Series 6 Review
Series 6 Review
Variable Life
Level Premiums
Universal
Variable Life Whole Life
Types of Debt
U.S. Gov’t
3
What Type of Debt is This?
Gov’t Agency
Privatized
Gov’t Agency
4
What Type of Debt is This?
Corporate
5
Series #6 Types of Debt
Municipal
5
Investment Securities
CORPORATIONS
• NEED FINANCING
INVESTMENT • CAN ISSUE:
– EQUITY
SECURITIES • common stock
• preferred stock
– DEBT
6
Investment Securities
Which of the following would be considered Which of the following do NOT have an equity
creditors of a corporation? position?
A. III only A. I, II
B. III and IV only B. I, III, IV
C. I and II only C. III, IV
D. I, II, and IV D. I, II, III, IV
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Investment Securities
SHAREHOLDER SHAREHOLDER
RECORDKEEPING RECORDKEEPING (cont.)
• REGISTRAR • TRANSFER AGENT
– maintains record of stockholders' names and – as trades of stock settle, report is made to the
addresses transfer agent
– makes sure company doesn't issue more shares – the transfer agent:
• cancels old shares which have been sold, and issues
than authorized new shares in the name of the new buyer
– watchdog over transfer agent • keeps an accurate record of shareholders which is
updated daily
• usu. handles mailings to shareholders (dividends,
voting materials, corporate records,...)
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Investment Securities
SHAREHOLDER
RECORDKEEPING (cont.) All of the following are functions of the
• TRANSFER AGENT (cont.) transfer agent EXCEPT:
– BOOKENTRY CERTIFICATE
• instead of physically issuing and canceling A. Mails dividend payments to shareholders
certificates, the transfer agent keeps the ownership B. Prepares and mails proxies
record along with the clearing corporation settling
trade
C. Sets the Declaration Date
D. Cancels old shares and issues new
shares
I Canceling old stock certificates All of the following are the responsibilities of the
II Issuing new stock certificates registrar EXCEPT:
III Acting as disbursement agent for the
corporation A. Distributing dividends, corporate reports, and
IV Maintaining a record of all shareholder voting materials
names and addresses B. Acting as a watchdog over the transfer agent
C. Accounting for the number of shares issued
A. II, III, IV D. Maintaining a record of all shareholder names
B. I, II, III
C. I, III, IV
D. I, II, III, IV
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Investment Securities
When comparing the statutory voting method to the RIGHTS OF THE COMMON
cumulative voting method, which statement is true?
SHAREHOLDERS (CONT.)
A. Minority shareholders have the same voting
effectiveness with both methods
• do NOT vote on:
B Minority shareholders have greater voting
– management
effectiveness with cumulative voting – cash or stock dividends
C. Minority shareholders have greater voting • stock dividends are distributions of 25% or
effectiveness with statutory voting less
D. Minority shareholders have limited voting powers – rights distribution
under the statutory and full voting powers under the – repurchase of shares for Treasury
cumulative method
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Investment Securities
A corporation declares a 2:1 stock split. A corporation declares a 5:4 stock split.
For a customer who owns 100 shares at For a customer who owns 100 shares at
$60, how many shares will he now have $60, how many shares will he now have
and at what dollar price? and at what dollar price?
A corporation declares a 5:4 stock split. A corporation declares a 5:4 stock split.
For a customer who owns 100 shares at For a customer who owns 100 shares at
$60, how many additional shares will he $60, how many shares will he now own?
now own?
A. 25
A. 25 B. 100
B. 100 C. 120
C. 120 D. 125
D. 125
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Investment Securities
12
Investment Securities
June July
S M T W H F S S M T W H F S
1 2 3 4 5 6 7 1 2 3 4 5 6 7
8 9 10 11 12 13 14 8 9 10 11 12 13 14
15 16 17 18 19 20 21 15 16 17 18 19 20 21
22 23 24 25 26 27 28 22 23 24 25 26 27 28
29 30 29 30 31
If record date is set at Monday, July 9, when is the
If record date is set at Wednesday, June 11, when is
last day to buy the stock and receive the dividend:
the last day to buy the stock and receive the
reg. way settlement? cash settlement? when is ex-
dividend: reg. way settlement? cash settlement?
date?
when is ex-date?
Series #6 Investment Securities 43 Series #6 Investment Securities 44
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Investment Securities
14
Investment Securities
A. first
B. after creditors but before preferred
stockholders
PREFERRED STOCK
C. after bondholders but before preferred
stockholders
D. last
15
Investment Securities
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Investment Securities
ABC Company has outstanding 10% non- ABC Company has outstanding 10% cumulative
cumulative preferred stock. Two years ago, ABC preferred stock. Two years ago, ABC paid a 6%
paid a 6% preferred dividend. Last year, ABC paid preferred dividend. Last year, ABC paid a 7%
a 7% preferred stock dividend. This year, ABC preferred stock dividend. This year, ABC wishes to
wishes to pay a common dividend. The preferred pay a common dividend. The preferred
shareholders must receive: shareholders must receive:
A. 0% A. 0%
B. 7% B. 7%
C. 10% C. 10%
D. 17% D. 17%
A. I and III
B. I and IV
C. II and III
D. II and IV
Series #6 Investment Securities 71 Series #6 Investment Securities 72
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Investment Securities
BOND
• debt security which obligates issuer to pay interest
- usu. semi-annually- and repay principal amount
when debt matures
• TRUST INDENTURE
Corporate Bonds – protects the interest of the bondholders
• PAR VALUE
– set usu. at $1,000 minimum and with a stated rate of
interest (the coupon)
• REDEMPTION
– at maturity, the bond is redeemed by issuer at par
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Investment Securities
A. $74.50 A. $25
B. $80 B. $250
C. $754 C. $500
D. $800 D. $1,000
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Investment Securities
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Investment Securities
SECURED
A bond issue where the bonds have the CORPORATE DEBT
same maturity but different dates of • specific collateral is pledged to back the
issuance is a: issue
• because of extra protection, it can be sold at
A. term bond offering lower interest rates than unsecured bonds
B. series bond offering
• if Trust Indenture is open end, corporation
C. serial bond offering
can sell additional bonds having equal
D. combined serial and term bond offering
status
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Investment Securities
22
Investment Securities
A corporate bond which is backed solely A short term corporate bond which is
by the full faith and credit of the issuer is backed solely by the full faith and credit
known as a: of the issuer is known as:
ZERO-COUPON BOND 1 zero coupon, $1,000 par, purchased at $200 with 10 years to
maturity
•how much will the bond's accreted value be after the first
• stated par value (usu. $1,000 minimum) but year?
without a stated rate of interest
•what is the amount of interest that would be taxed?
• no interest payments are made - these are
1 zero coupon, $1,000 par, purchased at $800 with 5 years to
purchased at a discount and mature at par
maturity
• tax status?
•how much will the bond's accreted value be after the first
– though no income is received until maturity, the year?
bondholder must pay tax on the accreted value
•what is the amount of interest that would be taxed?
– good for what type of account?
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Investment Securities
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Investment Securities
CONVERTIBLE CONVERTIBLE
CORPORATE DEBT (cont.) CORPORATE DEBT (cont.)
• EXAMPLE: A 10%, $1,000 Par • EXAMPLE: A 10%, $1,000 Par Convertible Bond
Convertible Bond Is Issued When The Is Issued When The Market Price Of The
Market Price Of The Common Stock Is $40 Common Stock Is $40 Per Share. The Conversion
Price Per Share Is Set At $50 Per Share. Currently
Per Share. The Conversion Price Per Share The Market Price Of The Stock Is $60 Per Share.
Is Set At $50 Per Share. The Conversion The Parity Price Of The Bond Is:
Ratio Is:
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Investment Securities
A. 24 A. I and II
B. 25 B. I and IV
C. 25.25 C. II and III
D. 26 D. II and IV
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Investment Securities
S&P Moody's
CC Ca
C C
Series #6 Investment Securities 129 Series #6 Investment Securities 130
What is the highest investment grade? A bond is rated Aaa by Moodys. The
bond is:
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Investment Securities
A bond is rated BBB by Standard and The lowest investment grade rating
Poors. The bond is: is:
A. Baa A. Baa
B. Ba B. Ba
C. CCC C. CCC
D. C D. C
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Investment Securities
Discount $800
Discount $800
Yield to Call
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Investment Securities
Discount $800
Interest rates going down
Yield to Call
$1,000 Par, 10 %, w/ 10
years to maturity
Current Yield = 8.3%
Premium $1,200
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Investment Securities
$1,000 Par, 10 %, w/ 10
years to maturity
Current Yield = 8.3%
Premium $1,200
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Discount $800
Yield to Call A corporation has issued 10% AA rated sinking fund
debentures at par. Three years later, similar issues are
being offered in the primary market at 12%. Which are true
Yield to Maturity = 13.3% statements about the outstanding 10% issue?
Current Yield = 12.5%
I The current yield will be higher than the nominal yield
$1,000 Par, 10 %, w/ 10 II The current yield will be lower than the nominal yield
years to maturity III The dollar price of the bond will be at a premium to par
IV The dollar price of the bond will be at a discount to par
Current Yield = 8.3%
A. I and III
Yield to Maturity = 7.27% B. I and IV
C. II and III
Yield to Call <- Bond must be priced here D. II and IV
Premium $1,200
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interest rates
For bonds trading at a discount, rank the yield For bonds trading at a premium, rank the yield
measures from lowest to highest? measures from lowest to highest?
I Nominal I Nominal
II Current II Current
III Basis III Basis
IV Yield to Call Basis IV Yield to Call Basis
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Investment Securities
When the price of a bond increases, which of the In 2015, a customer buys 5 GMAC 10%
following statements regarding yields are true? debentures, M‘35. The interest payment dates
are Feb 1 and Aug 1. The bonds are callable
I Current yield increases as of 2025 at 103. The current yield on the
II Current yield decreases bonds is 11.76%. The bond is trading:
III Yield to maturity increases
IV Yield to maturity decreases
A. at a premium
A. I and III B. at a discount
B. I and IV C. at par
C. II and III D. in the money
D. II and IV
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Investment Securities
33
Investment Securities
GOVERNMENT SPONSORED
Treasury Bonds ENTITIES (GSEs)
• created by Congress to fund loans to groups of
• maturities ranging from 10 to 30 years borrowers such as homeowners, farmers, and students
• multiples of $100 par at affordable rates
• trades settle next business day • these entities are set up as:
• pay interest semi-annually – Government Agencies: Government National Mortgage
Association (Ginnie MAE) which is a division of the
• quoted in 32nds government whose securities are backed by the full faith and
• long-term Treasury Bonds are usu. callable 5 years credit of the United States government
prior to maturity – Regional Bank Systems:
• Federal Home Loan Banks and Federal Farm Credit Banks; and
– i.e. if interest rates have dropped – privately owned corporations: Student Loan Marketing
Association (Sallie MAE); Federal National Mortgage
Association (Fannie MAE); and Federal Home Loan
Mortgage Corporation (Freddie MAC)
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Farmer Loans
• FED. FARM CREDIT
CONSOLIDATED SYSTEM
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Investment Securities
does not mean the certificate holder will get 30 – B) Extension Risk
• the risk that the mortgage will be paid off LATER than
years of payments because homeowners tend to anticipated (happens when interest rates rise)
move and prepay their mortgages after, say 15 • CMOs were developed by brokerage firms to
years (for illustration purposes - actual experience minimize these risks
is about 12 years) – CMOs have $1,000 denominations
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MUNICIPAL ISSUES
• General Obligation Bonds
– backed by full faith, credit, and taxing power of
issuer (ad valorem - property taxes)
MUNICIPAL DEBT – muni have Statutory & Constitutional Debt
limits imposed (they can’t keep raising tax rates
to pay off debt!)
• to exceed the limit, a public referendum (vote) is
required
– overlapping debt
• regional school
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Investment Securities
A. excise taxes
A. revenue bond
B. lease rentals
B. special tax bond
C. ad valorem taxes
C. moral obligation bond
D. enterprise activity income
D. general obligation bond
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Investment Securities
A. exempt from Federal; subject to state A. exempt from Federal; subject to state
and local and local
B. exempt from state and local; subject to B. exempt from state and local; subject to
Federal Federal
C. triple tax free C. triple tax free
D. fully taxable D. fully taxable
Series #6 Investment Securities 189 Series #6 Investment Securities 190
Which of the following municipal issues Issuers of Federal tax exempt commercial
would NOT be exempt from taxation of paper include:
interest by the Federal Government?
