MUST KNOW Series 66
Performance fee can only be charged to customers with at least
$1m assets to invest and a net worth of at least $2m
Deductible from federally taxable estate:
(Taxable over $5.45m) Executor files form 706 Deductions: Funeral & administrative expenses, cost of the estate attorney, claims made against estate, state death taxes
SEC Comissioners
- 5 comissioners appointed by POTUS - 5 year term - No more than 3 from 1 party - Cannnot have any other job and cannot effect securities transactions
TOD - Transfer on death (POD)
- Avoids having securities in the account transferred into name of estate - Security is excluded from estate of the decedent and avoids probate - Desinged for older customers
Under IAA of 1940 - disclosures required
- Comp paid to advisor by issuer for recommendation - Comp paid to advisor by BD - Comp paid to advisory by insurance company - Ability of the customer to use any BD to execute recommended portfolio transactions (does not have to effect trades through BD favored by IA)
Benefits of Real Estate Limited Partnership:
- Depreciation even if mkt value is increasing - non-recourse financing included in cost basis - interest on mortgage loans fully deductible - LTCG can be achieved when property sold
Characterists of Defined Contribution Plan
- Fixed Annual contribution - Varying Benefit amount
If IA wishes to take custody
- Must notify Admin in writing on form ADV - Custody must be kept by qualfied custodian - Prompt notice to clients in writing with custodian name, address, and manner maintained - Account statments sent quarterly - IA audited annually on surprise basis and sent to Admin within 120 days of completion of exam
Uniform State Law requires that for a security to be sold or offered in a state, it must be:
- Registered in that state; or - a federal covered security (Major exchange listed/Blue chip exemption); or - exempt from registration (gvt); or - sold in an exempt transaction (Reg D Private Placement, Reg A, rule 144 Intrastate offerings) Registration with SEC does not mean security is exempt from registration in state
Equity Index Annuity
- Regulated by insurance - Min guaranteed ROR (added expense) - Cap on max return - Backing by full faith and credit of insurance company
Exemptions from being registered as Agent
- sales of specified exempt securities such as Treasury, Agency and Muni debt (not all exempt securities) - Exempt transactions (such as sales of securities to institutions or underwriters) - sale of specific covered securities (private placement issuers) - sales of securities to employer if NO REMUNERATION is paid
Structured Products
-Derivative security, -created by bank, -bond-like but not bonds, -principal protected, -redeemed at par (embedded option in product), -little standardization, -buy and hold (no trading market)
Exempt Issues under Sec Act of 1933:
-Government Issues - Money market issues - Already regulated issuers (bank issuers but not bank holding companies, savings and loan issues, insurance companies, common carrier issues) - Micellaneous issuers: (charitable issuers, small business investment company issues)
ROI
= avg annual cash flow / investment
Active/Passive
Actively managed, passive investments
Partners, officers, and directors of the BD do not have to reigster as an
Agent
AGI includes:
All sources of taxable income: wages, commissions, royalties, alimony, SS payments, pension plan payments (except for payments attributable to the cost basis in non-qualfied plans), investment income (mutual fund distributions and income from foreign investments) and capital gains Once again: Distribution amounts from non-qualfied plans attributable to cost basis (non-deductible investment dollars) is not included
USA: Private placement exemption
An offer to no more than 10 PERSONS during any 12 month period (NOT just non-accredited investors!) TO qualify: - no commissions may be paid for soliciting (unless solicited to financial and institutional investors)
Perpetuity calc =
Annual income / int rate
Blue Chip Exemption to State Law
Any security by an issuer listed on a stock exchange or NASDAQ (they already must be registered with SEC and have stringent listing requirements; thus Admin is not worried about these issues) and investment company securities All securities of that issuer fall under exemption: common stock preferred stock, warrants, rights, bonds, etc. States cannot require registration but can require notice filings
Disputes can be handled by
