AD BANKER SIE WRONG QS

Vesting

refers to the amount of time an employee must be employed to have rights of ownership to the employer contributions within the plan. Employees are always 100% vested in their own contributions. Vesting schedules are usually set for the employee to vest at 20% per year until they are fully vested after 5 years.

Regulation T

regulates the extension of credit from the broker-dealer to customers for margin accounts. Regulation T also sets payment dates on corporate securities as trade date plus 4 business days. (T+4)

Under the FINRA rule, a member firm's Business Continuity Plan (BCP) must provide, at a minimum all the following

1. Communication with regulators 2. Alternate physical location for employees 3. The protection, backup and recovery of books and records

All the following securities trade in the Second Market

1. Corporate debt 2. Municipal debt 3. OTCBB securities & OTC Markets Group securities

What documents are required to open an options account for a customer?

1. Options Disclosure Document (ODD) 2. An options agreement At or before the time when the option account is approved, the customer must receive a copy of the disclosure document for options, called Characteristics and Risks of Standardized Options or Options Disclosure Document (ODD). When opening an option account for a client, the client must be explained the risks involved with trading options. These risks are explained in detail in the ODD. This agreement explains the types of transactions allowed in their account. Each customer can have different restrictions on their accounts. Some will not be able to write options. The hypothecation agreement is required when opening a margin account, not an options account.

REITs can distribute which of the following to shareholders?

1. Stock dividends 2. Cash dividends 3. Capital gains As a regulated investment company a REIT can distribute dividends and gains to shareholders. Capital losses cannot be passed onto shareholders.

Which of the following include loan provisions?

1. Variable life policy 2. 401(k) Plan

Zero Coupon Bond: Key concepts

1. Zeros are purchased at a significant discount and pay par at maturity. 2. They pay no semi-annual interest but their 'phantom income' is taxed each year. 3. Their prices are volatile. 4. They can be purchased in the secondary market.

Records to be Retained:

3 years Correspondence and communications including: e-mails, instant messages, records of gifts. 4 years Customer complaints 5 years CTR & SAR reports 6 years Customer account records, blotters, municipal complaints, POAs Life+3 Articles of Incorporation/Partnership agreement, Board meeting minutes, Stock certificate books

(Topic = Reduced Sales Charges:) Q: The ABC Fund family charges an 8.5% load on their funds. The fund family must offer which of the following benefits:

A Breakpoints on CDSCs B Exchanges C Rights of accumulation [ CORRECT ANSWER ] D Letters of intent EXPLINATION: This fund family charges the maximum sales charge allowed by FINRA. Therefore, they must offer breakpoints and rights of accumulation on existing funds. A contingent deferred sales charge declines a set amount each year but that decline is not considered to be a breakpoint. [ Key Concept ] To charge the maximum 8.5% sales charge, a fund must offer both: 1. Rights of Accumulation 2. Breakpoints

C Corporation

A C corporation is a separate legal entity with no "flow through" for tax purposes. A C corporation therefore is subject to corporate taxes, which causes double taxation; the entity is taxed on the income and the shareholder is taxed on their portion of the dividends. Shareholders have limited liability equal to that of their investment. C corporations have perpetual life, therefore when the owners die, the corporation will continue to operate. EXAMPLE: Q: Which of the following ways of organizing a business would normally not allow for pass-through of income before taxes to the owners? A: C corporation

Simplified Employee Pension/ SEP IRAs

A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. An Individual Retirement Account is established for each employee that is fully funded by the employer. Employers are allowed (but not required) to make annual contributions subject to specified limits of up to 25% of the employee's salary. These limits are much higher than traditional IRA plans.

Which of the following firms is required to join SIPC?

A broker-dealer that trades only in investment grade bonds on an agency basis.

Reverse Stock Split

A company will declare a reverse stock split when share prices are perceived to be too low. This action allows for fewer shares at a higher market price.

Discretionary Order

A discretionary order is an order in which the registered rep determines the name of the security, size of the order, and/or action to be taken (buy or sell). The customer must authorize this type of order by granting power of attorney to the RR.

S Corporation

An S corporation is a C corporation that made the election to pass down income and losses to shareholders. To make the S corporation election, there can be no more than 100 shareholders. Income and losses are reported on each shareholder's tax return, avoiding double taxation. S corporations can only issue common stock and are only available to U.S. citizens. [ Key Concept ] The following allow for pass-through of income to the owners before taxes are paid: 1. S corporations 2. Limited Partnerships 3. Limited Liability Companies (in most cases)

