exchange - Traded on: OTCBB and pink markets

Stock dividends

- Not taxable at time of receipt, only reduce cost-basis per share - Taxable only when sold - Gain/loss from subsequent sales calculated using new cost basis

Employee requirements for opening an account at another BD/FI

- Obtain prior written consent of their firm - Employees required to provide written notification to the executing firm of their association with another member firm - also applies to related persons of the employee

Occupation (as financial consideration)

- Occupation affects how RR deals w/ a customer - stable, steady income vs. volatile income customer may have to establish a cash reserve in case they have no income - Regulatory concerns - maybe employed w FINRA

Wrap accounts

- One fee (usually 1-3% annually) is charged by a BD for a number of services being provided - fee used to cover administrative, portfolio management, and transaction costs - good for a frequent trader

Unincorporated association accounts

- Opened in the name of the owner, which can be a business name. - The ownership of the account is subject to creditors' claims.

Stock dividend income

- Paid as additional shares - only adjust cost basis per share - do not declare as income

Cash dividend income

- Paid out quarterly or semiannually - Payments taxable in year of receipt

Capital reserve

- People should establish a cash reserve at least = 3 months of living expenses -if income is unpredictable, larger cash reserve maybe necessary

Characteristics and attributes - misleading

- Positive statements about potential benefits of an IC must be balanced with equally prominent statements about risks/limitations - Do not contain exaggerated/unwarranted claims about skill of managers, investment techniques, or comparisons of their fund vs other investments/indices - Must disclose that no guarantee that investment objectives will be met

Time/price exception

- Sometimes RR may receive verbal authorization from customer for certain decisions without being discretionary Customer must indicate: 1. Asset: Specific security/asset 2. Action: Buy/sell 3. Amount: # units to be bought or sold discretion left to timing/price of execution

Third-party posts

- Posts by customer or any other third party - third party posts that appear on the firm/employee social networking pages not considered advertising unless firm becomes entangled / adopted - If the firm/employee , solicit, pay, share, "liked" these comments on social media, they are subject to FINRA advertising rule - BDs prohibited from posting to a third party site they know contains false/misleading info

MSRB - Official statement summary

- Preliminary + final official statements are not considered advertising since they are prepared by/for the issuer - A summary of the official statement is considered advertising since it has been altered, and must be approved by MSP

Communication standards

- Provide good basis for evaluating investments, fair and balanced, good faith - No false, exaggerated, misleading claims - clear and balanced as to risks and potential benefits - considerate to audience - Not predicting/projecting performance, or implying that past results will be repeated

Dark Pools

- Provides liquidity for large institutional investors and high-frequency traders - Quotes are not disseminated to the public - Limits impact on the market

Past performance - misleading

- Providing portrayals of past performance may be misleading, so IC sales literature discloses that past performance is not indicative of future returns - Performance figures always reported after fees are deducted, before taxes are paid

Special Tax Treatment for Qualifying Cash Dividends

- Qualified dividend taxed at same rate as long-term capital gains rather than ordinary rate - REIT dividends still taxed at ordinary income rate because REIT does not pay corporate income tax if it distributes a minimum % of its income

401(k) plans

- Qualified plan that depends heavily on employee contribution - pre-tax $ - withdrawals taxed as ordinary income - employers may match contributions, but may establish vesting schedule - max annual contribution depends on IRS

Suitability violations

- RR makes recommendation to generate higher commission ; can be mutual funds, recommending margin acct, etc. - Recommending a new issue heavily promoted by their firm to keep their job

Tax information verification

- RR must request client's SSN or TIN - if they don't send, subject to backup withholding - customers asked to sign W-9 to verify that SSN or TIN provided is accurate, customer not subject to backup withholding (W-8 for non-residents)

New account documentation

- Record-keeping protects customer, firm, RR. - Customer info collected on new account form to satisfy regulatory requirements , but also understand investment objectives and satisfy suitability requirements - Includes KYC - More info from customer = smaller chance of unsuitable recommendation

Forms of retail communications that must be filed with FINRA WITHIN 10 Days

- Registered investment companies, i.e. mutual funds, closed-end funds, exchange-traded funds, UITs, variable products - Publicly-traded DPPs - SEC-registered collateralized mortgage obligations (CMOs) - Any security that is registered with the SEC and derived from/based on a single security, basket of securities, index, commodity, debt issuance, or foreign currency including publicly offered products like ETNs

Know Your Customer (KYC)

- Requirement that firms and RRs must know all the essential facts, financial and non-financial, about a customer - difference between profitability and suitability

Rights offerings

- Rights are not immediately taxable, but instead used to calculate cost basis for any stock purchased through the offering - if you sell the rights, proceeds taxable as ordinary income

Risk tolerance

- Risk tol not solely based on financials - also values, attitudes, perception of risk, etc. - A lot depends on preference which can be determined by the questionnaire

Recordkeeping requirements

- SEC and FINRA require member firms to retain a record of customer account info that's subsequently updated for >=6 years after the update. - Firms must keep record of the last update to any customer account info, or the original info if no updates, for >=6 years after the account was closed

Prior to settlement of first transaction, must try to obtain

- SSN or TIN - Cust. occupation and employer name and address - Associated w another member firm? - Financial info like annual income, net worth - Investment objectives

Wash sale

- Selling a security at a loss for tax purposes and, within 30 days before or after, purchasing the same or a substantially identical security - Also applies to a short-seller buying the security, then shorting it again within 30-days

