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264 Cards in this Set

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Uniform Securities Act
Blue Sky Laws, A model Law
Administrator
The USA, sets minimum qualitifcation standards for each state.
The state secturities administrator is the top securities regulator within the state.
Person
Any entity that can enter into legally binding contracts suchs as: Individual or Natural persons; Partnerships & Corporations; Federal & State Governments; Churches or Non Profit Organizations
Jurisdiction of Administrator
The state securities administtator has jurisdiction over securities transactions which: Orginated with their state; Are directed into their state; Are accepted in their state.
Registration of Broker Dealers
It is unlawful for a broker dealer to employ any agent who is not properly registred under the Uniform Securities Act (USA). If the state securities administrator takes action against a firm's registration and issues a cease and desist order or suspends or expels the firm, all agents registered with that firm are affected. A broker dealer must reister officers and directors of teh firm as agents in the state if they manage client accounts or supervise agents.
Relocation of a Customer
An agent who has a customer that changes his state of residency will require the agent to register in the customer's new state. The agent may continue to conduct business with the client while their registration is pending for up to 60 days.
Temporary Residency Rule
An agent may continue to conduct business with existing customers with less than 30 days temporary residency in the state (on vacation or business trips).
Consent to Service of Process
By signing the consent to service of process, the applicant appoints the administrator as their attorney in fact and allows the administrator to receive legal papers for the applicant. Any legal papers received by the administrator will have the same force and effect if they were served on applicant personally
Consent to Service of Process
(2)
The state securities administrator may issue a cease and desist order without a hearing . If the cease and desist order is appealed the appeal does not constitute a stay of the order.
Annual Renewal
All registrations expire Annually on 12/31. All state filing/registration fees must be paid promptly. Failure to pay will cause state registration to be cancelled. A firm acquiring ownership of a broker dealer will require the successor firm to file an application but is not required to pay filing fees.
Annual Renewal (2)
If a registrant pays the required filing/registration fee it does not guarantee that the registration will be renewed. The state must grant a registrant a renewal.
Surety Bonds
A surety Bond is posted by a broker dealer or investment adviser to ensure the firm's solvency in case of legal action. The amount of coverage required depends upon the nature of the business being conducted and varies by state. Firms with significant capital may have the surety bond requirement waived. A deposit of $25,000 of cash or approved securities may be accepted as a substitue for the bond.
Net Capital Requirement
All broker dealers are required to maintain a certain level of net capital in order to ensure that they are financially solvent. A bd's capital requirement is contingent on the type of business that the bd conducts. The larger and more complex the firm's business, the greater the net capital requirement.
Financial Requirements for IA's
An IA must maintain a minimal level of financial solvency. For advisers with custody of customer's cash and securities, the IA must maintain minimum net captial of $35,000. If the adviser is unable to meet this requirement, they may post a surety bond. Advisers who have only limited discretionary authority over customer's accounts need to maintain a minimum of $10,000 in net capital.
No Excessive Requirements
The state securities administrator may not as a condition of registration within the state place any requirement on the applicant that would be deemed excessive. OR Place conditions on any registration that would be more stringent than the requirements of federal registration.
No Excessive Requirements
(2)
The state securities administrator from a neighboring state may not as a condition of registration within the state place any requirement on an investment adviser that would be more stringent than the registration requirements of the adviser's home state.
Record Keeping
All BD's and IA's are required as a condition of state registration to create and preserve accurate books and records for a period of 3 years. Sales literature and advertising must be filed with the administrator
Actions by The Administrator
A state securities administrator may take action to bar, suspend, censure, or restrict the activities of a registrant if the administrator finds it in the public interest, and the applicant or registrant has violated state or securities regulations. An administrator may not fine an applicant who has not been operating within their state.
Actions by The Administrator
(2)
The administrator deeming it is in the public interest is not enough to take action. The applicant must have committed some violation. If the administrator is going to take action against the applicant, it must notify them promptly in writing of their intention and must provide a hearing for the applicant within 15 days of receiving the request for a hearing. An administrator may deem an applicant's registration based on lack of knowledge, training, or experience but a lack of experience, may not be the sole basis for the denial of a registration.
Withdrawal of Registration
A BD, IA or an agent may request that their registration with the state be withdrawn. The withdrawal will become effective 30 days after the administrator receives the request if no revocation or suspension proceedings are in process. The administrator had up to one year after the withdrawal of an applicant's registration to take action against the applicant to suspend or revoke their registration.
Investment Adviser (IA)
Anyone who charges a fee for investment advise or who holds themselves out to the public as being in the business of giving investment advise for a fee.
Investment Adviser Representatives
An individual that offers investment advice or who solicits clients for the employing investment adviser also an officer, director or partner of the firm.
Agent
An individual who represents a broker dealer, an investment advice or an issuer.
Broker Dealer
A firm that engages in the securities business and executes security transactions for its own account or for the account of others.
Blue Chip Exemption
A blue chip exemption is given to the securities of any issuer whose common stock is listed on a US stock exchange.
Company Selling Securities
Selling companies - Registrating through qualifications- Selling securities in home states. Selling in other states
Company Selling Securities
(2)
Need MORE - Companies selling through notification
Company Selling Securities - Federal Exemption
Federal covered exemption only given to NASDAQ NMS Securities
Non -accredited investors
Limited to 10 in any 12 month period
Security - Manual Exemption
A security would be entitled to a manual exemption if the information relating to the issuer could be found in a nationally recognized manual such as Moody's or S&P. The NASDAQ Composite is an index, not a published manual.
Registration Fee
Paid by initial and renewal applications, required by every state, maybe be partially retained by the administrator if the registration is denied or withdrawn
Bank to Bank transaction
Any transaction with a bank would represent an exempt transaction
Direct Participation Programs
Direct Participation Programs are required to be registered as a security with both the SEC and each state that the Direct Participation Program intends to be sold in. Private Placements, Foreign Federal Securities and Credit Union issues are all considered to be exempt securities for registration filings.
Register Securities
All securities sold or offered for sale must be properly registered prior to the offering in each state in which it is to be offered unless: it is exempt, sold in an exempt transaction, a federally covered securities.
Fraud
Any attempt to gain an unfair advantage over another party through the use of deception, concealment, or misrepresentation. The inadvertent or unintentional commission of a prohibited act would be unethical but not unlawful.