Margin Accounts

A margin account is a brokerage account in which the broker-dealer lends the customer money to buy securities for their account (long margin transaction) or lends the customer's securities to sell in the market (short margin transaction). The customer must deposit the initial margin requirement of $2,000 or 50% of the current market value of the securities purchased on margin (whichever is greater), and the balance is borrowed from the broker-dealer. Securities in the account that are used as collateral against the loan are held in the name of the broker dealer and is referred to as "street name". A short sale happens when an investor sells shares of stock that they currently do not own. They would borrow the shares from a stock lender (broker dealer). The investor is then obligated to return the borrowed shares at a later date. If the market price of the stock declines, the investor can then purchase the shares at a discount to those sold. The profit would be the difference in the two prices minus any transaction costs. Related term : Short Sale

Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is like a closed-end investment company, but is a trust rather than a corporation. As its name implies, a real estate investment trust invests in real estate (property), mortgages on real property, and/or shares of other REITs. Any uninvested cash may be used to purchase government securities. A REIT sells shares of beneficial interest to investors and is managed by a board of trustees. Under the IRS code, special tax treatment is allowed for qualified REITs. To be considered qualified, the REIT must have at least 75% of its assets invested in real estate, cash, or treasuries, a minimum of 75% of its gross income from real estate activities, and 90% of the ordinary income must be "passed through" (distributed) to holders of the units. If this is done, the REIT is only taxed on the retained amount and would be considered a Regulated Investment Company (RIC). For investors, this eliminates the double taxation that is commonly seen with C-Corporations, where the both the corporation and the shareholders pay taxes on the income. Distributions from REITs are taxed as ordinary income at the taxpayer's marginal rate. There are generally 2 types of REITs: Mortgage REITs and Equity REITs. These types of REITs invest in loans secured by real estate, or by the purchase of mortgage backed securities, and are considered real estate debt. Mortgage REITs are considered highly leveraged because they use a great deal of borrowed capital. Equity REITs own specific pieces of real estate like apartments, shopping malls, and office buildings. These are considered real estate equity since the REIT actually owns the properties found in the pool of assets. They are purchased for their dividend payouts. Hybrid, or combination REITs may also be created and use the strategies of both mortgage and equity REITs combined. A real estate investment trust could receive income from: 1. Rental income (received by Equity REIT) 2. Interest income (received by mortgage REIT) 3. The spread between its borrowing costs and its lending rates (received by mortgage REIT) 4. Appreciation of property values (received by Equity REIT)

Recession

A recession is a general contraction in economic activity. Economists often define a recession in terms of declining real gross domestic product (GDP). A recession begins when there are 2 consecutive quarters, or 6 months, of declining real GDP.

Short Sale

A short sale happens when an investor sells shares of stock that they currently do not own. The investor believes that the price of the stock will decline. They would borrow the shares from a stock lender (broker-dealer). The investor is then obligated to return the borrowed shares at a later date. If the market price of the stock declines, the investor can then purchase the shares at a discount to those sold. The profit would be the difference in the two prices minus any transaction costs. This is considered bearish and can only be done in a margin account. Key Concept : All the following are involved in a short-sale: 1 An investor sells shares that they borrow from the broker-dealer 2 An investor must return the borrowed shares at a later date 3 It is a bearish trade [End] Note : In options, the term "short" refers to selling an option contract. The writer of the contract is short the contract. With stock, the term "short stock" means the investor sold shares of stock they do not own.

New Issues in the Primary Market : In which situation could an investor recoup his investment alleging a violation of the Securities Act of 1933?

A situation where the prospectus fails to point out material facts that would have altered the investor's decision. The prospectus MUST disclose and include all material and detailed information involved in the issue.

401(k) plan

A traditional 401(k) plan is a type of defined contribution plan in which the employee makes elective pretax contributions through payroll deductions. In some cases, the employer may make matching contributions. Earnings accumulate on a tax-deferred basis and, since the plan is funded with pretax dollars, all benefits are taxable upon distribution as ordinary income.

Q: An RR receives a phone call from a long-time customer who is at the airport getting ready to leave for a 3-week vacation. The customer tells the RR to keep an eye on the Galaxy Fund and to buy $10,000 in shares if the market takes a dip. In this situation, the order:

A: May be accepted, but it is only in force until the end of the trading day EXPLINATION: The RR may accept verbal discretion since the customer has provided the action, asset, and amount ($10,000) desired. However, the order is in force only until the end of normal market hours on the day on which it was placed.

Tenants in Common (TIC)

An account registered as Tenants in Common may create an unequal interest in the account based on a specific allocation, or percentage, of ownership. Any owner on the account can transact business in the account. However, any earnings in the account will be paid to each owner based on their individual percentage of ownership. [ Key Concept ] The following are TRUE with regard to the tenants in common account : 1. Ownership may be unequal 2. When one co-tenant dies, his/her proportionate share goes to his/her estate 3. Both signatures are required to redeem shares when both names are on the certificates

Securities Exchange Act of 1934

An act that regulates the trading of securities such as stocks and bonds in the Secondary Market. Focuses on the secondary market, including exchanges, the OTC market, and broker-dealers.

