Series 66
Hedge Clause
"I may be ripping you off, but you can't sue me" - Prohibited in IA contract
IRA/Roth Contribution Limits
$6,500 or 100% of earned income, whichever is less - Contributions in excess are subject to a 6% tax penalty - Catch up provision allows an individual 50 or older to contribute an additional $1,000 per year
Total Return
(Ending value - beginning value + investment income) / beginning value
Recordkeeping
- 3 years: advertising, order tickets, confirmations - 5 years: all books and records must be maintained in an easily accessible location for 5 years and in the appropriate office of the IA for the first 2 years - 6 years: blotters, general ledgers, customer statements - Lifetime: AI, partnership agreements, stock certificates, minutes from board meetings
Discretion without Written Authority
- BDs and agents may not exercise discretionary authority without written discretionary authority from the client - IAs and IARs must obtain the client's written authorization within 10 business days after the date on which the first discretionary transaction is placed
Holding Period
- For restricted securities of a reporting company, the purchaser must hold the securities for 6 months before he may dispose of them - No holding period for control securities - For restricted securities of a non-reporting company, the purchaser must hold them for 1 year
Agent Exemption from State Registration
- If an agent's application for registration is pending in a state, the agent may engage in transactions for up to 60 days with an existing client who has moved to that state (agent must be eligible to register in the state, agent's BD must be registered in thee state, agent must be registered with FINRA, and the agent must be registered in at least one other state) - Agent is allowed to engage in securities transactions with an existing client who is temporarily visiting a state in which the agent is not registered
Negotiable CDs
- Short-term instruments that have maturities from 2 weeks to 1 year - Have minimum denominations of $100,000 but often trade in $1M + - FDIC provides insurance of up to $250,000 per depositor - Can be sold in the secondary market
Capital Gain Tax
- Short-term=taxed at ordinary income rates - Long-term=taxed at a maximum rate of 20%
Commodities
- Soft=corn, wheat, soybeans, coffee, sugar, and cattle (standard quantity=5,000 bushels) - Hard=gold, silver, coal, and copper (standard quantity=troy ounce)
Telemarketing
- Solicitations may only be placed between 8 AM - 9 PM local time (don't apply if there is a preexisting relationship) - Must place individuals on a do not call list if prompted
Regulation A
- Tier 1 = allows for sale of up to $20M within a 12 month period - Tier 2 = allows for sale of up to $75M within a 12 month period - Issuer is still required to file an offering statement with the SEC and provide an offering circular to prospective purchasers - Must be registered with the state administrator under the USA
Leveraged Investment Company
- When a person leverages a portfolio, he acquires a loan in order to buy more securities - This activity is done in a margin account, which allows him to magnify his investment results by increasing the number of shares or bonds that he is able to purchase
Bond Point
1% of par value ($10)
Accredited Investor
1. A financial institution 2. Any director, executive officer, or general partner of the issuer 3. An individual who meets either 1 of the criteria: has a net worth of at least $1M or has gross income of at least $200,000 ($300,000 for married couples) for each of the past 2 years with the anticipation that it will continue
Form and System for Registration
1. Broker dealer - files form BD using CRD 2. Agent - files form U4 using CRD 3. Investment adviser - files form ADV using IARD 4. Investment adviser representative - files form U4 using IARD via CRD
Account Statements Sent By IA
1. IA must have an independent CPA verify and audit accounts each year 2. The auditor's findings are reported through the IARD on form ADV-E within 120 days of completion of the audit 3. If the auditor discovers material discrepancies, the administrator must be notified within 1 business day
Minimum Financial Requirements
1. If the adviser has custody of client assets - $35,000 at all times 2. If the adviser has limited discretionary authority over accounts - $10,000 3. If the adviser has prepaid fees of more than $500 - positive net worth at all times - If the adviser's net worth drops below the minimum level, the adviser must notify the administrator of the deficiency by the end of the next business day - An adviser is only required to satisfy the minimum financial requirement of the state in which the principal office is located
Trust Beneficiaries
1. Income beneficiary=one who only has claims on the income, but not the property 2. Remainder beneficiary=has the right to receive property if a trust is being dissolved 3. Primary beneficiary=has the first claim to assets if a trust is broken up 4. Contingent beneficiary=given property only after the primary beneficiary cannot accept the assets
3(c)(1) and 3(c)(7) Requirements
1. Must have 100 or fewer investors for 3(c)(1) 2. Investors must be accredited for 3(c)(1) 3. Investors must have $5M in assets for 3(c)(7) - The adviser to the fund registers with the SEC, but the private fund itself doesn't register
Delaying Disbursements
1. No later than 2 business days after the requested disbursement, the BD provides written notification of the delay to all parties who are authorized to transact business in the account, 2. By no later than 2 business days after the requested disbursement, the BD notifies the state administrator and APS, and 3. The firm continues its internal review and reports its findings to thee state within 7 business days after the requested disbursement - Request will expire upon the sooner of a determination of the BD that the disbursement will not result in financial exploitation or 15 days after the delay began (extension up to 25 days)
Parts of a Transaction
1. Offer=every attempt to dispose of, and every solicitation to buy, a security for value (occurs where the offer originated, where it was received, where is was directed, and where it was accepted STATE WHERE DELIVERY OCCURRED DOESN'T MATTER) 2. Sale=any contract or agreement to dispose of a security for value
Mutual Fund Dvidend and Capital Gains Distributions
1. Ordinary dividends=from the securities in a fund's portfolio and short-term gains, paid monthly, quarterly, or annually, and taxed at the same rate as all other ordinary income 2. Qualified dividends=dividends from domestic stocks in a fund's portfolio, paid monthly, quarterly, or annually, and taxed at a maximum rate of 20% 3. Capital gains distributions=profits generated by sales of securities executed by fund managers (assumed to be long-term), paid annually, and taxed at a maximum rate of 20%
Money Laundering
1. Placement 2. Layering 3. Integration
Federal Registration Process
1. Pre-registration period = an issue and its underwriters prepare a registration statement for the offering 2. Cooling off period = 20 day period where the SEC reviews the registration statement (issuer may send out red herrings and blue sky the issue). Just before the determination of the effective date, a due diligence meeting is held to review the different aspects of the planned underwriting 3. Post-effective period = begins once the SEC determines the effective date. On the morning of the effective date, the POP is set by the underwriters. Final prospectus (with POP) must be delivered to any purchasers no later than at the time to sale is confirmed
Order of Liquidiation
1. Secured creditors 2. Administrative expenses 3. General creditors 4. Subordinated creditors 5. Preferred stockholders 6. Common stockholders
Exemptions from Federal Registration
1. The local exemption - available to an IA whose clients are all residents of the state in which the adviser maintains its principal office 2. The insurance exemption - available to an IA whose only clients are insurance companies 3. Thee foreign private adviser exemption - available to an adviser that has no place of business in the US, has fewer than 15 total clients and investors in the US, has aggregate AUM attributable to these clients and investors of less than $25M, and doesn't hold itself out generally to the public in the US as an IA
Registration Process
1. Usually requires registration at the state and federal levels 2. File form BD through CRD 3. File consent to service of process 4. Pay a filing fee 5. Meet federal net capital requirement 6. Post a surety bond if net capital requirement is not met
Whether Advice is Incidental to the Practice
1. Whether the professional holds himself out publicly as providing advice 2. Whether the advice is reasonably related to the professional services rendered 3. Whether the fee structure for investment advisory services is different from the charge for professional services
Swap Contracts
2 parties agree to exchange cash flows based on different financial instruments - Swaps are settled on a net basis, so payments are based on the difference between the fixed and floating interest rates
Investment Companies
3 kinds: FACs, UITs, and management companies - Not required to register as an investment company if: 1. Issuers have a maximum of 100 shareholders 2. Issuers shareholders are all qualified purchasers - Criminal penalties are a maximum fine of $10,000, imprisonment of 5 years or less, or both
Time Limits for Criminal Penalties
5 years after the alleged violation
Rate if Return Required for Money to Double
72 / number of years in which the money needs to double
Number of Years for Money to Double
72 / rate of return
Qualified Client
A client with net worth of more than $2.2 million or a client with a minimum of $1.1 million under management with an investment adviser - Advisers may only charge performance-based fees to qualified clients
UPIA
A fiduciary may make individual investments that are risky as long as the overall risk/return profile of the account remains suitable - Permits fiduciaries to delegate investment responsibilities to competent third parties
Investment Counsel
A firm or individual thats registered as an IA, whose principal business consists of acting as an IA, with a substantial part of its business consisting of providing investment supervisory services
Broker Dealer
A person in the business of effecting transactions in securities for the accounts of others or for its own account - Charges commissions - ABC - Test: 1. look at the activity that the firm is involved in 2. where the firm is doing business 3. the types of clients with whom the firm is doing business - EXCLUDED FROM THE DEFINITION: agents, issuers, banks, a person that has no place of business in the state and only transacts business with issuers or institutional investors, and a person who has no place of business in the state and is registered where the person maintains its place of business and only conducts business with retail clients who are not residents of the state - If a BD doesn't have an office in a state and its non-institutional clients don't live in the state, then it's not required to register there - If a firm has an office in a state, it must register in the state
Business Standard
A person is considered to be in the business of providing advice if it holds itself out as an IA, receives any separate or additional compensation for providing advice, or provides recommendations about specific securities
Purchaser Representative
A person with knowledge and experience in financial and business matters who is capable of evaluating the risks and merits of the prospective investment
Filing Tax Returns
A person's filing status is dependent on her marital situation on December 31 in the year for which the return is being filed
Plan Participants
A separate account must be maintained for each participant - There must be at least 3 core investment alternatives offered with various risk levels from which to choose and participants must be given the right to give instructions for plan fiduciaries
Complex Trust
Able to perform certain activities that a simple trust cannot, such as making tax-deductible contributions to charities and retaining income that is generated by the trust - Trustee may distribute principal and retain income
Jurisdiction
