Series 66

Contrarian Investors

Do the opposite of what most investors are doing at any particular time

realized return/realized profit or loss

considers original cost, sale price, interest, and dividends but wouldn't consider paper or unrealized gains or losses

prepaid tuition plan

"lock in" the cost of a specific # of academic periods/units at current prices to be used in the future provide a hedge against increase tuition costs and don't have investment risk available for all levels of schooling charge enrollment and administrative fees

yield to call is affected by

1. Call premiums 2. Time to call date 3. Price paid for the callable bond

3 types of investment companies

1. Face Amount Certificate Companies 2. Unit Investment Trusts 3. Management Companies - can be open-end or closed-end a. open-end investment companies (mutual funds) must redeem an investor's shares on demand at the current net asset value which is calculated daily and may be the same as, higher, or lower than the price paid b. closed-end when investment company shares are selling at a discount to the net asset value (NAV)

an IA who has custody or possession of a client's fund or securities for safekeeping must follow

1. IA must identify, segregate, and place in safe-keeping, by client, each client's securities 2. clients' funds must be deposited in 1 or more bank accounts which contain only client funds 3. IA must maintain records for each account and the amount of each client's beneficial interest 4. IA must notify each client in writing of the location and manner in which funds and securities will be maintained and give prompt written notice of any change of location 5. IA must provide each client w/ an itemized statement at a min of every 3 months (quarterly) 6. IAs must arrange w/ an independent public accountant for an unannounced examination to verify clients' funds and securities in custody at least 1x a yr 7. if a client is going to be out of town and gives the IA authorization to write checks out of the client's check book to pay custodial fees ONLY for the account, it WOULD be considered custody of client funds 8. an IAR would be considered to have custody of a client's funds if the IAR is also the trustee of the client's trust account 9. if a client mistakenly sends a check to the IA instead of the IA's custodian, the IA may w/in 3 business days return the check to the client and request the client to reissue the check payable to the custodian to avoid "custody" of client funds 10. "custody" generally doesn't include prepayment of advisory fees

excluded from the definition of an investment advisor (IA)

1. IARs 2. BDs and agents if advice is incidental and NO extra compensation 3. institutions (banks, savings institutions, trust companies, investment companies, and other financial intermediaries) even if they charge a fee for advisory services 4. publishers who give general securities advice (news paper) 5. Lawyers, Accountants, Teachers, Engineers (LATE) if their advice is incidental to the practice of their profession 6. federal covered advisors 7. employee benefit plans (exp 401k)

Exemption of registration under the IA Act '40

1. IA whose clients are all residents of the state w/in which the advisor maintains its principal office and place of business and the the advisor doesn't furnish advice, analyses, or reports w/ respect to securities listed on a national securities exchange 2. IA whose only clients are insurance companies 3. per Dodd Frank Act: a. exempt reporting advisors are IAs that qualify for the exemption of registration bec 1. they're an advisor solely to 1 or more venture capital funds 2. they're an advisor solely to small private funds that have AUM in the US of less than $150 mill (hedge funds and private equity funds where no public offering is made and funds are limited to accredited investors) b. private funds- fund issuers that're excluded from the def of an investment company under IA Act '40 so don't have to register w/ SEC and are exempt from reporting requirements of Securities Exchange Act '34 (hedge funds, private equity funds, and venture capital funds) 1. 2 categories of private funds: - funds w/ 100 investors or less which aren't making or proposing to make a public offering *investors are required to be accredited investors - funds w/ 101+ investors, but typically limited to 499 investors which aren't making or proposing to make a public offering * investors are required to be qualified purchasers 2. 401K and other types of retirement or employee benefit plans can invest in these types of funds subject to the plan asset rules - most private funds will have a private placement memorandum, subscription agreement, and a copy of the orig agreement 3. most private funds must periodically file for PF w/ SEC 4. private funds CAN'T advertise but direct mkting to specific potential investors is allowed 5. initial and ongoing costs are generally lower than a registered fund 6. performance fees are allowed if all invests are qualified clients 7. most private funds are formed as either a LP, LLC, or Business trust and can elect partnership status for tax purposes 8. once a fund has 500+ investors and more than $10 mill in assets, it's subject to reporting requirements of the Securities Exchange Act '34 and is no longer a private fund d. "associated person" of an IA: 1. officers, partners, and directors 2. employees providing advice to clients of the IA e. SEC prohibits the use of the initials RIA after the name of a federally covered advisor bec it may suggest a certain level of competence f. term investment counsel can't be used by and IA registered at the federal level unless both are met: 1. adviser's principal business consists of being an IA 2. substantial part of the IA's business consists of providing investment supervisory services g. IAs that're registered under IA Act '40 must electronically file an annual updating amendment to form ADV to their registration w/ SEC no later than 90 days after the end of the fiscal yr of the IA firm h. registration w/ SEC remains effective until revoked by the SEC or a w/drawal is filed by the IA and is accepted by SEC i. SEC can revoke IA's registration for: 1. willful misstatements in a SEC filing 2. failure to reasonably supervise employees 3. insolvency 4. being subject to a state court injunction against engaging in the commodities or securities business j. penalties: anyone who violates the IA Act '40 or any SEC rule or regulation is subject to a fine up to $10,000, prison for 5 yrs, or both k. giving advice regarding these don't require registration as an IA: 1. fixed annuities or insurance policies ONLY, or 2. any other non-securities products ONLY l. reporting of personal securities transactions of IAs 1. requires its directors, officers, partners, and supervised persons who have access to non-public info regarding securities transactions to report annually their personal securities holdings and quarterly their securities transactions 2. exception to reporting these occurs when an access person's securities are held in accounts over which they had "no direct or indirect influence or control" n. political pay-to-play rules 1. applies to registered advisers and advisers covered under the private advisor exemption: - 2-yr prohibition on any advisors providing compensated services to a gov entity following a political contribution to certain officials of that entity - prohibition on the use of 3rd party solicitors who aren't themselves " regulated persons" subject to pay-to-play restrictions on political contributions - prohibition on "bundling" and other efforts by advisors to solicit political contributions to certain officials of gov entity which the advisor is seeking to provide services 2. 2 exceptions to the 2-yr time out for de minimis contributions - entitled to vote then can make contributions of $350 or less per election - not entitled to vote then can make contributions of $150 or less per election

order ticket for securities transactions must include

1. act # 2. time that the order is received 3. agent on the account 4. terms and conditions of the order

administrator can

1. administer oaths 2. subpoena witnesses 3. take evidence 4. require documents or records which're relevant to any jury even if the documents are confidential CAN'T arrest, enjoin, indict ppl, or confiscate property

when initial registration is filed, following must be included

1. application for registering 2. registration fee 3. consent to service of process 4. bond or surety bond as the administrator may prescribe

how portfolios can be diversified

1. asset class- cash, stocks, bonds, metals, real estate, etc.. 2. sector- defense, utilities, durable goods, manufacturing etc.. 3. mkt capitalization- small cap, mid cap, large cap etc.. 4. mkt- NYSE, OTC, AMEX, CBOE etc.. 5. geographically- established mkts, emerging mkts etc..

to calculate DCF of a bond, the investor must know

1. coupon payment 2. final principal payment of maturity 3. discount rate

key elements when determining cost basis

1. date the asset was acquired 2. original cost of asset 3. any adjustments or depreciation taken on asset 4. who's the asset's owner (exp individual or corporation)

Exchange Traded Notes (ETNs)

1. debt securities issued by banks 2. bank promises to repay (principal amount - investor fees), at final maturity 3. performance is linked to specific index 4. ETN units are traded like stock and can be sold short 5. have a final maturity and can be callable used on: 1. commodities 2. currencies 3. emerging mkts 4. indexes (S&P 500)

administrator may by order revoke or deny certain exemptions

1. exempt transactions 2. exchange-listed securities 3. securities of non-profit orgs 4. investment contracts issued by employee benefit plans

types of beneficiaries of a trust

1. first or income beneficiaries- receive the interest and other income from property 2. remainder man or second beneficiaries- receive property upon passing of 1st beneficiary trustee must consider needs of both 1st beneficiaries and remainder man at the same time

excluded from definition of a security under USA

1. fixed life insurance policies 2. fixed annuity contracts 3. commodity futures contracts 4. collectibles, including antiques 5. precious metals 6. real estate

Assuming a call price that is equal to the face or par value of the bond, the yield to call will be

1. higher than the YTM on bonds trading at a discount 2. lower than the YTM on bonds trading at a premium

Investment Advisor (IA)

A advice about securities directly or indirectly (written or oral) B business of giving advice C compensation for services is received there's no requirement that a client implements the advice, or that the firm manages the funds

4 basic elements of an investment contract Howey decision

1. investment of money 2. common enterprise 3. expectation of profits 4. management by a 3rd party

Exempt transactions under USA

1. isolated non-issuer transactions, whether effected through a BD or not - "isolated" would mean separate or standing alone from other trades - "non-isolated" would mean there's no benefit to the issuer; stock has been issued and is trading in the secondary mkt 2. non-issuer transactions by registered agents at registered BDs if: - the issuer of the security being traded is engaged in business and ISN'T in the organizational stage, in the bankruptcy or receivership stage, or is a clank check, blind pool, or shell company - the security is senior in rank to the common stock of the issuer and has been outstanding for at least 3 yrs w/out default 3. non-issuer transactions effected by or through a registered BD pursuant to an unsolicited order or offer to buy - includes unsolicited orders by customers who call into their BD or execute unsolicited orders via an eletronic trading platform 4. fiduciary transactions - transactions by an executor or administrator of an estate, receiver or trustee in a bankruptcy, or a guardian or conservator 5. bona fide pledges of securities 6. underwriter transactions - transactions for new issues between underwriters and issuers or transactions between underwriters and members of the underwriting syndicate 7. transactions w/ financial institutions - sales to banks, savings institutions, trust or insurance companies, registered investment companies, and pension or profit-sharing trusts or other financial institutions or institutional buyers, or to a BD, whether the purchaser is acting for itself or in some other fiduciary capacity 8. private placements sold to less than 10 persons other than institutional investors, during a 12 mo period 9. mortgage bond transactions issued as a unit 10. pre-org subscription transactions which are used by growing companies who intend to incorporate in order to acquire additional capital -subscribers can't exceed 10 - no commission may be paid - payments may only be made after the security is registered - advertising isn't acceptable 11. rights, warrants, and convertible securities transactions w/ security holders or employees of issuers, if no commission or other remuneration is paid

if an IA has or intends to have custody of client funds and securities

1. notice must be given to the administrator (file form ADV) 2. examinations of books and records by administrator 3. have minimum capital set by administrator

discounted cash flow (DCF) can be used to evaluate

1. ongoing investments w/ no expected maturity 2. investments w/ an expected maturity 3. portfolios 4. specific projects w/ a completion date 5. business ventures w/ no specified completion date 6. investment managers

meaning of NPV findings

1. positive (above 0)- expected the investment will be profitable and exceed the hurdle rate or required rate of return 2. negative (below 0)- expected the investment will lose money and won't meet the hurdle rate or required rate of return 3. =0 - investment or project won't have net gains or losses for the investing entity

annualized return examples

1. purchased for $1,000 held for 6 months and sold for $1,050 ($50 in returns/$1,000 invested = .05 or 5%) 2. purchased for $2,000 held for 1 yr and sold for $2,200 ($200 in returns/$2,000 invested = .10 or 10%) 3. purchased for $1,500 held for 2 yrs and sold for $1,750 ($250 in returns/$1,500 invested = .167 or 16.7%) annualized: 1. returned 5% over a 6 month period (5% x 2 or 10% over a 1 yr period) 2. returned 10% over a 1 yr period 3. returned 16.7% over a 2 yr period (16.7%/2 = 8.35% per yr)

under the USA, a state administrator may require who to post surety bonds w/ the state administrator if they're going to have custody of or discretion over their clients' assets