Bond Pricing : Discount

An existing bond trading in the secondary market at a price lower than par is a discount bond. EXAMPLE: Q: ABC Inc. has 7% convertible debentures outstanding, offered at 96. What term is used to describe this bond? A: Any bond that has a price less than 100 (par) is termed a discount bond. A bond trading in the market at 96 is trading at 96% of par value. 96% x $1,000 = $960.

Communications with the Public: Independently Prepared Reprints

An independently prepared reprint is any reprint or excerpt of any article written by a publisher, as long as the publisher is not an affiliate of the member using the reprint, or an affiliate of any underwriter or issuer of a security mentioned in the reprint. In addition, the article must not have been commissioned by the member, an underwriter, or an issuer of a mentioned security. The member may not materially alter the article, except to make it consistent with a relevant regulation, or to correct factual errors. If the reprint is distributed to more than 25 investors, it is considered retail communication. Independently prepared reprints require principal approval before first use and do not have to be filed with FINRA.

Sales Charges and Asset-Based Fees: Relationship Between NAV and POP

As previously mentioned, a mutual fund POP cannot exceed the NAV by more than 8.5% of the POP. If the POP exceeds the NAV by more than 8.5%, assume the fund is closed-end, since closed-end shares trade in the secondary market. Closed-end funds, like stock, trade in the secondary market based on supply and demand, therefore the purchase price may be higher or lower than the NAV. For open-end shares, there is a relationship between NAV and POP such that the POP can be greater than the NAV within limits, or equal to the NAV, but never less than the NAV. EXAMPLE : Q: A fund is showing a NAV of $10 and the fund has a POP of $10.87. The prospectus of that fund shows the sales charge to be 8%. Which explanation below is correct? A: The sales charge is calculated as a percentage of the POP and not the NAV EXPLINATION: The sales charge is always expressed as a percentage of the POP, not the NAV.

Two sisters acquired 1,200 shares as joint tenants with right of survivorship. Each sister's ownership is:

Equal/undivided In a JTWROS situation, each person must have equal ownership. In addition, each shareholder has an undivided interest. This means the sisters cannot say these 600 shares are mine and those 600 shares are yours.

Broker-dealers have several departments that carry out the necessary functions:

Broker-dealers have several departments that carry out the necessary functions: 1. Investment Banking - The department of a broker-dealer that negotiates with issuers when selling securities to the public 2. Research - The department of a broker-dealer that investigates issuers and the merits of their securities to make buy and sell recommendations 3. Trading - The department of a broker-dealer that handles trade executions for clients and the firm 4. Operations - The department of a broker-dealer that ensures accurate record-keeping within the firm

Margin Accounts: Key Concept

Before the initial transaction takes place in a margin account, FINRA and Regulation T require a deposit of $2,000 or 50% of the value of the purchase, whichever is greater. Securities in the account that are used as collateral against the loan are held in the name of the broker dealer and referred to as "street name". To open a margin account, the customer will need to sign a margin agreement that pledges their securities. They will also be given a 1. loan consent agreement : which authorizes the firm to lend the client's securities to others. The client's signature is not legally required on this form, but most firms make it a requirement. 2. A credit disclosure document must also be given to the customer, explaining all the details on how the loans work and how interest is charged. Margin accounts also require a properly executed written hypothecation agreement, which is a very important document needed to maintain a margin account. The hypothecation agreement permits the broker-dealer to use some of the customer's securities as collateral for a bank loan to finance the customer's margin account debt or to lend to other customers. Additionally, a customer opening a margin account must receive a margin risk disclosure document at or before the opening of the account. Key Concept : Q: What is the collateral in a margin account? A: 1. Securities in a long account 2. Cash in a short account

FINRA Rules for Registered Representatives: Between whom are selling concessions allowed?

Between member firms FINRA's Conduct Code stipulates that selling concessions may only be remitted between FINRA member broker-dealers. Only registered representatives may share in concessions with their employing broker-dealer.

All of the following are characteristics of a corporation

Can enter into contracts Can issue stock and bonds to raise capital Has a board of directors unlimited life span

Which of the following may be purchased using margin?

Closed-End fund

EXAMPLE OF AD BANKER QUESTION : Dividend Yield

EXAMPLE OF AD BANKER QUESTION : Q: A common stock is selling at $14.90 per share. The issuer's new product line has increased profits the last three quarters. As a result, the issuer's board of directors has increased dividends each of the last three quarters even though the stock price has stayed the same. The common stock's yield will: A: Increase EXPLINATION: The yield on common stock is computed by dividing the market price of common stock into the dividend. If the common stock price has not changed, but the dividend continues to increase, the yield will increase. For example, if the stock costs $14.90 and the dividend is $1, the yield is 6.7% ($1 divided by $14.90). If the stock stays at $14.90 and the dividend increases to $1.50, the yield is 10% ($1.50 divided by $14.90).

