Series 6 FINRA
Insider Trading and Securities Fraud enforcement Act of 1988
- Trading secuirities using inside information (information not available to the public) Penalties - Civil = Fine up to > of 1 Million or 300% (trebled damages) of profit made or loss avoided. - Criminal = Up to 20 years
All or None underwriting
- unless all of the issue is sold, the underwriting is canceled
Each of the following is considered an investment company EXCEPT
A bank advisory account is not found among the definitions of an investment company
Closed-end investment company shares can be purchased and sold:
A closed-end company share is bought and sold in the secondary market.
Which of the following investment company portfolios is supervised rather than managed?
A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A REIT is not considered to be an investment company.
Which of the following statements regarding a unit investment trust is NOT true?
A unit investment trust has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.
Trading
BID Price - Customer sells ( Recieves $) - Market Maker buys (pays $) ASK price - Customer buys (pays $) - Market sells (receives $) Spread - Difference between BID and ASK - Profit to Market Maker Taxation - Ordinary Income - Capital Gaisn and Losses
Management of Investment Companies
Board of directors - at least 40% must be noninterested ( do not work for the company) - Simple Majority nontnterested if fund utilizes 12b-1 free > Advertising, Promoting and distributing the fund > Annual fee charged quartely > Misuseof no load technology (Maximun of 12b-1 fee .25% - Voting of 12b-1 fees > Full BOD, Noninterested BOD and shreholders must vote for approval > To terminate, only the noninterest BOD and shareholders must vote for termination Resposability of BOD - Set investment objective and dividends/gains disribution policy
Bond Prices
Bond Prices have an inverse relationship to interest rates - If interest rates go up, bond prices in the secondary market go down (discount) - if interest rates go down, bond prices in the secondary market go up (premium) - Bonds are quoted in points and fractional points - which is a % of par ($10.00 for each point and fraction)
Dividend or Current Yield
CY = Annual Dividend /CMV Ej. XYZ pays quarterly dividend of .35 and CMV is $23 What is the CY 35x4=1.40 (annual dividend) CY= 1.40/23 = 6.86%
How do closed-end investment companies differ from open-end investment companies?
Closed-end companies issue a fixed number of shares, whereas open-end companies do not specify the number of shares to be issued. Both types of company register issues with the SEC, and any investor may invest in either type of company. Open-end shares must always be sold with a prospectus because each is a newly issued share.
All of the following must be sold by prospectus EXCEPT
Closed-end company shares trading in the secondary market are not new securities, so they need not be sold by prospectus. However, a prospectus must be used in an initial offering of closed-end company shares. All open-end company shares must be sold by prospectus because they are considered continuous primary offerings
closed-end investment company may issue each of the following EXCEPT
Closed-end investment companies may issue both common and preferred shares as well as debt securities for capitalization. Only municipalities issue municipal bonds.
Municipal Bonds
General Obligation (GO) - Backed by full faith and credit of Issuer - Funded by State or Local Taxes - Voters approval required Revenue Bonds - Backed by user's fees (Tolls) IDR's (Industrial Revenue Bonds) - Created by municipality for corporate use, (backed by the credit of using corporation
Economic Factors
Gross Domestic product (GDP) - Annual national ouput of goods and services - Includes federal spending and exports Consumer Price Index (CPI) - Price of a representaive market-basket of goods - Normalized to a constant dollar - Increases with inflation; decreases with deflation
A financial reporter notices that the offering price of one investment company's share is at a 22% discount from the NAV. From this information, he can conclude that the company must be a(n):
If the ask price of a fund is less than the NAV, the fund must be a closed-end investment company
Cost Basis of Shares Transferred
Inherited - Use the fair market value (FMV) on date of death - Stepped up or down Basis Gifted - Use donors original cost basis - Gift Limit Applies
An investment company that is not classified as either a unit investment trust or a face-amount certificate company would be classified as a(n):
Management investment companies are one of the three classifications of investment companies under the Investment Company Act of 1940. The other two are face amount certificate companies and unit investment trusts, the latter of which can have a fixed or non-fixed portfolio
An investment company that is not classified as either a unit investment trust or a face amount certificate company would be classified as:
Management investment companies are the third classification of investment companies under the Investment Company Act of 1940. Open-end funds (mutual funds) and closed-end funds are subclassifications of management investment companies.
Mutual Funds Distribution and taxation
Net investment income = Dividend and interest recieved by fund minus expenses equals investment income = Taxable to investor when distributed Tax Treatment of investment income = Regulated investment company (Subchapter M, Conduit or pipeline tax Theory) 90% of net investment income distributed Fund not taxed on dividends distributed
SEC regulations for securities issued by investment companies prohibit which of the following?