Administrator has jurisdiction over any offers to buy or sell a security that are made or accepted in her state - Offer is considered to have been made in a state if the offer originated in, or was directed to and received in, the administrator's state - If the offer is made by mail or phone, the administrator has jurisdiction in thee state in which the offer originated and the state in which the offer was directed and received (not the state it was forwarded to) - If the offer is made through a newspaper, the administrator of the state where the newspaper is published will have jurisdiction (exception if the newspaper is published in a state and more than 2/3 of its circulation is outside of the publishing state then no administrator has jurisdiction) - If the offer is made through a radio or television broadcast, the state in which the broadcast originated has jurisdiction (where the camera or microphone is located)
Inspectorial Power
Administrator has the power to initiate investigations to determine whether any provisions of the Act have been or are about to be violated
Net Capital
Administrator may require BDs to maintain a specific minimum amount of net capital - Essentially BD's liquid net worth - May not exceed the requirement established by the SEC
Financial and Disciplinary Disclosures
Advisers must disclose to their clients all material, legal, or disciplinary actions that have occurred within the preceding 10 years - If an IA experiences a financial condition that may impair its ability to meet commitments, it must disclose when he has discretionary authority over client accounts, has custody of client funds or securities, or requires prepayment of more than $500 in fees
Bunching Orders
Advisors bunch orders to obtain volume discounts on execution costs - Shares received must be allocated fairly
Agents Changes Broker Dealers
Agent, old employer, and new employer must notify the administrator
Annuities
Agreement between an individual and an insurance company - Recommended for clients who are seeking a way to save for retirement (individual gives company money and company agrees to pay income) - Non-qualified annuities=contract owner invests money after paying taxes, but receives the benefit of the money on a tax-deferred basis - If withdrawal before 59 1/2, 10% penalty and taxed on any increase in value - All distributions that exceed the annuitant's basis will be taxed at ordinary income rates
Futures Contract
Agreement to buy or sell a specific amount of a commodity or a financial instrument at an agreed upon price on a stipulated date in the future - Buyer must purchase the underlying commodity and the seller must sell it at a prearranged price, unless the contract is offset before the settlement date - Must have the supply and demand for the underlying commodity or financial instrument must be large and the different units of the underlying commodity or financial instrument must be fungible
Unearned Income
Alimony, child support, and investment income - Cash dividends=taxable in the year its paid - Stock dividends=stockholder adjusts the cost basis - Alimony=individual who pays alimony doesn't have to deduct the payments and the recipient does not pay taxes on the money
Affiliated Persons
All employees, officers, partners, or directors of an adviser, as well as any persons contracted by the adviser
Efficient Market Hypothesis
All known information about an investment is reflected in the current price - Consistently outperforming the market is impossible - Strong form=all technical data, fundamental data, and private information is shared by all so there is no way to beat the market - Semi strong form=all technical and fundamental data is shared by all so the only way to beat the market is using private information
Per Capita
All of the living members of an identified group receive an equal share
UGMA/UTMA Accounts
All of the securities must be registered in the name of a custodian for the benefit of the minor - Each account may have only 1 custodian and 1 minor - The minor's SS number is used - Once the child reaches 19, the taxable investment income that she receives is taxed at her own rate - Gifts are always irrevocable - Donor may give an unlimited amount to the accounts, but gift tax will apply if more than $17,000 - No trading on margin - When a minor reaches adulthood, the custodian is responsible for making sure the account is transferred to the new adult's name
Form ADV Part 2A - the Brochure Rule
All registered investment advisers are required to provide clients with a disclosure document to describe their overall business as well as potential conflicts of interest - Firms can do this or provide a brochure with the equivalent information - A state registered investment adviser that is entering into a contract with a client must deliver its brochure not less than 48 hours prior to entering into any advisory contact with the client or at the time of entering into the contract if the client has a right to terminate the contract without penalty within 5 business days after entering into the contract - Adviser must give existing clients an updated version of its brochure annually (within 120 days after the end of the adviser's fiscal year) - Must be completed b all advisers registering with the SEC or any state securities authority - A FCA thats entering into a contract with a client must deliver its brochure either before or at the time it enters into an investment advisory contract with a client - A FCA is not required to provide a brochure to registered investment companies or clients whose contract is limited to impersonal advisory services for which the clients pays less than $500 per year
Profit-Sharing Plans
Allow employees to participate in a company's profits - Employers are not required to contribute - 401(k) plans=have the added feature of allowing employees to voluntarily contribute a portion of their salary for retirement on a pre-tax, payroll deduction basis
Payroll Deduction Plans
Allow employees to purchase life insurance, mutual funds, and variable annuities through after-tax deductions from their paychecks - Non-qualified
1035 Exchange
Allows investors to exhcnage the following insurance products without incurring a tax liability: 1. A non-qualified annuity for a non-qualified annuity 2. A life insurance policy for a non-qualified annuity 3. A life insurance policy for a life insurance policy - May still be subject to surrender charges and fees
Marital Deduction
Allows married couples to give each other an unlimited amount of property without incurring gift taxes - However, if one spouse is not a US citizen, then all gifts or inheritances are fully taxable
Time Horizon
Amount of time a client has to achieve her financial goals
Exempt from Registration
An adviser with no place of business in a state, who only provides advice to mutual funds (a type of investment company), other investment advisers, broker-dealers, banks, trust companies, insurance companies, savings and loan associations, employee benefit plans such as a 401(k), where the minimum amount of the assets is $1,000,000
Churning
An agent trading in a client's account for the purpose of generating commissions
Exempt Transactions
An exemption is provided based on how the security is offered or sold (non-issuer, fiduciary, isolated, private, or unsolicited) - Any isolated non-issuer transactions - Any non-issuer transaction by a registered agent of a BD provided the issuer is actually engaged in business - A non-issuer transaction in outstanding securities by a registered agent of a registered BD - Any non-issuer transaction in a security of a company thats subject to registration and reporting requirements, is registered under the Investment Company Act of 1940, or has filed information with the administrator thats substantially the same as that which is required by the Securities Exchange Act of 1934 for a period of at least 180 days prior to the transaction - Any non-issuer transaction effected through a registered BD on an unsolicited basis - Any transaction between an issuer and an underwriter - Any transaction in a bond secured by a real estate mortgage or deed of trust - Any transaction by a fiduciary - Any transaction by a bona fide pledgee - Any sale or offer to an institutional investor - A private placement transaction not directed to more than 10 retail investors - Any sale of a pre-organization certificate - Any transaction involving existing security holders of the issuer - Any offer of a security for which a registration statement has been filed under USA and the Securities Act of 1933
Current Yield
Annual interest / current market price
Form 10-K
Annual report that provides extensive information and a detailed overview of a company's results over the past year
Straight-Life Annuity
Annuitant receives monthly payments for as long as she lives - No named beneficiary (payments stop when annuitant dies and insurance company keeps the remainder)
Sharpe Ratio
Another type of risk-adjusted return - Indicates the amount of return earned per unit of risk - Return of the portfolio - risk free rate / SD - Determines whether a portfolio's returns are attributable to good investment decisions or are the result of assuming excess risk - A large Sharpe Ratio represents a good investor or portfolio manager (higher the ratio the greater the risk adjusted return and efficiency of the portfolio)
Appeal
Any appeal must be filed with the state court within 60 days of a determination after a hearing
Person
Any legal entity that is not deceased, not a minor, and is not mentally incompetent (not limited to individuals)
Investment Adviser Representative
Any partner, officer, director, or other individual who is associated with an investment adviser and makes recommendations or gives advise regarding securities, manages accounts or portfolios of clients, determines which recommendations or what advice should be given, solicits, offers, or negotiates the sale of investment advisory services, or supervises employees who perform any of these functions - IAR is to IA what agent is to BD - To register with the state, an IAR must: 1. file an application, 2. file a consent to service of process, and 3. pay a filing fee - Only required to be registered at the state level
Investment Adviser
Any person (usually a firm) that, for compensation, engages in the business of providing others with securities-related advice, reports, or analysis (ABC) - Brokerage firms that offer wrap accounts must register as IAs - NOT AN IA: IARs, banks, professionals whose investment advice is incidental to the practice of their professions, BDs and agents (as long as there is no additional compensation), publishers, federal covered advisers, US government securities advisers, credit rating agencies, family offices, or any other person designated by the administrator - Exemptions from state registration exist if the adviser has no place of business in the state and its only clients are institutional investors or if the adviser has no place of business in the state, and the adviser doesn't direct communication to more than 5 non-institution al clients in the state within a year
Court Review of Orders
Any person thats subject to an SEC order may appeal the order to one of the federal appeal courts by filing a written petition within 60 days of the date the order is entered
Eligible Adults
Any person who is age 65 or older or any person age 18 or older who the firm reasonably believes has a mental physical impairment that renders them unable to protect their own interests
Issuer
Any person who issues or proposes to issue a security
Non-Issuer Transaction
Any purchase or sale of a security whereby the issuer does not directly or indirectly derive a benefit
Civil Liabilities
Applies to a person who makes an untrue statement or omits a material fact in a registration statement - Applies to: every person who signed the registration statement, every director or partner of the issuer, every accountant, engineer, or appraiser who prepared or certified any part of the registration statement, or every underwriter of the security - Amount of damages is based on: the full purchase price + interest - income - Action to recover must be brought within 1 year from the discovery of the false statement, but not more than 3 years after the occurrence
RMDs
Apply to traditional IRAs - Investor is required to begin taking RMDs from her IRA by April 1 following the year in which she turns 73 (otherwise 25% penalty) - Doesn't apply to Roth IRAs
12b-1 Plan
Assesses 12b-1 fees - Allowed if: 1. Its initially approved by a majority of shares and by a majority of the non-affiliated directors 2. any payments made by the company in connection with the distribution are made pursuant to a written plan 3. payments under the plan are reviewed at least quarterly by a BOD 4. With 60 days' advanced written notice, the plan and its related agreements may be terminated