Stock Split

Declaring a stock split DOES require shareholder approval. The reason a corporation will split its stock is to make the stock more marketable, or make the price more attractive for investors trading the stock in the secondary market. The company will issue more shares based on a ratio, such as 2-for-1. This will adjust the stock's par and market value, but will not affect the total value of the stockholder's investment. EXAMPLE : Q: A corporation has common stock trading in the secondary market at $100 per share.It announces a 5-for-1 stock split. How will it impact the share price? A: It will decrease to $20 per share This was determined by taking : $100 / 5 = $20 per share. The number of shares outstanding will increase 5-fold.

Dividend Yield Formula

Dividend Yield = Annual Dividend ÷ Current Market Price

Dividend Yield

Dividend yield is a measure of the return on investment for a stock. When discussing a stock's dividend yield, investors compare the annual dividends to the current market price of the stock. EXAMPLE: The ABC corporation pays a quarterly dividend of $.25 and is trading at $20 per share. Compute the current dividend yield. Step 1. Calculate the annual dividend by multiplying the quarterly dividend by 4: $.25 x 4 = $1.00 Step 2. Divide the annual dividend by the market price. $1.00 ÷ $20 = .05 or 5% The following year, ABC continues to pay a quarterly dividend of $.25, but now the stock is trading at $25.00 per share. What happened to the dividend yield? $1.00 ÷ $25 = .04 or 4% If the dividend payout remains the same, but the price increases, the dividend yield will decrease. A change occurs in the yield any time the stock price and/or dividend changes. [ Key Concept ] Dividend Yield = Annual Dividend ÷ Current Market Price

Interest Rate Risk: Duration

Duration is the tool used to determine the price sensitivity of a bond based on a small interest rate change. A bond with a higher duration number will carry a higher interest-rate risk than a bond with a lower duration number. Bonds with a longer maturity and/or a lower coupon rate carry a higher interest-rate risk and will have a higher duration number. Bonds with a shorter maturity and/or higher coupon rate carry a lower interest-rate risk and will have a lower duration number. EXAMPLE: Q: Which of the following bonds will fluctuate the most in price when interest rates rise? A. A 5% Treasury bond due in 11 years [ CORRECT ] B. A 6% mortgage bond due in 6 years C. An 8% debenture due in 8 years D. A 4.6% general obligation bond due in 6 years EXPLINATION: When interest rates rise, bond prices fall. The bond that will fall the most is the one with the longest time to maturity. The concept behind this answer is known as duration. Duration is used to determine the price sensitivity of a bond based on a small interest rate change. When given four bonds, the one with the longest maturity will move the most in price.

Opening an Account: Customer Identification Program (CIP)

Federal rules require every broker-dealer to create a written Customer Identification Program (CIP). The purpose of the CIP is to ensure that the broker-dealer has a reasonable belief that it knows the true identity of the customer opening any account. Businesses are also subject to the CIP and must provide: 1. The name and physical address of the business 2. The EIN or Tax ID number and the corporate charter 3. Partnership agreement, trust document or government-issued business license. Note: Tax returns are not required. [ Key Concept ] Although a customer's SSN is needed to open the account under CIP, the Social Security card is not an acceptable form of ID for CIP.

General Obligation Bonds: GOs

General obligation bonds are issued by states, counties, cities, towns, and other political subdivisions. These bonds are backed by the full faith, credit and taxing power of the issuer. Only issuers with authority to levy taxes may sell GO bonds. Funds raised are not earmarked for any specific use, and bondholders are repaid through the tax collections of the issuer. Taxes levied may include income, property (ad valorem), sales, and real estate taxes. There is no specific use of funds, and there is no specific source of repayment. GO bonds are generally viewed as very safe since the issuer may have the ability to increase taxes to help repay the bondholders. [ Key Concept ] All of the following are characteristics of a general obligation bond : 1. They are backed by the full faith and credit of the municipality that issues them 2. Payments come from the general revenue of the governing body 3. They are generally considered to be a low risk 4. Municipal issues ( issued by city, state, etc) are NOT backed by the federal government. These bonds are subject to both default risk and Interest-rate risk. default risk because if Detroit is facing rough economic times due to X reason and everyone moves out the Municipality wont have anyone to tax and could possibly face default risk ( this is unlikely to happen) Interest rate risk because of the inverse relation ship interest and bonds share. EXAMPLE: When Interest rates go up bond prices go down. When Interest rates go down bond prices go up

Bond Taxation : All the following are subject to Federal tax

Government agency bonds Privatized/Private Government agency bonds U.S. Government bonds Corporate bonds

FINRA Rules for Registered Representatives Private Securities Transactions with Compensation

If a BD approves an RR's participation in private securities, and the RR is receiving selling compensation, the transaction will be recorded on the books and records of the firm, and the member firm will be responsible for the supervision of the RR's participation in the transaction as if the transaction were executed on behalf of the BD. [ Key Concept ] The RR must receive his/her employer's written permission before engaging in such activity.