I Corporations
A. San Francisco, CA – Convention Center II Federal Government
Revenue Bond III Municipal Government
B. Miami, FL – Sewer and Water Revenue
Bond A. I only
C. Nassau County, NY – Pollution Control B. II only
Bond C. III only
D. Des Monies, IA – School District Bond D. I, II, III
Series #6 Investment Securities 191 Series #6 Investment Securities 192
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Investment Securities
A. 8.3% A. 6.3%
B. 8.69% B. 8.3%
C. 16.9% C. 8.7%
D. 19.35% D. 9.6%
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Investment Securities
39
Investment Securities
40
Investment Securities
A. II and IV only
A. Overnight repurchase agreement
B. I, II, III
B. Federal Funds
C. I, III, IV
C. Eurodollars
D. I, II, III, IV
D. Prime banker's acceptance
Series #6 Investment Securities 211 Series #6 Investment Securities 212
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Investment Securities
42
Investment Securities
Options
A customer who is long call contracts would have
• Calls
what kind of market sentiment?
– options to BUY stock for buyer
– must SELL stock if the seller A. bullish
• Puts B. bearish
– options to SELL stock for buyer C. neutral
– must BUY stock if the buyer D. bullish and bearish
• Writing options
– for income
Options
A customer who is long put contracts would have
what kind of market sentiment? • a legal and binding contract entered into
between two parties
A. bullish • buyer = holder = long position
B. bearish – pays the premium
C. neutral • seller = writer = short position
D. bullish and bearish – receives the premium
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Investment Securities
A. I only A. I only
B. II only B. II only
When reading the morning newspaper, you see that AMERICAN DEPOSITARY
Japan is suffering from economic turmoil while
Canada is experiencing record economic growth. An RECEIPTS
appropriate strategy is to:
• vehicle for trading foreign securities in U.S.
I Buy Canadian Calls – the bank holds foreign securities in country of
II Buy Yen Calls origin and then issues receipts in the U.S. backed
III Buy Canadian Puts by the foreign security
IV Buy Yen Puts • foreign companies don't want their shares
issued in U.S. because of registration with SEC
A. I and II
B. I and IV • no voting rights and no preemptive rights
C. II and III
D. II and IV
Series #6 Investment Securities 231 Series #6 Investment Securities 232
ADRS (CONT.)
American Depositary Receipts would • ADR's are registered with SEC
– all exchange listed ADR's are sponsored
trade on all of the following EXCEPT: • meaning the foreign company "sponsors" the issue
– nonsponsored ADR's trade OTC
A. London Stock Exchange • these are assembled by banks and broker's without
issuer's participation
B. New York Stock Exchange
• dividends are declared in foreign currency,
C. NASDAQ System though are converted and paid in U.S.
D. American Stock Exchange dollars
• influenced by foreign currency exchange
fluctuations
Series #6 Investment Securities 233 Series #6 Investment Securities 234
44
Investment Securities
An ADR is:
American Depositary Receipts only
pay dividends in: A. a U. S. security held in U. S. branches of
foreign banks
B. a foreign security held in foreign
A. Eurodollars
branches of U. S. banks
B. European currency Units C. a negotiable certificate denominated in a
C. Foreign Currency foreign currency
D. U.S. Dollars D. a negotiable certificate denominated in
U. S. currency
Series #6 Investment Securities 235 Series #6 Investment Securities 236
Restricted Securities
• aka "letter stock" / "private placement"
• not offered to the general public
45
Securities Markets & Market Terms
TRADING MARKETS
PRIMARY MARKET
– new issues being sold for the first time
Securities Markets & SECONDARY MARKET
Market Terms – trading of issued securities
– First
– Second
– Third
– Fourth
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Securities Markets & Market Terms
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Securities Markets & Market Terms
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48
Securities Markets & Market Terms
A. first market
A. first
B. second market
B. second
C. third market
C. third
D. fourth market
D. fourth
Series #6 Securities Markets & Market Terms 19 Series #6 Securities Markets & Market Terms 20
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Securities Markets & Market Terms
GOOD DELIVERY OF
Trade Date VS Settlement Date
SECURITIES
• Trade Date • on settlement, securities are delivered and
• Settlement Date paid for; if securities are not in good form,
– regular way they can be rejected and settlement will not
– cash take place
• securities can be endorsed on the back (or a
"stock power" or "bond power" is signed
which transfers the ownership of the stock
without signing the security)
Series #6 Securities Markets & Market Terms 25 Series #6 Securities Markets & Market Terms 26
50
Securities Markets & Market Terms
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51
Securities Markets & Market Terms
INVESTMENT BANKING
A company's common stock is selling in
the market at a "multiple of 15". If the RELATIONSHIP
market price of the common stock is • INVESTMENT BANKER
currently $10, what is the earnings per STRUCTURES ISSUE
share? – investment banker examines:
• existing financial structure of company
A. $.15 • industry outlook
B. $.16 • intended use of funds
C. $.67 • current status of financial markets in order to
recommend proper financing vehicle (should the
D. $1.50 company issue equity or debt)
Series #6 Securities Markets & Market Terms 37 Series #6 Securities Markets & Market Terms 38
LETTER OF INTENT
A Company wants to issue a new series of
bonds. It would prefer to issue them at 5%.
Who would analyze the market to determine • LETTER OF INTENT
if this rate will probably be attractive enough – agreement between issuer and underwriter (not binding)
to sell the issue? – INCLUDES:
• type of security to be sold
A. The company’s Chief Financial Officer • size of issue
• total par value
B. An investment banker
• estimated Public Offer Price
C. A commercial bank • estimated interest rate
D. The company’s Board of Directors • underwriter's spread
• underwriting commitment
Series #6 Securities Markets & Market Terms 39 Series #6 Securities Markets & Market Terms 40
UNDERWRITING UNDERWRITING
COMMITMENTS COMMITMENTS (cont.)
• FIRM COMMITMENT • BEST EFFORTS (cont.)
– investment banker acts as principal, buying – all or none
issue from company and then resells issue to • deal is contingent on entire issue being sold; deal is
public, earning the spread canceled otherwise
– underwriter assumes full financial liability – mini-maxi
• BEST EFFORTS • minimum amount must be sold
– investment banker acts as "agent", taking no • underwriter continues to sell issue up to a maximum
financial liability portion of deal
– if part of issue is unsold, it remains with issuer – this "maxi" is on a best efforts basis
Series #6 Securities Markets & Market Terms 41 Series #6 Securities Markets & Market Terms 42
52
Securities Markets & Market Terms
UNDERWRITING
COMMITMENTS (cont.)
When an underwriter agrees to buy any unsold
• STANDBY UNDERWRITING portion of a new issue of securities, bearing all
– used when company attempts to sell additional shares the risk, what is this type of underwriting?
through a rights offering
– underwriter stands by on a firm commitment basis to A. Best efforts underwriting
"pick up" unsubscribed shares at subscription price B. Syndicate agreement
• negotiated underwriting C. All–or–none commitment
– typical for corporate underwritings; terms are D. Firm commitment
negotiated between issuer and underwriter
Series #6 Securities Markets & Market Terms 43 Series #6 Securities Markets & Market Terms 44
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FORMATION OF THE
When a corporation considering the sale of a new SYNDICATE
issue of securities stipulates that it will issue no • AGREEMENT AMONG
securities unless the entire issue sells, the
UNDERWRITERS
arrangement is a(n):
– investment banker will invite other firms into
syndicate, offering them a piece of issue
A. best efforts underwriting
B. stand–by underwriting – formal agreement is called the Syndicate
C. all–or–none commitment Agreement
D. firm commitment
Series #6 Securities Markets & Market Terms 47 Series #6 Securities Markets & Market Terms 48
53
Securities Markets & Market Terms
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UNDERWRITER'S
SELLING CONCESSION
CONCESSION
• the profit that the managing underwriter • the profit the selling group earns for helping
"concedes" to the syndicate members if they sell the syndicate sell the new issue; comes out
directly to the public
– AKA Total Takedown of the underwriter's concession
• the syndicate member earns everything except for – Selling Group
the management fee if the issue is sold directly to • used to help sell issue if underwriting is very large
the public
• always acts as agent taking on no liability
– Additional Takedown
• what the syndicate member earns if the issue is sold
to a selling group member
Series #6 Securities Markets & Market Terms 53 Series #6 Securities Markets & Market Terms 54
54
Securities Markets & Market Terms
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55
Investment Analysis
INVESTMENT
ECONOMIC FACTORS
ANALYSIS
56
Investment Analysis
ECONOMIC THEORIES TO
A six month mild decline in economic activity is EXPLAIN BUSINESS CYCLE
a(n):
• 1) Keynesian Theory
– theory developed in midst of Great Depression
A. recession – John Maynard Keynes developed this and other theories
on economy that advocated "Fiscal Policy" as a means
B. depression of achieving a "full employment" economy
– determined by forces of income and spending
C. correction – consumption is driving force behind growth
– to stimulate consumption, Keynes advocated increased
D. expansion Gov't spending and transfer payments to individuals
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Investment Analysis
• 2) Monetarist Theory
– fiscal policy is NOT main determinant of 3) Supply Side Theory
economic activity, rather monetary policy is the – i.e. Reaganomics, Christie Todd Whitman
causal factor – the economy is stimulated (effected) by tax cuts
– actions of Fed. Reserve are driving force – tax cuts and reduced government spending are
behind economic cycles the driving force behind economic cycles
58
Investment Analysis
59
Investment Analysis
ROLE OF THE
Measures of Inflation
FEDERAL RESERVE
• Consumer Price Index • Fed. Reserve controls money supply growth
– a "market basket" of selected goods and services across
the country • TOOLS OF FED. RESERVE:
– components of CPI include housing costs, food, – Discount Rate
clothing, medical, transportation,...
• Producer Price Index – Open Market Operations
– based on producer goods and does NOT include – Reserve Requirements
services
– increases in this are usually a precursor to increases in – Margin (Reg. T)
the CPI
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Investment Analysis
MEASURES OF MONEY
The narrowest measure of the money
SUPPLY (cont.)
supply is:
• M3
– a broader money definition, including M2
PLUS Time Deposits over $100,000
A. M-1
• L B. M-2
– the broadest money definition, including M3
PLUS Money Market Instruments and savings
C. M-3
bonds D. L
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Investment Analysis
C. L C. Demand Deposits
D. Currency in Circulation
D. GDP
Series #6 Investment Analysis 37 Series #6 Investment Analysis 38
MARKET ANALYSIS
• THE EFFECT OF THE BUSINESS CYCLE ON
THE MARKETS
– stock market is leading economic indicator
62
Investment Analysis
D. I, II, III, IV
Series #6 Investment Analysis 43 Series #6 Investment Analysis 44
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Investment Analysis
Inflation Decreases
A. U.S. goods are cheaper to foreign
Trade Deficit Widens
countries
Trade Deficit Narrows
B. U.S. exports are likely to rise
C. Foreign currencies buy fewer dollars Fed. Raises Interest Rates
EVENT EFFECT ON
EVENT EFFECT ON U.S.
DOLLAR U.S. STOCK PRICES
Economic Output Rises
More Foreigners Buy U.S.
Securities
Economic Output Falls
More U.S. Citizens Buy Foreign
Securities Interest Rates Fall
More U.S. Citizens Visit
Foreign Countries Interest Rates Rise
Inflation Rises
Series #6 Investment Analysis 51 Series #6 Investment Analysis 52
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Investment Analysis
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Investment Analysis
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Investment Analysis
A. systematic risk
A. issuers in differing states
B. non-systematic risk
B. industries
C. interest rate risk C. maturities
67
Investment Analysis
Which security is most affected by interest Which of the following securities has the
rate risk? highest level of credit risk?
68
Investment Analysis
A. I and III
B. I and IV
C. II and III
D. II and IV
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Investment Analysis
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Investment Analysis
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Investment Analysis
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Investment Analysis
Which of the following is NOT considered to All of the following are defensive stocks
be a cyclical stock? EXCEPT:
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Investment Analysis
INCOME (cont.)
