Unit 1 Notes

• A security- is an intangible financial asset that may be bought or sold or gifted between person
  • Paper or electronic record
  • examples are stocks, bonds, options, mutual funds, CDs, depository receipt
• the Howey test
  • the four-part test
  • a security is an investment of money made into
  • a common Enterprise
  • expectation of profit
  • through the efforts of a third party
• investors pool their money together with the expectation it will make a profit
  • Stocks
  • Bonds
  • Options
  • mutual funds
  • depository receipt
  • investment units
  • variable life, variable annuities
• things that are not securities
  • cash and currency
  • fixed annuities
  • life insurance
  • personal residence
  • Commodities
  • Bitcoin, Krypto- these are commodities not securities
• 2 major types of securities
  • Stop
  • Bonds
• characteristics of common stock
  • classified as
    • authorized, issued, outstanding, Treasury
• Corporations can raise money by issuing securities
  • in most cases a company does not issue all of the authorized shares just enough for them to raise sufficient Capital to meet the need
• issued stock- is stock sold to investors for future needs including
  • breathing new capital for expansion
  • paying dividends
  • exchanging common stock or convertible bonds or preferred stock
• outstanding stock includes shares that a company have issued and are in the hands of investors
  • sometimes owners of a company will donate the stock back to the company
  • treasury stock is sold then gained back
• types of common stock
• large cap
• midcap
  • large cap- Large companies companies that you have heard of
  • long history- steady dividend payments- Blue Chip stocks
  • Medicap- still large companies just not as big
  • small cap- marketed for growth, not profit
  • penny stocks- less than $5 per share
    • highly speculative
    • requires risk Disclosure document
      • risk Disclosure document fully describe the risks associated with penny stock Investments
    • broker-dealers must provide monthly accounts statement, indicate market value and number of shares for each penny stock as well as the issuers name
    • sec rules regarding cold calling is a solicitation to buy- must first determine suitability based on buyers financial situation and objective
• Suitability statement
  • new customers finances, understand liabilities
• dividends- distribution of companies profits to the shareholders
  • paid quarterly
  • check or deposit into brokerage account
• stock dividends- reinvest profit for more shares
  • cost per share adjusted
  • cash Dividends are taxed depending on investor income tax bracket
• declaration date- when the board of directors approved a dividend payment
• ex-dividend date 1 business day before the record date
• record date received the dividend distribution
• payable date disbursing agent sends dividend checks to stockholders
  • DERP
• benefit of owning common stock- freely transferable by buying
  • voting rights
    • statuatory voting- one vote for each item
    • cumulative voting allocate number of votes in any way
  • opportunity of appreciation
  • limited liability
  • limited rights to inside info- must get an audit
• the risks of owning common stock
  • stock can decline
  • lose Money invested
  • Market risk- a Stock’s price can fluctuate
  • no dividend income if the company loses money
    • common stockholders have the last claim on earnings no guarantee that dividends will be paid
  • low priority at dissolution- if company enters bankruptcy the holders of bonds and preferred stock have priority over the common stockholders
• preemptive rights- entitled existing common stockholders to maintain proportionate ownership by buying newly issued shares before company offers to General Public
  • right to exercise
  • treat as a security (sell)
  • 1 rate per share
• warrants- certificate granting a owner right to purchase securities from the issue are at a specific price
  • normally higher than the current market price
  • can buy shares at a later date
  • hopes that the current market value will be below current market value when warrant is exercised
• Restricted stock- required in private
  • cannot be sold for 6 months (holding period)
  • Before these stocks can be sold the issuer must remove the restriction allowing the shares to be traded freely
• ADR American depository receipts
  • u.s. security issued by us depository Bank in foreign country
  • American bank takes security of foreign share
  • deposit in Bank
  • Issue a d r
  • add diversity
  • dividends paid in foreign currency then exchanged into US currency
  • ADR are listed on New York Stock Exchange or NASDAQ
    • facilitate trade in a familiar well-regulated setting
    • Purchase made in the U.S. Dollars
    • capital gains taxed in US currency not foreign
• preferred stock- an equity security because it represents a class of ownership in the issuing Corporation
  • annual dividend
  • percentage of par value
  • Par value $100
  • shareholders have no voting rights
• benefits of preferred stock
  • dividend preference- shares must be paid before any payments to Common shareholders
• risks of preferred stock
  • purchasing power risk because of inflation fixed-income will not purchase as much in the future
  • interest rates- when interest rates rise the value of preferred shares decline
  • decrease dividend- if a company loses money possibility of dividend income the creases
  • priority a dissolution- preferred shareholders will be paid behind creditors if the company enters bankruptcy
• Callable preferred stock- company can buy back from investors at a stated price after specified date
  • are we fixed dividend
  • similar to refinancing a mortgage
• convertible preferred- owner can exchange the shares for fixed number of shares in the issuing corporation’s common stock
  • lower dividend rate because investor may have opportunity to convert common shares and gain greater capital gain potential
• adjustable-rate preferred- variable dividend rate

Unit 2 notes

Basics of bonds

• Par value- most debt Securities have a par value of $1,000
  • principal or face value
  • exam will assume a par value of $1,000
• maturity- Each Bond has its own maturity date
  • common maturities in the range of 5 to 30 years
• term bond- structured so the principle of the whole issue matures at once
• serial Bond- portions of the principal mature at intervals until the entire balance has been repaid
• balloon Bond- schedule Bond maturity using elements of cereal and term maturity
  • issuer pays part of the bonds principal before the final maturity date
  • but pays off major portion of bond at maturity
• the term series refers to types of saving bonds
  • savings bonds are types of debt issued by the federal government that may be purchased and redeemed at Banks or from Treasury Department
  • exempt from several security laws
• coupons and accrued interest
  • interest the issuer agrees to pay
  • bonds used to be issued With Coupons attached to the certificate that the investor would detach and turn in to receive interest payments
  • bonds no longer have physical coupons
    • the interest rate the bond pays is still called the coupon rate
      • also called stated yield or nominal yield
    • calculated from bonds par value as a percentage of par
  • bonds are less risky than stocks
  • they fund projects
• a bond is a loan given to a company or government by an investor
  • borrowing money paying interest on the money
  • investor buys the bond and pays the company money
  • the company will have to pay back the borrowed money
  • the company pays interest on the money owed
  • when did Bond reaches maturity the investor redeem the bond- getting
• What is a yield
  • bonds yield expresses the cash interest payments in relation to the bonds value
  • a yield is determined by the issuer is credit quality
    • nominal yield- a fixed percentage of the bonds par value
    • current yield Bond annual coupon payment
      • what investors will earn if you buy a bond and hold it for a year
      • Interest
    • yield to maturity- annual return of bond if held-to-maturity
      • the difference between the price that was paid for a bond and the par value received when Bond matures
  • yields are measured in basis points
    • a full percentage point is made of 100 basis points (10%)
    • yield to call- some bonds are issued with a call feature
      • find may Redeemed before maturity- the investor will receive the principal back sooner than anticipated
• inverse relationship of price and yields
• Bond ratings
  • the purchase of a bond is only as safe as the strength of the borrower
  • because safety of the bond will frequently be important consideration most investors consult rating services
    • three major credit rating agencies
      • Fitch
      • Moody’s investors service
      • Standard & Poor’s rating service
    • most important for the exam Standard & Poor’s, Moody’s
      • letter ratings indicating opinion of that safety
      • Fitch ratings follow same pattern as S&P
    • Investment grade-AAA,AA,A,BBB
    • Non investment Grade BB,B,C,D
    • Standard & Poor’s uses all capital letters, Moody’s has lowercase
• investment-grade debt- higher the rating lower the yield
  • risk and reward
  • ratings equal credit score
  • lower the credit score higher the risk, higher interest charge
• high yield bonds
  • lower ratings higher risk of default
  • last credit-worthy= more risk to the investor
• not all bonds are rated

volatility- bond prices move at inverse direction to interest rates

• The more time left to maturity the more volatile a bonds price will be
  • possibility of change in interest rates
• the lower a Bond’s coupon rate the more volatile it is
• high duration means more volatile price
• what word duration Less Price volatility

features of bonds

• Calls and puts
  • call feature allows an insurer to call a bond before maturity
    • this feature benefits the issuer
  • put feature- the opposite of tall
  • investor can put the bond back to this you were before it matures
    • interest rates are rising
    • take the principal returned and invested in a new Bond paying the current interest rate
  • convertible feature- much like convertible preferred stock
    • bonds are issued by corporate issuers allowing the investor to convert the bond into common stock
      • gives investor ownership rights
  • zero coupon Bond- that obligations that do not make regular interest payments
    • sold at a deep discount and mature at par
    • accrued interest the investor will receive
    • Phantom income

Corporate bonds

• Secured debt Securities backed by various kinds of assets
• unsecured back to my reputation credit record and financial stability
• Federal Trade + 2
• pay accrued interest on a 30-day per month 360 day year return

Mortgage bonds

• The corporation will borrow money backed by real estate

equipment trust certificates

• Corporations like railroads and other Transportation companies Finance the acquisition of Capital Equipment
• railroads will issue equipment trust certificates to purchase Rolling Stock and locomotives
• the newly acquired equipment is held in trust
• when the certificates are paid in full They will receive the title the equipment

collateral trust bonds

• sometimes a corporation wants to borrow money and has neither real estate or equipment to use as collateral and set it deposits security is it owns into a trust to serve as collateral
• All deposit of collateral Securities must be marketable- readily available to be liquidated

unsecured debt

• A written promise back by word and General Credit worthiness
• written promises to pay the principal at due date and interest on a regular basis
• not secured

guaranteed Bond

• Backed by a company other than the issuing Corporation such as a parent company
• value of guarantee is only as good as the strength of the company making the guarantee
• primary does it belongs to the issuer but if the issuer defaults the guarantee kicks in and must make the interest or principal payment
• Unsecured

income bonds

• Also known as adjustment bonds are used when a company is reorganizing and coming out of bankruptcy
• only pay interest if the corporation has enough income to meet interest
• Unsecured

subordinated debt -Lower or inferior class or rank Junior to any other creditor but senior Danny stockholder

order of liquidation

• Secured debt holders paid from the proceeds of the sale of the assets
• unsecured debt and general creditors
  • General creditors are those the company owns money as part of operations
    • vendors and other suppliers
  • Subordinated debt third in line- these bonds will have a higher coupon rate
• preferred stockholders
• common stockholders are last- in bankruptcy common stockholders extremely rare to get anything at liquidation

administrative claim holders- attorneys property appraisers auctioneers Liquidators

• Assist With liquidation
• paid for their services before anyone else

benefits of owning debt securities

• Income- bonds are considered the best way to produce current income for an investor
  • study and predictable income
• Safety- obligation to make interest payments less volatile than stock

risks of owning debt securities

• Default primary risk is at the issuer will fail to pay interest or principal when due

-worst outcome of owning a bond

• interest rate risk- All debt Securities will fluctuate in responses to changes and interest rates
• purchase power risk any security that produces fix payment is subject to purchasing power race car inflation
  • inflation is a rise in the price of goods over time as a fixed payment stays the same over time
    • prices are rising the amount of goods from the payment will by will decrease

Municipal bonds- is security issued by government, lending money for public works or Construction

• Interest on municipal bonds is tax free

General obligation municipal bonds- borrow money- sells bond to lend money to issuers

• • • fund projects like building a new High School
    • Library
    • Park
    • Turf field
  • Create no Revenue- the only way to bring revenue is to vote to allow bonds to happen
  • GO- General Obligation bond is paid by taxes which is why the public has to vote on it
    • By income tax license fees sales tax backspace by property tax
• revenue bonds
  • is she buying municipality for a project that creates Revenue
    • Hospital
    • toll road
    • Subway
  • these bonds cost money
  • must do feasibility study
• Revenue anticipation note- a bond for a future Revenue producing project or facility
• tax anticipation note- Finance current operations in anticipation of future tax receipts
  • help municipalities even out cash flow between tax collection.
• Bond anticipation note interim financing for sale of bonds
• construction loan note provide interim financing for construction of housing projects
• Grant anticipation note expectation of receiving grant money from the federal government

Treasuries

The federal government is the nation’s largest Borrower

• Securities issued by US Government are backed by full faith and credit

these Securities are classified as

• • bills
  • Notes
  • Bonds
• Government securities issued by US Treasury are issued in book entry form- no paper cert.

treasury bill- t-bill

• • short-term debt obligation
  • Issued weekly
  • maturity of 4 weeks, 13 weeks, 26 weeks, 52 weeks
  • 1 year or less
  • play no interest
  • issued a discount
  • redeemed at par

treasury note – t- notes

• • mature 2 to 10 years
  • direct obligation of US government
  • mature at par value
  • pay semi-annual interest