Opening an Account: New Account Form

In order to open a new account, broker-dealers are required to obtain the following information on each customer: 1. Full legal name of each customer having access to the account 2. Home or business street address. (A customer's physical address) (P.O. box is not sufficient) 3. Date of birth 4. Taxpayer Identification - U.S. Citizens must have a Social Security number or Federal ID number and UNEXPIRED government-issued identification, such as a driver's license or passport. Non-U.S. citizens must provide equivalent identification from the country of issuance. 5. Signature of the broker-dealer's principal

FINRA Rules for Registered Representatives Private Securities Transactions - No Compensation

In the case of a transaction in which an RR will not receive any selling compensation, a BD will inform the RR that it has received notification and might require the person to meet certain specified conditions in connection with their participation in the transaction.

Industrial Development Revenue Bond: IDR/ Private Activity Bonds

Industrial Development Revenue Bonds (IDRs) are considered private activity bonds and are a type of revenue bond issued to finance the construction or acquisition of a commercial facility that will be leased to a private entity/corporation. [ Key Concept ] All of the following are characteristics of an Industrial Development Revenue Bond - They are issued by a municipality - The proceeds benefit a non-governmental entity *****The interest are/may be subject to an Alternative Minimum Tax: AMT

Evaluation of Customers: Customer Profile

It is necessary to have both personal and financial information about a client when constructing a customer profile. The following information must be taken into consideration: 1. Age 2. Marital status 3. Dependents 4. income EXAMPLE: A registered representative is working with a new client. In building the financial profile for this client, all the following must be considered: 1. Age 2. Marital status 3. Income 4. Dependents

Custodial Accounts Under the Uniform Transfers to Minors (UTMA)

Key Concept UGMA/UTMA details to remember: 1. UGMA/UTMA accounts are not joint accounts. All property belongs to the child and the child's Social Security number is used to open the account. 2. The minor is responsible for taxes 3. Earnings subject to "kiddie tax" 4. Gifts are irrevocable 5. The UGMA/UTMA account is transferred to the child at age of majority

Government National Mortgage Association : GNMA or Ginnie Mae : Key Concept

Key Concept: GNMA pass-through certificates: 1. Make monthly payments to investors 1a. Interest is taxable as ordinary income. 2. Make payment made up of interest and principal 3. Pay rates that are often higher than Treasuries 4. Have interest and principal guaranteed by the U.S. Government

Investment recommendations are limited to what type of investment if the registered representative fails to obtain the requested information from a customer to determine suitability?

Money market funds Investment recommendations are limited to money market mutual funds if the registered representative fails to obtain the requested information from a customer to determine suitability.

Non-Systematic Risk

Non-systematic risk is another term for individual security selection risk; the risk that the security purchased loses money even though the rest of the market is doing well. When someone has high concentrations of one stock in their portfolio, they expose themselves to this risk. Non-systematic risk is easily reduced through diversification of a portfolio. As the old expression goes, "don't put all of your eggs in one basket." EXAMPLE : Q: John has 40% of his 401k invested in his company's stock. He has no other savings. To what risk has John subjected himself? A: Non-Systematic risk He is putting all his eggs in one basket relying on this one stock.

Non-traded REITs

Non-traded REITs are still registered with the SEC, but are unlisted and do not trade on an exchange. This makes them harder to redeem, and investors may have to wait long periods of time to liquidate their investment. Fees are usually much higher for non-traded REITs, possibly as high as 10%. In addition, non-traded REITs have higher internal fees. Non-traded REITs typically have a minimum investment amount that is not associated with publicly traded REITs.

When must a customer make payment for most purchases of securities?

Payment on most purchases is due from the customer no later than 4 business days after the trade date (T + 4).

Penalty Bid

Penalty bids are put in place to prevent too many people from hitting the stabilizing bid, looking to flip the purchase of shares of an IPO for a quick profit and which may cause a new issue's price to decline. [ Key Concept ] 1. Penalty bids are put in place to discourage selected dealers from selling to customers who will flip the shares, which may cause a new issue's price to decline 2. The penalty bid states that if the syndicate manager buys back too many shares from a particular syndicate member, that member is penalized by losing their concession on those shares 3. The penalty is usually equal to the broker's commission on the sale

403(b) plans

Public school teachers, government employees, and employees of certain non-profit organizations are eligible for 403(b) plans. These plans are qualified variable annuities and are only available to public sector employees. Variable annuities give participants an opportunity to manage their risk by investing separate account assets in various subaccounts. A very common subaccount option, due to the long-term nature of these programs, is a growth fund option. The following are associated with 403(b) Plans : 1. Qualified variable annuities (TSAs) 2. Growth mutual funds 3. 403(b)s