Royalties received from an oil
3) PASSIVE INCOME and gas program are:
– investments in real estate or limited partnerships
A. partnership income
• net income from each 3 categories is added and
taxed at taxpayer's bracket B. passive income
C. earned income
D. portfolio income
74
Investment Analysis
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Investment Analysis
A. 6 months
B. 12 months
C. 18 months
D. 24 months
76
Investment Companies
INVESTMENT COMPANY
2) FACE AMOUNT
1) UNIT INVESTMENT TRUST
CERTIFICATE COMPANY
• organized under a "trust indenture" rather • virtually obsolete; investors pay fixed monthly
than being set up by a corporation amount to investment company which invests
• a unit trust that holds only mutual fund funds in highest quality obligations (i.e. U.S. Gov't
shares is a Plan Company Debt & AAA municipal and corporate debt)
• corporation can issue shares while trusts • certificate promises investor a guaranteed rate of
issue "shares of beneficial interest" which return
represent the interest in the specified • total payments made by investor are less than face
securities held by the trustees amount received at maturity
77
Investment Companies
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Investment Companies
Open End VS Closed End (cont.) A customer places an order to buy a mutual fund
with:
Open End Prices Closed End Prices
1. NAV Price
NAV = $9.15 and POP = $10.
1. NAV POP
$9.15 $10
$9.15 $10 How much will the customer pay for 1 share?
2. NAV Price
2. NAV POP $9.15 $9.15
$9.15 $9.15 3. NAV Price A. $9.15
$9.15 $9.00
• buying the fund at the B. $9.15 + commission
• buying and selling at the
POP (which may include
"Price" C. $10
a sales charge) and
• the NAV is how much the
redeeming at NAV securities in the fund are D. $10 + commission
valued at NOW
Series #6 Investment Companies 15 Series #6 Investment Companies 16
A customer places an order to sell a mutual fund A customer places an order to buy a closed end
with: fund with:
NAV = $9.15 and POP = $10. NAV = $9.15 and Price = $10.
How much will the customer receive for 1 share? How much will the customer pay for 1 share?
A. $9.15 A. $9.15
B. $9.15 - commission B. $9.15 + commission
C. $10 C. $10
D. $10 - commission D. $10 + commission
79
Investment Companies
80
Investment Companies
CHARACTERISTICS OF CHARACTERISTICS OF
MANAGEMENT COMPANIES MANAGEMENT COMPANIES (cont.)
– i.e. fund targeted to investors who want
absolute safety
• U.S. Gov't & Agency securities
• formed when someone conceives an idea
– i.e. fund targeted to corporate treasurers with
for an investment company objective excess funds
needed by investors • high dividend rate preferred shares to take
advantage of corporate dividend exclusion
– i.e. fund targeted to speculators willing to buy
bankrupt companies in hopes of achieving large
capital gains if some companies emerge from
bankruptcy
Series #6 Investment Companies 25 Series #6 Investment Companies 26
Under the Investment Company Act of 1940, to Under the Investment Company Act of 1940, to
be “diversified”, an investment company can be “diversified”, an investment company can
hold no more than which percentage of issuer’s hold no more than which percentage of its
voting stock? assets in one issuer’s voting stock?
A. 5% A. 5%
B. 10% B. 10%
C. 15% C. 15%
D. 25% D. 25%
81
Investment Companies
STRUCTURE OF MANAGEMENT
COMPANIES (cont.) The Board of Directors of an open-
end management company that has
• Board of Directors (cont.) been segregated into classes, must
– 40% of the board cannot be interested persons
• interested persons include:
have minimum terms of:
– legal counsel, broker-dealer, investment adviser, underwriter
• affiliated persons include:
– officers, directors, employees, owners of 5% of the voting stock, A. 1 year
and controlling persons
B. 2 years
– a majority of the board must also be independent of the
fund's regular broker and principal underwriter C. 3 years
• there is an exception to No-Load funds – all except for 1
member of the board may be interested persons
D. 5 years
Series #6 Investment Companies 33 Series #6 Investment Companies 34
STRUCTURE OF MANAGEMENT
The Board of Directors of an open- COMPANIES (cont.)
end management company that has
been segregated into classes, must • Investment Adviser
– in the prospectus, it details which adviser is to
have maximum terms of: manage the fund within its objective
– earns a management fee based on a percentage
A. 1 year of all assets under management (which is
usually about ½% of the fund's average daily
B. 2 years NAV)
C. 3 years – adviser's contract is initially set for 2 years and
D. 5 years subject to shareholder vote every year after
82
Investment Companies
STRUCTURE OF MANAGEMENT
The custodian bank performs all of the
COMPANIES (cont.) following functions EXCEPT:
• Custodian
– safeguards funds assets A. sending dividends and capital gains
– can act as transfer agent and paying agent distributions to shareholders
• making dividend distributions, sending out B. selecting the investment manager
proxies,… C. preparing and mailing proxies to
– receives custodial fee shareholders
D. holding the portfolio of investments in
safekeeping
Series #6 Investment Companies 39 Series #6 Investment Companies 40
83
Investment Companies
STRUCTURE OF
MANAGEMENT COMPANIES Rights of Shareholders
(cont.)
• to vote:
– for the Board of Directors
– for changes in the investment objective or
policy
– annually on investment adviser
– on buying or selling real estate
– on becoming a 12b-1 mutual fund
• marketing expenses can be paid using fund
assets
• to receive annual and semiannual reports
Series #6 Investment Companies 43 Series #6 Investment Companies 44
Special Services re: All of the following statements are true concerning
special services offered by money market mutual
Money Market Funds funds EXCEPT:
• Check Writing
– money market funds are managed to maintain an NAV A. many money market mutual funds permit investors
= $1.00 per share to draw on their accounts directly by writing checks
– investors may draw on their accounts directly
B. money market mutual funds compound interest on
• interest is usually compounded on a daily basis
a daily basis and pay dividends monthly
and pay dividends monthly
• wire transfers of funds from bank accounts and C. money market mutual funds allow telephone
exchanging of shares within a group of funds is transfers of money from bank accounts to the funds
allowed D. money market funds issues shares with a sales
• money market funds are no load funds charge
Series #6 Investment Companies 47 Series #6 Investment Companies 48
84
Investment Companies
85
Investment Companies
86
Investment Companies
87
Investment Companies
88
Investment Companies
Which of the following statements is true regarding From which of the following sources may
12b-1 fees for advertising and marketing of mutual a mutual fund deduct 12b-1 fees?
fund shares?
If a mutual fund wishes to adopt or reapprove a "12-b-1" If a mutual fund wishes to terminate a "12-b-1" plan, which
plan, which of the following are required? of the following are required?
I Majority vote of the outstanding shares of the fund I Majority vote of the outstanding shares of the fund
II Majority vote of directors of the fund II Majority vote of directors of the fund
III Majority vote of the "uninterested" directors of the fund III Majority vote of the "uninterested" directors of the fund
IV Majority vote of investment advisory board of the fund IV Majority vote of investment advisory board of the fund
89
Investment Companies
• price at which the fund will redeem shares • selling dividends is prohibited
– usually the redemption price is based on the – ex-dividend and ex-capital gains distribution
valuation of the underlying stocks as of 4 PM dates reduce the NAV by the amount of the
EST (the close of business of the NYSE) distribution
• NAV = Gross Asset Value – Liabilities
– NAV / # of outstanding Shares = NAV per
share
90
Investment Companies
A customer has $20,000 to invest in a mutual fund with a A customer wants to buy $30,000 of a mutual fund that has a N.A.V. of
$9.15 and P.O.P. of $10. The fund has the following breakpoint
Net Asset Value per share of $9.42 and a Public Offering schedule:
Price of $10.30. In the prospectus is the following
breakpoint schedule: Purchase Amount Sales Charge
0 - $10,000 8 ½%
Purchase Amount Sales Charge
$0 - $10,000 8 1/2% $10,001 - $25,000 7 ¾%
$10,001 - $25,000 7 3/4% $25,001 - Over 6 ½%
$25,001 - over 6 1/2%
The customer will be able to buy:
How many shares of the fund can the customer purchase?
A. 3000 shares
A. 1942
B. 3033 shares
B. 1959
C. 2123 C. 3066 shares
D. 2159 D. 3099 shares
Series #6 Investment Companies 87 Series #6 Investment Companies 88
MUTUAL FUNDS
Fund Net Asset Value Offering Price The sales charge on a fund with
Kapital $9.01 $9.59 NAV of $15.75 and POP of $15.75
is:
The sales charge percentage on Kapital
Fund is:
A. 0%
A. 6.05% B. 5%
B. 7.75% C. 5 1/2%
C. 8.5% D. 8 1/2%
D. 9.39%
Series #6 Investment Companies 89 Series #6 Investment Companies 90
91
Investment Companies
Contingent Deferred
A non-12-b-1 fee mutual fund has a Net Asset
Value per share of $9.15 per share. If the Sales Charge
customer purchases $5,000 of the fund, the • the letter "r" is used to designate those funds
maximum offering price per share is: charging redemption fees
• a fund charging no sales charge to purchase
A. $9.15 shares, BUT, if investor redeems shares within an
allotted time period, a redemption charge is
B. $9.50 imposed
C. $9.92
• NOTE: if the letter "t" is used, it designates a fund
D. $10.00 which charges a 12b-1 fee AND a redemption fee
92
Investment Companies
93
Investment Companies
A customer is dollar cost averaging by investing Determine the difference between the average cost and
$200 per month into a mutual fund. Over 4 the average price per share.
months, the customer has made purchases at Month Share Price Shares Bought
$13, $10, $8, and $9 per share respectively. By
1 $8 15
using this method, the customer has paid a
weighted average price per share that is how 2 $10 12
much lower than the straight average? 3 $6 20
4 $12 10
A. 0
A. $.58
B. $.25
B. $.65
C. $.32 C. $.82
D. $.50 D. $.90
Series #6 Investment Companies 107 Series #6 Investment Companies 108
94
Investment Companies
BASIS OF COMPARISON
• compare funds:
– with:
SELLING
• similar objectives
• similar risk and investment policies
MUTUAL FUND
– over the same time period
– based on total return
SHARES
– and their expense ratio
REDEMPTION OF SHARES
According to the Investment Company Act of 1940,
• shares are sold back to the fund NOT traded! payment for shares of an open-end investment
• request for redemption must be in writing, though some company must be made within how many days of
funds also offer telephonic redemption a shareholder’s request for redemption?
• funds may charge a redemption fee but all fees combined
cannot be greater than 8 1/2 % A. 1 business day
• purchasing AND redeeming shares are "forward priced" B. 5 business days
– computation of the NAV as of the close of business C. 5 calendar days
• fund must make payment to the customer within 7 calendar D. 7 calendar days
days
95
Investment Companies
A customer redeems 1,000 shares of XYZ An investor purchases 1,000 mutual fund shares with a Net
Fund. The computed Net Asset Value per Asset Value of $10 each, where the fund imposes a 5%
contingent deferred sales charge if the shares are redeemed
share is $13 and the Public Offering Price is within the first year. The sales charge decreases by 1% for
$13. The fund has a 1/4% redemption fee. each year the investor remains invested in the fund. If the
The customer will receive? investor were to redeem his shares during the second year of
holding the fund, based upon the NAV of $10, he or she will
receive:
A. $12,967
A. $10,000
B. $12,979
B. $9,600
C. $13,000 C. $9,500
D. $13,003 D. $9,400
Series #6 Investment Companies 115 Series #6 Investment Companies 116
96
Investment Companies
CLOSED-END FUND Which of the following NAV and POP prices could
be listings for mutual funds?