Securities Act of 1933
Attempts to prevent fraud in the sale of new issues by requiring that investors be provided with enough relevant information about the offering to make an informed decision - Requires that certain securities be registered with the SEC to be offered or sold to the public - Regulates the primary market
Rule 147
Available to securities sold within the borders of 1 state - Companies that intend to offer their securities under this exemption must meet the following: 1. 80% of the company's assets are located within the state 2. 80% of the company's gross revenues are generated from operations within the state 3. 80% of the proceeds of the offering are used to operate a business within the state 4. 100% of the purchasers are principal residents of the state
Shadowing
BD executing a trade for its own account immediately after it executes a substantial client trade, but before the client's trade is reported
NASAA Model Act to Protect Vulnerable Adults
BDs are required to report suspicious activity of financial exploitation of eligible adults to state regulators
Payment
BDs generally require customers to pay for their securities by the settlement date of the trade (T+2)
Form BD
BDs registration form that must be filed with the SEC - BDs that meet one of the 2 following exemptions are not required to register: 1. A BD that operates exclusively on an intrastate basis and doesn't trade through a national securities exchange 2. Firms that limit their business to certain exempt securities
Federal Covered Adviser
Based on the adviser's AUM or the types of clients it services - Advisers are only subject to registration at one level (SEC) - States may require them to complete notice filing when a FCA has a place of business in a state and when an adviser has no place of business in the state, but has 6 or more non-institutional clients who reside in a state - FCAs include: investment advisers with $110M + in AUM, advisers to registered investment companies, advisers that would have to register in 15 or more states, advisers that operate almost exclusively through an interactive website, pension consultants that advise employee benefit plans with assets of at least $200M, and newly formed advisers that reasonably believe they will become eligible for federal registration within 120 days of formation - If an adviser doesn't qualify as a FCA, it must register at the state level - Adviser with AUM of $100M to $110M must register with either the SEC or the state - If a FCA's AUM falls below $90M, it must register with the state - De minimis for state is the no place of business in the state and a maximum of 5 persons in a 12 month period
Technical Analysis
Based on the examination of the past performance of a particular stock and/or index in order to identify trends or patterns - Examine past price trends and supply and demand to make predictions
Registration
Becomes effective at noon on the 30th day after the filing of the application - All registrations expire on December 31 - Administrators may choose to grant registration earlier
Single Premium, Immediate Annuity
Begins making income payments within a year of purchase
Annuity Period
Begins when the owner decides to start receiving income payments from the contract - Contract owner is permitted to surrender the annuity at any time for the current cash value, but once the annuity phase begins the owner may no longer surrender the annuity or withdraw money from it
Uniform Securities Act
Blueprint that each state may customize to suit its own needs - Regulates state securities rules
Debt to Equity Ratio
Bonds + preferred stock / common stock at par + capital surplus + retained earnings - Measures the financial leverage of a corporation - Long term debt to equity
Current Income
Bonds, preferred stocks, fixed annuities
Top Down Investing
Broad analysis of the economy is conducted first, then specific industries are identified that are likely to benefit from the anticipated future economic conditions - Prioritizes large financial factors over smaller factors
Corporations
Business owners are not personally responsible for the corporations' debts - Continues to exist if one of the owners dies or retires - Centralized management structure, access to capital, and interests that are freely transferrable
Internal Rate of Return
Calculated by estimating the present value of all future cash outflows and cash inflows - Doesn't consider external factors
POA
Canceled in 4 situations: 1. Specifically revoked 2. Expires 3. Account owner dies 4. Account owner becomes mentally incompetent - Durable POA continues after the principal becomes mentally incompetent
Assessable Stock
Class of stock in which the issuing company is allowed to demand additional funds from existing stockholders
Variable Universal Life Insurance
Combines the flexibility of universal life with the investment components of variable life
Soft Dollar Arrangements
Commission rebates that money managers receive for channeling some or all of their trades through certain brokerage firms - To use soft dollar arrangements: the adviser must be exercising investment discretion over the accounts of others, the BD must provide the adviser with services that assist the adviser in making investment decision for client accounts, and the adviser must determine that the value of these services is reasonable in relation to the commissions being charged by the brokerage firm - Services must benefit its clients and be reasonable in relation to the commissions paid - An IA sends client transactions to a particular BD even though that BD's commissions may not be the lowest ones available. In return, the IA receives research or other services from the BD
Security
Common stock, bonds, option contracts, and variable annuities - 4 part test: 1. an investment of money 2. in a common enterprise 3. with the expectation of profits 4. solely from the efforts of others - NOT: insurance, IRAs, currencies, commodity futures, collectibles, condominiums
Growth/Capital Appreciation
Common stocks and equity mutual funds
Liquidity Ratios
Company's ability to meet its short-term liabilities as well as its ability to convert its current assets into cash
Form 10-Q
Company's quarterly report that must be filed within 35 days of the end of each of its first 3 quarters
Book Value
Company's total assets - total liabilities - Represents what investors could receive if the company declared bankruptcy
Earned Income
Compensation a person receives for providing goods or services - Salaries, commissions, and wages - Taxed at the individual's tax bracket
Time-Weighted Return
Compounded growth rate of $1 over the period being measured - Assumes a single investment is made at the beginning of a period and the growth or loss of market value is measured to the end of that period
Assignmet
Considered the direct or indirect transfer of an advisory contract by the adviser or the transfer of a controlling block of the investment adviser's outstanding voting securities by a security holder of the advisory firm - An IA must obtain its clients consent to assign a contract to another adviser
Form ADV Part 2
Contains disclosure requirements for an investment adviser's brochure as well as other required supplements - Responses must be in a specific order and in plain English
Deferred Compensation Plans
Contract between an employer and an employee and is intended to defer some of the employee's income for distribution and taxation at a future dat4e - Non-qualified
Accumulation Period
Contract owner makes payments to the company and the value of the annuity grows on a tax-deferred basis - Owner buys accumulation units at their NAV
Fixed Annuity
Contract owner's premium payments are invested in the insurance company's general account - The company guarantees the contract owner the greater of the current interest rate or the minimum guaranteed rate of return over a specified period - Insurance company assumes risk - Disadvantage is that fixed-dollar payments fail to keep pace with inflation
529 Plans
Contributions are made with after-tax money and earnings grow tax-deferred - Qualified withdrawals for education are tax-free - Assets held in the account are considered the property of the person who created the account, not the beneficiary - May be used for elementary, secondary, public, private, or religious school - Individual may contribute up to $17,000 a year to avoid gift taxes - Individuals may aggregate 5 years of annual gifts and contribute $85,000 at one time into each 529 plan - No income limitation
Inheriting a Variable Annuity
Cost basis is the same as the amount invested by the original owner
QRDO
Court order to a pension plan to make a qualified distribution to a third party
SIMPLE 401(k) Plan
Created for small business owners with 100 or fewer employees and no other retirement plan - Employer is required to make either a matching contribution of up to 3% of each employee's pay or a non-elective contribution of 2% of each eligible employee's pay
CAPM
Created to find a theoretically correct rate of return for an investment - Assumes that riskier investments should provide a larger rate of return - Divides risk into systematic and non-systematic risk
Variable Annuities
Created to provide more protection against inflation than fixed annuities - Earnings are contributed after-tax and grow tax-deferred - Contract owner has control over how to money is invested, but the rate of return varies depending on the performance of the subaccounts - Appropriate for younger investors with long-time horizons and who are comfortable with illiquidity for 5-7 years
Certificate of Limited Partnership
Creates the LP when partners sign - Describes the terms and conditions under which the partnership will operate
Unified Estate and Gift Tax Credit
Current amount that may be gifted and sheltered during a person's lifetime and at death - Credit amount is determined by the IRS and inflation-adjusted
MSRB
DRP thats subject to oversight by the SEC
Effective Date
Date on which the appropriate regulator releases the security for public distribution - If any securities of the same class are outstanding, a registration statement may not be withdrawn for 1 year after its effective date
Speculation
Day trading in margin accounts, derivatives, hedge funds, and micro-cap stocks - Adviser must make sure the client has sufficient income to bear any loss, understands the risks involved, and has portfolios that are diversified with less risky investments
Market Maker
Dealer providing liquidity by publishing quotes in the Nasdaq marketplace - Offer both bid and ask prices
Repos
Dealer sells securities to another dealer and agrees to repurchase them at a specific time and price - In return for making the loan, the lender receives the difference between the purchase price and the resale price of the securities - Reverse repo=when the dealer purchases securities and agrees to sell them back to the other dealer at a specific date and price - Short-term/overnight transactions
Taxation of Life Insurance Policies
Death benefit passes tax-free to beneficiaries
Investment Advisers Act of 1940
Defines investment adviser as someone who provides advice about securities as a part of its business and receives compensation for the services (ABC) - Includes financial planners (offering securities advice), pension consultants, and sports and entertainment representatives
Correlation
Degree to which the prices of different investments move in the same direction - When the returns of 2 investments move in the same direction at the same time, they are positively correlated (+1), when there is no historical pattern between the 2, they are uncorrelated (0), and when the 2 investments show returns that move in the opposite direction, they are negatively correlated (-1) - MPT says that an optimal portfolio is one that is diversified with assets that are uncorrelated
Cash Surrender Value
Depending how long an investor has owned an annuity, he may need to pay surrender charges, taxes on the income, and a penalty if he's under 59 1/2 - Method used is LIFO
Structured Products
Derivative securities that may be linked to a variety of underlying assets including a single security, basket of securities, stock index, foreign currency, commodity, change in spread between asset classes, or an interest-rate or inflation-linked product - Typically consists of a fixed income instrument and a derivative product - Usually registered as securities with the SEC (not insured by FDIC)
Form ADV Part 2B - Brochure Supplement
