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Series 65, What's Missing?, (Securities Act '33/New…

- - - - Life expectancy
  - - - Risk vs. Return
      - Efficient Market Hypothesis*
        
        Weak: only price/volume known
        
        Semi-strong: normal public info known
        
        Strong: all info is known
      - Modern Porfolio Theory
        
        Diversification -> diff asset classes
        
        Maximize Return/Risk
        
        Efficient Frontier
        
        Low Risk: 20/80 Growth/Income
        
        Medium Risk: 70/30 Growth/Income
        
        High Risk: 100 Growth
  - - - Strategic: consistent allocation, re-balancing required
      - Tactical: Based on current market conditions
      - Buy/hold: low expense, tax efficient, bad for wrap accounts, passive
    - - growth: earnings/earnings momentum, high price/earning, typically younger, low/no dividends*
      - value: stable earnings, low PE's, higher dividend payout ratios*
    - - Diversification: NEGATIVE CORRELATION. US vs International are diverse.
      - Sector Rotation: invest based on economic cycles
      - D.C.A: total cost/total shares purchased*
  - - - capitl gains on inherited stock is evaluated only on the gain since the inheritance date
      - don't gift stock prior to death
      - estate is evaluated at time of death OR 6 months later; taxes must be paid within 9 months*
      - gift tax, for gifts >15k (CHECK THIS) paid by GIVER
  - - - Traditional IRA
        
        Invested in gold coins minted by us teasury
        
        Real estate investment can't be for personal use
        
        RMD, forced withdrawal at 70.5
      - Roth IRA
        
        Never have to withdraw
    - - employer mandatory contribution
      - employee voluntary
  - - - market order: fulfilled immediately, no specifications
      - limit: specify a price
      - Stop: if market does X then I wil buy or sell.
    - - market maker: broker dealer for unlisted OTC*
      - Agency-Broker-Commission
      - Dealer-Principal-Markup: buy and sell from own inventory
  - - - Assets-Liabilities=Net Worth
        
        Assets
        
        Property
        
        Primary Residence
        
        Investments/Inv Accts
        
        Retirement
        
        Cash
        
        Jewelry etc.
        
        Liabilities
        
        Loans
        
        Consumer Debt
        
        Statement of Cash Flow
        
        Income
        
        Salary
        
        Rental Income
        
        Investment Income
        
        Outgo
        
        Taxes
        
        Utilities
        
        Mortgage Payments
        
        Debt Payments
    - - CCorp: double-taxed, easiest to liquidate
    - - Living: setup while still alive
      - Testimentary: formed by will after death, contact executor
      - Simple: must distribute income/taxed annually
      - Complex: taxed only at distribution
      - Settler/Grantor: Provides assets to trust
      - Remaindermen: heirs of beneficiary, split original allocation evenly (per stirpes*)
      - Trustee: Manages based on the stated objective, Prudent Man Rule*
      - 1041 Tax form for trusts
    - - Tax-exempt
      - 403b
  - - - min 3 options
    - - NOT REQUIRED*
      - sumary plan document IS REQUIRED*
      - IPS DOES NOT include the individual securities selection*
  - - - Donor Retains Control*
      - Use tax free for education
      - max contribution is 2000 for coverdell
    - - Totten Trust (POD) if grandpa wants to transfer to minors after death but use while alive
      - only 1 to 1 gifts - NO LIMIT, but subject to gift tax
      - Age of Majority is when you can transfer account
      - IRREVOCABLE*
      - UTMA legal age up to 25
    - - Spouse dies, no probate, passes to living spouse*
    - - for non-spouses, % specified, does not avoid probate
- - - - Demand Deposit = Checking Account
      - C.D. - NO income
    - - Short Term, High Quality, Debt, Highly LIquid, Pays income, and Safe. Parking Garage for money that will be used soon.
      - *Not Guaranteed or Insured!! Not a bank account
  - - - asset-backed securities
      - corporate bonds
        
        Investor lends to company the bond par value/principal/maturity/face value
        
        Investor receives fixed semi-annual interest known as a coupon/nominal rate
        
        Bond Value varies inversely with interest rates (this is the source of risk)
        
        Price of bond does not effect income. But it will affect ROI/Current Yield. Current Yield = Annual Income/CMV (Current Market Value)
        
        Par value is usually 1000 or 100
      - municipal bonds (e.g., general obligation; revenue; insured)
        
        *Interest Income is Tax Exempt (DOES NOT APPLY to capital gains)
        