SEC Penny stock regulations

- Several rules regarding solicitation and sale of low-priced OTC stocks (penny stocks) - Penny stocks often quoted on OTCBB and Pink Marketplace

Right to Evidence of Ownership

- Shareholders have the right to receive one or more stock certificates as proof of ownership - certificate states name of corporation, name of owner, # shares owned by stockholder - Names of both transfer agent and registrar - signature of authorized corporate officer - Stock certificate must be endorsed by owner when sold to be in good deliverable form

Unmarried tax returns

- Single - Head of household if you have dependents - provides more tax benefits w/ lower rates and higher standard of deduction

Investment goal: Liquidity

- Some investors want option to access funds in short period of time - money-market funds, T-bills - relatively safe, lower return, liquid

Retail communications - FINRA Filing and Review

- Some required to be filed 10 business days prior to first use, others within 10 business days of first use - For first year as FINRA member, a new BD must file all broadly disseminated retail communications with FINRA 10 business days prior to first use (also applies to firms with disciplinary issues) - Broadly disseminated materials = materials created for generally accessible websites, print media, television or radio

Related persons of an employee

- Spouse - Children - related person over whose account employee has control - any other person whose account the employee has control of and financially supported by them

Exemptions to penny stock disclosures (and rule 15g-9)

- Transactions with institutional accredited investors (not individuals - Private placements - Transactions with issuers, officers, directors, GPs, or 5% owners of company stock - Transactions NOT recommended by BD - Transactions executed by BD whose commissions and markups do not exceed 5% total commissions and markups, and BD has not been a market maker of penny stock being solicited within past 12 months

Continuing disclosure requirements - MSRB

- Underwriter must disclose whether the issuer or other obligated persons agreed to provide continuing disclosure info under SEC rule 15c2-12 - they are allowed to enter into this type of contract

Preferred stock

- Usually issued by established companies with common stock outstanding - Suitable for investors interested more in income than capital appreciation (like bond investors), usually no voting rights - Usually issued w/ par value of $100 and carries a specific % dividend (of $100 par value), or as a $ amount - preferred stock dividend rate is the MAX amount preferred shareholders will receive, but can be less or nothing

Personal liabilities

- What a customer owes to their creditors e.g. mortgages, home equity loans, car loans, credit card balances, student loans, debit balance to buy stock on margin

Third party research disclosures

- Whether BD has received compensation within past 12 months or expects to in upcoming 3 months for IB services - If BD makes market in subject security - If BD has 1% + subject company's equity security - any other conflict of interest

Research - public appearance required disclosures

- Whether subject company is IB client of the member - Whether analyst or member of their household has financial interest in the security that is the subject of the report - whether member firm has 1% + ownership of outstanding stock of subject company - Whether analyst/member of household is an officer, director, or advisory board member - any material conflict of interest they are aware of Often prepare planned script and include appropriate disclaimers, which must be reviewed after

Previously opened account - employee disclosure

- Within 30 days of employment to keep the account - employee must provide written notification to executing firm of employment w/ another BD - employer does NOT need to obtain approval prior to entry of each order, but rules are firm-dependent

Account information must be sent to customer

- Within 30 days of opening account or at time client's next statement is sent - Periodic updates every 36 months thereafter

SEC Rule 156 - Investment Company Sales Literature

- Written sales materials may be used by an investment company accompanied/preceded by a current prospectus and meet standard of rule 156 - sales literature defined as any communication that offers to sell shares in an investment company - includes anything that may be directed towards potential investors

Institutional Communications

- Written/electronic communication made available only to institutional investors - Member firm must establish way to prevent institutional communications from being forwarded to retail investors i.e. place legend on communication stating: "For use by institutional investors only" - Subject to review and supervision, but need not be approved by principal

Correspondence

- Written/electronic communication sent to 25 or fewer retail investors within a 30-day period - Subject to review and supervision, but need not be approved by principal

Retail communications

- Written/electronic communications sent to 25 or more retail investors within a 30 day period - Broadest category, include both sales literature and advertising e.g. TV, Radio, billboards, magazines, news, websites, blogs, sales scripts, telemarketing, etc. - Subject to review and supervision, but also require principal approval - Must clearly state the name of the firm that created it (unless "blind" recruitment advertising) - Firms required to maintain a file with all approved communications for 3 years after the last date of use and in an easily accessible location for first 2 years - File must contain copies of communications, dates of first/last use, name of approving principal, date approval was given

Rights offering and subscription price

- in a rights offering, all common shareholders receive 1 right/share owned - however, # rights needed to buy 1 new share, price at which shares may be acquired, and available period to exercise rights may vary - Usually offer is only good for a certain # days (e.g. 30) and preset purchase price is below current mkt. value of stock - preset exercise price = subscription price

New Issues - Limitations on Research

- may be conflicts between a firm's IB goals and requirement to provide customers with fair and balanced research - rules now enforce a quiet period after an IPO/secondary offering, where an IB client AND the participating BDs cannot be subject of research or make public appearance - prevents analyst from giving a favorable rating

Personal social networking sites

- preapproval difficult, so many firms ban employees from using certain sites for business purposes - regular use is not considered advertising and not subject to FINRA rules - If a person includes links to business-related communication, this is considered advertising - subject to FINRA rules

BDs must offer to provide retail investors w/ educational materials on CMOs including