Describes the education, qualifications, and disciplinary history of all supervised persons who directly interact with the clients or who have discretionary authority over client accounts - Must be delivered to clients either prior to or at the time the person described in the supplement begins advising the clients - Only needed if there is material not covered in the brochure - Describes the personnel about the IA firm
Right of Recovery for Fraudulent Investment Advice
Determined using the formula: The cost of the advice + any loss due to the advice + interest + court costs and reasonable attorney's fees - income received
Inherited IRAs
Distributions must be made within 10 years after the death of the original owner - Beneficiary must withdraw all funds within the 10 year period
Stock's Price
Dividend / discount rate
Qualified Dividends
Dividends must be paid by an American corporation and the investor must hold the stock for 60 days (common stock) or 90 days (preferred stock) - Taxed at a maximum rate of 20%
Investment Policy Statement
Document that describes a plan's investment strategy as well as the specific needs of the plan
Consent to Service of Process
Document that irrevocably appoints the administrator as a registered person's attorney for the service of legal papers - Client may serve the administrator instead of the agent
QDROs
Document that typically is used by a court to establish an alternative payee's right to receive all or a portion of the benefits that are payable under a qualified retirement plan - Spouse who receives benefits is exempt from early withdrawal penalties, but the withdrawals are taxable - Used for any ERISA qualified retirement plan
Certificate of Incumbency
Documentation provided by the trustee to verify his appointment - Valid for 60 days from the date on which it was certified
Federal
Documents must be filed with the SEC - Have numbers in the title ("Securities Act of 1933")
Constant Dollars
Dollars measured for inflation - Coupon - CPI
Deferred Interest Bonds
Don't make coupon payments between their issuance and maturity - Accrues interest over its entire term and makes a lump sum interest payment at maturity, in addition to the principal amount
Efficient Portfolio
Earning the highest possible return while taking on little risk
Cost Basis for Gifted Securities
Either the donor's original cost basis (if the market value has risen) or the fair market value at the time of the gift (if the market value has fallen) (dual basis)
Dark Pools
Electronic alternative trading systems in which trades can be matched - Size and price of the orders are not revealed to other participants
NSMIA
Eliminated the duplication of state and federal securities regulation - Federal covered securities are exempt from formal state registration (securities listed on US exchanges, certain Reg D offerings, municipal securities issued out of state, and securities issued by registered investment companies) - Prohibits states from enforcing requirements that are more restrictive than existing federal requirements - Notice filing=states may require the issuers of federally covered securities to file copies of the documents that have been submitted to the SEC and may require a fee (ex: mutual funds)
Money Purchase Plans
Employer's contributions are based on a fixed percentage of the employee's salary - Employer must contribute the same amount annually
Defined Contribution Plans
Employer-sponsored retirement plans in which the retirement benefits are based on both the amount contributed to the plan and any investment gains earned on those contributions - Profit sharing, money purchase, 403(b) plans, and SEP plans
Top Heavy Test
Ensures that qualified retirement plan participants who are identified as key employees don't receive a disproportionate amount of benefits - Plan is considered top heavy if more than 60% of plan benefits are in the accounts of key employees - Must test plans annually
Securities Exchange Act of 1934
Established the SEC and appointed it the federal regulatory agency - Regulates the secondary market
Delta
Estimate of the amount by which an option premium will increase or decrease for a $1 change in the underlying stock price - Bullish option positions have positive deltas (premiums rise as stock's price rises and fall as stock's price falls) - Options in the money have deltas close to 1
Prospectus Requirement
Every customer who purchases a new issue must receive a copy of the final prospectus by the date the transaction is confirmed - After market prosecutus delivery rules: 1. Exchange listed APO=no requirement 2. IPO of exchange-listed stocks=25 days 3. APO for OTC stocks=40 days 4. IPO for OTC stocks=90 days
Updates
Every registered IA must update its brochure at least one per year by filing an annual updating amendment - Must be filed within 90 days of the end of the adviser's fiscal year - Material changes made to form ADV must file an amendment promptly/within 30 days (non-material must be filed within 90 days)
Section 501(c)(3)
Exempt from federal income tax as charitable organizations
Regulation D Rule 506
Exempts private placement of securities from the registration requirement if the following are met: 1. The issuer has reason to believe that the buyer is a sophisticated investor 2. The buyer has access to the same financial information thats normally included in a prospectus 3. The issuer has assurance that the buyer doesn't intend to make a quick sale of securities 4. The securities are sold to no more than 35 non-accredited investors
Established Business Relationships
Exists if 1 of the following is met: 1. Within 18 months prior to the solicitation, the person had made a securities transaction or had a securities balance with the BD 2. Within 18 months prior to the solicitation, the firm making the call is considered the BD on record for the account 3. Within 3 months of the solicitation, the person has contacted the BD to inquire about a product or service that is offered by the firm
Criminal Liability
Exists if a person willfully violates an order or provision of the USA - Max penalty for each violation is a fine of $5,000, imprisonment for 3 years, or both - No prison sentence is imposed if the person is able to prove that he had no prior knowledge of the rule or order violated
The Prudent Man Rule
Fiduciaries are required to do whats best for their clients based on their clients' objectives - Legal list=more stringent list of acceptable securities that fiduciaries could invest in (high quality bonds and objective of preservation of capital)
Form ADV Part 2A - Appendix 1
Filed by advisers that sponsor a wrap fee program - Must be provided to clients at or before the client enters into the contract
Form ADV-H
Filed by an adviser thats unable to file forms electronically - Hardship exemptions are available to extend the electronic filing deadline for 7 business days
Form 8-K
Filed by companies in order to provide information regarding unscheduled material events that are important to shareholders - Must be filed within 4 business days of any material event that may affect a company's share price or financial condition
Form ADV-W
Filed for advisers that are filing for a full or partial withdrawal of registration - If the number of states in which the adviser is required to register falls below 15, the adviser is required to file Form ADV-W, which indicates a partial withdrawal at the time of filing its annual updating amendments
Form ADV-NR
Filed if an adviser has general partners or managing agents who are non-residents of the US
Proxy Statements
Filed when a corporation intends to solicit voting powers of attorney from shareholders regarding issues to be voted on at the next shareholders meeting
Form ADV-E
Filed when an adviser has custody of client funds and securities to an independent accountant following the audit of the adviser's books - Must be submitted to the SEC within 120 days following the completion of the audit
Registration for FCAs
Files form ADV with the SEC using IARD - Within 45 days of filing, the SEC will either grant registration or institute proceedings to determine whether registration should be denied
Derivatives
Financial instrument whose value is based on the value and characteristics of another security - Swap contracts, option contracts, futures contracts, forward contracts
Painting the Tape
Financial professionals buying and or selling securities among themselves in order to create false trading volume
Small Business
Firm with AUM under $25M
Retirement Funding
First maximize contributions to a tax-deferred retirement plan
Whole Life Insurance
Fixed and level premium payments, a fixed death benefit, and a potential for building cash value - Remains in force for as long as the policyholder continues paying the premiums - Advantage is the potential to accumulate cash value - If the insured dies with outstanding loans, the company will deduct the loan from the death benefit - Insurance company assumes investment risk
Fees
Flat fees are generally prohibited - Investment advisers are allowed to charge flat fees for creating financial plans, as well as hourly fees or fees that are based on assets under management, provided they're not excessive for the service being provided
Borrowing and Lending (BD agents)
For a BD agent to borrow money or lend money to a client, there must be written procedures allowing the arangement and: 1. The customer must be a member of the agent's immediate family, 2. The customer must be a financial institution thats regularly engaged in the business of providing credit, financing, or loans, 3. The customer and the agent both must be registered persons of the same BD, and 4. The customer and the agent must have either a personal or business relationship that exists outside of the brokerage relationship - Otherwise, agents must provide notification to their member firms and obtain written approval prior to entering into such arrangements
Net Income
Found on the income statement by subtracting a client's monthly expenditures from his gross income
Class A Shares
Front end loads with small 12b-1 fees - Suitable for large purchases of shares within the same fund family for breakpoints and long-term investors - Disadvantage is that not all of the investor's money is directed into the portfolio
Cash Accounts
Full payment due within 4 business days of the trade date
Mutual Fund Capital Gains and Losses
Funds distribute capital gains at the end of the year - Assumed to be long-term - Short-term capital gains are included in the fund's ordinary dividends and are taxed as ordinary income
Present Value
Future value of present value compounded over n periods / (1 + rate of return) x exponent of number of compounding periods - What the investor needs to invest today to have a future value
Gifts of Securities
Generally not considered a sale - But a gift of assessable securities involves both an offer and a sale and is subject to the USA's requirement to disclose all material facts
Performance-Based Fees
Generally prohibited - May be charged to: registered investment companies, qualified clients that have at least $1.1M under management or have more than $2.2M in net worth, clients who are not US residents, knowledgeable individuals who are associated with the IA, and section 3(c)(7) hedge funds
Expected Return
Historical return on the invested weighted by the historical likelihood that the return will occur - Calculated by taking the sum of all the possible returns and multiplying it by the probability of each possible return - Expected return = market return x beta - Expected return (CAPM) = risk free rate + beta x (return on the market - risk free rate)
Standard Deviation
How MPT measures the risk of an investment - The more spread apart the historical returns, the higher the standard deviation and riskier the investment
Leverage Ratios
How much a company has borrowed and how much additional debt it can issue to fund its business
Dollar-Weighted Return
Identical in concept to an internal rate of return - Solves for the rate of return that makes the present value of an investment exactly equal to thee present value of the future cash flows
Death Benefit
If a contract owner dies during the accumulation period, the beneficiary will receive the greater of either the sum of all the contract owner's net payments into the annuity or the value of the annuity on the day the owner dies
Administrative Authority and Enforcemtn
If a regulation is violated, the 4 basic tools that may be used to enforce the USA are: 1. Orders issued by the Administrator 2. Actions against registration 3. Civil actions 4. Criminal actions
Using Puts as a Hedge