Open-end funds from issuing preferred stock Open-end funds from issuing bonds Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock; they may not issue senior securities.
Under the Investment Company Act of 1940, the term redeemable security could be used when referring to the securities issued by
Open-end investment companies (mutual funds) and unit investment trusts offer securities that are redeemable by the issuer. Closed-end shares are traded in the secondary markets in the same manner as any stock, as are securities issued by broker/dealer firms.
Under the Investment Company Act of 1940, open-end investment companies may issue
Open-end investment companies may issue only one class of stock, and that's common stock.
Closed-end investment companies
Publicly traded, or closed-end, funds generally make a one- time offering of shares which then trade on the secondary market. Unlike mutual funds, they may issue both bonds and preferred stock.
Ex-Dividend Date
STOCKS - Set by Self Regulatory Organization (SRO) (FINRA) - Date that the Price of the stock is reduced by declared dividend ( if the dividend is .50 the stock will trade below the .50) - 2 Business days before record date *** MUTUAL FUNDS - The Ex-dividend for a stock is 1 Busness day after the record date - The Ex- Dividend is set by the BOD not the SRO
Customers could pay a commission, rather than a sales charge, for shares of a(n):
Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares.
Which of the following statements describe an open-end investment company?
The company may sell new shares in any quantity at any time. The company must redeem shares in any quantity at any time except that it may suspend the redemption of shares with SEC approval.
The Investment Company Act of 1940 contains a large number of definitions. One of those is of a diversified management investment company. To comply with the definition for a diversified management investment company, an investment company must diversify how much of its assets in a prescribed way?
To meet the definition of a diversified management investment company, at least 75% of the company's assets must be diversified so that no more than 5% of total assets are invested in the securities of one issuer and no single holding represents more than 10% of the voting securities of an issuer. There is no restriction on the remaining 25% of the assets.
Retirement Plans
Traditional IRA ROTH IRA Non-Qualified Plans - Do not need IRS approval - After tax Contribution - Tax defferred grothw - can descriminate Plan Types = Deffered compsenation =457 Plans
Which of the following must be registered as investment companies under the Investment
Under the Investment Company Act of 1940, face-amount certificate companies, unit investment trusts, open- and closed-end management companies, and separate accounts of insurance companies used to fund variable annuity and variable life contracts must register with the SEC as investment companies. Note that the separate account is registered as an investment company, not the variable contract.
UIT
Unit investment trusts are one of the three classifications of investment companies defined in the Investment Company Act of 1940. They are unmanaged portfolios of debt or equity securities with low percentage sales charges.
Payable Date
- Set by the (BOD) - Date dividend is paid
An open-end investment company may do all of the following EXCEPT
A mutual fund may not issue any senior securities, although it may purchase almost any type of security for its portfolio.
The price of closed-end investment company shares is determined by:
Closed-end investment company shares trade in the secondary market. Therefore, supply and demand determine price.
Capital Gains and losses
Cost Basis = After-Tax dollars invested Unrealized = Grow or loss on unsold securities Realized = Grow or loss on sold securities Offsettings gains and losses - Dollar for dollar - Writte-Off net loss of $3000.00 against income - Carryover balance to the following years ( no limit how long)
Advantages of a Mutual Fund
Gurantee Marketability - Fund must send sale proceeds within seven days of receipt - Professional Management - Diversification = Type of security = Type of issuer - Invest almost any SUM - Automatic reinvest available (taxable event) 1099 sent - Voting Rights and safe keeping of assets Restrictions - No Margins, No Short Sales, No uncovered Options
Record Date
- (set by the BOD) - Owner of stock on Record Date entitled to dividend
TIPS (Treasury Infaltion Proctection Securities)
- Semi-annual adjustment to principal based on CPI
Investment Companies Offerings (1940) Closed End
- Shares are fixed - No prospectus after IPO - Shares not redeemable through issuer - Issues coommon,Prefered and/or Bonds - Trade on secondary market (Exchange/OTC) - Price by supply and demand - Commission are charged
Bond Yields
- nominal Yield - NY(interest rate) - Current Yield - CY (Annual Interest/CMV) - Yield to maturity - YTM (interest rate + discount or - premium)
Best Efforts Underwritting
- underwriter acts as broker (agent) Issuer has financial Risk The underwriter sells as much as possible
Under the definition of a management investment company, all of the following would qualify EXCEPT:
As defined in the Act of 1940, closed-end and open-end funds are subclassifications of management companies (actively-managed portfolios). Face-amount certificate companies are not managed, and real estate investment trusts are not investment companies at all, since they invest not in securities but in real estate.
