Series 65

Section 222 of Investment Advisers Act of 1940

prohibits am Administrator from conducting an audit of a federal covered adviser unless the adviser's principal is located in that state

Types of Orders Block Trades

$10,000 or more shares of stock

State Securities Registration Procedures Filing the Registration Statement

**most are filed by the issuer, but they may also be filed by any selling stockholder (block sale by an insider, or a broker/dealer)** -MUST supply the following information: a. amount of securities to be issued b. states which the security is to be offered c. any judgement concerning the offering -Administrator may require: a. Filing Fees (based on % of total offering price) b. Ongoing Reports -not required more often than quarterly c. Escrow -security to be placed in escrow IF: -security is issued in past 3 years -security is issued at a price substantially different than offering price -security is issued to any person for a consideration other than cash d. Special Subscription Form e. Withdrawal of Registration Statement -may not be withdrawn until 1 year after effective date

Maintenance of Records (state and federal)

-5 year requirement; first 2 must be maintained at principal office -State registered IA's must meets home state requirements, that is sufficient

Balance Sheet Shareholder Equity

-AKA: net worth -stockholders claims on company assets after creditors have been paid =Assets - Liabilities =capital stock+capital in excess of par+RE

Passive Income

-Rental Property -Limited Partnerships -Enterprises that an individual does NOT actively participate Ex. income from partnership if limited partner **may be used to offset passive losses ONLY**

Definitions Person Associated with an Investment Adviser

-any partner, officer, or director of the investment adviser, or -employees of the investment adviser (who do more than clerical/administrative work)

Broker/Dealer Definition

-any person engaged in the business of effecting transactions in securities for the account of others OR his own account -BROKER = when acting on behalf of others -DEALER = when acting on behalf of themselves

Exchange Traded Funds

-invest in a specific index -trades like a stock, so similar to closed end fund -can sell short, purchase on margin -generally have lower expenses (commission) -pooled

Taxation Wash Sale

-A sale at a loss and then a repurchase, of an identical security, within 30 days (rights, options, warrants, convertibles; bonds: same maturity, coupon, AND issuer) -cannot use the capital losses to offset gains -the disallowed loss is added to the repurchased shares cost basis **only applies to realized losses, NOT realized gains**

FHLMC

-AKA participation certificate -residential -no FFC of gov -higher yield than GNMA

Market Capitalization

-# of shares x MP -Small: 300MM-2B -Mid: 2B-10B -Large: 10B+

Investment Company Act of 1940 Embezzlement/Larceny

-$10,000 max fine -5 years max imprisonment -Subject to civil action by SEC

Educational Savings Programs 529 Plans (QTP: qualified tuition plans)

-2 types: 1. Prepaid Tuition Plans -locks in tuition prices at eligible universities (usually residency requirements) -covers tuition and mandatory fees only (some cover room/board) -guaranteed or backed by state -age limits -Lump sum payments based on age -Limited enrollment period 2. College Savings Plans -does not lock on college tuition -covers tuition, room and board, mandatory fees, books and computers -contribution limits of $250,000 -no state guarantee -no age limits -investment vehicle options (stock/bond MFs, MM funds) -Open enrollment TAX TREATMENT: -contributions are made with after-tax dollars -no state and federal tax on earnings -ineligible withdrawals are subject to 10% penalty CONTRIBUTIONS: -$65,000 (single) or $130,000 (mfj) per year per benficiary (no income limitations for donors) -Donor not required to be relative, maintains control over account -no gift tax consequences -unused funds can be rolled over to beneficiary's family member -Impacts ability to receive financial aid -Offering circular required (official statement) **investment Options do NOT allow US Savings Bonds**

Trust Basics

-3 parties specified in document: settlor, trustee, beneficiary (possible for all 3 to be same person) -Settlor: supplies property for trust -Trustee: holds legal title to property held, bound by trust documents and fiduciary duties -Beneficiary: receives benefit from trust -Remainderman: person receiving remaining balance after trust runs its course -Taxed based on distributed and retained income, retained income in excess of $11,650 is subject to highest tax rate (35%) -Income reported on Form 1041

Dividend Disbursing Process

-4 dates involved with the payment of a dividend on corporate stock: 1. DECLARATION DATE: -dividends are declared by company's board of directors -announced to the public 2. RECORD DATE -board specifies a date of record; the date that a list will be made of the owners of the stock who will receive the dividend 3. PAYABLE DATE -dividend checks are sent out 4. EX-DIVIDEND DATE -the first day on and after which a purchaser of the stock will not receive the dividend -left up to the SRO (FINRA for example) **SO, one must purchase the stock a day before the EX-dividend date in order to receive the dividend

Legal Jurisdiction of Administrator Requirements

-Administrator has jurisdiction over any: a. sales Includes: -transfers of security in which valuable consideration involved -bonus securities as part of transaction (car, jewelry, warrant, right) -gift of assessable stock (stock issued below par for which issuer has right to assess shareholders for balance of unpaid par) b. offer to sell -legal authority to regulate securities activities in that state -sales, or offers to sell must: 1. originate in the Administrators state, or 2. be directed to the Administrators state, or 3. be accepted in the Administrators state **more than one Administrator may have jurisdiction over a security or transaction, since they often involve several states (origination, direction, and accepted states)**

Administrators Powers of Exemptions

-Administrator has power to revoke ALL exempt transactions, and 2 exempt securities: SECURITY EXEMPTIONS (2): 1. any security issued by religious, educational, benevolent, charitable, fraternal, etc, AND 2. investment contracts issued with employees stock purchase plans, savings, etc. **if a person wishes to contest the Administrators decision, the Administrator must provide opportunity for a hearing within 15 days of the written request**

Financial Requirements For STATE Covered Advisers

-Administrator may require the adviser to post a surety bond, or maintain a minimum net worth -applies for CUSTODY (usually higher fees) and DISCRETION 1. CUSTODY: a. net worth requirement: $35,000 b. surety bond: $35,000 2. DISCRETION: a. net worth requirement: $10,000 b. surety bond: $35,000 3. NEITHER a. but accepts prepayment of fees of more than $500, MUST maintain a positive net worth at all times **states may have higher net worth or bonding requirements, but if an IA meets the requirements of the state where its principal office is located, that is sufficient**

Investment Analysis Terminology

-Alpha: extent that asset/portfolio return exceeds/falls short of expected (positive > negative) (=actual return - (benchmark return * beta)) -Arbitrage: guaranteed profit, purchase then sell security in different market -Benchmark portfolio: model portfolio of large number of assets (S&P 500) against which performance is measured -CAPM: theory, derive expected return on asset on basis of asset's systematic risk -Completely diversified portfolio: specific risk of each asset diversified away -Earnings multiplier: PE ratio -Efficient market theory: prices of securities rapidly reflect simultaneous access to all info -Monte Carlo simulation: stat method to determine return profile of security/portfolio, recreates potential outcomes by generating random values on basis of risk and return characteristics of securities (no real world data, unknown variables, and no analytical solution) -Optimal portfolio: highest expected returns for given risk level -RFR: interest rate of 90-day T-bill -R-squared: percentage of portfolio performance tied to benchmark (100: in line, higher R^2 has more useful beta) -Sharpe ratio: measure of portfolio's risk vs expected return (return/st dev) -Systematic risk: risk associated w/ macroeconomic factors (market risk) -Unsystematic risk: risk associated w/ investment

Sales of Securities at Financial Institutions

-B/D services conducted in distinct physical location away from area where retail deposits taken, or must distinguish services from financial institution -disclose orally and in writing that securities products not FDIC insured, not deposits/guarantees of financial institution, subject to risk -make reasonable effort to obtain written acknowledgement of disclosures -Display disclosures: ot FDIC insured, no bank guarantee, may lose value; UNLESS a. radio broadcasts under 30 seconds b. electronic signs that exclude media messages c. signs used only as location indicators

Post-Registration Requirements

-B/D's required to preserve records for 3 years (2 years easily accessible) -includes blotters, correspondence, memoranda, papers, emails, website design, etc -amendments filed promptly **no requirements to maintain copies of client tax returns**

Balanced Funds

-Both Stocks and Bonds -usually 60/40 (formula based)

Option Strategies

-Bullish: buy calls or write puts (BUY low) -Bearish: write calls or buy puts (SELL high) 1. Buy Calls (Premium loss) -bullish 2. Write Calls (Unlimited loss) -neutral or bearish -generate income from premium -hedge long position -speculate on decline of price 3. Buy Put (Premium loss) -bearish 4. Write Puts (Strike price-premium) -bullish 5. Straddles -not sure which direction market will move -combines a put and a call on same stock with same exercise price and expiration date -buyers: profit from volatility -sellers: profit from stability

Uniform Transfer to Minors Act (UTMA)

-Can hold real estate, partnership interests, intangible assets -Not required to be transferred to beneficiary upon age of majority, may be delayed until 21 or 25 (state specific) -Possible for assets to be included in custodian's estate upon death for tax purposes

Capital Gains/Losses

-Capital gain: sale price in excess of cost basis -Capital loss: sale price below cost basis -Net capital gains/losses (taxation): 1. Net ST gains/losses for year (held < 12 months), ordinary income rate 2. Net all LT gains/losses for year 3. Offset total ST by LT, resulting gain or loss is taxed based on LT or ST status -Capital losses are deductible up to 3,000, can carry forward indefinitely -Sell shares by FIFO (automatic), Share ID, or Average Cost Basis (MFs, not stocks)

Options

-Derivatives -Hedging (protect value or speculate price) -Establish price and time for buy/sale Buyer: right (long) Seller: obligation (short) -Call: holder: buy, writer: sell -Put: holder: sell, writer:buy -100 shares (round lot) -Premium: cost ($/share) -Leverage: options tend to cost less than underlying stock Close: exercise, sell/buy, or expires American: anytime European: at expiration date

Portfolio Income

-Dividends (15-20% if qualified) -Interest (debt security: ordinary income rate) -Net Capital Gains (stcg: ordinary income rate / Itcg: 15-20%) **taxed in the year received no matter what**

Gramm-Leach-Biley Act of 1999

-Domestic commercial banks and financial institutions are generally excluded from the B/D definition, BUT -those that engage in brokerage related activities are subject to BOTH SEC registration as well as applicable provisions of state securities law (USA) -AKA: Financial Modernization Act

Evaluating DPPs

-Economically viable -Tax benefits -GP management ability/track record -Investor's objectives met -Costs and revenues comparable

Bond Yields Current Yield

=coupon yield/current price (par*coupon/price) -trading at a discount: current yield > coupon -trading at premium: current yield < coupon

Keogh Plans

-Employee Retirement Income Security Act (ERISA) qualified plans (self-employed and owner-employees, unicorporated sources), CONTRIBUTIONS: -only cash can be contributed -deductible or non-deductible -up to $50,000 -Excess subject to penalty -EE gets same % as ER, NDR -Unlike IRA, contributions can be made by EE and ER TAX: -deferred on contributions until distributions are taken -income and capital gains are also tax deferred, but subject to ordinary income tax at distribution DISTRIBUTIONS: -10% early withdrawal penalty + income tax -can begin at 59 1/2, 70.5 rule applies -Lump sum or periodic -Can designate beneficiary ELIGIBILITY: 1. Full time employees (1,000+ hrs of work) 2. Tenured employees (one or more years of continuous employment) 3. Adult Employee (older than 21)

Employee stock options

-Employee right to purchase # of CS shares at stated price and time -No non-discrimination requriment -Strike/grant/exercise price usually MP at time option granted -Vesting period (minimum employment time) -Price increase, exercise low, sell high

3 Tools of Federal Reserve Board

-FED determines how much money is available 1. Changes in Reserve Requirements -raising amount of funds commercial banks must leave on deposit, decreasing money available for lending -leads to higher interest rates 2. Changes in Discount Rate -rate the FED charges member banks when lending them money -higher rates discourage borrowing, reducing money supply 3. Open Market Operations -when FED buys and sells US Treasuries in open market under FOMC -when purchased, increases money supply (banks have higher reserves) **FED does NOT set the prime rate**

Self Regulatory Organization (SRO)

-FINRA -Municipal Securities rulemaking Board (MSRB) -Chicago Board Options Exchange (CBOE)

Power of Attorney

-Full POA: deposit/WD cash/securities, make investment decisions for account owner -Limited POA: document specifies level of authority, cannot WD cash/securities -Durable POA: designated POA as continual in event of grantor's incapacitation, terminated upon grantor death

General terminology

-Guaranteed: principal, interest, or dividends (not cap gains) -Offer/offer to sell: every attempt/offer to dispose of or solicitation of offer to buy security or interest in security for value -Sale/sell: contract to sell or disposition of security/ interest in security -Fraud: intentional effort to deceive for profit -Solicitor: compensated individual who acts as agent of IA in referring clients -Registrant: security professionals/issuers in process of or who have registered with Administrator -Institution: banks, trust company, S&L, insurance companies, EBP > $1MM, government agencies -Retail client: non institutional client (need more protection than institutional clients) and accredited investors

Investment Counsel

-IA's PRINCIPAL business is GIVING INVESTMENT ADVICE -Provide investment supervisory services a. discretionary authority b. ongoing management, recommendations, arrange trades based on advice c. compensated for average value of client's account over period of time

Bonds Funds

-INCOME is primary objective 1. Tax Free (Tax-Exempt) Funds -municipal bonds/notes and tax-exempt MM -income exempt from federal tax -capital gains distributions are TAXABLE 2. U.S. Government and Agency Funds -focus on current income and MAXIMUM safety -ginnie mae

Rollovers

-IRA: Take possession once per 12 months if completed w/in 60 days, 100% must be rolled or subject to tax and penalty -Qualified Employer plan: take possession for rollover, 20% withheld, 100% must be rolled over (must make up 20%) or subject to tax/penalty, apply for refund on next return -Roth: rollover from traditional IRA taxed as income -Direct transfers: no withholding or time limit

Zero coupon bonds

-Issued at discount to par -No reinvestment risk -More volatile than comps -Useful when target goal -Corp/muni have higher credit risk -Treasuries (STRIPS) have zero risk -Lock in yield/ROR for predetermined time

Eurobond

-Issued/sold OUTSIDE denominated country -US government does NOT issue -Foreign/domestic corporations/governments -bearer form, annual interest, not subject to w/holding tax

Registration of Canadian Broker/Dealers and Agents

-Limited registration required for a B/D domiciled in Canada with no office in the U.S. can effect transactions with: 1. a person from Canada who is temporarily a resident in the U.S. and was already a client, or 2. a person from Canada who is a U.S. resident and whose transaction is in a self-directed retirement plan in Canada **renewal applications must be filed before December 1 each year**

Exchange

-Listed securities -Central marketplace -Double-auction markets (competing floor brokers) -Buyer executes at higher than last trade: plus tick -Seller executes at lower than last trade: minus tick -Specialist maintains order, trades from own inventory to stabilize/facilitate, fills market/limit orders

Withdrawal from Traditional and Sep IRAs

-Lump sums, installments, regular or irregular -Taxable as ordinary income -WD by year following 70.5, meet minimum or 50% penalty -SEPP IRS rule: IRA payments annually based on life expectancy, not penalized before 59.5 -After-tax contributions not subject to taxation

Dividend & Taxation

-MFs usually allow div, int, and cap gains to automatically reinvest -Dividend reinvestment plan (DRIP): purchase additional shares directly from issuer w/ little or no commission, often discounted price -Distributions taxable in cash AND reinvested form, 1099 details source of distributions -Interest-on-interest: compounding interest, taxable -Reinvestment is added to cost basis since already taxed -Stock splits added to cost basis

Management Investment Companies Open-End

-MUTUAL FUNDS -does not specify exact number of shares -can raise unlimited amount of capital by issuing new shares -active management, stated objective -net redemption: redemptions > purchases a. Capitalization: unlimited; continuous offering of shares b. Issues: common stock ONLY c. Shares: full or fractional d. Offering and Trading: sold and redeemed by fund only; continuous primary offering; MUST redeem shares e. Pricing: NAV + Sales Charge; selling price determined by formula in prospectus f. Shareholder Rights: dividends;voting **NAV calculated daily by deducting assets minus liabilities**

Securities and Exchange Commission (SEC) Credit Requirements (Margin)

-Regulation T a. delegates to Federal Reserve System b. sets margin requirements c. set at 50% Today -prevents excessive use of credit *newly issued securities cannot extend credit - payment must be in full (w/in 35 days) **mutual funds are continuous new issues - can NOT be purchased on margin

IRA contributions

-Made from Jan 1 thru tax deadline following year -Excess contributions subject to 6% penalty if not removed before filing or tax deadline -Cannot invest in collectibles or life insurance, cannot short sell, speculate w/ options, or trade on margin -Should not invest in tax-free muni securities -Can invest in real estate with NO personal interest (excluding siblings)

Taxation Margin Expenses

-Margin interest is tax-deductible -Cannot exceed net investment income (int, div, cap gains) -Excluding interest expense in purchase of muni's

Margin Accounts

-Margin limit set by Federal Reserve Board -Customers must meet min. suitability requirements, sign margin agreement (credit, hypothecation, loan consent) -Adviser cannot execute any transaction in margin without receiving an executed margin agreement promptly after the initial transaction in the account 1. Credit Agreement -discloses the terms under which credit is extended *mandatory 2. Hypothecation Agreement -allows firm to pledge securities held on margin *mandatory 3. Loan Consent -allows firm to lend securities held in margin to other brokers -usually for short sales *optional

Corporate Debt

-Mortgage bond: backed by real estate/physical assets, assets in excess of amount borrowed, holder is general creditor -Equipment trust certificate: finance acquisition of equipment, down payment (~20%), 15 yr term, receive title at payoff -Collateral trust bonds: securities deposited into trust as collateral, must be marketable, security quality determines bond rating -Guaranteed bond: guaranteed payment of principle and/or interest by entity other than issuer (unsecured) -Debenture: backed ONLY by its word and general creditworthiness, written promises of corporation (unsecured)

Administrator Orders

-Must notify all interested parties of orders/reason and grant hearing w/in 15 days of receiving written request -No final order entered without: q. Appropriate prior notice to interested parties b. opportunity for hearing c. written findings of fact and conclusions of law

Money Market Funds

-NO LOAD -Open End Mutual Funds -serve as temporary holding account for cash -primary objective is liquidity -dividends change often (amount, frequency) -dividends computed daily, credited monthly -check writing privileges -price fixed at $1 per share and does not fluctuate with interest rates

2. Provide Consent to Service of Process

-New applicants must provide Administrator in every state in which they intend to register with a consent to service of process -Appoints Administrator as applicants attorney to process no criminal security-related complaints (same legal effect of being served personally) -If registering in multiple states, the Administrator of each state must receive a consent to service of process *Remains in effect permanently and does NOT need to be renewed*

Types of Employee Stock Options

-No NDR 1. Non-qualified Stock Options (NSO) -form of compensation -when exercised (buy stock), the difference between the current market price and the strike price is reported as wages for both EE and ER -So, EE is taxed at ordinary income (considered salary), and -ER receives a tax deduction as salary expense 2. Incentive Stock Options (ISO) -Max 10 year limit for exercise -MV - Strike used for AMT add back -taxed like a Non-Qualified Stock Option UNLESS: a. exercised ISO is held min 2 years after date of grant, and b. 1 year after date of exercise, THEN: -it is taxed as capital gains

Form ADV-E

-ONLY applies to IA's who have custody of client accounts -requires an annual surprise examination by an independent public accountant -the form contains info about the adviser and about the exam conducted

Warrants

-Owner has right to purchase securities from issuer at price (usually MP+) -LT, buy at later date -Sweeten bundled securities -Derivative, value depends on underlying stock value

Management Investment Companies Closed-End

-PUBLICLY TRADED FUNDS -raises capital through a common stock offering -company registers a fixed number of shares with SEC and offers to public for limited time -active management, stated objective a. Capitalization: fixed; single offering of shares b. Issues: common stock, preferred stock, debt securities c. Shares: ONLY full d. Offering and Trading: initial primary offering; secondary trading OTC or on exchange; does NOT redeem shares e. Pricing: Current market value + commission; Price determined by supply and demand f. Share Holder Rights: dividends; voting **NAV calculated once per week**

Securities Act of 1933 Liabilities

-Penalties for false/misleading statements in registration statement or prospectus (civil, criminal) -Purchaser may sue: 1. every person who signed registration form 2. all directors of issuer 3. attorneys 4. accountants 5. appraisers, experts 6. underwriters 7. parent companies -statute of limitations: earlier of 1 year after violation discovery or 3 years after date of action -SEC can make/ammend/rescind ruled, administer oaths, supoena witnesses/records, seek injunctions/ restraining orders, turn over evidence to attorney general

Rights

-Preemptive rights: existing SH maintain proportion share by buying newly issued shares before public -Rights offering: existing SH purchase CS below current MP -Valued separately from stock -Trade in secondary market -Exercise, sell, or let expire

Breakpoint Sale

-Prohibited -attempting to make higher commissions by selling shares just below the point at which a sales charge is redcued

Simplified Employee Pensions (SEP IRA)

-Qualified Plan -Ideal for small businesses and self employed CONTRIBUTION: -up to 25% of employees salary up to max of $50,000 per employee -must contribute same percentage for each employe -FULLY VESTED (immediately belongs to employee) ELIGIBILITY: -must have min $550 compensation from employer in current year -must be 21 years old min -must have performed services for employer during at least 3 of last 5 years -Allow all eligible employees to participate TAX: a. Employer -contributions are tax deductible b. Employee -NOT tax deductible until withdrawn -earnings in account are tax deferred DISTRIBUTIONS: -10% penalty if taken before 59 1/2 -RMD by April following yr they turn 70 1/2, then by Dec 31 of each year -By April 1 following year of retirement (no RMDs until retirement, even if 70.5)

Taxation Individual Income Taxes

-Regressive Taxes - levied at same rate regardless of income (sales, payroll, property, gasoline) -Progressive Taxes - increase tax rate as income increases (income tax and estate taxes) **Alimony payments are deductible, Child Support is NOT** -Portfolio Income - includes dividends, interest, and capital gains *taxed in the year received* -Dividends - 15 - 20% tax -Interest - Ordinary Income Tax Rate

The Securities Act of 1933 SEC Regulation D (private placement exemption)

