Series 6 Unit 2 Securities and Tax Regulations

Types of Defined Contribution Plan

Money Purchase 401 K Profit Sharing Follow ERISA

Cost basis of shares Transferred.

*Inherited-fair market value on date of death. *Gifted-Donor's orig. cost basis. Gift tax limit applies.

Variable Annuity Contract Provisions

*Voting Rights on big items *Bene

What is spread?

Difference between bid and ask.

Who are non-accredited investors?

Individual people.

Non-Qualified Plans

* Do Not need IRS Approval *After Tax dollars *Money grows tax deferred *Tax on distributions *Can discriminate *Deferred Comp and 457 plans

Coverdell (ESA)

*$2000 per year per person until age 18 *Income Limits to contributor. As income goes up, then loses ability to contribute. *Anyone can contribute *Distributions-Grow tax free as long pays for qualified educational expenses. *Use money for preschool through college. *Account transferred to another child within same family *Contributions not tax deductible. *Cannot exceed educational cost for year; if does then pay taxes and 10% penalty

Gov't Nat'l Mortgage Assoc (Ginnie Mae)

*Actual Gov't Agency *Only Agency directly backed by Gov't *Mortgage -Backed Pass-Through Securities *Payments MONTHLY of interest and principal

What are Material Facts that are required to be disclosed per the Securities Act of 1933?

*Any fact about issuer, the new issue that would affect indv decision to purchase the issue. ie: the ed background of the CEO

Traditional IRA

*Contributions=100% earned income until $5k per year until 60 *Spousal IRA=non-working spouse. $10k per year total ($5k for spouse also) No contributions past age 70 1/2 *Distributions before 59 1/2 then ordinary income plus 10% tax penalty *70 1/2 must begin withdrawing money *taxation

Statutory Disqualification -Securities Exchange Act 1934

*Convicted of felony within 10 years. *Convicted of Securities crime within 10 years *Willfully violated Fed securities act *Expelled or suspended by SRO *Subject to order denying, suspending or revoking registration

ERISA Requirements

*Eligibility-c/n discriminate, 21 yrs, full time one year or more, 1000 hours qualifies for full time *Funding- *Reporting-Join plan and annually *Beneficiary-must name *Fiduciary Responsibility-To benefit the employees *Vesting-Immediately vested for your contributions. Employer contributions up to employer

ERISA

*Establishes eligibility requirements for Defined Contribution Plans and Defined Benefit Plans and Qualified 403(b) *Funding, reporting, Beneficiary, Fiduciary Responsibility and Vesting requirements

Taxation of Annuities

*Funded with after tax dollars *Money grows tax deferred *Taxed at distribution-Ordinary Income; no Cap Gains *Withdraw/LIFO of growth. Cost Basis is not taxed. *Annuitize-Exclusion Ratio=Cost Basis/Expected Return. Anything over tax basis will be taxed as ord income.

Which securities are exempt from Registration in the Securities Act of 1933?

*Municipals (GOs, Revenue, IDRs) *Government (T-Bills, T-Notes, T-Bonds) *Banker's Acceptance (max maturity 270d) *Commercial Paper (max maturity 270d) *Private Placement (Reg D-sold to no more than 35 non-accredited investors; Unlimited number of accredited investors)

Fed National Mortgage Assoc (Fannie Mae) Fed Home Loan Mortgage Corp (Freddie Mac)

*Not backed by gov't *Assumptions are that if get in trouble, gov't would step up and help them. *Backed by own authority

Collateralized Mortgage Obligations (CMOs)

*Pools of mortgage backed issues *Divided by tranches by risk. *Interest Rate Risks *Prepayment Risk *Extension Risk - If rates go high then less refi and new purchases

Real Estate Investment Trusts (REITs)

*Portfolio of Real Estate, Mortgages or both Investors pool their money and go out and purchase real estate like office buildings etc and sell at profit and $ distributed among investors. Liquidity Risk=considered liquid b/c traded over the counter Series 6 c/n trade

Securities Investor Protection Act of 1970

*Protects customers if B/D fails *Creates SIPC coverage is per separate customer (not account) *