Mutual Funds: What can be said about them to clients

Q: A registered representative is meeting with a potential investor and is discussing the costs associated with investing in mutual funds. Which of the following statements is appropriate for the registered representative to make? A: Mutual fund shares are purchased at the public offering price found in the prospectus and you may qualify for a discount based on the breakpoint schedule of the fund EXPLINATION: Sales of mutual funds to any member of the public cannot be discounted beyond the amounts stated in the prospectus. The breakpoint schedule for the fund will be found in the prospectus. Shares must be offered at the public offering price.

Primary Market for Municipal Bonds: New Issue Underwritings

Q: When must underwriters provide the final official statement to the MSRB? A: No later than 1 business day after the issuer has supplied it to them EXPLINATION: Underwriters must provide the final official statement to the MSRB no later than one business day after the issuer has supplied it to them. This is usually done by filing on the MSRB's electronic website called EMMA, the Electronic Municipal Market Access System.

Publicly Traded REITs

REITs that are registered with the SEC may be publicly traded or non-traded. Publicly traded REITs are listed and trade on a stock exchange and are considered safer than non-traded.

integration

Reintroducing the now clean funds back into the financial system by providing an apparently legitimate explanation for the illicit proceeds

Outside Business Activity non securities related ? ( double check with Garth) (or delete)

[ Key Concept ] Notify her employer in writing before commencing such activity is the correct procedure before a (RR) representative engages in NON-securities related outside business activity.

Retail communications

Retail communications are defined as a communication made available to more than 25 existing or prospective retail clients which includes advertising and sales literature. Retail communication must be approved by a principal before the earlier of its filing with FINRA or first use. Sales literature is a type of retail communication where the broker-dealer controls the distribution of this material. It is provided to a targeted audience, such as group emails, text messages, and form letters to more than 25 prospects. Research reports and brochures are other examples of sales literature. Advertising is retail communication that is distributed via mass media.

Roth IRAs Plan Characteristics

Roth IRAs are subject to the same maximum annual contribution limits and catch-up provisions as the traditional IRA. An individual can have both a traditional IRA and a Roth IRA, but the contribution limits apply per person, not per account. Contributions to a Roth are always made on an after-tax basis (and are nondeductible) and there is no age limit restriction to make contributions. Individuals may continue to make contributions even after the age of 70½, as long as the investor has earned income. There is no minimum required distribution limit or penalty imposed. Because Roth IRA distributions normally are tax free, the tax law does not require that Roth IRA holders take any distributions.

What entities are tasked with enforcing MSRB rules on broker-dealers?

SEC and FINRA. While the MSRB creates rules for municipal firms, the SEC and FINRA are tasked with enforcing the rules for broker-dealers.

Best Execution

Securities trade in various markets and on various electronic platforms. The broker-dealer must make a reasonable effort to determine the best market in which to execute a customer order so that the customer receives the best possible price. This obligation is known as Best Execution. The following factors are considered in determining if a member used reasonable diligence in directing a customer transaction to the best market: Security's characteristics, such as liquidity, volatility, available information, price, etc . Size and type of the transaction Number of markets the broker-dealer investigated before entering the customer order Accessibility of a quotation Terms and conditions of the order EXAMPLE : Q: Broker-dealers must make a reasonable effort to determine the best market in which to execute a customer order so that the customer receives the best possible price, this is known as: A: Best execution

Exempt Transactions: Private Placements

Since the goal of the Securities Act of 1933 is to protect the general public from investment fraud, offerings that are not made public, known as private offerings, are exempt from the registration process. Most private placements are sold under Regulation D. Under Reg D, private placement transactions are exempt from registration when offered to no more than 35 non-accredited investors (persons who do not meet the definition of accredited under the Act) and do not exceed $5 million. There are no restrictions on the number of accredited investors that can be involved in the sale. Through a private placement, accredited investors purchase restricted stock. The stock is delivered with an investment letter prohibiting the resale in the secondary market for a minimum of 6 months. Restricted stock may also be referred to as letter stock. Offering Memorandum/Private Placement Memorandum (PPM) Since there is no prospectus requirement, written disclosure documents are provided to private placement purchasers. These disclosure documents are referred to as an offering memorandum or private placement memorandum (PPM).

Zero Coupon Bond

Some issuers sell bonds that have no coupon at all, but are issued at a discount from par. Although the interest is paid at maturity when the principal is repaid, the accruing interest is taxed annually. The accreted value is the value, at any given time, of a debt instrument that accrues interest over multiple years. Since semi-annual interest is not paid, the prices of zero coupon bonds are more likely to fluctuate than other types of bonds in the secondary market. The further a bond is priced from par the more it will fluctuate in value.