1. registered BD and IA firms 2. individual agents of BDs (but not IARs) bond must be kept in force for as long as the registrant is in business and for 3 yrs thereafter bond isn't required of BDs or IAs who meet min capital requirements; instead would deposit cash or securities w/ the administrator

types of trusts

1. revocable (changeable) 2. irrevocable (unchangeable) 3. living 4. testamentary trust (trust created from a will) income from irrevocable trust is taxed at trust's tax rate and a revocable trust is taxed at grantor's tax rate

USA contains number of exemptions from the general requirement that all securities offerings must be registered. these exemptions are for

1. securities such as gov and municipal securities, and 2. transactions such as transactions among underwriters and w/ institutional investors

it's unlawful for any person to offer to sell any security in a state unless

1. security is covered under the USA 2. security or transaction is exempt from registration 3. security is a federal covered security

conditions which must be met to make a pre-organization subscription exempt from registration

1. subscribers can't exceed 10 2. no commission may be paid 3. payments may only be made after the security is registered 4. advertising is acceptable

Order of Asset Distribution upon Liquidation

1. taxes 2. secured debt (generally bonds backed by assets) 3. unsecured debt (debentures, general creditors, accounts payable) 4. preferred stock 5. common stock

no stop order can be entered w/out prior notice to

1. the applicant or registrant 2. issuer, and 3. the person on whose behalf the securities are to be or have been offered SRO (FINRA) notification isn't required

exempt securities in the '33 act

1. us gov securities (bills, notes, and bonds) and federal agency issues 2. muni Securities (issued by state and local govs) 3. securities issued by non-profit orgs (religious orgs, benevolent associations etc) 4. reg d offerings (private placements) 5. intrastate offering (securities sold by a locally incorporated company and only offered to residents of a single state) 6. reg a+ offering - the total amount of the offering to the public is $75 mill or less in any 12 month period. it's a short registration statement used instead of a normal registration statement. offering circular is distributed to the public instead of a prospectus 7. commercial paper w/ a maturity of 9 months (270 days) or less and the proceeds must be used for a current transaction of the issuer 8. promissory note that evidences an obligation to pay cash w/in 9 months issued in denominations of at least $50,000 9. securities issued by small business investment companies (SBIC) 10. banks and savings and loans 11. motor carriers. they're regulated by the interstate commerce commission (ICC) 12. certificate issued by a receiver or by a trustee in bankruptcy w/ the approval of a court

efficient mkt hypothesis

1. weak version- mkt price reflects past prices and trading volumes 2. semi-strong version- publicly available info is reflected in mkt price 3. strong version- all info, public or private, is reflected in mkt price random walk- stock mkt prices are "random" and not influenced by past events

corporate SEC filings

10-Q : comprehensive report of a company's performance that must be submitted quarterly and are required to disclose relevant info regarding their financial position 10-K : comprehensive summary report of a company's performance that must be submitted annually (more detail than the annual shareholders report) 8-K : report of unscheduled material events or corporate changes at a company that could be of importance to the shareholders (acquisitions, bankruptcy...) and must be filed w/in 4 business days of occurrence

general partnership

2+ general partners share in mgmt, profit/losses, and liabilities of partnership 1. easy to form 2. limited life 3. are "active participants" 4. unlimited personal liability

Russell 3000 index

3,000 of the largest companies Russell 2,000- small cap companies segment of the Russell 3000 index Russell 1,000- large cap companies segment of the Russell 3000 index

Wilshire 5000 index

7,000 largest companies based on mkt capitalization

active asset allocation

Active "stock picking" and market timing to constantly rebalance the portfolio to attempt to obtain returns in excess of a specific benchmark or expected return

current yield on bonds

Annual Interest _______________________ Current Market Price exp: purchase a 9% bond at 90, the current yield is 9% x 1000 = 90 ______ = 0.1 or 10% 90 x 10 = 900

after-tax yield

Annual Interest x (100% - Investor's Tax Rate) exp: taxable bond w/ coupon of 4% at par. the bond is exempt from state tax and the investor has a 28% marginal tax rate .04 x .072 (100% -28%) _________________________ = 2.88% after-tax yield

correspondence

Any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period qualified principal approval isn't required

403 (b) plan/tax-sheltered annuity arrangement (TSA)

CAN'T INVEST IN LPs used by tax exempt (non-profits) and provides benefits by purchasing annuities or contributing to custodial accounts invested in mutual funds for: 1. teachers and administrators 2. religious, education, or charitable orgs 3. certain employers of ministers, hospitals contributions can be up to $20,500 and $6,500 for catch-up if 50+ distributions can start at 591/2 but early w/drawals are taxed at 10%, are mandatory by 72, RMDs must start by April 1st following the calendar yr of turning 72 and late w/drawals are taxed at 50% distrubitons are taxed as ordinary income w/ a cost basis of 0

corporate taxes

Common and Preferred Dividends received by a corporation from another corp are 50% excluded from taxable income Only 50% is subject to tax Income from REITs would NOT Qualify for the exclusion

tactical asset allocation

Focuses on short-term asset mix adjustments can be made w/in a range based on current mkt and economic conditions such as a recessionary period tactical asset allocation is a form of mkt timing and a form of active asset allocation

which of the following is TRUE of holding period return (HPR)

HPR can be annualized to give investors a means of comparing different investments

which of the following would be features of a variable annuity I. tax deferral of earnings II. participation in mkts for securities III. a fluctuating future stream of income IV. guaranteed payout

I, II, and III only

an IA is registered in several states, including the state in which it has its principal place of business. which of the following is true concerning the IA's obligation to maintain a min net capital

IA must satisfy the requirements where it has its principal place of business

federal covered advisor

IA under the federal investment advisers act '40 must register w/ SEC only and is exempt from state registration but might have to file a notice w/ the states in which 6+ clients transact business w/ the fed covered advisor includes any iA who: 1. is an adviser to a registered investment company 2. manages an investment portfolio w/ AUM of $100 mill+ can register w/ SEC or $110 mill+ must register w/ SEC if federal covered advisor's AUM fall below $90 mill, advisor must w/draw registration unless there's an exception

if an investment has an NPV = o, that investment would be expected to have an IRR

IRR = the required rate of return

impersonal investment advice

Investment advisory services that do not purport to meet the objectives or needs of specific individuals or accounts (general statements) contract for impersonal advisory services: 1. by means of written material or oral statements which don't purport to meet the objectives or needs of specific individuals or accounts 2. through the issuance of statistical info containing no expression of opinion as to the investment merits to a particular security

if an investment has an IRR that = the required rate of return, that investment would be expected to have

NPV of 0

in terms of the mkt for CMOs, usually trade in the

OTC mkt w/ mark-ups and mark-downs

Inertial Inflation

Tendency of an inflation rate to remain constant or consistent unless there is a demand shock or supply shock demand shock- result from aggregate demand, which is the sum total of national demand for goods and services, outstripping national supply (demand-pull inflation) supply shock- result from increasing material costs or long-term wage and price contracts pushing up prices (cost-pull inflation)

political or country risk

The risk that an investment's returns could suffer as a result of political changes or instability in a country instability (change in gov, legislative bodies, other foreign policy makers, or military control)

reinvestment risk

The risk that interest and dividend income from existing investments may not be able to be reinvested in a way that will earn the same rate of return

inflation adjusted/real return/real interest rate

Total or nominal return on an investment - the rate of inflation attempts to give an adjusted return of an investment based on the current inflation rate exp: rate of return is 6% and inflation is 3% 6-3 = 3% real rate of return

termination of agents and IARs are reported on form

U-5

Brady bonds

U.S. Dollar- denominated bonds issued by Latin American countries that're collateralized by U.S. Treasury zero-coupon bonds issued to convert defaulted loans into bonds and thereby reschedule the issuer's debt repayments

yankee bonds

US dollar-demoninated bonds and issued in the US by foreign companies or govs used when interest rates in US are low

which of the following would NOT have an effect on fixed-income securities

age of the investor looking to buy the fixed-income securities

average or effective tax rate

amount of tax paid ____________________________ taxable income

the term "person"

an individual or legal entity 1. individuals not including minors 2. corporations 3. partnerships 4. associations 5. trusts 6. unincorporated orgs 7. Gov or gov sub-divisions

12b-1 fee

annual fee charged by a mutual fund which is taken out of the funds portfolio to cover the fund's marketing or distribution expenses

total return/annualized return

annual rate of return on an investment includes: 1. appreciation 2. capital gains or losses 3. dividends or interest 4. other distributions investment's performance is best measured by total return exp: buy ABC stock at $30 per share and sell at $40 per share. during the yr the investor received $2 in dividends per share 40-30 = 10 + 2 = 12/30 (initial investment) = 40% total return gain + dividend