Investment Company Act 1940

*Regulates Investment companies *3 Types of investment companies. 1. Face Amount Certificate Company (FAC) 2. Unit Investment Trust (UIT) 3. Management Companies Two Types of Management Companies: Open-End and Closed-End

Qualified Plans

*Required IRS approval *Pre-tax Contributions *Cannot discriminate *Money grows tax deferred *Koegh Plan (hr10), SIMPLE, Defined Contribution (401K, Money Purchase, Profit Sharing) 403b tax sheltered accounts (tsa)

Investment Advisers Act 1940

*Requires Registration of Investment Advisers (IA) *Investment Advisers charges a fee for investment advice. *IA registers with SEC or State SEC Registration: Manage assets of +$110m STATE: Manage Assets <$100m Choose who to reg. with: B/T $100 and $110 m

Purchasing Annuities

*Single Payment (Premium) 1. Deferred-Premium buys accumulation units. 2. Immediate-Premium buys annuity units *Periodic Payment-Can only be deferred-buys accumulation units

Insider Trading & Securities Fraud Enforcement Act of 1988

*Trading on insider information *Insider trading is the tipper and tippee *Penalties: 1. Civil-Fine up to >$1m or 300% (treble damages) of profit made or loss avoided

What are Exchange-Traded Funds (ETFs)

*Typically tracks an index *Trades close to a closed-end investment company *Can be traded on the margin and sold short *anything you can do with stock, you can do with an ETF Series 6 c/n trade

Payout (check) determined by factors:

1. Account Value 2. Age 3. Sex 4. Option that is selected a. Straight Life/Life only-check rest of life. When you die, check stops. No bene in annuity phase. Biggest Check b. Life with Period Certain. Ins. co guarantee check for min of 10 years. Bene gets check for remainder if you die. c. Joint with Last Survivor. 2 or more people. Check stops at last death. Smaller Check. d. Joint or Cash Refund Option. Guarantees that all money you start with gets distributed. e. Unit Refund -Smallest check 5. Investment return of separate account vs. AIR

Advantages of Mutual Funds

1. Guaranteed Marketability *Fund must send sale proceeds within 7 days of receipt of request 2. Professional Management 3. Diversification 75.5.10 Test 4. Invest as little as $25 per month 5. Used as collateral for loan but only after owned them for 30 days. 6. Automatic Reinvestment-1099-taxable 7. Voting Rights, BOD, big ticket items; not day to day activities or investments within portfolio 8. Custodian Bank watching over

What are the Secondary Markets?

1. Stock Exchange 2. Over the Counter Market (OTC) Electronic 3. NASDAQ 4. Third Market. OTC 5. Fourth (Instanet) No B/D

Sales Charges for Variable Annuities

Level or Contingent deferred sales charge, other expenses No max-must be reasonable

A company has negative operating revenues for the year. It would NOT be required to make interest payments on which of its following issues? A) Collateralized debt. B) Subordinated convertible debentures. C) Mortgage bonds. D) Adjustment bonds.

Adjustment bonds are sometimes called income bonds because they only pay interest when the company has sufficient income (as determined by the Board of Directors.

Class B Shares

Back-end Load After 5 to 7 years, sales charge goes to zero Higher internal fees Suitable for Smaller Investments over long time

Bonus Variable Annuities

Bonus variable annuities add a percentage of each premium payment to the account. They tend to have higher annual fees to help offset the cost of the bonus or enhancement and are generally associated with longer surrender charge periods.

Who are accredited investors?

Institutions Insiders of Issuer Ind. with NW $1+M (excluding primary home) Ind. filing taxes as single filer with income of $200k past 2 yrs and $300k married/joint

What are substantially identical security for purpose for wash sale?

Call Option Right Warrant Convertible Preferred Convertible Bond B/C each allow to get back what just sold. Can convert all to common stock.