Treasury bond- t- Bond

• • Direct that obligation of US government
  • pay semi-annual interest
  • Long-term maturities greater than 10 years up to 30 years

treasury receipts and treasury strips

• Treasury receipt- what type of bond from us treasury notes and bonds
  • broker-dealer buys treasury securities
  • place them in trust at a bank
  • so and sells separate receipts against principal and coupon payments
• Treasury strip- separate trading of registered interest and principal securities
  • certain issues suitable for stripping into interest and principal components
  • bank and broker-dealer perform actual separation of Interest coupon and principal
  • zero coupon Bond
• treasury inflation-protected securities- tips
  • 5 10 20 year maturity rate
  • text coupon rate
  • pay interest every 6 months
  • principal value of bond is adjusted every 6 months based on inflation rate
  • increase principal during inflation, decrease principal and deflation
  • final principal at maturity will have been adjusted for inflation over the term of the bond

Other agencies that issue debt securities

• Farm Credit system
  • privately owned government-sponsored Enterprise
  • raises one of those funds through the sale of farm credit debt securities
• government National Mortgage Association- Ginnie Mae
  • government-owned corporation that supports Department of Housing and Urban Development
  • backed by full faith and credit of the federal government
  • 30 year Life securities
  • back by mortgages
  • when mortgage is paid off before maturity the investor will receive back all outstanding principal of that loan at par
  • early payout is called prepayment risk
• Federal Home Loan mortgage Corporation- Freddie Mac
  • publicly held corporation that provides mortgage capital
  • purchases conventional and insured mortgages from federal housing Administration and Veterans Administration
  • backed by General Credit
  • government-sponsored entity
• money market- provides short-term funds to corporations Banks broker-dealers government municipalities and federal government
  • highly liquid
  • High degree of safety
  • short-term- Little time to default
  • 10 Securities with maturity of more than one year
  • investors who purchased money market Securities do not receive interest payments
    • securities issued at a discount and mature at face value
    • return is the difference between discounted purchase price and face value at maturity
• certificate of deposit- CD
  • fixed interest rate
  • minimum face value 100k
  • face values of 1 million or more common
  • mature in one year or less
  • negotiable CDs can be traded in secondary Market
    • Banks version of a unsecured promissory note
    • Banks promise to pay principal and interest back by Banks good face and credit
• Bankers Acceptance -BA
  • Post dated check or line of credit
  • 1 to 270 days- 9 months
  • used to finance international trade- typically pays for goods and services in a foreign country
• commercial paper- Prime paper and promissory notes
  • raise cash to finance account receivable
  • 1 – 270 days maturity
    • most mature within 90 days
    • companies with excellent credit
• us treasury bills- short-term debt obligations of the US government
  • issued weekly- maturity date 4 weeks, 13 weeks, 26 weeks, or 52 weeks
• repurchase agreements- in a repurposed agreement a financial institution such as a bank or broker dealer raises cash by temporarily selling some assets with an agreement to buy back the assets at a later date end slightly higher price
  • has a contract including a repurchase price and maturity date

Unit 3 notes

A derivative is a contract that derives its value from an underlying asset

• The buyer has the right to take an action ( buy or sell)
• the underlying asset from the seller
• in some contracts the buyer will be obligated to buy the asset on a specific date

derivatives are often used for commodities

• Such as oil gasoline or gold
• another asset class is currencies

options are derivative securities

• they derive their value from an underlying instrument such as
  • a stock
  • stock index
  • interest rate
  • or foreign currency

Components of call and put option contract

• An option is a two-party contract
• one party has the right to exercise of the contract to buy or sell the underline security
• the other is obligated to fulfill the terms of the contract
• the contract premium is the amount paid for the contract when purchased or received when sold
  • the buyer is the owner of the contract
    • pay the premium for the contract is called the holder
    • the buyer has the right to exercise the contract
    • buyers risk losing the premium if the option expires
  • the Seller is the one who received the premium for the contract
    • the seller will be obligated to perform if the buyer chooses to exercise the contract
    • sellers can potentially profit by the amount of Premium received if the option expires
• two types of options contracts– calls and puts
  • four basic transactions are available to an option investor
    • Buy calls
    • sell calls
    • buy puts
    • sell puts

basics of calls and puts

• Calls
  • long call- called by our own the right to buy 100 shares of a specific stock at the strike price before the expiration
  • call buyer is bullish- anticipating that the price of the underlying Security will rise
• buyers of calls want the market price of the underlying stock to rise
  • an investor who owns this call hopes that the market price will rise
  • has the right to buy the stock at the strike price even if the market price is higher
  • short call- a call writer has the obligation to sell 100 shares of a specific stock at the strike price if the buyer exercises the contract
    • a call writer is a bearish investor- one who anticipates the price of the underlying Security will fall
    • writers of calls want the market price of the underlying stock to fall or stay the same
    • the investor hopes that the market price will rise or go above
• Puts
  • long put- I put buyer owns the right to sell 100 shares of a specific stock at the strike price before the expiration date
  • a put buyer is bearish because they want the price of underlying security to fall
  • put buyers want the market price of the underlying security to fall
    • he has the right to sell the stock at the strike price even if the market price is lower
  • short put- a put writer-seller have the obligation to buy 100 shares of a specific stock at the strike price if the buyer exercises the contract
  • put writer is bullish because he wants the price of the underlying security to rise or remain unchanged

what is market attitude?

• Bearish or bullish
• Calls
  • a call buyer is bullish because he wants the market to rise
  • the call is exercised only if the market price rises above the strike price
  • a call Rider is bearish because he wants the market to fall
    • the contract is not exercise if the market price is below strike price
• Puts
  • a put buyer is bearish because he wants the market to fall
  • the put is exercised if the market price Falls below the strike price
  • a put writer is bullish because he wants the market to rise or remain unchanged
  • the contract is not exercised if the market price is above the strike price

CALL intrinsic value the same as the amount of the contract is in the money

• In the money- I call is in the money when the price of the stock exceeds the strike price
  • a buyer will exercise calls that are in the money
• at the money- call is at the money when the price of the stock equals the strike price
  • the buyer will not execute the call
  • sellers want in the money buyers do not
• out of the money- call is out of the money on the price of the stock is lower than the strike price
  • the buyer will not exercise the call
  • sellers keep the premium without obligation to perform
• options never have negative intrinsic value- it will always be positive or 0
  • at the money or out-of-the-money intrinsic value equal 0

put intrinsic value

• In the money- I put it in the money when the price of the stock is lower than the strike price
• at the money- I put it at the money when the price of the stock equals the strike price a virus not exercise puts that are at the money or out of the money
• Out of the money- I put it out of the money when the price of the stock is higher than the price of the put
• intrinsic value- options never have negative intrinsic value
  • buyers like to have intrinsic value sellers do not

intrinsic value and the premium

• The premium of an option consists of two parts the intrinsic value and the time value
• the basic formula for premium is intrinsic value plus time value equals premium
  • premium equals money per share
  • one contract equals 100 shares

non-equity options- underline instruments that are not shares of stock

• They have different contract sizes, delivery, exercise standards

broad-based index- reflects movement of the entire Market including s&p 100 s&p 500 major market index

• Index options stop trading at 4:15 p.m. eastern time
• the exercise of an Index option settles in cash, delivered on the next business day
• Settlement price based on the closing value of the index on the day of exercise
• expire on the third Friday of next bration month

index options strategy- index options may be used to speculate on movement of the market overall

• The investor believe the market will rise he can purchase index calls or right index puts
• if an investor believes the market will fall he can purchase index puts or write index calls
• hedging a portfolio is an important use of index options
  • the use of this index to offset loss if the market value of the stock Falls is called portfolio insurance

Unit 4 packaged Investments

• Packaged Investments our portfolio is made up of other Investments
  • stocks and bonds
• Investors buy interests in portfolio
  • Most common- investment companies
    • mutual funds
  • An investment company is a corporation that pools investors money, invests the money in securities on their behalf
  • paste on a clearly defined objective
    • Growth or income
    • Investing pooled funds, the Investment Company is able to invest in many different securities, reducing the overall risk
    • pooled Investments can total hundreds of millions of dollars
    • The ability to pool and investment with other investors gives individual investors a great advantage
      • purchasing power in the marketplace
• investment companies raise Capital by selling shares
  • must abide by Same registration and prospectus requirements Imposed By the security Act of 1933
  • investment companies are subject to regulations on how their Shares are sold to the public
• types of investment companies
  • three broad types
  • face amount certificate
  • unit Investment Trust
  • management investment companies
• Face amount certificates
  • a contract between an investor and an issuer which they issue are guarantees a payment for a stated face amount to the investor at a set date in the future
  • the investor agrees to pay the issuer a set amount of money, either as a lump sum or in periodic INSTALLMENTS
• Unit investment trusts
  • Investment company organized under a trust indenture
  • No board of directors
  • Create a portfolio of debt or equity securities designated to meet the company objectives then sell the units or shares of beneficial interest.
    • Fixed or unfixed
    • Debt fixed- purchases a portfolio of bonds and terminates when the bonds mature
    • Equity fixed- purchased portfolio of stocks
      • Stocks dont have maturity date, so they are predetermined to terminate on specific date
• Neither FAC or UIT are managed- once composed they do not change
• Do not trade in secondary market
• Managed Investment Companies
  • open end
  • close ended
  • actively manages our portfolio to achieve its stated investment objective
    • sell shares in an initial public offering IPO
    • closed-end shares are limited and clothes after specific number of shares have been sold
    • open end company- perpetually offering new shares, continually open to new investors
  • closed-end investment companies– a closed I’m company will raise capital for its portfolio by conducting a common stock offering
    • much like any other publicly traded company that raises capital to invest in business
      • register is a fixed amount of shares with sec
      • offers them to public with prospectus
      • limited time
      • uses underwriter
      • publicly traded funds
      • supply and demand determine the bid price- price an investor can Sell
      • ask price- price which investor can buy
    • Closed-end investment companies are the only Investment Company security but trades in the secondary Market
      • May issue common stock preferred stock and debt securities
    • open-ended investment companies ( MUTUAL FUNDS) open end company only issues one class of security which is common stock
      • does not specify the exact number of shares an intense issues but registers and open offering with the SEC
      • can raise an unlimited amount of capital by continuously issuing new shares
    • Mutual fund shares do not treat in the secondary Market
      • when an investor sells shares back to the fund the fund sends the investor money
      • a mutual funds Capital shrinks when investors redeem shares
      • when a client requires mutual fund shares they pay the current public offering price
    • mutual funds are priced at the end of each business day by 4 p.m.
    • mutual funds only issue common stock shares to their shareholders
      • the funds themselves can purchase common stock, prefer and for
      • each fund has a stated objective in which types of Securities from the purchases has largely to do with fulfilling the objective
• annuities- an annuity is an insurance contract designated to provide retirement income
  • the term annuity refers to a stream of payments guaranteed for a. Of time
    • the life of the Anu in it, until the annuitant’s has a certain age, word for a specific amount of years
  • the amount to be paid out may not be guaranteed but the stream of payments is
    • can provide income for the rest of someone’s life
      • mortality guarantee
  • variable annuity- opportunity to keep Pace with inflation
    • investor assumes investment risk, not the insurance company
    • includes the death benefit
      • beneficiaries will receive the greater contribution amount or current value if the owner dies during the accumulation.
    • Premium payments for variable annuities are invested in a separate account
      • behave like a diversified portfolio
        • not a mutual fund
      • these accounts have various objectives such as
        • Growth
        • Income
        • growth and income
      • Returns in the separate account are not guaranteed loss of principal is possible
  • if the investment manager of an insurance company is responsible for selecting the securities- the separate account is directly managed and must be registered
    • Investment Company Act of 1940
    • Open
  • all fees directly related to the Product must be disclosed to a variable annuity buyer
    • admin fee
    • investment advisory fees
    • custodial fees
  • no limit to the annual contribution
  • employer-sponsored retirement plans are funded with pre-tax contributions similar to 401 k plans
• Annutization- an investor who reaches retirement may choose to annutize her contract
  • one-time irreversible election to give up ownership of Assets in an annuity in return for Lifetime income guaranteed by Insurance Company
    • based on gender, age, account value
• Mutual funds
  • a mutual fund has a pool of investors money invested in various securities stated by the investment objective
  • mutual funds offer guaranteed marketability
  • if an investor wants to sell shares previously purchased in a mutual fund, the mutual fund will buy them back
    • ` redeemable securities
    • do not trade in the secondary Market
    • investors in an open then fund our mutual participants
    • issued common stock
    • shares mutually with other investors in games and distributions derived from the Investment Company portfolio

Characteristics of a mutual fund

• professional interest advisor manages portfolio
• mutual funds provide diversification investing in different companies insecurities
• Funds allow a minimum investment or 500 or less
• Investment Company allow Investments at reduced sales
• investor retains voting rights similar to the common stockholders
• must offer reinvestment of dividends
• investor can liquidate a portion of holding without disturbing portfolio
• tax liabilities- form 1099
• withdrawal plans different payment methods
• reinstatement Provisions allowing investors who withdraw funds to reinvest within 30 days
• Investment Company Act of 1940- Maximum sales charge allowed as 8 and a half percent of p o p