All of the following would qualify as management companies EXCEPT
As defined in the Investment Company Act of 1940, closed- and open-end funds are subclassifications of management companies (actively managed portfolios). Face amount certificate companies and unit trusts are separate investment company classifications and do not have managed portfolios.
To be considered a diversified investment company by the SEC, the company must meet which of the following requirements?
By definition, a diversified investment company must invest at least 75% of its assets, concentrate no more than 5% of its assets in any one company, and own no more than 10% of any single company's voting securities
Mutual Funds Shares Class C shares (Level loads 12b-1 fee)
C shares have no front end load - Typically a 1%- year CDSC - 12b-1 fee represents a level load that never disappears - C shares are suitable for shorter time horizons, but not less than 1 year
Mutual Funds Shares Class A shares (Front-end loads)
Class A shares (Front-end loads) - Sales charges levied at purchase (NAV + SC = POP) - Sales charge always quoted as percentage of POP - A shares have lower operating expenses and typically breakpoints and letters of intent - Suitable for large investment and long time Horizons.
Diversified companies 75-5-10 rule
- 75% of asset invested - no more than 5% of fund asset are invested on one issue. - No more than 10% of voting stock
Tax-Equivalent Yield and Tax-Free equivalent yield
- A client whose tax barcket is 30% owns a 10% Corporate Bond or 7% Municipal Bond $100 Interest/year $70 Intesrest a year -$30 tax $0 tax $70 After tax $70 *** If an investor on a high tax bracket is looking for income, Municipal Bonds may be appropiate ***
Mutual Fund characteristics
- A professional investment adviser manages the portfolio for investors - Mutual funds provide diversification by investing in different companies - Most funds allow investment , often $500 or less and additional of $25 - May allow investment at redue sales by offering breake pints through larger deposits - An investor retains voting rights similar to common stocks - new funds must offer re-investment of dividends and capital gains without sales charge - Investor may liquidate a portion of his holding without disturbing the portfolio
FINRA Conduct Rules Comunications With The Public
- Advertising - Sales Litereature - Correspondance - Institutional Sales Material - Public Apperance - Independently Prepare Reports
Common Stock Characteristics
- All Corporations Issue Common Stock - Most junior security - has residual claim to assets if company goes out business or liquidates Purchase for - Growth - Income - Growth and Income
Underwritter
- Are also called the sponsors or distributors - Must be FINRA member firms - May not inventory mutual funds shares - Are compensate only from the sales charge - Use cmpesation to payfor advertising and other selling expenses - May never be treated as an expense to the fund
Mutual Funds Shares Class B shares (Back-end loads)
- Back-end load (CDSC) diminishes to 0% after five to seven years then converts to A shares - B Shares have higher operating expenses - suitable for smaller investments, long time horizon
BETA
- Beta is a means of measuring the volatility of a security or portfolio in comparison with the market as a whole. - A Beta coefficeint of 1.0 indicates a security price will move in correlation with the market. - A Beta grater than 1.0 is more voliatile than the market - A Beta less than 1.0 indicates the security will be less volatile than the market.
Bullish
- Buy Call - Sell Put
Bearish
- Buy Put - Sell Call
Stocks Trade date
- Cash trade date and settlement date on Same day - Regular Way -Three Business Days Regulation T -FRB - Credit extend from broker/dealer to customer - Two Business days after settlement date
Investment Companies Offerings (1940) Face amount certificate (FAC)
- Clasified as investment companies - Pays a fixed rate of return - Do not trade in the secondary market - Purchase at discount and matures at ace amount similiar to a Zero coupon bond - Non managed
Investment Company registration Requirements
- Clearly define investment Objective - Reports to shareholders - Minimun net assets - $100,000
Voting
- Common stockholders vote for BOD, mergers, changes to corporate charter and other important corporate matters ( But not on day to day operations) - Number of votes +BOD vacancies x # of shares owned (one vote per share for each vacancy on BOD) - Voting is either Statutory (Regular) or Cumulative
Open-End Company
- Continuous primary offering - Prospectus required - Must redeem Shares - Issue common stock only - No secondary trading - Price by formula - 8 1/2% Maximum sales charge
Investment Companies Offerings (1940) Open End (Mutual Fund)
- Continuous primary offering - Prospectus required ( prior or at sale) - Must redem shares - Issues comon stock only - no secondary trading - Price by formula 8 1/2 % Maximun sales charge