- questions a CMO investor should ask before investing - discussion of structure of cmo that explains different types, tranches, risks associated with each type of security - Though two CMOs may have same underlying collateral, prepayment and interest-rate risk may differ - discussion of characteristics and risks of CMOs that details how changing interest rates may affect prepayment rates and avg. life of security, tax considerations, credit risk, minimum investments liquidity, and transaction costs - an explanaation of the relationship between mortgage loans and mortgage securities - glossary of terms applicable to mortgage-backed securities

Investment objective: tax relief

- some investors have high income and put in high marginal rate/ tax bracket - some investments produce tax-exempt income e.g. municipal bonds - tax-deferred retirement plans - traditional IRA, annuities, employee-sponsored retirement plans - LPs or other investments that provide tax credits/deductions

Convertible preferred stock

- stock that permits the preferred stockholders to convert their shares into common stock - good for investors who want higher, more secure income than common stock, but also potential for higher capital appreciation than preferred - determine if mkt price x conversion ratio > call price

Review and approval of IB over research

- strictly prohibited - cannot give any other department review/veto power over research

Research report disclosures - content

- whether analyst/member of their household has financial interest in securities of subject company - whether firm has ownership of subject security and whether it is 1% + of outstanding stock of subject company - whether firm makes a market in the subject security - any material conflict of interest that analyst/member firm is aware of - whether firm has received IB compensation for a deal with subject company within 12 months, or expects to within 3 months following publication - Whether analyst / member of family is officer, director, advisory board member of subject company

MSRB - Advertising

-BDs cannot publish anything false or misleading - All advertisements related to munis and muni fund securities (529 plans) must be approved by a MSP or GSP prior to use

Estate and gift taxes

-Can transfer up to $16k/year to any number of persons without gift tax - $32k if married couple

Suitability FINRA vs. Reg BI

-FINRA defines institutional investor including anyone w/ net worth >$50M, but Reg BI suitability rules apply to any individual. -For other I.I's, FINRA suitability rules apply (i.e. banks, IAs, investment companies)

Hypothetical illustrations of variable life insurance policies

-FINRA prohibis member firms from projecting investment results, but hypothetical illustrations OK provided that: - assumed ROR may not exceed 12% - One of the assumed ROR must be 0% - Assumed ROR must be reasonable based on current market - Cash value + death benefits must reflect policy's maximum mortality and expense charges for each assumed ROR -

alternative minimum tax

-ensures that taxpayers pay at least the minimum -recalculates income tax after adding certain tax preference items back into adjusted gross income such as interest on certain muni bonds, depreciation expenses, LP interest ownership events..

Required information for new account form

1. Name + Residence 2. Of legal age 3. Name of RR(s) responsible for acct. and scope of responsibility 4. If customer is corp., legal entity, partnership - name of anyone authorized to do business on their behalf 5. Signature of partner, officer, manager (principal) denoting acceptance of the account Discretionary accounts - need 1. signature of each named natural person and 2. date on which they were authorized to exercise discretion

Correctly established qualified plans have following benefits

1. Pre-tax contributions - employers and employees can contribute pre-tax $ 2. Tax-deferred growth - Investment earnings (dividends and interest) on all contributions are tax-deferred until withdrawal 3. Payments received at retirement may qualify for special tax treatment

Primary tax issues - equities

1. Tax status of securities dividend payments 2. Resulting capital event at time of resale

IPO quiet period

10 days - applies to everyone involved

Common stock

1. basic unit of corporate ownership 2. most widely issued stock type 3. first type of stock issued by a corporation - common usually issued with a par value, a nominal amount used for the company's financial statement (not related to market value)

2 options for investors with rights

1. exercise rights by tendering to issuer's transfer agent 2. freely transfer (trade) the rights

Variable life insurance policy illustration must include prominent statement that

1. its purpose is to show how the performance of underlying subaccounts could affect policy's cash value / death benefits 2. It is hypothetical 3. Does not project/predict investment results

Follow-on offering quiet period

3 days - only applies to managers and co-managers - no restrictions for other participants

Custodial accounts

Accounts created for minors in custodian's name - under UPIA, custodian may authorize investment discretion to a 3rd party if they lack experience, etc. 2 types: 1. UGMA 2. UTMA

Customer verification

A BD must verify a customer's identity within a reasonable period, before or after account opens Minimum required information: - Name - DOB - Address - ID number - TIN for US citizens (SSN or employer ID numer) - For non-US citizens - TIN, passport # and country of issuance, alien ID number, or gov't issued ID showing nationality, residence, and photo

Treasury stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use

Pattern day trader

A customer who executes 4 + trades over a 5-day period

Policies and procedures for social media

A firm should address: - Usage restrictions: Which sites restricted, which are prohibited - Training and Education: Promote understanding of differences between personal/business communications, how to respond to clients on social media - Recordkeeping + record retention: Firm must document how it will comply when using social media - Monitoring: How they will monitor and review content - Approval of social networking sites: Firm indicates which sites permitted, ensure compliance w/ FINRA rules

Joint tenants with right of survivorship (JTWROS)

A form of joint ownership of an account whereby a deceased tenant's interest in the account passes to the surviving tenant. It is used almost exclusively by husbands and wives.

Options disclosure document

A publication of the Options Clearing Corporation that outlines the tax implications, transaction costs, margin requirements, and trading risks of investing in options - must be given to each customer at/before the time of opening an options account and must accompany any options sales literature sent to a customer.