If an investor is currently long a position, he may buy puts as a way of protecting his stock against downside risk - Loss is limited to premium
Unit Refund Life Annuity
If the annuitant dies before receiving a specific number of payments, her beneficiary will receive the remainder as scheduled or as a lump sum
Disclosure of Control Relationships
If the firm discloses a control relationship orally before a trade has been executed, it must provide a written disclosure by no later than the date on which the transaction is settled
Registration by Coordination
If the same offering is being registered under the Securities Act of 1933 - Registration statement must be filed with the administrator along with 3 copies of the latest prospectus that was filed with the SEC - Becomes effective at the same time as the federal registration - Registration statement must be on file with the administrator for at least 10 days - Statement of the minimum and maximum offering prices, maximum underwriting discounts, and commissions must have been on file for at least 2 business days
Business Continuity Plans
In the event of an emergency, IAs are required to establish a written BCP that identifies procedures to be followed - Plan must be reviewed annually - Plan must address: data backup and recovery, financial and operational assessments, alternative communications between customers and the firm, alternative communications between the firm and its employees, alternative physical locations of employees, and communications with regulators
Financial Considerations
Include occupation, income, and tax consequences
SEC Release IA-1092
Includes a list of all persons that provide investment advice as an integral part of their business (includes any persons that provide advice regarding the selection of investment managers and any persons recommending asset allocation programs)
Yield to Maturity
Includes the bond's semiannual interest payments minus loss (or plus gain) incurred when the bond matures plus interest earned from reinvesting semiannual coupon payments
Application for Registration with Regulatory Authority
Includes: 1. Applicants name and aliases 2. Address for the last 5 years 3. Applicant's financial condition and history 4. Employment history for the last 10 years 5. Type of business to be conducted 6. Other business activities 7. Any charge or conviction issued by a court 8. Details regarding unsatisfied judgements or liens against the registrant 9. Any settlements of $15,000 or more related to customer complaints, arbitration, or civil litigation 10. Whether a bonding company has ever denied, paid out on, or revoked a bond for the registrant 11. Qualifications and business history of any partner, officer, director, or person in a controlling position - Amendments must be filed within 30 days
Passive Income
Income from a limited partnership - Taxed in the same manner as earned and investment income
Passive Losses
Income from limited partnership - May only be deducted against passive income - Losses may be carried forward
Estate and Gift Taxes
Individuals may gift up to $17,000 per year to any number of persons without incurring a gift tax (married couples may give $34,000)
Withdrawals
Individuals may withdraw their registration in a state because they no longer intend to conduct business in the state - Withdrawals from registration become effective 30 days after thee filing of a withdrawal application
Parties in Interest
Individuals who provide services to the plan in their professional capacities - ERISA prohibits these parties from: 1. Selling, exchanging, or leasing property to the plan 2. Lending money or extending credit to the plan 3. Furnishing goods, services, or facilities to the plan 4. Transferring or using plan assets for their own benefit
Qualified Purchasers
Individuals with at least $5M in investments and institutions with at least $25M in investments
SPACs
Initially set up as a blank check company with shares that are sold to investors in an IPO and subsequently listed on an exchange
Short Swing Profit
Insider making a profit on a company's stock that was held for less than 6 months - Prohibited and profits must be returned to the company
Surety Bond
Insurance issued by a bonding company that agrees to pay the sum of money awarded by a court up to a certain amount - Bond must be maintained for as long as the registrant is in business and for 3 years after
Fraud
Intentional deception carried out for personal gain or to damage another person - States require willful intent: present if a person intended to person the acts of which he's accused (no state of mind requirement)
Dollar Cost Averaging
Investing a fixed dollar amount at regular intervals without regard for the market price of the security - At redemption, investors will sustain a loss if the market value of the shares is below the total cost of the shares - Investors must take into account their ability to continue the plan regardless of price levels - The plan doesn't protect against loss in steadily declining markets
Exempt Reporting Advisers (ERAs)
Investment advisers that are not required to register as an adviser with either the SEC or state regulators, but must still notice file with a state Administrator and pay fees - Private fund adviser exemption (US based advisers that only manage private funds and have less than $150M in regulatory AUM) and the venture capital fund adviser exemption (adviser that solely advises venture capital funds, AUM doesn't matter) - Both venture capital fund advisers and private fund advisers are required to file Form ADV Part 1A with the SEC within 60 days of their first reliance on the exemption - An ERA must amend its ADV at least annually within 90 days of its fiscal year or promptly if any material information changes
Fund Manager Tenure
Investment advisers with longer tenure have most likely been successful over a long period
Barbell Strategy
Investor buys bonds at the 2 ends of the yield curve (short and long maturities)
Section 3(c)(7) Hedge Funds
Investors consist solely of qualified purchasers (individuals who own at least $5M in investments and other entities that own and invest at least $25M in investments)
ETFs
Issue shares each of which represent an interest in an underlying basket of securities that mirror a specific index - Traded on an exchange, have prices that are determined continuously by the forces of supply and demand, have lower expenses, may be sold short, and may be purchased on margin - Investors pay commissions - Offer limited liability (investor is only exposed to a potential loss of the instrument's purchase price) - Leveraged and inverse ETFs are considered derivatives
Exempt Securities
Issued by US gov and municipalities, issued by Canadian government and municipalities, securities issued by other foreign governments, securities issued by banks, savings institutions, or trust companies, securities issued by federal credit unions, securities issued by insurance companies, securities issued by common carriers, securities issued by not-for-profit organizations, promissory notes/BAs maturing in no more than 9 months, investment contracts issued in connection with an employees' stock purchase/benefit plan if the administrator is notified in writing at least 30 days before the inception of the plan, and federal covered securities
Eurodollar
Issued by foreign corporations, but pay interest and principal in USD
Refunding
Issuer selling a new bond and using the proceeds to pay off bonds that are still outstanding - Done when interest rates fall
Filing Fees
Issuers are required to pay at the time of initial registration and annually for renewal - If not paid, the administrator may issue a stop order which suspends the sale of the security - If 2 or more firms combine to become 1, the successor firm is only required to file an updated application rather than paying a new filing fee
Sinking Call Fund
Issuers deposit funds each year to redeem bonds - Enhances the liquidity of the issue
Custody
Legal responsibility for someone's assets - Adviser has custody if he's in possession of client funds or securities or has full discretionary authority - The Administrator has power to allow or disallow any adviser from maintaining custody - If an adviser has custody it must: 1. provide immediate written notification to the administrator using form ADV, 2. use a qualified custodian to hold the funds and securities in a separate account, 3. provide written notification to all clients of the custodian's name, address, and manner in which the funds will be maintained, and 4. send quarterly account statements to clients - Can avoid custody by having the assets held by a brokerage firm - If an IA has custody, he must prepare and maintain: a journal showing all purchases, sales, and receipts of securities, a separate ledger for each client showing all purchases, sales, receipts, and deliveries of securities, copies and confirmations sent to clients, and a record for each security in which a client has a position showing the name of the client, the amount of the client's interest, and the location of the security - If an adviser has custody they must: 1. deposit the funds in a separate account with a qualified custodian 2. provide each client with written notification of the place and manner in which the funds and securities will be maintained 3. send to each client, at least quarterly, an itemized statement of all the funds, securities, and transactions effected in the account, and 4. arrange an unannounced annual examination by an independent public accountant and the accountant must file Form ADV-E with the SEC within 120 days following the examination - If an adviser has custody it must maintain: journals of securities transactions and movements, separate client ledgers, copies of confirmations, and records by security
Estate Tax
Levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit that is set forth by federal law - Doesn't apply to the transfer of assets to a surviving spouse
Master Limited Partnership
Limited partnership that is traded publicly on an exchange - Combines the tax benefits of a limited partnership, with the liquidity that publicly traded securities offer
Per Stirpes
Living member in the class of beneficiaries who are closest in relationship to the person making the distribution will receive an equal share - If a member in the class of beneficiaries is deceased, then the descendants will take by representation what the parent would have taken
Modern Portfolio Theory
Main assumption is that investors are risk averse - 3 main components are expected return, standard deviation, and correlation
2 and 20 Fee Structure
Manager charges a 2% management fee and takes 20% of any profits earned
PE Ratio
Market price / EPS - Stocks with low PE is undervalued
Market Capitalization
Market price of common stock x common shares outstanding - Large cap = $10B+ - Mid cap = $2B-$10B - Small cap = $300M-$2B - Micro cap = $50M-$300M
Brokered CDs
Maturities from 2-20 years and are not considered money market securities - Limited or potentially no liquidity - Possibility of experiencing a loss of principal if sold prior to maturity - Potential existence of call features that limit capital appreciation - FDIC insurance may not apply
General Partnership
May be created simply by a verbal agreement of 2 or more people to form a partnership - Automatically dissolved by the death or disability of any partner
Coverdell ESAs
May contribute up to $2,000 per year for the benefit of a child under 18 - Contributions are made with after-tax money and it grows tax-deferred - Withdrawals are tax-free if used to pay for the child's eduction - If used for a different purpose, the earnings are subject to ordinary income plus a 10% penalty - If the money doesn't need to be used for education, the funds may be transferred to an account maintained for one of the original beneficiary's relatives without penalty - If the funds are not used before the beneficiary turns 30 or transferred to another account, it must be distributed and will be subject to ordinary income taxes plus a 10% penalty - Income limitations
Canadian BDs and Agents
May effect transactions with a person from Canada who is temporarily in the US provided there was an existing relationship
Sharing in Profits and Losses in a Client's Account
May share if: 1. the sharing arrangement is approved in writing by the customer and the agent's BD, and 2. the sharing is proportionate based on the funds invested by each party
Beta
Measure of the volatility of a security or portfolio in comparison to the market - Based on how much an investment's returns historically move relative to the S&P 500
Duration