Prohibited Practices
It is unlawful for a firm or an agent to engage in any activity that is designed to control or influence a securities price or activity. Some manipulative practices: Capping, Pegging, Wash Sales, matached purchases, Front running, trading ahead, Participating in rings or pool, Selling away
Churning
A violation committed by a Representative who executes transactions for the account of a customer simple to generate commissions for the Representatives
Commingling
Commingling customer's cash and securities with the firm's or agent's securities is prohibited.
When was the CG emblem officially designated?
1927
Company Registration
Company selling securities in its home state for the first time and the 2 year old company who sold securities in 4 other states would be required to register through qualification. Even though the 10 yr old company meets some of the requirements to register through notification, they are selling securities for the first time and in one state only.
Fatality rates have greatly declined as a
result of what Coast Guard mission?
Boating Saftey
Offering of a private placement
The number of non-accreditied investors is limited to 10 in any 12 month period.
Registration application
Paid for all initial and renewal applications.
Required by every state
May be partially retained by administrator if registration is denied or withdrawn
Bank to bank transaction
Any transaction with a bank would represent an exempt transaction
Manual Exemption
A security would be entitled to a manual exemption if information relating to the company could be found in a nationally recognized manual such as Moody's or S&P
Direct Participation Programs
DPPs are required to be registered as a security with both the SEC and each state that the DPP intends to be sold in. Private Placements, Foreign Federal Securities and Credit Union issues are all considered to be exempt securities for registration filings
Securities Sold
All securities sold or offered for sale must be properly registered prior to the offering in each state in which it is to be offered unless itis an exempt security, is sold in an exempt transaction, or is a federally covered security
Agent and customer joint accounts
An agent and a customer may have a joint account if the approved by the firm and the client
Suitablity
A representative must ensure that all recommendations are suitable for the customer based on an investigation of the customer's investment objectives, financial profile, and attitude towars investing. A recommendation to a customer could be profitable yet still be unsuitable if the customer's profile is considered. Firms and agents are prohibited from: making blanket recommendations; failing to state all material facts; making unfair comparisons.
Discretion - Agent
An agent may not exercise discretion without written authority.
Prohibited Practices (2)
Firms and agents are prohibited from:
Accepting orders from a 3rd party not named on the account.
Affecting unauthorized transactions
Not disclosing a customer's written complaints to a principal of the firm.
Sharing in the profit or loss of a customer's account with no investment in the account.
Prohibited Practices (3)
Prohibited -
Spreading rumors
Using flamboyant language
Promising services with no intent or ability to perform
Providing factious quotes
Misrepresenting account status
Painting the Tape
A manipulative act by 2 or more parties designed to create false activity in the security without any beneficial change in ownership. The increased activity is used to attract new buyers.
Arbitrage
An investment strategy used to profit from market inefficiencies, perfectly lawful
Splitting commissions
2 agents may split commissions on a transaction or on an account if both are registered in the state
Prohibited Practices (5)
Commingling customer's cash and securities with the firm's or agent's securities.
Borrowing money or securities from a customer unless the customer is a bank or other lending institution.
If a firm buys research from another party the firm may not present the research as having been created by the firm.
Prohibited Practices (8)
Agent may not: Make false or misleading statements
Imply endorsements or approval of the agent or firm by any regulator.
Use flamboyant language "it's a sure thing"
No guarantee's -
Guarantee
a guarantee may only be made by the government, an insurance company or a parent company may guarantee the obligations of a subsidary
Advisory Contracts
All investment advisor contracts must be in writing and must contain disclosures of:
Length; Services to be provided; Fees to be charged and how they are assessed; The amount of prepaid fees to be returned upon cancellation of the contract; A stmt prohibiting the IA from assigning the contract without the customer's consent; A notification of any changes in the adviser's management; Limits on the adviser's discretionary authority over the customer's account, if any.
Contract may not be assigned without consent.
Custody
Physical possession of cash and securities. An IA with full discretion to withdraw customer cash and securities is considered to have custody
Custody (2)
An advisor also had custody if they charge $500 or 6 months or more in fees in advance of providing advice.
States must approve custody for states registered advisers.
Advisers with custody my advise clients as to location of assets
Jurisdiction of the Administrator
The administrator may issue a cease and desist order if a violation has occurred or if they feel a violation is about to occur
Jurisdiction of Administrator (2)
If the administrator issues a cease and desist order prior to the commission of a violation the registrations of the firm and agents may not be suspended or revoked without providing an opportunity for a hearing
Jurisdiction of administrator (3)
The administrator has subpoena powers and may command that witnesses, books and records be produced.
The administrator subpoena and investigative powers extend to any state, not just their home state.
Administrator may comple a witness to testify
Jurisdiction of The Administrator (4)
If an administrator is going to take action against a registrant the administrator must provide written evidence as the basis for the action and must provide the opportunity for a hearing.
Criminal penalties: $5,000 and/or 3 years in prison
Right of Rescission
If the seller of a security determines that they have made a sale of securities that violates any provision of the USA, the may order the affected parties rescission. All offers of recession must be in writing and inculde an agreement to re-purchase the securities at the original purchase price and must include interest for the time period that the money was invested.
Right of Rescission (2)
If the buyer does not accept the offer of rescission within 30 days, the seller has no further liability with regard to the sale of those securities and the buyer forfeits their right to sue.
Right of Rescission (3)
An investor's acknowledgement that a sale is in violation of the USA is NEVER valid
Statute of Limitations
If a buyer of a security finds the sale of the security violates any of the provisions of the USA, the purchaser has 2 years from discovery of the violation or 3 years from the purchase date, whichever comes first, to take action
Buyer and Seller Rights
Purchasers fo securities have the right to expect to be treated fairly.
If the purchaser feels they have not been treated fairly they may take action within the statute of limitations.
If the seller of a security tries to make the purchaser whole by offering rescission then the purchaser has 30 days to accept
Tombstone advertisment
A syndicate member may only run a tombstone ad announcing an issue and gather interest during the cooling off period.
Member firms charging "higher than ordinary comissions"
A member firm may charge a customer a larger than ordinary commission for the execution of a specific order so long as it is disclosed to the customer. A member firm must always execute a customer's order.