UGMA and UTMA

any account that includes an adult and minor must be set up as an UGMA/UTMA NOT A JOINT ACCT minors ss# is used for account margin accounts and short selling AREN'T allowed potential tax benefit since minor is in lower tax bracket UTMA- any asset UGMA- limits gifts/transfers to bank deposits, securities, and insurance policies

offer "to buy"/offer "to sell"

any attempt to solicit a purchase or sale of a security for value offer is considered to have been made in a state when: 1. originates in the state 2. it's directed to the state 3. it's accepted in the state

security

any evidence of an interest in a common enterprise which the investor expects a profit from the managerial efforts

investment advisor representative (IAR)

any individual, parter, officer, director, employee, or associate of an IA who: 1. makes recommendations or gives advice regarding any securities 2. manages clients' accounts or portfolios 3. determines the suitability of recommendations 4. solicits, sells, or negotiates investment advisory services 5. supervises employees who perform the above listed services IAR would include solicitors who must be registered in order to solicit business or be paid a referral fee IAR ISN'T required to register in a state

solicitation

any oral, written, or other communication used to offer or sell investment company shares excludes: 1. proxy statement 2. report to shareholders 3. or other disclosure document relating to a security covered under '33 act

issuer

any person (a company) who issues or proposes to issue any security for sale and receives the proceeds of the sale

BD

any person (a firm) engaged in the business of effecting transactions in securities for the accounts of others or for the firm's own account exp: Morgan stanley ad merrill lynch

suspicious activity report (SAR)

any transaction conducted through a financial firm involving funds or assets of $5,000+ where firms detects any known or suspected federal criminal violation if firm becomes aware of a suspicious transaction firm must file SAR w/in 30 days suspicious activity- lack of concern regarding risks and commissions, losses in account, frequent trading ...

retail communications

any written or electronic communication distributed to 26+ retail investors within a 30-calendar-day period advertisements, sales literature, and independently prepared reprints qualified principal approval is required before use or filing w/ FINRA

guaranteed

as to payment or principal, interest, OR dividends guarantees are issued by someone other than the issuer

defined benefit plan

benefits received by employees are computed using a predetermined formula benefits are calculated on compensation, yrs of service, and age high salaried employees near retirement benefit the most used by gov employers and large companies benefits are taxed as ordinary income

if investor is willing to bear investment risk, what's the best investment strategy to exploit their acceptance of mkt risk

best risk mgmt technique would be to eliminate the unsystematic risk from their portfolio

futures contracts

binding contract made on the reading floor of a futures exchange to buy/sell specific commodity or financial instrument at some point in the future variable part of the contract is the price which is based on cash mkt value of the commodity used by speculators and hedgers

standard and poor's 500 index

broad large cap index and is considered to be the measure of average mkt performance benchmark

XYZ is currently trading at $40. An investor who is long 1,000 XYZ shares believes the shares will trade lower w/in the next 6 months. Which option strategy best protects the investor's long position

buy 10 XYZ puts investors long stock buy puts for downside protection. 1 option contract = 100 shares, so needs 10 option contracts x 100 shares = his 1,000 shares

rudy smith sold short 100 shares ABC stock at $50 per share. ABC stock has been depreciating in value in the mkt and has currently decreased to $20 per share. today the mkt took an upturn and the stock price went up to $30 per share. if Rudy wants to protect the remaining profit in his position w/out immediately closing it, he should place a

buy stop order this allows ABC to fluctuate downward w/out resulting in an immediate purchase and closure of the short sale position. buy stop protects Rudy by resulting in a purchase of stock to cover the short sale if the mkt price rises to the stop price on Rudy's order

Generally, if stock prices are rising and such moves are above the moving averages for that stock's price over the past measured period it would be a signal to a technical analyst to do which of the following

buy the stock

exchange mkts (auction mkts)

buyers and sellers meet to execute trades DMM is key individual and is required to maintain fair and orderly mkt securities traded on exchange are listed

Dealer (Principal Capacity)

buying and selling securities for or from firm's own inventory and charging a mark-up to the price on a buy and mark-down to the price on a sell

broker (agency capacity)

buying and selling securities for the accounts of customers and charging commissions

present value and discounting

calculations are used to determine how much money would have to be invested today at a specific interest rate to equal a fixed amount of money needed in the future referred to as discounting since we could be reversing the compounding process to determine the amount needed in the future to its PV

future value and compounding

calculations are used to determine what the value of a fixed sum of money invested today at a specific interest rate will be worth at a future date taking into consideration compounding exp: current annual interest rates are 6% and an investor invested $10,000. at the end of yr 5 it'll be worth $10,000(1+0.6)^5 = $13,382.26

call premiums

call premium over the face or par value of the bond will cause the yield to call on the bonds trading at a discount of par value will be higher than the YTM

As stated in the USA, federal-covered advisors

can be required to give notice to administrators in states in which 6 or more retail clients transact business with the federal-covered advisor

assistant of an agent

can hire unregistered assistants or interns who post and update acct records under the direction and supervision of the agent, but can only handle trades or make recommendations to clients if they're registered

civil liabilities

can't sue after 3 yrs or 2 yrs after discovery of facts of violation buyer can sue: (consideration paid + interest + attorney fees) - any income received can't sue for 2x or 3x of damages

bonds

debt security that pays interest to investors semi-annually at a stated rate fixed income security par/face value = $1,000 1 point = $10

which of the following is NOT a shared characteristic between common stock and preferred stock

changes in mkt value of shares is primarily driven by company performance mkt price in preferred stock is more commonly driven by changes to interest rates and dividend rates on similar preferred stock

accessable stock

class of stock which the issuing company has the ability to impose future levies on stockholders for additional funds "gift" of accessible stock is a "sale" bec the owner would no longer be liable for future assessments by gifting the stock

under the IA act '40 which of the following persons WOULDN'T have been considered to have received compensation for the giving of advice

commission charge for the execution of securities transactions a fee charged to a family for the establishment of family trust funds

Monte Carlo simulation

computer program simulation runs thousands of chance scenarios to produce probable outcome involving a # of random variables creates a frequency distribution table based on a wide range of potential outcomes

BD Inc is located in state A. Indie is an individual who represents BD Inc in state B as an independent contractor. in this case, indie is

considered an agent of BD Inc and both BD Inc and Indie would have to register in state B independent contractor is an agent

derivatives

contract that's valued based on the value of an underlying asset, index, or security. they're leveraged investments exps of derivatives: 1. futures contract 2. forward contracts 3. equity options 4. LEAP options (expiration 39 months) 5. index options 6. foreign currency options 7. swaps- including interest rate swaps 8. warrants 9. rights NOT a derivative: bec underlying asset is owned 1. REITs 2. investment companies a. open-end companies (mutual funds) b. closed-end companies c. unit investment trusts (UITs)

coverdell

contributions must be in cash in 1 yr can't contribute more than $2,000 up until beneficiary is 18 assets must be distributed or transferred before beneficiary is 30, if not it'll be taxed at 30% contributions aren't deductible but w/drawals for education expenses are tax free "earnings" portion of distribution not used for education is taxed as ordinary income + 10% penalty most appropriate for low and middle level contributions

mkt capitalization

current mkt price per share x # of shares outstanding ___________________________________ = mkt capitalization

average of effective tax rate

customer pays over a period of time amount of tax paid ____________________________ taxable income

certificate of deposit (CD)

debt security issued by bank that has fixed rate of interest and maturity date 1. is a "time deposit" 2. funds w/drawn early must pay a penalty 3. not considered liquid

considerations in investing and managing trusts assets

decisions should be in the context of the trust portfolio as a whole and as part of an overall investment strategy 1. general economic conditions 2. possible effects of inflation or deflation 3. expected tax consequences to the beneficiaries of investment decisions or strategies 4. role the investment plays in the overall trust portfolio 5. expected total return from income and appreciation of capital 6. other resources of the beneficiaries 7. needs for liquidity, income, and preservations of capital 8. asset's special value, if any, in regard to beneficiaries

457 (b) plan

deferred compensation plan for employees of state or local gov contributions are up to $20,500 + $6,500 catch-up for 50+ tax advantage: contributions and earnings are deferred private non-gov 457 plans for hospitals, unions, and charitable orgs limit participation to a select group of mgmt highly compensated employees

opportunity risk

describes the value of the next best choice that 1 foregoes as a result of making a decision

administrator

designated state official who administers the uniform securities act and enforces other securities regulations in a given state can make public or private investigations w/in or outside of the state at any time

dividend discount model

determines the price at which a common stock should be trading considering the discounted value of potential future dividends used to determine common stock values

non-qualified dividends

dividends paid by REITs, master limited partnerships, and money mkt accounts taxed at individual's ordinary income tax rate

washed sales or matched orders

effecting, alone or w/ 1 or more persons, a series of transactions in any security creating actual or apparently active trading in a security for the purpose of inducing the purchase or sale of a security by others

dark pools

electronic trading platforms run by large investment banks and hedge funds for institutional investors to trade stock privately and anonymously off the floor of an exchange to obtain price improvement when a large block of stock is traded

transfer on death (TOD) or pay-on-death (POD)

eliminates need for probate upon death assets are passed to beneficiaries uses of TOD: stocks, bonds, and mutual funds NOT ELIGIBLE: LP interests, precious metals, variable and fixed annuities, and commodities

defined contribution plan

employees, employers, or both make contributions to employees' individual accounts employers can make matching and profit sharing contributions which're fixed by a predetermined formula retirement benefit can't be calculate in advance but depends upon the amount of contributions and performance of investments in the account

preferred stock

equity ownership of a corporation fixed income security w/ fixed or set dividend rate no voting rights less potential for appreciation than common stock since it's a fixed income security

common stock

equity ownership of a corporation variable dividends = want to voting rights: shareholders vote for BOD and stock splits high level of risk highly susceptible to mkt risk

expected return/mean return/expected annual return

estimates return on an investment based on certain scenarios (bull or bear mkt) and weighs estimates based on the probability of the occurrence of each scenerio it's the weighted average of the expected annual returns for all components of the portfolio

discounted cash flow methods/discounted cash flow analysis (DCF)

evaluation of securities, portfolios, or projects, collectively "investments" using the concept of discounting (PV) analysts use DCF to evaluate an investment's inflows and outflows, as well as the expected cost of capital related to the investment to determine the NPV and IRR

filing (notice filing)

exp: mutual fund form of registration used by federal covered securities or an established company which has registration statement on file w/ SEC following conditions must be met: 1. engaged in business operations in US for at least 36 consecutive months (3 yrs) 2. have a class of securities held 500+ persons 3. have a total net worth of $4 mill, or have a total net worth of $2 mill and net pretax income from operations before allowances for extrordinary items for at least 2 of the 3 preceding fiscal yrs federal covered securities- administrator may require the filing of any or all of the following documents w/ respect to a "covered" security: 1. prior to initial offering, all docs that're part of the federal registration statement 2. consent to service of process signed by issuer along w/ fee for filing 3. all docs that're part of an amendment to the federal registration statement 4. report of the value of such federal covered securities offered or sold in this state 5. any necessary filing fees exp: open-end investment companies (mutual funds) and reg A+ offerings