-SEC adopted in an effort to facilitate the capital needs of small businesses -SEC Rule 506: -provides an exemption for offers and sales to no more than 35 purchasers -accredited investors do not count in that limit -counts towards Unsophisticated investors, who can participate in offering if a purchaser representative (accountant, lawyer, or financial adviser) is representing them. -cannot solicit or advertise

The Securities Act of 1933 Rule 482 (Omtiting) Prospectus

-SEC permits companies to use as long as the following conditions are met (for mutual funds): -information must be taken from regular prospectus -must state from whom the prospectus can be obtained -must urge investors to read prospectus before investing -past performance data quoted must be accompanied by disclaimers -cannot be used to purchase the shares; purchases may be made only via an application found in final prospectus

Securities and Exchange Commission (SEC) Order Tickets

-SEC requires preparation of order tickets before order entry -Required disclosures include: a. account number b. whether solicited, unsolicited, or discretionary c. whether long or short (if a sale) d. terms and conditions of order (market or limit) e. number of shares or aggregate par value f. time of order entry and execution, and price, and g.identity of agent who accepted order ***2 items NOT on order ticket: 1. current market price 2. clients name or address

Earned Income

-Salary -Bonuses -Income from Active Participation in a Trade or Business -General partner includes partnership income

SIMPLE Plans

-Savings Incentive Match Plans for Employees -for businesses with less than 100 employees who earned min $5,000 in compensation -No other retirement plan in place -Easy, inexpensive -Pre-tax contributions ($11,500 max, $2,500 catch-up) -Employee matching (2% nonelective up to 250K, OR dollar-for-dollar match up to 3% of compensation)

Investment Company Act of 1940 Shareholder Reports

-Shareholders MUST be mailed semiannual reports including: 1. balance sheet 2. income statement 3. listing of the amount and values of securities owned 4. statement of purchases and sales 5. statement of the remuneration paid by the investment company

Econ Basics

-Social science concerned with production, distribution, consumption -Micro: individual units (households, firms) -Macro: aggregates (GDP, inflation, unemployment) -Fiscal policy: president and congress (budgeting/taxation) -Monetary policy: board of governors and federal reserve

Asset Allocation Funds

-Stocks, Bonds, and Money Market instruments -allocations are changed based on expectations or performance

Fundamental Analysis 4 Types of Industries

-Study of business prospects of company w/in context of industry & economy 1. Defensive Industries -LEAST affected by normal business cycles, demand constant -produce non-durable consumer goods -ex: food, pharmaceuticals, tobacco, and energy -stock: less risk, less return 2. Cyclical Industries -HIGHLY sensitive to business cycles and inflation -produce durable goods -ex: heavy machinery and automobiles -Counter-cyclical: up when economy down (gold mining) 3. Growth Industries -growing faster than the economy as a whole -due to technological changes, new products, or changing consumer tastes -pay little or no dividends because companies reinvest all earnings -Computers, bioengineering (current) 4. Special Situation Stocks -unusual profit potential -nonrecurring circumstances -new management, resource discovery, new product

Investment Company Act of 1940 Computing Returns on Mutual Fund Shares

-TWO types of returns (SEC approved) used when computing returns on investments in mutual funds: 1. CURRENT RETURN: -may only be based on preceding 12 months -capital gains distributions may not be included in calc Calculation: (annual dividend) / (current offering price) 2. TOTAL RETURN: -always assumes reinvestment of all distributions (dividends and capital gains) Calculation: (capital gains) + (dividends distributed)

What is a Security - Howey Decision

-The US Supreme Court, under the Howey decision, defined a security as: 1. an investment of money, 2. in a common enterprise, 3. with the expectation of profits, 4. to be derived primarily from the efforts of a person other than the investor **common enterprise - fortunes of the investor are interwoven with those of either, the person offering the investment, a 3rd party, or other investors

Trust/Estate suitability

-Trust document states objectives (must be followed) -Will instructions must be followed (estate) -Prudent investor rule if actively managing -Tax considerations -Conflicts between grantor and beneficiary

Eurodollars

-US dollars deposited in FOREIGN banks (euro=outside) -short-term (1-180 days) -LIBOR interest rate (daily bank survey, 15 periods, multi currency) (most widely used ST benchmark)

Exemptions From Registration

-USA may exempt BOTH securities and/or transactions from registration and filing in the state -Exempt securities retain their exempt status at its initial issue and in subsequent trading BUT... -Exempt transactions must be established before each transaction NOTE: -it is unlawful for any person to offer or sell any security in this state unless: 1. it is registered under the act, or 2. the security or transaction is exempted under state law, or 3. it is federally covered

Investment Company Act of 1940 Transactions of Certain Affiliated Persons and Underwriters

-Unlawful for any affiliated person (or principal underwriter) of a registered investment company to: 1. knowingly sell any security to that investment company unless it is a sale only of shares issued by that company OR a sale of securities of which the seller is the issuer and which are part of a general public offering 2. borrow money or any property from the fund 3. knowingly purchase from that investment company any security other than the funds shares -may file petition for exemption with SEC **Affiliated Person - any person directly or indirectly owning, controlling, or holding with power to vote, 5% or more of outstanding shares of the investment company

OTC

-Unlisted securities -Location: no central, phone, computer, trading rooms -Pricing: interdealer network, negotiated market -Market makers: buy/sell at least minimum unit in which they have published bid/ask -Price dynamics: MM raise bid: market price rises, vv

Disclaiming IRA

-Within 9 months, in writing, cannot take any money -Passed to next beneficiary or dictated by will

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) General

-a "beefed" up version of 1934 Act -increased penalties for insider transaction -made the recipient of insider information as guilty as the insider who passed on the information (tippee/tipper liability) -insider violates the rules only if he acts (makes a transaction) on the basis of non-public information -the act allows to seek civil penalties against violators up to the greater of $1MM or treble damages TREBLE DAMAGES: -a fine of up to 3 times any losses avoided or ill-gotten gains ON TOP OF required surrender of profits/losses avoided -can offer reward to informants -SEC can elect to pursue criminal action Criminal: max of 20 years in jail

Securities and Exchange Commission (SEC) Market Maker

-a dealer who holds himself out as being willing to buy and sell a particular security for his own account regularly

Debenture

-a debt obligation of the corporation backed ONLY by its word and general creditworthiness -written promises of corporation

Risk Measurements Convexity

-a more accurate representation of what will happen to prices with changes in interest rates -characteristics: a. on a curve b. higher convexity = good c. MOST useful in determining price volatility to significant change in interest rates

The Securities Act of 1933 The Final Prospectus

-a shorter document, compared to to registration document -summarizes the info in the registration statement -must contain all facts in registration statement, in shorter form -must be given to every person who purchases, no later than with confirmation of sale **unlawful to sell securities before the effective date of registration statement**

Advertising Rules for Websites

-act considers an IA's website to be advertising -prohibits the following: 1. uses of testimonials 2. uses the initials RIA or IAR beside the advisers name -suggests a level of competence, when there are non at all required 3. makes reference to past profitable recommendations made without including those unprofitable as well -must also caution the reader that it should not be assumed that future recommendations will be profitable 4. represents that any graph, chart, etc can be used to determine which securities to buy or sell 5. fails to disclose any ownership position in securities being recommended by the investment adviser

Administrator Summary Order (Acting Summarily)

-acting without prior notice -specific cases where the power applies: 1. postponing or suspending registration of any securities professional (pending related proceeding determination) 2. postponing or suspending registration of any security (pending related proceeding determination) 3. denying or revoking a specific security or transaction exemption **applies to BOTH professionals AND securities**

General Partner

-active investor of the LP (fiduciary relationship) -assumes unlimited liability; personally liable for all losses and debts -makes decision that bind the partnership -buys and sells property for partnership -manages the partnership property and money -supervises all aspects of partnerships business -maintain minimum of 1% financial interest in the partnership **CANNOT borrow, compete, or commingle personal funds with partnership**

Securities and Exchange Commission (SEC) Insider Transactions Section G Filings

-adopted to ease the beneficial ownership requirements for passive investors -passive investors owning more than 5% of any registered security may file Schedule G rather than Schedule D -must do so within 10 days after crossing the 5% threshold, amend w/in 45 days of quarter end for changes **PASSIVE INVESTOR -can certify they did not purchase or do not hold the securities for purpose of changing or influencing control over the issuer -hold no more than 20% of issuers securities

Financial Requirements for Registration Substantial Prepayment of Fees

-advance payment for services to be rendered in the future. FEDERAL: -prepayments exceeding $1,200 per client, six months or more in advance STATE: -prepayments exceeding $500 per client, six months or more in advance

Agency Cross Transactions

-adviser acts as an agent for both its advisory client AND the party on the other side of the trade -permitted by both state and federal law -BUT written consent must be obtained by client -adviser must disclose the following: 1. adviser will be receiving commission for both sides of trade 2. potential conflict of interest due to division of loyalties 3. adviser must provide (at least annually) the total number of such transactions and the total amount 4. indicates that this arrangement may be terminated at any time 5. no transaction is effected in which the same investment adviser recommended the transaction to both seller and purchaser **CANNOT recommend the transaction to both parties in the trade**

Exemptions from Registration for Investment Advisers Under the USA

-advisers who have no place of business in the state but are registered in another state, provided their only clients in the state are: 1. broker/dealers registered under the act, 2. other investment advisers, 3. institutional investors -employee benefit plans with min assets of $1MM 4. existing clients who are temporarily in the state (not residents) 5. limited to 5 or fewer clients resident in the state for last 12 months -de minimis exemption 6. any others the Administrator exempts by rule or order **investment advisers exempt from state registration are NOT exempt from paying state filing fees and giving notice to the Administrator where required- NOTICE FILING**

The Securities Act of 1933 General

-aka: The Paper Act, Prospectus Act, or Truth in Securities Act -regulates the issuing of corporate securities sold to the public (IPO's) and through subsequent public offerings (SPO's) -requires securities issuers to make full disclosure of all material information in their regulation materials in order for investors to make fully informed investment decisions -Issuer information must be disclosed to the SEC and published in a prospectus -No fraudulent activity in sale, underwriting, distribution (civil/criminal penalties)

Defined Contribution and Defined Benefit Pans

-all qualified plans fall into one of these categories -contributory: both employee and employer contribute -noncontributory: employer only contributions (0 employee cost/tax basis) -employer contributions 100% tax deductible DEFINED CONTRIBUTION: -offer no specific end result -focus on current tax deductible contributions -plan participant assumes investment risk -includes 401(k) plans, profit sharing plans, etc -max employer contribution is $50,000/yr/employee DEFINED BENEFIT: -promise a specific retirement benefit -do not specify level of current contributions -promised benefit is paid regardless of investment performance (formula: years of service and average salary, NOT sex) -plan sponsor assumes investment risk`

Educational Savings Programs Coverdell Education Savings Accounts

-allow after-tax contributions for student beneficiaries -must be made in cash -must be made on or before beneficiary turns 18 (unless special needs: additional time to complete education) -distributions must be use to pay for qualified educational expenses OR subject to 10% penalty -the earnings portion of the distribution is excluded from income if used for qualified educational expenses -contributions are limited to $2,000/yr/beneficiary (95K single, 190K joint AGI limits before phaseout begins) -distributions must be taken before age of 30 or subject to ordinary income tax and 10% penalty

Exchanges Within a Family of Funds

-allowing an investor to convert an investment in one fund for an equal investment in another fund in the same family -allows investor to avoid a sales charge -considered a sale for tax purposes and must be reported at time of exchange

The $20 Million Buffer

-allows Advisers to remain registered (with state or SEC, whichever applies) until reaching the threshold (annual reported AUM) -Threshold: a. 110MM b. 90 MM *a. has 90 days to register with SEC* *b. has 180 days to register with State*

401(k) Plans

-allows employees to deduct a percentage of salary for contributions -employer can match a percentage, 15% max of salary (def cont) -contributions are made with PRE-TAX dollars -allow for hardship withdrawals, maximum, taxable, possible 10% penalty -allow for plan loans, lesser of: max $50,000 or 50% of participants vested share, regular payment schedule, 60 month payoff limit ROTH 401(k) PLANS: -require AFTER-TAX contributions -so, withdrawals are tax-free (59.5 & 5 year old rules) -employer match deposited into a regular 401(k) plan, so the employee will have two separate accounts -No income limit restrictions **10% early withdrawal penalty and RMD's at 70 1/2 apply to BOTH plans** Self-employed 401(K) (aka: individual, solo 401(k) -Sole proprietor (only individual and spouse full-time employees) -Highest contribution level -59.5, 70.5, 10% apply

Profit Sharing Plans

-allows employees to participate in the business profits -benefits can be paid directly to employee or deferred into an account for future payment -allow employers much flexibility for contributions because they can skip contributions during years of low profits -predetermined contribution formula not required

30 Day Snowbird Exclusion Rule

-allows the B/D to continue business with existing customers who are: A. temporarily in another state (that b/d is not registered in) -no time limit as long as no official residency has changed -ex: summer home, MBA, etc B. legally changing residence to another state -has 30 days to continue doing business without registration

Variable Life Contract Exchange

-allows the insured right to exchange policy for form of permanent insurance issued by company -provision must be available for minimum of 2 years -no medical underwriting is required -new policy will have same contract date and death benefit -issued as if retroactive (age at original contract used to calculate premiums)

Securities Amendments Act of 1975 General

-amended certain parts of the Securities Exchange Act of 1934 and Securities Act of 1933 -main purpose: remove any barriers to competition in the securities industry -SEC given more power

75-5-10 Test

-an investment company qualifies as Diversified if: 1. 75% of total assets are invested in securities issued by companies other than the investment company. **includes cash/equivalents(MM, ST gov)** 2. of this 75%, no more than 5% can be invested in any one corporation's securities 3. of this 75%, the investment company can own no more than 10% of outside corporations common stock

Securities and Exchange Commission (SEC) Exchange

-an organization, association, or group of persons providing a marketplace of facilities for bringing together purchasers and sellers of securities -must be registered with SEC -must demonstrate: 1. formation of exchange is in public interest 2. exchange will have ability to enforce both SEC rules and its own rules 3. board of directors has at least 1 member representing the investing public, and at least 1 representing listed companies 4. membership in the exchange may only be offered to registered broker/dealers or associated persons

Dividend Models (2)

-analysts believe the value of a stock can be determined using current or anticipated dividends -two models are used 1. Dividend Discount Model -value of a stock should equal PV of all future dividends 2. Dividend Growth Model -assumes the annual dividend will grow at a constant rate -forecasts HIGHER stock price

Yield Spread

-analysts compare the different yields on bonds with same maturity but different rating -widens when economic conditions are poor -narrows when economic conditions get better -greater risk = higher yield

Annuities

-annuitant pays premium (lump or periodic), can surrender for lump sum or receive payments for life -all earnings are tax-deferred; valuable tool for retirement -3 Types: 1. Fixed Annuities 2. Variable Annuities 3. Combination Annuities 4. Index Annuity

2. Agents

-any individual who represents a broker/dealer or issuer in effecting transactions in securities -typically act in a sales capacity and work on commission -AKA: sales/registered representative -can ONLY be an individual NOT a corporation

4. Investment Adviser Representative

-any individual who represents a state-registered investment adviser or federal covered investment adviser, performing duties related to the giving or soliciting for advisory services (pg 400)

Investment Adviser Representative

-any individual who represents an investment adviser performing duties related to the giving or soliciting for advisory services (IAR)

Definitions Supervised Person

-any partner, officer, director, or employee who provides investment advice on behalf of the investment adviser, under supervision/control of IA -includes ALL employees, even those who perform clerical functions

Investment Adviser Representative Definition

-any partner, officer, director, or other individual employed by, or associated with, and IA that is registered or required to be registered by the USA -both state or federal covered advisers (individuals) fall under the registration requirements by doing any of the following: 1. Make recommendations or render advice regarding securities 2. Manage accounts or portfolios of clients 3. Determine the recommendation regarding securities 4. Solicits or offers the sale of investment advisory services 5. Supervises employees who perform any of the above

1. Broker/Dealers

-any person engaged in the business of effecting transactions in securities for the accounts of others OR its own account -MUST register in the state where it is in the business of buying and selling securities UNDERWRITING -one of the roles of b/d's -distribute shares of new securities for issuers -generally earn a spread or receive commission on sales -spread/commission paid to agent selling securities

Investment Adviser

-any person who engages in advising others as to the value of securities or advisability of investing in, purchasing, or selling securities (directly or in writing) -OR who issues or promulgates analyses or reports concerning securities as part of a compensated business position -National Securities Markets Improvements Act of 1996 (NSMIA): -investment advisers are registered with either the SEC or the state, but never both

Securities and Exchange Commission (SEC) Transfer Agent

-any person who engages on behalf of an issuer of securities in: 1. countersigning certificates 2. registering transfer of isser securities 3. exchanging or converting issuers securities, and 4. transferring record ownership of securities by bookkeeping entry without physical issuance of securities certificates DOES NOT INCLUDE: 1. insurance companies that performs these functions with respect to variable annuities or life policies, or 2. registered clearing agency (options clearing corporation) that performs these functions solely with respect to options contracts it issues

Issuer

-any person who proposes or issues any securities -include corporations and governments -excludes certificates of interest in gas, oil, mining titles or leases -nonissuer: not directly or indirectly for the benefit of the issuer

3. Investment Adviser

-any person who, for compensation & business, engages in the business of advising others as to the value of securities or as to the advisability of investing in or selling them -advice can be delivered in person, through publications, or writings, or research reports -advice given on investments NOT defined as securities (rare coins, art, real estate, etc) is not considered investment advice

Definitions Investment Adviser

-any person who, for compensation, engages in the business of advising others as to the value of securities or advisability of investing in securities or issues analyses/reports concerning securities

Agent Definition

-any, non broker/dealer, individual who represents a b/d or issuer in effecting purchases or sales of securities -ALWAYS individuals -usually work for B/D's -their function is to be involved in securities sales or supervising those who do -AKA: registered representatives

Form ADV Organization

-application for registration as an investment adviser PART 1: -location of principal office, -form of business organization, -methods of business, -maintaining custody of customer assets or exercising discretion -control persons (1A) (25%+ voting, officer/partner) -indirect owners (1B) (State covered advisors) -disciplinary history (DRP's) PART 2A - Narrative Brochure: -compensation arrangements -types of clients -types of investments -types of strategies -methods of analysis -educational and business background or those who render advice PART 2B - Brochure Supplements: -information regarding certain supervised persons **2A and 2B are delivered to the client**

Form ADV-W

-application to withdraw registration -must be filed to withdraw voluntarily -is effective 60 days after filing with SEC, 30 days for State IA's (SEC may initiate withdrawal for non practice or not meeting minimum AUM)

Registration by Qualification

-applies to ANY security, securities not eligible for registration under other method -typically for securities that will only be sold in 1 state -consent of service and person info, capital structure, proceeds, securities offered, price, selling costs, stock options, prospectus, audited balance sheet Effective Date: -becomes effective when state Administrator orders

General Registration Procedures (5)

-applies to any broker/dealer, agent, IA, or IAR -MUST register with the state Administrator -Steps: 1. submit an application 2. provide consent to service of process 3. pay filing fees 4. post a bond (if required), and 5. take and pass an examination (if required)

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) Chinese Wall Doctrine

-applies to broker/dealers involved with mergers and acquisitions -they must have inside information to do their job THEREFORE, -these firms must insulate information from reaching the wrong hands

Exclusions from Definition of Agent for Personnel Representing Issuers

-applies to individuals who represent ISSUERS of securities -rather than going through an investment bank, the issuer sells the security in house -Individuals that work for the issuer are excluded when effecting transactions: 1. in exempt securities 2. exempt from registration, and 3. with existing employees, partners, or directors of the issuer if no commission is paid for soliciting any of these people

Exemptions From Brochure Rules

-apply to both state and federal advisers 1. contracts with registered investment companies 2. contracts providing only impersonal advisory services -publishers of market letters -UNLESS, fee is greater than $200 (or $500 under USA)

Hedge Clause

-attempt by an IA to waive the fiduciary responsibilities inherent in the client/adviser relationship -any attempt to limit or misstate the advisers fiduciary obligations to its clients is NEVER PERMITTED

Index Annuities

-attempt to lower purchasing power and market risk -credits the owners account using a formula based on the performance of a particular stock index (percentage of growth: participation rate) -if the index does poorly over life of annuity, has a minimum guaranteed return - typically 3 or 4% -usually has a cap rate as well (cap on the upside potential) -longer surrender charge periods -AKA: equity index annuity -Crediting methods a. annual reset: end of year value vs begin of year value b. high-water mark: highest value vs begin of year value c. point-to-point: end of contract vs beginning

Risk Measurements Correlation Coefficient

-best way to diversify a portfolio is to include investments with a negative correlation 1: perfect correlation 0: no correlation -1: perfectly negative correlation

3. Payment of Fees

-both filing fees and renewal fees -administrator able to keep portion of withdrawn or denied application fee -fees can vary based on applicant classification (B/D, IA, etc) -renewal date is December 31 -new registrations come up for renewal at NEXT December, so first year is always a short one

The Securities Act of 1933 Exempted Securities

-certain securities are exempted from the registration requirements of the Act (same as those under the USA): a. securities issued or guaranteed by the U.S., any state, or any political sub division (all federal government issues and municipal securities are EXEMPT) b. any commercial paper w/ a maturity of no more than 9 months (270 days), with a stipulation that the proceeds are to be used to increase working capital and NOT for purchase of fixed assets c. any security issued by religious, educational, charitable, or non-profit institution d. interest in a "railroad equipment trust" (equipment trust, lease, etc used to finance the acquisition of rolling stock) e. securities issued by federal or state banks, savings and loan associations, building loan associations, or similar (does NOT apply to bank holding companies)

Technical Analysis

-chartists -used to measure the market risk assumed when investing in a particular security -method of attempting to predict stock price trends over the near term -tries to reduce TIMING RISK by using charts and trading volumes -overbought: extended period of buying (prices down or horizontal) -oversold: extended period of selling (prices stabilize or increase) -trendlines: charts stock price, find bottom/top

The Securities Act of 1933 SEC Rule 501: Accredited Investors

-classifies accredited investors into separate categories for purposes of Regulation D -considered accredited (after reasonable inquiry) if they fall into one of the following categories: 1. bank, insurance company, or registered investment company 2. employee benefit plan, if #1 makes the investment decisions, or if plan has total assets exceeding 5MM 3. charitable organization, corporation, or partnership with assets exceeding 5MM 4. directors, executive officers, and general partners of the issuer 5. any natural person/joint with net worth exceeding 1MM (excluding primary residence) 6. any natural person with individual income greater than 200K in last two years, or joint income exceeding 300K in last two years 7. entities made up of accredited investors **term accredited investor only applies to private placements**