Securities Exchange Act of 1934 (People Act)
- Created the securities and exchange Commission - Requires registration of: > Secondary Markets > Broker Dealeers > Representatives Statutory Discualification - Convicted of a felony within 10 Years - Convicted of a securities crime 10 years - Willfully violated federal security Act - Explelled or suspended by a SRO
Common Stocks Features and Rights
- Dividends (when declared by the BOD) - Pre-emptive Rights (Subscription Rights) - Vote for BOD and other important corporate decisions - Last claim Assets for corporation if liquidate
Dividends
- Dividends are paid to shareholders once a dividend has been declared by the BOD - Dividends can be paid in cash ( Cash Dividends) or additional shares of the common stock (Stock Dividends)
FINRA Conduct Rules & uniform Practice Code
- FINRA rule 5130 Sales of new Issues by resticted persons - Recomendation to Customers - Selling Concessions - Rewarding Employees of other Gifts - Continuing Commissions - Private Securities Transactions - Opening Accounts with other Broker Dealers - Sharing customers accounts - Borrwing or lending to Customers - Customer mail Hold Trade Confirmations
Investment Company Prospectus
- Full (statutory) Prospectus = Updated annually = Prospectus can be use fo 16 months = Includes investment objective-Performance, sales load, expense ratio, Shareholder rights and privileges Summary Prospectus = May be used for solicitation and purchase = Delivery of full prospectus prior to or with confirmation of purchase-Online delivery okay Statement of
Warrants
- Grants it's owner the right to buy the issuers common stock - Offered to anyone - Long Term - Exercise price above current market when issue - Often as sweeteners - May be attached to bonds or preferred stock - Increases Marketability - Reduces the cost of raising funds
Money Market
- High-Quality debt instaruments with one year or less to maturity - Bills = High quality and 52 weeks or less to MATURITY Bankers Acceptances (BAS) - Facilitate Foreign trade (Import/Export) - 270 days maximum Maturity to be exempt from registration Negotiable (jumbo) CDS-Minunim $100,000
Municipal Bonds Taxes
- Interest is tax-exempt at the federal level - Interest may be tax-exempt at the state and local level if purchaser is a resident of the state in which the bodn is issue
Taxation of Goverment Securities
- Interest tax-exempt at the state and local level
The Custodian
- Is generally a commercial Bank - Is the safekeeper of the assets of the fund - Maintains asset records - Periodically audits the funds assets to assure that they are properly acounted for - Is paid a fee from the income of the fund.
Transfer Agent Functions
- Issuing, redeeming, and cancelling of fund shares - Handling name charges for the fund - Maintaining customers records and providing customers service - Sending customers records and providing customer service - Sending customer confirmations and fund distributions - Recording outstanding shares for proper distribution - is paid a fee from the income of the fund.
T Bills
- Matturities -One year or Less 4, 13, 26, and 52 Weeks - Price at Discount by Auction- Mature at Pas; No periodic interest - Non Callable
T Notes
- Maturities 2 to 10 Years - $1,000 Denominations - Semianual Interest (Six Months - 26 Weeks)
T Bonds
- Maturities Greater than 10 Years - $1,000 Denominations - Semianual Interest (Six Months - 26 Weeks)
Firm Commitment Underwriting
- Most commonly used underwriting - The underwriter assumes the financial risk - Could be negotiated or competitive bid. negotiated is the most common - Competitive is normally used for municipal bonds
Redemption of Mutual Funds Shares
- Next-Determined NAV - Timely payment by fund: Seven days from reciept of request - If redeemed within sevendays of initial purchase, sales charge returned to underwritter (distributor)
Debt Securities (Corporate, U.S. Government & Municipals)
- Par Value = $1,000.00 Amount repaid at maturity (Face amount, Principal amount or Maturity Value) - Interest = % of Par paid semi-annually (Nominal Yield, Stated Rate or Coupon Rate)
Preferred Stock Features
- Pays a fixed dividend (not guaranteed) - either percent of par ($100) or stated $ Amount - Dividends paid before common - Suitable for income objective customers - Price has inverse relationship to interest rates - no voting rights
New Issue Market (Primary Market)
- Proceeds form sale of securities goes to issuer - Issuer = Sales securities to raise capital Underwriter (Investment Banker) - Broker Dealer - helps issuer register new issue - Markets new issue to investors
FINRA rule 5130
- Prohibits restricted person from buying IPO (does not apply to subsecuent new isssues) - Restricted Persons (BD and its personel, Officers, Directors, Employees and registred Representatives. - Imeduiate Family of restrcited Persons Spouse, Children, Parents, Siblings, in-laws, Person who recieved material support.