Progressive tax

A tax for which the percentage of income paid in taxes increases as income increases

Regressive/flat tax

A tax for which the percentage of income paid in taxes stays the same as income increases e.g. sales tax, excise tax, Social security tax

403(b) plan

A tax-deferred retirement plan for teachers, hospital workers, ministers, and some other public employees - max annual contribution depends on IRS

Standard corporation

AKA Subchapter C Corporation - Taxed separately from owners and has unlimited # of shareholders 1. Taxed at corporate level if distributed as a dividend to shareholders 2. taxed to the shareholder - Considered a separate person under law, individual shareholder not responsible for corporation's debts

Advertisements for municipal fund securities

Advertising related to muni fund securities (529 plans), certain disclosures must be provided: - advise investor to consider investment objectives, risks, charges, expenses associated w/ muni fund securities - Explain that more info is available in official statement and it should be read carefully - Identify firm as underwriter of 1+ issues of muni fund securities if the firm publishes the advertisement and will supply the official statement

Uniform Gift to Minors Act (UGMA)

Allows minors to own cash or securities. The UGMA/UTMA accounts are governed by state law that requires the custodian of the account, usually a parent or grandparent, to manage the account for the benefit of the minor child. - May NOT be margin accounts - thus no commodities futures, shorting, etc. - $16k tax free/year

Standardized performance info font size

At least as big as that used for non-standardized performance information

Board of Directors

Appoints senior managers who run company

Record retention

BD must maintain records of methods used to verify customer identity for 5 years following closing of account

Advertising Day-Trading

BDs can advertise/promote benefits of day trading on website, which would be a retail communication, thus subject to principal approval and filing with FINRA, and copy of it must be retained for 3 years - BDs must give customers a special written disclosure document and post this on website in clear and conspicuous manner - if customer opens account in a firm that promotes a day-trading strategy, he may engage in other activities if he signs a written agreement

Title restrictions

BDs cannot use "advisor/adviser" in title unless also registered as an Investment Adviser For an RR to use advisor/adviser, must pass series 65/66

Suitability

BDs must have a reasonable basis to recommend a transaction / investment strategy for retail investors. 3 main obligations: 1. Reasonable basis - must have a reasonable basis to recommend to at least some investors 2. customer-specific obligation - reasonable basis to recommend to specific customer based on investment profile 3. quantitative obligation - A series of recommendations are not excessive even if suitable

Suitable investments (ERISA)

Based on fiduciary obligation, plan manager should maximize returns for plan's participants - Conservative investments are a priority, aggressive strategies prohibited - Certain conservative option strategies like covered call writing are permitted - Plan grows tax-deferred, so manager should avoid tax-free investments like munis in the plan

Corporate resolution + Corporate Charter required?

Both required for all accounts (Margin trading, options trading) except cash account trading which only requires a corporate resolution, not a corporate charter.

CMO retail communications must be approved

By principal prior to initial use, filed with FINRA within 10 days of first use

Short vs. Long term capital gains/loss

Long-term = >1 year held, max tax = 20% Short-term = 1 year or less, taxed as ordinary income - short-sales generally treated as short-term

Full POA

Can trade in the account as well as withdraw money and/or securities

Email and instant messaging

Can be considered correspondence, institutional communication, or retail communication depending on context

Voting by proxy

Can choose to authorize someone else to vote the shares owned by the shareholder

Verification of investor accreditation of sophistication

Certain investments require a min. net worth / earnings, understanding of product/risk, etc. - need to be accredited and sophisticated To verify this: 1. Review previously filed IRS tax forms and other tax forms to determine investor's income 2. Review bank / brokerage acct statements and other statements of assets for prior three months to determine investor net worth 3. Obtain written confirmation of investor's accredited status from BD, registered IAs, attorneys, accountants - Just need to take reasonable steps to ensure the people are accredited investors, not any one method required by SEC

Affiliated directors

Certain senior executives (CEO, president) who also serve on the board

American Depository Receipts (ADRs)

Claim to foreign securities with actual shares held in US banks abroad - Trade in US OTC or on exchange, pay dividends in USD - still indirect ownership of foreign securities and subject to foreign currency risk

Tenancy in Common

Co-ownership of account in which each party owns an undivided interest that passes to their estate at death

Right to receive dividends

Companies often pay out a portion of profits to common + preferred shareholders as dividends - not guaranteed

Research - public appearances

Conference call, seminar, public speaking delivered to 15+ people or 1 + representative of the media via radio, TV, or print media interview where a research analyst makes a recommendation/opinion on equity security - must make disclosures

Customers vs. Consumers

Customers: have ongoing relationship with firm Consumers: in process of providing info to firm for a potential transaction

Pattern day trading account

Day trading = purchasing + selling the same security, within same day, in a margin account - Firm may impose special day-trading margin requirements for any pattern day trader - If # trades is 6% or less of total trades for 5 business day period, the customer is NOT considered a pattern day trader Exceptions: 1. A long position held overnight and sold the next day prior to purchase of another security 2. Short position held overnight and purchased the next day prior to any new sale of the same security

Account registration changes

Death, divorce, transfer of securities to someone else - may necessitate account registration changes Changes may require: - Marriage/divorce - marriage certificate, divorce decree, court document - To add or remove a person: Birth date, SSN, contact info, and signature of both parties - principal approval of document changes before any transactions executed in account

DVP/RVP Accounts

Delivery versus payment and Receive versus payment AKA payment on delivery (POD) + Collect on delivery (COD) - clients sometimes use a bank to centralize bookkeeping and custody while executing trades through various BDs - usually used by smaller mutual funds, institutional accounts, private, HNW investors