Exclusions from Definition of Agent for Administrative Personnel

-clerical and administrative employees are not included in the definition -EXCEPT when they take on securities related functions (take orders, accept transactions) *Cold callers would only have to be registered if they did anything more than ask if clients want to receive information*

Wrap Fee Programs

-client is charges a specified fee NOT based directly on investment advisory services or execution of client transactions -files under Part 2A, Appendix 1 -must provide a wrap fee program brochure to clients -if all the IA does is sponsor wrap fee programs, all it needs to prepare and deliver is Part 2A, Appendix 1, NOT Part 2A -commissions are included in the program fee -disclosures on pg 514 **Buy and Hold clients are not suitable for wrap fee accounts because the minimal volume of trading isn't enough to benefit them from the included commissions in the fee**

Real Estate Investment Trusts (REIT's)

-company that manages portfolio of real estate investments (LT financing) -trade on exchanges and over the counter -NOT investment companies (MF), similar capital pooling (undivided interest) -investment income, cap gains dist. -dividends are taxed at ordinary income (not 15% preferred rate) -shares or cert. of beneficial interest -avoid corp. taxation by: 75% of income from RE, distribute 90% of taxable income to investors (IRC sM) -Not DPPs, losses not pass thru -3 types: 1. equity REIT's - own commercial property 2. mortgage REIT's- commercial mort. 3. hybrid REIT's - both

Personal Use of Rental Property

-considered home, NOT business, IF used for greater of: a. personal purposes for more than 14 days, or b. 10% of total days it is rented to others for fair price **would not be able to take deductions for the property**

The Securities Exchange Act of 1934 Securities and Exchange Commission (SEC)

-consists of 5 people, with one serving as chair appointed by the president & consent of Senate, staggered terms (1 new appointee per year) -Maximum 3 appointees per political party -administrates all federal laws regulating the securities industry -commissioners are appointed for 5 year terms, no other business/employment -commissioners may NOT engage in any personal securities transactions other than US government issues -all securities positions they had when appointed are placed into a blind trust

Taxation of Annuities

-contributions made with AFTER-tax dollars -interest, dividends, and capital gains taxes are deferred until distributions are made -anything exceeding the cost basis is taxed at ordinary income -exclusion ration: percentage of contribution basis to total -distributions to beneficiaries taxed as ordinary income

Investment Companies

-corporations or trusts -individuals invest in large, diversified portfolios -pool funds with other investors -companies raise capital by selling shares to public -regulated by Investment Company Act of 1940 -registration/prospectus requirements: SA 1993 **AKA: pooled investments**

The Securities Act of 1933 SEC Rule 144

-created so certain resales of existing securities can be made without filing a complete registration statement with SEC -expensive and time consuming **NOT CONVENIENT**

The Securities Exchange Act of 1934

-created the SEC -grants the SEC authority over all aspects of securities industry -grants power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies, as well as self-regulatory organizations (SRO's) *SRO's are the various stock exchanges -includes the NYSE, AMEX, NASDAQ, FINRA (largest), etc

Types of Orders Limit Orders

-customer limits the acceptable purchase or selling price -can ONLY be executed at specified price OR better -if order cannot be executed at the market, the broker leaves the order with the specialist who will execute when the market price meets the limit order price -May not execute if other orders ahead (stock ahead) **if any part of the limit order can be filled at the limit price, it is done and the balance is cancelled**

"Impersonal Investment Advice"

-investment services provided by written material or oral statements that do not meet the objectives or needs of specific individuals or accounts **these are EXCLUDED from the IAR definition and do not need to register**

Section 457 Plans

-deferred compensation plan (yearly deduction for deferred amount) -for employees of state, political subdivision of state, and any agency of a state -also allowed for hospitals, charities, unions etc -NOT allowed for churches Key Points: -exempt from ERISA, no NDR -Tax-exempt organizations: only highly compensated persons -Governmental: any employee/contractor may participate -distributions may NOT be rolled into an IRA -NO 10% early withdrawal penalty -Can have 457 and 403(b) and make max contr. to both -Loans only available to government plans, higher restrictions, not required to offer

Investment Advisers Act of 1940

-defines the term INVESTMENT ADVISER -those who fall within this definition are required to register with the SEC or with the states they do business, but NOT both -Two purposes: 1. regulation of persons/individuals in the business of giving investment advice 2. the establishment of standards of ethical business conduct

SEC Release IA-1092

-defines who is subject to the Investment Advisers Act of 1940 -identifies and investment adviser as anyone who: A. provides investment advice, reports, or analyses with respect to securities B. is in the business of providing advice or analyses, and C. receives compensation, directly or indirectly, for these services

The Securities Act of 1933 Definitions Security

-definition determined in a U.S. Supreme Court case known as HOWEY CASE -HOWEY CASE defines an investment contract as a security if it met 4 conditions: 1. the investment of money 2. in a common enterprise (pooling) 3. with an expectation of profits 4. that results solely from efforts of others -HOWEY CASE defines a security as any of the following: -stock, bond, debenture, right, warrant, note, put, call, lp interest, certificate of interest in profit sharing arrangement

Security Market Line

-derived from the CML -used to analyze individual securities for use in a diversified portfolio (ERa, RFR, RoM, Ba) -uses BETA as measure of risk

Grantor Retained Annuity Trusts (GRAT)

-designed to pass assets to beneficiaries in a way to minimize gift and estate taxes -Steps: 1. grantor transfers property into a GRAT 2. grantor receives a fixed annuity each year for a specified term 3. at end of term, remainder beneficiaries get whats left a. any earnings greater than 3% pass to beneficiaries free of estate and gift taxes b. but if grantor dies during the term, the remaining assets are included in gross estate -Tax liability falls on grantor (technically irrevocable but grantor retains interest) **used to minimize gift and estate taxes**

Rule of 72

-determines number of years for an investment to double in value = 72 / r

Investment Advisory Contracts

-determines the primary relationship between a client and an investment adviser -both federal and state advisers must disclose: 1. services to be provided, including custody 2. term of the contract 3. amount of the advisory fee or the formula computing the fee 4. amount of any prepaid fee to be returned in event of contract termination 5. whether the contract grants discretionary power to adviser or representatives 6. if adviser is organize as a partnership, any change in minority interest will be communicated within a reasonable time period -2 major differences between state and federal adviser requirements: 1. federal law permits contract to be written or oral, but state law requires contracts in writing 2. federal law requires fees to be reasonable while state law requires that fees be competitive Performance Based Fees: -Both acts prohibit performance based fee contingent on capital gains or appreciation AND waiving fees in event of losses -Exception if client is defined as: 1. natural person or company with at least 1MM under management 2. natural person or company believes to have (excluding residence) net worth exceeding 2MM (immediately prior to entering a contract) 3. natural person who is an officer or director of investment adviser or one of the firms IAR's employed in industry at least 12 months **if using performance based fees, adviser must use net performance, considering both gains and losses**

Modern Portfolio Theory

-determining relationship between risk and reward in the total portfolio IS BETTER than analyzing specific securities -focuses on relationship of all investments of a portfolio -build portfolios with assets whose returns are not correlated -reduce risk while increasing expected return (diversification) -uses the capital asset pricing model (CAPM) a. pricing of a stock must take BOTH systematic and unsystematic risk into account b. provides an expected return on a security/portfolio based on level of risk

Investment Return Measures Net Present Value

-difference between investments present value and its cost (in terms of $) -use by corporations to determine whether to invest in a capital project -generally more important that IRR -can be used by investment advisers using these steps: a. project cash flows from the investment b. discounts the cash flows to their PV using Req RoR c. discounted cash flows are compared to the cost of investment d. if positive: good investment / if negative: bad investment

Collateralized Mortgage Obligations (CMO's)

-different from traditional pass-through's because: 1. issued with a stated maturity, and 2. the principal payments are exclusively used for the newest maturity in sequence, until each maturity is paid off

US Treasury Notes

-direct debt obligations of U.S. Treasury -pay semi-annual interest -mature at par value -have maturities of 2, 3, 5, 7, and 10 years

US Treasury Bills

-direct debt obligations of U.S. government -only security issued at a discount -no stated interest rate -highly liquid -have maturities of 4, 13, 26, and 52 weeks -13 wk (or 90 day) Treasury Bills = "risk free" investment

US Treasury Bonds

-direct debt obligations of the U.S. Treasury -pay semi-annual interest -maturities between 10-30 years

Disclosure and Consent

-disclosure must be mad to all current clients regarding material disciplinary action -basically, any actions taken against the firm by a court or regulatory authority within last 10 years -includes: 1. state or regulatory proceedings which the adviser was found to have violated rules leading to the denial, suspension or revocation of the firm/individual's registration 2. court proceedings related to investment related activity or felonies 3. SRO proceedings where the adviser caused business to lose registration or the individual was suspended, fined in excess of $2,500, or expelled

National Securities Markets Improvement Act of 1996 (NSMIA)

-divided registration responsibilities between the SEC and the states -the larger firms (Federal Covered Advisers) are required to register with SEC: a. are required to register with SEC because they meet the min AUM of $100 MM b. are excluded from the definition of investment adviser by the Investment Adviser Act of 1940, or c. are under contract to manage an investment company registered under the Investment Company Act of 1940, regardless of the AUM

National Securities Market Improvement Act of 1996 (NSMIA)

-divided the responsibility for regulating investment advisers between the states and SEC -created a category of registration known as FEDERAL COVERED ADVISER -create the term FEDERAL COVERED SECURITY, meaning it is exempt from registration at the state level -state registrations requirements preempted by federal, states can require filing fees and copies of SEC documents filed

NonQualified Corporate Plans

-do NOT allow the employer a current tax deduction for contributions -instead, the employer receives a deduction when money is paid out -If structured correctly, can be tax deferred for employee (funded plans not tax deferred) -Taxed contributions are 0 tax/cost base -No NDR (can include key employees and exclude others) Types: 1. Payroll Deduction Plans -deducted after taxes are paid 2. Deferred Compensation Plans (NQDC plan) -employee agrees to defer receipt of current compensation -commonly used to provide benefits to retain key employees (discrimination IS allowed) -Not available to company directors -Conditions: forfeit circumstances (non-compete), qualifying distribution circumstances (death, retirement, disability), voiding circumstance (bankruptcy)

Hedge Funds

-do NOT register with SEC -adopt riskier strategies; arbitrage strategies, use of leverage and derivatives -aim to reduce volatility/risk while preserving capital and always generating positive returns -alternative investments -high management fees; 2 and 20 (2% MF, 20$ return) -usually organized as a Limited Partnership -limited to institutional clients and wealthy individuals (accredited investors) -hedge fund mutual funds available **most are organized as limited partnerships with the portfolio managers investing along with the investors**

SEC Review of Securities

-does not approve, guarantee, or comment on merit or accuracy of statements or registration -Makes sure all information is filed and disclosed

Payment of Estate Taxes

-due no later than 9 months after death -computation of the tax is done on IRS Form 706

Barometers of Economic Activity #3 Lagging Indicators (been)

-duration of unemployment -ratio of consumer credit to personal income -prime rate -change in CPI -ratio of manufacturing and trade inventories to sales -outstanding commercial and industrial loans -change in index of labor cost per unit of output

Forward Contracts

-eliminate the problem of finding a buyer or seller in an upcoming transaction -reduce the price risk in changing supply and demand relationships -serves as a direct commitment between one buyer and one seller -illiquid because between one buyer and one seller -no secondary market -5 components: 1. quantity 2. quality 3. time of delivery 4. place for delivery, and 5. price paid at delivery

Taxation Alternative Minimum Tax (AMT)

-ensures that high income tax payers do not escape taxation -"Tax Preferenced Items" must be added back into taxable income -If AMT is higher than regular tax computation, MUST pay AMT amt Tax Preferenced Items: 1. accelerated depreciation on property (post 1986) 2. costs associated with limited partnership programs 3. local tax and interest on investments that dont generate income 4. tax-exempt interest on private purpose muni bonds (post August 7, 1986) 5. incentive stock options if FMV > Strike

Investment Return Measures Expected Return

-estimates of probable returns an investment may yield = (prob return 1 x poss return 1) + (prob of return 2 x poss return 2) -assign probabilities to returns and add

Economic Indicator #5 Trade Deficit

-excess of imports over exports -part of balance of payments number -excessive trade deficit can lead to a weakening currency

Brady bond

-exchange for defaulted commercial bank loans issued in less-developed countries -most US denominated -safety depends on collateral -higher liquidity than other emerging market debt

Futures

-exchange traded obligations -Buyer long, seller short -Gains/losses computed daily and credited to account -Offset: close by completing opposing transaction -5 factors 1. Quantity (5,000 bushels of corn) 2. Quality 3. Time of Delivery 4. Location 5. Delivery Price

Exempt Security/Transaction

-excused from requirements 1. Security -does not need to be registered in order to be sold -no requirements to file advertising with Administrator 2. Transaction -does not need to be registered with the Administrator -filing of advertising material is not required

Types of Orders Market Orders

-executed immediately at the current market price -has priority over all other types of orders A. market order to buy - executed at lowest offering price available B. market order to sell - executed at highest bid price available

Alternative Valuation Date

-executor may choose to value assets in an estate as of: a. date of death, or b. 6 months later -beneficial if assets decrease in value following death of decedent **if sold at a greatly reduced price that the does meet the definition of FMV as defined by the IRS...then IRS will use higher value**

Balance Sheet Ratios Current Ratio

-expresses working capital as a ratio **current ratio = current assets/current liabilities -the higher the ratio, the more liquid the company is

Appeals

-file written petition within 60 days -allows for review of the order in court

Administrator denial of Securities Professional license

-filed incomplete, false, misleading registration application -willfully violated USA -convicted of a securities-related misdemeanor or any felony w/in last 10 years (based on state where occurred) -enjoined from engaging in securities business -subject to another admin's denial/suspension/ revocation -engaged in dishonest, illegal, or unethical practices -insolvent -subject of adjudication for violation of securities acts -failed to reasonably supervise his agents/employees -failed to pay application filing fees -not qualified on basis of experience/training/ knowledge (can limit capacity of registrant)

Reductions in Sales Charge

-for an investment company to qualify for the maximum 8.5% sales charge, they must offer both of the following: 1. Breakpoints -a schedule of discounts a mutual fund offers -allows an investor a lower % fee for more shares purchase -can be done through an LOI which states that the investor intends to purchase more shares within 13 months, allowing him to reach a particular breakpoint (firm binding only, can backdate 90 days) -Investment clubs/associations do not qualify 2. Rights of Accumulation -do not apply to initial transactions -are available for subsequent investments -allow investor to use prior share appreciation to qualify -NO time limits -not accept in excess of $100,000

Notice Filing

-for federal covered securities -gives Administrator authority to require notice filings with respect to federal covered securities -an opportunity for the state to collect revenue in the form of filing fees

Registration by Coordination

-for securities that are not federal covered -most common method (OTC, Pink Sheet) -a registration statement must have been filed under the Securities Act of 1933 (admin can request docs filed under this act) -Effective Date: -becomes effective at the same time the federal registration becomes effective **only sensible registration method to register a multi-state offering**

Catch Up Contributions

-for those aged 50 or older -additional $1,000 annually **Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) - established the catch up provisions**

Investment Company Act of 1940 Subclassification of Investment Companies

-further divides management companies into 2 categories: 1. OPEN-END COMPANY -offering for sale, or has outstanding, any redeemable security of which it is the issuer -synonymous with Mutual Fund -redemption price is the NAV -NAV calculated every business day at markets close -redemption must be made within 7 business days of request -purchases are always at NAV plus any sales charge (if any) 2. CLOSED-END COMPANY -any management company other than (1) -generally have a one time offering of shares and do not redeem outstanding shares -pricing is based on supply and demand -shares may be purchased or sold in the market at a price above or below the NAV: a. Selling Above NAV: Premium b. Selling Below NAV: Discount

Footnotes

-generally found at the bottom of the statements -identify accounting methods used, extraordinary items, pending litigation, management philosophy, etc

Securities and Exchange Commission (SEC) Insider Transactions Schedule 13 D Filings

-generally requires a beneficial owner of more than 5% equity registered under SEC to file a report with the issuer, SEC, and the securities markets within 10 days of any transaction that results in beneficial ownership of more than 5% -Schedule 13 D requires: a. name and background of person/entity b. origin of money for acquisition of securities c. purpose of acquiring the securities

Modern Portfolio Theory and Efficient Frontier

-goal of MPT is to construct the most efficient portfolio -feasible set: all portfolios from given equity set -efficient portfolio: most return for risk, or least risk for return -collection of efficient portfolios = efficient frontier -the efficient frontier is plotted as a curve and the portfolio must lie on the curve -anything below the curve is NOT efficient

Fixed Annuities

-guarantees a fixed rate of return (by value/life expect) -payment remains constant through life -insurance company bears the risk, so it is an insurance product NOT a security -purchasing power risk -invest in fixed-income securities **salesperson does NOT need to be securities licensed**

TIPS

-help protect against purchasing power risk -issued with a fixed interest rate -the principal amount is adjusted semi-annually equal to the change in the CPI -have maturities of 5, 10, and 30 years -sold with lower interest rates due to their adjustable principal feature *real rate of return is ALWAYS the coupon* **like all other Treasury notes, they are exempt from state and local income tax, but subject to federal taxation**

Right of Rescission

-if the seller discovers that he has made a sale violating the USA, he can offer to repurchase the securities from the buyer -must pay back the original purchase price and interest -must also send a letter of rescission -buyer has 30 days to accept or reject, he gives up right to pursue legal action

Brochure Rule

-in 2010, the SEC adopted amendments to Part 2 of Form ADV: 1. Part 2A of Form ADV: Firm Brochure 2. Part 2A Appendix 1 of Form ADV: Wrap Fee Program Brochure 3. Part 2B of Form ADV: Brochure Supplement -deliver to clients and prospective clients Key Points: A. Narrative Format -types of advisory services, fees and compensation, methods of analysis, strategies, risk of loss, disciplinary info, selection process of B/D, custody practice, investment discretion, etc B. Plain English -should use short sentences -concrete, everyday words -active voice -tables or bullet lists -avoid legal jargon -avoid multiple negative C. Disclosure Obligations as a Fiduciary D. Truthful Disclosure E. Filing -Through IARD system F. Cover page -Disclose basic company info (address, phone, web page, etc.) -Disclosure: provides info, contact info for questions, info not approve/verified by SEC or state authority, SEC website: advisorinfo.sec.gov

Investment Return Measures Total Return

-income from dividends/interest plus any capital appreciation less capital depreciation =(income + appreciation- depreciation)/purchase price -usually over one year (annualized) -BEST measure of how a security has performed

Stock Funds

-income: preferred, utility, and large-cap stocks -growth: common stock 1. Growth Funds -rapidly growing corporations -reinvest profits instead of paying dividends -focus on capital gains over income -aggressive: small-cap -conservative: large-cap 2. Income Funds -focus on current income over growth -stocks with history of dividend payments 3. Combination -combines Growth and Income objectives -stocks w/ long term potential and pay high dividend 4. Specialized (Sector) -25-100% invested in their specialties (sector or geography) 5. Special Situation -companies that benefit from change within corporation or economy (e.g. takeover, turnaround) 6. Index Funds -mirror a particular market index (composition of index) -passive investment style -low turnover = low management costs -minimal taxable capital gains 7. Foreign Stock Funds -focus on long-term capital appreciation -subject to foreign currency risks

Barometers of Economic Activity #2 Coincident Indicators (current)

-industrial production -personal income minus SS, veteran benefits, and welfare payments -non-agricultural employment

Comparing Mutual Funds

-investor should review: 1. Performance -fund must disclose average annual returns for 1,5, and 10 yrs since inception -track record of meeting objective 2. Costs -expense ratio; expresses management fees and operating expenses as a percentage of funds net assets (expenses/avg. NAV) -sales charge not considered expense -aggressive funds: higher expense ratio (more trading) -Stock: 1-1.5%, bond 0.5-1% 3. Taxation -pay taxes on income and capital gains distributed (even if reinvested) -dividends at 15%, and -capital gains at 15% - all are from funds long term gains 4. Portfolio Turnover, and -funds holding period -higher turnover usually means higher expenses -100% means they hold securities on avg for less than one year (gains likely to have max tax rate) 5. Services Offered -retirement accounts, investment plans, conversion privileges, etc.