Primary purpose of Uniform Securities Act?
The primary purpose of the Uniform Securities Act is to prevent any fraudulent or misleading practices, to keep the from occuring, and to protect the investor.
The Uniform Securities act covers fraud in which of the following areas
Sale of securities
Purchase of securities
Investment advisory practices
What's required for an offer of rescession?
It be in writing
Exempt Transactions
Sometimes a security that would otherwise have to register is exempt from state registration because of the type of transaction that is involved. Exemptions:
Private placements
Transactions with Institutions
Transaction with fiduciaries
Standards for Investment Advisers
The fiduciary of an IA goes beyond that of BD. The IA is required to develop a client profile when opening the client's account and must updated it regularly as the client's needs change.
Investment Advisory Fees
An IA may receive the following fees:
A fee based on client assets
An hourly fee
A one time fee for devloping a financial plan.
An IA may also receive transaction based compensation for executing orders through a BD
Advisory Client Profiles
IAs are required to make recommendations that are in line with the advisory client's financial needs and objectives. As such the IA must develop a client profile.
Advisory Client Profiles (1)
The adviser should obtain enough information about the customer to ensure that their recommendations are suitable, based on a review of the client's: Investment objectives, Financial status, Income, Investment holdings, Retirement needs, College and other major expenses, Tax bracket, Attitude towards investing
Prudent Man Rule
Fiduciaries are bound by what has become known as the "prudent man" rule: IAs and other fiduciaries may only act for the benefit of their as a prudent person would do for themselves. To ensure fiduciaries, custodians and other fiduciaries do not act too speculatively states have developed a "legal list". The legal list is an actual list of securities that may be purchased by fiduciaries
Requirement to Diversify
Market risk is also known as a systematic risk and itis the risk that is inherent in any investment in the markets.
Nonsystematic Risk
Risk that pertains to one company or industry.
Requirement to Diversify (2)
IA and other fiduciaries must diversify industries and the types of securities in an effect to obtain the best returns while managing the protfolio's overall risk profile
Suitability
A determination that the characteristics of a security are in line with an investor's onjectives, financial profile, and attitudes towards investing
Types of Client Accounts
When an adviser meets with a potential new client the adviser must deterrmine the legal structure under which the client operates. Clients may hold investments in their own name or various entities: Sole proprietorship; C Corp; S Corp; A partnership; limited partnership; A family limited partnership; trust
A limited partnership
Consists of at least one general partner and one or more limited partners. It is duty of the general parner to manage the partnership in accordance with the partnerships objectives. The limited partners put up the investment capital required but may not exercise management or control over the partnership.
Family limited partnership
Often used for estate planning. Parents may place significant assets into a family limited partnership as a way to transfer their ownership. Usually the parents will act as the general partners and will transfer limited partnershp interests to their children. As the interests are transferred to the children the parents may become subject to gift taxes. However the gift taxes will usually be lower than they would have suffered without the partnership.
Trusts
A trust is a legal entity established by a grantor. The grantor is the indivdual who places the assets in the trust. The trust may be revocable or irrevocable. The trustee will manage the trust for the beneficiaries.
Estates
Upon the death of an individual account holder the account will be converted in the estate account. The estate account will be administrator by an executir/excutrix or an administrator who will distribute the assets pursuant to the terms of the Will.
Soft dollar compensation
The term soft dollars refers to the payments made by mutual funds (and other money managers) to their service providers. The difference between soft dollars and hard dollars is that instead of paying the service providers with cash (i.e. hard dollars), the mutual fund will pay in-kind (i.e. with soft dollars) by passing on business to the brokerage.
Who is not an IA?
A bank or S&L; A BD; an agent; a lawyer, accountant, teacher, i.e. people whose services are incidental to their business and who receive a specific fee for those services
Any person exempted by the state administrator or SEC
Publishers of newspapers & magazines
Securities information processors
When is a BD an IA?
An individual who operates as an independent IA may be registered as an agent with a BD.
If the individual prepares financial plans for a fee while operating as an independent adviser this will not require the BD with which the individual is registered to register as an investment adviser.
When is a BD an IA? (2)
If a BD provides a financial planning tool to its clients and does receive a fee for the tool, the BD would not be required to register.
When is a BD an IA? (3)
If a BD employs an agent who maintains a CFP designation this alone would not require the firm to register as an investment adviser
De Minimus Exemptions
To be exempt from registration at the state level the IA must have no place of busines in the state and:
Give advice only to institutions OR
Gives advice to less than 6 clients in any 12 month period.
De Minimus Exemptions (2)
Federally registered advisers are all exempt from registration at the state level
Federal Exemptions
If an IA gives advice exclusively to sophisticated investors such as insurance companies the adviser would be exempt from federral registration
Federal Exemptions (2)
An IA would be exempt from federal registration if the adviser gives advice to 15 or fewer clients inn any 12 month period.
IAs and IARs
If a federally registered advisor who is based in a neighboring state employs an investment advisor representative in the state, the IAR would be required to register with the state, even though the firm is exempt
SEC Release 1092
SEC Release 1092 expanded the definition of who must register as an IA. IAs have been expanded to Sports and enternatinment agents, Financial planners, Pension consultants
SEC Release 1092 (2)
Individuals who advise pension funds on the merits of portfolio managers or who act as pension consultants must also register as investment advisers
Advice to Institutions
Institutions who receive advice from IAs are deemed to be sophisticated investors. As such the disclosure and protections offered to individuals is NOT required to be provided to institution
Form ADV
All newly formed adviser must fill out and submit Form ADV. This form is the disclosure form for registration.
Form ADV (2)
Items in Form ADV:
How and when fees are charge
Types of securities the adviser does business in
How recommendations are made
Type of clients the adviser has
The qualifications of officers and directors
If the adviser plans to have custody of client funds
Form ADV (3)
Along with Form ADV is a consent to service of process that will allow the authorities to receive legal papers and inspect the adviser's office
Advisers with custody must include an audited balance sheet. If the adviser does not have cutody the balance sheet does not need to be audited
Withdrawal of Registration
An investment adviser, may request that their registration with the state be withdrawn. The withdrawal will become effective 45 days after the administrator receives the request if no revocation or suspension proceedings are in process. The administrator has up to one year after the withdrawal of an applicant's registration to take action against the applicant to suspend or revoke their registration.