All the following U.S. Government securities are sold using a competitive bid system, known as a Dutch Auction

TIPS T-Notes T-Bonds All other Government debt, which includes T-Notes, Bonds, Tips, and the 52-week T-Bills, are auctioned monthly. These auctions use a type of competitive bid system called a Dutch Auction.

12b-1 Asset-Based Distribution Fees key Concepts

The 12b-1 distribution fee includes: 1. Marketing, advertising, and other costs of distributing fund shares 2. Advertising includes the printing and mailing of prospectuses and sales literature to new investors, but not existing investors 12b-1 annual fees are charged quarterly 12b-1 fees must be approved initially by a majority vote of the board of directors, including a majority of the disinterested members, and a majority vote for all outstanding shares. 12b-1 fee will be reviewed quarterly by the board of directors and, if there are no changes, approved annually by a majority of the board, including disinterested members. [ Key Concept ] All of the following must approve a 12b-1 fee: Non-affiliated directors Outstanding shares The board of directors

Risk-Free rate of return/ Real return?

The Risk-Free Rate of Return is a return where it is assumed that there can be no losses and is extremely safe. Most analysts use Treasury bills for this measure. They are safe and have short maturities.

Securities Act of 1933

The Securities Act of 1933, also known as the "Paper Act" 2 main objectives: 1 Provide investors with sufficient information to make informed investment decisions related to new issues through full and fair disclosure. 2 Establish laws intended to prevent misrepresentation and fraudulent activities in the sale of securities. Under this Act, issuers selling securities to the public are generally required to register their security with the SEC by filing a written registration statement and prospectus. To sell a new issue, the security must either be registered with the SEC or be exempt from registration.

If a listed security trades off the exchange floor and trades OTC, which market does this occur in?

The Third Market! is the trading of exchange listed securities OTC

Depression

The U.S. Department of Commerce defines a depression as a decline in real GDP for 6 consecutive quarters, or 18 months.

Annualized Return

The annualized return demonstrates how much money a security earned each year for a specific period. Annualized return does NOT indicate the volatility of the security Annualized returns become a more valuable data source the longer the investor plans on holding their investment. EXAMPLE : Q: If a portfolio manager achieves a return of 8% over a 6-month time horizon, what is the annualized rate of return? A: Any returns achieved must be reported in a manner that is consistent with the way yields are generally measured, which is annualized. If the portfolio manager achieved a return of 8% in 6-months, the annualized return would be twice this, 16% or slightly higher if compounding is factored in.

Corporate Charter

The corporate charter will detail what types of securities transactions a corporation can participate in to finance growth.

Corporate Resolution

The corporate resolution specifies which individuals are authorized by the board of directors to enter orders in the account and act on behalf of the company and is usually notarized.

Treasury Stock

The corporation may offer to buy back outstanding shares from the existing shareholders. These shares that were previously issued and then repurchased by the company are referred to as treasury stock. A company may buy its own stock if they feel it is undervalued or to boost the price of the common stock in the market. If the company earns the same amount of profits, but there are fewer shares outstanding, the reported earnings per share will increase. [ Key Concept ] Has no voting rights Does not receive dividends Is purchased by the issuer to increase earnings per share Treasury stock has nothing to do with the U.S. Government. [ End ]

characteristics of a cash account

The customer must pay in cash to buy securities The customer can withdraw cash when securities are sold The customer must pay the broker-dealer within 4 days of purchasing securities

The maximum annual contribution to an IRA for an individual is:

The maximum annual contribution per person is the lesser of a specified annual limit ($5,500 in 2018) or 100% of earned income. Earned income includes wages, salary, tips, or commissions. Investment income such as bond interest, stock dividends, or income from retirement plans is not considered earned income.

Suspicious Activity Report (SAR)

The purpose of the Suspicious Activity Report (SAR) is to report known or suspected violations of law or suspicious activity observed by financial institutions subject to the Bank Secrecy Act (BSA). The SAR has been instrumental in enabling law enforcement to initiate or supplement major money laundering or terrorist financing investigations and other criminal cases. As part of their anti-money laundering training programs, broker-dealers must train registered representatives and other employees to detect suspicious activities, or red flags that may indicate money laundering.

Sales Charges and Asset-Based Fees: Sales Charge

The sales charge, also called the sales load, for a mutual fund is the primary compensation paid to the underwriter and broker-dealers for marketing, advertising, and selling fund shares to the public. When paid at the time of purchase, the sales charge is always a percentage of the POP, not the NAV, and is always expressed as a percentage of the POP, not a dollar amount. Under FINRA rules, mutual fund sales charges cannot exceed 8.5%. In order to charge the maximum sales charge, funds must offer the investor certain beneficial features. The sales charge will be specified in the mutual fund prospectus; it is assumed that sales charges are paid as a front-end load, and all calculations should be based on that assumption.