Securities Investors ACT of 1970
- Protect customers if (BD) broker dealer fails - Created Securities Investor Proctection Corporation (SIPC) - SIPC coverage isper separate customer (not account) = 500,000 coverage (securities and cash) = No more than 250,000 cash = Beyond limit customer is a general creditor
Securities Investor Act of 1970
- Protet customers if broker dealer fails - Created Securities Investor Protection Corporation (SIPC) - SIPC coverage is per separate customer (not account) = 500, 000 Cobverage (securities and Cash) = no more than 250, 000 Cash = Beyond limit customer is a general creditor
Investment Company Act of 1940
- Regulate investment companies > Face Amount Certifiacte > Unit Investment Trust (UIT) > Management companies = Open- End (Mutual Funds) = Closed End
Securities Act of 1933 (Paper Act)
- Regulates new issues (Primary offerings) - Requires new issue registration with the federal goverment - Requires full disclousure of all materials facts (Prospectus) > Purpose is to prevent fraud > Prospectus required at or before solicitation, if unsolicited no later than confirmation
Investment Advisers Act of 1940
- Requires registrattion of Investment Adviser (IA) - IA charges a fee for Investment Advice - Register with SEC or State Exclude from definition - Banks - Layers, Accountant, Teacher, Engineer if advice is incidental - Publisher of periodical in general and regular circulation
Declaration Date
- Set by the Board od Directors ( BOD) - Date dividend is decalred by BOD
Closed-End Company
- Shares Fixed - Prospectus after IPO - Shares not redeemable - Issues common stock, Preffered and /or Bonds - Secondary (exchange /OTC) - price by Supply and demand - Commissions
Investment Companies Offerings (1940) UIT Unit Investment Trust
- Similiar to mutual fund comprised of a pool of securities - UIT shares do not trade in secondary market, must be redeemed by trust - Not actively managed; there is no board of directors or investment adviser
Mutual Funds Investment Objectives
- Stock funds = Growth, Value, Blend/core within Large, Medium and Small Capitalization = Income = Growth and Income = Index Funds = Specialized (sector) at least 25% must be in specialty ej. Precious metals funds, electronic funds, companies of the northseast Options income Funds = Sell calls owned securities (covered calls) to increse return
Types of Preferred stocks
- Straight = No special features beyond the fixed dividend - Cumulative = Pays dividends missed (arrears) - Participating = can be paid a dividend beyond the fixed dividend - Callable = can be retired by issuer (used as interest rates decline) - Convertible = convertible into issuers common stock - Adjustable Rate = Dividend tied to an index (possible hedge against inflation)
Wash Sale
- The IRS will disallow a loss if the same security or subtantially identical securities are purchased or repurchased within 30days of a sale that resulted in a loss. This is based on a trade date, adn results in a 61 day period. Substatially identical Securities - Call Option - Right - Warrant - Convertible Preffered Stock - Convertible Bond
Insider Trading and Securities Fraud enforment ACT of 1988
- Trading Securities using inside information (not availble to the public) Penalties - Civil = Fine up to > $1 Million or 300% (treble damages) of profit made or loss avoided - Criminal = Up to 20 Years in prison
Secondary Markets
- Trading of outstanding shares (perivously Issued) - Prceeds from sale of securities goes to someone other than issuer ( Investor) Exchange - Phyiscal Location - Listed Securities Trade - Auction Market - Specialist = Matains a fair and orderly market
Seconadry Markets
- Trading of outstanding shares (previously Issued) and proceeds from sales of securities goes to the investors Exchange - Physical location, Listed Securities, Auction Market, Specialist matains a fair nd orderly Market Over The Counter - Eletronic Market, Unlisted Securities trade (most are unlisted), negtiaded market and the Market Maker (dealer) provides market liquidity - NASDAQ Computerized quotation system used by market makers, prices and inventory Third Market (NASDAQ Itermarket) - Listed securities trade OTC Fourth Market (INSTINET) Direct institutional trading and BD involvment
Standby underwriting
- underwriter agrees to buy all shares that remain unsold - underwriter assumes all the financial risk
Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies?
Both exchange-traded funds and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Both may be sold short (and purchased on margin). Neither is redeemable with the issuer as they are traded in the secondary market.
When shares of a closed-end investment company are purchased by an investor, the price paid is the:
Closed-end investment company shares are priced based on supply and demand. The ask is the price that investors will pay for purchasing shares. Investors will also pay a commission as this is what the broker charges for executing the transaction
From which of the following might you be able to purchase shares of a closed-end investment company after its initial offering?
Closed-end investment company shares are traded in the secondary marketplace (OTC or exchange). Shares are thus purchased from other shareholders through broker/dealers.