• one time stock issuance and stock then trades on I NAV = $10; POP = $9
an exchange II NAV = $10; POP = $10
• can trade at a premium or discount to Net Asset III NAV = $10; POP = $10.25
Value IV NAV = $10; POP = $10.50
– NOT redeemable
• customer receives execution price less a A. I only
commission upon liquidation B. I, II
C. II, III, IV
• customer buys and sells at the "ask"
D. I, II, III, IV
– the NAV is what the fund is worth if it liquidates
Series #6 Investment Companies 125 Series #6 Investment Companies 126
97
Investment Companies
Fund Net Asset Value Stock Close NAV Change Joe places an order to buy shares of a closed-
Acco $8.32 8.13 -.08 end fund in a regular way trade. Under FINRA
rules, the securities will be delivered and Terry
A customer who places an order to sell 100 shares must make payment:
of Acco Fund will receive:
A. prior to the processing of the trade
A. $805 less a commission B. by the end of the business day on which the
B. $813 less a commission trade was executed
C. $821 less a commission C. on the 3rd business day following trade date
D. $832 less a commission
D. on the 5th business day following trade date
98
Investment Companies
• ETFs are investment companies legally • the investors, who are institutions, buy
classified as open-end companies or Unit Creation Units with a basket of securities
Investment Trusts but are different from that generally mirrors the ETF’s portfolio
traditional open-end companies and UITs in • after purchasing a Creation Unit, the
the following respects: institution splits it up and sells the
– ETFs don’t sell individual shares directly to individual shares in the secondary market,
investors, but rather only issue their shares in allowing other investors to purchase
large blocks (blocks of 50,000 shares, for
individual shares (instead of Creation Units)
example) that are known as "Creation Units"
Series #6 Investment Companies 133 Series #6 Investment Companies 134
Exchange Traded Funds (ETFs) (cont.) Exchange Traded Funds (ETFs) (cont.)
• investors who want to sell their ETF shares have • because of the limited redeemability of ETFs, they are not
two options: considered to be—and may not call themselves—mutual
funds
– (1) they can trade individual shares to other investors
• thus, ETFs are shares of ownership in portfolios of
on the secondary market; or common stock that track the performance of a specific
– (2) they can redeem the Creation Units back to the ETF. index
• ETFs generally redeem Creation Units by giving investors the – i.e. the S&P 500 Index Fund, traded on the AMEX, called
"SPIDER" (SPDR), which stands for "Standard and Poor's
securities that comprise the portfolio instead of cash Depository Receipt"
– i.e. an ETF invested in the stocks contained in the Dow Jones • though ETFs trade like stock, the purchaser is required to
Industrial Average (DJIA) would give a redeeming shareholder receive a prospectus or a product document summarizing
the actual securities that constitute the DJIA instead of cash
key information about the ETF and the details of where a
prospectus may be obtained
Series #6 Investment Companies 135 Series #6 Investment Companies 136
Exchange Traded Funds (ETFs) (cont.) Exchange Traded Funds (ETFs) (cont.)
• Advantages of an ETF VERSUS an Index • Most Actively Traded ETFs
Mutual Fund – SPDRs
– ETFs trade continuously throughout the day with the • Standard and Poor's 500 Depository Receipts
market price based on the instantaneous value of all the • a.k.a. Spiders
securities included within the underlying index – DIAs
– ETFs are purchased or sold any time during the day • Dow Jones Industrial Average – 30 Industrial Stocks
(incurring a commission) • a.k.a. Diamonds
– ETFs can be purchased on margin and sold short – QQQs
– ETFs have generally lower expense ratios • NASDAQ 100 Index
• a.k.a. Q's
• dividends and capital gains are distributed to
– the principal trading market for ETFs is the American
shareholders to BOTH ETFs and mutual funds Stock Exchange
Series #6 Investment Companies 137 Series #6 Investment Companies 138
99
Investment Companies
100
Fund Income & Taxation
Series #6 Fund Income & Taxation 1 Series #6 Fund Income & Taxation 2
Series #6 Fund Income & Taxation 3 Series #6 Fund Income & Taxation 4
101
Fund Income & Taxation
Series #6 Fund Income & Taxation 7 Series #6 Fund Income & Taxation 8
DIVIDENDS
A mutual fund has received dividend and interest
• paid from net investment income income from its portfolio of investment securities.
• the amount of the dividend paid, as well as How often during the year can it make
distributions of these as dividends to its
the frequency, may vary shareholders?
• dividend yield does NOT include capital
gains A. One time
B. Two times
C. Four times
DIVIDEND YIELD = Dividend Paid
D. As often as the fund sees fit
Current Net Asset Value
Series #6 Fund Income & Taxation 9 Series #6 Fund Income & Taxation 10
UNREALIZED APPRECIATION OR
During the past year, the Snow White Mutual DEPRECIATION OF INVESTMENTS
Fund paid a dividend of $1.00 per share and
capital gains of $1.50 per share. At the end of • UNREALIZED APPRECIATION in fund shares is a
the year, the net asset value per share for the component of an investor's total return
fund was $25, up from $23 the previous year. – i.e. if a fund holds stock that appreciates in value, the
What is the dividend yield for the Snow White net asset value will increase
• investors are not taxed on this gain until the fund sells the
Fund? shares
• UNREALIZED DEPRECIATION in fund shares
A. 4%
reduces the net asset value per share
B. 6%
– a "loss" is realized when the depreciated securities
C. 10% are sold by the fund
D. 11%
Series #6 Fund Income & Taxation 11 Series #6 Fund Income & Taxation 12
102
Fund Income & Taxation
• to realize a capital gain, a mutual fund must sell the securities for a profit
• CAPITAL GAINS are DISTRIBUTED ANNUALLY
When a management company shows an increase
• under IRS rules, if a fund doesn’t distribute at least 98% of capital gains, it is in net asset value due to a rising market, this is
subject to a 4% excise tax on undistributed income called:
– if the fund realizes it has not distributed enough capital gains, the fund may make
a supplemental long-term capital gains distribution, to avoid this excise tax
• a fund may not decided to distribute all of its capital gains to retain A. asset appreciation
cash
– shareholders must still report their allocated portion of the gains for income tax
B. net investment income
via Form 2439 – Notice to Shareholder of Undistributed Long-Term Capital C. a capital gain distribution
Gains
• any losses can offset gains and the fund only distributes the net capital gain D. increased asset coverage
(if applicable)
Series #6 Fund Income & Taxation 13 Series #6 Fund Income & Taxation 14
Series #6 Fund Income & Taxation 15 Series #6 Fund Income & Taxation 16
Series #6 Fund Income & Taxation 17 Series #6 Fund Income & Taxation 18
103
Fund Income & Taxation
The tax rate applied to cash dividends received The tax rate applied to interest received from
from stock investments is the same rate as: bond investments is the same rate as for:
Series #6 Fund Income & Taxation 19 Series #6 Fund Income & Taxation 20
Series #6 Fund Income & Taxation 21 Series #6 Fund Income & Taxation 22
A. I and III
B. I and IV
C. II and III
D. II and IV
Series #6 Fund Income & Taxation 23 Series #6 Fund Income & Taxation 24
104
Fund Income & Taxation
TAX-EXEMPT INTEREST
Two years ago, an individual had invested INCOME
$5,000 in a mutual fund. Over the two years, the
fund has distributed $100, consisting of $75 of • the dividends received from a mutual fund
dividends and $25 of capital gains. The investor that invests in tax-free municipal bonds
has reinvested these distributions in additional are not taxable, however, when a tax-free
shares of the fund. The investor's aggregate municipal bond fund distributes capital
current cost basis is:
gains, these gains would be subject to
A. $5,025 capital gains tax
B. $5,075 – only the interest income is tax exempt
C. $5,100
D. $5,225
Series #6 Fund Income & Taxation 25 Series #6 Fund Income & Taxation 26
Series #6 Fund Income & Taxation 27 Series #6 Fund Income & Taxation 28
Series #6 Fund Income & Taxation 29 Series #6 Fund Income & Taxation 30
105
Fund Income & Taxation
A. $0 A. $38
B. $40 B. $45
C. $52
D. $55 C. $52
D. $58
Series #6 Fund Income & Taxation 33 Series #6 Fund Income & Taxation 34
Series #6 Fund Income & Taxation 35 Series #6 Fund Income & Taxation 36
106
Fund Income & Taxation
A mutual fund family offers a variety of funds and WASH SALE RULE
has an "exchange feature" at NAV. If an investor
opts to switch out of one fund into another in this
family, which of the following statements are true? • applies to the purchase of security sold at a
loss (as remember, up to $3,000 of net
I a sales charge will be paid upon switching capital losses can be used to offset one's
II no sales charge will be incurred earned income)
III a tax event will take place upon switching • the loss is disallowed if the security bought
IV no taxable event occurs because of the back within 30 days
exchange feature • also, the loss is disallowed if equivalent
security is purchased (i.e. call option,
A. I and III warrant, convertible bond, convertible
B. I and IV preferred stock, or rights are purchased)
C. II and III
D. II and IV • to avoid the rule, wait 31 days
Series #6 Fund Income & Taxation 37 Series #6 Fund Income & Taxation 38
Series #6 Fund Income & Taxation 41 Series #6 Fund Income & Taxation 42
107
Fund Income & Taxation
REGULATED INVESTMENT
COMPANY (cont.)
If Franciscan Growth Mutual Fund makes net
• if 90% of an investment company's Net Investment Income (NII) is investment income of $100,000, to be
distributed to shareholders, the fund is "Regulated" under
Subchapter M regulated under Subchapter M of the Internal
– fund only has to pay tax on retained income Revenue Code, Franciscan must distribute to
– if 90% isn't distributed, it's not "Regulated" shareholders at least:
– to be Regulated:
• 90% of a fund's NII, income derived from dividends, interest, and A. $85,000
gains must be distributed to shareholders; B. $90,000
• 50% of a fund's assets must be invested in diversified securities
• the fund must be registered under the Investment Company Act of
C. $95,000
1940 D. $100,000
• election to the regulated must be filed with the IRS
Series #6 Fund Income & Taxation 45 Series #6 Fund Income & Taxation 46
UNDISTRIBUTED CAPITAL
GAINS
• shareholders are taxed for undistributed
capital gains
• if a fund realized $1.00 capital gain and
only distributed $.80, the shareholder must
still report $1.00 for that year
– however, shareholders get a credit against
their tax liability for any tax paid by the fund
on that gain
108
Variable Annuities
109
Variable Annuities
110
Variable Annuities
Features of Variable
Capital gains realized in a variable annuity
Annuity Contracts separate account during the accumulation
• tax deferred accumulation period are:
• voting rights
A. not subject to tax
B. subject to a maximum tax rate of 20%
C. subject to a maximum tax rate of 28%
D. subject to a maximum tax rate of 35%
111
Variable Annuities
A variable annuity contract holder wants an Which of the following annuity payment options
annuity payout option that will guarantee that will pay the estate of the annuitant if the full
payments continue only for his or her life. The
value of the account was not received?
appropriate payout option is:
A. Life annuity
A. Life annuity
B. Life annuity with period certain B. Life annuity with period certain
C. Joint and last survivor annuity C. Joint and last survivor annuity
D. Unit refund annuity D. Unit refund annuity
112
Variable Annuities
PURCHASING VARIABLE
ANNUITIES
To sell a variable annuity, what license(s) is (are)
• to sell contracts to customers, either a Series #7 or #6 needed?
is required as well as a state insurance license
• customers invest by making a lump sum investment, A. Series #6 only
varied periodic payments, or by signing a "long-term B. Series #7 only
investment contract" (a.k.a. contractual plan) C. Insurance license only
– here, the customer decides to invest (let's say) D. Series #6 or Series #7 plus a state insurance
– $100 a month for the next 10 years license
• sales charges must be "fair and reasonable"
113
Variable Annuities
I Dollar value of the units is fixed A. a fixed number of annuity units based on the number of
II Dollar value of the units vary accumulation units.
III Number of units is fixed B. a fixed number of annuity units based on the value of the
IV Number of units varies accumulation units.
C. a fixed value for the annuity units as set forth in the
A. I and III original contract.
B. I and IV
C. II and III D. a lump sum payment equal to the value of the units.
D. II and IV
Series #6 Variable Annuities 35 Series #6 Variable Annuities 36
114
Variable Annuities
115
Variable Annuities
Income Tax Treatment of All of the following are true about variable
annuities EXCEPT:
Variable Annuities (cont.)