Combination Annuity

Characteristics of both fixed and variable Min. fixed payout plus variable payout

Separation Account of Annuity

Classified as investment company Valuation of Separate Account for Variable then purchase accumulation units; not shares. Fluctuate in value. Must make payment to increase accumulation units. Payout is systematic distribution of annuity units

Variable Annuity

Insurance and Series 6 Premiums in separate accounts and invested in pseudo mutual funds. No guaranteed ROR Investment Risk assumed by customer. Possible inflation protection Mortality Risk assumed by insurance co. Monthly check fluctuates.

What is NASDAQ

Computerized system used by Market Maker. Negotiated market

529 Plans

Contributions-vary from state to state; usually high limits. IRS special provision combine 5 years contributions and pay no gift tax. But cannot give same person give for 5 years. $13000 per indv; $26000 per married joint per year *no income limitations *Distributions-Qualified educational expenses; can be used for any age; higher education; transferred to member of same family *Taxes: not tax deduction for fed (maybe state), Grows tax free if used for qualified educational expenses then taxed as ordinary income and penalty 10%.

What is ask price?

Customer buy ask price Market Maker sells ask price

What is bid price?

Customer sells bid price Market Maker buys

Underwriter

Investment Banker B/D who helps to issuer register new issue with fed and market to investors

What is a market maker?

Dealer in the Over the Counter Market. Provides Market Liquidity

Class A Shares

Front-End Load NAV + Sales Charge=POP Max 8.5 % Sales charge % of POP Internal Expenses typically lower Suitable for Large Investments b/c of breakpoint over long term

Gift Tax Rule

Gift Limit $13,000 without tax. Anything over limit then taxable to donor in year of gift. $26,000 married filing jointly $26k per child per year and no gift tax

Mortgage-Backed Issues

Gov't Nat'l Mortgage Assoc (Ginnie Mae) Fed National Mortgage Assoc (Fannie Mae) Fed Home Loan Mortgage Corp (Freddie Mac) *Taxed at all levels

Securities Exchange Act 1934

Known as People Act *Created SEC *Requires registration of Secondary Markets (exchange markets), Broker/Dealers, Representatives

Class C Shares

Level Load; 12b-1 Fee NAV=POP Typically a 1-year CDSC (Contingent Deferred Sales Charge); 1% Shorter time but not less than 1 year

Fixed Annuities

Money goes into general account and invested conservatively in bonds, investment corp debt, real estate. Surrender charges on average 7-10 years Minimum Guaranteed Rate of Interest Investment risk assumed by insurance company. Insurance License Mortality Expense Risk assumed by insurance company. Purchasing Power risk. Assumed by customer. b/c may not keep pace with inflation. When annuitized, receive fixed payments.

Defined Benefit Plan

Non-Qualified Plan Business-sponsored retirement plan Retirement benefits are known Traditional pension plan Percentage of pre-retirement income Contribution Amounts are unknown. Employer must fund the plan no matter how much amount may be. Do not see around much any more b/c driven companies into bankruptcy Contributions tax deductible Grows tax deferred Distribution subject to ord. income tax 10% penalty before 59 1/2 70 1/2 must start taking RMDs (required mandatory distributions) Follow ERISA

Hedge Funds

Not required to register with SEC Not for retail regular investors Has aggressive investment activity like on the margin, selling short etc Risky Series 6 c/n trade

SIPC Coverage

Per Customer (not account) *$500,000 coverage (securities and cash) *No more than $250,000 Cash *Beyond limit, customer becomes general creditor

Funds of Funds

Purchase funds of funds. Series 6 cannot trade Can trade funds of funds and funds of hedge funds

Regulation of Variable Products

Securities Act 1933 *New Issues require prospectus,MF, Annuities, Vari Life Security Exchange Act 1934 *Register reps Investment Company Act 1940 *Separate Account Register as Investment Company Investment Advisors Act 1940 *Investment Advisor that manages an acct must be registered State Regulations *Security and Insurance laws/regulations

What is a wash sale?