Uniform Securities Act (USA)

fed gov and states regulate the securities industry purpose: 1. minimize duplication of fed and state registration requirements 2. prevent fraud ("blue sky") protects the investing PUBLIC

criminal penalties

fined $5,000, imprisoned 3 yrs, or both

annualized return

give an investor an idea of their return in a standardized format for various investments which have different holding periods comparable investment returns for less than 1 yr are generally annualized

alpha

gives idea how an investment performs relative to the amount of risk taken calculated using stock's beta to account for volatility that's expected in relation to benchmark can be expressed as a %, #, or numerically including the risk factor of the benchmark

internal rate of return (IRR) or dollar weighted return

form of DCF that uses discounting to find the PV of inflows (revenue) and outflows (expenses) for each yr of a given investment, then sets the equation = 0 in order to find the rate of return which gets the investment to a break point goal is to identify the rate of return that gets a project to a breakeven point which can be compared to the estimated cost of capital or required rate of return higher the IRR, the better the investment (exp IRR of 10% is better than an IRR of 1%) IRR determinations are cash flow dependent the inflows of the investment are assumed to be reinvested at the investment's IRR

net present value (NPV)

form of DCF which uses discounting to find the PV of inflows (revenues) and outflows (expenses) for each yr of a given investment goal is to allow comparison of the PV of the investment, discounted to todays dollar and the cost of the investment today

hedge funds

form of LP take on long and short positions use leverage and derivatives subject investors to a larger degree of risk not as liquid as other currencies sales or redemptions are monthly, quarterly, or annually must be accredited investors, qualified clients, and semi-affluent investors

coordination

form of registration used for new issues whose registration is pending w/ SEC. any security which a registration statement has been filed w/ SEC can be registered by coordination state registration becomes "effective" when the federal registration becomes effective

qualification

form of registration used when the new issue of securities isn't going to be registered w/ SEC but only in the state of issuance. any security can be registered by qualification registration statement must be filed w/ the state(s) that includes complete info about the offering and issuer distribution of a prospectus to each offer before the sale of a security might be required by administrator such registration becomes effective when administrator so orders exp: small company making only an intrastate offer

non-qualified deferred compensation plan

frequently used by highly-paid athletes and executives who enter into large compensation contracts not subject to ERISA so employer can choose who to offer plan to agreement to defer receipt of part of compensation until retirement, disability, or death business failure could lead to no payments as plan assets could be subject to the company's creditors. the employee becomes a general creditor of the company if the business fails

futures contract calculation

gain or loss x contract size ___________________ =total gain or loss

max federal gift tax annual exclusion

gifts in 1 yr to 1 person from single person: $15,000 combined gifts from married couple: $30,000

qualified plan fiduciaries, responsible for the investment choices of a qualified plan, would find which of the following in the investment policy statement of the plan

goals, objectives, and responsibilities of plan participants

Adjusted Gross Income (AGI)

gross income - adjustments ____________________ = AGI

per stirpe provision in a will

how property will be distributed when a beneficiary w/ kids dies before the testator/maker of the will. also known as the right of representative distribution and results in unequal shares

sale of main home

if gain from sale of home, might qualify to exclude from your income tax $250,000 if filed as single $500,000 if filed as joint return w/ spouse exp: single person bought home 20 yrs ago for $120,000 and sells this yr for $400,000 400,000 sale price - 120,000 orig cost __________________________ $280,000 adjust basis - 250,000 deduction ____________________________ = $30,000 taxable gain

profit-sharing plan defined contribution plan

incentive to be productive company shares its profits w/ employees determination to contribute and size of annual contributions are made by the employer contribution is dependent on company profit all funds in plan are tax-sheltered

operating cash flow/cash flow from operations

includes net earnings + non-cash expenses (depreciation and amortization) as well as changes in working capital net income + depreciation and amortization gives investors an idea of the company's cash flow over a specified period of time

dow jones

industrial average- 30 selected large cap blue chip stocks divided by a constant. it's an indicator for large cap stocks composite average- 65 stocks form the industrial, transportation, and utility sectors

dollar cost averaging

investing a set fixed sum of money at regular intervals in specific investments, regardless of the mkt price average cost per share will always be lower than the average price per share involves investing a fixed # of dollars at regular intervals

speculation

investing in high-risk securities in hope of achieving very high returns volatile common stocks, junk bonds and/or stock options

growth investment objective

investments that have the potential to provide a rate of return from an increase in value of the securities tech stocks or sector funds for aggressive growth bluechip and defensive stocks for moderate growth

qualified client

investor w/ net worth of $2.2 mill or $1.1 mill in assets under management (AUM)

margin account

investors borrow money from BD to buy securities min deposit to open margin acct is $2,000 Reg T requirement on new purchases and on short sales is 50%

investor looking for which of the following investment goals would be BEST served by a deferred variable annuity

investors seeking capital appreciation over a long period of time

income investment objective

investors who require certain amount of money every month corporate bonds and bond funds, REITs for high-yield interest preferred stocks, utility stocks, and blue chip stocks for dividend income

protection

investors who want to protect or hedge a stock position can purchase options long stock, buy put options short stock, buy call options

safety investment objective

investors who wish to minimize and protect principal while receiving some return on investments treasury securities (US gov bills, notes, and bonds), certificates of deposit (CDs), and money mkt funds time deposits at banks for 1 yr or less investment: t-bills

from a historical perspective, investments in real estate would be expected to

move in the opposite direction to investments in the stock mkt

low volatility

investors who're willing to accept lower than expected mkt returns in order to have less unpredictability in investments bonds and money mkt securities AVOID equity securities (common stocks)

investment time horizon

length of time you need to liquidate an investment for a specific goal (exp kid's education or retirement) those w/ longer time horizons are generally willing to be more aggressive w/ investments and invest in less liquid investments

non-traditoinal ETFs

leveraged ETFs- track an index fund or benchmark 1. fund borrows capital w/ goal of generating increased % return 2. uses derivatives such as futures and options inverse ETFs- deliver the opposite of performance of tracked index or benchmark 1. profits if index decreases and loses if index increases 2. can be leveraged and called "short ETFs" 3. used for hiding purposes 4. maintain derivatives in portfolio but rely more on derivatives to achieve investment objectives unsuitable to be held for longer than 1 day

if an IA has a principal place of business in a given state, the state's administrator may impose what requirements according to the USA

may require the IA to file certain financial documents may require the IA to file amendments to certain existing registrations applications may require the IA to file its sales literature may require the IA to maintain certain records

duration

measure of sensitivity of a bond's mkt price to changes in interest rates

standard deviation

measure of volatility of a security or portfolio from the expected return ("mean") based on past performance greater the deviation range, the greater the risk

holding period rate of return (HPR)

measures return on an investment calculated over the time period during which the investment is held calculated specifically for the time period that an investor held an investment profit or loss _________________ =HPR investment or cost

beta

measures the volatility of the stock's price in relation or comparison to a benchmark (index or mkt as a whole)

stop order

memo order from customer that becomes mkt order if a trade takes place at or through prices stated in the memo protects a profit or limit losses on an existing position but can't assure specific price of execution buy stop protects a profit on a short stock position sell stop protects a profit on a long stock position

per capita provision in a will

method of distributing property in a will. also known as per head distribution and results in equal shares

exchange traded funds (ETFs)

mirror a specific index or industry sector basket of securities 1. shares trade like common stock 2. can be purchased on margin and sold short 3. no sales load 4. settlement is T+2 5. options are available on most

rudy smith was a wealthy individual and has passed away w/ many assets in his estate. what value would be used to assess property for estate purposes

mkt value on the date of the death of the property

overall return on a diversified portfolio

multiply the percentage of the portfolio comprised by each security or product by the expected return for that security or product, add these figures together, and arrive at the expected overall return to find weighted value for each, multiply the % of the portfolio by the expected return

index funds

mutual funds that have a portfolio that mirrors a broad based index portfolio purpose of fund is to keep pace w/ the chosen index big advantage of fund is low mgmt fees most index funds have equity-based index (stock) benchmarks

efficient trading mkt is one w/

narrow or small bid/ask spreads

earnings per share (EPS)

net earnings _________________________________________ common shares outstanding

long-term capital gains

net long term gain x 0.15 __________________________ = tax liability profits on assets held for 12 months + 1 day high cost basis results in lower capital gain taxed at rate of 15% exp: customer has long-term capital gain on common stock of $3,500. he's in the 28% tax bracket. what's his tax liability? 3,500 x .15 = $525

short-term capital gains

net short term gain x investors tax rate __________________________ = tax liability profits on assets held for 12 months or less gain is taxed at investor's ordinary income tax rate exp: customer has short-term capital gain on common stock of $3,500. He's in the 28% tax bracket. what's the liability? 3,500 x .28 = $980

when must the final prospectus be received by customers purchasing new issues

no later than w/ their purchase confirmation administrator may require that a prospectus be sent before the sale of a security

all of the following statements about mutual fund fees and expenses are TRUE, EXCEPT

no-load funds don't charge any sales loads, fees, or expenses these will often have annual expenses, fees associated w/ purchasing shares, fees associated w/ exchanging shares, and fees associated w/ redeeming shares

modern portfolio theory

optimizes expected returns for a portfolio for a given level of risk and minimizes risk for a given amount of return 1. security valuation 2. asset allocation 3. portfolio optimization 4. performance measurement

limit orders

order to buy/sell a security at a specific price or better

market order

order to buy/sell a security at the best price available mkt orders entered at opening on an exchange always have priority over limit orders

institutional investors

orgs that trade large volumes of securities 1. banks 2. insurance companies 3. employee benefit plans 4. any other persons who are designated as such by rule or order of the administrator

dividends

paid on common and preferred stock, mutual funds, and some other securities "cash" dividends are taxable as ordinary income to the investor in the yr received

marginal tax rate

paid on the last dollar you made in the US, the progressive income tax causes the marginal rate to increase w/ increasing salaries

fiduciaries

person vested w/ legal rights and powers to be exercised for the benefit of another person 1. administrators 2. executors, guardians 3. trustees, custodians 4. FBO- for the benefit of fiduciaries CAN'T grant a trading authorization to a 3rd party bec fiduciary is already 3rd party

