SERIES 6

Alternative Minimum Tax (AMT)

- Enacted by Congress to prevent high-income taxpayers from escaping federal income taxes - If AMT tax liability > regular tax, taxpayer must pay AMT - Tax-preferenced items (e.g. private purpose municipal bonds)

IRS Code Section 1035

- can exchange variable life policy from one company to another without generating any tax consequences - permanent life can be exchanged for an annuity contract w/o generating tax consequence - a fixed annuity cannot be exchanged for a life insurance policy

3 General principles of the prudent investor:

- liquidity of investment - diversification - reasonable expected returns

Code of Arbitration Procedure is mandatory for disputes between

- members and members - customers requesting arbitration against their RR

Characteristics of qualified pension plans

- must not discriminate - must have a vesting schedule

Securities Exchange Act of 1934 (The People Act)

- prohibits unequitable and unfair trade practices - provides for regulation of OTC market - requires registration of B/D with SEC

Similarities between ETFs and closed-end investment companies:

- they are traded on registered stock exchanges - investors pay commissions to purchase and liquidate their positions

Characteristics of money market funds (MMFs)

- typically no-load -managed so NAV remains within narrow limits - underlying portfolios normally made up of short-term debt instruments

How many days does firm have to supply customer with copy of arbitration agreement once requested?

10 days

How are advertising costs expensed?

12b-1 fees

Within how many days must an open-end investment company redeem securities after a redemption request?

7 days

BOD is composed of what percentage of interested persons?

70%

Regarding the Investment Company Act of 1970, what is maximum sales charge that may be deducted over the life of a contractual plan?

9%

Expenses paid from open-end investment company investment income

Advisory fees, accounting, custodial charges

How do interest rate fluctuations affect bonds?

Affects bond PRICE, not PAYABLE INTEREST. Payable interest is stated on face of bond and a legal obligation

Under the Uniform Transfer to Minors Act, what is the maximum allowable gift?

An unlimited donation

Dividend yield =

Annual dividends per share / price per share

Outside business activities and commissions

Any RR must notify member firm in writing before engaging in any activity outside of firm RELATED to the sale of securities. If compensation was rcvd, REGARDLESS OF AMOUNT, firm must give permission in writing and agree to handle the transaction on its books as it would any trade run thru the firm

Define large-cap growth

Appropriate for moderate-risk client; generally less volatile than small-cap stocks, and provide long-term capital growth.

Who must approve the implementation of a 12b-1 plan?

BOD, non-interested board members, outstanding voting shares of company

Preferred stock conversion price =

Conversion price = Par value / # shares

If a bond is trading at a premium, what will be the highest bond yield?

Coupon rate

Uniform Transfers to Minors (UTMA)

Custodial account. Custodian cannot withdraw funds for his own personal use.

Section 529 Plan

Custodial account. No income limitations regarding contributions

An arm of FINRA, what entity issues a formal complaint against a member firm?

Department of Enforcement

Keogh Plan

Eligibility = full-time personnel (1k+ hours per year) who are 21 years + and who have been with the company for 1+ years

Churning

Excessive activity in an account for the purpose of generating excess commissions for the RR

Three classifications used to identify investment companies

Face-amount Certificate Companies (FACC), Unit Investment Trusts (UITs), and Management Companies

True or false: institutional communication requires principal approval?

False -- written procedures for review of institutional communications must be established/used by member

Who approves retail communication?

Firm's principal

1933 Act Registration exemptions

Gov't securities, debt offerings with maturity <270 days, and intrastate offerings, nonprofit orgs

Code of Arbitration Procedure

Handles disputes regarding Uniform Practice Code (UPC)

High-yield bond

High paying bond with a lower credit rating than investment-grade corporate bonds, treasury bonds, and municipal bonds. Riskiest debt security and carries most credit risk.

FINRA Rule 5130

IPOs cannot be purchased by most FINRA member firms, their employees, or close family members -- including those whom the employee financially supports. EXCEPTION made for those who work for limited broker/dealers, such as those who only sell investment company offerings and variable contracts

When can an article be used as an independent reprint?

If the publisher isn't affiliated with member firm in any way

Low dividend yield

Implies stock's market price is considerably HIGHER than the dividend payments

"Buy and hold" style of investing

Index

Interest in separate account =

Interest in separate account = # accumulation units x by unit value **sales charges not included

Treasury note

Issued at par. Fixed interest rate, maturity between 1 and 10 years. Interest paid semiannually. Income not taxable on municipal or state level, but is federally taxed. Popular, which adds to liquidity.

Industrial development revenue bonds

Issued by municipalities; backed by lease payments from a corporation.

Long-term prices fluctuate _____ than short-term prices

More

Short-term rates fluctuate ______ than long-term rates

More

457 Plan

Nonqualified (tax-deferred) deferred-compensation retirement plan available for gov't and certain non-gov't employers in US. Employer provides plan, employee defers compensation into it on a pre-tax basis

Diversification helps protect against which type of risk?

Nonsystematic and business risk.

All member firms must have at least one:

Office of Supervisory Jurisdiction (OSJ)

According to the Conduct Rules, a FINRA member firm may give certain selling concessions to which whom?

Other member firms

What might affect NAV of a mutual fund

Paying a dividend, cash, or an asset. This reduces asset value.

What market does the Securities Act of 1933 regulate?