Class a front end load shares-

• The first time an investor buys shares in the sales charges taken from the total amount invested
• front end is most common way of paying for mutual fund shares

Class B back and load shares-

• Contingent deferred sales charge
  • create at the time and invest or sell shares previously purchased
    • Read
  • sales load- declining percentage charge reduced annual
  • 8% the first year, that 7 percent the second year, 6% the third year
  • drops to zero after an extended holding period
    • No longer than 5 years
• Class C- Level- 1 year CD SC- please to promote the funds
• annual charges make them expensive to own if investing for more than 45 years

no load shares- some companies Market their shares directly to the public- in and let/ end the sales charges used to compensate them

• No-load funds are permitted to charge fees
  • such as purchase fees
  • Account
  • exchange fees
  • Redemption fees

a Shares are best for investors with large Investments and longer time frames

B shares are best for investors with smaller Investments and long time frames

see Shares are best for investors with short time frames- not more than five years

 

break points

• Quantity discounts on open and management company shares- Mutual
• the greater the dollar amount of purchase, the lower the sales charge
• all registered representative is required to inform the customer that the investment could qualify for the next break point
  • reducing the sales charge
• most mutual funds allow investors to combine orders among related accounts- to achieve a better breakpoint
  • corporations might do this among different divisions and subsidiary companies
  • investment clubs might not get break points

letters of intent

• A person who plans to invest more money with the same mutual fund May decrease overall sales charge by signing a letter-of-intent
• the investor informs the Investment Company of the intention to invest the additional funds to reach the necessary break point with in 13 months
  • this is a one-sided contract binding on the fund only
  • Customer must complete the investment to qualify for the reduced sales charge
  • if the customer does not completely investment he will be given the choice of sending a check for the difference in sales charges, or cashing in escrow shares to pay the difference

rights of accumulation

• Similar to break points- allow an investor to qualify for reduced sales charges
  • the difference is
  • rights of accumulation are available for subsequent Investments and do not apply to initial transactions
  • allow the investor to use prior share appreciation to qualify for break points
  • do not impose time limits
• the customer may qualify for reduced charges when the total value of shares previously purchased and the shares currently being purchase exceeds a certain dollar amount
• a combination privilege also known as a family of funds is a mutual fund sponsor moving more than one fund
  • an investor seeking a reduced sales charge may be allowed to combine separate Investments within the same family to reach a break point
• exchange privilege- conversion privilege- Investor in another fund in the same family to convert an investment without incurring an additional sales charge
  • taxable event
  • maybe tax consequences
• failure to disclose the break point triggers a breakpoint sale violation

Pricing

• Net asset value is the amount an investor receives upon Redemption
  • calculated at least once per business day
  • at the end of the business day
  • forward pricing
• the purchase price of a fund share is called public offering price
• NAV plus the sales charge + public offer price
  • Nav Changes daily- because of changes in the market value of security and I fund portfolio
  • start with the total asset and subtract total liabilities
• expense ratio- compares the management fees and operating expenses- with the fund’s net assets
• all mutual funds have expense ratios
  • more aggressive funds have higher expense ratios
    • a fund’s expense ratio includes
      • Manager fees
      • Admin fees- Trading transfer agents, accountants, attorney
      • Board of director costs
      • 12B-1 fees

disclosure and Taxation

• 4 disclosure documents associated with a mutual fund

Full or statutory prospectus– a full and fair Disclosure document that provides a prospective inventor with material information needed to make a fully informed investment decision

• • must be distributed to an investor before or during the solicitation
  • contains key information in plain English
  • clear and concise format including
    • funds objective
    • investment policies
    • sales charges
    • Management expenses
    • Services offered

Summary prospectus- a mutual fund can provide a summary prospectus including an application that investors can use to buy the fund shares

• Specific requirements for summary prospectus
  • must be included on the cover page or at the beginning
    • the fund name in the class of shares
    • next Exchange if the fund is exchange traded fund
      • identification of which Market it’s in
    • which must appear on the cover page that refers to the summary of the prospectus end the availability of the funds full perspective
      • providing a toll free number to request paper delivery or website where it can be downloaded

Statement of additional information

• Mutual funds are required to have a statement of additional information available for delivery within 3 business days without charge
  • can obtain a copy by calling a riding to the Investment Company
  • contacting a broker dealer that sells the investment companies
  • shares, comment contact

prospectus is normally sufficient for the purpose of selling shares but some investors May seek additional information

statement of additional information provide the funding opportunity to have expanded discussions on matters as the funds history and policy

• Including the balance sheet
• statement of operations
• in income
• portfolio statement additional information sheet was compiled

prospectus may never be altered no highlighting riding in or taking measure to bring any attention to specific passage or section

Omitting prospectus

• Fund advertisement
• not enough information for a full and fair disclosure
• not sufficient to solicit a trade
• purpose is to raise awareness.

Mutual fund taxation

Other investment vehicles

Different investment vehicles and specialized account types

529 College savings and prepaid tuition

• • section 529 plan is a specific type of education savings account
  • allow money to be used for qualified expenses for k-12 and post-secondary education
    • Qualified expenses include tuition at elementary or secondary public private or religious school
      • Up to $10,000 per year
    • because they are state-sponsored they are defined as Municipal fund security
    • see all of these plans must be accompanied by an official statement similar to a prospectus

two basic types of 529 plans

• • prepaid tuition for State residents
  • savings plans for residents and non-residents
• prepaid plans allow a resident donors to lock in current tuition rates by paying now for future education costs
• more popular is a savings plan allowing donors to save money to be used later for Education expenses- such as tuition room and board and expenses
• Any adult can open a 529 plan for future College
  • does not have to be related to the student
  • an adult can also contribute to their own 529 plan
• donor can invest a lump sum or make periodic payments
• When student is ready for college donor withdraws the amount needed to pay for qualified education expenses
  • subject to taxes on games and a 10% penalty
  • contributions to these accounts are considered gifts under the federal tax law
    • made with after-tax do
    • accumulator earnings on a tax-deferred bass
    • withdrawals are tax-free at Federal level if they are used for qualified education expenses
  • if a customer opens an out-of-state plan- must advise customer that certain tax advantages such as the one noted may not be available to out-of-state donors
• if beneficiary does not need funds for school there no tax consequences if the donor changes the designated beneficiary to a family member
  • for example the original beneficiary chooses not to attend college
  • daughter can transfer the funds into a sibling plan without penalty
• left beneficiary receives the scholarship, donor May withdraw the equivalent value from the plan without penalty
  • income taxes will still apply

other important parts regarding section 529 plan

• • contribution level can Berry
  • asset remains under donor control even after student becomes legal age
  • no income limit
  • monthly payments if desired
  • account balances left unused may be transferred
  • Rollover permitted from one state to another
    • once every twelve months LGIP- local government investment pool
• States establish local government investment pool to provide other government entities such as cities, County, school districts, or other state agencies as a short term investment vehicle to invest funds
  • formed as a trust
  • Municipalities Can purchase shares or units in the Investment Portfolio
  • not a money market fund- but operates similar to 1
  • not required to register with sec
  • not subject to SEC regulatory requirements
  • No Prospectus- but do have disclosure documents
    • information statement, investment policy, operating procedures

achieving a better life experience account- ABLE

• Tax-advantaged savings account for individuals with disabilities and their families
  • ABLE Act of 2014
  • beneficiary of the account and the account owner
  • income earned by the account is not taxe
  • limit eligibility to individuals with significant disability
  • age of onset of the disability occurred before turning age 26
  • one could be over the age of 26 but the onset of disability occurred before 26
• Social Security insurance or Social Security disability insurance- automatically eligible to establish ABLE account
  • only one account per person
  • contributions can be made by any person must be made using after-tax dollars
  • not tax-deductible
  • limited to a specified dollar amount per year
    • can be adjusted due to inflation

direct participation programs

• Partnership- an unincorporated association of two or more individuals
  • opening an account for business purposes
  • must complete a partnership agreement
  • which of the partners can make transactions
• if partnership opens a margin account they must disclose any investment limitations
  • amended of partnership agreement must be obtained each year if changes are made
• two categories of partnership
  • general partnership
  • Limited
• in a general partnership all Partners in the business have responsibility to manage the business
  • specific responsibilities may be assigned to specific partners
  • all owners may be held liable for actions of the partnership- no liability protection
  • must be a tax reporting entity- REPORT BUSINESS RESULTS

Direct participation program– line of business that raised money to invest in real estate, oil and gas, equipment leasing, other similar business ventures

• • Not taxed as a corporation would be the income or loss is pass directly through the owners of the partnership- the investors
  • investors are then individually responsible for satisfying tax consequences
  • No secondary market
  • highly illiquid

Limited partnership- most common type of direct participation program

• Investment opportunities that permit The Economic Consequences of a business to flow or pass through to investors
  • not taxpaying entity
  • pass-through to investors a share in the income, gains, losses, deductions , and tax credits business entity
  • Partners have the responsibility to report individually to the i r s
  • biggest disadvantage is lack of liquidity
• limited partnership involves two types of partner
  • General partner
  • limited partner
  • must have one of each
  • property in these Partnerships is held in form of tenants in common
    • provides limited liability and no management responsibilities

General partner– have unlimited liability- they can be held personally liable for business losses and debts

• • role is to manage all aspects of partnership
  • fiduciary responsibility in the best interest of the investors
  • manage the partnership- make decision
  • buy and sell property for the partnership
  • compensated for filling these duties
  • may not compete with the business, borrow money, or commingle the partnership funds with personal assets

limited partner- has limited liability- they can’t lose more than they invested

• • no management responsibilities
  • cannot participate in day-to-day management of the business because they can lose their limited liability status
    • turn into g p
  • has the right to vote on business objectives and the right to receive cash distributions, capital gains, and tax deductions generated by the business
  • the right to inspect all books and Records
  • limited partners have the right to sue the GP if GP does not act in the best interest of the business

Partnership sales and dissolutions

• Limited Partnerships may be sold through private placements or public offerings
  • private placements involve a small group of limited partners- each contributing a large sum of money
  • must be accredited investors
    • meeting income and net worth criteria
  • must have substantial investment experience
  • general public generally does not meet this description
• in a public offering limited Partnerships are sold by prospectus for a disclosure
  • limited Partnerships are liquidated on a predetermined date in the partnership agreement
  • when dissolution occurs the general partner must settle accounts in the following order
    • secured lenders
    • Other creditors
    • limited partners
    • General partners

Types of limited Partnerships

• • real estate programs- can invest in raw land , new construction , or existing properties
    • provide investors with following benefit opportunities
      • Capital growth potential
      • cash flow
      • tax deductions
      • tax credits
  • Oil and gas programs– wildcatting programs to locate new oil deposits
    • programs that drill near existing producing wells in hopes of locating new deposits
    • income programs that invest in producing Wells
      • tax advantages associated with these programs
        • intangible drilling costs- costs associated with drilling such as wages supplies Fuel and insurance
        • have no value when the program ends
        • intangible drilling costs can be written off in full in the first year of operation
        • tangible drilling costs such as drilling equipment has some salvageable value at the end of the program
        • deduction over several years- depreciation of material

each year the asset is worth a little less

• • • • • depletion allowances- tax deductions that compensate the program for the increasing Supply of oil or gas
  • leasing program– equipment leasing programs are created to purchase equipment leased to other businesses
    • Equipment such as jetliners, rail cars, trucks lease to shipping companies, or computers leased to a business in need of them
    • investors receive income from lease payments
      • as well as right offs- operating expenses, interest expenses, depreciation of actual equipment
      • tax sheltered income

Direct participation programs- suitability and Taxation

• Historically limited Partnerships were called tax shelters
• structure of limited partnership allows for investor to receive income that is sheltered from taxes
  • use depreciation and depletion to reduce taxable income
  • reduce taxable income without affecting cash flow
• LP is considered passive income- added to ordinary income for tax purposes
• losses from LP are called passive losses
  • passive losses offset passive income

Specific risks to limited partners- liquidity, audit/ recapture of tax benefit

• If the IRS disallows a prior tax benefit the consequences flow to the limited partners
• if an audit resulted in depreciation deduction being disallowed the limited partners would find themselves having an extra amount of income for that tax year
  • the IRS will impose tax and penalty for under-reporting of income and interest on unpaid taxes
  • limited partners would have to pay forward under-reporting income and interest

Real Estate Investment Trust REIT -A company that manages portfolio of Real Estate, mortgages, or both to earn profits for shareholders