Measurement of how sensitive a bond's price is to small changes in interest rates and is determined by the weighted average of the discounted cash flows until maturity - Long and low have high duration
Theta
Measures the rate at which the option's time value will decrease
Gamma
Measures the rate of change of the delta for a $1 change in the underlying stock price
Systematic Rebalancing
Method of buying and selling assets on a periodic basis
AMT
Method of calculating a person's tax liability and is used when income is derived from certain investments - These taxpayers must compute their income taxes twice (standard and AMT) and the taxes due are the greater of the 2
Discounted Cash Flow Analysis
Method of estimating the price of an investment, typically a bond - Involves taking all future cash flows and discounting them to their present value
Liquidity
Money market funds and T-bills
Fed Funds
Monies borrowed overnight on a bank-to-bank basis - Rate charged on these loans is the fed funds rate (fluctuates daily and is a leading indicator of interest rate trends) - Prime rate=what banks charge when providing loans to corporations that are among the best credit-rated customers - LIBOR=average rate that banks charge each other on loans for London deposits of Eurodollars
Capital Reserve
Most people should have a cash reserve equal to at least 3 months' living expenses - Should be kept in money market funds
Tax Relief
Municipal bonds, annuities, traditional IRAs, and employer-sponsored retirement plans
Customer Verification
Must be completed either before or after the customers account is opened - Must verify: 1. Name 2. DOB 3. Address (principal place of business for corporations) 4. An ID number (US: taxpayer ID, non-US: passport) - Must maintain records for 5 years following the closure of an account
Limited Partnership Agreement
Must be created as a contract between the general partners and limited partners to document each partner's rights and responsibilities
CMIR
Must be filed any time a person physically transports, sends, or receives cash in an aggregate amount that exceeds $10,000 into or out of the US
Form 13F
Must be filed by institutional investment managers that exercise discretion if the aggregate market value of equity securities under the adviser's control exceeds $100M on the last trading day of any month
CTR
Must be filed for all cash transactions that are executed by a single customer during 1 business day that exceed $10,000
Schedule 13D
Must be filed when a person acquires more than 5% of an issuer's equity securities - Within 10 days after the acquisition, Schedule 13D is filed to serve as notification to the issuer, the exchange on which the stock trades, and the SEC
SARs
Must be filed whenever a transaction equals or exceeds $5,000 and the firm suspects the client is violating federal laws, the transaction involved illegal funds, the transaction is designed to avoid reporting, or the transaction has no apparent business or legitimate purpose
Investment Company Reports
Must be filed with the SEC annually
Advertising and Sales Literature
Must be filed with the administrator - Not required to file for exempt securities/exempt transactions - Must include "clarity of text in this document may be affected by the size of the screen on which it is displayed" - Must be preserved for 3 years and easily accessible for the first 2 years - Advertising=communication targeted to reach more than 1 person
Order Memorandums
Must include: 1. Account number, date of entry, date of execution 2. Instructions, modifications, and/or cancellations 3. Terms and conditions 4. The person who recommended the order or whether it was unsolicited 5. Whether the order was executed on a discretionary basis 6. The BD or bank that executed the order
IA Federal Recordkeeping Requirements
Must maintain a record of: 1. all discretionary accounts and all powers of attorneys from clients who have granted such authorization 2. all written agreements between the IA and its clients 3. a record of every securities transaction in a client's account which must be completed within 10 days of the end of the quarter in which the transaction occurred 4. a memorandum of each order to purchase or sell a security 5. a copy of each notice, circular, advertisement, or other communication that is circulated to 10 or more persons (USA states that nan adviser must maintain a record of any advertisement sent to 2 or more persons) 6. the names and addresses of the recipients of each notice, circular, advertisement, or other communication thats sent to 10 or fewer persons (not required to record names and addresses of advertisements sent to 10 or more persons) 7. a record of all personal securities transactions of the IA or any IAR 8. copy of each written disclosure statement and amendment sent to clients along with written acknowledgements of receipt from the clients 9. all documents that are required to demonstrate the calculation of the performance or rate of return for managed accounts or securities recommendations 10. a copy of the IA code of ethics as well as records of any violations of these codes
Subchapter M
Net Investment income = dividends + interest - expenses - A fund is able to avoid paying taxes on a significant portion of its NII if it distributes at least 90% of the income to its shareholders (registered investment company)
EPS
Net income - preferred dividends / number of outstanding common shares
No Load Fund
No front-end charge, no CDSC, and no 12b-1 fee that exceeds .25% of the fund's average net assets each year
Time Limits for Civil Liabilities
No person may sue under the civil liabilities section of the USA more than 3 years after the occurrence of the violation or the rendering of the investment advice, or after 2 years from the discovery of the violation (whichever is first)
Class B Shares
No up-front sales charge, higher 12b-1 fees, and subject to CDSCs if the shares are redeemed before a certain time (6-8 years) - Most suitable for investors who intend to redeem their shares within 5-7 years
Agent of BD
Non-clerical individual who represents a BD in effecting securities transactions (salespersons of BD) - Subject to registration - An individual who only performs clerical tasks is not an agent - Even if the individual executes transactions on exempt securities/transactions he still must be registered as an agent - Must register by filing U4 through the CRD - If terminated/quits, both the BD and agent must ensure that form U5 is filed with the CRD (registration lapses after 2 years) - Dual registration of an agent is allowed if the administrator's direct authorization is received - If an agent wants to split commissions with another person, the other person must be a registered agent in the same state and be employed by the same BD or one under common control
Agent of an Issuer
Non-clerical individual who represents an issuer in effecting securities transactions with the public involving the issuer's securities - Exclusions exist when the individual effects transactions in securities that are exempt or transactions that are exempt
Private Fiundation
Non-government, non-profit organization which has a principal fund that is managed by its directors or trustees - Typically have one major source of funding
457 Plans
Non-qualified retirement plan that may only be established by state and local government entities and certain non-profits - Funds grow tax-deferred - Withdrawals taken for termination or hardship exceptions are not penalized - 457(g)=
Federal Covered Securities
Not required to e registered at the state level - Certain securities still must notice file - exchange-listed securities, securities sold to qualified purchasers (owns at least $5M in investments), investment company securities (subject to notice filing), and securities issued pursuant to reg D rule 506 (subject to notice filing)
Equity-Indexed Annuities
Not securities - Return is linked to the performance of an underlying stock index - Company guarantees a minimum rate of return, but the annuity's ultimate return will vary depending on the performance of the index - Risk and return limited - Return will be below the return of the underlying index - Participation rates=calculate the contract owner's return (cap on return) - Indexing methods=different methods for calculating changes in the index to which an annuity is linked - Suitable for younger, long-term investors
Conversion Value
Number of shares received x price per share
Insider Trading
Occurs if a person uses material, non-public information either to make a profit or avoid a loss - Maximum civil penalty is 3x the profit gained or loss avoided - Maximum criminal penalty is a fine of $5M for an individual or $25M for a corporation (individual may be imprisoned for up to 20 years)
Trading Ahead
Occurs when a BD accepts and holds an order for a security from its own client, or a client of another firm, and trades that security on the same side of the market for its own account at a price that would satisfy the customer's order
Front-Running
Occurs when a brokerage firm enters into an equity trade or options or futures contract, with advance knowledge of an impending block transaction that will influence the price of an underlying security in an effort to capitalize on the trade
Structuring
Occurs when a customer executes several small transactions in dollar amounts that are below the reporting threshold ($10,000) to evade the regulations
Agency Cross Trade
Occurs when an IA acts as a broker for its client and for another person on the other side of the transaction - Not permitted if the IA recommends the trade to both the buyer and the seller (one side must be unsolicited) - Adviser must: 1. Provide a prospective client with a written disclosure regarding the potential conflicts that may arise from agency cross trades 2. Obtain written, revocable client consent authorizing the adviser to effect agency cross trades 3. Send the client a written confirmation, no later than the completion of the transaction, that includes the nature of the transaction, the date of the transaction, an offer to provide the time of the transaction, and the source and amount of any other compensation received by the IA in connection with the transaction 4. At least annually, send each client a written disclosure identifying the total number of agency cross trades effected during the period and the total amount of commissions received by the IA for cross trades executed during the period
Selling Away
Occurs when an agent executes securities transactions without the knowledge and control of his BD
Conversion
Occurs when an agent illegally takes possession of a client's assets for his own personal use - Agents who inadvertently hold funds that belong to clients for longer than 3 days are considered to have custody of the clients' assets
Felony
Offense punishable by a sentence of at least 1 year imprisonment and/or a fine of at least $1,000
Demand Deposits
Offered by commercial banks and are safer than investments in common stock - Deposits are insured by the FDIC - Very low rate of return
Access Person
Officer, director, partner, or other supervised person of the adviser who has access to non-public information or who's in a position to exploit information that relates to client transactions or holdings in reportable securities - Must report their personal securities transactions to their firm's chief compliance officer no later than 10 days after they become an access person and at least once every 12 months after - Must also submit quarterly securities transactions reports no later than 30 days after the end of each calendar quarter
Class C Shares
Ongoing fee for as long as the investor holds the shares - Most suitable for short term investors - Back-end load may be assessed if shares are redeemed within 1 year - High 12b-1 fees
Right of Recission
Only applies to civil penalties
Guarantees
Only permitted in connection to a security whose payment of dividends, interest, and principal is guaranteed by an entity other than than the issuer
Individual Accounts
Opened by and for one person - The individual is the only one who is able to initiate activity in the account unless a third party has been authorized in writing
American Style
Option buyer may exercise the contract at any time
European Style
Option buyer may only exercise the option on the day of expiration
Future Value
Original investment amount (1 + rate of return) x exponent of number of compounding periods
Spousal IRA
Owned by an unemployed spouse - Married couple with 1 working spouse may contribute to 2 IRAs if the working spouse has income of at least $13,000 in the current tax year