        Good for those in highest tax brackets
        
        **Tax Equivalent Yield, What a corporate bond must yield to beat a municipal bond: Municipal Yield/(100%-T.B.) = Equivalent Tax Free (corp) Yield....TB=Tax Bracket
      - foreign bonds (e.g., government debt; corporate debt)
      - U.S. government and agency securities (e.g., Treasury securities; FNMA; TIPS)
        
        Safest (capital preservation)
        
        Bill (shortest) - 1,3,6,12 months
        
        Note - 2-10 yrs
        
        Bond >10yrs
        
        Risks
        
        Interest Rates
        
        Reinvestment
        
        TIPs
        
        Principle is adjusted with inflation/CPI
        
        Yankee Bond
        
        Issued by Foreign Companies/Govs, paid in USD
        
        Brady Bonds
        
        US issued foreign debt
    - - characteristics (e.g., tax implications; bond ratings; market liquidity; liquidation
        preference; call features; coupon v. zero coupon; duration; premium)
        
        Longterm and lowest coupon rate, most volatile
        
        Zero coupon is most volatile and doesn't pay fixed rate
        
        Bond Rating: AAA->D; If it starts with a B and has 2 letters it's a junk bond
      - fixed income valuation factors (e.g., duration; maturity; yield-to-call; yield-tomaturity; coupon; conversion valuation; bond ratings; credit spread; discounted
        cash flow)
        
        Bought at discount: YTC>YTM, reversed if bought at premium (teeter totter)
        
        Discounted Cash Flow: how many semi-annual payments will you get and how much total cash payout. Need 1. Coupon Rate 2. Maturity Date 3. Principal*
      - Difference from preferred stock. Debt rather than equity based. Bonds pay back the principle at maturity date unless bankruptcy, stock has to be sold to pay back anything.
  - - - preferred and convertible preferred stock
        
        *Pays a fixed dividend like a bond
      - employee stock options (e.g., incentive; nonqualified)
        
        Can't be sold/traded for 6 mo or until registration
      - restricted stock
        
        Private Placement (offered prior to IPO): Can't be sold/traded for 6 mo or until registration
      - common stock- domestic and foreign
        
        Rights
        
        Voting Rights EXCEPT for Officers
        
        Receive Dividends if declared. Need to be a shareholder 2 days prior to Record Date.
        
        Pre-emptive. Right not to be diluted by new share distribution
        
        ADR (American Depository Receipt): way to buy foreign stock domestically. Currency Risk!
    - - shareholder rights (e.g., voting rights; antidilution; liquidation preferences)
      - resale restrictions
      - dividends
    - - technical analysis
        
        stock trends, patterns
        
        Top down: Industry->Company
        
        Bottom Up: Company ->Industry
      - fundamental analysis
        
        deals with financials
        
        assets
        
        Liabilities
        
        PE
        
        Income
      - dividend discount
        
        used for analysis
      - discounted cash flow
        
        Used for analysis
  - - - private funds (e.g., hedge funds; private equity; venture capital)
        
        loosely regulated funds
        
        able to buy on margin
        
        derivatives
      - unit investment trusts (UITs)
        
        Continuously issue brand new shares with prospectus. Continuous primary Offering (Securities Act 33 regulates)
      - exchange traded funds (ETFs)
        
        like a closed-end fund, but it tracks an index, so management fees are low (passive mgmt)
      - real estate investment trusts (REITs)
        
        no fractional shares
        
        equity based
        
        generates income (from rent/mortgages)
      - mutual funds (i.e., open-end; closed-end mgmt companies)
        
        Prospectus: the investment objective of the fund (Securities Act 33)*
        
        Value of Share = (Assets-Expenses:Net Asset Value)/# Outstanding Shares, calculated 1/day. Shares get sold back to mgmt company and are destroyed. Priced at NAV+Sales Charge (max 8.5%)*
        
        closed end funds: prices change continuously, which means traded on secondary market, can be sold at price difference from Net Asset Value/Shares. Bought at Market value based on supply and demand*
    - - share classes
      - liquidity
      - tax implications
      - fee structures and other costs
      - pricing (e.g., net asset value; discount/premium)
      - benefits and risks
  - - - futures and forward contracts (definitions)
        
        NOT securities
        
        Futures
        
        Like options
        
        Often purchased/sold by consumers/producers of commodities. (Airline buys the right to buy gasoline at price; oil company sells that right)
        
        Forwards
        
        "Swaps"
        