Money Market Commercial Paper

-issued by corporations to raise working capital for current needs -ST, unsecured -maturities < 270 days exempt from registration

Face Amount Certificate (FAC) Companies

-issuer guarantees investor payment of fixed sum at some date in future -investor agrees to pay issuer a set amount either as a lump sum (FULLY PAID FAC) or periodic installments -few operate today due to tax law changes **do NOT trade in secondary market, they are redeemed by issuer**

The Securities Act of 1933 The Registration Statement

-issuer must file with SEC -discloses material info about the issue -must be signed by the principal executive officer, principal financial officer, and majority of board directors (all subject to penalty for omission/misstate) -information required in the statement: a. purpose of issue b. public offering price c. underwriters commission or discounts d. promotion expenses e. expected use of net proceeds f. balance sheet g. earnings statements for last 3 years h. names, addresses, and bios of officers, directors, underwriters, and stockholders owning more than 10% of outstanding stock i. copies of underwriting agreements j. copies of articles of incorp

Mixed Margin Account

-margin account contains both long and short positions CALCULATING ACCOUNT EQUITY: 1. Long Equity = CMV long - Debit Balance (own-owe) 2. Short Equity = Credit Balance - CMV Short (have-owe)

Money Market

-market for b/s short-term loanable funds -securities and loans -trade money -maturity < 1 yr (most < 6) -many issued @ discount w/ no interest -safe

Emerging Markets

-markets in lesser developed countries (currency restrictions) -low levels of income & capitalization -questionable market liquidity -high volatility -high taxes and commission costs for foreign investor -lower regulation > lack transparent **usually have rapid growth rates making them more attractive**

Developed Markets

-markets with highly developed economies with stable political and social institutions (no currency restrictions) -low commission rates -highly liquid markets -large levels of equity capitalization -defined regulation > transparency

Types of Sales Charges

-max sales charge is 8.5% of Public Offering Price (charges specified in prospectus) 1.Closed-End Funds -NO sales charge 2. Open-End Funds A. Front-End Loads -reflected in public offering price (POP-NAV) -added to NAV at purchase -Class A B. Back-End Loads -Contingent Deferred Sales Charge -Charged at redemption -Declining percentage each year (0% @ 6-8 yrs) -Class B C. 12B-1 Fees -fee for promotion or sales-related activities -flat or percent of average annual NAV -max = .75% of net assets -if fee exceeds .25% fund cannot use term NO LOAD

Risk Measurements Standard Deviation

-measure of volatility of an investments expected returns using historical performance data -measures amount of variability around an average -generally accepted that a security will vary: a. within 1 standard deviations: 66% of the time b. within 2 standard deviations: 95% of the time c. within 3 standard deviations: 99% of the time *measures BOTH systematic and unsystematic risk*

Balance Sheet Ratios Working Capital

-measures a firms liquidity to meet short term obligations A. Increases in Working Capital -profits ,sale of securities, sale of non-current assets B. Decreases in Working Capital -dividends, paying off debt, net loss **working capital = current assets - current liabilities

Economic Indicator #4 Balance of Payments

-measures all the nations import and export transactions with those of other countries for the year (debit: payment to foreign, credit: received) *if the U.S. dollar weakens, U.S. exports becomes MORE competitive in foreign markets (less foreign currency buys more US goods)* *to protect against a weakening U.S. dollar, invest in ADR's*

Risk Measurements Sharpe Ratio

-measures the amount of return per unit of risk -higher = more return per unit of risk -3 components: 1. actual return, minus 2. risk free rate, divided by 3. standard deviation **is a risk-adjusted measure of return**

Economic Indicator #3 CPI

-measures the general retail price level (basket today vs. year ago) -attempts to measure the rate of increase/decrease in a broad range of prices -published MONTHLY -core CPI: all items excluding food and energy, MEDIA generated

Risk Measurements Duration

-measures volatility of debt securities with changes in interest rates -basically measures time it takes for interest payments to repay the invested principal -characteristics: a. longer maturity = longer duration b. lower cpn = longer duration / higher cpn = shorter duration c. duration is always less than bonds maturity d. duration for zero cpn bonds equals the maturity

Investment Return Measures Internal Rate of Return

-method of computing long-term returns that takes TVM into consideration -makes the FV of an investment equal to its PV *YTM of a bond is considered its IRR* -Time-weighted: excludes deposits/withdrawals -Dollar-weighted: based on cash flows

Variable Life Policy Loans

-minimum of 75% of cash value must be available for loan after the policy is in force for 3 years -insurer is never required to loan 100% - that is considered a surrender -if insured dies or surrenders with loan outstanding, death benefit is reduced by loan amount

Technical Analysis Chart Patterns Moving Averages

-modifies fluctuations of stock prices into a smoothed trend -takes the Friday close price for last 13 weeks and plots the average price. Each week a new Friday price is used and average is re-calculated and plotted -if the price moves below the moving average, it is a signal of a change from a rising to declining market

Variable Annuities

-money deposited is kept in a separate account from the insurance company's general funds -price based on formula -invests in securities, rather than accepting guarantee of insurance company (stock, bond, MM) -investor bears the risk, so considered a security -AIR: assumed interest rate, basis for determining distributions, earnings target (adjusts annuity unit value) **salespersons must be registered with SEC and FINRA in addition to state insurance departments**

Money Market Negotiable Certificates of Deposit

-money is being loaned to the bank for a specified period of time -redeems the CD at face value plus interest -ONLY money market that pays interest -MUST have face value of $100,000 or more -do NOT have a prepayment penalty -FDIC insured up to $250,000 -aka Jumbo CDs

Distributable Net Income (DNI)

-most trusts distribute their income due to complicated tax implications -DNI refers to the taxable income distributed (even if not physically distributed) a. commissions and fees charged for buying/selling securities are SUBTRACTED from DNI b. realized capital gains that are reinvested in the trust are EXCLUDED from DNI

Direct Participation Programs (DPP's)

-mostly LP's, so income, gains, losses, deductions and credits pass directly to investors -do not pay dividends -usually borrow money in non-recourse loans, meaning the GP assumes responsibility NOT the LP -units of ownership are called INTERESTS not shares -alternative investment -illiquid

The Securities Act of 1933 Form D

-must be filed by an issuer who is issuing in reliance of Regulation D no later than 15 days after first sale of securities (irrevocable commitment) -requires: a. total size of offering b.amount sold to date c. use of proceeds d. names of persons paid commissions -securities issued under Regulation D are federal covered securities and no state may impose registration or qualification requirements

The Securities Act of 1933 Preliminary (Red Herring) Prospectus

-must be made available to any prospective purchaser who expresses interest in the security from time the issue is filed with SEC until it becomes publicly available for sale (Effective Date) -front page has statement in red ink -no alterations can be made by representative -not included: public offering price, effective date USED TO: -acquaint investors with facts concerning the new issue -solicit indications of buyer interest -state expected number of shares to be sold -estimate price range per share (required) CANNOT BE USED: -as a confirmation of sale (& no money/orders accepted) -in place of registration statement -to declare final public offering price

Annual Report

-must be provided to shareholders -company can provide 10-K instead of sending this report

Updating Form ADV

-must be updated each year -file an annual updating amendment -done within 90 days after end of fiscal year -fees for initial filing and annual renewal (not updates) **verification of AUM is important here** -Key information amended as it occurs

Updating the Brochure

-must be updated: 1. each year at the time of filing the annual updating amendment, and 2. promptly, whenever information becomes materially inaccurate A. Federal Covered Advisers -required to file brochure amendments electronically through IARD -but NOT required to file amendments to brochure supplements with SEC -but MUST maintain copies of changes B. State Covered Advisers -required to file brochure amendments AND supplement amendments with the appropriate state securities authorities through IARD

Failure to Maintain Minimum Net Worth (STATE)

-must notify the Administrator on the NEXT business day that their net worth has fallen below the required limit -after sending notice, they must file a financial report with the Administrator by the close of business on the NEXT (next) business day -adviser must obtain a bond in the amount of the net worth deficiency rounded up to the nearest $5,000

Claims against the surety bond

-must provide that any customer who can prove violation (w/in statute of limitations) is entitled to collect against the bond

Investment Company Act of 1940 Registration of Investment Companies

-must register with SEC -open-end investment companies file Form N-1 A -registrant describes all important information including objective, sales loads, whether they will be concerning investment in a particular industry, and so on

1. Submitting an Application

-must submit initial application and renewals to state Administrator MAY INCLUDE: -form and place of business -proposed method of doing business -qualifications and business history -court-issued injunctions and administrative orders -convictions (mis: security related, felony: any) -info to be furnished/disseminated to client/prospect (IA) -financial condition and history -citizenship (for individuals), etc. *fingerprints do NOT have to be submitted, unlike FINRA requirements**

Yield Curve Analysis Inverted

-negative slope -occurs when Fed has tightened credit -predicts that rates will fall in future *result of a high current demand for money relative to available supply *occur due to a sharp increase in short term rates

Investment Company Act of 1940 Investment Advisory and Underwriter Contracts

-no registered investment company can engage any person to serve or act as an investment adviser of a registered investment company except pursuant to a written contract that: 1. describes all compensation to be paid 2. will be approved (at least annually) by board or majority vote of non-interested parties 3. provides that it may be terminated any time without penalty by board or majority vote on no more than 60 days notice 5. provides for automatic termination in event of assignment

Investment Company Act of 1940 Size of Investment Companies

-not permitted to make a public offering of securities unless it has min net worth of 100K

The Uniform Securities Act of 1956 History

-numerous state securities laws brought the need for a uniform security law, so -in 1956 the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted the Uniform Securities Act (USA) -USA -is NOT actual legislation *is a template or guide that each state uses in drafting its securities legislation -State security laws: Blue Sky laws

Yield Curve Analysis Flat

-occurs when economy is peaking -no change in rates is expected

Accounting for Depreciation

-on balance sheet, tangible assets are valued at their cost as of date of acquisition -these are depreciated using one of two methods: A. Straight Line -evenly over its useful life B. Accelerated -higher in earlier years and lower in later years

The Securities Act of 1933 Effective Date of Registration Statement

-on date a registration becomes effective, securities may be sold to public -a copy of the final (effective) prospectus must be delivered to each purchaser (include with trade confirm) -no markings allowed on prospectus -money may be accepted by broker/dealer at this time -every prospectus has an SEC disclaimer on the front page (pg. 342)

Intrastate Advisers

-only has clients in the state of its principal office, and -do NOT advise on securities listed on any national exchange

Family Balance Sheet

-only includes assets and liabilities, not income (salary, interest or dividends)

Repayment of Principal Convertible Bonds

-only issued by corporations -conversion at investor discretion (but callable) -mostly debentures -conversion ratio varies for each bond -assured income, price floor (due to coupon) -upside potential of stock w/o as much downside risk a.typically states the number of shares which is convertible per bond ex: 50:1 is 50 shares for each bond OR, b.bond states the conversion price ex: convertible at $20 means it can be converted to 50 shares (1000/ $20)

Balance Sheet Ratios Quick Ratio

-only uses quick assets -quick assets = current assets - inventory **quick ratio = quick assets/current liabilities

Balance Sheet Assets

-organized in order of liquidity: 1. Current Assets -includes all cash and items expected to be converted into cash in next 12 months A. Cash and Equivalents - money market B. Accounts Receivable - amounts due from customers C. Inventory - cost of raw materials D. Prepaid Expenses - rents, taxes, prepaid advertising 2. Fixed Assets A. Property Plant and Equipment -factories 3. Other Assets A. Intangible Assets -brand names, trademarks, formulas, etc

Tax Reporting

-partners receive reports of income/losses on IRS Schedule K-1 -LP's are considered PASSIVE INVESTORS, so a. any income = passive income b. any losses = passive losses -can only deduct passive losses against passive income -unused passive losses can be carried forward to the next year -dividends, interest, and wages NOT passive income

Limited Partner

-passive investors -no management or decision making -not personally liable for indebtedness

Whole Life

-permanent -benefit remains constant (face amount) -premium remains constant -contains a cash surrender value (cannot forfeit) -disadvantages a. premium period may last longer than the insured's income producing years b. does not provide as much protection as term insurance

Definitions Fiduciary

-person legally appointed to hold assets in trust for another person -manages assets for benefit of others and must exercise a standard of care -ex: executor of estate, trustee, and investment advisers

Yield Curve Analysis

-plots the difference between long and short term rates, also reflection of investor expectations of inflation (expect high inflation: need high rates of interest) -lenders must be compensated for: 1. time value of money 2. reduced buying power from inflation 3. increased risk of default over long periods 4. loss of liquidity -if corporate vs. government bonds yield spread is: A.Widening -a recession is expected -investors chose government bonds (safe) over high yield corporates which occurs in a slowing economy B. Narrowing -expansion is expected -investors are willing to take risks Usually constructed w/ bonds of single issuer over varying maturities

Universal Life

-policy owner may adjust the death benefit -premium amounts may be changed (flexible premium, assuming sufficient cash value to keep policy in place) -premium payments are separated, first paid toward insurance protection and remaining balance towards the cash value -Interest Rates - subject to two A. current annual rate -varies with the market B. contract rate -minimum guaranteed by the policy **idea is to build cash value at a rate greater than whole life policy**

MBS

-pool, pass-thru, undivided -GNMA most popular (VA, FHA insured) -FFC of Gov -Monthly payments -$25,000 minimum denominations -higher ROR than comparable debt -complicated -prepayment risk, default risk, reinvestment risk, liquidity risk -analysis: want to know average maturities

Yield Curve Analysis Normal

-positive slope -occurs in economic expansion -predicts that rates will rise in the future

Variable Life

-premiums are invested (not in the general account) but in a SEPARATE ACCOUNT allowing the insured to choose between several investment options -cash value fluctuates with the performance of the separate account -policy will provide a minimum guaranteed death benefit which it may never fall below -1 vote per $100 of separate account cash value -life insurance, not investment

Investment Company Act of 1940 Ineligibility of Certain Affiliated Persons and Underwriters

-prohibits people who have committed certain acts from serving in certain sensitive positions with an investment company or its advisor or its underwriter -No one may serve as a director, employee, investment adviser, member of advisory board, officer, or principal underwriter if: 1. they have been convicted of a felony/misdemeanor within last 10 years involving purchase or sale of securities while associated with an investment company OR 2. they have permanently or temporarily enjoined by order or judgement from acting in any phase of securities business -any person who is ineligible may file with SEC to become eligible again -investment companies cannot have a board of directors consisting of more than 60% of persons who are interested persons of investment company

Capital Market Line

-provides an expected return based on level of risk -evaluates diversified portfolios (ERp, RFR, RoM, ST Dev of M&P) -uses STANDARD DEVIATION as measure of risk

Corporate Sponsored Retirement Plans / Qualified Plans

-qualified for special tax treatment under Section 401(1) of IRC -established under trust agreement, appoint trustee/fiduciary -MUST comply with ERISA ERISA: -Employee Retirement Income Security Act of 1974 -federal legislation that regulates the establishment and management of corporate pension or retirement plans

The Securities Act of 1933 Exempted Securities Rule 147

-qualifies as an exempt security under federal law but is NOT exempt under the Uniform Securities Act RULE 147: -any security offered and sold only to persons resident within a single state or territory, where the issuer is a person resident and doing business within such state or territory. -if any sales take place to non-residents, entire issue loses exemption -purpose is to allow issuers to raise money on a local basis -5 conditions: 1. must be offered or sold exclusively to persons resident on one state and persons purchasing must have principal residence within the state 2. For 9 months following the sale by the issuer, resales can only be made to persons resident within the same state or territory 3. at least 80% of issuers gross revenue must be derived from operations within the state 4. at least 80% of the proceeds of the offering must be used for business purposes within the state 5. at least 80% of the issuers assets must be located within the state *****Think 80-80-80 Rule****

Interest Rates 3 Factors Influencing Rates

-rate a borrower pays for funds is determined by: 1. supply and demand for loanable funds, 2. credit quality of the borrower, and 3. length of time which the money is borrowed 4. current and expected inflation

Interest Rates Broker Call/Loan Rate

-rate banks charge broker/dealers on money they borrow to lend to margin account customers -AKA: call loan rate or call money rate -slightly higher than other short-term rate, callable on 24 hour notice

Interest Rates Federal Funds Rate

-rate member banks charge each other for overnight loans of 1MM + -MOST volatile rate -considered a barometer of the direction of short-term rates -determined by demand for bank reserves

Bond Yields Yield to Call

-rate of return the bond provides from the purchase date to the call date -lower yield than YTM -CY > YTC: premium -usually only called when selling at a premium

Interest Rates Prime Rate

-rate that large commercial banks charge their most creditworthy corporate borrowers for unsecured loans -determined by the bank itself; each bank sets its own rate -lowers with increased money supply, vv

Interest Rates Discount Rate

-rate the New York Federal Reserve Bank charges for short-term loans to member banks -determined by FED -used as a tool of monetary policy (managed rate)

Investment Return Measures After-Tax Return

-reduces the investments return by the clients tax rate **remember that interest on muni bonds is tax-free but capital gains are NOT**

Administrator

-refers to the office or agency that has the complete responsibility for administrating the securities laws of the state -has power: 1. over all securities activity that emanates from his state as well as received in his state 2. over registration of securities professionals and securities 3. to make rules and issue orders 4. to deny, suspend, or revoke registrations

Registration For Investment Advisers - Federal Law ADV Uses (3)

-registration is done using Form ADV -uses Form ADV to: 1. register with the SEC, 2. register with one or more state securities authorities 3. amend those registrations filing is done through the IARD: -Investment Adviser Registration Depository -electronic filing system that facilitates the registration

Securities and Exchange Commission (SEC) Insider Transactions - General

-regulates securities transactions by insiders who generally own large amounts of their companies stock (must notify SEC of changes) -these people must file a statement with the SEC concerning amount of equity owned: -Includes: a. every person directly/indirectly the beneficial owner of more than 10% of any class of equity security registered on a national exchange b. officers or directors of the issuers of such securities -these individuals are prohibited from selling short, and engaging in short-term transactions (short-swing profits) defined as a 6 mo period

TRA 2010

-removed reason for using a bypass trust -allows for portability of the unused portion of the deceased spouse's federal exemption ($5M per person) -permits the surviving spouse right to take the unused portion and aggregate it with his/her portion

Corporate SEC Filings 3 Filings

-reports required to be filed with the SEC for publicly traded companies 1. Form 8-K -newsworthy events, make available to public -change in mgmt, change in company's name, mergers, acquisitions, new product introductions, bankruptcy, etc -filed within 4 days of occurrence -foreign issuers are exempt SO ADR's are exempt 2. Form 10-K -overview of company's business and financial condition -includes audited financial statements -more detailed than annual report 3. Form 10-Q -filed quarterly (w/in 40-45 days after end of quarter) -unaudited financial statements

American Depository Receipts (ADR)

-represents a receipt for shares of stock in NON-US corporations -trade in the US markets, so they trade in US Dollars -issued by domestic branches of American banks, custodied -bear currency risk -investor's not registered owners, dividends sent to custodian -owners claim tax credit for w/holdings

Preferred Stock

-represents equity ownership, BUT -has fixed dividend payment, SO -its price reacts to the market like a bond and is sensitive to interest rate changes -non-voting Benefits: -dividend priority -fixed dividend is key for income investors (% of par, or no-par $) -priority claim on assets in bankruptcy -no maturity or redemption....known as a PERPETUAL security

Technical Analysis Chart Patterns Support and Resistance

-represents the price action at the end of a long rising trend A. Resistance Level -level which the stock shows a resistance to move to a further price -more sellers than buyers B. Support Level -level which the price does not want to go below -more buyers than sellers

Brochure Deliver Requirements

-required for both state and federal covered advisers A. FEDERAL COVERED ADVISERS: -must be delivered to each client before or at the time an advisory agreement is entered into with that client -each year after, within 120 days of end of year, an updated brochure must be delivered to each client, outlining material changes -if NO material changes, then the brochure nor the brochure supplement, nor the summary is required to be sent B. STATE COVERED ADVISERS: -same as above, EXCEPT: -must deliver at least 48 hours before entering into advisory contract or a the time of entering into the contract, IF the adviser has right to terminate the contract within 5 business days after entering the contract

New Account Form Requirements

-required for each new account opened: 1. Full Name 2. Date of Birth 3. Address and phone numbers 4. SSN or TIN **1-4 are required under USA PATRIOT ACT of 2001** 5. Occupation 6. Citizenship 7. whether the customer is an officer, director, or more than 10% shareholder of a public company (necessary to monitor trading activity with insiders) 8. Estimated income/net worth, investment objectives, bank/brokerage references, FINRA member employee, how account acquired 9. Name/occupation of authorized account persons 10. Signature of registered principal stating account is acceptable

Securities and Exchange Commission (SEC) Insider Transactions Section 16 Filings

-requires executive officers, directors, and greater than 10% stockholders (insiders) to file transaction reports before the end of the second business day after a transaction has been executed in an equity where they are considered an insider

Investment Company Act of 1940 Custodian

-requires that every registered investment company keep its assets with a custodian -if a bank, the act does not require it to have FDIC coverage

Securities and Exchange Commission (SEC) Insider Transactions Section 13 F Filings

-requires the filing of Form 13F for any institutional investment manager that: 1. uses mail or any means of interstate commerce, and 2. exercises investment discretion over equity portfolio of 100MM or more in 13(f) securities -must be filed quarterly with the SEC, within 45 days of end of each quarter -purpose is to make periodic public disclosures of significant portfolio holdings WHAT ARE 13F SECURITIES: (found on SEC website) -exchange-traded stocks, equity options and warrants, shares of closed-end investment companies, certain convertible debt securities, and ETF's -EXCLUDES Mutual Funds

Accredited Investor

-rile 501 of Securities Act of 1933 -refers to a person who is NOT counted when computing number of investors purchasing a private placement INCLUDES: 1. institutional investors -banks, insurance companies, investment companies, etc 2. charitable organizations 3. corporations 4. partnerships -more than 5MM in assets 5. natural persons (individuals) -Three ways for them to qualify: a. be a director, executive level officer, or general partner of issuer b. individual/joint net worth exceeding 1MM, excluding equity of residence c. income exceeding $200,000 (single) / $300,000 (jointly) ****this is a Federal term NOT one found in the USA****

Investment Company Act of 1940 Sale of Redeemable Securities

-rule basically states that the offering price for mutual funds be upheld for all buyers use of a BREAKPOINT: -most important way a reduction of sales charge may be made available -is the quantity level which investors receive a reduction in load -available to any person who purchases in the stated quantity No sales charge: -Related persons to fund -Automatic reinvestment of div/cap gains

Government Securities Types

-safest of ALL! -2 types of backing: a. direct government backing, or b. moral guarantee Types: 1. US Treasury Bills 2. US Treasury Notes 3. US Treasury Bonds 4. Treasury Inflation Protection Securities (TIPS) 5. US Federal Agency Securities

Investment Return Measures Holding Period Return

-same as Total Return, except can be computed for any period (not just one year) -is the percentage return over a defined period

Simple Trusts vs Complex Trusts

-simple trusts MUST distribute all income earned during the year received -complex trusts may accumulate income, permitted deductions for distributions

Securities and Exchange Commission (SEC) Investment Discretion

-someone who is authorized to determine: a. which securities will be purchased or sold by for the account b. amount of the securities to be bought or sold for the account c. whether the transactions will be a purchase or sale DISCRETION-TIME AND/OR PRICE -federal and state law prohibit exercise of discretionary power in customers account unless customer has given prior written authorization (power of attorney/trading authorization) -EXCEPTION: -an oral grant of time and price discretion -must be by end of business day on which customer grants it -an extension of this time and price discretion MUST be in writing

Systematic vs Unsystematic Risk

-sources of risk that both businesses and investors bear 1. Systematic -risk that changes in overall market (war, natural disaster, etc) -CANNOT be diversified away -market risk, interest rate risk, and purchasing power risk -measured by Beta 2. Unsystematic -risks unique to specific business (labor union strikes, lawsuits, etc) -CAN be reduced through diversification -business risk and financial risk