Bond mutual fund volatility ratings

Descriptions that are issued by an independent third party to measure how sensitive a bond fund's NAV is to changes in economic and market conditions. - firm may only use in supp. sales literature, not advertisements intended for public dissemination - Supp. sales literature may only be used if prospectus for bond mutual fund has been sent to customer and: - rating may not describe volatility as a risk rating - Supp. sales lit. must include most recent ratings - Criteria to determine rating must be based on objective/qualifiable factors - ranking entity must provide disclosure on rating methodology to investors through website or toll free #

Non-qualified retirement plans

Do not need to meet ERISA standards

Employee Stock Ownership Plan (ESOP) (non-qualified)

Employee benefit plans in which company contributes its own stock/money to purchase stock to the plan - stock generally comes from retiring/departed employees - when individuals retire, they receive $ equivalent of the stock

Early withdrawals from IRAs

Exceptions from tax penalty: - medical insurance premiums if owner = unemployed - <$10k for a qualified first-time home buyer - <$5k for birth/adoption of a child - qualified higher education expenses for account holder / immediate family Still pay income tax on withdrawals

Shorting against the box

Executing a short sale on a stock that the investor owns for timely delivery of securities that may be in a legal transfer

Variable product communications

FINRA established special guidelines for written materials used to sell variable products - often need to prepare customized illustrations for interested customers

Employee Retirement Income Security Act (ERISA)

Federal law that increased the responsibility of pension plan trustees to protect retirees, established certain rights related to vesting and portability, and created the Pension Benefit Guarantee Corporation

Identity theft prevention (FTC Red flags rule)

Federal trade commission (FTC) red flags rule requires many institutions to create and implement a written identity theft prevention program - assists firms in quickly identifying suspicious activity and protecting clients - all policies and procedures must be disclosed in written supervisory procedures (WSP) documentation

Municipal interest tax treatment

Federal: NO State/Local: Depends on issuer, customer state of residency

Treasury interest tax treatment

Federal: YES State/Local: NO

Specifically designated nationals and blocked persons list

Firms and RRs must make sure not to do business with anyone on this list maintained by OFAC - list referred to as SDN list - BDs must use extra caution and due diligence when opening private banking accounts for foreign nationals

Privacy notice (regulation SP)

Firms must provide customers with description of privacy policies (privacy notice) - must disclose right to opt out of info being shared - For customers: At time relationship is first established and annually thereafter - For consumers: Only before (if) firm discloses non-public, personal info w/ any third party

General Obligations (Reg BI)

For BDs only (IAs subject to IA Act of 1940 instead) 1. Disclosure - Provide certain disclosures for recs made to retail customer and relationship btwn customer and firm before/at time of recommendation 2. Care - exercise reasonable diligence, care and skill in making recommendations 3. Conflicts of interest - establish, maintain, enforce written policies/procedures that address conflicts of interest 4. Compliance - Establish, maintain, enforce written policies/procedures that achieve compliance w Reg BI

Taxation of contributions (to qualified retirement plans)

Generally contributions made pre-tax, reduces total taxable income - also means a zero-cost basis

Capital gains

Generated when investment sold for greater value than its cost basis - Short term: <1 year - taxed at same rate as ordinary income - Long term: >1 year - taxed at max rate of 20%

Warrants

Give the holder the right to buy a firm's equity at a fixed price prior to the warrant's expiration - Maturity is long, or even perpetual - subscription price generally higher than current market price of stock - often issued in connection with another issue of stocks or bonds as a "sweetener" - but can also be detached as their own securities

Privacy of consumer financial information (regulation SP)

Graham-Leach-Bliley act requires certain institutions to: 1. Establish privacy policies for customer info collection 2. Notify customers of privacy policies 3. Give customers right to opt-out of disclosures of non-public personal info to certain third parties

Income (as financial consideration)

Greater income means higher risk tolerance; Lower income = lower risk tolerance Also consider source + reliability of income - determine customer's cash flow

Joint accounts

Have more than one owner, any joint owner can initiate activity in the account - New account info obtained for both owners - when signatures are required, all owners must sign - any check made out to account must be to both owners - Tax reporting data listed under only one tax ID number belonging to one of the owners

Performance Information Disclosures (Rule 482)

If 482 advertisement contains performance info, must disclose: - Performance data being quoted represents past performance and past performance does not guarantee future results - Investment's return and principal will fluctuate so when shares are redeemed, may be worth more/less than original cost - either toll-free phone # or website from which investor may obtain performance data that's current to most recent month end - whether a sales load or other non-recurring fee is charged, max amount of load/fee, and that performance data doesn't reflect sales load deduction

Combined withdrawals

If an investor has retirement account w/ both pre-tax and after-tax contributions and begins withdrawls, IRS considers withdrawals to come from both sources - a portion of withdrawal is taxable and other is tax free

Multiple class / two-tier funds

If investment company rankings are being used for more than one class of investment with the same portfolio (class A and B shares), retail communication must provide a prominent disclosure of this fact

Warrant - intrinsic value

If stock's mkt. price goes higher than subscription price, there is intrinsic value

Filing of TV / Video retail communications

If already filed a draft version or storyboard of a TV/video retail communication, must also file final filmed version within 10 business days of first use or broadcast

Internal transfers

If you want to transfer securities into another's account, stock transfer is completed - all parties must approve

Shareholder Rights

In corporate charter and bylaws: - right to evidence of ownership - right of transfer - right of inspection - Right to vote - Right to receive dividends