• REIT’S- Pool capital in a manner similar to an investment company
  • not an investment company
• shareholders receive dividends from investment income or capital gain
  • own commercial property
  • Own mortgage on commercial property
  • do both
• organized as Trust- investors buy shares or certificates of beneficial interest
  • on stock exchange or otc Market
• Can avoid being taxed as a corporation by receiving 75% or more of its income from Real Estate, and distributing 90% or more of net Investments to its shareholders
• registered with sec- subject to disclosure requirements- public REIT
  • However some are not registered and they are called private
  • Not subject to same disclosures and subject to more risks
• Many are traded on stock exchange- exchange traded- listed

Important information to understand about REITs

• Owner holds undivided interest in a pool of real estate Investments
• may or may not be registered with sec
• may or may not be listed
• not an investment company
• offers dividends and games to investors, but do not pass through losses like LPs- therefore are not considered dpp’s

Hedge funds- Often organized as limited Partnerships sold as private placements

• Similar to mutual funds
  • Investments are pooled and professionally managed
  • more flexibility in the investment Strategies employed
• hedging is the practice of attempting to limit risks
  • most hedge funds specified generating High returns as primary investment objective
  • Center shoulder a substantial amount of risk
• aggressively managed- constructing portfolios of high-risk Investments
  • use Advanced and sometimes complicated investment strategies

Industries and companies

Fundamental analysis– the study of Industries and companies to identify the best places to invest

• – the process of examining the economy to identify industries that will do well in the near future and the companies within those industries that are financially strong
• – also called top-down analysis

Some Industries perform better or worse depending on the business cycle

– divided into four broad classes

• Cyclical
• non cyclical
• Counter-cyclical
• growth

cyclical Industries-

• Durable goods such as heavy machinery and raw materials
  • Steel
  • Automobiles
  • heavy equipment
  • capital goods like washers and dryers
    • during a recession the demand for these products declines as manufacturers postpone Investments, and consumers postponed purchases of these Goods

non-cyclical Industries (defensive)

• Generally produce non-durable consumer goods
• Such as food Pharmaceuticals tobacco
• the public consumption of these Goods remain steady through the business cycle
  • Food
  • Utilities
  • Clothing
  • Drugs
  • Tobacco
  • Alcohol

counter-cyclical– these industries tend to turn down of the economy heats up

• Products people buy when they are scared and looking for safety
  • gold and gold mining
  • precious metals
• people tend to flock to Gold when the economy is weak

growth or special situation– a growth industry is one that seems to be disconnected from the business cycle regardless of the economy

• Individual stock
• specific Industries
  • special situation might be anything from a hostile takeover to a cultural shift that moves consumer away from the product
  • smartphones and apps
    • even during the recession in 1990 people were still buying smartphones

impact of the business cycle on different Industries

• Cyclical industries-Tend to do well and expansion, poorly and contracts
• defense- less impacted by business cycle
• Counter cyclical Industries- do better when the economy is weak
• growth industries- don’t care about the economy they just keep growing
• special situations- some specific circumstances affect them

corporate Financial reports– provide fundamental analysts the data they need to understand the financial strength and weakness of a company

• Allow us to compare a company’s financials with those of a competitor
• released quarterly or annually
• two primary reports– balance sheet and income statement

balance sheet– provides a snapshot of a company’s financial position at a specific time

• Value of the company’s assets ( what it owns)
• and liabilities ( what it owes)
• the difference is the corporation’s Equity or net worth
• A corporation can buy assets using borrowed money ( liabilities) and Equity raised by selling stock
  • value of its assets must equal ( balance with ) the value of its liabilities and equity

components of the balance sheet

• Assets– current assets, fixed assets, and other
  • current assets are cash and assets that may be easily converted to cash– Securities accounts receivable and inventory
  • fixed assets– assets that are difficult to liquidate
    • real estate, furniture, equipment
  • other assets- called intangibles
    • things that are difficult to value
      • Trademarks, copyrights, reputation, intellectual property
• Liabilities– divided into two categories; current and long-term
  • current liability– my abilities due now or in the near future ( within 12 months)
    • accrued wages, accrued taxes, accounts payable, interest payments
  • long-term liabilities– that they will not be paid off in the near future
    • notes and bonds
    • the principal is the long-term liability
• net worth- shareholders equity
  • preferred stock- how many funds received from the sale of preferred stock
  • common stock- the par value of the common stock
  • capital in excess of par- money received from the sale of common stock in excess of the par value
  • retained earnings- my name is at the company has made that has not been paid out as a dividend

balance sheet analysis- A lot of information is available from the balance sheet- however only four ratios are tested

• Short-term liquidity
  • working capital– the amount of money a company can spend ( or lose) to remain operational
    • current assets– current liabilities = working capital
  • current ratio- used to compare the liquidity of a company
    • written as a ratio (example 2:1)
    • Current assets : current liabilities = current ratio
  • acid ratio– also called the quick ratio
    • test of a company’s liquidity if everything goes really bad
      • (Current assets – inventory) : current liability = acid ratio
• long-term solvency- the most common measure is the debt ratio- or the debt to equity ratio
  • a measure of how much the corporation’s net worth is derived from the long-term debt
  • Long-term debt/ ( long term debt + net worth) = debt ratio
    • expressed as a percentage
• income statement- also called a profit and loss– summarizes a corporation’s revenue and expenses for a physical.
  • Usually quarterly, year-to-date, or the full year
  • compare Revenue with costs and expenses
  • fundamental analysts use the income statement to judge efficiency of a company’s operation and profitability

components of the income statement

• Cost of goods sold
• operating costs ( including depreciation)
• operating profit
• non-operating income
• operating income ( earnings before interest and taxes)
• interest expenses
• Taxable income
• Taxes
• net income after taxes
• preferred dividends
• earnings available to Common
• common dividends
• retained earnings

Unit 16- placing a trade

-Basics of how to place a trade

– types of Trades normal for secondary markets

– qualifiers and time limits

Bull and Bear– bullish and bearish– refer to an Investor’s attitude towards Market or security

• Bull- if a person believes the market is likely to go up in value that person is bullish
  • with a covered call in a hybrid position you always look at the larger position ( the one with more value when position established)
  • if you are long a stock and you wanted to go up you are a bowl
• Bear- a person believe that they given Market or stock is going to go down in value rather than up
  • if you were short a stock you are a bear
• when a bull is going across the field its horns point up- bulls think it’s going up
• when a bear walks through the forest its claws Point down

an investor will enter an order with a broker-dealer to execute a buy or sell transaction

• The order will be entered by the broker-dealer on the appropriate exchange or trading venue

different types of orders

• Market order– buy or sell, it is executed immediately at the best available market price
• limit order- buy or sell; the limit price is the maximum purchase price if buying, OR the minimum selling price if selling

Market orders are always executed immediately at the current market price

limit orders can only be executed at the limit price or better

• For a buy limit order- or better means at the limit price or lower
• for a sell limit order or better means at the limit price or higher

stop orders

• A stop order is not an order, but a trigger price
  • when reached it will trigger an order
  • no time priority
• a stop order– buy or sell, a stop order does not become a live working order until the stock trades at or through a specific price ( THE STOP PRICE)
• once the order is triggered by the stock reaches the specific stop price, the order becomes a market order
  • it will be executed immediately at the best available market price

Stop-limit order– buy or sell this order type has a stop price but does not become a working order until the stock trades at or through the stop price

• Whatever it also has a limit price
  • once the order is triggered by the stock reaching the specific stop price the order becomes a limit order to buy or sell at the specified limit
• may or may not be executed depending on where the price of the stock is

restrictions that can be applied to an order

• Additional instructions attached to the order a customer would like at here to
  • time restrictions
    • day order
    • Good- til- cancelled
    • Market-on-open/close
  • fill restrictions
    • Fill or kill
    • immediate or cancel
    • all or none
• time restrictions
  • day order- orders are assumed to be de orders ( default time limit)
    • A day order is valid only until the close of the trading day
    • if the order has not been filled it is canceled
    • Market order should be filled immediately, day orders are more important with limit orders
      • if the order is partially filled then the unexecuted portion is canceled at the end of the trading day
  • good till canceled order– valid until executed or canceled
    • all good till canceled orders are automatically canceled and if unexecuted on the last business day of April/ the last business day of October
      • if the customer wishes to have the order remain working Beyond those day- they I must request the order continue for the next cycle
  • Market at open OR Market at close order- Market orders designated to be executed on the opening day or at the close of the day
    • customer is not guaranteed the exact opening or closing price
      • instead a price at, or close to, the first or last price of the day
• fill restrictions
  • fill or Kill Order- instruction to fill the order immediately or kill the order completely
    • no partial execution
  • immediate or cancel order- like Phil or kill orders except that a partial execution is acceptable
    • if only a portion can be filled, it is, and the remaining on executed portion is cancelled
  • all or none order– all or none orders must be executed in their entirety or not at all
    • can be day orders or good till canceled orders
    • different from fill or kill- they do not have to be filled immediately
    • they can be Until the end of the day
  • all fill restrictions are only for limit orders
    • Market orders are always filled at the best available price– immediately

Unit 17- quotes

Cut is what most investors want to hear before they place a trade

“ the current quote is “

“ The stock is being quoted at”

a quote is two-sided– consisting of a bid, and ask ( sometimes called the offer)

• Quotes will provide size– the number
  • the size for a stock quote is expressed in round Lots ( units of 100 shares)
• a bid is always less than the ask price
• Bid- the highest amount someone is willing to pay for the security
  • size is the number of shares someone is willing to buy
    • “I will buy this stock at this price”
• ask- the lowest amount someone is willing to sell the security 4
  • size is the number of shares willing to sell at the ask
    • “ I will sell this stock at this price”
  • if an investor wants to buy, they are buying from the person making the offer
    • the ask price is the price a buyer pays

An example- BCO stock is ask 42.5, size 12

• This means there is someone willing to sell as many as 1,200 shares of BCO $ 42. 50 per share
• if your customer wants to buy BCO stock they can buy as many as twelve hundred shares at 42.50 per share
• the quote would look like this
  • BCO bid 42 ask 42.5 size 10 x 12

How do we get the bid and ask?

• How the quote is generated depends on where it’s traded

Quotes for listed stocks

• Stocks listed on the exchange, DMM maintains and order book
  • in the book are all open limit orders for the stock
  • highest by limit is the most someone will pay and establishes the bid
    • size of the limit order establishes the size
  • lowest sell limit is the least someone will sell their stock at– establishing be ask
    • the size of the limit order establishes the size

quotes for OTC stocks and bonds

• Is made of broker-dealers- some acting as market makers
• some acting as brokers
  • trading is between broker-dealers
  • here the bid is the highest bid from a market maker
  • end the ask is the lowest ask from a market maker
  • customer will sell to the dealer at the bid or buy from the dealer at the ask

Calculate the bid/ ask spread

• The spread is the difference between the bid and the ask prices
  • difference between what the security may be bought for and what it sells for
  • a market-maker is buying and selling at the ask- that’s how they make money

Unit 18- position, strategies and trade authority

When an investor buys the security he has taken a long position in the security

• He now owns the security

someone who is long– hopes the security will rise in value, to later sell for a profit

• • this is a bullish position- anticipating that the security will rise in value
  • Risks Associated with long position is if the price of the security falls
    • maximum loss for the investor occurs if the security becomes worthless
  • investors open a long position by buying a security and then may close the position by selling the security
    • hopefully at a higher price and for a prophet
  • the amount of money they paid for the position is called cost basis
  • when the close the position the money they receive is called the sales proceeds
• Long: Buy to open, sell to close

An investor can sell a security to open a position

• To do this the investor is actually selling a security they do not own
• this is done by borrowing stock from a stock lender
• and selling the borrowed shares ( shorting)
  • selling a security one does not own is known as being short

A short customer is taking the view that the stock will decline in price, enabling the customer to buy the shares back at a lower price

• • • buying back the shares enables the investor to return them to the party they were borrowed from
      • in this scenario the customer profits by the difference between the short sale price, and the price at which the shares are bought back
      • also known as being bearish– anticipating the security will fall in value

the risk to a short-seller is that the price of the borrowed shares can increase

• • • forcing the seller to buy back at a higher price instead of a lower price like anticipated
    • unlimited loss potential because there is no limit on how high the security price may rise
• just as investors can open a position by buying a security, they can open a position by selling a security
• Short: sell-to-open, buy to close

Short against the Box

• Investor may sell a stock short that they own
  • different from closing a long position
• Investor borrows in cells short stock that they own
  • does not sell the stock they own but borrows the shares and cells
    • Rare
    • taxpayer Relief act took away the lane of capital gains- now there is little reason to do a short against the Box sale
    • rarely done but still tested

locate requirement-

• When an investor wants to enter a short sale, the broker-dealer must first locate the shares that will be borrowed
  • if the broker-dealer does not have the shares available within its accounts it can borrow the shares from another broker-dealer
  • no matter where the shares come from they must be located and secured before a short sale may be executed
  • “Uncovered short”

Regulation SHO –requires broker-dealers to identify a source of borrowable stock before executing a short sale in any equity security with the goal of reducing the number of situations where stock is unavailable for settlement.