At the Federal level the adviser would file form ADVW to withdraw their registration
Anti Fraud Provisions
No IA or IAR may imply that any regulator has endorsed the firm, its agents or any security.
No adviser or agent may mark or change any required disclosure documents.
Disclosure of Conflicts
AN IA must disclose to clients any potential conflicts of interest that may arise as a result of: A relationship with BD; Effecting agency cross transactions; executing orders a principal basis; receipt of compensation for executing orders; Execution of orders for adviser's personal account that are not consistent with the advice given to clients.
Brochure Rule
Clients of IAs are not required to be given a brochure from the adviser, or form ADV II.
The brochure or form ADV II is the adviser's full disclosure document
Brochure Delivery
An IA is required to provide all prospective clients with a brochure or Form ADV part II at least 48 hours prior ro the signing of the contract or at least the time of the signing of the contract. If the client is given a 5 day grace period to withdraw without penalty.
Brochure Delivery (2)
The brochure or Form ADV part II will state: How and when fees are charged; the types of securities the adviser does business in; How recommendations are made; the type of clients the adviser has; the qualifications of officiers and directors
Use of Solicitor
Advisers will utilize the services of solicitors to as a way to obtain new clients. If the adviser uses such services they must: Be registered as an investment adviser; have a written agreement with the solicitor; provide a solicitor's brochure to clients intoduced to through the solicitor if the use solicitor imposes any dditional costs to the client.
Use of Solicitor (2)
The solicitor most at the time of the solicitation must present both brochures to the client.
IA must receive a sign statement from the client that they received both the adiser's brochure and the solicitor brochure. This rule is not in effect for impersonal services.
How is IA's Fee Charged
An IA must clearly disclose to clients how and when fees are to be charged, calculated and paid. An IA may change: Hourly; For developing a written plan; Flat fee; Fees & commissions
Wrap Accounts
A wrap account is an account that charges 1 fee for both the advice received as well as the cost of the tranasction. All client who open wrap accounts must be given the wrap account brochure that will provide of the information that is found on Form ADV part II.
Agents who manage a wrap account must be registered as an IAR
Performance based Fees
Preformance based compensation to clients, provided that the clients have a minimum of $750,000 of assets under the adviseer's management or have a net worth of $1.5 million. Corporations with $25 million in assets and individuals with at least $5 million in investmetns may also participate.
All performance must be ,easured against a known and identified index to determine the adviser's relative performance
Fulcrum Fees
Provides the adviser with additional compensation for outperforming a broad based index and less compensation for underperforming. The amount of additonal compensation received must be equal to the amount of compensation lost for underperformance.
The index used as the basis of determining performance must contain similar securities and risks.
Agency Cross Transactions
An agency cross transaction is one in which the IA represents both the purchasing and selling security holder and receives advisory fees and commissions from both parties
Agency Cross Disclosures
Advisers engaging in agency cross transactions must disclose all potential conflicts relating to the execution of an agency cross transaction.
Agency Cross Disclosures (1)
All clients must get annual notification from the IA detailing the total number of agency cross transactions that the adviser has executed during the year. The adviser must disclose the amount of commissions received from agency cross transactions
IA Advertising
Advisers may use advertising as a way to gain new client for the advisory business. Advertising is public communication where the adviser does not control the audience.
IA Advertising (3)
Advisory firms and representative are strictly prohibited from using acronyms. The use of RIA or IAR is too often perceived as a credential such as MD or PhD and can mislead the reader.
Advisers may not use testimonials
Enforcing Federal Law
SEC is a direct government body and is the ultimate securities industry regular. SEC may subpoena people, books and records. The SEC may seek injunction in federal court. An injunction may only be issued and enforced by the court
Books & Records
All BDs and IAs must maintain accurate books and records. All advertising and sales literature must be kept and readily accessible for the first 2 years. Realily accessible means that it must be able to be produced upon request. Records may be kept electronically so long as they are read only and the records may be printed
Quantitative Analysis
For every unit of risk an investor accepts in their portfolio they must receive compensation, an investor's compensation is the return realized from that investment. Simply stated the greater the risk, the greater the potential reward should be.
Time Value of Money
As time progresses, inflation eats away at the value or the purchasing power of the dollar. The concept is a dollar today is worth more than a dollar tomorrow
Future Value of Money
Investors can determine the future value of a sum investeed if they know the interest rate, the time horizon, and the compounding schedule.
Future Value of Money (1)
FV= PV(1+R)T
FV= Future Value
PV= Present Value
R=Interest Rate
T= The number of compounding periods for which the money will be investeed.
Example: FV=?;PV=$1,000;R=5%; T= 5yrs compounding annually.
FV= 1,000(1+.05)5; FV=1,276
Present Value of Money
If an ivestor wanted to know how much they would have to invest today to have a given sum in the future the investor would have to calculate the present value of that future amount:
PV= FV/ (1 + R)T
FV= Future Value; PV=Present Value; R= Int Rates; T the number of compounding periods for which the $ will be invested
Internal Rate of Return (IRR)
An investment's internal rate of return is the return that must be realized from an investment to reach a future value given a specific present value. The IRR assumes that cash flow generated by the investment are reinvested at the same rate of return. If an investor can not reinvest the cash flow at the same rate of return that would be known as reinvestment risk.
Total Return
The sum of any dividends received plus capital appreciation. Total return is negative when interest earned cannot overcome any capital loss.
Annual Return
Compares a return for a certain holding period to a calendar year and calculates the return for a full year. If an investor made 5% in 6 months, their annualized return is 10%
Monte Carlo Simulation
A computer simulation used by portfolio managers to determine the likelihood of various returns given different portfolios and different events
Modern Portfolio Theory
The concept that investors are risk adverse. Through diversification of investments and asset classes, portfolios can be constructed with higher levels of expected return for each unit of risk assumed
Expected Rate of return
Expected rate of return for an investment is the sum of its weighted returns
Standard Deviation
Measurement of a securities price volatility and it the standard deviation of a statistical population, a data set, or a probability distribution is the square root of its variance.