Advertising a 529 savings plan

Include statement to advise investor to consider whether their home state offers any state tax/other benefits only available for investments in that state - disclose that when calculating tax-equivalent yields or after-tax returns, firm must assume that any distributions that are not reinvested will be used in manner intended to qualify for fed. tax exemption in section 529, i.e. distro + yields will be lower if not used correctly

predispute arbitration clause

Included in many new account forms, this obligates customers to submit all disputes w/ RR/firm to binding arbitration - Arbitration = final and binding on parties - Waving right to seek remedies in court, i.e. jury trial - Prearbitration discovery is more limited than and different from court proceedings - Not required that arbitrators' award include factual findings, right to appeal/modify rulings by arbitrators = very limited

Deferred income

Income earned in account requiring tax be paid at later date e.g. retirement plans/annuities like IRA, 401k, Keogh - not currently taxed - withdrawals taxed as ordinary income

Retirement funding

Income stops ~60, need portfolio to last >20 yrs. so need to construct a portfolio that accounts for multiple risks like inflation eroding purchasing power, as well as loss of principal from risky investments - also take advantage of tax-deferred retirement plans - most people need ~70% of current pre-tax income when they retire

Insiders - trading limitations

Insiders not allowed to keep short-swing profits in any stock of corporation they are insiders of -short-swing profits = result of insider selling stock at a profit within 6 months of its acquisition - a violation can mean the corporation sues for disgorgement - insiders cannot short their own stock, unless "shorting against the box" - insiders may write covered calls but not uncovered calls

Omitting prospectuses (rule 482)

Investment company advertisements that technically meet the definition of a prospectus are referred to as omitting prospectuses - these omit/summarize info contained in statutory prospectus - may not contain an application to invest (like tombstone advertisements) - primary advertising rule for mutual funds and mutual fund performance may be included in the advertisement if proper disclosures are made

Sophistication

Investment experience

Investment goal: Current income

Investments that produce steady stream of cash - bonds, preferred stock, annuities downside: little potential for growth, if any; inflation can erode purchasing power and no growth is not keeping up

Investment goal: Preservation of capital

Investors who have preservation of capital as an investment objective are very conservative and are more concerned with keeping the money they have saved.

Prime brokerage accounts

Involves a clearing firm offering a bundled package of services to sophisticated clients - clearing firm is a centralized location to hold all securities positions created by several executing firms - clients use one prime broker to consolidate bookkeeping process - PB benefits large, active customers - centralize clearing and custodial services, receive one set of comprehensive reports on portfolios, and concentration of margin positions into one single account lowers cost of funds

Age in investing

Just starting career = more years to earn more, replace losses, higher risk tol. 100 - client's age = % they should invest in stocks

Uniform Transfers to Minors Act (UTMA)

Legislation that allows for postponement of the transfer of assets to the minor - May be margin accounts - Opened under minor's SSN, minor responsible for paying taxes on any income generated in the account - may allow for street name holding - $16k tax free/year

Statement must be included to indicate CMO's yield and avg. life (exp. return of principal)

May fluctuate depending on: 1. Actual rate at which holders prepay mortgages underlying CMO 2. changes in current interest rates

Generic 529 advertisements

May not refer to a specific fund by name, but may describe general nature of 529 plans and various investment objectives of different plan types - may also contain invitation for further info. as long as official statement is provided

Qualified plans

Meet IRS and ERISA requirements and receive favorable tax treatment 1. Eligibility requirements 2. Vesting 3. Investment of contribution and determination of benefits

Accounts at other BDs/financial institutions

Member firms required to monitor personal accounts that their employees open with a different firm, employee must observe special rules prior to account being opened

Approving customer accounts

Must be done by principal - the exam certification depends on the type of account e.g. - Series 24 for general securities principal - mutual funds, corp securities, variable annuities - Series 53 for municipal securities principal - only they may perform daily review of account activity

If BD sells penny stock as of last trading day of month

Must deliver a monthly statement to the customer, provided they are holding the security, with identity and # shares of each penny stock, and estimated mkt value of the stock

General required disclosures (rule 482)

Must disclose: -Investors must carefully consider investment objectives, risks, charges, and expenses of a mutual fund before investing - prospectus contains these details about the mutual fund - Prospectus should be read carefully before investing - Source from which an investor may obtain a prospectus

Seminars given by RRs

Must make a record of date, topic, and sponsor of seminar - needed for supervisory purposes

Performance indicators in advertising 529 plans

Must present statment: " past performance does not guarantee future results.... investor shares may be worth more/less than original cost... Current performance may be lower/higher than advertisement" - if advertisement doesn't include total return quotations calculated to most recent month and ending within 7 business days prior to date of advertisement, firm must include a toll-free phone # or website where info can be found - if sales load or other non-recurring fee is charged, max amount should be stated

Any reprint or excerpt of an article or report that is issued by a publisher, provided the publisher is not affiliated with the member firm or issuer of the securities that's being mentioned / been commissioned in the reprint - filing requirement?

No

Communications that simply refer to types of investments as part of a listing of products and services that are offered by the member firm - Filing requirement?

No

Institutional communication + correspondence - Filing requirements?

No

Press releases made available to only the media - Filing requirement?

No

Previously filed retail communication without material change - Filing requirements?

No

Retail communications that identify a member firm's national securities exchange symbol, identify a security for which the member is a registered market maker, or identify that member firm offers a specific security at a stated price - Filing requirement?

No

Tombstone advertisements, mutual fund profiles, prospectuses filed with SEC - Filing requirement?