Conversion Ratio
Par value of bond / conversion price
LLC
Passes through both income and losses - Easier to establish than a C Corporation - No continuity of life and interests are not freely transferrable
Present Value of Perpetuity
Payment / rate of return
Value Analysis
Performed by investors who are seeking stocks of companies that are intrinsically undervalued - Attractive to long-term investors - High EPS, low PE, high dividend yields, and low price-to-book ratios
Variable Life Insurance
Permanent life insurance in which the premiums are fixed, but the death benefit and the cash value may vary depending on the performance of the investments chosen - Considered securities and must be registered with the SEC - Prospectus must accompany or precede any offer to sell variable life insurance - Policy holder decides how the premium payments will be invested - Client must be sophisticated enough to understand the available investment options and tolerate the cash value fluctuations (clients can invest in subaccounts that have the potential for higher rates of return) - Death benefit generally may not decrease below a guaranteed minimum - Cash value is determined by the performance of the subaccounts (calculated daily) - Owner may borrow against the cash value up to certain limits - Policyholder assumes investment risk (insurance company's only obligation is to pay the minimum death benefit when the insured dies)
Universal Life Insurance
Permanent life insurance that offers adjustability as well as the potential for building cash value - Advantage is that its more flexible than traditional whole life insurance - Policyholders may adjust death benefit and premiums - Insurance company assumes investment risk (company must pay death benefits and guarantee a minimum rate of return)
State Administrator
Person responsible for administering, enforcing, and educating investors on the securities law of a state - Primary goal is to protect consumers
REIT
Portfolio must have 75% of assets invested in real estate, cash, and US Treasuries - Must have at least 75% of its gross income derived from rent, interest on mortgages, or real estate sales - Equity REIT=invests its portfolios in real estate assets and offers investors income thats derived from rents and capital gains - Mortgage REIT=borrows money from a commercial bank and then lends the borrowed funds to building developers at a higher rate - Shares are publicly traded
Blind Pool REITs
Portfolio that is invested in real estate - Permit investments outside of real estate markets - Investment policy statement and other disclosure documents will not specifically mention the types of investments that will be chosen
Strategic Asset Allocation
Portfolios are rebalanced periodically rather than in an attempt to time the market - Believe in the efficient market hypothesis and that market timing is ineffective - Passive investment approach
Net Present Value
Present value of cash flows - market price of the investment - If the NPV is positive, the investment should be purchased since the return exceeds the discount rate
Borrowing and Lending (IAs and IARs)
Prohibited from borrowing and lending unless the client is: 1. A BD, 2. An affiliate of the IA, or 3. A financial institution thats engaged in the business of loaning funds - Not permitted to borrow or loan to an immediate family member who happens to be a client of the firm
Cherry-Picking
Prohibited practice of only including recommendations that produced favorable results
Reverse Churning
Prohibited practice that occurs when an adviser feels that the trading in a client's account is too frequent in relation to the flat fee the client is being charge and, therefore, begins to recommend fewer trades
Pay to Play Practices
Prohibits IAs from receiving compensation for advisory services for 2 years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds - If the covered employee is able to vote for the candidate, he may contribute up to $350 per election - If the covered employee is not able to vote for the candidate, he may contribute up to $150 per election
Tax Credit
Provides a dollar-for-dollar reduction of the investor's tax liability, while a deduction reduces an investor's taxable income - Provided by limited partnerships
Life Annuity with Period Certain
Provides annuitant with payments for her lifetime - If the annuitant dies before the end of the period certain, a beneficiary continues to receive the payments for the remainder of the period
SIPC
Provides coverage for each separate customer to a maximum of $500,000 of which no more than $250,000 may be cash holdings - Cash accounts and margin accounts are combined to determine coverage - Treated as a general creditor for remaining balance
Riders
Provisions that clients may add to insurance policies or annuities that modifies its terms to meet their specific needs or to provide them with added benefits - IAR should not advise a client to purchase a rider unless the client has a need for extra benefit and the additional cost is justified
Registration Statement
Public document that an issuer files with the SEC - Designed to provide full disclosure of all material information about the issuer and the offering
Straddles
Purchase of both a call and a put (long straddle/volatility) or the sale of both a call and a put (short straddle/stability) - Same underlying security, same exercise price, and same expiration date
Substituted Consent to Service of Process
Purchaser may sue the seller in the purchaser's state and then bring an action on the judgment in the seller's state
Ponzi Scheme
Pyramid scam where returns received by earlier investors are derived from the capital contributed by subsequent investors
AIR
Rate of interest that is stated in the annuity contract and used to determine the size of an annuitant's payment - If the separate account performance is greater than the AIR, then the annuitant's payment will increase
Risk-Free Return
Rate of return attributable to an investment with 0 risk - 3 month T-bill
Third Party Ratings
Rating/ranking of an IA by a person thats not affiliated with the IA - IA is prohibited from using third party ratings unless it has a reasonable basis for believing that any questionanaire or survey being used in the preparation of the rating is structured to make it equally easy for a participant to provide favorable and unfavorable responses and clearly discloses the date on which the rating was given, the identity of the third party, and the compensation that has been provided in connection with the rating
Cost Basis of Inherited Securities
Recipient's cost basis is equal to the market value of the securities at the time of the deceased's death (step-up in basis) - Holding period will be considered long-term
Notice Filing
Refers to a state's demand that certain issuers of federal covered securities satisfy state requirements such as signing a consent to service of process, paying a filing fee, and possibly filing with an administrator any copies of material that has been filed with the SEC
SEC
Registers and regulates BDs, transfer agents, clearing agencies, SROs, and stock exchanges - 5 commissioners appointed by the President with the advice and consent of the Senate (no more than 3 may be members of the same political party) - Has authority to suspend trading in a specified security for up to 10 days - Has the power to suspend all trading on an exchange for up to 90 days with prior notification of the President
Registration Postponement/Suspension
Registrant must be provided with prior written notice and be allowed to submit a written request for a hearing, which must be held within 15 days of the request
Viatical Investments
Represent the purchase of the rights to the death benefit from an individual's life insurance policy - Considered securities - May only be sold to suitable investors (accredited investors, officer of the issuer, or a natural person who has a minimum net worth of $150,000 and gross income that exceeds $100,000, or has a minimum net worth of $250,000) - BD must be registered in the states they sell viatical securities in - Investor can receive 0 if the life insurance company declares bankruptcy
Credit Spread
Represents the difference in yields between various types of bonds and Treasury securities which have similar maturities
Balance Sheet
Required if an adviser has custody of client funds or securities, has full discretionary authority over a client's account, or solicits prepayment of advisory fees (federal: more than $1,200 in fees per client, state: more than $500 in fees per client) - Schedule G describes the manner in which the audited balance sheet should be prepared - Divided into assets, liabilities, and stockholder's equity
Subscription Agreement
Requirement of many limited partnerships stating that they have read the prospectus, understand the risks, and meet the minimum financial requirements - Accepted as a limited partner when general partner signs
ERISA Rule 404(c)
Requires fiduciaries to: - Act solely in the interest of plan participants and beneficiaries - Discharge their duties for the exclusive purpose of providing benefits and defraying reasonable expenses of plan administration - Act with the same care, prudence, skill, and diligence that a prudent person familiar with such matters would use - Give appropriate consideration to all relevant facts and circumstances - Diversify plan investments to prevent large losses
ERISA Rule 404(b)
Requires that retirement plan assets be held in a location that is subject to both the jurisdiction of US federal courts and US securities regulators - Required to maintain a fidelity bond (to ensure participants are protected against theft by employees of the trust)
Form ADV Part 1
Requires the disclosure of information about an adviser's business, ownership, clients, employees, business practices, affiliations, and any disciplinary events of the adviser or its employees - If an adviser answers yes ti numerous disciplinary questions, the firm must also complete a DRP to provide details (may file a criminal action DRP or a regulatory action DRP depending on the disclosure) - Must be completed by all advisers that are registering with the SEC or any state securities authorities
NASAA
Responsible for updating the USA and maintaining the content of the Series 66 exam - Released model rules and statements of policy to clarify provisions of the USA
Keogh Plans
Restricted to individuals whose earned income is generated through self-employment - Funds grow tax-deferred and taxed at ordinary income when withdrawn - Funds withdrawn before 59 1/2 are subject to 10% penalty - RMDs must begin by April 1 of the year following the latter of the calendar year in which the employee turns 73 or the calendar year in which the employee retires
Defined Benefit Plan
Retirement plan that is designed to provide employees with a fixed monthly payment at retirement - Employer is responsible for funding the plan and making contributions based on actuarial assumptions, investing the plan's funds, bearing all the investment risk, and providing benefits even if the plan's investments perform below expectations
Risk Premium
Return on the market minus the risk-free rate of return
Fundamental Analysis
Reviewing a company's financial statements to determine its value - Attempt to determine if stock is trading at the right price
Reinvestment Risk
Risk that a bond investor will not be able to reinvest the principal amount at the same interest rate after the bond is called or matures - Typically occurs when interest rates fall
Systematic Risk
Risk that changes in the economy or the entire market will negatively impact investments - Cannot diversify out - Measured using beta - Market risk, interest rate risk, inflation risk, and event risk
Non-Systematic Risk
Risk that is specific to a particular security or sector - Can be eliminated through diversification - Measures this risk using alpha - Business risk, regulatory risk, legislative risk, political risk, liquidity risk, opportunity risk, currency risk, capital risk. credit risk, call risk, and complexity risk
Alpha
Risk-adjusted return and represents the difference between an asset's expected return and its actual return - If a security's actual return is higher than its beta, the security has a positive alpha
Wrap Fee Program Brochure
SEC requires the delivery of a special wrap fee program disclosure brochure
GAAP
SEC typically requires corporations to file their forms in accordance with GAAP rules
Net Assets
Securities valued at current market prices + cash - total liabilities
Expiration