Correlation
The degree to which the price of 2 investments move together. Perfect correlation would mean the prices move dollar for dollar in the same direction at the same time
Negative Correlation
The to which the price of 2 investments move away from each other. perfect negative correlation would mean the prices move dollar for dollar in the opposite direction at the same time.
Asset Allocation
Investors may elect to employ a buy and hold strategy and let the allocations go where they may. This buy and hold strategy would reduce transaction costs and tax consequences.
Strategic allocation
If a client's portfolio is designed to be 70%/25%/5% in stocks, bonds, and cash respectively, as the percentages shift, the portfolio manager would rebalance the assets to maintain the original percentages
Tactical allocation
Assumes that a portfolio manager can effectively shift the asset allocation to take advantage of shift in the performance of the various asset classes
Capital Asset Pricing Model
Through modern portfolio theory, can construct portfolio based on various allocations over the three main asset classes whose return will be greatest given each unit of risk. This level of optimal performance is known as the efficient frontier. Any portfolio whose returns are expected to be less than optimal are said to be operating behind the efficient frontier. Optimal portfolio performance will be achieved by constructing a portfolio whose securities prices move independently of one another or whose prices move inversely to one another.
Alpha
The projected independent rate of change or the difference between an investment's expected return and its actual return.
Beta
The projected rate of change relative to the market as a whole. If the market was up 10% for the year, a stock with a beta of 1.5 could reasonably be expected to be up 15%. A stock with a beta greater than one has a higher level of volatility than the market as a whole and is considered to be more risky than the overall market. A stock with a beta less than 1 is less volatile than prices in the overall market.
Adding Alpha
Portfolio managers whose portfolios have positive alphas are adding value thorugh their asset selection. If a portfolio manager's returns are superior to the market they are earning their fees.
Stock selection - Company, Industry & Economy view
An investor who uses the "bottom up approach" will first look at how the company is doing, then analyze the industry and then look at the sector then to the overall economy.
Stock selection - Economy, Industry & Company,view
An investor who uses the "top down approach" will first look at how the economy is doing, then analyze the sector and industry then they will look at how the specific company is doing.
Who is not a Broker Dealer?
An agent; An issuer; a bank; a savings & loan; A person with no business in the state, who deals exclusively with financial institutions or issuers; A person with no place of business in the state who conducts business with existing clients who do not reside in the state and are in state for less than 30 days.
Broker Dealer Registration
a BD is a person or firm that maintains a place of business and affects transactions in the securities markets for its own account or for the account of others. BDs must be registered in its home state as well as in the states of its "individual" clients.
Jurisdiction of the Administrator
The state securities administrator has jurisdiction over securities transactions which: Originated with their state; Are directed into their state; Are accepted in their state.
Broker Dealer Exemptions
A BD with no place of business in an outside state is exempt from registering in that state is exempt from registering in that state if they deal execlusively with: Institutional investors; Issuers; Insurance companies, Mutual Funds & BDs. The receipt of an unsolicited order from an outside state would not require the B/D to register.
Who is an Issuer?
Any person who successfully issues or simply proposes to issue a security. To be considered as an issuer for the exam the entity is not required to successfully issue or sell the proposed securities.
Issuer Transactions
In an issuer or primary transaction, the issuer receives the proceeds from the sale. all secondary market transactions that take place on an exchange or in the OTC market are non-issuer transactions, and the selling security holder receives the sale proceeds.
Primary & Secondary markets
The Primary Market is regulated by the 1933 Act.
The seconday Market is regulated by the 1934 Act.
Who is an Agent in an Issuer Transaction?
A natural person who works for a broker dealer that is representing the issuerr in the sale of non exempt securities.
Exempt from the definition of an agent are the officiers and directors of the issue.
Who is an Investment Advisor?
Investment Advisers Act of 1940: sets forth guidelines for business requirements and activities of investment advisers. As defined an investment adviser is anyone who: Gives advice; Is engaged in the business of advising of investment matters; receives compensation for advice.
Who is an Investment Advisor? "The ABC test":
A person may be considered an adviser if they hold themselves out to be in the business of providing advice for a fee. An IA is NOT: lawyer, accountant, teacher or engineer, who may give advice in the course of doing their separate profession
Who is an IA Rep?
An Investment Adviser Representative ia a natural person who is under the control of the investment adviser and includes: Officiers & directors; Partners; Solicitors; Supervisors; Individuals who provide advice or manage accounts. Support staff such as a file clerk would be exempt
Is the Firm a B/D or IA?
A broker dealer is a firm who executes orders for a fee. An investment Adviserr is a firm that provides advice for a fee.
Is the firm a B/D or an IA?
Broker dealers give advice in the normal course of their business as a BD. However, the BD does not receive compensation until the client asts on the advice and buys or sells a security. IAs give advice for a fee and are compensated regardless of whether or not the client acts on that advice.
Transaction based Compensation
A BD receives transaction beased compensation for executing customer orders.
Selling Research
A BD may not sell its research for a fee. However, it may provide research to its clients for free in hope of receiving transaction based compensation when the customer acts on the advice in the research. An IA may sell its research as a method of providing advice to those who subscribe to the research.
Broker Vs Dealer
The term "broker dealer" describes the two capacities in which a form may act when executing a customer's order. When the firm executes a customer's order for a fee or a commission it is acting in its capacity as a BD or as an agent.
When the firm particiaptes in a customer's order by buying or selling the security it is acting in its capacity as a dealer or as a principal.
Agency Cross Transactions
An agency cross tranaction is one in which the IA represents both the purchasing and selling security holder either as an IA or as BD. If the IA is going to execute an agency cross transaction, they must get the advisory client's authorization in writing. The authorization may be pulled at any time verbally and the adviser may not have solicited both sides of the trade.
Who is not an IA (gov securities)?
If advice is only given on US government securities and US Government agency securities the person is exempt from registration as an investment adviser.
State or SEC Registration?
The National Securites Improvement Act of 1996 eliminated regulatory duplication of effort and established registration requirements for IAs. a federally covered IA must register with the SEC, and is any IA: That manages at least $30 million; Manages investment company portfolios: Not registered under state laws.
State or SEC Registration? (1)
All federally registered IAs must pay state filing fees and notify the administrator in the states in which they conduct business. An IA is required to register with the state if they manage less than $25 million. An IA who mangages between $25 and $30 million may chosse to register either with the state or with the SEC.