        Non-standardized, highly sophisticated, between institutions
      - options and warrants (definitions)
        
        options
        
        Call gives right to buy
        
        Put gives right to sell
        
        Used to protect stock or generate income
    - - costs, benefits, and risks of derivative securities
  - - - "equity linked note"
        
        Income + equity linked principal return. Like bond+index*
    - - primary purpose is to invest in viable business. Tax benefits are secondary
  - - - fixed: guaranteed return
      - variable: after tax dollars, no guaranteed return, invest for retirement, tax deferred. Early withdraw penalty before 59.5. Only taxed on gains as ordinary income. low inflation risk
      - Equity indexed: Participation rate: how much of gain/loss the investor actually gets
    - - needs analysis
      - Whole: guaranteed, fixed premium
      - Variable: death benefit guaranteed, investments/cash value not guaranteed, fixed premiums
      - Universal: no guarantees, non-fixed premiums
- - - - jurisdiction over all securities offered, sold in, originating in, directed to, or accepted in their state*
      - infinite power to subpoena: compells testimony
      - deny, suspend, revoke registration for felony conviction or security misdemeanor
      - criminal penalties 3yrs/$5k
        
        civil: statute of lim 3yr since occur, 2yr since discover
        
        don't sue me! instead use right of rescission: all principle +interest + court cost - dividends, or keep stock
  - - - if drop below 90mil, back to state
    - - register with SEC only
      - don't register: private, foreign, vent capital
      - Federal Advisers DON'T register in states* they will try to trick with this
    - - register if office or client in the state
      - do not register if no more than 5 client in state
    - - IA has net cap requirement of $35k if custody or $10 without custody of customer funds
    - - refile application
      - don't repay filing fees*
    - - 1 day to notify if don't meet net cap requirement, 1 day to send plan
    - - Officers, Direct partners are auto-registered*
      - effective in 45 days
      - withdrawal takes 60 days
      - Brochure Rule
        
        often form adv part 2*
        
        state advisor provides 48 hours prior OR client gets 5 days to back out*
        
        fedral provides at or prior to contract
        
        state must resend annually if material changes or requested *
        
        fed must resend 120 days fiscal year end*
        
        advisor contracts
        
        No Assignment Clause Required*
        
        accounts cannot be simply bought by a new firm without client consent*
        
        Partnership change requires notice to clients
        
        If business entity changes, no assignment claus applies
      - ADV Act 40
        
        SEC Release IA 1092
        
        All of these must register as IA
        
        Financial Planner
        
        Sport/Entertainment Agent
        
        Pension Consultants
  - - - Fed IAR: registers with state admin in all states with offices, not where clients are
      - State IAR: office or more than 5 clients must register with state
    - - may be denied with securities MISDEMEANOR felony CONVICTION in last 10 yesr*
      - Pass S65
      - Fingerprints
      - Consult to service of processes - application only*
      - admin cleared, eff noon 30th day of application, expires every 31st*
      - withdrawal: Federal: IAR notify admin; State: firm notifies admin*
  - - - Civil penalties: $1 mill or 3x profits made
        
        Chinese wall: departments can't share info with eachother
    - - person/corporation that effects securities tansactions for the benefit of others or themselves
      - broker/agency transaction: commission (Agency, Broker, Commission: ABC)
      - Dealer transaction (principal trans): markp
    - - Must register if they have office or resident client in a state
      - not required if no office or client in state or client is institution
  - - - individual who accepts or places order for securities, NOT necessarily an employee of broker dealer
      - must register IF accepting or placing orders for SECURITIES (not futures contracts etc.)
      - Agent of issuer
      - Companies = "non-exempt issuers"
  - - - NOT futures, fixed insurance and annuities, retirement plans, commodities (gold)
    - - securities must be registered
      - 2 methods of registration
        
        coordination: state + fed, IPO's
        
        cleared when cleared by SEC
        
        Qualification: single state, no SEC cleared by admin
      - NSMIA covers listed on exchange, mutual fund comps, NASDAQ, meaning only register with SEC, but pay filing fees to states with notice filing
    - - US Govt
      - Munis
      - Bank/insurance
      - Non-profits
      - Canadian Govts
      - Fed Govt from Foreign countries
      - Commercial Paper,
      - Exempt Transactions: unsolicited, between financial institutions, private placement, sherriff/bankruptcy shares (w/trustee)
  - - - ability to take fees straight from client account constitutes custody, checks and payments do not so long as forwarded within 3 days.
    - - Can't borrow from customers or share in profits unless joint on account or family
      - Cannot solicit on both sides of transaction
    - - All must be disclosed in disclosure brochure (fees, commissions,discounts, etc.)*
      - Compensation cannot be account performance based except...
        