Term Life

-specified term -cheapest form of life insurance -death benefit only paid if the insured dies within the term -do NOT accumulate cash value **provides substantial coverage at minimum cost - so younger people with children or those with limited income are ideal candidates**

The National Securities Markets Improvement Act of 1996 (NAMIA)

-split the regulation of investment advisers by creating a new definition: Covered Adviser -also introduced Covered Security

Asset Allocation

-spreading portfolio funds among different asset classes -3 major types of asset classes: A. Stock B. Bonds C. Cash 1. STRATEGIC ASSET ALLOCATION -proportion of various types of investments to compose a long term portfolio (standard: 100-age = stock %) -rebalanced to bring asset mix back to target allocations A. Constant Ratio Plan -attempts to maintain desired ratio between debt and equity B. Constant Dollar Plan -attempts to maintain constant dollar amount in asset class 2. TACTICAL ASSET ALLOCATION -short term portfolio adjustments considering market conditions

Registration Requirements 203 A of IA Act of 1940

-state registration of an IAR is required ONLY in the states where they have a place of business -not effective when not employed by registered IA -Registered IA responsible for any IARs, independent contractors or not -No financial requirements, Admin may require bonding -Excludes individuals performing clerical/admin duties -"place of business" a. an office where they regularly provide investment services, solicits, or meets with clients, and b. any other location that is held out to the general public which the IAR provides investment services, solicits, or meets with clients -instead of filing Form U-4, their information is included in Form ADV Part 1, AND must pass appropriate qualification exams **registration as an IAR is done solely on a state basis, never with the SEC**

Barometers of Economic Activity #1 Leading Indicators (heading)

-stock prices -money supply -weekly claims for unemployment insurance -manufacturers new orders, supplier deliveries -building permits -interest rate spread (10 yr T-Bond and Fed Funds rate) -index of consumer expectations

Efficient Market Hypothesis

-suggests that there is no way to predict stock rices and passive strategie are most effective -3 versions: 1. Weak -current asset prices already reflect all past information of: a. PRICE, and b. VOLUME -technical analysis is useless 2. Semi-Strong -prices already reflect information for: a. PRICE b. VOLUME, and c. COMPANY STATEMENTS, ANNOUNCEMENTS, ECONOMIC FACTORS, etc -fundamental analysis is useless 3. Strong -includes private and insider information -says that ALL information is already reflected in market prices -no benefit in using technical or fundamental analysis

Bypass Trust

-takes advantage of lifetime estate tax exclusion (spouse is unlimited, non spouse it $3.5 M) -commonly used between spouses -irrevocable -used to pass assets from parents to children at the second parents death ex: a man with an estate valued at 10MM could use a bypass trust and leave 3.5MM to his children (unified credit amount) and the remaining 6.5MM to his wife. This would avoid all estate taxes at HIS death. Now assume the wife dies the next year...the first 3.5MM of her 6.5. MM passes untaxed and the remaining 3MM is taxed

Tax Equivalent Yield

-the coupon an investor requires to purchase a taxable bond (corporate bond) over a tax-free bond (municipal) TEY = (tax-free yield) / (100 - tax bracket)

5 Categories of Federal Covered Securities

-the following CANNOT be regulated by state securities Administrators: 1. securities issued by open or closed end companies, unit investment trusts, or face amount certificate companies that is registered under the Investment Company Act of 1940 2. securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 (private placements) 3. securities offered by a US Federal Government issuer or a Municipal issuer -UNLESS the municipal issuer is located in the state in which securities are being offered 4. securities listed on one of the major exchanges (NYSE, NASDAQ, etc) 5. securities that are equal in seniority (rights or warrants) to #4 or senior to these securities (bonds and preferred stock) **registering a security with the SEC does NOT automatically make it federally covered (ex. OTC)**

Yield to Maturity or Basis

-the gain or loss the investor will have when the bonds are redeemed at maturity. It is the combination of the money received in interest plus or minus the difference between purchase price and par.

Effectiveness of Registration

-the license becomes effective at noon, 30 days after the later of: a. the date an application for licensing is filed and is complete, or b. the date an amendment to an application is filed and is complete (Administrator will notify person of effectiveness) -Administrator has power to place a "rush order" an authorize an earlier effective date of licensing (or earlier withdrawal) -a request to withdraw registration also becomes effective on the 30th day after submission, Administrator retains jurisdiction for one year

Book Value per Share

-the liquidation value of the company -the amount that is left to common shareholders after selling all assets and paying off all debts (including preferred stock holders) -only uses TANGIBLE assets because intangible assets may not be worth what the balance sheet says =(tangible assets-liabilities-par of PS)/outstanding CS

The Securities Act of 1933 The Cooling Off Period

-the period beginning after issuer files registration statement with SEC -lasts min 20 days, but could be longer -period before the registration becomes effective -SEC may issues a STOP ORDER, demanding all underwriting activity to cease during this period (missing/fraudulent info)

Definition of Control

-the power to direct the management or policies of an investment adviser: -includes officers, partners, directors (Act of 1940) -Presumed Control: a. corporation -right to vote 25% or more of voting securities b. partnership -contributed more than 25% of capital

Investment Return Measures Annualized Return

-the return an investor would have received had he held the investment for one year -annualization factor: 365/# of days investment held =total return * annualization factor

Investment Adviser Requirements (3)

-to be considered an investment adviser, a PERSON must: 1. provide advice about securities (not rare coins, jewelry, etc) 2. provide that advice as part of an ongoing business (office), and 3. receive compensation for the advice

Registration Requirements Under Act of 1940 Exemptions (3)

-unlawful for unregistered IA's to use mail or any form of interstate commerce in connection with his business (meet the definition of IA, but excluded from regist) 1. Intrastate Advisers 2. Advisers to Insurance Companies 3. Private Fund Advisers

Registration of Securities Under the USA

-unlawful to offer or sell an UNREGISTERED security in a state UNLESS: 1. It is registered under the USA, 2. security/transaction is exempted from registration, or 3. It is a federal covered security

Advertising

-unlawful under both laws, state and federal 1. USA's RULE: -unlawful for any IA to publish, circulate, or distribute any advertisement that does not comply with the rules under the Investment Advisers Act of 1940 2. SEC's RULE: -any notice, circular, website, letter, or other written communication addressed to more than one person, or -any notice by radio or television that offers: A. any analysis, report, or publication concerning securities B. any graph, chart, formula, or other device concerning securities C. any other investment advisory service regarding securities

Unit Investment Trusts (UIT's)

-unmanaged (trust indenture) -do not have a board of directors -do not employ investment advisers, and -do not actively manage portfolios (trade securities) -redeemable shares (units, shares of beneficial interest) -must maintain secondary market -undivided interest -most ETFs A. Fixed UIT -purchase individual stocks or bonds -liquidation date set in offering documents B. Non-Fixed UIT -purchases shares of underlying mutual funds -when securities are liquidated, the proceeds must be distributed

The Securities Act of 1933 SEC Rule 144 Restricted Securities

-unregistered securities purchased by investor in private placement -AKA: letter securities, or legend securities -purchasers must sign an investment letter attesting to their understanding of restriction upon resale

Administrator Stop Order

-used by the Administrator to deny effectiveness, suspend, or revoke and effectiveness of any registration statement **ONLY applies to securities NOT professionals**

Administrator Cease and Desist Order

-used by the Administrator whenever it appears that any registered person has engaged OR will engage in any act violating any provision or rule -can be done with or without a prior hearing against the person **ONLY applies to registered persons, NOT securities**

Valuation Ratios

-used to compare companies within one or multiple industries 1. Earnings Per Share (EPS) -measures the value of a company's earnings for each common share (RE/outstanding shares) 2. Dividends Per Share -dollar amount of cash dividends paid on each common share (annual div/outstanding shares) 3. Current Yield (Dividend Yield) -expresses the annual dividend payout as a percentage of the current price (annual dividend/market value per share) 4. Dividend Payout Ratio -measures the proportion of earnings paid as dividends (annual div/EPS) 5. Price to Earnings Ratio (PE) -provides a relationship between the prices of different common stocks compared to the earnings that accrue to one share of stock (current market price/EPS) -growth companies > cyclical

Capital Needs Analysis

-used to determine how much life insurance is necessary to meet future needs -need to try and protect future earnings, then -estimate life expectancy and account for inflation, then -look at protecting existing assets -should provide for: a. payoff mortgage and other debts, b. income for survivors, c. college tuition, d. estate taxes if taxable estate will exceed 5.25 MM

Investment Policy Statement

-used to determine policies to be followed by an adviser -2 parts: objectives and constraints 1. Objectives: a. return requirements b. risk tolerance 2. Constraints: a. time horizon b. liquidity c. taxes d. laws and regulations e. unique circumstances -investor preferences or desires to avoid particular types of assets

Economic Indicators

-used to measure the economic health of a country at a given time

Generation Skipping Trust (GST)

-used to pass money from family members to other family members who are more than one generation removed -eliminates a level of estate taxation -placing appreciating assets is a HUGE BENEFIT A. Direct Skip -assets directly skip a generation -DONOR or DONOR's ESTATE must pay the GSTT (GS transfer tax) B. Taxable Termination -trust is terminated and pays out remainder of funds -TRUSTEE must pay the GSTT C. Taxable Distribution -to a skip person that is not 1 or 2 -RECIPIENT must pay the GSTT

Person Definition

-very broad definition (individual, business, gov) -just know there are only 3 NONPERSONS: 1. minors (anyone unable to enter into contract by law) 2. deceased individuals, and 3. individuals legally declared mentally incompetent

Risk Measurements Beta

-volatility measure of a security compared to the overall market -1: moves with market -below 1: less volatile than market -above 1: more volatile than market *ONLY measures systematic risk*

Technical Analysis Chart Patterns Breakout

-when the price moves past the support and resistance levels -confirmed when movement is at least 3% penetration

Classes of Fund Shares

1. Class A Shares -front-end loads -pay at time of purchase 2. Class B Shares -back-end loads -declines annually -pay at redemption 3. Class C Shares -level load -no charge to purchase -usually a 1% CDSC for one year, and -continuous 12 B-1 fee

Access Person Record Requirements

1. record of each report made by access person 2. record of names of access persons currently and within last 5 yrs 3. record of decisions, and their reasons, to approve acquisition of securities for last 5 years

Balance Sheet Liabilities

1. Current Liabilities -debt obligations due in next 12 months A. Accounts Payable - owed to suppliers of materials B. Accrued Wages Payable - unpaid wages, salaries, etc C. Current Long-Term Debt - long-term debt due in 12 mo. D. Notes Payable - balance on equipment purchased on credit E. Accrued Taxes 2. Long-Term Liabilities -due after 12 months

Investment Company Act of 1940 Prohibited Activities of Investment Companies

1. purchase any securities on margin 2. participate on a joint basis in any trading account in securities 3. sell any security short, or 4. acquire more than 3% of the shares of another investment company

Securities Amendments Act of 1975 Main Provisions

1. Fixed commission rates abolished 2. Directed SEC to develop a national market system -goal: rely less on dealers and place more trades in agency capacity (increased efficiency) 3. SEC can approve/refuse any proposed rule changes by exchanges, FINRA, MSRB 4. Required registration of municipal securities dealers with SEC -previously, these b/d's were exempt from registration -gave rise to MSRB, who are mostly banks regulated by separate authorities 5. SEC was given power to regulate clearing corporations, securities depositories, and transfer agents

Personal Trading Procedures (7)

1, prior written approval before access persons can place personal trades 2. maintaining lists of issuers of securities the firm is analyzing/recommending, personal trading prohibited 3. maintaining restricted lists of issuers about which the firm has inside information and prohibits any trading 4. blackout periods; when access persons are not permitted to place PERSONAL trades because client securities trades are being placed 5. reminders that investment opportunities must be offered to clients FIRST before employees may act on them, associated procedures 6. requirements to provide the adviser with duplicate trade confirmations and account statements 7. procedures for assigning new securities analyses to employees whose personal holdings do not present conflicts of interest

Accumulation vs Annuity Stages

1. Accumulation Stage -the pay-in period -can terminate contract anytime (usually charge if w/in 5-10 years) -companies allow borrowing from their accounts -accumulation unit: ownership value of separate account 2. Annuity Stage -the payout period -switching from accumulation to annuitization locks in the specified payment option and it MAY NOT be changed -annuity units: fixed # at annuitization, value fluctuates

Alimony and Child Support

1. Alimony -deductible to spouse making payments -includable to spouse receiving 2. Child Support -not deductible or includeable **for purposes of IRA contributions, Alimony is eligible income but Child Support is NOT**

Disadvantages to Variable Annuities

1. All earnings taxed as ordinary income 2. High administrative expenses 3. 10% penalty for withdrawals before 59 1/2 4. Most have a CDSC -so early surrender involves more costs 5. Investment risks

6 Items NOT considered securities under the USA

1. An insurance or endowment policy or annuity contract (only fixed) 2. Interests in a retirement plan 3. Collectibles 4. Commodities (precious metals and grains, futures contracts) 5. Condominiums used as personal residence 6. Currency *fraud committed with these items violates antifraud provisions and not security laws* **non-exempt securities do not have to be registered if sold in an EXEMPT transaction**

Exclusions of Investment Adviser Definition Federal Law (5)

1. Any bank or bank holding company 2. Any lawyer, accountant, teacher, or engineer whose advice is incidental to the practice of his profession -does not apply to any who has a separate advisory business established 3. Any broker/dealer and registered reps of broker/dealers, no special compensation (definable charge specifically for advice) 4. Publishers of any newspaper, news magazine, or business publication, etc. -must be of general and regular circulation 5. Any person whose advice relates SOLELY to securities issued or guaranteed by the federal government

Portfolio Management Styles and Strategies

1. Asset Allocation: a. strategic b. tactical 2. Active and Passive Management a. growth b. value c. buy and hold d. indexing e. bond strategies

Fundamental Analysis 3 Tools

1. Balance Sheet -snapshot of financial position at specific point in time -assets-liabilities = equity/net worth *does NOT indicate whether company's business is improving or not 2. Income Statement -summarizes a company's revenues and expenses -used to judge the profitability of a company -3 components: a. revenue b. cost of goods sold c. pretax income 3. Cash Flow Statement -reports business sources and uses of cash -3 components: a. operating activities b. investing activities c. financing activites

Bond Strategies to Reduce Interest Rate Risk

1. Barbells -investor purchases: a. x amount maturing in 1-2 years, and b. x amount maturing in 10 or more years 2. Bullets -strategy used for a specific goal (college funding) -bonds are purchased at different times but all mature at same time (target date) -allows investor to capture current interest rates as they change 3. Ladders -bonds are purchased at the same time but mature at different times

Persons Subject to State Registration (4)

1. Broker/Dealers -generally legal persons such as corporations or partnerships 2. Agents -always individuals (natural persons) 3. Investment Advisers -generally legal persons such as corporations or partnerships 4. Investment Adviser Representatives -always individuals (natural persons) *Pay attention to which type of person*

Primary Unsystematic Risks

1. Business 2. Financial 3. Liquidity 4. Political 5. Regulatory

Unethical Business Practices Broker/Dealer AND Agent (17)

1. CHURNING -inducing excessive trading in a customers account -excessive in size or frequency, based on customers needs 2. UNSUITABLE RECOMMENDATIONS -making recommendations to a customer without reasonable grounds that the advice is suitable -making blanket recommendations -not disclosing important security facts/risks 3. UNAUTHORIZED TRANSACTIONS -executing transactions on behalf of a customer without authorization to do so, or failing to follow customer instructions -if spouse calls with order, cannot accept unless third party trading authorization is on file 4. EXERCISING DISCRETION -must have a power of attorney from client or trading authority -given when the client authorizes, in writing, the agent to decide: a. Asset (security) b. Action (buy or sell) c. Amount (how many shares) 5. MARGIN DOCUMENTS -executing transactions in a margin account without a written margin agreement (after the initial transaction) from the client 6. UNREASONABLE COMMISSIONS OR MARKUPS -must be reasonable to the current market price 7. TIMELY PROSPECTIVE DELIVERY -must deliver a final prospectus or preliminary prospectus no later than the due date of confirmation of the transaction -administrator may require one to be sent to each person who an offer was made to, no later than with trade confirmation 8. MARKET MANIPULATION -effecting transaction by means of manipulating, deceptive, or fraudulent plans -most common forms: A. Matched Orders -market participants agree to buy and sell securities among themselves to create an appearance of activity/trading -increased volume can induce investors to purchase the security, increasing the price -as the price rises, participants manipulating the markets, sell their securities at a profit B. Wash Trades -creating an interest in the security that does not really exist -buying in one account and selling on another simultaneously -no real change occurs, but to the marketplace is appears that volume/price is increasing 9. GUARANTEEING AGAINST LOSS -cannot guarantee certain performance -cannot guarantee against a loss by providing funds to the account 10. DISSEMINATING FALSE TRADING INFORMATION 11. DECEPTIVE ADVERTISING PRACTICES -nonfactual data based on unrealistic claims or assertions -sales brochures for new issues that only include the positive info and leave out the risk factors -highlighting or drawing attention to key points

Repayment of Principal Redemption Before Maturity

1. Callable Bonds -issuer can redeem before maturity -will be done as interest rates go down and prices go up 2. Refunding -issuer will issue new bonds at the new (lower) interest rate and use proceeds to call in the old bonds that have higher coupons 3. Call Protection -number of years till the call date

Unethical Business Practices Broker/Dealer ONLY (8)

1. DELIVERY DELAYS -unreasonable delays in delivery of securities by customers or payment (upon request of customer) of credit balances 2. COMMINGLING OF CUSTOMER AND FIRM ASSETS -securities held in a customers name cannot be commingled with securities of the firm -gives undue leverage (borrowing power) to a firm, jeopardizing the clients account 3. IMPROPER HYPOTHECATION -pledging margin securities -must have written consent 4. UNREASONABLE SERVICING FEES -unreasonable fees for services performed -includes collection of monies for principal, dividends, interest, exchange or transfer of securities, appraisals, custody of securities, etc. A. Higher than Normal Commissions -all charges must be clearly disclosed to clients -must be justified based on the service provided or transaction 5. DISHONORING QUOTES -offering a stated price to a client and not prepared to buy/sell 6. FAILING TO DISCLOSE CONFLICTS OF INTEREST -B/D is controlled, affiliated, or under common control of issuer of security (or relation to control person of security) -"house funds" for example, are mutual funds where the underwriter is affiliated with the b/d 7. WITHHOLDING SHARES OF A PUBLIC OFFERING -keeping shares for themselves to benefit themselves in the case that the stock soars 8. WAIVERS -if a client agrees their rights to sue, the agreement is null and void 9. Free Lunch Seminars -must clearly present intention to solicit accounts or sale of securities

Funding Techniques

1. DOLLAR COST AVERAGING -a means to invest consistent amounts of money in a mutual fund or stock at regular periodic intervals -allows to purchase more shares when prices are low *reduces timing risk - that all your money is invested at a market top 2. INCOME REINVESTMENT 3. DIVIDEND REINVESTMENT PLANS (DRIPS) -shareholder purchases additional shares directly from issuer -so pays little or no commissions *distributions are taxable whether taken in cash or reinvested*

Annuity Purchase Options (3)

1. Deferred Annuity -single lump sum investment -payments of benefits are deferred until elected to receive them -AKA: single premium deferred 2. Periodic Payment Deferred Annuity -invest periodically; monthly, quarterly, or annually -payment of benefits are deferred until elected to receive them 3. Immediate Annuity -single lump sum invested -payment of benefit begins immediately (w/in 60 days)

Advantages of Mutual Funds

1. Diversification (#1 advantage) 2. Professional Management 3. Convenience 4. Liquidity -pmt must be mad within 7 days of request 5. Minimal Initial Investment

Market Averages (1)

1. Dow Jones Industrial Average -PRICE weighted -30 industrial stocks of the 30 best known corporations in the world -4 Averages: A. 30 industrial B. 15 utilities C. 20 transportation D. Composite of all 65

ERISA Guidelines

1. Eligibility -all employees must be covered if 21+, 1+ year of service, and work 1,000+ hrs per yr 2. Funding -fund segregated from corporate assets 3. Vesting: current/previous employees entitled to full benefits after vesting period 4. Communication -employees must be kept informed of plan benefits, availability, account status, and vesting procedure annually 5. Nondiscrimination -Participants entitled to receive free Summary Plan Document (what provided, how operated, when participate, how benefits/services calculated, when vested, when/how benefits paid, how to claim benefits) **ERISA only applies to private sector/ corporate plans (not public sector)**

Estate and Gift Taxes

1. Estate Taxes -imposed on transfer of substantial amounts of property at death -unlimited amount allowed for spouses-MARITAL DEDUCTION -unlimited amount allowed to eligible charities -tax credit will offset up to $5MM TOTAL for other heirs -Calculate gross estate (all property owned at TOD), deduct expenses (funeral, charity, debts) for adjusted gross estate (AGE), deduct unlimited martial/charity for total taxable estate -Estate may be valued 6 months later, taxes due 9 months after death (form 706) 2. Gift Taxes -imposed on transfer of property during lifetime -5.25MM of lifetime gifts and 14 K/yr allowed before taxes set in (28K for couples) -Spouses usually unlimited, except when spouse is noncitizen -filed on FORM 709 and due with income tax return

Exclusion vs Exemption

1. Exclusion -means NOT included in a definition 2. Exemption -means NOT being subject to a registration provision even though otherwise covered by the act (meet the exemption requirements)

Stages of Business Cycle

1. Expansion -increased business activity (higher production, lower inventory) -increased GDP -increasing consumer demand for goods -rising stock market & property values 2. Peak -businesses reach productive capacity 3. Contraction -rising inventories (sign of slackening consumer demand) -decreasing GDP -rising bankruptcies and bond defaults, high consumer debt -falling stock market -Short term/mild: recession (2+ consecutive quarters) -Long term/severe: depression (6+ consecutive quarters) 4. Trough -business activity stops declining and levels off Different sectors are strongest in different stages

Types of Investment Companies

1. Face Amount Certificate Companies 2. Unit Investment Trusts (UIT's) 3. Management Investment Companies A. Closed End B. Open End

US Federal Agency Securities (6)