Private Adviser Exemptions
A firm with no oiffice in the state would be exempt from state registration if: All clients are sophistcated institutions OR IA gives advice to less than 6 clients in a 12 month period
What is a Security?
A security is anything that can be exchanged for value that involves a risk to the holder. A security also represents an investment in an entity managed by a third party.
Howey Test
Used by the Supreme Court to determine a security, and it states that a security must meet the following 4 characteristics. It must: Be an investment of money; Involve a common enterprise; Give the investor an exception of a profit; Entail the management of a 3rd party
What is NOT a security?
Real Estate; Retirement Plans (IRAs & 401(k)(s);Bank accounts;Collectibles;Precious metals;Fixed Annuities/fixed contracts;Whole and term life policies;Antiques;Futures contracts (commodities);Trade confirmation;Prospectuses
What is a Security? (1)
If an investment is classified as a security it may be subject to registration at both the state and federal level.
What is a Security? (Examples)
Stocks,Bonds,Notes&Debentures;Evidence of indebtedness;Transferable rights;Warrants,rights,or options for securities,Multilevel marketing programs & schemes;Whiskey warehouse receipts
What is a Security? (Key terms)
Key terms = "Certificate", "Interest in", "Variable" & "Option"
All of these terms indicate that a security is involved
Was an Offer Made?
An offer is any attempt to solicit the purchase or sale of a security for value. An offer is considered to have been made in the state where the offer originated, as well as in the state where it is received or direct.
A Sale
To sell a security, its ownership must be conveyed for value. A sale is considered to have been made at the time of the contract (trade)
What is Assessable Stock?
A gift assessable stock is also considered a sale. Assessable stock is stock that may require the holder to make additional payments as a term of ownership. A sale does not include a dividend or the pledge of a security for a collateral loan.
Exempt Issuers - Examples
US Govt; State & municipal governments; Foreign national governments;Canadian federal and municipal governments; Insurance companies; Banks & trusts; Credit Unions and S&Ls; Common Carriers (railroads, trucking, & airlines) who are subject to Interstate Commerce Commission (the term "consolidated" is the key word; Religious & Charitable organizations; Public Utility securities; Securities issued by a cooperative
Foreign Government Issues
All Canadian Federal & Municipal securities are exempt; Mexico's Federal debt is exempt, but London's is not: Securities under the control of any of the following are also exempt: Public Utility Commission; Banks and S&Ls; Interstate Commerce Commission (ICC)
Special Exemptions
When the country was coming out of the Great Depression the country was looking to the railroads, trucking companies, and the utilities to restore economic prosperity. To help these companies raise the funds needed to expand, securities offered by companies under the ICC or Public Utility Commission were given exemptions from registration
Registration of IPOs Coordination
When a company first sells stock to the public during an initial public offering (IPO), the company must file a registration statement with the SEC. The company must also file a registraation statement with the states securities administrator in the states where the issue will be sold. Most IPOs will register with the state securities administrator at the same time that they are becoming registered with the SEC
Registration by Qualification
Securities of issuers that will be sold only in one state through an intrastate offering will be registered through qualification. Registration through qualification is the most complex method of registration. The issuer must file a statement containing all of the information required by the states securities administrator.
Exempt Transactions
Sometimes a security that would otherwise have to register is exempt from state registration because of the type of transaction that is involved. The following are all exempt transactions: Private Placements; Transactions with institutions; Transactions with fiduciaries
Exempt Transactions (1)
Secondary market transactions in securities registered under The Securities Act of 1934 are exempt: Private placements under Regulation D; Transactions in mortgage backed bonds
Actions Against Registrations
A state securities administrator may take action to bar, suspend, centure or restrict the activites of a registrant if the administrator finds it in the public interest, and the applicant or registrant does one or more of the following:
Actions Against Registrations - List of Offensives
Fails to pay filing fees; Is insolvent; Fails to surpervise employees; Willfully violates the securities or banking laws of another country or has had a foreign regulator deny, revoke, or suspend its registration within the last 5 yrs; Violates federal securities or commodities laws;Has been convicted of any felony with the last 10 yrs; Has been convicted of a securities related misdemeanor;Willfully violates any provision of the USA; Files an incomplete, false, or misleading application
Credit Risk
Credit risk is the risk of default inherent in debt securities. An investor may lose all or part of their money because the issuer has defaulted and cannot pay the interest or principal payments owed to the investor
Systematic Risk
Systematic risk and it is the risk that is inherent in any investment in the markets. For example, you could own stock in the greatest company in the world but the value of your stock is going down simply because the market as a whole is going down.
Interest Rate Risk
Interest rate risk is the risk that the price of bonds will fall as interest rates increase. As interest rate risk the value of existing bonds fall and may subject the bondholder to a loss if they need to sell the bond.
The Securities Act of 1933
The Securities Act of 1933: The first major piece of securities industry legislation, which regulates the primary market and requires that non-exempt issuers file a registration statement with the SEC. The Act of 1933 also requires that investors in new issues be given a prospectus.
Legislative Risk
The risk that the government will do something that adversely affects your investment. For example, beer manufacturers probably did not fare too well when the government enacted prohibition.
Nonsystematic Risk
The risk that pertains to one company or industry. For example, the problems that the tobacco industry faced a few years ago would not have affected a computer company.
Timing Risk
The risk that an investor will buy and sell at the wrong time and will lose money as a result.
Securities Act 1933
Sometimes a security that would otherwise have to register is exempt from the registration requirements of the Securities Act of 1933 because of type of transaction that is involved. The following are all exempt transaction: Private Placements/Regulation D Offerings; Rule 144; Regulation A Offerings; Rule 145; Rule 147 Intrastate Offering
What is an Accredited Investor?
A private placement is a sale of securities that is made to a group of accredited investors and the securities are not offered to the general public. Accredited investor include institutional investors and individuals who: Earn at least $200,000 per year if single Or Earn at least $300,000 jointly with a spouse Or $1 million net worth. The maximum number of non accredited investors who may participate in a private placement is 35 in 12 months
Securities Exchange Act of 1934
Was the 2nd major piece of legislation that resulted from the market crash of 1929. The act regulates the secondary market that consists of investor-to-investor transactions. The act also regulates all individuals and firms that conduct business in the securities industry. The act: Created the SEC; Requires registration of BDs and agents; Regulates exchanges and the NASD (now part of FINRA); Requires net capital for BDs.