• • • Who does regulation SHO apply to?
      • Regulation SHO applies to short sales of equity securities

Do not confuse going short on an option ( writing) with an uncovered short

Selling an uncovered option is perfectly legal, selling a stock short without locating the source of the shares is a rules violation

trade Authority

• solicited vs. unsolicited trade

solicited trade- if a representative or a communication from a broker-dealer introduces the purchase of a specific security to a customer, the trade is solicited

If something the broker-dealer representative did led the customer to place a trade for a specific security it is a solicited trade

• A solicited trade must be marked as solicited on the trade ticket ( order forms)
• marking a solicited trade as unsolicited is a violation

Unsolicited Trade- If a customer places a trade that has not been suggested by the broker-dealer or representative it is considered unsolicited.

Discretionary trade- customer may Grant trading authority to a registered representatives to place trades in their account without pre-authorization

• Exercising discretion requires specific authorization to place trade
• this is a type of a power of attorney granted by the customer to the registered representative
• these trades must be marked as discretionary- failure to Mark as a discretionary will be a serious violation

What constitutes a discretionary trade?

• All trades have 3 key elements
  • an action ( buy or sell)
  • the amount of the trade ( shares or $)
  • the specific asset to be traded ( what you are buying or selling)
• these three elements are called the three A’s of discretion

Allowing the representative to choose the time and the price at which a trade is executed is not considered discretion this is called the time and price authority

An example- mrs. Francis calls you and says I have $10,000 sitting in my account, I want you to take the money and purchase a great technology company in to my account

• Here mrs. Francis identified the action ( buy) and the amount (10k) but the outside was not clearly identified
• if the representative decided on the stock to buy and place the trade without further information this would be a discretionary trade

if the representative chooses one or more of the three “A” elements it is considered a discretionary trade.

what are the authorization required for a discretionary trade

discretionary trading is only allowed as long as proper authorizations have been received

• In order for discretionary tried to be properly answered
  • the client must agree in writing to Grant a representative discretionary trading authority
  • a principal of the firm must, in writing, approve the the discretionary trading authority
• if a client wants to revoke the discretion, They must do so in writing
  • accounts with discretionary trades are supervised more closely
  • principals want to make sure it’s already is being used in a manner that benefits the customer
  • discretion is granted to the representative not the broker-dealer
    • if the representative pass away/ leave the firm The Authority ends

Features and requirements of a wrap account

• Wrap accounts are accounts for which firms provide a group of services
  • such as asset allocations, Portfolio management, executions, Administration, for a single fee
  • fee may be monthly or quarterly, but most often a percentage of assets under management (AUM)
  • Wrap accounts are generally investment advisory accounts
    • Broker-dealer must meet fiduciary requirements under the investment advisers Act of 1940
    • a required disclosure- is that the customer may be able to get all of the same services on a separate basis for Less cost

Unit 19- settlement

When a customers trade is executed it begins the process called settlement

• settlement is the process that insures both parties in a transaction received what they’re supposed to receive
  • money goes to the seller
  • Securities go to the buyer

settlement is designed to ensure that the trade is completed in a timely manner

• trades must be settled by the end of the day on the settlement date

Settlement occurs by the end of the business day either one or two business days following the trade date

• It will see this expressed as T + 1 or trades that settled the next business day
• T + 2 for trades that settle into business days
• this is called regular way settlement

Settlement rules are for secondary Market trades

What settles in one business day?

• • All treasury securities
    • T-bills, t-notes, t-bonds- regular way settlement is T + 1
  • Corporate issues- stocks and bonds
  • Municipal debt
  • agency securities GNMA
  • GSE security such as FNMA FHLMC

what has to happen at the end of the settlement day?

• • broker-dealer representing the seller received the cash due the seller
  • broker-dealer representing the buyer receive the Securities due the buyer

what is a cash settlement trade?

• • cash settlement- same-day settlement- requires delivery of the Securities from the seller and payment from the buyer on the same day the trade is executed
    • stocks or bonds sold for cash settlement must be available on the spot for delivery to the buyer
    • both parties in the transaction has to agree for cash settlement to occur
    • rare but still occur
  • both parties ( buyer and seller) and a cash settlement must agree before the trade text
  • trade settles on the trade date
    • do not confuse this with cash trade- which is simply a trade that does not involve any margin borrowing– the buyer paid in cash

When an option trades- the settlement is the next business day ( T + 1) this applies to all option trades

when an option is exercised by the owner ( long) there is a required time for completion

this is often referred to as the settlement– even though it is not the settlement of a trade–mechanics are similar

in an equity option exercise– the transaction must be completed by the second business day ( T + 2)

• the two-day delay allows the person delivering the stock time to acquire the stock before it is delivered
• the settlement process is essentially the same
  • one side received the stock and the other side is paid

Index option- no underlying security to deliver

• The writer pays the owner cash equal to the in- the- money amount
• is made the next business day ( T + 1)

what is good delivery?

good delivery rules govern the delivery of physical stock and bond certificates in a trade

when a certificate is delivered it must be indoors

• By all owners whose name appears on the face of the certificate
• Signed exactly as the name appears
  • exactly it means just that if the name on the face of their certificate reads James T Kirk the signature must be James T Kirk.
  • if the middle name was written out instead of an initial the signature must match
    • if the name is James Tiberius Kirk then the signature must match rioting in a T instead of the full name would not be good delivery
  • Instead of signing the back of the certificate the customer signs a separate document called a stock power / or Bond power
    • this is common when the certificates will be mailed
    • similar to an endorse check
    • the stock power identifies the specific certificate ( issuer, number of shares, certificate number

differentiate between delivery of physical certificate, and electronic Holdings

• If Securities are issued with physical paper certificates ( bonds for shares) those certificates will be required for physical delivery
• most Securities are sold without physical certificate
  • evidence of ownership is kept on record at Central agency
• government certificates issued by US Treasury are issued in book form
  • no physical Securities exist
  • transfer of ownership is recorded by entering the change on the books or electronic files
    • more efficient in faster than paper certificates
  • when security is held in electronic form by broker-dealer on behalf of a customer– that is called the street name
    • no physical certificate and no require for signatures for good delivery

Unit 20 investment returns

The process for distribution of dividends from mutual funds

• The dates involved in a cash dividend from a stock are in DERP order to account for trading on the secondary Market where the settlement creates a delay between the day the trade takes place when the day the customer is an owner of record
• mutual funds do not trade in secondary markets
  • when a customer purchase a redeem the mutual fund the transaction is directly with the fund and the trade is settled the same day it is executed
  • purchasers of mutual fund shares become owners of record on the day the by takes place
  • sellers of mutual funds cease to be owners on the day the trade takes place
    • buy the fund and received the dividend as an owner on the same day
  • When is the dividend no longer available to new owners
    • the day after the record date
    • the ex dividend date for a mutual fund is the day after the record date

mutual funds the order is-

• • declaration date- ( record and payable date) – ex-dividend date
    • DRPE
    • the ex-dividend for mutual fund as set by the funds board of directors not finra

how to calculate current yield

• Yield is a measurement of the amount of income an investor will receive as a percentage of the cost of the investment
• Current Yield May apply to both stocks and bonds
• If the income is from a stock dividend it is called the dividend yield

How to calculate capital gains

• Capital gains are generated from closing an open position
• If you close an open position for a loss you have Capital loss
• the formula is
  • sales proceeds – adjusted cost basis = ( capital gains if a positive number, Capital losses if a negative number)

Identify long term gains

• A long-term gain is taxed differently than a short-term game
• to receive long-term game treatment a position must have been held for more than one year
  • a position held for less than one year is a short-term
• the difference in how long term gains and short-term gains are taxed
  • formula for calculating capital gains is
  • [ income received + gains ( or – losses) ] / cost basis = total return

break Total return questions down– you can do this

a total return calculation may use realized capital gains or losses for close positions but it may also be use open positions using unrealized capital gains or losses

Taxation and benchmarks

• Three primary components of ordinary income
  • earned income, investment income, passive income
  • earned income includes salary wages bonuses tips
    • taxable income is derived from earned income
  • investment income is earned from one’s Investments
    • also called portfolio income
    • includes dividends and interest payments
    • derived from the assets the investor holds
  • passive income- a type of investment income derived from Investments
    • participation and programs such as limited partnership and real estate Investments
      • may produce passive losses, or a passive income
      • passive losses in a given Year may use losses to offset passive income
      • Passive losses may only be used to offset passive income not any other type of income

capital gains and capital losses- generated from buying and selling of a security

• Gains and losses are generated when investment position is closed and the investor no longer holds the asset
• Long-term capital gains- taxed at Advantage rate
  • rate changes regularly
  • lower than income tax rate
• short-term capital gains- games made from assets held for a period of one year or less
  • taxed as ordinary income
• long and short-term capital losses
  • Capital losses may be used to offset capital gains
    • if an investor has losses that exceed games in a given year they may use up to $3,000 of those losses to reduce ordinary income
    • If the investor as losses in excess of $3,000, they may carry those losses into the next year
      • called carry forward losses

Benchmarks and indices

• Frequently cited indices and averages
  • Dow Jones Industrial Average- widely cited measure 30 stocks of large well known companies, Standard & Poor’s 500 index– more than 500 stocks of large us companies- basis for several mutual funds , Russell 2000 Index– tracks approx 2000 small company stocks- benchmark for smaller companies, Wilshire 5000 index– broadest measure of overall stock performance in US , Barclays Capital us aggregate Bond index- composite index combining several bond indexes for picture of entire bond market, MSCI EAFEindex– equity performance outside the us EAFE is Europe Australasia and Far East

what is a wash sale?

• An attempt to create a loss for tax purposes ( spell at a loss ) when the investors intent is to still maintain ownership of the securities
  • any repurchase Of the same securities within 30 days before or after the date establishing the loss would be recognized as ones intent to maintain ownership
  • Wash sale not illegal– attempting to use the lost from the wash sale in order to reduce taxes is illegal

Unit 21- Corporate actions

Operations can take a number of different actions that may change the number of outstanding shares in the corporation has

• Some of these actions will require a vote of the company’s shares and others do not
• other organizations may buy shares of a corporation in order to take control or merge their companies
  • how can shareholders vote their shares without attending a meeting
• Calculate cost basis and share price adjustments for stock dividends and stock splits

stock dividends

• • • if a company wishes to reinvest its profits for business purposes a board May declare a stock dividend
    • typical and gross companies to invest their cash resources and research and development
    • the company will issue additional shares of common stock as a dividend instead of cash
    • the net result is that the shareholder now owns more shares after

what is a merger?

• in a merger two or more companies combined operations and assets
• The shareholders of both companies received new shares of the combined company and their shares of the old company or canceled

what is an acquisition?

• In an acquisition one company takes over the operations and assets of another firm
• Are holders of the company that was acquired will receive shares of the company that did the acquiring they’re old Shares are canceled

What is a spinoff?

• In a spin off a corporation forms of subsidiary company out of some of the corporation’s assets and operations
  • it issued shares of the newly-formed corporation to the shareholders of the original company

what is a buyback?

• A buy back is when a company buys its own outstanding shares in the open market from existing shareholders
• companies might buy back shares for many reasons
  • buying back shares reduces the number of shares available ( Supply) therefore it can increase the value of shares still available
  • this approach to increasing shareholder value is becoming more popular as corporations prefer share BuyBacks rather than paying dividends

what is a tender offer?

• An offer to buy security directly from the owners of the security( and not through the secondary Market)
• corporations may take a tender offer on their own debt as a way to retire the debt early
• companies looking to acquire another company may take a tender offer to take the Target company’s shares
  • friendly or hostile
• a company making a bid to take over another company might also make it tender offer on the target convertible securities
• BuyBacks and tender offers are normally cash offers

what are some tax consequences of different corporate action?

• If the corporate action results and shareholders receiving shares of stock there’s generally no tax event
• if the corporate action results in the stockholder receiving cash, it will generally result in a tax event because it is the sale of a security
  • Stock splits and stock dividends are never taxable because they result in the receipt of additional shares
  • mergers Acquisitions and spin-offs are generally not taxable because shareholders receive stocks
    • however they can be a mix of stock and cash payments
      • cash portion is taxable as capital gain or loss
  • BuyBacks and tender offers are almost always all-cash offers
    • treated as the sale of the security resulting in capital gain or loss

what are some notification requirements for corporate action

• • required by the SEC to give notice of corporate action to shareholders
    • or actions such as cash dividends, stock, forward or reverse split, rights or warrants offering
  • the following should be included in the notice
    • title of security
    • Date of Declaration
    • date of record
    • date of payment distribution
    • cash dividend- the amount to be paid
    • stock dividend- rate of the dividend
    • Split- forward or reverse; rate of distribution
  • notice should be given no later than 10 days before the record
  • no later than the effective date

what is proxy voting?