Primary market -- covers registration and disclosure requirements regarding new issues.

A branch office can be managed by:

Principal or qualified RR

What is required to perform outside business activities?

Prior written notification to member firm. No compensation limits; FINRA not concerned

Preferred stock

Priority claim to assets at dissolution of corporation, fixed rate of return, typically no voting rights

Participating preferred stock

Provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation

SIPC Coverage limits

Provides each separate customer $500k, with cash coverage not to exceed $250k

Cost basis for gifts

Recipient maintains donor's cost basis

Outside business activities unrelated to securities industry

Require written notification to firm prior to sale

Investment Company Act of 1940

Requires investment companies to register with SEC as either FACC, UIT, or management company

Function of an investment company's custodian bank

Safekeeping of portfolio securities and cash. Performs bookkeeping and clerical functions for the fund

What market does the Securities Act of 1934 regulate?

Secondary market

How often must investment company report to shareholders?

Semiannually

Types of preferred stock

Straight, callable, cumulative, convertible, participating, and adjustable

For an insurance company, mortality risk turns out unfavorably if:

The annuitant lives longer than expected AND a life insurance holder dies sooner than expected.

What is the custodian/beneficiary relationship from UTMAs?

There is one custodian and one beneficiary. Beneficiary must be under the age of 25.

When can a member firm make alterations to an independently prepared reprint?

To correct factual errors or to make the article consistent with regulatory standards

Cost basis of mutual fund:

Total cost, including sales charge, plus dividends or capital gains reinvested in fund

True or False: gifts to employees of other member firms is acceptable

True; as long as it is no more than $100

Define Selling Away

When a broker solicits an investor to purchase securities not held or offered by his/her brokerage firm. Violation of securities regulations

Must a new stock being offered in 3 states be registered with the SEC?

Yes -- must also be registered with states

Treasury receipt

Zero-coupon bond that doesn't pay interest, but accrues interest and pays it with principal at maturity. Not good for investor looking for income. STRIPS is a type of Treasury receipt. Sold below par

Warrants

a derivative that give the right, but not the obligation, to buy or sell a security at a certain price before expiration (exercise price or strike price). Frequently issued in bond offerings to improve marketability; preemptive rights offered to existing stockholders to maintain proportionate ownership. Can be traded on secondary mkt before they expire. If not exercised, typically expire within 2 to 10 years

Characteristics of growth fund

capital appreciation, low dividend yield, investments chiefly in large cap stocks

Define funding

covers how an employer contributes to, or funds, a retirement plan

Types of qualified retirement plans

defined benefit (traditional pension) and defined contribution (401k)

In a period of deflation, what happens to bond prices?

deflation = declining interest rates --> INCREASING bond prices

Adjustable preferred stock

dividends issued will vary with a benchmark (typically a T-bill rate). Value of dividend from the preferred share is set by a predetermined formula to move with rate. Because of this flexibility, preferred prices are often more stable than fixed-rate preferred stocks

Who may participate in 403(b) plan

employees of schools, church orgs, and nonprofit orgs

Qualified Retirement Plan

established by an employer for benefit of company's employees. Gives employers a tax break for contributions they make for employees. Helps employers attract and retain good employees.

At what levels is a Collateralized Mortgage Obligation (CMO) taxable?

federal, state, and local

When mgr is suspicious of churning, what will he look for in an account?

financial resources and objectives

What does Securities Act of 1933 address? (The Paper Act)

full and fair disclosure; requires prospectus and registration statement

Rights

give stockholders the right to purchase new shares issued by a corporation at a predetermined price (typically at a discount) in proportion to # of shares currently owned. Expire within 30 to 45 days. Can be traded on secondary mkt before they expire

Code of Procedure (COP)

handles trade practice complaints regarding violations of the Conduct Rules

Convertible preferred stock

includes an option for the holder to convert the preferred shares into a fixed # of common shares, usually anytime after a predetermined date

Broker call loan rate

interest rate charged to B/D for margin loans

Define balanced fund

invests in both common stocks and bonds to preserve capital, generate current income, and provide long-term growth

American Depository Receipts (ADRs)

issued by banks, represent a specific # of shares of a foreign company, and trade and pay dividends in dollars

Callable preferred stock

issuer has right to call in or redeem the stock at a preset price after a defined date.

How are MF dividends paid?

net investment income

Straight preferred stock

noncumulative; any dividends passed are lost if not declared

Define equity income fund

seeks primarily current income, secondary objectives = capital growth and income growth. Composed of common stock, preferred stock, and large-cap convertible securities.

Treasury bill (T-bill)

short-term debt obligation backed by US gov't with < 1 year maturity. Sold in denominations of $1k. Maximum purchase of $5M. Commonly mature in 1 month, 3 months, or 6 months. Issued at a DISCOUNT below par -- doesn't pay fixed interest payments, but bond appreciation provides return on capital

The main benefit of a 1035 exchange is:

tax savings

What is the total amount that may be invested in a Coverdell Education Savings Account in one year?

the current maximum per child

Wash sale

transaction where an investor sells a losing security to claim a capital loss, only to repurchase it again for a bargain.

Under FINRA Rule 2110, communications with public are defined as:

written

Treasury STRIPS (Separate Trading of Registered Interest and Principal Securities)

zero-coupon bond sold at a SIGNIFICANT DISCOUNT to face value and offers no interest payments because they mature at par.