• i.e. separate account: A. Salesman must register with both the SEC
and the State Insurance Commission
– from contributions = $10,000
B. Annuity payments may not be reduced despite
– from buildup = $5,000 increased expenses absorbed by the insurance
• of the total $15,000: company
– 67% = already taxed; 33% taxable
C. Variable annuities are considered to be
• investor takes 200 monthly payments as the payout securities regulated by the Investment Company
option
Act of 1940
– each payment = $15,000 / 200 = $75
– $50 is not taxable while $25 is taxable
D. Investment risk is carried by the issuer of the
annuity
Series #6 Variable Annuities 45 Series #6 Variable Annuities 46
116
Variable Annuities
Jane, aged 63, bought a variable annuity James Darrow elected the life income option for
contract in 2006 for $10,000. In 2012 Jane payout of the $250,000 account balance in his non-
elects to terminate her variable annuity contract qualified variable annuity. Darrow has a cost basis of
and accept a life income when her life $75,000. Darrow's life expectancy is 15 years. How
expectancy was 12.5 years and the account much of each annual payment will be excludible from
value was $27,000. How much of the first Darrow's taxable income each year?
annual payment of $3,000 would be taxable?
A. $300
A. $600 B. $1,667
B. $1,200
C. $3,000
C. $1,800
D. $2,200 D. $5,000
B. Income tax and 10% penalty will be due on $400. A. I and III
C. Income tax will be due on $4,000. B. I and IV
D. Income tax and 10% penalty will be due on $4,000. C. II and III
D. II and IV
Series #6 Variable Annuities 51 Series #6 Variable Annuities 52
The owner of a variable annuity contract surrenders Which two of the following terms are descriptive of
the contract for a lump sum during the accumulation annuity contracts?
period. Under these circumstances, all of the
following statements are correct EXCEPT: I Universal
II Variable
A. Only the dollar amount in excess of the contract III Fixed
owner’s cost basis is included in her gross income
B. If surrender occurs before age 59 1/2 while the IV Participating
contract owner is in good health, a 10% penalty is
imposed on any taxable income A. I and III
C. If surrender occurs after age 59 1/2, the B. I and IV
accumulated investment income escapes income
C. II and III
taxes
D. The 10% penalty is not imposed after age 59 1/2 D. II and IV
Series #6 Variable Annuities 53 Series #6 Variable Annuities 54
117
Variable Annuities
118
Variable Annuities
VARIABLE ANNUITY
ROLLOVER (cont.) All of the following rollovers are tax free EXCEPT:
119
Variable Annuities
Which of the following terms describe Equity-Indexed Which statements are TRUE when comparing Equity Indexed Annuities
to Variable Annuities?
Annuities?
I In a year of sharply rising stock prices, variable annuities will
I Investment product outperform equity indexed annuities
II Insurance product II In a year of sharply rising stock prices, equity indexed annuities will
outperform variable annuities
III Principal protected
III In a year of sharply falling stock prices, variable annuities will
IV Not principal protected outperform equity indexed annuities
IV In a year of sharply falling stock prices, equity indexed annuities will
outperform variable annuities
A. I and III
B. I and IV A. I and III
B. I and IV
C. II and III
C. II and III
D. II and IV D. II and IV
Series #6 Variable Annuities 69 Series #6 Variable Annuities 70
120
Variable Annuities
Under which of the following circumstances would a Which of the following statements describes a
universal life insurance policy operate as term insurance? universal life insurance policy?
121
Variable Annuities
An insurance policy that promises to pay a named Which type of life insurance has a fixed annual
beneficiary a specified amount of money only if premium, a fixed death benefit, a fixed time period
the insured dies within a certain limited time is a: for coverage and no cash value?
122
Variable Annuities
123
Retirement Plans / College Plans
RETIREMENT PLANS
• ERISA
– employer established plans are regulated under
ERISA (Employee's Retirement Income
RETIREMENT PLANS Security Act)
124
Retirement Plans / College Plans
Which of the following statements are true Which of the following statements are true
regarding a tax qualified retirement plan? regarding a non-tax qualified retirement plan?
IRA
The maximum contribution into an IRA
• any employed person qualifies and can for an individual, age 50 or older, is:
contribute lesser of 100% of income or:
Year Amount A. $500
2015 $5,500 B. $3,000
– if married and filing a joint return, the couple C. $4,500
can contribute 2 TIMES the amount
D. $6,500
– "IRA Catch-Up”
– for taxpayers aged 50 or over, the individual
can contribute an additional $1,000
Series #6 Retirement Plans 9 Series #6 Retirement Plans 10
125
Retirement Plans / College Plans
• contribution is always tax deductible in full I The maximum permitted IRA contribution is $2,000
if not covered by another pension plan II The maximum permitted IRA contribution is $5,500
– however, if investor IS in another plan, tax III The contribution is tax deductible
deductible amount is phased out as income IV The contribution is not tax deductible
level increases
A. I and III
B. I and IV
C. II and III
D. II and IV
Series #6 Retirement Plans 13 Series #6 Retirement Plans 14
126
Retirement Plans / College Plans
127
Retirement Plans / College Plans
All of the following retirement plans require that The penalty tax applied for not taking required
minimum distribution amounts be taken once the minimum distribution from a qualified retirement plan
participant reaches the age of 70 1/2 EXCEPT: in a given year is:
128
Retirement Plans / College Plans
A. roll the funds over into a new IRA in the spouse's A. roll the funds over into a new IRA in the spouse's
name name
B. transfer the IRA funds to a beneficiary distribution B. transfer the IRA funds to a beneficiary distribution
account account
C. cash out the inherited IRA account C. cash out the inherited IRA account
D. disclaim the inherited IRA account D. disclaim the inherited IRA account
Series #6 Retirement Plans 33 Series #6 Retirement Plans 34
129
Retirement Plans / College Plans
130
Retirement Plans / College Plans
131
Retirement Plans / College Plans
A doctor earns $260,000 per year and A self-employed individual earns $100,000 per year. He
works part time for a corporation and earns an additional
contributes the maximum for the year to a Keogh. $50,000. Which of the following statements are true?
The doctor employs a male nurse earning
I The maximum annual contribution to a Keogh Plan
$40,000 a year. The contribution to be made on
for this person is $20,000
behalf of the male nurse is: II The maximum annual contribution to a Keogh Plan
for this person is $53,000
III The individual may not contribute to an IRA
A. $4,000 IV The individual may contribute a maximum of $5,500
to an IRA
B. $6,000
A. I and III
C. $8,000 B. I and IV
C. II and III
D. $10,000 D. II and IV
Series #6 Retirement Plans 49 Series #6 Retirement Plans 50
TAX DEFERRED
To be included in a Keogh (HR10) Plan, ANNUITIES - TDAs (403b)
employees must work in excess of:
• normally, annuities are nontax qualified, however,
employees of nonprofit organizations (i.e. schools,
A. 500 hours per year hospitals,..) are allowed to contribute "tax
qualified" annuities
B. 1,000 hours per year – the investments in the plan must be managed by a
professional manager
C. 1,500 hours per year – contributions are tax deductible and earnings are tax
deferred
D. 2,000 hours per year – so all distributions are 100% taxable
A. Common stocks
A. private corporations B. Mutual Funds
B. foundations C. Fixed Annuities
D. Variable Annuities
C. state universities
D. local schools
Series #6 Retirement Plans 53 Series #6 Retirement Plans 54
132
Retirement Plans / College Plans
133
Retirement Plans / College Plans
ERISA ERISA
• Payroll Deduction Savings • Simplified Employee Pension (SEP) IRA
– employers match employee contributions – generally used by small businesses
– employer makes contribution on employee's behalf
– 401K plan
– virtually all employees included (full & part-time) as long as
– build up is tax deferred; when payments are taken, they're 21 years old and have worked at least 3 out of the last 5
100% is taxable upon distribution years
– maximum annual contribution is $18,000 in 2015 – contribution is made by "salary reduction"
– contribution is deducted from gross income employee received
– subject to ERISA
– cannot exceed 25% of income up to a maximum of $53,000
– used by smaller employers because it's less complicated
134
Customer Accounts
SUITABILITY
• FOR ALL FINRA, MSRB, CBOE:
– these entities are known as SROs (Self‐Regulatory
Organizations)
CUSTOMER ACCOUNTS • non‐governmental organizations that have the power to create
and enforce industry regulations and standards
• the main objective is to protect investors through the
establishment of rules that promote ethics and equality
– the information required on a new account form would
depend upon the type of securities that will be traded
– know your customer rule; suitability determination is
required before making recommendations
135
Customer Accounts
A customer wishes to open a new account, but refuses In order to open a new account for an
to give her social security number and date of birth, individual customer, which information is
claiming that the release of such information would required on the new account form?
allow the customer's identity to be stolen. Which
statement is true? I Customer name
II Residence address
A. As long as the customer signs a statement to the
III Date of birth
effect that she is the true account owner, then the
account can be opened IV Social security number
B. The account can be opened as long as the firm is
able to verify the customer's identity A. I and III
C. The account can be opened as long as the manager B. II and IV
approves C. I, II, III
D. The account cannot be opened D. I, II, III, IV
Series #6 Customer Accounts 7 Series #6 Customer Accounts 8
NEW ACCOUNT FORM (cont.)
Independent verification of a new
customer's identity can be satisfied by • the rep opening the account must obtain the customer's
occupation
obtaining a photocopy of all of the – if the customer is an employee of another FINRA member, the
following EXCEPT the customer's: executing firm must determine whether opening the account is a
conflict of interest
– before opening the account, the firm sends notices of the opening of
the account to the employing firm
A. passport • the executing firm must make available duplicate confirmations and
B. driver's license statements
• this rule does NOT apply to an employee of another firm wanting to open
C. military ID an account solely to buy investment company securities, as the employee
has NO idea which specific securities the fund manager will be purchasing
D. marriage certificate
Series #6 Customer Accounts 9 Series #6 Customer Accounts 10
136
Customer Accounts
FEDERAL RESERVE MARGIN RULES SET
UNDER REG. T
• 100% must be deposited for a mutual fund
• closed end funds may be bought in the
secondary market on margin
Regulation T • Reg. T only applies to non‐exempt securities
(not U.S. Gov't, Agency, or Municipal)
– Reg. T controls credit from broker to customer
DISCRETIONARY ACCOUNT DISCRETIONARY ACCOUNT (cont.)
• customer gives brokerage firm trading
authorization • considered "discretionary" if size and/or
• customer must sign trading authorization BEFORE security are chosen by broker
any discretionary trades take place • principal must approve orders promptly
• 4 items chosen:
– size of trade
– security
– price of execution
– time of execution
137
Customer Accounts
Given the following orders, which one requires Which one of the following orders requires
specific customer authorization? specific customer authorization?
A. Customer's order is to buy 100 shares of A. Customer's order is to sell 100 shares of KO
IBM at the best price available at the market
B. Customer's order is to sell 100 shares of KO B. Customer's order is to buy as much of GE at
at the market $40 during this trading day
C. Customer's order is to buy 100 shares of C. Customer's order is to buy 100 shares of
any computer stock priced at under $40 IBM at $125
D. Customer's order is to sell 100 shares of D. Customer's order is to sell 100 shares of GE
GM when it gets to a certain level or lower when it gets to a certain level or lower
All of the following statements are true Under New York Stock Exchange rules, a
regarding discretionary accounts EXCEPT: written power of attorney is required for a
registered representative to choose which of the
A. The account must be approved by a principal following order related items?
or branch manager
B. An account can be opened once a customer I Security to be traded
II Size of the order
has guaranteed that a written power of attorney III Price of Execution
has been placed in the mail IV Time of Execution
C. Each order ticket must be marked
"discretionary" A. I and II
D. Every order ticket must be approved B. III and IV
promptly by a general principal or branch office C. I, II, III
manager D. I, II, III, IV
Series #6 Customer Accounts 23 Series #6 Customer Accounts 24
138
Customer Accounts
THIRD PARTY TRADING (cont.)
CORPORATE / PARTNERSHIP ACCOUNTS
All of the following paperwork is required to
open a corporate account EXCEPT:
CORPORATE ACCOUNT
– copy of corporate charter is required
A. corporate charter
– a "resolution" with corporate seal affixed to it
will state who has trading authorization B. corporate resolution
PARTNERSHIP ACCOUNT C. proof of domicile
– copy of partnership agreement must be
obtained D. corporate seal
139
Customer Accounts
ACCOUNTS FOR INVESTMENT
FIDUCIARY ACCOUNT (cont.)