No

Retail communications that don't make recommendation and do not promote their product - Filing requirement?

No - These are also excluded from principal approval requirement. i.e. Recruitment advertising, advertising related to changes in BD name, personnel, address, ownership, office, business structure, officers/partners, or phone #, and advertising related to M&A

457 Plan (non-qualified)

Non-qualified, deferred compensation plan established by state and local governments for tax-exempt government agencies and tax exempt employees. - allow pre-tax contributions to be made by employees - max contribution annually determined by IRS - after age 50, can contribute additional amount - No 10% penalty for withdrawals prior to 59 1/2

Irrevocable trust

Once assets are deposited into account, grantor can no longer modify/cancel the trust - reduces donor's estate tax, avoids probate

Statutory voting

One vote/share owned/voting issue - beneficial for the larger, more substantial shareholders

Required signatures: Standard brokerage + cash accounts

Only approving principal

Limited POA

Only trade in the account, no withdrawals

Individual accounts

Opened by and for one person - only person that can direct activity in the account unless a third party is authorized

Conversion ratio (convertible preferred)

Par value preferred ($100) / conversion price convert if this value x mkt value > call price

Spin-off transaction

Parent company distributes shares of a subsidiary company to the parent company's shareholders - retain original shares, but also given shares in the newly created entity - No immediate tax consequence - Spinoffs done by seller in hope that combined valuation of the separate companies will be more than the original entity

Non-affiliated Directors

People who serve on the board of directors that are not otherwise connected to the corporation

Retail customer

Person or their non-professional legal representative who: 1. receives recommendation of securities transaction/investment strategy from BD 2. Uses recommendation for personal, family, or household purposes NOT: Professional legal representatives, fiduciaries

Eligibility requirements (qualified retirement plans)

Plan must cover all employees over 21 and worked for employer at least 1 year (1,000+ hours = full time)

Taxation of income and trading events during plan's life (retirement plans)

Plans may generate dividends or interest - all tax-sheltered

Taxation of distributions (retirement plans)

Pre-tax $ generally taxed at ordinary income rates as well as all income and trading profits 1. post-tax contributions not taxed upon distribution 2. Pre-tax contributions taxable at ordinary rate upon distribution 3. All account earnings (interest, dividends, trading profits) taxable at ordinary income tax rate upon distribution

Cumulative preferred stock

Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid

Participating preferred stock

Preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock. - 5% preferred, participating to 8% - usually pays 5%, but could get up to 8%

non-cumulative preferred stock

Preferred stock where missed dividends do not accumulate. Only the current year's dividend is owed before common dividends can be paid

Independent third-party research

Prepared by a person/firm that: 1. has no affiliation/contractual relationship w/ disturbing member 2. makes content determinations without any input from distributing member or member's affiliates - approval by principal NOT required - Required disclosures must be provided by the firm preparing the report, not the firm distributing it

Third party research report

Prepared by an affiliate of the broker dealer - must be approved by a supervisory analyst or approved supervisory person of BD (e.g. GSP)

Required signatures: Option + margin accounts

Principal signature and client's signature

SEC Rule 15g-9

Prior to purchase of penny stock by customer, BD must approve person's account for penny stock transactions and obtain written agreement indicating identity and quantity of stock

Scope of info that must be protected (Regulation SP)

Protecting non-public personal info, does not include publicly available information

Client Relationship Summary (Form CRS)

Provides retail investors with information about the nature of their relationship with their financial professional in a simple, easy-to-understand format. - no longer than 2 pages - new retail investors must receive CRS no later than time they open a brokerage account, place an order, or receive a new recommendation for an account type, securities transaction, or investment strategy

Discretionary account

RR = authorized 3rd party - Different levels of discretion - i.e. none, limited, full - A principal must accept the discretionary authorization in writing - Each discretionary order must be approved by the principal promptly and account activity must be frequently reviewed - Account holder's permission not required to be obtained unless the RR wants to put some of its own firm's stock into the account *Churning would be a main concern* - investment objectives very important to pay attention to

Corporate accounts

RR must be sure the person opening a corporate account is authorized with a corporate resolution - Corporate resolution created by BOD appointing one or more people to operate the account *Customer here = the corporation, not person opening account*

Ranking entity - retail communications

Ranking entity: organization that provides the public with general information about an investment company, independent of IC/affiliates, and has not been hired by the IC to assign the fund a ranking Member firms cannot use IC rankings in retail communications other than: 1. Rankings created and published by ranking entities 2. Rankings created by an IC or IC affiliate, but based on performance measurements of a ranking entity

DVP

Receive $, give stock

RVP

Receive stock, give $

Other forms of retail communications that must be filed with FINRA at least 10 days prior to first use

Registered investment companies that include rankings/comparisons

Sales Contests

Regulation BI effectively bans all sales contests, quotas, bonuses, and other non-cash compensation that are tied to sales of specific securities or types of securities However, compensation based on other metrics, such as total sales, asset growth or accumulation, or customer satisfaction still permitted Training and education meetings also permitted as long as attendance is not based on selling certain products within a limited period. SRO rules on non-cash compensation updated to reflect Reg BI

Information barriers between IB and ER

Reinforced via supervision, including a member's written supervisory procedures - heavily regulated

Preemptive rights

Rights that entitle shareholders to purchase newly issued shares of a corporation's stock to maintain proportionate ownership of company before offering to public

SEC Standardized Yields - retail communcations

SEC established 2 standardized used that must be used in Retail communication: 1. Money-market Funds: 7-day standardized yield 2. Bond Funds: 30-day standardized yield