Securities Exchange Act of 1934 (1)
The Securities Act of 1933 is known as the truth in securities act. The Securities Act of 1934 wrote the rules of fair practice. Also under the 1934 Act: Anti manipulation rules; Regulation T
Securities Exchange Act of 1934 (2)
Trading on inside information has always been a violation of the Securities Exchange Act of 1934 and the Insider Trader Act prescribed additional penalties for violators: Statute of Limitations; Six years - federal for fraud;5 years - state for fraud
Investment Products
A complete understanding of the types of investment products that may be offered by investment advisers is required to successfully complete the exam: Stocks;Bonds;Options;Mutual Funds
Limit Orders
A buy limit order sets the maximum price that the investor will pay for the security. The order may never be executed at a price higher than the investor's limit price. While a buy limit order guarantees that the investor will not pay over a certain price, it does not guarantee them an execution
Sell Limit
A Sell Limit order sets the minimum price that the investor will accept for the security. The order may never be executed at a price lower than the investor's limit price. While a sell limit order guarantees that the investor will not receive less than a certain price, it does not guarantee them an execution.
Stop Orders
A stop order or stop loss order can be used by investors to limit or guard against a loss, or to protect a profit. A stop order will be placed away from the market in case the stock starts to move against the investor. A stop order is not a "live" order;it has to be elected. A stop order is elected and becomes a live order when the stock trades at or through the stop price. The stop price is also known as the trigger price. Once the stock has traded at or through the stop price the order becomes a market order to either buy or sell the stock depending on the type of order that was placed.
Acting As a Broker
When a firm is acting as a broker, it is acting as the customer's agent and is merely executing the customer's order for a fee known as a commission. The role of the broker is simply to find someone willing to buy the investor's securities if the customer is selling or to find someone willing to sell them the securities if they are buyers.
Acting As a Dealer
When the firm acts as a dealer when it participates in the transaction by taking the opposite side of the trade. For example, the firm may fill a customer's buy order by selling the securities to the customer from the firm's own account or the dealer may fill the customer's sell order by buying the securities for their own account. A brokerage firm is always acting as a dealer or in a principal capacity when it is making markets over the counter. When acting as a dealer the firm will charge a mark up or mark down.
Bids and Offers
Orders that are executable will always be executed at the best available price known as the inside market.
The Inside Market
It is the highest bid and lowest offer.
Corporate Bonds
Corporations will issue bonds in an effort to raise working capital to build and expand their business. Corporate bondholders are not owners of the corporation; they are creditors of the company. Corporate debt financing is known as leverage financing because the company pays interest only on the loan until maturity. Bondholders do not have voting rights so long as the company pays the interest and principal payments in a timely fashion.
Corporate Bonds (2)
Par/Principal/Face amount = $1,000; Coupon Rate is a percentage of par and fixed at time of issuance; Interest is paid semi annually;Current yield= annual Income/Current Market Price
What's the Yield?
A bond's yield is the investor's return for holding the bond; A bond's nominal yield is the interest rate that is printed or "named" on the bond. The nominal yield is always stated as a percentage of par
Current Yield
The current yield is a relationship between the annual interest generated by the bond and the bond's current market price.
Current yield (CY) =
What's the yield?
Current Yield (CY)= Annual interest (AI) / Current Market Value (CMV)
Par = $1,000
NY = 6%
AI = $60
CY=60/980 = 6.122%
What's the yield? (long version)
A bond's yield to maturity is the investor's total annualized return for investing in the bond. A bond's yield to maturity takes into consideration the annual income received by the investor along with any difference between the price the investor paid for the bond and the par value that will be received at maturity. It also assumes that the investor is reinvesting the semi-annual interest payments at the same rate. The yield to maturity is the most important yield for an investor who purchases the bond.
What's the yield? (2)
In the event that the bond may be called in or redeemed by the issuer under the call feature an investor may calculate the approximate number of years left until the bond may be called
What's the highest yield to call?
The yield to call will always extend past the yield to maturity. The yield to call will always be the highest yield on a bond purchased at a discount and it will always be lowest yield for a bond purchased at a premium.
Prices and Yields
There is an inverse relationship between prices and yields. That is to say that prices and yields on income producing investments move in the opposite direction. As the price of the investment rises, the investment's yield falls. Conversely, as the price of the investment falls, the investment's yield will rise.
Price Volatility
An investor who purchases long term bond when interest rates are high and expected to decline will realize the greatest price appreciation. Conversely...An investor who purchased long term bonds when rates were low would suffer the greatest loss if interest rates increase.
Price Volatility - Duration effect on bond price
Duration is a measurement of the bond's price sensitivity to a small change in interest rates and it is stated in years. Longer term bonds and bonds with low coupons will generally have a higher duration than shorter term or higher yielding bonds. The higher the bond's duration, the greater the bond's interest rate risk and the greater its price volatility
Price volatility - Convexity
Convexity measures a bond's price volatility to large changes in interest rates. A bond's price will not respond equally to both an increase and decrease in interest rates. As interest rates fall, bonds tend to increase in price, more than they would fall if interest rates were to rise by equal amount.
Bond Recap
Corporate bond issuance and types: Convertible;Debentures;Bonds backed by a specific pledge of assets. Trust Indenture Act of 1939;The Securities Act of 1933
Collateral Trust Certificate
A bond that has been backed by a pledge of securities that the issuer has purchased for investment purposes or they could be backed by shares of a wholly owned subsidiary. Both stocks and bonds are acceptable forms of collateral.
Equipment Trust Certificate
Backed by a pledge of large equipment that the corporation owns. Airlines, railroads, and large shipping companies
Mortgage Bonds
A bond that has been backed by a pledge of real property. The corporation will issue bonds to investors and the corporation will pledge real estate, owned by the company , as collateral
Convertible Bond
A convertible bond is a corporate bond that may be converted or exchaged for common shares of the corporation at a pre-determined price known as the conversion price. Convertible bonds have benefits to both the issuer and the investor. Beacuse the bond is convertible, it will usually pay a lower rate of interest then nonconvertible bonds.