ADVISERS
• cash account only, no margin unless specifically INVESTMENT ADVISER
authorized – person that a customer entrusts to manage his money
• fiduciaries are often limited to investing in securities – will open account with brokerage firm to perform trades for
customer
that are on a "legal list" (safe securities)
– can have hundreds of customers
– this list is provided by the State OR they must follow the
"Prudent Man Rule" – Wrap Account
• this rule states that only investments that would be made by a • where all brokerage services are paid by the customer through a flat
prudent individual are allowed annual fee
• thus, there are no separate commissions on trades or charges for
other services
• reps offering these accounts must be registered as an Investment
Adviser Rep and pass either the Series #65 or Series #66 state‐
licensing exam
Series #6 Customer Accounts 33 Series #6 Customer Accounts 34
140
Customer Accounts
BOOKS AND RECORDS
Which of the following is a true statement about
managed wrap accounts? The customer is charged:
• purchase and sales records must be
A. a single annual fee based on total assets in the maintained for 6 years and readily accessible
account for account transactions and maintenance during the first 2 years of operations
B. a commission for each transaction performed • a separate file of customer complaints must
C. a commission for each recommendation that be kept and any action taken by the member
results in a transaction
D. both a commission on each transaction
in response
performed and an annual maintenance fee based
on total assets in the account
FORMS OF OWNERSHIP FOR FORMS OF OWNERSHIP FOR
INVESTMENTS INVESTMENTS (cont.)
INDIVIDUAL ACCOUNTS JOINT ACCOUNTS
• held in the name of a single person – Joint Tenancy with Rights of Survivorship
– only that person can enter orders (i.e. trade the account) • if one party dies, the other is the sole owner
– Transfer on Death ‐ TOD – Tenancy in Common
• has a named beneficiary receiving the assets of the account only
upon death of the owner • each party has a % and is passed to estate if he dies
– the assets pass directly to the beneficiary, avoiding probate
• this designation is used many times for elderly people who can
provide for automatic transfer of assets to heirs after death, but
still maintain control over the assets during their lifetime
141
Customer Accounts
Two brothers wish to open an account with a Two brothers wish to open an account with a
registered representative. In sharing in the registered representative. In sharing in the
account's gains or losses, they wish that if one account's gains or losses, they wish that if one
dies, the deceased brother's interest be dies, the deceased brother's interest will go to
handled by his estate. What kind of account the other brother. What kind of account should
should be opened? be opened?
A. corporate account
A. corporate account
B. partnership account
B. partnership account
C. joint account with rights of survivorship
D. joint account with tenants in common C. joint account with rights of survivorship
D. joint account with tenants in common
TRUST ACCOUNTS (cont.)
The person who donates the assets into
• Revocable Trust the trust is the:
– the grantor transfers assets into a trust, but has
the right to take them back
A. Custodian
• taxed at the rate of the grantor
• Irrevocable Trust B. Fiduciary
– the grantor cannot take the assets back
• taxed at the rate of the trust C. Grantor
D. Trustee
142
Customer Accounts
Which of the following statements are true regarding non- To open a new account for a non-revocable trust,
revocable trusts?
which statement is true?
I Income is taxed at the rate scheduled for the grantor
II Income is taxed at the rate scheduled for the trusts A. The tax identification number of the trust must be
III The grantor has control over the assets obtained
IV The trustee has control over the assets B. The tax identification number of the trustee must
be obtained
A. I and III C. The tax identification of the trust beneficiary must
be obtained
B. I and IV
C. II and III D. There is no required to obtain a tax identification
number when opening a trust account
D. II and IV
Series #6 Customer Accounts 53 Series #6 Customer Accounts 54
143
Customer Accounts
CUSTODIAN ACCOUNTS (cont.)
Which of the following best describes a
– any adult can open account for minor (doesn't have to be
custodian in a Uniform Gifts to Minors
related) Account?
– all securities must be registered in account name
– cash balances can't be held in account for extended period A. Adult
must be invested in a security or transferred to a
Custodian Account maintained at a bank B. Relative
– one custodian for one minor account
• canNOT have "John Jones as custodian for Jill and Jean Jones" C. Person living in minor’s state of residence
• need 2 separate accounts: for John & Jill and John & Jean
D. Person with parental obligation to the
minor
144
Customer Accounts
CUSTODIAN ACCOUNTS (cont.) CUSTODIAN ACCOUNTS (cont.)
– cash accounts only NO margin accounts – no third party trading authorizations
– gifts are irrevocable – options usu. NOT considered appropriate for
custodian accounts (covered call writings not bad,
– S.S. # of minor is needed
though)
– if custodian is the parent and the minor is
under 18, the parent's S.S. # must also be – if rights offering, custodian sells rights or exercises
obtained because any substantial income custodian cannot let them expire worthless as this
generated is taxable at the adult's tax bracket isn't in account's best interest
145
Customer Accounts
MARGIN ACCOUNT RULES
Uniform Gifts to Minors Act accounts
require the social security number of • OPENING A MARGIN ACCOUNT
the: – when opened, it allows the customer to put up
50% to buy a security
• the customer borrows the other 50% from the
A. parent if child is below 18 years of brokerage firm
age
B. custodian
C. minor
D. donor
Series #6 Customer Accounts 67 Series #6 Customer Accounts 68
MARGIN ACCOUNT RULES (cont.) MARGIN ACCOUNT RULES (cont.)
– when the account is opened, the customer signs the
Margin (a.k.a. Hypothecation or Customer) Agreement, • the Federal Reserve sets the initial margin on non‐
pledging securities as collateral for the 50% borrowed exempt (corporate) securities under Regulation T
• the broker‐dealer holds these securities in "street name", meaning
in the name of the firm, thereby allowing the broker‐dealer to sell – marginable securities
the securities at any time without needing the customer's • stocks traded on exchanges and NASDAQ
signature • closed‐end funds
• hypothecation allows the firm to commingle customer margin • U.S. Government and Municipal securities
securities with other customer margin securities • Corporate bonds
– note that any fully paid securities must be segregated and placed in
safe‐keeping – non‐marginable securities
• new issues, including mutual funds and UITs
• non‐negotiable Series EE and HH bonds
MARGIN ACCOUNT RULES (cont.) MARGIN ACCOUNT RULES (cont.)
• note that if a security is not marginable, it • if the level falls lower than the minimum, a
must be paid for in full maintenance call is issued, requiring the
– also, after held for 30 days, mutual funds become customer to deposit more money so that the
marginable account goes back up to the minimum
• after the account is opened, the customer maintenance of 25%
must keep minimum maintenance margin
requirements set by FINRA
– i.e. where the initial margin is 50%, the minimum
is only 25%
Series #6 Customer Accounts 71 Series #6 Customer Accounts 72
146
Customer Accounts
MARGIN ACCOUNT RULES (cont.)
• besides margin, Regulation T also requires investors to deliver
and make payment for securities "promptly", but no later
Under Regulation T, full payment in a
than 2 days after the settlement (i.e. T + 5 = trade date plus 5 cash account must be made:
business days = S + 2 = Settlement plus 2 business days)
– if payment isn’t received by 5 days, an extension may be requested
• if the position is still not paid, the firm is obligated to sell out the position
A. promptly
and freeze the account for 90 days B. within 5 business days of trade date
– when the account is frozen, all trades require cash payment in advance
C. within 35 calendar days of trade date
D. within 90 calendar days of trade date
MARGIN ACCOUNT RULES (cont.)
Payment for a securities transaction
must be received by how many days • lastly, if the amount of the margin call is for $1,000
in order for the account not to be or less, the broker‐dealer may elect to not liquidate
the position or freeze the account
frozen?
A. promptly
B. next business day
C. 3 business days
D. 5 business days
Series #6 Customer Accounts 75 Series #6 Customer Accounts 76
CONTINUING MAINTENANCE OF CONTINUING MAINTENANCE OF
ACCOUNT ACCOUNT (cont.)
• confirms are sent day after trade date Inherited Account
• statements sent quarterly unless trades occur then • if an account is "inherited" by another
sent for that month
representative, the account should be
• mail can't be held by brokerage firm, however, if updated prior to effecting transactions in the
customer requests that his mail be held:
account (note, there is no need for an
• IF TRAVELING:
additional new account form to be completed)
– DOMESTICALLY
• 2 months holding permitted
– INTERNATIONALLY
• 3 months holding permitted
147
Customer Accounts
SHARING PROFITS IN AN
A customer is traveling to Alaska and ACCOUNT
directs your firm to hold his mail. • reps cannot share in the profits of an account unless
Under NYSE rules, the mail can be the firm approves of this in writing; and the rep
held for: shares in proportion to his/her financial contribution
– an exception to the proportionate test is allowed where
the joint account is opened with an immediate family
A. one month member
• i.e. for a rep opening an account with her spouse, sharing need not
B. two months be "proportionate
C. three months
D. the duration of the trip
Series #6 Customer Accounts 79 Series #6 Customer Accounts 80
BORROWING FROM OR LENDING TO
CUSTOMERS
A registered representative is permitted to share in • normally, reps cannot borrow from or lend money to customers
the gain and loss of a customer account: • however, loans are allowed for:
– immediate family members (also included here are non‐related persons under
the rep's financial control)
A. only with FINRA approval – financial institutions which normally provide credit in the course of its
B. if the sharing is in proportion to capital business
– customers who are reps of the same firm
contributed and the principal approves – customers and reps who have a personal relationship outside of the
C. if the customer is not related to the registered broker/customer relationship (such as live‐in boyfriend/girlfriend) OR a
business relationship outside of the broker/customer relationship
representative
• the rep must obtain firm approval of any of these arrangements with
D. if such sharing will benefit the customer customers EXCEPT in the case of immediate family and financial
institutions
148
Customer Accounts
CUSTOMER PRIVACY RULES CUSTOMER PRIVACY RULES
• SEC Regulation SP (cont.) • acceptable opt‐out notices:
– firms cannot divulge non‐public information about – including a reply form with an opt‐out notice;
customers to 3rd parties unless the firm has given – providing an electronic means to opt‐out, if the
notice to the customers of this intent and the customer agrees to electronic delivery of info
customer has not elected to opt out of the – providing a toll‐free #
disclosure (the customer is given 30 days to "opt
out") – including designated check‐off boxes on the
relevant forms
149
Customer Accounts
CUSTOMER PRIVACY RULES CUSTOMER PRIVACY RULES
• unacceptable opt‐out notices • Non‐Objecting Beneficial Owner ‐ NOBO
– having the customer write a letter exercising his – a customer who has chosen NOT to opt‐out, and thus the
customer’s name and address can be disclosed to any
opt‐out right; or
issuer in which the customer has invested
– having the consumer use check‐off boxes on a • thus, the issuer can send out proxies, 10Ks, 10Qs,…directly to the
form only included in the original notice, but not customer
within the subsequent annual notice • Objecting Beneficial Owner ‐ OBO
– a customer who HAS chosen to opt‐out, and thus the firm
canNOT disclose customer info
• an issuer distributions would be sent to the firm and the firm
would retransmit info to the customer
CUSTOMER PRIVACY RULES CUSTOMER PRIVACY RULES
• note that if a person does not have an account and • this rule applies to individual transactions and
simply wants to sell some securities and then have a NOT to aggregated or averaged information
check remitted, this person is a "consumer" and NOT that is not linked to a specific customer
a customer
– the consumer only gets the privacy notice at the time of • lastly, if a regulator (i.e. FINRA or the SEC)
the transaction requests customer information, the privacy
• also, the broker‐dealer must: rules do not apply
– ensure the security and protect the confidentiality of
customer records; and
– protect customer records against unauthorized access
150
Customer Accounts
BANK SECRECY ACT ANTI‐MONEY LAUNDERING RULES
• MONEY LAUNDERING • PATRIOT Act
– the principal scope of the act – Congress passed the Providing Appropriate Tools
– there are 3 main activities of money laundering: Required to Intercept and Obstruct Terrorism
• 1) depositing "ill‐begotten" money in a bank and then
transferring these funds as legitimate funds somewhere else (PATRIOT) Act after the 9/11 World Trade Center
• 2) structuring – concealing illegal money through a series of bombing requiring securities firms and financial
transactions rather than in a one‐lump sum institutions to:
• 3) integration – commingling suspect funds with legitimate
funds
• establish written money laundering programs;
• WIRE TRANSFERS • provide ongoing training to employees so that they can
detect and prevent money laundering; and
– detailed transactions of amounts of $3,000 or more must be made
available for regulators' review (though they need not be filed) • report suspicious transactions and activity
ANTI‐MONEY LAUNDERING RULES ANTI‐MONEY
(cont.) LAUNDERING RULES (cont.)