Selling a security at a loss for tax purposes and, within 30 days before or after, purchasing the same or a substantially identical security. The IRS disallows the claimed loss. Based on Trade date and results in 61 day period b/c 30 days after and 30 days before

Variable Annuity Suitability

Should be supplement to income that they will already receive. Like IRA, Soc Sec. Should be funded with Available Cash. If have to cash out other things then not suitable. Funding Annuity with contributions don't need for other things. Separate Account is investing in securities. Must be comfortable investing in securities.

Capital Gains/Losses

Start with cost basis. Money invested-after tax dollars.

Investment Objectives of Mutual Funds

Stock Funds: Growth,Value,Blend/Core-Lg, Med & Sm Cap funds. Lg Cap is more conservative. Income: Dividend-paying; utilities, blue chip, preferred stock funds Index Funds: Not really managed. Index is weighted value of the market. Specialized Fund (sector fund): specialty; either niche of economy of geographic area. More volatile. 25% diversified; name rule: if type of fund is in the name, then at least that type must be 80%

1035 Exchange

Switch policies tax free if money transferred and not withdrawn Annuity to Annuity Life to Annuity Life to Life NO Annuity to Life Suitability: Not suitable for seniors due to surrender charges

Your customer is a 66-year-old retired widower. He is seeking an investment of $50,000 that will keep pace with inflation. He currently survives on Social security and a pension and is very risk averse. Which of the following do you recommend? A) Gold fund B) Fixed annuity C) High-yield bond fund D) TIPS

TIPS is the only choice that keeps pace with inflation and also has the lowest default risk of the choices given. The biggest risk associated with a fixed annuity is that over time it won't keep pace with inflation and both the high-yield bond fund and the gold fund are too volatile for this risk averse client.

Qualified 403(b)

TSA 403(b) and 501(c)(3) Employees of public schools and non-profits Employee and employer puts money in Grows tax deferred; Taxed as ordinary income at distribution; penalty prior to 591/2 and RMD at 70-1/2 Must follow ERISA

Securities Act 1933

The Paper Act, The Act of Full Disclosure, The Prospectus Act *Regulates the new issues market (Primary Offerings) *Requires new issue registration with Fed Gov't *Requires full disclosure of all material facts (Prospectus) *Designed to prevent fraud *Requires Prospectus to be delivered (at or before solicitation) *If unsolicited, no later than confirmation (Settlement Date)

A 55-year-old customer in the 18% tax bracket wants to maximize current return with a moderate degree of risk. He has just inherited $25,000 and seeks a bond investment. A suitable bond would have which of the following features?

The investor's tax bracket is not high enough to take advantage of a bond's tax-exempt status, but a bond with a low rating is not suitable because the investor is willing to bear only moderate risk. A bond with call protection and a relatively high rating would meet this customer's needs.

A customer in the 28% tax bracket wants to buy a municipal GO bond with a 7.5% yield maturing in six years. You should point out that the tax-equivalent yield of this bond is:

The municipal bond interest of 7.5% is received by the investor tax-free. To determine what pre-tax interest rate the investor would have to receive to equal a 7.5% after-tax yield, divide the municipal bond yield by the after-tax rate (100% − the investor's tax rate; 100% − 28% = 72%) 7.5% / 72% = 10.4%. Note: the answer has to be higher than 7.5% no matter what the investor's tax bracket may be, and only one answer qualifies.

Indexed Annuity

Tied to performance of index. May or may not have guar ROR Participate in some gains but not losses Participation Rate and Cap Rate tied to this annuity depending on your participation rate and cap rate. Longer surrender periods. Insurance License

Stand-by Underwriting

Underwriter acting as dealer Buy new issues; put in stock and sell Underwriter has risk Used with pre-emptive rights

Firm Commitment

Underwriter acting as dealer/principal Underwriter has risk

All or None Underwriting

Underwriter acts as broker/agent Issuer has financial risk If they don't sell all, then nothing

Mini-Max Underwriting

Underwriter acts as broker/agent Issuer has financial risk Sell a minimum or max of the total

Best Efforts Underwriting

Underwriter acts as broker/agent Issuer has financial risk Sell as much as can

Realized vs Unrealized Gains/Losses

Unrealized is the growth/loss on unsold shares. Realized is the growth/loss on redeemed shares.