• Every publicly traded company must have an annual General shareholder meeting- where management present any decisions that require shareholder approval
• approval or disapproval is given by means of voting for each decision
  • shareholders May attend the meeting to vote or vote by proxy
    • electronic or male
  • most corporate stockholders usually vote by proxy– like an absentee ballot
  • limited power of attorney that a stockholder gives another person– transferring the right to vote on the stockholders behalf
• proxy solicitation- offered to let a third-party vote for controversial company proposals
  • SEC requires company to give stockholders information about the items to be voted on
  • everyone who participates must register with sec

forwarding proxies- and related material

• Member broker-dealer firms must cooperate with a Shores by ensuring customers whose stock is held in the broker dealers name are alerted to all financial matters
  • quarterly reports and proxy statement
  • members act as forwarding agents for all proxies and other corporate materials received from an issuer for a stock
  • If a customer signs/ returns a proxy statement/ but does not indicate how the shares are to be voted the member must vote the shares as recommended by the issuer management
  • if a customer does not return the proxy within 10 days before the shareholder meeting remember me vote the shares as it seems fit
  • if the proxy is not returned the shares are not voted

 

stock splits- forward split and reverse split

• • • • forward split- to make the stock price attractive to a wider base of investors a company can declare a forward stock split
      • increases the number of shares and reduces the price without affecting the market value
      • an investor will receive more shares with the value of each share is reduced
        • even split or uneven split
      • in an even split investor will be given a certain number of shares for each share owned
      • and I’m even split the split can be designated in any ratio
    • in a forward split the number of shares will increase and the price per share will decrease
    • reverse split- sometimes the stock price become so low it attains an undesirable aura about it.
      • A low stock price might not meet listen criteria of Stock Exchange and the listing can occur
    • reverse split- unlike a forward split where the number of shares has increased and the price per share is decreased; a reverse split has the opposite effect on the number and price of shares
      • after a reverse split the investor owns fewer shares– that are worth more per share
      • the number of shares decreases while the price per share increases
      • can also be even split or uneven split
      • even split- 1 for 2 or 1 for 3
      • an even split can be designated in any ratio
    • as with forward splits the total position value for the investor is always the same before and after the split
• 

Unit 22 notes- non qualified accounts

Non Qualified accounts are those that are not part of a retirement plan

individual account– one beneficial owner, account holder is the only person who can control Investments within the account, request distributions of cash or securities

individual account- one owner, one authorized Trader

• when the individual owner dies the account assets are distributed Through the owner’s estate unless other arrangements have been made ahead of time/

Joint Account– two or more adults are named on the account as co-owners

• each allow some form of control over the account
• requires signatures of all owners
• checks must be made payable to the names in which the account is registered and endorsed for deposit by all tenants
• designated as tenants-in-common or joint tenants with rights of survivorship
  • these designations determine how the account ownership will be hindered if any party of the account dies

Joint tenants with rights of survivorship ( JTWROS)

• • stipulate that a deceased tenant’s interest in the account passes to their surviving tenant
  • undivided interest in the account
  • All tenants own the account equally
  • If one tenant does the account remains property of the surviving tenant
  • comment for married couples
    • if one dies the surviving spouse continues to manage the account

Tenants in common- TIC

• Ownership provides a deceased tenant’s interest in the account is retained by that tenants estate and not passed to the surviving tenant
• tenants should have an agreement as to what percentage of the account is owned by who
• if no agreement was executed it is assumed the account is owned equally
  • the deceased portion of the account is identified and must be distributed through the accounts estate
  • this account will remain Frozen until the required estate paperwork was received and processed

transfer on death

• The designation that an owner may add to an account that allows the owner to pass all or a portion of account to a named beneficiary at death
  • this account avoids probate because estate law is bypassed
  • In a case of a joint account transfer on death becomes effective after the death of the last surviving tenant

Power of attorney

• A person who is not an owner has given Authority or the account
  • customer must file written authorization with broker-dealer giving the person access to the account
  • full power of attorney or limited power of attorney– granted to a person such as a representative or attorney not a firm
  • power of attorney is canceled upon death of either party
  • granting power of attorney does not take away account owners authority to manage the account
    • full power of attorney- grants appointed person the power to deposit or withdraw cash or securities and making investment decisions for the account
    • have the same power over the account as the owner
      • a registered representative having full power of attorney on a customer account is highly unusual– most firms would not approve this appointment
    • limited power of attorney– a lot of the appointed person to have some but my total control
      • document specifies the level of access
      • also called limited trading authorization allows entering of buy and sell orders but no withdrawal of assets
      • common use of limited power of attorney is a spouse granting limited power of attorney for an IRA account
    • durable power of attorney– power of attorney ends with death of either party

What are different types of business accounts?

• Business accounts are open to hold the assets of a business
• sole proprietor account, partnership account, corporate account
• sole proprietor account- effectively the property of the business owner- may have a business name associated with it in addition to the owner’s name
  • DBA account- stands for doing business as
  • checks deposited in the account can be made payable to the account owner or the business name
• partnership account- unincorporated association of two or more individuals
  • partnership must have a written partnership agreement and an authorization form from the partners– stating which Partners can make transactions for the account
  • Amended partnership agreement- similar to a corporate resolution– must be obtained each year of changes are made
• corporate account– corporations may desire to open a brokerage account
  • turn must obtain a copy of the corporate charter, as well as corporate resolution
  • Charter is proof that the corporation exist
  • resolution authors both the opening of account and the officer is designated to enter orders
  • the corporate resolution is the resolution of the board of directors
    • resolution must contain
      • business is legal right to open an investment account
      • indication of limitations that the owners, stockholders, a court, or any other entity is placed on securities and wish the business can invest
      • the individual who represent the business in transactions involving the account

trust accounts

• A trust is a way to hold assets that allows for greater flexibility in assigning the different aspects of ownership
• If you own something you legally possess it and have certain rights
• you can choose how the assets will be used and who benefits from the asset
• assets held in trust belong to the trust
  • Assets are placed into the trust by a grantor- ( or settlor)– the person who owns the asset
  • The settlor May appoint a trustee, whose job it is to manage the assets for the beneficiary
  • the beneficiaries selected by The grantor

what is a living trust?– a trust that is created and funded by the grantor During their lifetime is called a living trust

• Decedent trust – Funded by a will, or other estate process All sets are placed in the trust after the owner has passed away
• revocable trust- most living trust may be modified or completely revoked
• as long as a grantor is alive the trust may be modified
• the Assets in the trust are still considered part of The grantors assets and will be included in the estate
• In a revocable living trust it is common for the grantor to be the trustee and the beneficiary

The trustee of a trust has a fiduciary duty to manage the trust for the benefit of the beneficiary

What is a custodial account?

• the custodial account is an account set up for a minor established under the uniform gift to minors Act
• these accounts require an adult to act as custodian for a minor
• any kind of security or cash may be given to the account without limitation
• Any assets given to a minor are managed by a custodian and so the minor reaches the age of maturity
  • custodian has full control over the minors account and can
    • buy or sell securities
    • Exercise rights or warrants
    • liquidate trade or hold securities
• a custodian may also use the property in the account in any way you deem proper for the minors support– education, maintenance, General use, benefit
  • this account is not used to pay expenses like parental responsibilities of raising a child
• registered Representatives must know the following rules of custodial account
  • An account may only have one custodian and one minor
  • only an individual can be a custodian for a minor account
  • a minor can be the beneficiary of more than one account
  • a custodian may serve from more than one account as long as each account only benefits one minor
  • The donor of Securities can act as the custodian- or can appoint someone else
  • unless they are acting as custodian– parents have no legal control over a custodial account
• representative must ensure that the account application contains
  • the custodian name,
  • minor name and social security number,
  • the state in which the account is registered
• no documentation of custodial rights or Court certification is required
• any Securities in the custodial account must be for the benefit of the minor and registered in a way that custodial relationship is evident
• The minor is responsible for any and all taxes on the account
  • it is the legal guardian responsibility to see that the taxes are paid
• the fiduciary is charged with fiduciary responsibilities when managing the account
  • certain restrictions have been placed on what is proper handling of the Investments
    • open and managed as cash accounts only
    • Cannot purchase Securities in an account on margin- or pledge them as collateral
    • and reinvest all cash proceeds, dividends, and interest within a reasonable time
    • cash proceeds from sales may be held in a non interest bearing account
    • investment decisions must take into account minors age and custodial relationships
    • options may not be bought in a custodial account
    • stock subscription rates must either be exercised or sold
    • custodian May loan money to an account may not borrow from it
    • custodian may be reimbursed for expenses incurred in managing the account, as well as compensation
    • custodial accounts are under a minor social security number and tax. Minor tax rate
  • The beneficiary dies- the Securities in the account passed to the minors Estates, not the parents or custodian
• two types of custodial accounts
  • UTMA VS UGMA
  • UTMA- allow for Real Estate to be titled in the custodial name
    • held in custodial name until beneficiary turns 25

accounts with a fiduciary

• Fiduciary is any person legally appointed and authorized to represent another person, act on their behalf, and make decisions necessary to the management of the account
• such as
  • a trustee designated to administer a trust
  • an Executor designated in decedent’s will to manage the Affairs of the estate
  • an administrator appointed by the court to liquidate the estate of a person who died- without a will
  • the guardian designated by the court to handle a Minor’s affairS until the minor reaches the age of majority, or two handle and incompetent person’s affairs
  • a custodian for a minor
  • a receiver in a bankruptcy
  • a conservator for and incompetent person
• any trades a fiduciary enters must be compatible with the objectives of the underline entity
  • the registered representative must be aware of the following rules
    • proper authorization must be given
    • necessary documents must be filed and verified with broker-dealer
    • speculative transactions are not permitted
    • margin accounts only permitted if authorized
    • prudent investor rule requires fiduciary to make wise and safe Investments
    • States publish a legal list of Securities approved for fiduciary account
    • may not share in the accounts profits but may charge a reasonable fee

a trust must specifically allow for margin in order to open a margin account

what is an education IRA?

• Coverdell education savings account- educational IRA
  • allows after tax contributions of up to $2,000 per student per year for children younger than age 18
  • Contribution limits may be reduced or eliminated for higher-income taxpayers
  • no tax deduction
    • distributions are tax-free as long as the funds are used for qualified education expenses
    • nonqualified distributions are subject to Income Tax Plus 10% penalty
    • if a student account is not depleted by age 30 the funds must be distributed to the individual subject to income tax with a 10% penalty or rolled into an education Ira for another beneficiary
  • coverdell education savings account is not as popular as 529 plan due to the small contribution Limit
• 529 plan
  • a 529 plan is a specific type of education savings account and available to investors
  • these plans allow money to be saved to be used for qualified expenses for K -12 and post-secondary education
  • qualified expenses include tuition at elementary or secondary public, private, or religious school, for up to $10,000 per year
  • Defined as a municipal fund security
    • sales of these plans must be preceded by an official statement- similar to a prospectus, in the same way other Municipal Securities sales would be
  • there are two basic types of 529 plans– prepaid tuition plan for State residents, and savings plan for residents and non-residents
    • The pay plans allow a resident donors to lock in current tuition rates by paying now for future education costs
    • the Prepaid Plan provides protection against inflation
  • a more popular option is a college Savings Plan– which allows donors to save money to be used later for college expenses
• money placed in a 529 College Savings Plan has invested into units of a separate account, not tears of a mutual fund
  • any adult can open a 529 plan for a future college student
  • Donor does not have to be related to student
  • donor can invest a lump sum or make periodic payments
  • when the student is ready for college the donor can withdraw the money needed to pay for qualified education expenses
    • Tuition, books, Room & Board
  • contributions are considered gifts under federal tax law
  • Runnings accumulate on tax-deferred basis
  • withdraws are tax-free Federal level if used for qualified education expenses
• if a customer wants to open an out-of-state plan– you must advise them certain tax advantages such as the end state tax deductible may not be available to out-of-state donors
  • if beneficiary does not need funds for school there are no tax consequences if the donor changes the beneficiary to another member of the family
• overall total contribution levels can vary from state-to-state
  • no annual contribution limit
• assets remain under donor control
• no income limitations
• account balances left unused may be transferred to related beneficiary
• no age limit
• rollovers permitted from one state plan to another state plan once a year