investment advisor (IA)

person who for compensation engages in the business of advising others, either directly or though publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities exp: portfolio managers and financial planners

diversification

portfolio manager seeks to minimize the overall risk to the portfolio by spreading investments over various mkts, sectors, and types of investments most effective if the asset classes aren't highly correlated

sector rotation

portfolio managers move from investing in 1 sector of the economy to the other 1. expanding (recovery)- invest in industrials 2. peaking (of the recovery; interest rates increase)- invest in consumer staples 3. contracting (beginning of recession)- invest in utilities 4. trough (bottom of recession)- invest in tech and as recession nears its end, industrials

pre-tax margin

pre-tax profit ____________________ sales

long-term corporate bond trading in the secondary mkt has a nominal yield of 10% and a basis of 7%. the current yield is 9% and the par value is $1,000. the bond is trading at a

premium ytm or basis < coupon rate/nomial yield

NYSE ARCA major mkt index (MMI)

price-weighted average of 20 blue chip industrial stocks

major disadvantage of owning a mutual fund that invents primarily in common stocks is the risk of loss of

principal

client personal financial goals

priority, estimated cost, and target dates 1. long term (10+ yrs)- comfy retirement at certain age and college education for child/grandchild 2. medium term (3-10 yrs)- purchase home, starting a business, and carrying for old parents 3. short term (less than 3 yrs)- buying new car and family vacation

after-tax rates of return

tax liability - gross rate of return _____________________________ = after-tax rate of return

all of the following are considered to be "compensation" to an IA who charges "no fee" to customers EXCEPT

profits on securities recommended to customers that were also purchased for the advisor in their own account IA act '40 profits on securities recommended to customers that were also purchased for the advisor in their own account wouldn't be considered compensation

income tax rate

progressive tax based on amount of money you make in a given yr

after-tax rates of return

tax liability - gross rate of return ______________________________ = after-tax rate of return

purpose of the USA is to

protect investors from fraud

laddering

purchase of fixed income securities w/ different coupon rate and different maturities in an attempt to reduce interest rate risk and re-investment risk

risk free rate of return

rate of return on a 3 month t-bill 3 month t-bill is "risk free" risk premium describes the additional return an investor can expect for taking risk above and beyond risk-free investments

Tax minimization

reducing tax liability might be secondary objective for investors looking for income muni bonds for tax-free income

according to NASAA regulations, which of the following would be required in order to establish a margin account for a client

require the client to sign a margin agreement promptly after the initial transaction in the account

money purchase plan defined contribution pension plan

requires fixed % of compensation to be contributed to each eligible employee, annually by employer only contribution up to 25% of compensation or $61,000 employees retirement benefit is uncertain employer's contribution is a known and fixed amount regardless how well or poorly the company does

qualified plans

retirement plan established and maintained by a private employer that meets the requirements of ERISA advantages: 1. employer gets current tax deductions for their contributions 2. employees don't have to pay current income taxes on contributions by employer 3. in tax-qualified deferred compensation plans income taxes are deferred on contributions until distributions are taken out but contribution amounts are still subject to social security, medicare, state and federal unemployment tax 4. earnings in plan are tax deferred until received by employee or beneficiary 5. taxes are paid only when funds are distributed (retirement when the taxpayer is in a lower tax bracket)

competitive risk

risk that a company will fail to keep up w/ competing firms and new developments in the industry or sector

regulatory risk

risk that changes in gov activity (laws, rules, regulations, and tax rates in US) will have adverse effect on investments

short selling

sale of stock by customer who borrowed the stock from BD seller expects mkt price of stock to decline can only be in a margin acct

scaling in

securities are purchased in increments to achieve any overall total goal to attain an average purchase price as the value of the security is declining

Exempt securities under USA

securities issued by well-known, very credit worthy issuers such as governments, financial institutions, and some blue chip companies 1. us gov securities - including T bonds, T notes, and T bills, as well as US gov agency issues 2. municipal securities - securities sold by a state or local gov, transit authority etc - both general obligation and revenue bonds would be included in this exemption 3. securities issued or guaranteed by the country of Canada or its provinces - exemption wouldn't include securities listed on a Canadian Exchange or issued by Canadian companies inlcuding Canadian insurance companies 4. securities issued by US banks, savings institutions, or trust companies organized under state laws -securities issued by banks are exempt but securities issued by holding companies which may own banks wouldn't be exempt 5. securities issued by a federal savings and loan association or building and loan or similar associations 6. credit unions (federal or state chartered) 7. securities issued by US insurance companies 8. any security listed on a registered stock exchange - secured bonds (convertible and non-convertible) exp mortgage and equipment-related debt - unsecured bonds (convertible and non-convertible) exp debentures - preferred stock (convertible and non-convertible) 9. non-profit issues such as charitable or educational orgs, chamber of commerce, or trade association 10. promissory notes, commercial paper, or bits of exchange issued in denominations of $50,000+ (are an obligation to pay cash w/in 9 mo) 11. public utility and common carrier securities - exp railroad companies 12. investment contracts in connection w/ employee stock purchase, savings, pension, and profit-sharing plans

rudy smith owns 100 shares of ABC stock which he bought for $50. ABC stock has been appreciating in the mkt, and has increased to $90 per share. however, today the mkt took a turn, and the stock is only worth $80 per share. Rudy wants to protect his profit, what order would he place

sell stop loss used to protect an investor w/ a long stock position, when the mkt is going down

Steve owns subchapter s-corp and is 1 of the major shareholders in the corp. the company has had a good yr and has realized capital gains which will be distributed to all shareholders. how will these distributions be reported by the shareholders when they file their tax returns

shareholder capital gains s-corp taxes and gains are "passed through" to shareholders

bottom-up investing

starts w/ a company-by-company analysis of individual firms

top-down investing

starts w/ global outlook and then moves down

dispersion

statistical range of potential returns for an investment or a portfolio's returns helps measure the risk of an investment types of dispersion: 1. range 2. variance 3. standard deviation 4. mean

Keogh plan/HR-10 plan qualified plan

tax-deferred plan for self-employed ppl that can be set up as a defined contribution or benefit plan allows higher contribution limits than SEPs invest in stocks, bonds (including T-bonds), mutual funds, UITs, and variable annuities distributions can start at 591/2 but early w/drawals are taxed at 10%, are mandatory by 72, RMDs must start by April 1st following the calendar yr of turning 72 and late w/drawals are taxed at 50% distributions are taxed as ordinary income

qualified dividends

taxed as ordinary income but qualify for a reduced tax rate, generally 15% represent most regular quarterly dividends received by investors invested in corporation's common and/or preferred stock

agent- issuer exclusions

term agent doesn't include an individual who represents an issuer in effecting: 1. transactions in some exempt securities a. US gov securities b. muni securities c. Canadian gov securities (issued by any province of Canada) d. banks e. promissory notes and investment contracts 2. exempt transactions a. isolated non-issuer transactions (secondary transactions by investors) b. transaction in certain covered securities (securities sold to qualified purchasers or sold in private placement) c. transactions w/ investing employees, partners, or directors of the issuer if no commission or other remuneration is paid

after registration for a security becomes effective, the registration statement can only be amended to change

the amount of securities to be offered or sold

agents shall not effect transactions (including private securities transactions) not recorded on the regular books or records of the BD which the agent represents ("selling away"), unless

the transactions are authorized in writing by the BD before execution

which of the following are features of a call or put option which has a "Eurpoean-style" exercise

this type of option can only be exercised at expiration this type of option is most commonly used for hedging purposes

BOTH the agent and BD must be registered in the state

to solicit or transact business in a state

real returns

total returns (income and realized capital gains) adjusted for inflation exp: investment has total returns of 12% and the inflation rate during that time was 3% 12 - 3 = 9% real rate of return

currency transaction report (CTR)

transactions involving currency (cash) over $10,000 for 1 person in a single business day if a person has a financial account in a foreign country, that person must report the relationship if the aggregate value exceeds $10,000 firms who transfer funds, including wire fund transfers of $3,000+ must collect, retain, and record: 1. name and addy of transmitter and recipient 2. recipient's financial institution, account #, and amount firms must verify the identity of any transmitter or recipient who isn't an established customer

over the counter mkt (OTC)

unlisted mkt trades off the floor of an organized exchange traded by MM who trades from own inventory a. MM are BDs who maintain firm bid and ask price stock exchanges have auction mkts and OTC NASDAQ mkt is a negotiated mkt

529 plan

used to pay beneficiary's qualified education expenses value is based on performance of investments chosen earnings accumulate tax free potential for higher returns than pre-paid tuition plans qualified w/drawals for qualified education expenses are tax free AREN'T mutual funds but offer mutual funds as an investment option they're mini securities and are exempt from SEC regulation offering circular is delivered as a disclosure document to potential investors charge enrollment fees, annual maintenance fees, and asset mgmt fees in addition to "loads" for plans sold by brokers contributions aren't deductible on federal tax return, grow tax free distributions for non-qualified reasons are taxed as ordinary income + 10% penalty can only be 1 student per account

time value of money

value of a dollar today will be higher than the value of that same dollar in the future 2 reasons: 1. inflation 2. potential appreciation or income received from investing that dollar

final prospectus must be received by customers purchasing new issues no later than

w/ their purchase confirmation administrator may require the prospectus be sent before the sale of a security

an IA charges a fee for an overall financial plan for a client. which of the following facts must be disclosed to the client? the fact that the IA

will receive compensation related to the transactions in equity and deb securities recommended in the financial plan makes a market in the bonds recommended in the financial plan

what're IA fees based on

% (averaged) total value of the fund over a period of time

customer confirmations must be sent at or before completion of a transaction and must include

- date and time of transaction - identity of the security - price of the security - # of shares - principal amount if its a bond/debt security - whether the BD acted as an agent or principal - yield to maturity calculated from the dollar price - field at which the trade was effected don't have to disclose a bond's rating

Exclusions of IA under IA Act '40

-any US bank or bank holding company -any lawyer, accountant., teacher, engineer (LATE) whose performance of such advisory services is incidental to the practice of their profession -any BD or RR whose advisory services are incidental to the conduct of business of the BD and who receives no special compensation for services -any publisher of any bona fide newspaper, magazine, business, or financial publication of general or regular circulation -any person whose advice or services is related only to US gov securities

it's unlawful for an IA to enter into, extend, or renew any investment advisory contract unless it states in writing