Use of Stockholder Information for Solicitation

SRO rules don't allow a trustee to use stockholder information for solicitation purposes unless the member firm is specifically directed to do so by, and for the benefit of, the corporation. e.g. do not cold call

Person vs. customer

Same person can act in different capacities, i.e. retirement account vs. growth brokerage account - different customers, different investment objectives, same person

Vesting (qualified retirement plans)

Schedule under which employees rights to receive benefits contributed to plan by employers gradually become guaranteed based on years of service At a minimum: 1. All must be fully vested after 5 years OR 2. All 20% vested after 3 years, fully vested after 7 years - employees always 100% vested in their own contributions

Market cap

Share price x shares outstanding

Cumulative voting

Shareholders can multiply number of shares they own by number of voting issues, resulting in total number of votes the shareholder can use in any way they like

Customer's personal I/S

Shows discretionary income, sources of income, how they spend it higher discretionary income - more aggressive investment strategy

Institutional suitability

Sophisticated institutional investors can be exempt from customer specific suitability as they can effectively gauge risk on their own. 1. Firm and RR must have reasonable basis to believe the Institutional customer can evaluate risks independently 2. Institutional customer must affirmatively state it can exercise independent judgment to evaluate recommendations

An RR without the Research Analyst designation prepares report for distribution

Still considered research reports, subject to same review and approval requirements

Outstanding stock

Stock that has been issued and is being held by stockholders - Receives dividends and voting rights

Right of transfer

Stockholders have the right to freely transfer their shares by selling them, giving them away, or bequeathing them to heirs. - Right may be limited for shareholders who are also employees of the company who acquired stock as a direct form of compensation - Restricted shares are not freely transferable (carry a legend printed on face of certificate to indicate ineligibility for transfer)

Customer Identification Program (CIP)

The policies and procedures of an institution that aim to identify and verify the identity of its customers. - The program must be in writing, have senior board approval and include procedures for customer notification - Determine whether person is known/suspected terrorist or affiliated organization

Bank Secrecy Act (BSA)

The primary U.S. anti-money laundering law -> prevents terrorist financing networks - Imposes a number of new regulatory obligations on BDs including verifying identity of those who intend to open accounts

Probate

The process of proving in court that the will of someone who has died is valid, and of administering the estate of a dead person

Personal Balance Sheet formula

Total assets - Total liabilities = Net Worth

Derivatives

Track value of common stock / underlying asset 3 main types: 1. Rights 2. Warrants 3. Options

Additional exemption from rule 15g-9

Transactions with established customers - for whom the BD has an account and who has: - executed a transaction/deposited funds into his account >1year prior to penny stock transaction - Made 3 purchases of penny stocks occurring on 3 separate days involving 3 separate issues

Investment objective: speculation

Try to beat the market, high degree of risk to lose full principal e.g. day trading in margin acct, alternatives like derivatives, hedge funds, small/micro cap stocks

College funding

UGMA/UTMA, Coverdell Education savings accts, 529 plans, etc.

Rule 156 - materially misleading`

Unlawful for an IC to sell shares using sales literature that: - Contains untrue statement of material fact or - Omits a material fact that is necessary to prevent the statement from being misleading - fails to properly explain, qualify, or limit claims it makes about the investment - fails to mention importance of general economic/financial conditions

Penny stock

Unlisted equity security trading at <$5/share Not applicable: - Exhange-traded equities (NYSE/Nasdaq, Regardless of price) - Investment company securities - OCC-listed puts + calls - Securities w/ market value at least $5/share - Securities whose issuer has either: 1. net tangible assets >$2Million if in continuous operation at least 3 years 2. Net tangible assets >$5million if less than 3 years 3. Avg. revenue of $6million for past 3 years

Executing broker dealer requirements

Upon written request, the executing firm is required to send duplicate copies of confirmations, statements, or any other transactional information to the employee's broker-dealer. Exemptions: mutual fund shares, UIT, variable contracts, or 529 plans

Taxation of investment income

Usually taxed as ordinary income based on tax bracket

Account registration - forms of account ownership

When BD collects necessary info, client must disclose which account type they want to open, since different account types may require specific documentation beyond new account form

Date of First Use and Approval Information

With each filing that's made to FINRA, a member firm is required to provide: - name - title - Central Registration Depository (CRD) number of the registered principal who approved the retail communications along with the date on which the approval was given.

Early withdrawals from Retirement plans

Withdrawal from retirement plan before 59 1/2 subject to 10% tax penalty as well as the amount being taxable as ordinary income Exceptions: - account owner becomes disabled - account owner dies and money withdrawn by beneficiary - withdrawals set up as a series of substantially equal periodic payments over owner's lifetime - money used to pay certain medical expenses Still pay income tax on withdrawals

Trading authorization

Written permission, signed by account owners naming a 3rd party to transact business on their behalf - AKA power of attorney (POA) Examples of 3rd parties: - family member - attorney - investment adviser - Registered representative

Right of inspection

each director can access the corporation's books and records, facilities, and premises - usually through receipt of an annual audited report

Limited liability

if the business cannot pay its debts, a shareholder generally loses only their original investment

Hot news exception

research may be published during the quiet period if the issuer is subject to certain unexpected news events

Municipal securities confirmation

must be sent at/before completion of the transaction (usually settlement date) - 529 plan confirmations must contain the portfolio allocation / fund designation for these securities

Issued shares

represent the total number of shares of stock that have been sold by the corporation