Arbitration - binding by all parties Mediation is a negotiation between parties and is not binding (PROHIBITED)
Under Investment Company Act of 1940 - Management companies
At least 40% of BOD non interested - Min of $100,000 Total net assets for fund
Brochure Rule Applies to
Both Oral and written advisory contracts (Conflicts with IAA 1940's requirement that advisory contracts must be in writing, but they wanted broadest definition possible)
Agent can or cannot rebate commission if stock decreases
Cannot (only if error was made by the firm)
Unwillful violation can result in
Civil liability (NO CIVIL PENALTY)
Investment advisors & Broker dealers may be formed as:
Corp, part, sole prop, association of owners Any one of these is a "legal" person However, BD's cannot be formed as IA, and IA cannot be formed as BD
Willful violation can result in
Criminal Liab and Criminal Penalty
Custody Rules of both SEC and NASAA
DOES NOT INCLUDE Limited POA, or discretionary accounts, DOES INCLUDE FULL POA If it holds, directly or indirectly, client funds or securities or has the authority to obtain possession of them. This includes: - Receiving checks from clients made out to the name of the advisor (unless they return or forward to BD within 3 business days) - any arrangement where advisor is permitted to withdraw client funds from custodian - Any capacity, such as being a general partner, that gives the adviser access to client funds or securities (acts as trustee for client where the grantor of the trust is the client)
BD's must have physical possession of _____ securities
Derivative
Admin cannot require filing of advertising in a state for
Exempt securities, federal covered securities, and securities offered in exempt transactions
SEC suspends or revokes registration under IA1940 - appel may be filed with ___ within ___ days
Federal court, 60 days
Under USA, IA must update their Form ADV (State registration form) annually within _____ days of fiscal year end
Filed electronically with the SEC and NASAA no ater than 90 days to reflect current and accurate information. Updated form ADV must be sent to IA clients within 120 days of the year end if there is a material change
Deposits made in cash over $10k over 2 week window must be reported to
FinCEN within 15 days
IAR registered in state terminates employment with Fed covered advisor - notice made by
IAR - because Fed covered advisor not registered in state
BDs excluded from def of
IAas long as no fees charged
There is no federal registration for
Investment Advisor Representatives
Brochure must include:
Investment advisers services, fees, educational background, investment practices, conflicts of interest, types of investments, types of clients, etc. - balance sheet included if advisor took custody
an IA who renders advice soley to investment companies
Is a federal covered advisor (exempt from state reg, subject to fed reg)
Individual who represent an ____ in the sale of an _____ security is excluded from definition of agent
Issuer, Exempt
Hedge Funds most often structured as
Limited Partnerships (Private Partnerships - units are calculated and valued based on mark-to-market accounting, so they are also valued at "market value") - Advisor comp based on % of capital appreciation - Advisor typically makes a significant personal investment
Pref Stock maturity
Longest maturity available - extremely affected by interest rate risk
Systematic risk =
Market risk - market moves adversely - cannot be diversified away, but can be hedged against
Commercial Paper is exempt if
Max maturity is 270 days, issued in at least $50k amounts, and is in top 3 ratings
If a person (firm) has an office in the state and deals with clients in that state is there an exception for not registering there?
NO - no matter who it's customers are, it must register in that state (exempt from registering with SEC)
Earnings limit on converting Traditional IRA to Roth?
NO - tax grab for federal gvt
Covered call writing is a bull, bear, or neutral strategy?
Neutral/(slightly)Bearish strategy If market plummets, covered call writer still owns stock that dives
Customer must receive disclosure doc/prospectus
No later than confirm of sale
Earned income is income received from one's
Occupation (NOT FROM SELLING OPTIONS)
Prudent Investor Act vs Prudent Man Rule
PIA - gives fiduciaries much broader latitude in terms of their ability to allocate trust assets to various investment classes PMR - simply requires investments be of low risk
What happens to ROR when interest rate stays the same and time intervals lengthen?