1. Federal Land Banks -secured by mortgages -made to farmers and ranchers 2. Federal Intermediate Credit Bank -made to farmers for expenses, machinery, and livestock 3. Federal Home Loan Banks (FHLB) -borrow money in open market to re-lend to savings and loans (S&L) -the S&L's then re-lend to home buyers 4. Federal National Mortgage Association (Fannie Mae) -purchases and sells real estate mortgages -primarily those that are insured by the Federal Housing Administration (FHA) -issue mortgage backed bonds that can be purchased by investors **1-4 are all MORAL obligations* 5. Government National Mortgage Association (Ginnie Mae) -known as modified pass through certificates -represent an interest in pools of FHA-insured mortgages -as home owners make monthly mortgage payments, they are collected in a pool and shares pass through to investors *5 is a DIRECT obligation of the government*

Economic Indicator #1 GDP/GNP

1. GDP -total value of all final goods and services produced in U.S during the year 2. GNP -output generated by the country's citizens regardless of where they live -includes income a country's citizens earned abroad -excludes income foreigners earned domestically

Types of Municipal Bonds (2)

1. General Obligation Bonds (GO's) -backed by pledge of issuers full faith and credit -secured by property taxes -analyzed in terms of size of the resources being taxed -very safe 2. Revenue Bonds -payable from revenue-producing enterprises -water, sewer, electric or gas, toll bridge, airport, college, etc -analyzed in terms of earnings, -higher yields due to increased risk

Types of Accounts

1. INDIVIDUAL ACCOUNTS -one beneficial owner -only person who can control the investments, or request distribtions 2. JOINT ACCOUNTS -two or more adults (suitability info on all) -either TIC or JTWROS -docs must be signed by all tenants (even checks) -Good delivery form: securities sold signed by all A. Tenants in Common (TIC) -a deceased tenants interest in the account is retained by his estate (proportion distributed) -does NOT pass to surviving tenants -interest can be UNEQUAL B. Joint Tenants with Rights of Survivorship (JTWROS) -deceased tenants interest passes to surviving tenants -equal/undivided interest amongst all parties C. Transfer on Death Account (TOD) (AKA: Pay on death; POD) -avoids being subject to probate, but does not avoid estate tax -while alive, owner is only person with rights to property -at death, property is immediately transferred to named beneficiaries (will does NOT control who gets what) -ONLY accounts that can be opened with TOD are: a. Individual, or b. JTWROS 3. PARTNERSHIP ACCOUNTS -New account forms, furnish partnership agreement, margin accounts only allowed if stated in agreement and limitations disclosed 4. CORPORATE ACCOUNTS -needs a corporate resolution, margin account needs charter and resolution identifying officers authorized to trade 5. WRAP ACCOUNTS -firm charges a fixed fee expressed as an annual percentage for portfolio management and related services -must be registered as investment advisers (65/66) 6. DESIGNATED ACCOUNTS A. Third-Party Accounts -person opens an account for himself and grants a power of attorney to someone else B. Fiduciary Accounts -individual with fiduciary responsibility enters trades, makes all investment, management, and distribution decisions -trustee, executor, guardian, custodian (UGMA), etc -State law may limit traded securities -Need trust agreement or court certification to open (unless UGMA or UTMA) **trust accounts do not permit speculation, margin account must be stated in legal docs to be allowed**

Variable Life Income Tax and Estate Tax Implications

1. Income Tax -premiums are nondeductible -proceeds made to beneficiaries are exempt from federal income tax 2. Estate Tax -if incidents of ownership are held, entire death benefit is included in federal estate tax on insureds estate -can designate beneficiary

Exemptions from Registration Exempt Transactions

1. Isolated Nonissuer Transactions -similar to individuals placing a "for sale by owner" sign in their lawn, -one individual selling stock to another in a one-on-one transaction (issuer received no proceeds) 2. Unsolicited Brokerage Transactions -most common form of exempt transactions -transactions initiated by client not the agent 3. Underwriter Transactions -between issuer and underwriter, or 2 underwriters 4. Bankruptcy, Guardian, or Conservator Transactions -transactions by an entity in bankruptcy -does NOT include UGMA or UTMA 5. Institutional Investor Transactions -between financial institutions such as banks, insurance companies, investment companies, etc. 6. Limited Offering Transactions -includes any offering (private placement) directed at a max of 10 persons other than institutional investors in last 12 months -restricts the number of offers that may be made -must be purchased for investment purposes (not needed in writing), no commission paid for solicitation, and no advertising used 7. Preorganization Certificate -purpose of these is to enable a new corporation to obtain the minimum amount of capital required and provide evidnce that the minimum funding is assured -3 requirements: a. no commission can be paid b. max number of subscribers is 10 c. no payment can be made by any subscriber 8. Transactions with Existing Security Holders -includes persons who are holders of convertible securities, rights, or warrants of the issuer -no commission may be made for the solicitation 9. Nonissuer Transactions by Pledges -if you pledge your stock as collateral for a loan and default on your obligation, the transaction the lender makes to sell your stock and recoup his loss is EXEMPT

Capital Structure Specifics

1. Issuing Securities -net worth increases by additional capital raised -cash on "asset" side increases 2. Convertible Securities -when investor converts, liabilities decreases and owners equity increases 3. Bond Redemption -liabilities are reduced while cash decreases 4. Dividends A. Cash -declared: retained earnings are lowered, and current liabilities increase -paid: cash lowered, current liabilities decrease B. Stock -no change (increase number of shares, each share worth less, wash) 5. Stock Splits -no change 6. Financial Leverage -debt-to-equity greater than 50% are considered highly leveraged -affected more by interest rate changes -debt-to-equity(capitalization) ratio: LT debt / capitalization

3 Schools of Economics

1. KEYNESIAN ECONOMICS -government intervention -higher taxes -more government spending 2. CLASSICAL AND SUPPLY SIDE ECONOMICS -lower taxes and less government regulation -> increased supply -supply creates demand by providing jobs and wages -if unemployment is high, wages will fall, reducing prices -reduced prices will increase product demand, increasing demand for labor until excess supply of labor is eliminated 3. MONETARIST THEORY -quantity of money determines price levels and economic activity -money > # goods: inflation ; # goods > money: deflation -believe a well controlled money supply leads to price stability

Dodd-Frank and Assets Under Management 3 Thresholds

1. LARGE INVESTMENT ADVISERS -at least $100 MM under management -once AUM reaches $110 MM, registration with SEC is mandatory -state registration not required, SEC required if no exemptions 2. MID-SIZE INVESTMENT ADVISERS -at least $25 MM but no more than $100MM -generally prohibited from registering with SEC and must register with the state...BUT, there are exceptions that allow registration with SEC: A. if adviser is not required to register with the Administrator of the state where it maintains its principal office B. if registered, the adviser would not be subject to examination as an investment adviser by that securities Administrator C. if they are required to register in 15 or more states, or D. adviser elects to take advantage of the "buffer" 3. SMALL INVESTMENT ADVISERS -less than $25 MM under management -SEC registration is prohibited (unless IA to IC under ICA), and must register with the state (unless exempt) -register in 15+ states, then SEC registration allowed

Factors in Choosing the Right Business Structure

1. LLC, General Partnership, and S corporations have NO double taxation 2. company that expects to be very profitable should be a C corporation because nothing can be retained in LLC, GP, or S corp (all earnings pass to owners) 3. the only companies taxed on their income are: a. Sole Proprietorship (personal income tax return), and b. C Corporation (Form 1120) 4. Corporations survive death (LLC, S, C)

Economic Indicator #6 Barometers of Economic Activity

1. Leading -turn down before the beginning of a recession -turn up before the beginning of an expansion -predict economic activity 4-6 months following 2. Coincident -change directly/simultaneously with the business cycle 3. Lagging -change 4-6 months after the economy begins a new trend -serves to confirm the new trend (differentiate long vs short term trends)

Annuity Payout Options (5)

1. Life Annuity/Straight Life/Pure Life -periodic payments over lifetime (usually monthly) -largest periodic payment 2. Life Annuity with Period Certain -periodic payments for life with certain minimum period guaranteed -if annuitant dies before period certain expires, payments made to beneficiaries -if annuitant lives beyond the period certain, payments continue until his death 3. Joint Life with Last Survivor Annuity -covers two or more people -payment is conditioned on both (all) lives 4. Mortality Guarantee -guarantee payments for as long as they live (even if life expectancy changes) 5. Operating Expense Guarantee -expenses projected by the company for administering the plan -if higher than expected, they cover the difference

4 Broad Powers of the Administrator

1. Make, Amend, or Rescind Rules and Orders -all rules and forms must be published -rules apply to everyone -orders apply to a specific instance -person can challenge in court within 60 days of issuance -cannot alter the law itself (only rules and orders) 2. Conducts Investigations and Issue Subpoenas a. require statement in writing, under oath, as to all matters relating to the issue under investigation b. publish and make public the facts and circumstances concerning the issue to be investigated c. subpoena witnesses and compel their attendance and testimony, d. take evidence and require production of documents deemed relevant -can make investigations private and may occur outside admin's state (does not need permission to investigate B/D registered in state, even if primary location out of state) -Failure to comply is Contumacy and Administrator can appeal to appropriate court for help -Can only issue and enforce subpoenas for violations of laws/rules/orders of that particular state 3. Issue Cease and Desist Orders and Seek Injunctions -no FORMAL order may be issued without: a. giving appropriate prior notice b. granting opportunity for a hearing, and c. providing findings of fact of law -Cease and desist is issued to pause activities until they can be thoroughly reviewed and go through formal process -compel compliance with injunction through court a. enjoined: person subject to injunction 4. Deny, Suspend, Cancel, or Revoke Registrations and Licenses -must notify registrant and provide hearing within 15 days

Primary Systematic Risks

1. Market 2. Interest Rate 3. Inflation / Purchasing Power- fixed income is most vulnerable

Methods of State Registration of Securities (3)

1. NOTICE FILING 2. REGISTRATION BY COORDINATION 3. REGISTRATION BY QUALIFICATION **Factors that Apply to ALL 3 Methods** 1. consent to service of process must be filed with the Administrator 2. registration statements remain effective for 1 YEAR from its effective date 3. registration statement may be amended after its effective date to change the number of shares offered and sold, two conditions: A. public offering price is unchanged, and B. underwriters discounts and commissions are unchanged

Real Estate Limited Partnerships

1. New Construction -Potential for appreciation -Cost overrun, no track record, find permanent financing, cannot deduct current expenses during construction 2. Existing Property -Track record, estimate income/expenses, immediate CF -Mainenance/repair, expiring leases, existing rental agreements 3. Raw Land -Appreciation potential -Speculative, real estate taxes, interest costs, delayed benefit

Statement of Cash Flow 3 components

1. Operating Activities -includes cash receipts from selling goods or services -includes income from interest and dividends -includes cash payments (going out) for cost of inventory, payroll taxes, interest, utilities, and rent 2. Investing Activities -purchase and sale of securities, land, buildings, equipment, and other assets -making and collecting of loans 3. Financing Activities -cash proceeds from issuing stock or bonds -payments to repurchase stock or retire bonds, payment of dividends, etc

Exclusions from Definition of Broker/Dealer

1. Persons NOT included: A. agents B. issuers C. banks, savings institutions, and trust companies (not engaged in broker/dealer activities) (subsidiaries acting as broker/dealer not excluded) 2. No Place of Business in the State (exclusion from definition of B/D and therefore registration) A. have no place of business in the state and deal exclusively with issuers, other broker/dealers, or other financial institutions (banks, trust companies, investment companies, etc) B. AND have no place of business in the state, but are licensed in a state where they have a place of business and offer and sell securities ONLY with persons in the state who are existing customers and who are NOT residents of the state -aka: snowbird exemption

Variable Life Deductions from Premium and Separate Account

1. Premium A. administrative fee -one-time charge B. sales load -max is 9% per year (over 20 year period) -can be front-end at 50% of first yr premium, but must avg 9% annually C. state premium taxes **think ASS - admin, sales, state** 2. Separate Account A. mortality risk fee (cost of insurance) -risk may live shoter than assumed B. expense risk fee -risk that administrative costs are greater than assumed C. investment management risk fee

Financial Goals and Objectives (1-4)

1. Preservation of Capital -use CD's; bank insured CDs eliminate interest rate risk 2. Current Income -focus individual securities or mutual funds investing in fixed income investments: a. government bonds and notes b. corporate bonds and notes c. preferred stock d. utility company stock -Time investor plans to remain in the investment is key: a. less than 2 years; money market mutual fund b. 3 to 5 years; intermediate term government bond c. 5 to 10 years: corporate bonds 3. Capital Growth A. aggressive growth -younger investors -risk seeking -ability to remain invested for many years B. large cap stock funds -older investors -more risk averse -3 to 5 year liquidation 4. Speculation a. highly volatile stocks b. high yield (junk) bonds c. options d. commodity futures

Issuing Partnership Investments Private Placements vs. Public Offerings

1. Private Placements -offered to accredited investors not general public -each LP usually contributes upwards of $100K 2. Public Offerings -larger number of investors contribute smaller amount of cash -can be publicly advertised -tightly regulated (federal registration, prospectus)

Market Indices (5)

1. S&P 500 -CAP weighted; base period of 1941-43 equal to 10 -includes 4 main groups: A. 400 industrials B. 20 transportation C. 40 public utilities D. 40 financial institutions 2. NYSE Index -CAP weighted; base period of 1965 equal to 50 -includes ALL common stocks listed on NYSE 3. Nasdaq Composite Index -CAP weighted; base period 1971 equal to 100 -covers the OTC market -3,000+ companies 4. EAFE -CAP weighted -covers foreign stocks from 21 developed countries 5. Wilshire 5000 -CAP weighted -covers every US based company on NYSE, AMEX, and Nasdaq -6,000+ companies -BROADEST COVERAGE of US stock markets

Taxation Business Taxation

1. SOLE PROPRIETORSHIP -no liability protection -personal assets of owner are at risk -Schedule C on Form 1040 2. PARTNERSHIPS -flow-through of income and losses -the Partnership itself does NOT pay taxes -File 1065 information form, Form K-1 is issued to each partner A. General Partnerships -no liability protection to partners B. Limited Partnerships -max loss is what has been invested and committed 3. LLC -is not recognized as a classification for tax purposes -must file as a Corporation, Partnership, or Sole Proprietor 4. CORPORATIONS A. C-Corp -only entity that must pay income tax (form 1120) -rate generally wont exceed 35% -dividends are paid out AFTER taxes are paid, then they are taxed again at the shareholder level - DOUBLE TAXATION B. S-Corp -treated the same as a partnership (but file Form 1120S) -shareholders receive a Form K-1 IRCs for Corporations: -Dividends paid from another corporation: 70% tax exempt (avoid triple taxation) -Do not pay federal taxes on muni bond interest

Investment Objectives

1. STOCK FUNDS 2. BOND FUNDS 3. BALANCED FUNDS 4. ASSET ALLOCATION FUNDS 5. MONEY MARKET FUNDS

Variable Life Scheduled Premium VL and Flexible Premium VL

1. Scheduled Premium -aka: fixed premium -issued with a minimum guaranteed death benefit -death benefit is determined at issue (age, sex, face) -requires evidence of insurability 2. Flexible Premium -aka: universal variable life -flexible premiums -flexible death benefit -can reduce or skip premium payments, but must maintain minimum cash value

Liquidity Priority

1. Secured Creditors -mortgage bonds, equipment trust certificates, etc 2. Unsecured Creditors -general creditors including debenture holders 3. Subordinated Debt Holders 4. Preferred Stockholders 5. Common Stockholders

Unethical Business Practices Agent ONLY (4)

1. Selling Away -transactions that are not recorded on the books unless they are authorized in writing by the broker/dealer prior to execution 2. Fictitious Accounts -account containing fictitious info in order to execute otherwise prohibited transactions -"beefing up" a clients account to increase his net worth and make him eligible for margin or options trading 3. Sharing in Accounts -sharing profits and losses with a customer without written consent (customer AND B/D) -ONLY allowed for Agents if client provides written approval (becomes joint account) -NEVER allowed for b/d's, investment advisers, or investment adviser representatives 4. Splitting Commissions -splitting commissions with any person who is not also registered as an agent for the same b/d

3 Technical Market Theories

1. Short Interest Theory -refers to number of shares sold short -High: Bullish indicator / Low: Bearish indicator 2 Odd-Lot Theory -transactions of fewer than 100 shares; small investors -theory holds that small investors buy/sell at wrong times -traders then do the opposite 3. Advance/Decline Theory -market breadth reflected in securities closing up/down -Number of daily declines > advances: bearish -Number of daily advances > declines: bullish

Tax Filing Status

1. Single 2. MFJ 3. MFS 4. Head of Household 5. Qualifying Widow with Dependent Child -Tax advantage for Head of House or MFJ **status is determined by your marital status as of the last day of the year (December 31)**

Business Accounts

1. Sole proprietorship: treated as individual account, unlimited liability 2. Partnership: profits/losses flow thru, must consider collective objectives of partners, unlimited liability 3. LLC: limited liability with tax advantages, consider objectives of all members, Form K-1 4. S Corp: limited liability, tax advantages, profit/loss pass thru, <100 shareholders, losses based on stock basis, consider objectives of all members, Form K-1 5. C Corp: business separate from owners, officers/directors shielded from liability, tax applied to corporation, double taxation, harder to dissolve, good if expectation of high profit, can raise large capital

Types of Preferred Stock

1. Straight -pays the stated dividend payment -missed dividends are not paid to holder 2. Cumulative -accrues payments due in the event dividends are reduced/suspended -provides steady income 3. Callable Preferred -typically has highest state dividend rate -company can buy back @ stated price after specified date (refinance) 4. Convertible Preferred -generally issued with a lower stated dividend rate because the investor can convert it to common shares, price fluctuates w/ CS price 5. Adjustable Rate Preferred -dividends are tied to rates of other interest rate benchmarks -price stable -LEAST appropriate choice if looking for income

Issuing Partnership Investments Documentation

1. Subscription Agreement -investors includes statement of net worth, annual income, and power of attorney -registered rep must make certain all info is accurate 2. Certificate of Limited Partnership -business files in its home state -legally recognizes the firm as a limited partnership -lets creditors know who is the GP and who are the LP's, otherwise all partners are GP's 3. Partnership Agreement -guidelines for operation -describes partner roles/rights/responsibilities

Advantages to Variable Annuities

1. Tax deferred participation in the equity markets 2. Lifetime income - protection against longevity risk 3. IRS Section 1035 transfers -transfer to different annuity tax free 4. No 70 1/2 restrictions (aka no RMD's) 5. No probate -passes directly to beneficiaries 6. No contribution limits 7. Tax-free transfers between sub accounts

Types of Life Insurance (4)

1. Term Life Insurance 2. Whole Life Insurance 3. Universal Life Insurance 4. Variable Life Insurance

Top Down vs. Bottom Up Analysis

1. Top-Down -broad to narrow (overall economy -> individual business) -think triangle top is literally down 2. Bottom-Up -narrow to broad (individual -> economy)

Market Capitalization

1. micro cap = less than 300 MM 2. small cap = 300 MM to 2B 3. mid - cap = 2B to 10B 4. large cap = greater than 10B

3 Advantages of Eurodollar Bonds

1. no currency risk to US investors since they are dollar denominated 2. rated by US rating agencies so their risk is clear 3. may offer higher yields than domestic bonds from same issuer

3 Disadvantages of Eurodollar Bonds

1. not registered with the SEC so lack of transparency 2. political and social risk 3. less liquidity than domestic issues

Risks of Mortgage Baked Securities

1. prepayment risk (mortgages being refinanced) 2. default risk 3. reinvestment risk 4. liquidity risk

Exempt Securities (10)

1. US and Canadian Government and Muni Securities 2. Foreign Government Securities -with which the U.S. maintains diplomatic relations 3. Depository Institutions -Securities issued, guaranteed, direct obligations of: A. any bank under the laws of the united states, or any bank, savings institution, or trust company organized under the laws of any state B. any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in the state C. any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state 4. Insurance Company Securities -refers to the stocks or bonds issued by insurance companies NOT the variable policies or the fixed insurance/annuity policies 5. Public Utility Securities -public utility holding companies, or equipment trust certificates issued by a railroad or other common carrier regulated to rates by federal or state authority 6. Federal Covered Securities -rights, warrant, preferred stock, and any other debt security 7. Securities Issued by Nonprofit Organization -religious, educational, fraternal, charitable, social, athletic, reformatory, or trade associations 8. Securities Issued by Cooperatives 9.Securities of Employee Benefit Plans -employee stock purchase, savings, pension, of profit sharing plan 10. Certain Money Market Instruments -commercial paper and bankers acceptances -EXEMPTIONS: not exempt from anti-fraud provisions of the USA -EXCLUSIONS: not a security, so not covered by anti-fraud statutes

Terminations of Registration

1. Withdrawal -effective 30 days after Administrator receives request (unless revocation/suspension proceedings pending) 2. Cancellation -results due to death, dissolution, nonpractice, or mental incompetency

Order Ticket Requirements (7)

1. account ID 2. description of security 3. number of shares or par value 4. terms of order (market or limit) 5. time of order entry and execution 6. execution price 7. identity of agent who accepted the order **client name or address NOT needed**

Private Fund Advisers (3)

1. advisers solely to private funds -less than 150MM AUM 2. non-US advisers -no place of business in U.S. -less than 25MM AUM for US clients 3. advisers solely to venture capital funds

Three Exceptions to Personal Securities Reporting

1. any automatic investment plan, which regular periodic purchases are made automatically (dividend reinvestment plans) w/ predetermined schedule 2. securities held in accounts which access persons had NO direct or indirect influence or control, or 3. advisory firms that have only 1 access person, as long as the firm maintains records of the holdings and transactions

Administrators Powers over Securities Issues (7)

1. applicant files false or incomplete statement 2. applicant is in violation of USA 3. applicant is engaged in a method of business that is illegal 4. applicant has prepared a fraudulent registration 5. underwriter charges unreasonable fees 6. the issue is subject to a court injunction (enjoined) 7. registrant is subject to a stop order of another state -can suspend registration until registration fees are paid **Administrator can deny, suspend, or revoke registration**

Exclusions of Investment Adviser Definition State Law (8)

1. banks, savings institutions, and trust companies -does NOT include savings and loan associations or foreign banks 2. lawyer, accountant, teacher, or engineer whose advice is incidental to their profession 3. broker/dealer and registered reps of broker/dealers 4. publishers of any newspaper, news magazine, or business publication, etc -does NOT need to be of regular circulation BUT cannot render advice of specific subscribers 5. investment adviser representatives 6. any person who is a federal covered adviser 7. any person excluded by the Investment Advisers Act of 1940 8. any other person the Administrator specifies