• thus, outside of the SROs' Suitability rules, a • when opening an account, the firm must
higher level of scrutiny must be given to independently verify the customer's
customers who: name and address; and for non‐resident
– are from a country which is NOT a member of the aliens, must obtain the customer's
Financial Action Task Force (FATF) – these are 29 passport number and the necessary U.S.
countries that combat money laundering tax forms
worldwide;
– reside in countries that have bank secrecy laws;
– operate cash‐intensive businesses
151
Customer Accounts
ANTI‐MONEY
LAUNDERING RULES (cont.) The purpose of OFAC (Office of Foreign Assets
Control) is to:
• the Department of Treasury’s Office of Foreign
Assets Control maintains a list of named countries, A. set higher margin requirements for foreign
organizations, and individuals with whom anyone in nationals that wish to invest in the United States
the US is prohibited from doing business B. monitor the activities of foreign investors in the
– the list must be checked before opening an account for a U.S. markets
foreigner or foreign entity C. impose economic sanctions against hostile
– a financial institution having knowledge of a payment to foreign countries and groups
or from one of these countries/entities is required to D. monitor foreign currency inflows into the U.S.
block the transaction; and report to OFAC within 10 days markets
ANTI‐MONEY ANTI‐MONEY
LAUNDERING RULES (cont.) LAUNDERING RULES (cont.)
• also, the firm must match the customer's
name against a terrorist watch list • the broker‐dealer must file Suspicious Activity
maintained by the federal government Reports (SARs) with the Financial Crime
Enforcement Network (FinCEN – part of the
– if there is a match, the account cannot be Treasury Dept.) which acts as the central
opened; and the federal authorities must be
notified collection point for these reports and then
provides intelligence info to the appropriate law
enforcement groups
– note SARs must be filed with FinCEN within 30 days of
detection of the activity if the amount in question is $5K or
more and the firm believes that illegal activity is occurring in
the account
Series #6 Customer Accounts 105 Series #6 Customer Accounts 106
ANTI‐MONEY ANTI‐MONEY
LAUNDERING RULES (cont.) LAUNDERING RULES (cont.)
• Potential Money Laundering Acts at the Account • Potential Money Laundering Acts Related to Account
Opening stage Activity
– If the customer is: – If the customer:
• unusually concerned with the firm's compliance with government • attempts to make frequent or large deposits of currency or cash –
reporting requirements; known as “layering” – where the owners of illegal funds deposit
• reluctant to reveal personal info about his/her business activity; them in “layers” to different accounts to disguise true ownership;
• furnishing suspicious ID or business documents; • engages in cash transactions (or similar ones, like money orders)
• wishing to engage in transactions inconsistent with the customer's structured to be under the $10,000 IRS reporting limit;
investment strategy; – cash transactions of $10,000 or more are required to be reported to FinCEN
by an “approving official” as a currency transaction report – CTR – within 15
• acting as agent for another entity and is evasive about providing days
info about that entity • note integration occurs when the funds from structuring and
• having a difficult time describing his/her business layering appear to be legitimate!
152
Customer Accounts
ANTI‐MONEY ANTI‐MONEY
LAUNDERING RULES (cont.) LAUNDERING RULES (cont.)
• Potential Money Laundering Acts Related to • Potential Money Laundering Acts Related to
Account Activity Account Activity (cont.)
– If the customer (cont.): – If the customer:
• engages in multiple or sudden or unexplained wire transfers to
countries that are considered non‐cooperative by the FATF and • has multiple accounts with a large number of inter‐
FinCEN; account transfers or excessive journal entries for no
• makes a funds deposit followed by an immediate request that the apparent business purpose
funds be transferred to another party for no apparent business
purpose; • deposits bearer bonds followed by a request for the
• makes a funds deposit for the purchase of a long‐term investment, disbursement of funds;
followed shortly by a request to liquidate the position and transfer
proceeds out of the account; • exhibits a lack of concern regarding risks, commissions,
and other transaction costs
153
Customer Accounts
154
Customer Accounts
When opening an account for a non-resident Deposits of which TWO of the following by a
alien, the registered representative must obtain customer could be indicators of potential
which of the following from the customer? money laundering?
I United States Passport Number I Cash
II Foreign Country Passport Number II Checks drawn on U.S. banks
III United States Tax Identification Number III Money orders
IV Foreign Country Tax Identification Number IV Wire transfers from U.S. banks
A. I and III A. I and III
B. I and IV B. I and IV
C. II and III C. II and III
D. II and IV D. II and IV
Series #6 Customer Accounts 121 Series #6 Customer Accounts 122
Which of the following customer actions would NOT Which of the following cash transactions must be
be an indicator of potential money laundering? reported to FinCEN under the firm's AML policies?
A. Deposits of bearer bonds to a margin account A. Deposits of cash from a single customer adding to
followed by immediate withdrawals of funds $7,500
B. Extensive wire activity with accounts in countries B. A money order drawn by a customer in the amount
with stringent bank secrecy laws of $7,500
C. Frequent deposits or withdrawals of cash in C. Deposits of cash from a single customer adding to
amounts just under $5,000 more than $10,000
D. Frequent trades of securities of issuers D. Deposits of cash from a single customer adding to
headquartered outside the United States more than $1,000
155
Customer Accounts
FINRA ANTI‐MONEY LAUNDERING FINRA ANTI‐MONEY LAUNDERING
RULE RULE
PROHIBITED PRACTICES PROHIBITED PRACTICES
• guaranteeing the customer account against loss • charging excessive commissions
• churning • manipulating the market by “painting the tape”
• front running – if a rep receives a large institutional • wash trades
order that is likely to have an impact on the • trading in mutual fund shares
underlying security, he/she cannot place an order • selling mutual funds just below breakpoint levels
ahead of this order for his/her own benefit
• selling dividends
• reps sharing in the gains/losses in customer accounts
(discussed in detail later) • free riding – buying a security without the intent of
ever paying for it before you sell it
156
Customer Accounts
A mutual fund has the following breakpoint A registered representative says the following to
schedule: her customer: "If we do not generate an
investment return of 10% within 1 year, we will
Purchase Amount Sales Charge
happily refund your money." This statement is:
$0 - $10,000 6%
$10,001-$25,000 5%
A. permitted since the customer benefits from the
$25,001-over 4%
guarantee
Which of the following single purchase amount B. prohibited because it is not known if the
would be considered a "breakpoint sale"? broker-dealer will be in business 1 year later
C. prohibited since this is a guarantee of
A. $1,000 performance
B. $11,000 D. permitted if the broker-dealer maintains
C. $24,000 adequate Net Capital to fund any customer refund
D. $26,000 claims made
Series #6 Customer Accounts 137 Series #6 Customer Accounts 138
157
Customer Accounts
Step 1: Financial Status
Does the customer have a
net worth or discretionary
income to invest?
158
Customer Accounts
For Safety:
LIFETIME INCOME
Recommend:
R e co m m e n d :
For Income w/ Safety
Tr e a s u r y S e cu r i ti e s F u n d s
SUITABILITY FACTORS
Treasury Securities Funds GNMA Funds
F o r T a x ‐ Ex e mp t I n c o m e
• obviously before a rep makes an appropriate
For Safety w/ Liquidity
Money Market Funds
Variable Annuity
Muni Bond Funds
Recommend: C o n v e r t i b l e S e cu r i ti e s F u n d s
Eq u i t y I n co m e F u n d s
– 1) INVESTMENT OBJECTIVES;
For Capital Appreciation w/ Low Risk A s s e t A l l o ca t i o n F u n d s
1) CLIENT INVESTMENT OBJECTIVES
1) CLIENT INVESTMENT OBJECTIVES
(cont.)
– generally, the client has one or more of these – Preservation of Capital
three main investment objectives: • keeping principal safe and avoiding investment loss
• Preservation Of Capital • these investors are conservative and will generally
• Capital Appreciation pursue defensive investment strategies of low risk
• Current Income – Capital Appreciation
• accepting some risk to achieve growth
• Aggressive Growth
– for investors willing to take on even greater risks for the
potential of greater returns
1) CLIENT INVESTMENT OBJECTIVES
2) CLIENT FINANCIAL/TAX STATUS
(cont.)
– Current Income –to analyze a client's financial status,
• for investors who are more interested in receiving income from
their investments the rep should look at the client's:
• Tax‐Exempt Income
– for investors in high tax brackets who desire income free from • Balance Sheet; and
income tax (like by investing in municipal bonds)
» the return on the municipal investments should be higher than
• Income Statement
the after‐tax return on taxable investments
» note that "private purpose" municipal bonds are taxable
• like for a sports stadium
» "public purpose" municipal bonds are not taxable
• like for a school
159
Customer Accounts
2) CLIENT FINANCIAL/TAX STATUS 2) CLIENT FINANCIAL/TAX STATUS
(cont.) (cont.)
– Balance Sheet
• gives the customer's financial situation
– Income Statement
• Assets = Liabilities + Net Worth • shows the client's income and expenses over
– Assets are what the client owns
» Current Assets are ones that can be transferred into cash quickly (like
the entire year
securities)
• Discretionary Income = Total Income – Total
» Fixed Assets are ones that cannot readily be turned into cash (like real
estate) Expenses
– Liabilities are what the client owes
» Current Liabilities are bills that must be repaid within 1 year (like a credit • Disposable Income = Total Income – Taxes (i.e.
card bill)
it does NOT consider expenses)
» Long‐Term/Fixed Liabilities are bills payable in more than 1 year (like a
mortgage)
– Net Worth is what is left from the Assets after paying the Liabilities
3) RISK TOLERANCE AND TIME 3) RISK TOLERANCE AND TIME
HORIZON HORIZON (cont.)
– Risk Tolerance • for those not as aggressive, but risk tolerant might invest in
growth funds, value funds, international funds, and similar
• probably the most important of all suitability common stock funds
considerations • more conservative investors who tolerate only a moderate level of
• risk takers are aggressive investors seeking higher risk might find a growth and income fund or a blue‐chip stock fund
more suitable
returns
• for risk averse investors seeking preservation of capital, a
– for those that want current income, a high‐yield bond fund
government securities fund might be suitable
might be suitable
• regarding senior citizens it should be noted that while many
retired individuals are risk averse, some might still tolerate a more
aggressive investment, like one in a common stock fund
3) RISK TOLERANCE AND TIME 3) RISK TOLERANCE AND TIME
HORIZON (cont.) HORIZON (cont.)
– Investment Time Horizon – Volatility
• the length of time a customer expects to hold an • the fluctuation of the value of invested capital as
investment market prices change
– customers should have liquid assets to meet short‐term • aggressive growth funds are likely to have greater
needs, including emergency needs changes in value than other funds (like a balanced
• stocks should normally be purchased for one who has a fund) during periods of stock market volatility
time horizon of at least 3‐5 years • interest rate changes affect long term bond funds more
• a customer who needs money within a short time than short‐term bond funds
should invest in a money market fund • high‐volatility investments are suitable to more risk‐
tolerant customers
160
Customer Accounts
3) RISK TOLERANCE AND TIME FINRA RULES REGARDING
HORIZON (cont.) RECOMMENDATIONS
– the rep should review a customer's suitability • before making a recommendation, reps must
factors periodically to make sure of any changes in make a reasonable effort to obtain the
the customer's investment objectives/situations customer's (suitability):
– financial and tax status;
– investment objectives; and
– any other info considered reasonable when
making a recommendation
FINRA RULES REGARDING
RECOMMENDATIONS (cont.)