Convertible Bond - Formula to determine the number of shares
Par value/Conversion Price
Convertible Bond - Formula to determine parity price of bond
Stock's current market price X number of shares to be received upon conversion
Convertible Bond - Formula to determine parity price of stock
Bond's current market price/Number of shares to be received upon conversion
Treasury Receipts
Created by BDs and banks. B/Ds and banks purchase large amounts of Treasury securities, place them in a trust and sell off the interest and principal payments to different investors
Zero Coupon Bond
A bond that is issued at a discount from its par value and makes NO regular interest payments. An investor's interest is reflected by the security's appreciation towards par at maturity. The appreciation is taxable each year even though it is not actually received by the investor and is known as phantom income.
T' Bills
Issued at a discount
4, 13 & 26 Weeks
T' Notes
Issued at $1,000, pay interest semi annually 1 to 10 Years
T' Bond
Issued at $1,000, pay interest semi annually 10 years or greater
Agency issues
The federral government has authorized certain agencies and certain quasi agencies to issue debt securities that are collectively referred to as "agency issues." Investors who purchase agency securities are offered interest rates that generally fall in between the rates offered by similar term Treasury and corporate bonds.
Ginnie Mae
Guaranteed by the government
Not Guranteed (Prior to nationalization*)
Fannie Mae*
Sallie Mae
Fredie Mac*
CMOs
A collaterized mortage obilgation is a mortage-backed security issued by private finance companies, as well as by FHLMC and FNMA. The securities are structured much like a pass-through certificate and their term is set into different maturity schedules, known as tranches.
Mutual Funds
An investment company that invests in and manages a portfolio of securities for its shareholders. Open end mutual funds sell its shares to investors on a continuous basis and must stand ready to redeem its shares upon the shareholders request
Annuity
A contract between an individual and an insurance company that is designed to provide the annuitant with lifetime income in exchange for either a lump sum or period deposits into the contract
Unit Investment Trusts
(UIT) A type of investment company organized as a trust to invest in a portfolio of securities. The UIT sells redeemable securities to investors in the form of shares or units of beneficial interest.
Unit Investment Trusts - Fixed
A fixed UIT will purchase a portfolio of bonds and hold until maturity
Unit Investment Trusts - Non-Fixed
A non-fixed UIT may be issued under a contractual plan or as a vechicle for variable products
Fixed Annuity
An insurance contract where the insurance company guarantees fixed payments to the annuitant usually util the annuitant's death. a fixed annuity is an insurance product not a security
Variable Annuity
A contract issued by an insurance company that is both a security and an insurance product. The annuitant's contributions are invested through the separate account into a portfolio of securities. The annuitant's payment depend largerly on the investment results of the separate account.
Management Company
A type of investment company that actively manages a portfolio of securities in order to meet a stated investment objective. Management companies are also known as mutual funds.
Closed end Investment Company
A management company that issues a fixed number of shares to investors in an managed portfolio and whose shares are traded in the secondary market. A CLOSED END INVESTMENT COMPANY DOES NOT REDEEM THEIR OWN SHARES
Characteristics of Open Ended Mutual Funds
Diversification;Professional management;Low minimum investment;easy tax reporting, form 1099;Reduction of sales charges through break point schedule, letter of intent and rights accumulation;Automatic reinvestment of dividends and capital gains distributions;Structed withdrawal plans
Mutual Fund Charges - No Load
A fund that does not charge the investor a sales charge to invest in the fund. Shares of a no load mutual funds are sold directly from the fund company to the investor. The maximum alllowable sales charge for an open end mutual funds is 8.5% of the public offering price POP.
Mutual Fund Charges - Closed End Funds
Closed end investment company shares may be priced at, above or below the fund's NAV. The shares can trade above or below NAV, depending on supply and demand
Dollar Cost Averaging
A strategy of investing a fixed sum of money on a regular basis into a fluctuating maket price. Over time an investor shold be able to achieve an average cost per share which is below their average price per share. Dollar cost averaging is a popular investment strategy with mutual fund investors.
Methods of sale for IRS
FIFO - First In, First Out
Share ID - Identify the shares to be sold
Average cost
Front end load
a sales charge paid by investors in open end mutual funds, which is paid at the time of purchase.
Back end load
Also known as a contingent deferred sales charge' a mutual fund sales charge that is assessed upon the redemption of shares. The amount of the sales charge to be assessed upon redemption decreases the longer the shares are held.
Level Load
A mutual fund share that charges a flat annual fee
Front end load
a sales charge paid by investors in open end mutual funds, which is paid at the time of purchase.
12 B-1 Fee
An asset based distribution fee, which is assessed annually and paid out quarterly to cover advertising and distribution costs. All 12b1 fees must be reasonable
Front end load
a sales charge paid by investors in open end mutual funds, which is paid at the time of purchase.
Back end load
Also known as a contingent deferred sales charge' a mutual fund sales charge that is assessed upon the redemption of shares. The amount of the sales charge to be assessed upon redemption decreases the longer the shares are held.
Level Load
A mutual fund share that charges a flat annual fee
Back end load
Also known as a contingent deferred sales charge' a mutual fund sales charge that is assessed upon the redemption of shares. The amount of the sales charge to be assessed upon redemption decreases the longer the shares are held.
Level Load
A mutual fund share that charges a flat annual fee
12 B-1 Fee
An asset based distribution fee, which is assessed annually and paid out quarterly to cover advertising and distribution costs. All 12b1 fees must be reasonable
12 B-1 Fee
An asset based distribution fee, which is assessed annually and paid out quarterly to cover advertising and distribution costs. All 12b1 fees must be reasonable
Break Point Violation
It would be a violation for an agent to sell mutual fund shares in an amount just under the level that would offer the investor a reduced sales charge
Break Point sales charge reductions
Available to any person;Corporations;Trusts; Accounts of minors.
Not available for koint accounts with adult children
Mutual Fund Expense Ratio
The amount of a mutual fund's expenses relative to its assets. The higher the expense ratio, the lower the investor's return. A mutual fund's expense ratio tells an investor how efficiently a mutual fund operates not how profitable the mutual fund is.
The investment adviser is the largest expense of a mutual fund.
Other expenses:Custodian bank;Transfer agent; Board of Directors