1. ("performance" fees) the advisor won't be compensate on the basis of a share of capital gains or appreciation of funds but can be compensated on the total value of a fund averaged over a defined period 2. no assignment of contract can be made by the advisor w/out consent of the client assignment- transfer of rights and duties of contract to another party 3. if terms of advisory contract changes, IA must have client sign a revised contract 4. if advisory company is a partnership, it shall notify the client of any change in membership of partnership

are federal covered securities bec exemption exists from registration at federal level under '33 act

1. US gov securities 2. muni bonds, but only if offered outside the state of issue (interstate) 3. securities that're unregistered and issued as private placements under SEC rules (reg d offerings)

"offer to sell" and "offer for sale" in '33 act

1. a RR who solicits sales of securities or mutual funds from his customers, and 2. broker who attempts to sell part of a new issue to a customer an issuer negotiating w/ an underwriter wouldn't constitute an offer to sell under the act

If an IA has custody or possession of securities or funds of a customer, the following additional records must be maintained

1. a journal and separate ledger showing all purchases, sales, receipts, and deliveries of securities 2. copies of all confirmations 3. record showing the name of the customer, the amount of interest, and the location of the security

what must be on an order ticket for a sales transaction

1. act # 2. time the order was received 3. agent on the acct 4. terms and conditions of the order

SEC release IA-1092 requires all IAs to disclose

1. any potential conflicts of interest 2. that they must act in a fiduciary capacity for the benefit of the client 3. acting as an IA is a separate and diff service than acting as a RR 4. any personal interest the advisor has w/ regard to recommendations made to clients 5. IA services are independent from BD activities and the client must relieve disclosure stating that recommended transaction need not be effected through the IA's BD or an affiliated BD 6. products offered are the firm's own products, if such is the case 7. the adviser will take on the same positions as those recommended to clients 8. adviser takes positions inconsistent to those recommended to clients 9. access persons include any supervised persons who have access to non-public info regarding client transactions or holdings or who make recommendations to clients or have access to such recommendations to clients including most advisers and all officers, directors, and partners of the IA. access persons must report their personal securities transactions to the CCO or another designated person quarterly

calculating total return on a mutual fund that provides for reinvestment of dividends and capital gains distributions considers

1. beginning price 2. beginning # of shares 3. ending price 4. ending # of shares

important factors to consider when determining client's portfolio

1. current strategies 2. investment objectives 3. current holdings or investments

endorsement and testimonials: disclosure, oversight, and disqualification provisions

1. disclosure- advertisements that include testimonials or endorsements (whether in writing or orally) must clearly and prominently disclose: a. whether the person giving the testimonial or endorsement is a client b. whether the promoter is compensated c. a brief statement of any material conflicts of interest on the part of the person giving the testimonial or endorsement d. material terms of any compensation arrangement including a description of the compensation provided or to be provided, directly or indirectly, to the person for the testimonial or endorsement e. SEC DOESN'T require the following to be disclosed: - name of the BD that'll execute trades - business background of the promoter 2. oversight and written agreement- adviser that uses testimonials or endorsements in an advertisement must oversee compliance w/ the mkting rule. advisor must also enter into a written agreement w/ promoters, expect where the promoter is an affiliate of the adviser or the promoter receives de minimis compensation 3. disqualification- prohibits certain "bad actors" from acting as promoters, subject to exceptions where other disqualification provisions apply. "bad actor" is an SEC term that refers to individuals who're subject to an SEC action such as an order barring, suspending, or prohibiting these individuals from the securities industry 4. timing of disclosures- the required disclosures must be provided at the time the testimonial or endorsement is disseminated: a. either the adviser or solicitor make the required disclosures b. if adviser doesn't make the disclosures, it must have a reasonable belief that the solicitor is doing so whether SEC or federally registered, IARs must register at state level

'34 act requires

1. exchanges, listed securities, and BDs register w/ the SEC 2. publicly held companies and BDs file periodic reports (10-k, 10-q etc) 3. persons who become the owner of more than 5% of the outstanding stock of a stock listed on a national securities exchange must file a report w/ SEC w/in 10 days 4. rules for the extension of credit of securities transactions be set by the federal reserve bank

"securities" doesn't include under the '33 act

1. future contracts 2. real estate or an option to buy or sell real estate 3. precious metals 4. collectibles

Following persons would be deemed an IA and would be required to register if they

1. give advice w/ regard to securities and/or 2. hold themselves out as offering such services: a. financial planners b. pension consultants c. adviser to athletes and/or entertainers d. advisers to employee benefit plans e. advisors to clients regarding the selection or retention of an investment manager

performance advertising in IA marketing

1. if gross performance is presented, the advertisement must also present net performance. net performance includes the effect of fees and expenses on the investment return 2. performance results must include specific time periods in which the results were realized 3. any statement that the commission has approved or reviewed any calculation or presentation of performance results is prohibited 4. IA is prohibited from "cherry picking" results. if performance of 1 portfolio is presented, the IA must present the results from all related portfolios w/ substantially similar investment policies and/or objectives 5. IA is prohibited from "cherry picking" results from a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio 6. hypothetical performance is allowed if the advisor adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the advisor provides the criteria and assumptions the adviser used that underly the hypothetical performance a. the SEC defines hypothetical performance as results that weren't actually achieved by any portfolio of the IA b. hypothetical performance info is provide din response to an unsolicited investor request or to a private fund investor in a 1-on-1 communication is excluded from the definition of advertisement c. SEC doesn't consider performance results generated by an investment analysis tool as hypothetical analysis provided the current or prospective investor used the tool 7. predecessor performance- (investment results attained at a previous IA) can be advertised if there's appropriate similarity regarding the personnel and accounts at the predecessor advisor and the personnel and accounts at the advertising (current) adviser. advertising adviser must include all relevant disclosures clearly and prominently in the advertisement

discounts for open-end fund sales charges (breakpoints) may be given to

1. individuals who qualify for quantity discounts 2. employee benefit plans 3. directors, officers, partners, employee, or sales reps of the fund, it's IAs, and the principal underwriter, and 4. fund contractual plans or plan companies

investment company

1. issues its own shares to the public and 2. manages a portfolio of other securities for the benefit of its clients includes the separate accounts of insurance companies, but not REITS, BDs, fixed insurance companies, or pooled investments in precious metals

IA record keeping rules

1. journals of cash receipts and disbursements and other records of original entry 2. ledgers showing assets, liabilities, reserves, capital, income, and expenses 3. memorandum of each order (buy or sell) including: a. terms and conditions of the order b. name of the person who recommended the transaction c. acct # d. date e. name of BD or bank which executed the order 4. checkbooks, bank records, and bills relating to the business (but not a log of tele calls) 5. originals of all communications received and copies of all communications sent to the public or clients relating to any investments or recommendations 6. all discretionary authorizations and powers of attorney 7. all written agreements between the IA and customers 8. copy of each notice, circular, newspaper article, investment letters, bulletin, or other communication circulated, directly or indirectly to 10 or more persons 9. record of every transaction in which the IA requires beneficial ownership of a security 10. copy of all written disclosure statements, including dates sent to customers and signed written receipts received from customers 11. all records pertaining to the calculation of performance or rate of return where recommendations are distributed 12. current and historical copies of form ADV-part 3 and records of the dates the form has been filed w/ SEC and delivered to customers 13. all advertisements that the IA disseminates, directly or indirectly except: a. oral advertisements, the adviser may instead retain a copy of any written or recorded materials used by the adviser in connection w/ the oral advertisement b. for compensated oral testimonials and endorsements, adviser may instead make and keep a record of the disclosures provided to clients or investors c. regarding advertisements and the use of 3rd party ratings, IA must retain a copy of any questionnaire or survey used in the preparation of a 3rd party rating included or appearing in any advertisement in the event the adviser obtains a copy of the questionnaire or survey

general prohibitions in IA marketing

1. making an untrue statement of material fact or omitting a material fact to make the statements not misleading 2. making a material statement of fact that the advisor doesn't reasonably believe it can substantiate upon demand by the commission 3. discussing any potential benefits w/out providing fair and balanced treatment of any associated material risks or limitations 4. referencing specific investment advice provided by the advisor that isn't presented in a fair and balanced manner 5. including or excluding performance results, or presenting performance time periods, in a manner that's not fair and balanced 6. including info that's otherwise materially misleading

info on new account report forms

1. name 2. contact info (addy and tele #) 3. occupation, employer, business addy 4. citizenship 5. birthday 6. SSN or tax ID # 7. Gov ID

what does the securities exchange act '34 regulate

1. national securities exchanges 2. OTC market 3. registered self regulatory organizations (SROs) such as FINRA and MSRB to maintain a fair and orderly mkt for investors 4. transfer agents- cancel old certificates and issue new ones. don't include clearing agencies- handle the processing of settlements of securities trades 5. BDs and their associated persons SEC doesn't have jurisdiction over national banks

'40 act requires an investment company

1. obtain majority shareholder approval for: a. any deviation from the fund's investment objective/policy b. using fund assets to pay for the cost of distributing fund shares c. compensation agreements between the fund and the IA. the agreement must be in writing and can't continue for more than 2 yrs w/out shareholder approval. the agreement creates a fiduciary duty between the fund and the IA d. the renewal of the IA's contract (also requires the approval of the BOD of the fund) approval of a contract w/ an investment advisor of or principal underwriter of a registered investment company requires approval of a majority of non-interested directors (directors who aren't parties to such contract or agreement) 2. to get an exemption from the SEC a. for a merger between 2 investment companies b. for a purchase of assets from the fund's IA c. to own more than 3% of the shares of another fund

exempt transactions in '33 act

1. privately held corporation issuing stock to a new stockholder 2. investment manager for an insurance company negotiating w/ a financial executive of a publicly held corporation to buy a note that matures exp: 4 yrs 3. broker transactions that're unsolicited 4. intrastate offerings underwriter selling shares of a new issue isn't an exempt transaction

the SEC regulates

1. registration of investment companies 2. disclosure documents such as prospectuses 3. proxies, and 4. annual reports

mutual funds are subject to regulations of

1. securities act of '33 2. securities exchange act of '34 3. investment company act of '40

"Security" under '33 Act

1. stocks 2. bonds 3. investment contracts 4. rights 5. warrants 6. fractional interest in oil, gas, and other mineral rights 7. puts and calls on securities, as well as 8. puts and calls on foreign currencies