• if the customer refuses to provide sufficient
personal information, the rep cannot make The definition of net worth for a customer is:
recommendations, but can still open the
A. assets minus liabilities
account and accept unsolicited orders from
B. income minus expenses
the customer C. assets plus liabilities
D. capital plus income
161
Customer Accounts
162
Customer Accounts
163
Customer Accounts
164
Customer Accounts
165
Customer Accounts
166
Customer Accounts
167
Customer Accounts
168
Customer Accounts
A. prohibited under FINRA rules A. These securities are not proper trading vehicles and such
B. permitted only if they are made in writing and an activity is, on its face, a rule violation
not over the telephone B. These securities are listed and trade like other stocks, so
C. permitted only if information is collected about this is a permitted practice
the customer's other financial holdings and C. These securities can only be traded if the fund has closed
itself to new investment and the shares cannot be
financial situation and needs
purchased in the normal manner
D. permitted if the customer signs an arbitration D. These securities must be on the "Legal List" in order for
agreement prior to the first trade trading to be authorized
169
Customer Accounts
A. institutional customers
A. Front running B. retail customers
B. Free riding C. any customer who requests
C. Selling away D. another member firm
D. Churning
170
Customer Accounts
171
Regulations
TOMBSTONES &
PRELIMINARY PROSPECTUS
ADVERTISING
• called "red herring" because it says "THIS IS • Tombstone Ad (really an "announcement")
NOT AN OFFER TO SELL...." in red ink need not be accompanied by a prospectus
• used by brokers to obtain an indication of as it says on it "this is not an offer to sell or
interest from potential buyers solicit…" and "…the offer can only be
• syndicate meets during 20 day cooling off period made with a prospectus…"
with "indications of interest" in hand
– if increasing interest in issue, price will likely be raised
(or interest rates lowered)
PERFORMANCE DATA
Commercial paper is an exempt security as
long as its maturity does not exceed: • if performance data is shown in an
investment company ad, it must state
something to the effect that "past
A. 30 days performance is not indicative of future
B. 60 days results" and that "investment return and
principal may fluctuate"
C. 90 days • note: money market funds do not need to
D. 270 days make a disclosure about fluctuation of
principal
Series #6 Regulations 23 Series #6 Regulations 24
– that the data does not reflect the deduction of – 2) CURRENT YIELD
• if a yield is shown in advertising, it must show a current yield
fees and that the performance data would be quotation and compute the yield over a 30-day period
reduced if fees were deducted • also, a quotation of total return must accompany the current yield
quotation
PROVISIONS OF SECURITIES
AND EXCHANGE ACT OF 1934 MANIPULATION
• act does not apply to exempt securities • manipulation is fraud whether the
– BUT, fraud provisions apply to both exempt securities are exempt or nonexempt
and nonexempt securities • SECTION 9
– unlawful practices
– i.e. sale of security using false statements,
effecting wash trades,...
• Wash Trades
– buying and selling to create "appearance" of trade (a.k.a.
“painting the tape”)
A. I and II only
B. II and III
C. III and IV
D. I, II, III, IV
Series #6 Regulations 45 Series #6 Regulations 46
A. 3 months
A. the registered representative only
B. 6 months
B. the president only
C. 9 months
C. both the registered representative and the president
D. 1 year D. neither the registered representative nor the
president
Series #6 Regulations 47 Series #6 Regulations 48
MISSPERMS (cont.)
Which of the following is true about credit on
new issues?
• MARGIN REGULATION
– Reg. T A. new issues are marginable as long as the
• controlling credit from broker to customer offer is made with a prospectus
– Reg. U B. new issues are not marginable until the
• controlling credit from bank to broker effective date
– credit is not allowed on nonexempt new C. new issues are not marginable until 30 days
issues, only on nonexempt "listed" from the completion of the offering
securities (ones trading) D. new issues are not marginable until 60 days
• new issues cannot be margined until 30 days from the completion of the offering
after the completion of the offering
Series #6 Regulations 53 Series #6 Regulations 54
MISSPERMS (cont.)
The federal regulation that controls credit
from bank to broker is: • STABILIZATION OF NEW ISSUES IN THE
TRADING MARKET
– rules:
A. Reg. T • only one stabilizing bid is allowed; placed by
manager
B. Reg. U • bid placed at or below P.O.P., never above
• "notice of stabilization" on prospectus
C. Reg. Q • bid is withdrawn when syndicate is disbanded
D. Reg. G
Series #6 Regulations 55 Series #6 Regulations 56
The general provisions of the Securities and The Securities Exchange Commission was
Exchange Act of 1934 apply to all of the created under the:
following EXCEPT:
Sales Assistants (Series #11 licensed individuals) are An assistant sales representative accepts an
permitted to: unsolicited customer order. Which statement is
true?
I Provide securities price quotes to customers
II Accept unsolicited customer orders A. this action is prohibited unless that individual
passes the General Securities exam
III Sign up new customers
IV Solicit new customers B. The order must be approved by a principal prior
to entry
A. I and II only
C. The order must be approved by a supervising
B. I and IV only
registered representative prior to entry
C. II, III, IV
D. The order must be reviewed by a principal at
D. I, II, III, IV the end of the day (promptly)
Series #6 Regulations 69 Series #6 Regulations 70
A. 1 year
B. 2 years
C. 3 years
D. 5 years
Series #6 Regulations 85 Series #6 Regulations 86
CENTRAL REGISTRATION
FINRA BROKER-CHECK
DEPOSITORY (CRD)
• each registered person's record is on file • for the general public to inquire as to a
at CRD registered person's disciplinary history, they can
go to www.finra.org
• any disciplinary action is part of the U-4
• the information found includes the broker’s:
information and is recorded in that
– 10-year consecutive employment history;
person's file – securities licenses and registrations; and
– disciplinary record, which includes both complaints;
allegations that have not yet been resolved; and a
record of any disciplinary or settlement actions taken
Conduct of Customer
A broker-dealer is recommending the purchase of shares of
Accounts a corporation that is affiliated with the broker-dealer. The firm
can buy these shares for its discretionary customer
• suitability accounts:
A FINRA member sells a new issue of non-exempt A “bona-fide” customer is defined as a person
securities to a customer with an agreement to buy who:
the securities back at the end of 3 months at the
Public Offering Price. This action is:
A. has cash and/or securities in the possession of
A. permitted as long as the activity is disclosed in the member
the Prospectus
B. has traded through the member within the past
B. permitted if evidenced in writing and approved by 3 months
a principal
C. permitted without restriction C. is not a member of FINRA
D. prohibited since customer accounts cannot be D. has engaged in any business transaction with
guaranteed against loss by a member the member within the past 12 months
Series #6 Regulations 95 Series #6 Regulations 96
D. II and IV
Series #6 Regulations 101 Series #6 Regulations 102
APPROVAL OF APPROVAL OF
COMMUNICATIONS COMMUNICATIONS
• CORRESPONDENCE • RETAIL COMMUNICATION
– if the firm doesn’t have a communication compliance – must be approved in writing by a principal
program in place that trains reps with regards to what
prior to use or filing with FINRA (if required)
can and cannot be said; and that audits this for
compliance, then all correspondence must be pre-
approved
– however, if the firm DOES have a communications
compliance program in place, FINRA only requires a
“post-use review and approval” by a principal
Which of the following is defined as an Under FINRA rules, which of the following is
advertisement under FINRA rules? defined as "sales literature"?
CUSTOMER COMPLAINTS
A member firm receives a written customer
• if a written complaint is directed at the firm
complaint alleging that an associated person
(rather than a “person”), the problem is to forged the customer's signature on a discretionary
be escalated to compliance account power of attorney. This complaint:
OTHER MISCELLANEOUS
A decision has been reached by the District Hearing ITEMS (cont.)
Panel under the Code of Procedure. Which
• FINRA (cont.)
statement is true?
– Code of Arbitration
• firms will generally not be involved with the Code of
Procedure for resolving customer disputes because most
firms require, as policy, that the customer sign an arbitration
A. The decision is binding and cannot be appealed agreement
• The Code of Arbitration Is Mandatory to Settle Customer
B. An appeal may be filed with the National Disputes Only If the Customer Previously Signed an
Adjudicatory Council Arbitration Agreement
• Arbitration Is Mandatory for Settling Intra-industry
Disputes
C. An appeal may be filed with the SEC
• Industry Arbitration Is Binding and not appealable
D. An appeal may be filed with the Federal Courts • the statute of limitation for filing an arbitration claim is 6 years
Why is arbitration preferred over litigation over settling A decision has been reached under the Code of
disputes between customers and brokerage firms? Arbitration. Which statement is true?
All of the following are defined as “branch” offices of BRANCH OFFICE (cont.)
your firm by FINRA EXCEPT:
• Offices EXCLUDED from the
A. A home office of a registered representative
where your firm pays a substantial portion of the Branch Definition
operating expenses – back offices, residences of RRs,
B. An office sublet by your firm to another FINRA "offices of convenience", and satellite
member offices are NOT defined as branches
C. An office location of your firm listed in a
telephone directory
D. An office shared with another company that is not
in the securities business
Series #6 Regulations 137 Series #6 Regulations 138
• member's name must be clearly displayed III It must disclose that the investment is not FDIC insured
• at, or prior to, opening an account, the member IV It must disclose that the broker-dealer is a member of SIPC
must disclose:
A. I and II
– the account is NOT FDIC insured;
– securities are NOT guaranteed by the bank B. III and IV
– securities are subject to investment risk and may lose C. I, II, and IV
value D. I, II, III, IV
Series #6 Regulations 141 Series #6 Regulations 142
A registered representative in your office wishes to open a A registered representative that works in your
satellite office that is closer to his customers, and wants to branch has just had a child and will be splitting her
take another representative with him. In order to do so, which time working 3 days a week from home and 3 days
statement is true under FINRA rules?
in the branch office. The address to be used on any
correspondence with customers is the:
A. One of the two representatives in the office must pass the
a principal examination
A. firm's main office address
B. Both of the representatives in the office must pass a B. branch office address
principal examination
C. the home office address
C. The location must be registered with FINRA as a small D. the home office address for communications
branch sent from the home locations and the branch office
D. The location is defined as an office of convenience that is address for communications sent from the branch
not required to be registered location
Series #6 Regulations 143 Series #6 Regulations 144
A #24 principal supervises both a main office with 30 A location held out to the public as a place
representatives and a satellite office that has 2 where the member firm conducts investment
representatives. The satellite office primarily sells
banking or securities business is defined as
insurance products and does fewer than 25 securities
trades per year. Under FINRA rules, the satellite office a(n):
is considered to be a(n):
A. branch office
A. branch office
B. satellite office
B. non-branch office
C. office of convenience C. office of supervisory jurisdiction
D. small office D. main office
Series #6 Regulations 145 Series #6 Regulations 146
Which statements are true about the FINRA rule covering TRUST INDENTURE
business continuity plans?
ACT OF 1939
I The rule's requirements are flexible and allow the plan to be
tailored to the needs of each member • enforced because it was felt that the Act of 1933
didn't adequately protect bondholders after
II The rule's requirements are inflexible and the plan must offering was completed
adhere to each point set forth in the rule
• requires all interstate offerings of "non-exempt"
III The plan must be reviewed annually and updated if needed bonds of $5,000,000 or more be made with a
IV The plan must be reviewed every 3 years and updated if
Trust Indenture
needed – does NOT apply to U.S. Gov't, Agency, or municipal
debt (exempt securities)
A. I and III • requires the appointment of a "substantial"
B. I and IV Trustee to protect interest of bondholders and
insure that the requirements set forth are
C. II and III adhered to by issuer
D. II and IV
Series #6 Regulations 155 Series #6 Regulations 156
A lawyer who gives advice about investing in Which of the following must be registered
securities as part of an overall estate tax plan: with the SEC as an investment adviser
under the Investment Advisers Act of 1940?
A. must register as a registered investment
adviser
A. Broker-dealer
B. must register as a broker-dealer
B. Bank
C. must register as both a broker-dealer and an
investment adviser C. Senior Editor of an investment magazine
D. does not have to register as either a broker- D. Accountant who gives investment advice
dealer or an investment adviser to clients for a fee
Series #6 Regulations 161 Series #6 Regulations 162
A. SEC
A. Telemarketing firm
B. FTC
B. Real estate company
C. FCC
C. Non-profit organization
D. FINRA
D. Securities firm
Series #6 Regulations 175 Series #6 Regulations 176
GRAMM-LEACH-BLILEY
Which of the following maintain Do Not Call lists? PRIVACY PROTECTION
• firms cannot disclose customer information
I SEC
to third parties unless the firm notifies the
II Member firm
customers of its intent and provides an
III FTC
"opt-out notice"
IV FINRA
• there is an exception to the privacy
A. I and IV protection for an existing customer of the
B. II and III firm
C. II and IV • Regulation SP implements this rule for
D. I and III broker-dealers
Series #6 Regulations 179 Series #6 Regulations 180