Requirements of Maintenance of Books and Records State and Federal (10)

1. cash receipts and disbursement records 2. ledgers reflecting asset, liability, reserve, capital income, and expense accounts 3. memorandum of each order given by adviser/client for purchase/sale or receipt/delivery (client) of securities or modification/cancellation of orders (client) 4. checkbooks, bank statements, canceled checks, cash reconciliations 5. bills or statements paid or unpaid 6. financial statements, trial balances, internal audit 7. originals of all written communication received and copies of written communication sent to any recommendation given; list of recipients of advertisement sent to <10 people (unless SPECIFIC list of >10 people) 8. record of accounts the adviser is vested with discretionary power 9. all powers of attorney 10. all written agreements entered into with client 11. copies of notice/circular/advertisement/article etc. distributed to 10+ people recommending sell/buy of specific security w/o reasons for recommendation 12. all security transactions in which IA or IAR has direct or beneficial ownership

3 factors for selection of client investments

1. client objectives 2. amount available for investing (discretionary cash) 3. clients aversion to risk -Loss tolerance -Liquidity requirements -Tax considerations -Time horizon -Investment experience -Current holdings -Expectations -Tolerance for market fluctuations

Clients who the IA is NOT required to deliver supplements

1. clients who the IA is not required to deliver a firm brochure or wrap fee program brochure 2. clients who only receive impersonal investment advice 3. clients who are executive officers, directors, trustees, general partners etc of the firm or any employees of the firm

Investment Adviser Code of Ethics Rule 204 A-1

1. copy of investment advisers code of ethics adopted and implemented pursuant to the Investment Advisers Act of 1940 2. a record of any violation of code ethics and the action taken 3. a record of all written acknowledgements for each person who is (or was within last 5 years) a supervised person of the investment adviser 4. code of ethics that require an advisers "access persons" to periodically report their personal securities transactions and holdings to the CCO, advisors review reports

Restrictions on Money Market Funds

1. front cover must state that investments are not insured by the US government 2. no more than 5% of funds assets may be invested in any 1 issuers securities 3. investments limited to securities with remaining maturities of 397 days or less; average portfolio maturity may not exceed 90 days 4. investments limited to securities that have received a rating from a recognized rating agency in one of the two highest short-term rating categories

Venture Capital Funds Exemption

1. has limited leverage 2. does not offer investors redemption rights or similar liquidity rights 3. represents itself as a venture capital fund to investors 4. is not registered under the Investment Company Act of 1940

Five Exceptions that exclude securities that present little opportunity of improper trading

1. transactions and holdings in direct obligations of the government of U.S. 2. money market instruments 3. shares of money market funds 4. transactions and holdings in shares of mutual funds, unless the adviser acts as the investment adviser or principal underwriter for the fund 5. transactions in units of a unit investment trust, IF it is invested exclusively in unaffiliated mutual funds

Securities and Exchange Commission (SEC) Regulation of Manipulative and Deceptive Devices

1.CHURNING (deceptive) -effecting transactions in a discretionary account that are excessive in size or frequency (considering account resources, objectives, character) 2.WASH TRADES -Prohibited -transaction that involves no change in beneficial ownership -simultaneously buying and selling shares in one company through two different brokerage firms -creates appearance of substantial trading activity -NOT related to wash sales (taxation) 3. MATCHED ORDERS -Illegal -no change in beneficial ownership -entering of a sell or buy knowing that a corresponding buy or sell of same size, at same time, for same price will take place 4. PEGGING, FIXING, and STABILIZING -attempt to create a price level different from that which would result from forces of supply and demand -prohibited (unless specifically permitted by SEC rules) **accurate recording of orders and trades is one way that regulators monitor for attempts to manipulate the market**

Investment Company Act of 1940 Types of Investment Companies

1.FACE AMOUNT CERTIFICATE COMPANY -issues face amount certificates on installment plan -is a security that represents an obligation on the part of its issuer to pay a stated sum at a fixed date more than 24 months of issuance 2.UNIT INVESTMENT TRUST (UIT) -investment company that does not have a board of directors -issues only redeemable securities, each which represents an undivided interest in a unit of specified securities -portfolio remains fixed -ex: municipal bond trust 3.MANAGEMENT COMPANY -any investment company other than (1) and (2) -managed by advisors with a fee usually based on AUM EXCLUDES: holding and insurance company

Unethical Business Practices Broker/Dealer AND Agent (17) Cont.

12. RESPONDING TO COMPLAINTS -if agent receives complaint, must report to supervisor ASAP -only written complaints are recognized (includes emails) -entries are made for complaints (records) -withdrawn complaints are copied and original returned 13. FRONT RUNNING -placing a personal order ahead of a previously received customer order -when the firm has received an institutional order of sufficient size to move the market, the representative can profit on that movement if they execute a customers order after 14. SPREADING RUMORS -must be reported to supervisor 15. BACKDATING RECORDS -must reflect actual dates 16. INVESTMENT COMPANY SALES -1997, NASAA adopted a policy titled "Dishonest or Unethical Business Practices by Broker-Dealers and Agents in Connection with Investment Company Shares A. Sales Load Communications -stating that shares are sold without commission, are no load, or have no sales charge IF there is associated with the purchase: a. front-end load b. contingent deferred sales load, or c. rule 12b-1 fee or a service fee exceeding .25% of average net fund assets per year B. Breakpoints -failing to disclose and relevant: a. sales charge discount on purchase of shares , or b. letter of intent feature, if available, that will reduce the sales charge 17. LENDING OR BORROWING -lending to, or borrowing from a customer -only allowed if client is a broker/dealer, an affiliate of the professional, or a financial institution engaged in business of loaning money 18. Waivers -any stipulation, condition, provision binding a person to waive compliance or rights under the Act is VOID

Variable Life Death Benefit

2 parts: -guaranteed minimum provided by funds invested in general accts -variable death benefit provided by funds invested in separate accts **death benefits calculated ANNUALLY** **cash values calculated MONTHLY** **separate account unit values calculated DAILY** -compared to AIR, earnings > AIR increase benefit, earnings < AIR decrease benefit up to minimum -must make up negative performance before earnings can increase benefit

Failure to State Material Facts and Inside Information

2. FAILURE TO STATE MATERIAL FACTS -requires an agent to provide all information material to making informed investment decisions -also applies when filling out order tickets 3. USING INSIDE INFORMATION -only applies if you act/trade on this information -simply knowing inside info is not a crime

Capital Structure

4 elements build a corporations capital structure: 1. Long-Term Debt 2. Capital Stock (common and preferred) 3. Capital in Excess of Par 4. Retained Earnings (surplus)

Financial Goals and Objectives (5-9)

5. College Tuition -zero coupon bonds that mature when tuition expenses are due -Coverdell ESA's and 529 Plan (tax advantage) 6. Retirement -main concern: longevity risk -solution: variable annuities -long life span may allow for equities 7. Death Benefits a. life insurance -premiums are generally nondeductible for income tax purposes -proceeds are generally exempt from income tax 8. Disability a. workers compensation: medical, income, death benefits b. social security c. disability insurance 9. Tax Planning -3 states: A. Asset and Income Shifting -shift to a person in lower tax bracket B. Tax Deferral -qualified retirement plans or TSA's C. Tax-Free Income -municipal bonds (capital gains are taxed)

Types of Accounts cont.

7. CUSTODIAL ACCOUNTS -custodian enters all trades, controls account assets -UGMA and UTMA require adult/trustee custodians -Require custodian name, minor name and social, and registration state -Custodian has fiduciary responsibilities (cash only account, no options, reinvest div/int, rights/warrants exercised or sold) -Donations final (indefeasible title) -1 custodian and 1 minor/beneficiary per account -Parents have no legal control over account unless custodian -Minor can sue custodian for improper actions -Securities registered in custodian name for benefit of minor -Minor files tax return on income exceeding $1,900 at parent's top marginal tax rate until 19, or 24 if full-time student -In event of death, account passes to minors estate 8. DISCRETIONARY ACCOUNTS -preapproved authority for agent or IA to make transactions without approval -defined as the authority to decide: a. which security, b. number of shares, c. whether to buy or sell -At least 1 must be decided by agent to be discretionary (not timing or price) -Need written authorization of LPOA -Must be: identified, approved, record kept, not excessive, reviewed

Bond yields Yield To Maturity

=annual interest-(premium/years to maturity)/average price of bond -aka market driven yield -pay more you get LESS -pay less you get MORE -always higher than current yield on discount bond, vv -total return on bonds held to maturity **a bond with a 5% coupon that is currently yielding 6% is selling at a DISCOUNT**

Investor Suitability Examples A. aggressive growth B. income and safety C. higher income w/ moderate risk D. very high risk tolerance E. high tax bracket F. income-producing stock

A. small-cap funds or stock funds invested in new companies B. government bond fund C. corporate bond fund D. high yield (junk) bond fund - maximize income E. municipal bond fund F. large-cap, preferred stock, or utility stock fund

Whole Life Cash Surrender Values and Policy Loans

A. Cash Surrender Values -insurer invests reserves in conservative investments -the reserves are held in the insurer's GENERAL ACCOUNTS -if policy-owner decides to stop paying premiums: a. can surrender the policy for its cash value b. take a reduced paid-up policy, reducing death benefit but also eliminating premiums c. take extended term insurance B. Policy Loans -may borrow a portion of the accumulated cash value -must be paid back with interest -if they die before paying back the loan, the death benefit will be reduced by the amount owed

Universal Life Death Benefits and Policy Loans

A. Death Benefits a. Option 1 -level death benefit equal to face amount of policy -as cash value increases, net death benefit decreases over life of policy b. Option 2 -increasing death benefit equal to face value plus cash account B. Policy Loans -allows loans in same manner as WL policies -also allows a CASH WITHDRAWAL (partial surrender) which is not treated as a loan and will reduce the cash value

Eurobond and Eurodollar Bonds

A. Eurobond -a bond denominated in a currency other than the currency of the issuing country B. Eurodollar Bond -bonds issues by an overseas company outside of the U.S. -does not only apply to European issuers; its just the term used -no registration with SEC, lower issue cost

Civil Penalties Rights of Recovery

A. From Improper Sale of Securities -original purchase price of securities, plus -interest at rate determined by Administrator, plus -all reasonable attorney fees and court costs, minus -income received while securities were held B. From Improper Investment Advice -cost of advice, plus -loss as result of the advice, plus -interest at rate determined by Administrator, plus -any reasonable attorney fees

Technical Analysis Chart Patterns Head and Shoulders

A. Head and Shoulders Top -indicates that the market has topped and future price trend will be downward (trendline at low point) B. Head and Shoulders Bottom (inverted -indicates the market has bottomed and future trend is up (trendline at high points) **most important factor is how many times the trendline has been touched**

Living Trust vs. Testamentary Trust

A. Living trust (inter vivos trust) -established during the makers life time B. Testamentary trusts -triggered when the maker dies. -his will indicates the property to be placed in trust for the beneficiaries *assets do NOT avoid probate* *does NOT reduce the grantors income or estate tax*

Revocable vs Irrevocable Trusts

A. Revocable Trusts: -terms may be changed during life -therefore it MUST be a living trust, becomes irrevocable at grantor's death -the value of any trust assets are included in the grantors gross estate -therefore there are no estate tax benefits B. Irrevocable Trust: -maker must give up all ownership -usually NOT included in grantors gross estate as long as: a. does not retain a life interest or life income, b. does not retain reversionary interest c. does not retain general power d. does not transfer life insurance policy while retaining incidents of ownership

Economic Indicator #2 Employment Indicators

A. average weekly initial claims for unemployment compensation B. average workweek in manufacturing ~4% unemployment reflects full employment

Investment Return Measures Inflation-Adjusted Return (Real Return)

A. bonds -subtract the inflation, as measured by the CPI, from the nominal return B. equities -subtract inflation rate, measured by CPI, from the total return CPI increase = inflation increased

Brochure Supplement

ADV Part 2 B: 1. Cover Page -identifies the supervised person -includes any person who formulates investment advice for a client and has direct contact, or -and person who has discretionary authoirty over clients assets, even without client contact 2. Educational Background and Business Experience -Or lack of 3. Disciplinary Information -Past 10 years, unless serious effect on client perception 4. Other Business Activities -Commissions, bonuses, compensation based on sales 5. Additional Compensation 6. Supervision -And supervised persons (with direct contact and discretion)

Income Statement 3 components

AKA Profit and Loss statement 1. Revenues -total sales during the period 2. Cost of Goods Sold -costs of labor, material, and production used to create finished goods -Two methods of accounting A. LIFO -higher costs of more recently purchased inventory -reported income is reduced B. FIFO Revenue - COGS - Operating costs (depreciation) = Gross profit 3. Pretax Income (EBITA) -operating income less interest payment expenses -interest payments reduce taxable income whereas dividends are paid with AFTER tax dollars

Investment Company Act of 1940 Rule 12B-1

AKA: Payment of Asset Based Sales Loads by Registered Open-End Management Investment Companies -permits a mutual fund to act as a distributor of its own shares without use of an underwriter and with an asset-based sales load *Asset Based Sales Load -any direct or indirect financing by a mutual fund of sales or promotional services in connection with distribution of shares (allows commission to salespeople) -The mutual fund may NOT use the term "no load" if its fee exceeds 25 basis points -Max fee may not exceed 75 basis points -The mutual fund may act as a distributor of the shares provided that any sales load paid by the company is paid according to a written plan describing all material aspects of the financing and MUST: 1. be initially approved by vote of majority of shareholders 2. reapproved at least annually by a vote of board of directors and the directors who are not interested persons of the company and have no financial interest in the plan (believing fees to be: beneficial, reasonable, and terminated by majority vote)

Types of Orders Stop Orders

AKA: Stop Loss Order -used to protect profit or prevent a loss if the stock moves in the wrong direction -becomes a market order once the stock trades through a certain price - stop price -takes 2 orders to execute: 1. Trigger - at or through the stop price activates the trade 2. Execution - becomes a market order and is executed at market price -risk accelerating market in one direction or another STOP LIMIT ORDER: -once triggered, it becomes a limit order

Securities and Exchange Commission (SEC) Securities Information Processor (SIP)

ANY PERSON INVOLVED IN: 1. collecting, processing, or preparing information w/ respect to transactions for any nonexempt security, or 2. distributing or publishing information with respect to transactions on a continued basis EXAMPLES: -the consolidated ticker tape -bloomberg and reuters -nasdaq -the pink sheets DOES NOT INCLUDE: 1. newspaper, magazine or business publication (wall street journal) 2. any SRO (other than nasdaq) 3. bank or broker/dealer supplying transaction information 4. common carrier subject to the jurisdiction of the Federal Communications Commission or State Commission (radio and TV)

Active and Passive Management Styles

Active: (similar to tactical asset allocation) -buying and selling individual stocks -relies on manager's stock picking and market timing Passive: (similar to strategic asset allocation) -believes no management style will outperform the market averages -constructs a portfolio that mirrors a market index (S&P 500) -seeks low cost, long term returns, and minimal turnover 1. GROWTH -focus on stocks with earnings growing faster than most others -typically buy stocks that are at the high end of 52 wk price range *seeking earnings momentum* *expect to see high P/E ratios with little to no dividends* 2. VALUE -seek undervalued securities -securities whose price is low relative to company earnings -typically buy stocks that are at the low end of 52 wk price range *expect to see low P/E ratios with reasonable dividends* *may have large cash surplus (rainy day fund)* 3. BUY AND HOLD -rarely trades -low transaction costs -long term capital gains taxes -Classic "passive" strategy 4. INDEXING -mirror a stock index -passively managed -low transaction costs, more tax efficient 5. Diversification -Reduce unsystematic risk 6. Contrarian -Take positions opposite of other managers or market beliefs 7. BOND STRATEGIES -attempt to mitigate the effects of interest rate fluctuations on principal and/or income

Situation:

Administrator of state A wishes to investigate a B/D registered in state A but whose principal office is in state B.... He can investigate any time WITHOUT approval of state B

3 Advantages and Disadvantages of LP's

Advantages: 1. professional management 2. flow through of income and certain expenses, and 3. limited liability Disadvantages: 1. Liquidity Risk -limited secondary market 2. Legislative Risk -new tax laws may damage lp's who are locked in 3. Risk of Audit -higher percentage of audits

Nominal yield

Aka coupon yield -fixed percentage of par value

Dividend Yield

Annual Dividends per Share / Price per Share

Current Yield

Annual Interest in $ / Current Market Price

Traditional IRA

Any one under 70 1/2 @ year end can open. CONTRIBUTION: -lesser of $5,000 per individual/$10,000 per couple or 100% of earned income -tax deductible (phases out past certain income point if also covered by qualified employer plan) -CANNOT be made past age of 70 1/2 TAX: -income and capital gains are tax deferred until withdrawn DISTRIBUTIONS: -10% early withdrawal penalty before 59 1/2 -RMD's required after year they turn 70 1/2 NON-COMPENSATION: income from: -Cap gains, interest, dividends, pension, annuity, child support, passive DPP

Securities and Exchange Commission (SEC) Broker, Dealer, and Associated Person

BROKER: -any person engages in business of effecting transactions in securities for others -NOT banks DEALER: -any person regularly engaged in business of buying and selling securities for his own account -does NOT include banks, insurance companies, investment companies, and any persons involved in investing or trading for own accounts on non-business basis ASSOCIATED PERSON: -any partner, officer, or director of the broker/dealer -any person directly controlling or controlled by broker dealer (excludes clerical/ministerial employees) -includes outside directors or partners whose only connection to the firm is contribution of capital

Brokers vs. Dealers

BROKERS: Schwab -agents that arrange trades for clients -charge commissions -facilitate trading between buyers/sellers *must disclose amount of commission to client* DEALERS: Bond guys -aka: principals -buy and sell securities for own accounts (position trading) -charge a markup (net price) *does not have to disclose amount of markup/markdown to client*

General Definitions

Broker: persons engaged in effecting transactions... Dealer: person regularly engaged in buy/sell securities as principal for own account (business), excludes bank, insurance company, or investment company

Roth IRA

CONTRIBUTION: -lesser of $5,000 per individual/$10,000 per couple or 100% of earned income (max for roth and traditional combined) -Can be made by spouse -NOT tax deductible -CAN be made past the age of 70 1/2 DISTRIBUTIONS: -do NOT have to begin at age 70 1/2 -Earnings w/d tax-free after 5 years if: a. account holder is 59 1/2 + b. money used for a first time home purchase (up to $10,000) c. account holder has died or become disabled d. paying for authorized higher education expenses e. money used for medical expenses -NO RMD's and age 70 1/2 is IRRELEVANT -Regular contributions always wd tax free (already taxes) ELIGIBILITY: -anyone with earned income -AGI limit: a. $110,000 (single) b. $173,000 (mfj) -Phaseout: a. $110,000-125,000 (single) b. $173,000-183,000 (mfj) -Minor can be named as beneficiary

The Securities Act of 1933 SEC Rule 144 Control Person, Control Stock, and Nonaffiliate

CONTROL PERSON: -corporate director, officer, greater than 10% voting stockholder, or spouse of any of the preceding. -referred to as Insiders or Affiliates CONTROL STOCK: -stock held by a control person NONAFFILIATE -investor who is not a control person and has no other affiliation with issuer other than as an owner of securities

Definition of Custody

CUSTODY: -holding, directly or indirectly, client funds or securities, OR having authority to obtain possession of them -includes: 1. possession of client funds, unless you receive them inadvertently and return them to the sender within 3 business days 2. any arrangement where you are authorized to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian 3. any capacity that gives legal ownership to client funds DIRECT FEE DEDUCTION: -considered having custody because fees are directly deducted from client accounts -must provide: 1. written authorization from each client 2. notice of fee deduction -send custodian notice of amount -send client an invoice itemizing the fee 3. notice of safeguards -notifies Administrator on Form ADV QUALIFIED CUSTODIAN: -bank or savings associations -registered broker-dealer -foreign financial institution

Bond pricing

Corp/Muni: 1/8ths *10 (quoted on yield basis) Gov: 1/32 *10

Cash Accounts

Customer pays in full for any securities purchased Accounts allowed to be ONLY opened as cash accounts: 1. personal retirement accounts (IRA's, Keogh's, and TSA's) 2. corporate retirement accounts 3. custodial accounts (UGMA's)

Anti- Fraud Provisions of the USA

Definition: -the deliberate or willful attempt to deceive someone for profit or gain Fraud is subject to criminal punishment (jail) vs prohibited/unethical behavior is subject to fines and suspension/revocation ***if it is a security (exempt or not), it is covered under the USA's anti-fraud provisions - ONLY applies to securities***

Securities and Exchange Commission (SEC) Statutory Disqualificaiton

Disqualification of membership, participation, or association with member of SRO if person: -expelled/suspended from membership or member association in SRO, commodities market, or futures trading association -Revoked registration, or suspended by SEC/regulatory agency membership/association with broker/dealer for max 12 months -Conduct while associated with broker/dealer found to be cause of above -Associated w/ person described above -Convicted of securities violation or or financial/theft misdemeanor or felony -Temperary/permanent injunction from securities business -Violation of federal securities law -Made false/misleading statement in filing requested by SRO *prohibits association with member firm or investment advisor*

Exclusions from Definition of Agent Exempt Transactions

Employee of ISSUER not an agent when transactions exempt: 1. transactions between the issuer and underwriter 2. transactions with financial institutions 3. private placements 4. transactions on issuer securities within the issuer's employees, assuming no payment (ex. benefit plan with employer securities)

Bids and Offers

Firm quote: MM's current bid and offer 1. CURRENT BID -highest price the dealer will buy 2. CURRENT OFFER -lowest price which the dealer will sell **difference between the two = SPREAD* Ex. 43.25 to .50 : bid:43.25, ask: 43.50 Inside market: highest bid and lowest ask

403 (b) Plans (tax-exempt organizations)