ROR declines (less compounded interest)
To fall under def of IA, one must render advice about
SECURITIES
SEA of 1934 requires registration of excahnges and makes them
SROs under SEC. Does not require registration of investment advisors
BD registration required under:
Section 15 of Securities Exchange Act of 1934
Priority claim in corporate liquidation
Secured creditors, unpaid wages and taxes, trade creditors (unsecured creditors), unsecured bondholders, preferred stock, com stock
Broker dealers and agents of broker dealers must register with ______
State, unless an exemption is available. (A BD wit no office in state, that deals exclusively with financial institutions, issuers, or other BDs, is EXCLUDED from definition of BD)
Growth Investors consider company's
Stock price appreciation rate
Non-systematic risk
Stock specific risk - Can be diversified away - Once fully diversified, it no longer has non-systematic risk
Susppicion
Suspicious activity report (SAR) filed within 30 days
Dynamic asset allocation
Tactical asset allocation - shifting values of different asset classes (dynamically change percentages)
NPV
Takes the expected anual cash flows from an investment over the years and discounts them, using market rate of interest compounded over time, to today's present value. Opposite of future value - Can be used to decide the best option when presented with a choice of either receiving/making a lump sum now, or receiving/making smaller payments of a longer period of time that equal a greater dollar amount
What type of plan can be rolled over to a IRA
Tax-qualfied Non tax qualfied include tax on build up portion
Order Tickets Must Contain
Timestamp Time of execution Customer name/account # Size of trade Security to be traded & description Price Time length of order Solicited or unsolicited Registered Rep name/number
Surety bond can be required for
Typically $10,000 state regestration of BDs, agents, and IA's who take custody
IRR =
YTM ROR that makes PV of inflows = to the present value of outflows IRR for investment is discount rate that makes NPV of investment's CFs = to 0, assumes any payments are reinvested True implicit yield of an investment
Stock dividends
adjust CB down, and are non-taxable events
Post-registration requirements do not pertain to
agents
Death or withdrawal of a minority of the partners does or does not constitute assignment
does not
an IA with no office in that state that only solicits institutional investors is
exempt from registration in that state Not exempt if it solicits individual investors (States care about the little guys)
Advisors to investment companies are
federally covered
13g
filing by anyone who accumulates 5% or greater holding in company - required to file witihin 45 days of calendar year-end with SEC if any one person (or an entity controlled by that person) intends to remain a passive investor.
Fed Covered Advisor can be audited by state admin
if state admin suspects fraud
Long term fixed income are lousy in times of
inflation
Cost of money =
interest rate
NYSE and S&P 500 are generally composed of
large caps
When mkt price of security reaches eq. - transaction costs will be
lower - spread between bid and ask is non-existent and active trading is taking place at that price. Very active trading, low commission costs
Reg D 504, 505 & 506 (no fed required, state required)
maximum under 504 - $1m $1m-$5m - 505 Minimum under 506 - $5m
Sandardized futures contracts do not include
price of commodity
Margin agreement obtained ______ after first transaction
promptly
To sell an asset allocation program, it must be
proven and validated - supported with data. Omitting this is unethical
Soft Dollar arrangements cannot be used to pay for
salaries, hotel and retnatl car costs, travel or entertainment
A firm that prepares research reports or allocation reports covering ________ are defined as IAs
securities
Arithmetic mean
simple average
Institutional buyer is defined under USA as any person
so designated by the Admin by rule or order (banks, savings & loans, trust companies, insurance companies, investment companies, pension and profit sharing plans, other financial institutions) - no minimum for AUM
8k
special report of significant events
Citizenship is not considered when evaluating
tax status
Manager must approve opening of account before
the first trade
State registration laws are concerned with protecting
the small investor
Customer Privacy rules allow disclosure of specific customer account info
to a third party as necessary to complete transaction requested by that customer - Finra or SEC - Not to any gvt agency though
Commission disclosed on
trade confirmation
Exchange traded note (ETN)
type of structured product - created by ban - return tied to benchmark - debt instrument (not an equity security) - Listed on exchange and trade (minimal liquidity risk) - no interest or divident payments - tax advantaged compared to conventional debt instruments (taxed at LT capital gains rates)
Issuer transaction
where issuer sells or redeems securities (in the primary or new issue market) - Where issuer receives proceeds of sale
Advisors to insurance companies required to register
with the state
Under Uniform Sec Act - Investment advisory contracts must be in
writing
NASDAQ Index is heavily weighted in
younger high tech growth companies
Unregistered agents cannot sell
any type of security (even if security is exempt) - can sell CD's because they are bank products
IA Soliciters
are not required to reg with SEC as IAs, are required to register in state as either IA or affiliate with IA and register as IAR
Portfolio with beta over +1 has
both systematic and market risk
Geometric Mean
considers compounding of annual returns
10k
corporation annual audited financial statement
10q
corporation quarterly unaudited financial statements