Unit 23- qualified plans

Individual Retirement account- IRA

• Create it as a way of encouraging people to save for retirement
• all employed people regardless of covered by a qualified corporate retirement plan may open and contribute to an IRA
• IRA has are not considered qualified plans for by the i r s
• qualified plans require an employee sponsor
  • however IRA has the same rules and restrictions
  • think of them as a self sponsored qualified plan– but technically they are not qualified

qualified plans allow their earnings in the account to grow tax-deferred

• individuals making a contribution to an IRA can take a tax deduction if certain criteria is met
• If not actively participating in employer’s 401 k plan the full amount of the contribution to the IRA is deductible
  • the tax deduction gradually phases out as the taxpayers adjusted gross income columns
  • exact income levels at which tax-deductible contributions are prohibited because these levels are raised each year
• Contributions to IRA is made out of earned income

traditional IRA

• Contribution– an eligiable individual may make contributions up to a maximum dollar amount– provided the this contribution does not exceed earned income for the year
  • the dollar cap is increased by catch-up amount for individuals aged 50 and older
  • currently the catch-up amount is $1,000
  • contributions may be made for a tax year as late as the first filing deadline– April 15th
• Investment- within an IRA Investments can be made in stocks, bonds, investment companies securities, u.s- minted gold and silver coins
  • certain Investments are considered ineligible for use in IRA– like collectibles–
  • Life insurance contracts may not be purchased as an IRA
• although life insurance is not allowed within IRAs annuities are
  • investments generally considered appropriate
    • Stocks, bonds , mutual funds, unit Investment Trust, government securities, u.s. government issued gold and silver coins
  • Certain practices are considered inappropriate
    • short sales
    • speculative options.
    • Tax exempt Municipal securities
    • margin account Trading
• Rollover- when a customer with drawers and takes possession of Ira assets, then return the assets back to an IRA within 60 calendar days
  • 60 calendar days not 2 months
• one rollover per rolling year– not per IRA and not per calendar year
• transfer– a customer may transfer Ira assets from one IRA account to another
  • this is called custodian to custody and transfer
  • no limit to the number of times that customer may do a transfer
  • customer move money from employer plan ( 401k) to IRA this is called a direct rollover
• Withdrawals– distributions May begin without penalty after age 59 and a half
  • added to ordinary income for tax purposes
  • before age 59 are subject to 10% penalty and income tax
    • exceptions to the penalty
      • death of the owner, disability of the owner
      • , first time home buyer
      • education expenses for taxpayer, , spouse , child
      • medical premiums for unemployed
      • medical expenses

required minimum distribution– RMD

• • required beginning in the year the account owner turns 72
  • annually by December 31st
  • Amount of RMD paste on the account values at the end of the previous year
    • the account holder may choose which account to take the distribution problem
  • the first RMD may be delayed until April first of the year after the account holder turns 72
    • if it is delayed there will need to be a second distribution in that year by December 31st
  • if an account holder fails to take the RMD by the required date, the difference between any with drawn and RMD requirement will be subject to 50% penalty

Roth IRA

• • introduced 1997– 1997 tax payer Relief act
  • principal sponsor Senator William Roth
  • variation of traditional IRA
• Contributions– same as traditional IRAs
  • Customer cannot contribute the maximum and both traditional and Roth IRA
    • contribution must come from earned income
    • not deductible from current income
  • eligibility to contribute to Roth IRA is phased out at higher income limits
  • no age limit for contributions to Roth IRA
    • must be from earned income
  • Investments– same limitations as traditional IRA
  • roll over– rollover rules are the same
    • only one roll over per rolling year, per person
    • come out and do a roll over in a traditional, and roll
  • Transfer– transfer must be from Roth account to Roth account
  • Withdraws– distributions is where Roth shines
    • Qualified Distributions are tax-free
    • nonqualified distribution of income or games is taxed as ordinary income subject to a 10% penalty

For distribution to be qualified- account holder must have held a Roth IRA for at least 5 years before the distribution, and must be 59 1/2 or older

• Exceptions to the age limit
  • Death
  • Disability
  • first-time home purchase
• no required minimum distribution rule– can leave the money in the account until they die
• suitability– Roth IRAs are considered a good way to save for retirement for those who are younger, and those in lower income tax brackets

defined benefit pension plan- defined benefit pension plan to find within the plan document the benefit will pay the retirees

• often just called a pension plan
• Pension plans determine a benefit that retirees receive based on years of service, age salary
• Employers use the service of an outside firm to determine how much the company needs to contribute to the plan to have sufficient assets to meet the benefit payments
• employers are required to make the payments as defined in the plan
  • placing investment risk on the company
• Pension plans from employers pay a fixed benefit
  • when the employee begins to collect benefits the amount will not change, the

defined contribution plan- Define the amount that may be contributed to the plan

• employees with these types of plans will have a balance they must invest in a mix of Securities as defined within the plan
• at retirement employees may take possession of the Assets in the account
  • often transferring the assets to an IRA for distribution during retirement
  • employers may be required to contribute to the plan depending on the type of plan and specifics

 

Unit 24 account features

The cash account is the basic type of investment account

• Anyone eligible to open an investment account can open a cash account
• and a cash account a customer pays in full for any Securities purchased
  • payment is expected by the end of the day on the settlement date
  • corporate and Municipal securities- this is the second business day
  • Regular way settlement is industry-standard enforced by self-regulatory organization
  • The federal government also has an expectation for payment under Federal Reserve regulation t
• Regulation t- payment must occur no later than two business days after the standard settlement.
  • Few broker-dealers will tolerate customers that do not respect the regular way settlement rules
  • Corporate stock is purchased in a cash account and it will settle the regular way (t +2)
  • certain accounts must be opened as cash accounts– ( Accounts that have contribution limits like IRAs and other retirement plans) and custodial accounts UTMA and UGMA
• Margin buying
  • trading on margin– allows customers to increase their trading Capital by borrowing cash or Securities through their broker-dealer
  • two types of margin accounts- long and short
  • in a long margin account customers purchase Securities and pay interest on the money borrowed until the loan is repaid
  • in a short margin account stock is borrowed and then sold short– enabling the customer to profit if it’s value declines
  • all short sales must be executed and accounted for in a margin account
  • stock can be borrowed from several sources– for short sales in a margin account
    • the member firm executing a short sale on behalf of the customer
    • margin customers of that member firm
    • other member firms
    • specialized companies known as stock lending firms
    • institutional investors
  • the most common source is another customer’s margin account– but permission must be given by signing a consent to a loan agreement
  • margin advantages for customers
    • purchase more Securities with lower cash
    • leverage the investment by borrowing a portion of the purchase price
      • leveraging magnifies the customers rate of return– or the rate of loss
    • trading costs– known as commissions, or interest costs are applied for the funds borrowed
  • margin advantages for broker-dealers
    • margin loans generate interest income for the firm
    • margin customers trade larger positions because increase trading capital, generating higher commissions for the firm
• hypothecation and rehypothecation
  • hypothecation is pledging of customer Securities as collateral for margin loans
    • a hypothesis an agreement must be signed by a customer who wants to open a margin account
    • this agreement is contained within the margin agreement
    • so customers give permission for this process to occur when they sign margin agreements
  • typically a broker-dealer will not use its own cash to lend for margin
    • they borrow that money from the bank
    • a loan from the bank is secured by a portion of the stocks purchased on the margin
    • after the customer pledges a Securities to the broker-dealer by signing the Margin agreement, the broker-dealer re-pledges ( rehypothecates) the Securities as collateral from a loan from the bank
    • regulation u- oversees the process of a bank lending money to broker-dealers based on customer Securities having been pledged as collateral for the loan
• firms cannot commingle customer Securities with Securities owned by The Firm
  • however they can commingle one customer Securities with another customer securities
    • the customers have already signed the hypothecation agreement
• accounts that may have a margin feature-
  • individual and joint accounts may be margin accounts- once all the required forms are submitted
  • corporate and partnership accounts may have margin
    • however a partnership agreement must be checked to see if prohibition against margin exists in the document
  • trust and other fiduciary accounts– require the trust or similar document to be checked
    • for this type of account to have margin the document must specify it
    • if it does not- margin is not allowed
• all margin accounts need to be approved by a principal of the firm before the first trade

three forms for a margin account– are all three forms associated with adding margin borrowing to an account

• Credit agreement– discloses the terms of the credit extended by the broker-dealer
• hypothecation agreement– allows the Securities to be pledged for the loan and gives permission for the broker-dealer to re pledge customer merge and securities as collateral
  • The Firm rehypothecation eats customer Securities to the bank- and as the basis of the loan
• consent to loan agreement– don’t consent form gives permission to the firm to loan the customer margin Securities to other customers or broker dealers–
  • to facilitate short sales were security need to be borrowed
• to open a margin account and is mandatory the customer signs the credit agreement and hypothecation agreement
• must be provided with the risk disclosure document– and this document must be provided annually
  • risks associated with margin Trading
    • customer is not entitled to choose which Securities can be sold at the maintenance calls not met
    • customers can lose more money than initially deposited
    • customer is not entitled to an extension of time to meet a margin call
    • firms can increase margin requirements without advance notice

which Securities are eligible for margin borrowing?

• Exchange listed stocks, Bonds
• NASDAQ stocks
• OTC issues approved by the Federal Reserve Bank for margin
• Lawrence

the following cannot be purchased on margin and cannot be used as collateral

• Options– calls and puts
• Rights
• non-national Market securities
• insurance contracts

the following cannot be bought on margin– but can be used as collateral after being held for 30 days

• Mutual funds

which Securities are exempt from Federal Reserve Bank regulation t

• US t bills, t notes, t bonds
• government agency
• Municipal
• exempt Securities are bought or sold in the margin account– they require initial deposit requirement
  • add a minimum must follow maintenance requirements established by finra

margin– the amount of equity that must be deposited to buy Securities in a margin account

marginable– refers to Securities that can be used as collateral in a margin account

Regulation t– customers are required to deposit a minimum account of equity for their first purchase in a margin account

• Regulation T states that a deposit of 50% of the market value of the purchases required
• FINRA has an initial requirement of $2,000, or 100% whichever is less
• the customer is required to deposit the greater of the regulation t or the FINRA minimum

What is a maintenance call?

• The Stock’s value drops the customers equity in the account will drop
  • if the customer is equity jobs below 25% of the accounts market value, The customer receives a maintenance call
    • the customer is required to deposit additional assets to bring the equity in the account up to the 25% minimum
    • if a customer fails to make the required deposit the broker-dealer May liquidate assets from the account to bring the accounts Equity to 25%
    • The FINRA minimum maintenance equity on a short margin account is higher 30% or $2,000
    • a broker-dealer can have a higher minimum– call the house call

most customer accounts are commission base– the Commissioners charge for each transaction

a fee-based account would be appropriate for customers who trade frequently

Unit 25 AML / BSA

What is money laundering?

money laundering is defined as the process of creating the appearance that money originally obtained from criminal activity, such as drug trafficking or terrorist activity, came from a legitimate source.

• The Bank Secrecy Act- Establishes with the US Treasury Department as the lead Agency for developing regulations in connection with anti-money laundering ( AML)
• before September 11th 2001 money laundering rules were concerned mostly with the origin of the cash
• after September 11th- with the passage of the UAS PATRIOT ACT- Regulators became just as focused on concern where the funds are going
  • The idea is to prevent “ clean money” ( money that has been laundered) from being used for “ dirty” purposes ( such as funding terrorist activities)

three stages of money laundering

1. Placement- the first stage- funds are assets are moved into the laundering system ,Illegal funds are the most susceptible to detection
2. Layering- conceal the source of the funds are assets– a series of layers of transactions are generally numerous and can vary in form and complexity.
   1. often the transactions do not make business or investing sense, but they make perfect sense if you are trying to obscure the source of the funds
3. Integration- final stage of money laundering – Illegal funds are commingled with legitimate funds In what appeared to be a legitimate business concerns. this can be accomplished using front companies operating on a cash basis, Import and Export companies, or other businesses. at this point funds make their way back to the criminals and a way that appears to be a legitimate source of income

what is FINCEN?