ELIGIBILITY: 1. public educational institution 403(b): elementary, secondary, college/uni, medical 2. tax-exempt 501(c)3 organization, or -private colleges, trade schools, zoos, museums, religious, charitable, private hospitals, etc 3. church organization -Full time employees, 21+, 1+ year of service, NDR PLAN REQUIREMENTS: 1. must be in writing and must be made through a plan instrument or trust agreement 2. plan contributions limited to annuities, mutual funds, or other approved investment CONTRIBUTION: 1. Salary Reduction -max: $17,000 (2012) -catch up: $5,500 2. Employer -lesser of 100% of salary or $50,000 per year Typically invest in annuities, 403b can be stocks, bonds, MFs, and CDs, GICs (issued by insurance company but not insurance) TAX: -contributions (salary reductions) are excluded from gross income -earnings accumulate tax free until distribution -contributions tax-deferred DISTRIBUTIONS: -10% penalty before 59 1/2 -RMD at 70 1/2, then annually by Dec 31 -all distributions are subject to ordinary income tax in the year received AKA: **TSA - Tax Sheltered Annuity** -qualified annuity plans offered under Section 403(b) of IRC

Exclusions from Definition of Agent Exempt Securities

Employee of ISSUER not an agent when securities exempt from registration: 1. U.S. government and Municipal Bonds 2. Securities of governments which the U.S. has diplomatic relations 3. U.S. commercial banks and savings institutions or trust companies 4. Commercial paper w/ denominations of $50,000 or more and less than 9 month maturities (rated A or higher) 5. Investment Contracts issued for employee stock purchase plans, pensions, or profit sharing plans

Common Stock

Equity ownership Share of earnings and dividends Vote on management (BOD) A. Growth: capital appreciation (increase MV), returns exceed inflation B. Income: dividends (cash; shares of stock, property, subsidiary, product) C. Rights: proxy, give/sell shares, transferable, limited corp books, BOD meeting minutes, SH list, financial statements, preemptive proportional share D. Limited liability E. No assurance of returns, market risk, decreased/no income, low claim on assets

Exceptions under Dodd-Frand

Exemptions from prohibition on registration -pension consultants with $200 MM AUM -IA's expecting to be eligible for SEC registration w/in 120 days of filing -Internet advisors

Balance Sheet Requirements State vs. Federal

FEDERAL: -for advisers who require substantial prepayment of fees -must include a balance sheet with advisers ADV Part 2A: 1.prepared in accordance with the generally accepted accounting principles (GAAP) 2. audited by an independent public accountant, and 3. accompanied by a note explaining the principles used to prepare the balance sheet, the basis of securities included, etc. STATE: Same EXCEPT balance sheet does NOT need to be audited -must disclose financial conditions likely to impair ability to meet contractual commitments, when IA has discretion or custody over client fund

Enforcement of Investment Advisers Act of 1940

FEDERAL: -if SEC seeks criminal penalties, max fine is: a. $10,000 b. imprisonment for max 5 years c. both a and b STATE: -responsibility of each Administrator -if seeking criminal penalties, max fine is: a. $5,000 b. imprisonment for max 3 years c. both a and b

Time Value of Money

FV = PV (1+r)^t Discount Factor: -in the PV formula, an investment equals the FV DISCOUNTED at (divided by) an interest rate over a time period. -so, the (1+r)^t factor in the formula is the Discount Factor

Currency Transaction Reports (CTRs)

FinCEN Form 104 -Cash transaction exceeding $10,000 (or structured transactions over short period exceeding $10,000) -Wire transfers exceeding $3,000

Taxation Sale of Primary Residence

For Couples: -first $500,000 in profit is excluded from capital gains Single: -first $250,000 excluded **must have lived in as primary residence for at least 2 of last 5 yrs**

Taxation Donated (Gifted) and Inherited Securities

GIFTS: -cost basis to the recipient is treated as CARRYOVER BASIS -if gifted shares held by donor for 1+ years, tax deduction for donor is FMV at time of donation INHERITED: -cost basis steps up to date of death value (FMV on death date) **does NOT apply to annuities**

Securities and Exchange Commission (SEC) Registration

GROUPS: 1. brokers and dealers operating in interstate commerce, exchanges, OTC markets -file application on Form BD, and SEC has 45 days to accept or deny 2. securities exchanges -SEC has 90 days to accept or deny 3. national securities organizations (FINRA, MSRB) 4. corporations with listed securities -Application must include: a. organization, financial structure, nature of business b. terms, position, rights, privileges of different classes of securities c. terms on which their securities are to be /have been offered to public d. directors, officers, underwriters, security holder (more than 10%) e. certified balance sheets for last 3 years prepared by independent accountants f. certified profit and loss statements for last 3 years prepared by independent accountants

Exclusions from Definition of Broker/Dealer Internet Advertisement

General advertisements don't require registration, but follow-up with advice (IAR) or offering securities (agent) you have to register or find exemption

Hedging with Options

Goal: increase reward or reduce loss 1. Long Stock and Long Puts -portfolio insurance -investor owns a stock and protects the downside by buying a put -Useful for managers of large portolios 2. Long Stock and Short Calls -covered call writing -call written on stock they own -limits potential gain but protects against loss 3. Short Stock and Long Calls -Protection for short sales (hope price declines) -Caps loss if price increases instead of declines

IRA and Qualified Distributions

IRAs/Sep -Traditional IRAs and SEPs treated as single account, RMDs apply across all accounts -WDs treated as income -Not meeting RMDs, subject to 50% tax on shortfall Qualified Plans -Not treated as single account, account distributions do not affect each other -WDs treated as income -Early WDs not available w/o penalty for first home or education (death, disability, equal distributions are allowed) -Not meeting RMDs, subject to 50% tax on shortfall -Distributions paid to employees that are eligible for rollover subject to 20% witholding (direct rollover not subject)

The Securities Act of 1933 Definitions Issuer, Underwriter, and Person

ISSUER: -any person who issues or proposes to issue any security -most are businesses -also applies to government city UNDERWRITER: -any person who has purchased from an issuer with view to selling -does NOT include brokerage firms earning commission on retail sale PERSON: -includes individuals, corporation, partnership, association, joint stock company, trust, unincorporated organization, or government /political subdivision

Termination of IAR

STATE REGISTERED ADVISERS: -firm must notify Administrator FEDERAL COVERED ADVISERS: -individual must notify Administrator **both file Form U-5**

Inflation & Deflation

Inflation: general increase in price as measured by an index (CPI) -Mild can be good, stimulate investing -High reduces buying power and demand -Inflation inertia: rate of inflation does not immediately react to changes in economic conditions -Causes: excessive demand, monetary expansion (money supply increases faster than growth) -Effects: higher interest rates, lower bond prices -Increase in real income: % increase in income > inflation (increased buying power) Deflation: general decline in prices -Causes: excessive supply, monetary contraction -Effects: declining interest rates/bond yields, increasing bond prices -Can experience during recession, investors switch to government securities

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) Private Rights of Action

Inside traders subject to actions filed against them by persons who transacted on other end of securities traded illegally -Liability: damages cannot exceed profit gained/loss avoided in transactions (max penalty of personal loss) -Statute of Limitations: 5 years after last transactions

Portfolio Benchmarks

Large Cap - S&P 500 Mid Cap - S&P 400 Small Cap - Russell 2000 International - EAFE

Margin Call vs. Maintenance Margin

MARGIN CALL: -the initial call for funds in a margin transaction -50% requirements (Regulation T) -broker/dealer lends the other 50% = the DEBIT BALANCE MAINTENANCE MARGIN: -SRO (FINRA, NYSE) requirement -minimum levels of equity in a margin account below which a call will go out for additional funds -25% for long margin accounts -if stocks price drops below the level which the account is equal to 25% of current market value -If not met, broker/dealer will liquidate to meet -House maintenance: stricter maintenance requirements imposed by broker/dealer (35% or higher)

Investment Company Act of 1940 Subclassification of Investment Companies

Management Companies are further sub classified: 1. DIVERSIFIED COMPANY: -at least 75% of total assets are invested in no one issuer greater than 5% of it's total assets -no more than 10% of outstanding voting securities of any issuer are held -May exceed 75% rule with remaining 25% + 5% of 75% 2. NON-DIVERSIFIED COMPANY -any other than (1)

Taxation Effective Tax Rate vs Marginal Tax Rate

Marginal: -rate you pay on each additional dollar you receive as income Effective: -overall rate you pay on total taxable income

Definition of a Private Fund

Meet definition of IC, but excluded for: A. 3(c)(1) -securities are owned by NO MORE than 100 persons, and -does not presently propose to make a public offering B. 3(c)(7) -securities are owned by people who are qualified purchasers: a. min $5 MM in investments for individuals, or b. min $25 MM in investments for business entities -does not propose to make a public offering

Account Records

Must maintain records on each account: -Name, address, phone -Account type and number -Investment objective -List of deposited securities -List of all transactions

Pref. Stock Risks

No inflation protection, share value declines as interest rates rise, dividends may be skipped, creditors have prior claim to assets

Registration State vs. Federal

STATE: All 4 Parts; 1A, 1B, 2A, and 2B FEDERAL: 3 Parts; 1A, 2A, 2B **parts 2A and 2B go to the clients**

Interest Rates Nominal vs. Real

Nominal: -actual amount a borrower pays for loanable funds -is the coupon rate for bonds Real Rate: -nominal rate minus the inflation rate

Publishing/Broadcast Exceptions to Jurisdiction

Not originating in Administrator state or subject to their jurisdiction if an offer were made: -TV or radio broadcast originating outside the state -Newspaper or periodical published outside the state OR published inside the state with over 2/3 of its circulation outside the state last year

Needs Objectives vs Recommendations

O: Preservation of capital/safety R: insured bank CDs, money market instruments/funds, T-bills O: Growth R:Balanced/moderate: Large-cap stocks, defensive stocks R: Aggressive: Tech stocks, sector funds, cyclical stocks O: Income R: Safety: US Gov bonds R: Tax-free: Muni bonds/bond funds R: High-yield: Corporate bonds/bond funds R: Stock portfolio: preferred/utility stocks O: Liquidity R: Money market funds (NOT DPPS, annuities, or RE) O: Speculation R: volatile stocks, high-yield bonds, stock/index options

The Securities Act of 1933 Definitions Prospectus and Sale

PROSPECTUS: -a notice or communication of some sort that offers any security for sale or confirms the sale of a security -does NOT include oral communications -does NOT include tombstone advertisements (identifies only security, price, underwriters) SALE: -includes a contract for sale or disposition of security for value Offer to sell: attempt/offer to dispose of security/interest for value or solicitation of an offer to buy security for value -does NOT include a gift of securities, or preliminary negotiations/agreements between issuer and underwriter -ex: if a bond is sold with warrants attached, the warrants are NOT considered a sale because they are part of the bond sale, but when they are exercised, it is then considered a sale of the security being purchased

Principal or Agency Transactions

Principal Transactions: -an adviser is acting for its own account and buys/sells securities to/from a client's account *may lead to price manipulation or placing unwanted securities into client accounts Agency Transactions: -adviser arranges a transaction between different advisory clients or between a brokerage customer and an advisory client *primary incentive is to earn additional compensation, therefore poses a conflict of interest -regulators did not prohibit these transactions completely, rather they have imposed a disclosure and client consent requirement: 1. adviser may obtain client consent to a principal or agency transaction after execution BUT PRIOR to settlement 2. an adviser is not considered as acting as a broker if he receives no compensation for effecting agency transactions

ERISA Fiduciary

Prudent Man Rule (1830, court ruling) Uniform Prudent Investor Act (1994) -Prudence applies to portfolio in whole -Risk-return trade-off main concern -No categorical investment restrictions -Diversification required -Certain delegation allowed -Reason able skill, care, and caution -Evaluate investments on individual and portfolio level, investment objectives considered -Consider: economics, inflation/deflation, taxes, asset role, expected return and capital appreciation, beneficiary resources, liquidity needs, income regularity, preservation/appreciation of capital, asset special value to trust or beneficiaries -Prudent expert: must use special skills/expertise if advertised by fiduciary -May delegate duties if prudent/careful in selection, defining scope/terms, and monitoring advisors (compliance eliminates liability for advisor performance) -Section 404: cannot delegate fiduciary duties for employee benefit plan, but can delegate investment management -Control expenses (not including transaction costs) -Can take no personal gain or interest in funds -Cannot make loans to employer -Section 407: no acquisition of security/property of employer, if exceeds 10% of plan value

Registration Requirements

REGISTRATION: -Form U-4 must be completed -must disclose citizenship (unlike B/D) -registration contingent on employment with B/D -cannot be agent for more than one B/D w/o approval from administrator *when an agent shifts employment to a new b/d or issuer, ALL THREE parties must promptly notify the Administrator (agent, old employer, and new employer)* FINANCIAL: -no financial requirements (no net worth requirements) -can split fee/commission with other agents under same B/D w/o disclosure to clients

Broker/Dealer Requirements

REGISTRATION: -under the USA, if a person is included in the definition of a broker/dealer, that person must register as a b/d in all states that it does business -registration is accomplished by filing the SEC's Form B/D FINANCIAL: -Administrator may establish NET CAPITAL REQUIREMENTS (liquid net worth) -may also require posting SURETY BONDS (may also accept deposits of cash or securities) -these requirements of the states MAY NOT exceed those required by federal law (SE Act)

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) Financial Responsibility Rules

RULE 15C 3-1; UNIFORM NET CAPITAL RULE -establishes minimum net capital requirements for broker/dealers -net capital refers to net liquid assets of a firm -broker/dealer must maintain a minimum amount of net capital for the protection of customers or it CANNOT operate -must also maintain a fidelity bond to protect customers, min 100K

Securities and Exchange Commission (SEC) Regulatory Authority

Regulatory authority over: -National securities exchanges -Registered securities exchanges -Members of an exchange or association -Persons associated with a member -Applicants to become a member or person associated with a member NO Regulatory Authority over: -Federal Reserve Board (establish credit regulations) -Office of the Controller of the Currency -Federal Deposit Insurance Corp (FDIC)

Suitability Information

Required to attempt to collect info necessary to make suitable investment recommendations (income, net worth, tax status, dependents, financial situation, holdings, risk tolerance, investment objectives) -Broker/dealers may complete transactions w/o all info if directed by client (not advising client) -Investment advisors must deny account if client refuses to furnish information (cannot make informed decisions)

De Minimis Rule

Rule 203(b)(3)-1 defines a SINGLE client as: 1. any natural person, and: a. any minor child of the natural person, b. any relative, spouse, or relative of the spouse of the natural person with the same principal residence c. all accounts which the natural person and (a) and (b) are he only primary beneficiaries d. all trusts of which the natural person and/or (a) and (b) are the only primary beneficiaries

Debt Security Ratings

S&P Ratings: AAA, AA, A, BBB -these are considered investment grade debt BB, B, CCC, C, D -these are considered junk bonds/high yield bonds Moody's Ratings: Aaa, Aa, A, Baa -these are considered investment grade debt Ba, B, Caa, Ca, C -these are considered junk bonds/high yield bonds -Investment grade: eligible for institutions and fiduciaries -high yield: suitable for sophisticated investor -prime rate: changed by banks to most creditworthy customers, indicator of money rates

Effective Date of Registration State vs Federal

SEC: 45th day after filing STATE: noon of 30th day

The Securities Act of 1933 Exemptions Under USA vs Act of 1933

SECURITIES: -3 exemptions available under the Uniform Securities Act that are NOT available under Securities Act of 1933: 1. foreign government securities 2. federal covered securities listed in national exchange (blue chip exemption) 3. securities issued by insurance companies (only refers to securities issued by insurance companies not their policies)

The Securities Act of 1933 3 Phases of Underwriting

STEP 1: Issuer files registration with SEC -prior to filing, no sales can be solicited and no prospectus can circulate STEP 2: Cooling off Period -min 20 days, usually longer -no sales can be solicited -indications of interest can be solicited with a red herring STEP 3: Effective Date - offering period may begin -sales can now be solicited -firm must use a final prospectus

Rules on Custody of Funds and Securities

Safekeeping Required: -in order to have custody of client funds, MUST: A. have a qualified custodian (i.e. Fidelity, Schwab) B. notify clients of the custodians name, address, etc when accounts are opened C. account statements are delivered to clients, either -by the custodian, quarterly -by the adviser, quarterly (must be verified by independent public accountant at least once per year) (Notify Admin in writing on ADV that IA has/will have custody, if no rule prohibiting custody) EXCEPTIONS: 1. Shares of Mutual Funds -may use the funds transfer agent in lieu of a custodian 2. Privately Offered Securities -securities acquired from issuer non involving a public offering -securities uncertified -securities transferable only with prior consent of issuer or holders of outstanding securities of the issuer 3. Registered Investment Companies **most IA's do not take custody of and therefore are unable to accept direct delivery of customer securities except under limited conditions

Inherited IRA

Spousal beneficiary: 1. Rollover to spouse IRA -Same rules as IRA 2. Spouse assumes IRA -No early WD penalty -RMDs required at deceased 70.5 age (trad or sep), based on beneficiary life expectancy -WD of earnings made to Roth subject to tax if made before 5 year period since open Nonspousal benficiary: - No early WD penalty, unless roth IRA younger than 5 years (income tax) -RMDs year after deceased's death, based on beneficiary life expectancy (oldest person if multiple, unless specially set up to base each individual separately) -Can elect to distribute over 5 year period, no required frequency

Quantitative measures

Statistical concepts used to analyze (TVM, FV, PV)

Top Heavy Plans and Safe Harbor 401(k) Plans

TOP HEAVY PLANS: -benefits a disproportionate amount of KEY employees -must be tested annually to comply with regulations SAFE HARBOR: -Employer contributions immediately vested -allows a plan to forego testing if set up properly -employer has two options: 1. Match Employee Contributions -100% up to 3% of compensation and then 50% of next 2% of compensation (aka 4% max) 2. Nonelective Formula -ALL participants receive 3% match

Random and Lump Sum Withdrawals

Taxed as LIFO (earnings taxed first as ordinary income) -Before 59.5, 10% penalty

Option Value

Think in terms of buyer 1. Intrinsic -"In-the-money" (relationship between strike and market price) -Premium, at minimum, difference between strike price and stock price (amount by which an option is in the money) -Call option: stock $ > strike $ -Put: stock $ < strike $ 2. Time - Premium > Intrinsic Value -Diminishes as expiration approaches -At expiration: premium = intrinsic value (parity) -Passage of time deteriorates option value

ERISA 404(c)

Trustee is protected from liability on 401(K) if participant has control over: -Investment selection: investment choice (3 minimum) and ability to impact risk/diversification -Investment control: control over assets and allocations, at least quarterly -Communicate required information: prospectus, statements, reports, plan statement, risk/return of investments, real-time access to accounts

Investment Analysis

Two Approaches: 1. Fundamental Analysis -broad economic trends -current business conditions within an industry -quality of a corporations business, finances, and management 2. Technical Analysis -predict direction of prices based on historic price and trading volume patterns

Per Stirpes

Used in estate accounts (established like trust for beneficiaries of estates, same taxation and form 1041) -means the deceased intended that a beneficiaries share of the inheritance is to go to an heir ex: a widow had 3 children and wished the estate to be distributed equally. If one of his children died prior to the estate settlement, that child's children would receive a one-third share split

Bond Yields Ranking for Discounts and Premiums

Yields Lowest to Highest: 1. Selling at Discount a. Nominal b. CY c. YTM d. YTC 2. Selling at Premium a. YTC b. YTM c. CY d. Nominal

Misleading or Untrue Statements

a.inaccurate market quotations b.misstatements of issuers earnings or projected earnings/dividends c.inaccurate statements regarding commissions, markups/markdowns, etc d.implying that the agent has inside information e.telling a customer that a security will be listed on an exchange without concrete info f. informing client that registration of a security with SEC or with the state Administrator means the security has been approved g.misrepresenting the status of customer accounts h. promising services without intent to perform them or being qualified to perform them i. saying that the Administrator approves the B/D's abilities **Never "approved", always Registered**

Statute of Limitations Civil Liabilities and Criminal Penalties

a. Civil 3 years from sale or 2 years after discovering the violation b. Criminal 5 year statute, $5,000 max fine, and/or imprisonment of max 3 years **REMEMBER 5-5-3 for CRIMINAL PENALTIES**

Access Person Definition

a. has access to nonpublic information regarding clients purchase or sale of securities, or nonpublic information regarding portfolio holdings of any reportable fund, or b. is involved in making securities recommendations to clients, or who has access to these recommendations **if providing investment advice is primary business, all directors, officers, and partners are considered access persons**

C. Compensation

compensation includes: -advisory fees, commissions, or other fees relating to the services **all compensation must always be disclosed to the client**

Investment Company Act of 1940 General

defines an INVESTMENT COMPANY as: -any issuer that is or holds itself as being engaged primarily in the business of investing, reinvesting, or trading securities -more than 40% of value of total assets is invested in securities -does NOT include: 1. broker/dealers and underwriters 2. banks and savings and loans 3. insurance companies 4. holding companies 5. issuers whose securities are beneficially owned by no more than 100 persons 6. issuers who trade in investments other than securities -majority shareholder vote for substantial changes

The Securities Act of 1933 Registration of Securities

protects investors who buy new issues by: 1. requiring registration of new issues to be distributed interstate 2. requiring issuer to provide full and fair disclosure about the offering 3. requiring issuer to make available all material information necessary for investor to judge the issues merit 4. regulating the underwriting and distribution of primary and secondary issues 5. providing criminal penalties for fraud in issuance of new securities

When an Employers registration (B/D or IA) is suspended or revoked...

that of the registered individual is also suspended. If revoked, the individual will have to find a new affiliation or license will expire on Dec 31

If a person is convicted of a misdemeanor in state A, but then moves to state B, where that same crime is a felony...

the Administrator must consider the crime under the status of the state where it occurred (state A)

Once your registration has been withdrawn...

the Administrator still retains jurisdiction over you for ONE YEAR

B. In the Business of Providing Advice

the definition applies if he: -gives advice regularly that it constitutes a business activity -advertises investment advisory services -receives separate compensation that represents a charge for giving the advice

A. Provide Investment Advice

the definition includes: 1. FINANCIAL PLANNERS 2. PENSION CONSULTANTS -advise on employee benefit plans 3. SPORTS AND ENTERTAINMENT REPRESENTATIVES

Non-U.S. Advisers Exemption

under Dodd-Frank Act, a foreign adviser: 1. has no place of business in the US 2. has, in total, fewer than 15 clients and investors in the US 3. has less than $25 MM under management for US clients, and 4. does not hold itself out to the public in the US as an investment adviser