Security's registration expires 1 year after its effective date - Must be reregistered or sold through an exemption
Bottom Up Investing
Selects investments based on fundamental analysis and involves evaluating each company based on a number of factors - Goal is to find stable companies that have a history of profits in order to determine whether a company is undervalued relative to its peers - Prioritizes small factors over large financial factors
Income Statement
Shows a company's financial performance during a set period - Revenues and expenses
Monte Carlo Simulations
Simulate a portfolio's future hypothetical returns
Investment Advisory Contracts
State law requires that contracts between clients and state-registered advisers be in writing
State
State, commonwealth, territory, or profession of the US - Rules if the USA apply
Partnership Agreement
States the nature of the business, the capital contributed by each partner, and the rights and responsibilities of each partner
Term Life Insurance
Stays in force for a specified period and is the simplest form of life insurance - Suitable for people who only want life insurance protection and are not interested in using their policy for investment purposes - Least expensive life insurance available
Principal Trades
Subject to several conditions - adviser must: 1. provide a prospective client with a written disclosure regarding the potential conflicts of interest that may arise from principal trades 2. obtain written, revocable client consent authorizing the adviser to enter into principal trades 3. make certain disclosures, either orally or in writing, and obtain the client's consent before each principal trade 4. send the client a confirmation statement disclosing the capacity in which the adviser acted and disclosing that the adviser informed the client that it may act in a principal capacity and received the client's authorization 5. deliver to the client an annual report itemizing all principal trades
Taxable Equivalent Yield
Tax free interest rate / (100%-tax bracket %)
403(b) Plans
Tax-deferred retirement plans that may only be established by certain tax-exempt, non-profit organizations - Funds may only be invested in annuity contracts, custodial accounts holding mutual fund shares, or retirement income accounts
HSA
Tax-exempt trust or custodial account thats set up with a qualified HSA trustee - Offered to individuals with high deductible plans - Contributions are tax-deductible and the earnings are tax-free if used for qualified medical expenses - If used for non-qualified expenses, subject to a 20% penalty and taxed at ordinary income
Rollovers
Tax-free withdrawal of cash or other assets from an eligible retirement plan into another eligible plan - Transaction is reportable on a tax return but the penalty is avoided if the rollover is completed within 60 days - Allowed once a year
After-Tax Yield
Taxable interest rate x (100%-tax bracket %)
Right of Recovery for Securities Sold in Violation of the Act
The amount that a purchaser has a right to recover is determined using the formula: The full purchase price + interest + court costs and reasonable attorney's fees - income received from the security
Transfers
The shifting of funds from 1 IRA trustee/custodian directly to another trustee/custodian - No tax liability and no limit to the number of transfers allowed per year
Client Solicitation
Third party promoters may recieve a fee from an adviser for the marketing of advisory clients if: the adviser is registered, there is no outstanding SEC order suspending, limiting, or barring the promoter's activities, cash or non-cash compensation exceeding $1,000 in a 12-month period is disclosed, and material conflicts of interest for the person who's providing the testimonial is disclosed (adviser must receive a signed acknowledgement from the client confirming receipt of adviser's and solicitor's disclosure documents)
Form CRS
To provide retail investors with information about the nature of their relationship with their financial professional in a simple format - No longer than 2 pages - New retail investors must receive a copy of Form CRS by no later than the time they open a brokerage account, place an order, or receive a new recommendation for an account type, securities transaction, or investment strategy - If an agent of a BD is not registered as an IAR hes not allowed to refer to himself as an adviser in marketing materials
S Corporation
To qualify company: 1. May have no more than 100 shareholders 2. All shareholders must be US citizens or resident aliens 3. Shareholders must all be individuals, estates, or trusts 4. Must be a domestic corporation 5. May not be part of an affiliated group of corporations 6. May have only one class of stock outstanding - Pass through losses, income, deductions, and credits - May elect to be treated like a partnership for federal tax purposes
Quick Asset Ratio
Total current assets - inventory / total current liabilities - More conservative measure of a company's liquidity
Working Capital
Total current assets - total current liabilities
Current Ratio
Total current assets / total current liabilities
NAV
Total net assets / number of outstanding shares - Mutual funds calculate their NAV daily at 4 PM EST - A fund must redeem the shares and send a check to the client within 7 calendar days
Simple Trust
Trustee is required to distribute all of the income generated by the trust to the beneficiaries in the year in which the income is received - Trustee may not make distributions of principal to the beneficiaries
Sector Rotation
Type of active or tactical investment strategy which involves moving investments from one industry to another in an attempt to profit from changes in the business cycle - Portfolio managers will try to anticipate the next turn in the business cycle and shift assets to the sectors that will benefit
Bypass Trusts
Type of irrevocable trust that is most commonly used to pass assets from parents to children at the time of the second parent's death
Fulcrum Fee
Type of performance based fee that has 2 parts - a base fee plus a performance-based fee that increases or decreases based on the performance of the client's portfolio as compared to a specific benchmark over a specified period
SEP Plans
Type of retirement plan that is designed to provide employers with an easier and more simplified way of making contributions - Popular for self-employed individuals
Convertible Bonds
Typically offer lower coupons - Can have significant price appreciation/depreciation if the underlying equity changes in value
Oral Discretion
Typically, cannot exercise discretion without written authorization - Oral discretion is enough to allow an IA to buy or sell securities on the client's behalf without written authorization (only effective for 10 business days without written authorization) - Does not apply to BDs - they always need written authorization
Preservation of Capital
US Gov securities. insured CDs, or money market funds
State Recordkeeping Requirements
Unless otherwise directed by the administrator, all required records must be preserved for a period of 5 years in an easily accessible location - For the first 2 years, the record must be kept in the principal office of the IA
C Corporation
Unlimited number of shareholders and is subject to regular corporate taxation - Required to pay corporate taxes on income, while shareholders must pay personal income taxes on any profits they receive in the form of cash dividends - More complex operations and reporting requirements
ETNs
Unsecured debt security with returns linked to the performance of an index - Usually don't pay an annual coupon or specified dividend (all gains are paid at maturity) - Traded on exchanges and may be purchased on margin and sold short - Carry issuer risk tied to the creditworthiness of the financial institution backing the note
Growth Analysis
Used by investors who are interested in companies with significant future earnings potential - Believe that if a company's net income is rising, the stock's price will increase as well - Purchase stocks with high PE ratios
Registration by Filing
Used by well-established corporations meeting stringent financial requirements - Previously filed with the SEC and meet established requirements (page 17) - Application for registration by filing must contain a statement of eligibility, the issuer's name, address, and form of organization, a statement describing the offering, and a copy of the prospectus filed with the SEC - Becomes effective at the same time as the federal registration - Required information and documents must have been on file for at least 5 days and the registration fee must have been paid - Infrequently used because most securities are considered federal covered securities and can complete a notice filing
Rule of 72
Used to calculate the approximate number of years it will take for a principal amount to double at a given rate of return and the internal rate of return needed for an investment to double over a given number of years
Price to Book Ratio
Used to compare the price of a company's stock to its book value - Measures how much the market believes the stock is worth compared with accounting value
Family Limited Partnership
Used to minimize estate and gift taxes -To receive full tax advantages, an FLP must have a legitimate business purpose and profit motive
Letter of Rescission
Used when a firm realizes that it has effected an illegal sale - Represents an offer to buy back the security plus interest minus any income received on the security - If the client doesn't act within 30 days of receipt of the letter, the client is generally not permitted to bring the action in court
Registration by Qualification
Used when either a security's federal registration has already become effective or when no federal registration will be filed (intrastate offerings) - More involved that coordination or filing - Registration becomes effective only when determined by the administrator - Registration is effective for 1 year after effective date - Registration can be amended after effective date to increase offering size as long as terms remain unchanged - Right of recession must be accepted or rejected within 30 days
Capital Structure
Way a corporation raises money to finance operations and expansion - Capital = debt + equity
Dividend Discount Model
Way to value the price of a stock by using an estimate of future dividends and discounting them back to present value - Most effective when valuing a mature company that pays significant dividends (utilities company)
Early Withdrawals
When an account owner withdraws money before the age of 59 1/2 - Amount withdrawn is added to income for the year and he is subject to a 10% penalty - Not early withdrawal if: 1. the account owner died/becomes disabled 2. the money is being used to pay certain medical expenses 3. the money is being used to pay expenses associated with the birth or adoption of a child 4. the money is being used for expenses related to the first time purchase of a home 5. the money is being used to pay qualified higher education expenses for the account owner or a member of his immediate family 6. the withdrawal has been set up as a series of substantially equal periodic payments taken over the owner's life expectancy - Roth account holders may withdraw their contributions at any time without paying taxes
Entanglement
When an adviser pays for a social media post - When an adviser is directly involved in the creation of third-party content or has influence over what is created
Issuer Transaction
When the issuing entity is in a position to receive the proceeds of a distribution
Adoption
When third-party content is created and posted without being requested by an IA and the advisory firm then uses the content in its marketing campaign (shares, retweets, posts)
Wilshire 500 to GDP Ratio
Wilshire 500 aggregates the market value of all US stocks - A high Wilshire to GDP ratio implies that US stocks are overvalued
Social Security
Withdrawals can begin at 62 with smaller payouts - Once a person begins taking benefits, she locks in the base amount that she will receive - If a person divorced and her marriage lasted at least 10 years, she is entitled to receive benefits when her ex-spouse dies if she is unmarried and age 62 or older and her spouses' death benefit is larger than the benefit to which she is entitled based on her work history
Omitting Prospectus
Written communication that offers mutual fund shares for sale, but contains limited information concerning the fund's performance data and disclaimers - Can be distributed prior to the delivery of a prospectus - May not contain an application to invest