'40 act regulates

1. the capital structure of investment companies 2. custody of money and securities of a fund 3. fund trades w/ affiliated companies 4. fund investments in other funds '40 act doesn't regulate the level of returns to clients

who can be sued for filing false registration statement

1. the directors, partners, and officers of the issuer 2. accountants preparing or certifying any statements related to the registration 3. every person who signs the registrant statement 4. lawyer for the issuer shareholders can't be sued

to register a security listed on an exchange, info must be filed regarding

1. the issuer 2. any person who directly or indirectly controls or is controlled by the issuer 3. the issuer's balance sheet for the last 3 yrs 4. names of officers, directors, and underwriters 5. organization, financial structure, and the nature of the business

partnership

2+ ppl agree to invest in business ends when certain events occur share in profits and losses advantage: income is taxed once ("flow through," "pass through," or "conduit" taxation)

Securities act '33 min cooling off period

20 days then the registration becomes effective and the security can be sold

all books and records of and IA must be maintained in a readily accessible location for

5 yrs from the end of the fiscal yr in which the entry was made records may be subject to SEC examination at any time 3yrs after termination of the enterprise of the IA

wrap fee

Form of compensation where a client no longer pays fees for specific services, such as commissions on trades, or fees for specific financial advice. Instead, the client typically pays a set percentage of assets under management for agreed-upon services clients must receive a written statement containing schedule H of form ADV when a wrap fee is charged. this statement includes info on the IA fees, and IA interest in client transactions, and the IA's balance sheet

SEC best interest (BI) customer relationship summary (form CRS for BDs and for ADV part 3 for IAs)

SEC requires registered IAs and BDs to provide retail investors w/ form ADV-Part 3 or CRS these forms provide simple, easy-to-understand info about the nature of the customer's relationship w/ their financial professional: - firm's services - fees and costs - conflicts of interest - disciplinary history of its financial professionals - link to the SEC's investor education website, investor.gov Delivery of ADV-part 3 must be to new and existing retail customers. for new customers, it must be delivered at or before the IA enters into an investment advisory contract - if any info becomes inaccurate, IA must file an amended form w/ SEC w/in 30 days and existing customers must be notified w/in 90 days Regulation BI defines a retail customer as natural person, or legal representative of such person who: 1. receive a recommendation for any securities transaction or investment strategy, and 2. uses the recommendation primarily for personal, family, or household purposes

inflation risk/purchasing power risk

The risk that the return from an investment won't cover the loss in purchasing power caused by inflation tangible assets such as gold coins etc.. are sometimes included in a portfolio bec these types of assets typically perform well in terms of inflation

Wrap Fee Program

an advisory program under which a specified fee or fees not based directly upon transactions in a client's account is charged for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and the execution of client transactions

Agent

an individual who represents a BD or an issuer in effecting or attempting to effect purchases or sales securities. Refers to employees of a brokerage firm or a company issuing securities who execute transactions in the purchase or sale of securities to the investing public individual that represents and issuer in the sale of an interest in a LP is an agent and must be registered as such Agent doesn't include an individual who represents an issuer in effecting: 1. transactions of these exempt securities a. US gov securities b. muni securities c. Canadian gov securities; including securities issued by any providence of Canada d. banks e. promissory notes and investment contracts 2. exempt transactions a. isolated non-issuer transactions (secondary mkt transactions by investors) b. transactions in certain covered securities, securities sold to qualified purchasers, or sold in a private placement c. transactions w/ investing employee, partners, or directors of the issuer if no commission or other remuneration is paid Agent doesn't include these BD exceptions: 1. an individual who represents a BD in 1 state and is servicing an existing client who's temporarily in another state (vacation or business trip) 2. partner, officer, or director of a BD or issuer; they would only be considered an agent if they were to personally effect transactions

advertisement

any direct or indirect communication an IA makes that: a. offers the IA's investment advisory services regarding securities to prospective clients or private fund investors b. offers new investment advisory services regarding securities to current clients or private fund investors indirect communications are those initiated by an IA and disseminated through 3rd parties such as consultants, other IAs, and promoters exclusions: 1. most 1-on-1 communications w/ existing customers are not included in the def of advertisement if they don't pertain to offering new advisory services 2. extemporaneous, live, and oral communications regardless of whether they are broadcast and or take place in 1-on-1 context are excluded from the def testimonials and endorsements- solicitation activities for which an advisor provides cash and non-cash compensation directly or indirectly regardless of whether the communication is made orally or in wiring to 1+ persons a. testimonials- any statement by a current client or private fund investor about the client's or private fund investor's experience w/ the IA or its supervised persons b. endorsement- any statement by a person other than a current client or private fund investor that indicates approval, support, or recommendation of the IA or its supervised persons or describes that person's experience w/ the IA or its supervised persons

Federal Covered Adviser under the IA Act '40

any investment advisor who must register w/ the SEC and includes: 1. an advisor to a registered investment company; or 2. an advisor managing an investment portfolio of: a. $100 mill+ may register w/ SEC b. $110 mill+ must register w/ SEC accomplished by filing form ADV w/ SEC a. registration is denied to anyone who has spent 1 yr or more in prison if AUM falls bellow $90 mill then the advisor must w/drawal its federal registration unless an exception exists

associated person of a BD

any partner, officer, director, or branch manager of a BD, any person directly or indirectly controlled by or under common control of a BD and any employee of the BD except any person whose functions are solely clerical

Form ADV

application form for the registration of IAs that's filed w/ SEC Part 1- provides detailed info about the IA for the SEC (direct owners and executive officers of IA) but doesn't require a list of the IA's clients Part 2 (brochure rule)- provides the required disclosures about the IA for prospective and existing clients

Strategic Asset Allocation

assets in a portfolio over the long term are balanced and generally kept at an assigned balance these allocations are maintained in order to achieve the highest anticipated return vs the risk strategic asset allocation is a form of passive asset allocation

global fund includes

both foreign and domestic issues

Any changes in fees requires

client to sign a revised contract showing the change in fees

Limited Liability Company (LLC)

combines limited liability w/ pass-through taxation owners are called members limited existence advantages: 1. limited liability 2. pass-through tax 3. no requirements on # of owners 4. use of marketability and/or minority discount disadvantages: 1. limited life 2. must have consent of members to sell interest

mkt risk or systemic risk

common to all securities of the same general asset class (stocks, bonds) can't be minimized or eliminated w/ diversification w/ the same asset class

mkt manipulation

creating false or misleading appearance of active trading in the security or a false misleading appearance w/ respect to the mkt for the security unless such an order is a bona fide (in good faith) agency cross by the BD for its customers

Sharpe Ratio

distinguishes how well the return of an asset compensates the investor for the amount of risk taken it's a measure of the risk-adjusted return relative to a portfolio's volatility higher the ratio the better performance of the manager/manager's strategy (return of portfolio - risk free return) ______________________________________________________ standard deviation

IAs must disclose in writing when they act as a BD in any capacity before completion of the transaction and must obtain written consent of the client for the transaction

exception: an IA registered as a BD is exempt from the disclosure/consent required if the BD is acting as an advisor by means of: 1. public distribution of written or oral statements (35+ ppl who pay for the materials) 2. written or oral statements which don't meet investment objectives of individuals or accounts 3. issuance of statistical info which doesn't contain expressions of opinion regarding advisability of investing in a particular security

interest rate risk

fixed income investment's value will change due to a change in interest rates risk applies to bond in that the price of a bond will move in the opposite direction of interest rates (inverse reaction) bonds w/ longest maturities and lowest coupons have the greatest interest rate risk

growth investors

focus on companies w/ above average earnings and prospective earnings has higher than average future earnings potential and trade w/ higher P/E ratio investor/portfolio manager is concerned w/ earnings and the momentum of earnings

value investor

focus on value stocks which are undervalued companies w/ low P/E ratios companies pay regular dividends, low price/book ratios, and have little or no debt investors will look at book value, overall yield, dividend yield, P/E ratio, price/sales, and the capitalization of the company

Fundamental Analysis

focuses on fundaments of a company such as the company's financial statements, mgmt, and products to evaluate whether the stock of the company is properly valued earnings momentum looks at how earnings have been moving over a specified time period (accelerating, decelerating)

technical analysis

focuses on mkt trends, charts, and mkt patterns in an attempt to predict the direction of a company's stock price 1. point and figure - form of charting where specific entry and exit points are established 2. moving averages - average price of a security over a specific amount of time. by averaging price moves, the price move is smoothed out and helps an analyst identify trends 3. advances and declines - ratio of advancing stock prices to declining stock prices 4. odd lot purchases and sales - for stock, trades of less than 100 shares 5. changes in the P/E ratio of Dow Jones Industrial Average during the past yr

quantitative analysis

focuses on quantitative (#) or hard data only such as revenues, margins, profits, and assets in order to determine the value of a stock all subjective data is excluded from quantitative analysis

Traditional IRA

for employed ppl and their spouse contributions can be in: 1. stocks, bonds, mutual funds, and other securities 2. certain US gov or state issued gold, silver, platinum, and palladium coins and bullion 3. real estate advantages: contributions are tax deductible and taxes on contributions and earnings are deferred contributions can be made up to $6,000 and + $1,000 for catchup if 50+ AGI: single- $78,000+, no deduction married filing jointly- $129,000+, no deduction excess contributions are subject to 6% excise tax contributions must be made in cash and made up to April 15th of the yr following the yr that deduction is claimed ppl who aren't active in a work retirement plan can deduct all of their contributions up to $6,000 ppl who are active in a work retirement plan can deduct a contribution distributions may begin at 591/2, early w/drawals are subject to 10% tax, are mandatory by 72 and no later than April 1st following the calendar yr turning 72

Savings Incentive Match Plan for Employees (SIMPLE)

for retirement for small business owners (less than 100 ppl) and their employees allows employers tax deduction for contributions and allows eligible employees to make elective salary deferrals of their pre-tax compensation to the plan employer can't concurrently have another retirement plan contribution from employers: 1. up to $14,000 of salary reductions and $3,000 catch-up for 50+ 2. 3% of compensation for matching, OR 3. 2% of compensation for non-election contributions must be done for all eligible employees ($5,000+ earned for past 2 yrs) same rules as traditional IRA, but has 25% early w/drawal tax

penalty for trading on material non-public info is 3x the profit gained or loss avoided

if an IAR trades on material non-public info, both the IAR and the advisory firm employer may be liable to pay civil penalties

registration for BDs is accomplished by filing form BD

if the BD changes its name or location it must promptly file an amended form BD showing the changes