• Financial crimes enforcement Network- a bureau of the US Treasury
  • collects and analyzes information about financial transactions to combat money laundering, domestic and international terrorist financing, and other crimes
  • as part of the treasury– not the Department of Justice– FINCEN does not have a enforcement branch
  • better understood as an intelligence agency– using the information available in the financial system to detect illegal activity

currency transaction report ( CTR)

• The bank secrecy act requires broker-dealers to report any currency received in the amount of more than 10K on a single day
• paying for purchase Securities with currency is not prohibited– many firms do permit this
• failure to report can result in fines of up to $500,000, 10 years in prison, or botH
  • records relating to the filed reports must be retained for 5 years
  • the report must be filed within 15 days of receipt of the currency
  • this is a regulatory effort to deal with money laundering
  • there are two federal agencies and power to deal with this abuse
    • Federal Reserve
    • you you a
• designing deposits to fall under the 10K radar is a prohibited activity known as structuring
  • financial institutions have systems in place to Monitor and recognize these attempts
• currency transaction reports involve deposits of currency– not checks, or wire transfers
  • not always necessarily US dollars

suspicious activity report (SAR)

the USA Patriot Act requires firms to report to FINCEN- Financial crimes enforcement Network– when there is an event, transaction, or series of events or transactions that appeared to be questionable

• Requires firms to report to fincen- any transaction that alone involves at least 5K in funds or other assets if the firm suspects that it falls within one of the following four classes
  • The transaction involves funds derived from legal activity
  • transaction is designed to evade requirements of Bank secrecy Act
  • transaction appears to serve no business or lawful purpose
  • transaction involves the use of the firm to facilitate criminal activity
• firms must file a suspicious activity report within 30 days
  • copies of each specific activity report must be retained for five years
  • remain confidential
  • the person involved in the transaction who is the subject of the report must not be notified
  • if subpoenaed The Firm must refuse to provide the information- and report to FINCEN the request unless the disclosure is required
  • report to the SEC, or other law enforcement Authority
• in addition the USA Patriot Act requires firms to make and retain records relating to wire transfers of 3 K or more
  • information collected is the name and address of the sender and the recipient
  • amount of the transfer
  • name of the recipient financial institution
  • account number of recipient

a pattern of cash deposits overtime can trigger a suspicious activity report

for example if a customer deposits $1,000 each week for many weeks in a row this might constitute suspicious activity and filing a suspicious activity report would be appropriate

firms are required to designate a chief anti-money laundering officer

• There is no requirement for this person to be registered as a representative or a principal
• the anti-money laundering officer will establish internal compliance procedures to to detect abuse
• There are red flags that might suggest possibility of money laundering
  • is red fog should be reported to the principal designated to receive reports immediately

examples of these red flags

• • • Customer exhibiting a lack of concern regarding risk commission or other transaction cost
    • customer attempting to make frequent or large deposits of currency or cashier checks
    • customer making a large number of wire transfers to unrelated third parties
    • customer engaging and excessive journal entries between unrelated accounts
    • customer who designs currency deposits/ withdraws to fall under the 10K cash transaction report filing threshold- known as structuring

Office of foreign assets control (OFAC) – publishes and maintains a list of individuals and companies who are under controlled, or who are acting on behalf of targeted countries, individuals, groups or entities, designated under programs that are not country-specific– such as terrorists, and those trafficking narcotics

• When individuals or groups appear on the specially designated Nationals list- their assets are blocked
  • u.s. persons and businesses which INCLUDE registered representatives and broker-dealers are prohibited from dealing with or conducting business with them
  • Customers must be advised before the account is opened that the firm is requesting information to verify their identity
• u.s. Citizens are prohibited from doing business with anyone on the office of foreign assets control specially designated Nationals list end should check the list to ensure they are not in breach of the new law if there is any uncertainty
  • businesses should conduct checks before establishing a relationship with person or entity
  • the office of foreign assets control means this specially designated Nationals list in a searchable format on the treasury website

 

Unit 26 Notes- General Suitability

FINRA and other SROs Require Brokers to know their customers

• This implies understanding customers financial status ( net worth and net income)
• Investment objectives
• facts essential and making suitable recommendations

it is a registered Representatives responsibility to perform due diligence to determine the validity of customer information

• Registered representative must have a reasonable basis to believe a transaction or investment strategy, involving a security or Securities is suitable for the customer
• recommendations are advice to invest in or employ investment strategies
  • to hold, sell, as well as suggestions to Market sectors, day trading, or divesting of an asset to make funds available to purchase securities
• Customer- excluding other Brokers and certain potential investors
  • rules do not apply if recipient of advice is not currently a client/ and neither the representative nor the firm receives direct or indirect compensation as a result of giving advice
• Financial considerations– your customers Financial circumstances are an important part of understanding what is or is not a suitable investment for them
  • easily Quantified as an amount of money- either or a stream of payments
  • examples of financial circumstances are
    • Income
    • value of their home
    • liquid net worth
    • debt payment
    • Total debt

tolerance for risk and investment goals

• • a customer’s risk tolerance and investment goals are important considerations that will shape their portfolio
  • do you understand a customer’s attitude about investment Alternatives the representative or advisor should ask the following questions
    • what kind of risks can you afford to take
    • how liquid must your Investments be
    • How important are tax considerations
    • are you seeking long-term or short-term Investments ( investment Horizon)
    • what is your investment experience
    • what types of Investments do you currently hold

what is an investment recommendation?

• • when a registered representative provides information that a reasonable person would view as suggesting a course of action regarding a security, class of investment, or an investment strategy– that person is making a recommendation
  • a person making a recommendation should consider the circumstances of communication, knowledge and sophistication of the recipient
  • lack of an intent to provide a recommendation does not prevent a communication that meets the above criteria from being as such

as a first rule and Investments primary purpose should align with the customer’s primary objective

• The next step is to consider the customers tolerance for risk– with more conservative Investments more appropriate for those with a low tolerance for risk– and more aggressive Investments with a higher tolerance for risk
• any other circumstances and impacts the investment decision

Unit 27- communication with the public

The rules about Communications with our customers are designed to protect investors and remind us of our duty to them

the purpose is to ensure that the information we provide is fair balance and complete

• Communication with the public
  • FINRA holds broker-dealers to General standards regarding member firm Communications
  • All member Communications must be based on principles of fair dealing in good faith
  • must be clear and not misleading within the context they are
  • Fair and balanced regarding risks and benefits
  • omission of materials fax is not permitted
    • false exaggerating claims or misleading statements
  • no communication should imply that past performance will be repeated
  • FINRA mandates that members must consider the nature of the audience
    • should provide details and explanations appropriate
• three categories of communications
  • institutional Communications
  • retail communication
  • Correspondence
• institutional communication– means any written communication made available to only institutional. Investors
  • does not include members internal Communications ( memos )
  • examples of institutional investors
    • another member firm or registered representative
    • a bank
    • savings and loan Association
    • Insurance Company
    • registered Investment Company– mutual fund
    • employee Benefit Plan
    • government entity or subdivision
    • person acting on behalf of an Institutional Investor
    • entity with 50 million or more of total assets
• Retail communication– any written communication that is distributed or made available to more than 25 retail investors- Within a 30 calendar day period
  • A retail investor is any person other than an Institutional Investor
• the requirement is that a firm sends a copy to finra for filing, this is not an approval process Justified okapi

the rules require that all retail Communications receive principal approval before use or filing with finra

Correspondence- any written communication that is distributed or made available to 25 or fewer retail investors within a 30 calendar day period

• Each firm must establish if it will require principal approval or allow for post use of approval
• If a broker-dealer does not require prior principal approval it must provide and document Education and Training of the associated people regarding the corresponding

social media use– regarding the use of social media for online activities firms are required to monitor the business-related social media presence of all Representatives

contents such as a Blog website must be approved and registered with the principal before use

• Sometimes may be required to be filed with FINRA
• no requirement to pre-approve individual posts with an online interactive forums but firms must have policies and procedures in their written supervisory procedures concerning these activities
• Representatives May use social media to engage with existing customers and potential clients

if you’re not an Institutional customer you are a retail customer

cold calling rules of TCPA ACT 1990

The telephone consumer protection act of 1991 was administered by the Federal Communications Commission it was an acted to protect consumers from unwanted telephone solicitation- TELEmarketing

• Telephone solicitation is defined as a telephone call initiated for the purpose of encouraging the purchase of an investment in property goods or services
• this act governs commercial calls recorded solicitations from Auto dialers and solicitations to fax machines and modems
• The basic rules under the telephone consumer protection act
  • anyone making cold calls informs prospects of their name the company name and the company’s telephone number or address
  • solicitation only occurs between 8 a.m. and 9 p.m.
  • no calls 2 numbers on the company or federal Do Not Call list
• exempting calls from
  • calls made the parties in the caller has established a business relationship
  • made on behalf of a tax-exempt nonprofit organization
  • Not made for commercial purpose
  • Made for a legitimate debt collection

two types of Do Not Call list

• If your organization does cold calling you need to do this-
  • maintain the Do Not Call list- people who don’t want to be called
  • Institute of written policy on maintenance procedures for the do-not-call list
  • train representative how to use the list
  • in Ensure that representative of egg knowledge and immediately record the names and telephone numbers of prospects who don’t want to be called
  • telemarketers should not call a prospect from the time they asked not to be called
  • update that list every 30 days
• the Federal Trade Commission maintains the National Do Not Call list, telemarketers are required to check the numbers on that list
  • before making a solicitation representative must check the number on the do-not-call list
    • if the number is on the list don’t call it

firms are permitted to hold mail for a customer

• The Firm receives written instructions that includes the time.– Up to 3 months
• for an acceptable reason such a safety or security concerns
• inform the customer of alternative method the customer may use to receive account activity
  • such as email or the member form website
  • member firm verifies that the customers instructions still apply
  • member firm must attempt in a timely manner to provide important and column formation
• number for must ensure customers mail is not tampered with
• holding mail as a courtesy
• Regulation S-P – was enacted by the SEC to protect the privacy of customer information
  • in particular the regulation deals with non-public personal information
    • customer social security number
    • account balance
    • transaction history
    • information collected through Internet cookie
  • confidentiality of information
    • right to disclose unaffiliated third parties non-public personal information
    • notice must provide a customer reasonable means to opt out of this disclosure
    • reasonable opt-out means providing the customer at The Forum with check off boxes and a prepaid return envelope
    • or electronic means to opt out
    • toll-free telephone number
  • regulation SP means privacy of consumer financial information– it was designed to protect the customers non-public personal information
  • firms must provide every customer with the Privacy notice at the time the relationship is first established
• Safeguard requirements
  • obligation of financial institutions to safeguard customer information relating to all forms of existing and developing technology
    • includes but not limited to securing desktop laptop computers and encrypting email
  • under regulation s p a customer has an ongoing relationship, if the relationship is one time and limited their referred to as a consumer

business continuity plan– member firms need to create and maintain a business continuity plan to deal with the possibility of a significant business disruption

• The plan must address consequences of the event, including but not limited to
  • data backup and Recovery– hard copy and electronic
  • alternate communication between firm and customers
  • alternate alternate community alternate communicate employees
  • alternate physical location of employees
  • communication with regulators
  • prompt consumer access to Fun Zone Securities in the event that the firm is unable to continue business
• firms must designate a member of Senior Management to approve update and conduct an annual review of the plan
  • finra requires firms to provide them with the names of 2 emergency contact people
  • they both must be Associated persons and at least one must be a principal/ part of senior Management

they must be familiar with the firm’s operations

• could be the firm attorney or accountants

firms must disclose with customers how it will respond to significant events of varying scope

• this disclosure must be made in writing so customers at the time of account opening, put it on the firm website, mail

Unit 28 – record keeping requirements

Most important rules that protect both the customers can the broker dealers are the record-keeping rules

• keeping good accurate records is vital to maintaining the Public’s trust in our firm And its Representatives
• SEC rules mandate which records must be prepared by members, The records must be prepared, and for how long the records must be retained
• paper media and digital media
  • Such storage material must have the capability to maintain records and non rewritable and non erasable format

records that are kept for the life of the firm– redeemed as long as the firm exists

• • Indefinitely
  • partnership agreement- foundational document of a partnership.. There is no written partnership agreement.
• corporate charter are Articles of Incorporation– condition of document of a corporation.. if there is no Charter there is no Corporation
• stock certificate books– an actual book where the certificates are held until they are issued
  • a record of who the certificates are issued to is also found in the book
• Minutes– a record of the meetings of the board of directors
• Amendments– amendments to any of these records are kept with the original record
• organizational records– any other records related to the foundations of the firm an example would be form BD- the registration application for a broker-dealer

records maintained for six years

• Blotters– a bladder is a record of original entry relating to the purchase and sale of securities, the receipt and delivery of securities, the receipt and disbursement of cash
  • reflect transactions of the trade date must be prepared no later than the following business day
• General ledger– contains accounting records of the firm’s assets and liabilities, as well as Net worth account
  • general ledger must be prepared as frequently as necessary to determine compliance with the net capital rule– no less than monthly
• stock record– stock record shows all Securities held by the firm, the ownership of those securities, end where the Securities are held
  • must be posted no later than the business day after the settlement date
• customer Ledger– customer letters are customer statements
  • cash accounts and margin accounts are shown on separate Ledger’s
  • what does must be posted no later than the settlement date
• designation of principles– when an associate is appointed to a principal position and what areas they will oversee

these records are maintained for 4 years

• Written complaints must be retained for four years after resolution
• normally maintains that the office of supervisory jurisdiction- for the office where the complaint originated
• if a complaint was delivered to the firm’s headquarters the record may be retained their

finra and SEC regulations apply to written complaints

written means any communication that has letters organized into words on paper email text instant message tweet social media post

Most firms have procedures for verbal complaints but only written complaints have regulatory standing

these records are maintained for three years

• Everything else must be retained for three years after I last use
  • Advertise
  • monthly financial report
  • Form U4 and U5 and fingerprint cards for terminated personnel
  • customer confirmations
  • Order tickets
  • other Ledger’s with Securities borrowed and securities loan, money is borrowed money is loaned, dividends and interest received
  • list of every office where each Associated person regularly conducts business
  • Associated person’s compensation record
  • firm’s compliance and procedures manual

related categories

Other