Out-of-the-Money

This is the opposite of in-the-money. If an option could not currently be favorably exercised by the holder, the option is out-of-the-money. [ Key Concept ] Out-of-the-Money A CALL is out-of-the-money when the market price of the stock is BELOW the strike price. A PUT is out-of-the-money when the market price of the stock is ABOVE the strike price. [ End ] EXAMPLE: Q: An investor purchased 1 OPQ Aug 40 put at 1.50. Currently OPQ common stock is trading at 44.50 per share. This put option is currently: A: Out-of-the-money by $4.50 EXPLINATION: An option is out-of-the-money when it is not profitable to exercise it. It would not make financial sense for the investor to sell OPQ stock at the $40 exercise price when OPQ is currently selling for $44.50. The difference between the strike price and the current market price determines how far an option is either in or out of the money. The put option is current out of the money by $4.50 ($40 strike price ˗ $44.50 current price = ˗$4.50). The premium paid is not a factor in determining how far an option is in or out of the money.

Which of the following securities are not traded in the secondary market?

UIT's UITs are redeemable with the trust, they do not trade in the secondary market.

Cumulative Voting

Under cumulative voting, investors are awarded a maximum number of votes based on the number of shares they own multiplied by the number of open seats. This method allows shareholders to earmark their votes in any fashion they choose. An investor who owns 1,000 shares will have 3,000 votes (1,000 x 3), while a smaller investor owning 100 shares will only have 300 votes (100 x 3). The votes may be divided evenly among desired candidates or weighted in favor of a particular candidate. [ Key Concept ] 1. In a cumulative voting structure, shareholders may cast their votes in any way they wish. 2. Cumulative gives minority shareholders greater voting effectiveness and is considered an advantage to the small investor.

How much may be contributed to a Coverdell Education Savings Account during 2018 for the benefit of a single child (BEST ANSWER)?

Up to $2,000 total in any number of ESAs with any number of contributors For any beneficiary, total contributions to ESAs must not exceed $2,000. The number of ESAs and contributors is not limited.

Which gift violates FINRA's gifts to employees of member firms rule?

Weekend at a convention in the Bahamas FINRA prohibits gifts valued at more than $100. Occasional meals, drinks or event tickets are permissible.

Options Contracts: Exercise and Assignment

When an option contract is exercised, the writer of the contract is notified that this occurred. It lets the writer know that they will have to fulfill the contract. Prior to being exercised, the writer had an obligation. Once exercised, that obligation becomes an assignment. If a call is exercised, the writer needs to sell the underlying security at the strike price. If a put is exercised, the writer needs to purchase the underlying security at the strike price.

Statutory Voting

When voting for members of the board, the number of statutory votes is the maximum that may be voted for each available seat on the board. An investor who owns 1,000 shares will have 1,000 votes per seat (for a total of 3,000 votes), while a smaller investor owning 100 shares will only have 100 votes per seat (for a total of 300 votes). [ Key Concept ] Each share gets one vote in the election of each board nominee

Open-End Funds (Mutual Funds) : Mutual Fund Prohibited Activities

[ Key Concept ] Certain activities are prohibited for mutual funds. They cannot engage in: 1. Buying on margin (buying securities with borrowed funds) 2. Selling on margin, or short selling 3. Selling an uncovered (naked) option contract [ end ] Covered Call Writing (also known as Long stock, Short Call) is an acceptable option strategy a mutual fund can use as an investment alternative. Covered call writing occurs when the fund holds common stock and then the fund sells a call against the common stock. Option income funds traditionally participate in covered call writing to generate extra income. EXAMPLE: Q: Which of the following activities may the investment adviser of ABC Income Fund engage in? A: Long stock, Short Call also known as Covered Call Writing

investment company

an investment company is a corporation, trust, or partnership that issues packaged securities to investors. The investment company collects the investors' money and then selects the appropriate securities to meet the objectives for that specific portfolio.

Variable Annuities

are intended to generate an income stream, typically to supplement retirement income. Note: considered securities that require a FINRA Series 6 or 7 license in addition to a state insurance license to sell.

Trade Date

date in which the order is executed.

Settlement Date

date in which the transaction is paid for. EXAMPLE : Q: What is the name of the date that cash is exchanged for the purchased securities? A: Settlement date

Correspondence

is defined as a communication made available to 25 or fewer existing or prospective clients and is subject to post use review and approval (provided the firm has appropriate supervisory procedures in place).

Roth IRAs: key concepts

the following statements regarding Roth IRAs are TRUE: 1. There are no Required Minimum Distribution: RMDs required upon reaching age 70 1/2 2. The maximum annual contribution is increased for a client age 50 and older 3. Income may limit a client's ability to contribute