Chinese wall (info barriers)

imaginary barrier between the investment banking department, research department, and trading/mkt making departments main purpose is to prevent material, non-public info from being shared between departments w/in a BD thereby promoting confidentiality and trust w/ the investing public

s-corp

income "flows through" to the shareholders and is taxed once (like partnerships) 1. no double taxation 2. limited liability and pass-through tax 3. can only have 100 or less shareholders (or 75 or less) 4. UNLIMITED LIFE

accredited investor

institutional investors and certain wealthy investors who're eligible to participate in private placements 1. banks 2. insurance companies 3. registered investment companies 4. any trust w/ total assets of $5 mill 5. individuals or individuals and their spouses a. $1 mill of net worth or $1 mill of net worth for the investor and the investor's spouse (excluding value of home) b. income in excess of $200,000 in each of the last 2 yrs and who reasonably expect the income excess of $200,000 in the current yr

Style Drift

investment manager strays or departs from their normal investment philosophy or style "drift" is negative and isn't proven to be successful of the manager

capital appreciation strategy

max capital appreciation, or the increase in value of a portfolio or asset over the long term investing for capital appreciation brings on more risk, but the potential for returns can be much greater

Qualified client

natural person or company that enters into a contract for at least $1.1 mill under management or has a net worth of $2.2 mill+ (excluding the person's primary residence) at time the contract is entered into

offering price

net asset value + sales charge _____________________ = offering price

indexing

no need for portfolio manager; lowers cost of mgmt passively-managed portfolio weighting a portfolio to mirror a broad based index or buying shares in an index fund this strategy doesn't attempt to identify under or overvalued securities if there's a deviation, it would be referred to as a tracking error

Form ADV-W

notice of w/drawal from registration as an IA IAs can accomplish a full or partial w/drawal from registration

c-corp

owned by shareholders that have the right to vote for directors and other matters advantages: 1. limited personal liability 2. unlimited life 3. net capital losses can be carried forward to offset capital gains for up to 5 yrs disadvantage: double taxation

IA under the IA Act '40

person who receives compensation for advising others about securities or about the advisability of investing in securities, including: 1. providing written or oral advice or issuing reports or analyses w/ regard to securities 2. engaging in the business of providing such services. "primarily engaged in the business" means the the advisory services represent more than 50% of the IA's total sales and revenues before tax for the most recent 3 fiscal yrs, not including investment company clients

business continuity and succession planning

plan should be based on: 1. facts and circumstances of IA's business model including size of the firm 2. type(s) of services provided 3. # of locations of the IA protection, backup, and recovery of books and records 1. alternate means of communications w/ customers, key personnel, employees, service providers, and regulators 2. office relocation in event of temporary or permanent loss of principal place of business 3. assignment of duties to qualified responsible persons in event of death or unavailability of key personnel

Passive Asset Allocation

portfolio is set and is re-balanced at pre-determined intervals (semi-annually, annually, etc) rebalancing ensures portfolio is brought back to pre-determined target %

Contingent Immunization Strategy

portfolio manager has the opportunity to actively manage a portfolio, but if the returns fall below a specified level, active mgmt ceases and immunization of the portfolio occurs immunization of a portfolio takes place when the duration of a portfolio's assets = the duration of the portfolio's liabilities

Barbell Portfolio

portfolio of bonds w/ concentrations of short and long term maturities but very few mid range maturities portfolio is adjusted to maintain the long and short distributions

Roth IRA

ppl and their spouses receive compensation contributions aren't tax deductible and can be w/drawn at any time w/out penalties upon retirement, qualified w/drawals of both contributions and earnings are tax free contribution limits can be made up to $6,000 and $1,000 catch-up if 50+ AGI: single = $144,000+, no contribution allowed married filing jointly = $214,000+, no contribution allowed qualified distributions- 5 yr holding period AND 1 of the following: 1. made after age 591/2 2. made as a result of death or disability 3. used for "qualified 1st time home buyer expenses"

high frequency trading (HFT)

proprietary trading firms. that use high speed systems to monitor mkt data and submit large # of orders to the mkts orders are entered for stocks, futures, options, bonds, and foreign currencies in mili seconds most orders are short-term trades some HFTs are hybrids, acting as MM and proprietary trading firms

Employee Retirement Income Security Act (ERISA)

protects the retirement assets of participants in private sector employee benefit plans 1. disclosure- plans must regularly provide participants w/ important info about plan features and funding 2. standards- min standards are required for participation, vesting, and providing promised benefits 3. accountability- fiduciaries are required to be accountable 4. remedies- participants may pursue legal action for fiduciary breaches 5. guarantees- payment of certain defined benefits is guaranteed through the Pension Benefit Guaranty Corporation fiduciary has the power to exercise discretionary authority or control over a plan's mgmt or assets or who's paid a fee or any form of compensation for investment advisory services fiduciaries must act solely in the interest of the plan participants and beneficiaries using care, skill, prudence, and diligence fiduciaries could transfer responsibility for any losses resulting from participants decisions by designating the plan as a self-directed plan

third party rating in IA marketing

rating or ranking of an IA provided by a person who isn't a related person, and such person provides such ratings or rankings in the ordinary course of its business inclusion of 3rd party rating is prohibited unless the advisor provides disclosures in the advertisement regarding the 3rd party rating as such: a. the date on which the rating was given and the period of time upon which the rating was based b. identity of 3rd party that created the rating c. if compensation has been provided directly or indirectly by the adviser

Brochure Rule (Part 2 of form ADV)

requires the IA must make certain disclosures to prospective and existing clients Part 2A- the brochure Part 2B- the brochure supplement 1. Part 2A includes a description of the IA's business practices and conflicting interests in client transactions and personal trading a. must be written in plain English 2. Part 2B consists of disclosures about the individuals who provide the investment management: a. education and experience over the last 5yrs b. disciplinary actions over the last 10 yrs and c. additional compensations from other sources for investment services rendered IA must amend part 2 info each yr w/in 90 days of fiscal yr end to provide a current brochure. Summary of material changes must be prepared by IAs amending their brochures and included in the brochure or be a stand-alone doc (stand-alone doc must be filed w/ SEC) SEC delivery requirements of a current or supplement brochure: 1. IA must deliver to a client or prospective client the IA's current brochure at or before the time the IA enters into an investment advisory contract w/ a client, and 2. deliver to each client annually w/in 120 days after the end of the IA's fiscal yr w/out charge if there are material changes in the brochure since the last annual updating amendment: a. a current brochure, or b. the summary of martial changes (supplement) required by form ADV 3. deliver to each client or prospective client a current brochure supplement for a supervised person at or before the time that supervised person begins to provide advisory services to the client NASAA brochure rule requirements for IAs: 1. initial delivery- IA shall deliver part 2A and any supplements required to a prospective advisory client: a. not less than 48 hrs prior to entering into any advisory contract w/ such client or prospective client b. at the time of entering into any such contract, if the advisory client has a right to terminate the contract w/out penalty w/in 5 business days after entering into the contract 2. annual delivery a. w/in 120 days of the end of its fiscal yr, a free updated brochure and related supplements which include or are accompanied by a summary of material changes b. summary of material changes that includes an offer to prove a copy of the updated brochure and supplements and info on ho the client may obtain a copy 3. delivery of the brochure and related brochure supplements need not be made to: a. clients who relieve only impersonal advice and who pay less than $500 in fees per yr b. investment company registered under the Investment Company Act '40, or c. business development company as defined in the Investment Company Act '40 4. delivery of brochure and supplements may be made electronically IAs don't have to deliver brochures to clients who: 1. receive only impersonal (general) investment advice 2. are registered investment companies 3. are business development companies

business risk, credit risk, or financial risk

risk associated w/ unique situation of an individual company risk a company will fail (bankruptcy) to minimize risks in a common stock portfolio, invest the largest % of the portfolio in securities that're affected differently by economic conditions and in leading companies in various industries

Liquidity Risk

risk that an investment won't be able to be sold quickly enough to prevent a loss high liquidity risk: thinly-traded stocks, LPs, real estate or land purchases low liquidity: NYSE-listed common stock

401K Plan Cash or deferred Arrangements (CODA) defined contribution plan

saving for retirement by having a portion of salary deferred into a 401K account this plan is voluntary by employers pre-tax contributions up to $20,500 and $6,500 catch-up if 50+ contributions and earnings grow tax deferred distributions can begin at 591/2 but early w/drawals are subject to 10% tax. mandatory by 72. RMDs must start no later than April 1st following the calendar yr of turning 72 and late distributions are subject to 50% tax distributions are taxable as ordinary income DOL requires plan admin to furnish investment-related info for each option offered under a plan to a participant prior to or on the date the participant directs their investment and at least ANNUALLY (firms not required to file info-chart w/ FINRA) part-time employees 21+ who work 500+ hrs per yr for 3 consecutive yrs qualify for company's 401K plan

income investing

simple and straight forward investment strategy which involves accumulating assets such as stocks, bonds, mutual funds, and real estate that generate the highest possible annual income at the lowest possible risk

Buy and Hold Strategy

simplest form of portfolio mgmt strategy which investment manager or investor designs a portfolio and purchases appropriate investments to fit that portfolio, then holds investments w/ the anticipation of appreciation and income no rebalancing; reduces transaction-related costs lower tax rates and fewer overall expenses buy high quality securities to finance long term goal/need

Sole Proprietorship

simplest way of doing business advantages: 1. no or low startup and maintenance costs 2. losses may be used to offset income for tax purposes disadvantages: 1. unlimited personal liability 2. must pay self-employment tax 3. responsible for running business

when securities are acquired as a gift

sold as a profit, cost basis of donor is used sold as loss, cost basis of securities at the time of the gift is used

simplified employee pension (SEP/SEPIRA)

subject to same rules as traditional IRAs retirement plan used by small business owners to provide retirement benefits to themselves and their employees advantages: low cost of administration and tax-deductible nature of contributions employers make contributions to personal IRAs of employees contributions are tax deductible for employer and can vary from yr to yr and employees can make own contributions also up to 25% of employee's compensation of $61,000 eligibility: 1. 21+ 2. have worked there at least 3 of 5 yrs, and 3. $600 in wages for the current tax yr

disinterested and impartial advice as a fiduciary is required

the IA is giving advice for the benefit of the client and not for the beneficial interest of the IA

Arbitrage

trading strategy where arbitrageur attempts to lock in a profit from a momentary difference in the price of a security b/w 2 or more financial mkts make trading more efficient bec once price differences are discovered they're quickly fixed can be applied to any security or commodity