        for hedge funds
        
        accounts worth over $1M (or $2.1M net worth)
        
        Can only receive software, research, and seminar fees as non-monetary compensation
- - - - Cyclical (follow the economy)
      - Defensive (stable)
    - - Fiscal: Gov't Spend, Taxes
      - Monetary: FRB, Inflation
        
        Buy from banks: increase money supply, interest rate drops, inflation
        
        Sell to banks: decrease money supply, interest rate rises, deflation
        
        Buying -> Inflation, Not Buying -> Deflation
    - - Debit: Pay foreign dividends, buy foreign cars
      - Credits: Foreign investors
    - - Inverted Yield Curve: Decrease Interest Rates, Precursor for Recession
    - - Leading: Stock Market, Unemployment Claims
      - Coincident: GDP, Manufacturing, Unemployment Rate
      - Lagging: Inventory Held, Unemployment Duration
  - - - Assets
        
        Current Assets (CA): Cash, Marketable Securities, AR
        
        Fixed Assets: Buildings, Equipment
        
        Other Assets
      - Liabilities
        
        Current: Wages, AP, Current Year Loan Interest
        
        Longterm: Interest on outstanding debt
  - - - FV=PV(1+r)^t
      - Net Present Value = FV-PV
    - - *Beta: simple volatility measure = your return/SP500 return. (market risk)
      - Alpha: difference between current beta and historic beta (business risk)
    - - Liquidity/Current Ratios: CA/CL
      - Quick Ratio (asset test): CA (exclude inventories)/CL
  - - - Market
      - Interest Rate
      - Currency
    - - Business
      - Regulatory
      - Political
- - - - 20 day cooling off period, can't solicite security during this time
        
        sends out a generic notice of shares/tombstone advertising
        
        Get indications of interest (IOI) NO COMMITMENTS
        
        No notice after 20 days from SEC means cleared to release to public
        
        '34 Act formed SEC to prevent scams
- - - - needs frequent review and supervisor approval
  - - - hearing within 15 days of request
    - - offered
      - Received
      - accepted
    - - agent deemed mentally incompetent
      - cannot find registrant
- - - - only works with
        
        issuer
        
        other B/Ds
        
        Financial Institutions
    - - incidental exclusion applies to
        
        engineers
        
        lawyers
        
        teachers
    - - clients must be notified of any membership change
    - - security given as bonus
      - gift of derivatives
      - exercise of right to convert or purchase
    - - exclusions
        
        minors
        
        dead
        
        mentally incompetent
    - - effective when SEC registation is effective
    - - exclusions
        
        clerical or admin personnel
      - anyone who deals with public on behalf of IA
      - federally covered advisors ARE covered by this definition
    - - partnership ownership
      - stocks
      - rights to buy or sell
      - commercial paper
      - exclusions
        
        personal residence
        
        currency
        
        antiques
    - - sales of securities to financial institutions
  - - - must notify when funds move
      - segregate client funds
      - report every 3 months
      - annual independent audit
    - - take evidence
      - subpoena witnesses
      - administer oaths
      - require records
    - - IA acts as broker for advisory client
      - cannot recommend these transactions to both buyer AND seller
      - allowed in best interest of client if obtaining best possible price
      - annual count of these transactions, and commissions received, must be sent
  - - - Only Allowable Soft Dollar Compensation
        
        Investment Education Fees
        
        Software
        
        Research
      - Not Allowed
        
        Travel Reimbursement
        
        Furniture
        
        Equipment
    - - employed or controlled by
    - - org that provides facilities for buyers and sellers of securities
  - - - employee or material business associate,adviser, underwriter, 5+% owner
    - - face amount certificate companies
      - UITs
      - management companies
    - - no place of business in state, <6 clients
      - only advises employee benefit plans with assets of $1M+
      - only advising registeres investment companies
  - - - Max $3000 of net loss each year, rest carries over, Net losses can offset ordinary income
    - - income reported on 1041
      - alternative valuation 6mo after death
      - tax due 9mo after death
      - max 40% tax rate
    - - max 40% tax rate
  - - - UTMA has pretty much replaced UGMA
      - UTMA allows for transfer of most property types to minors
    - - allows for control by creator of trust
- - - - growth
      - income
      - risk level
    - - TTLLU
        
        Time Horizon
        
        Taxes
        
        Liquidity
        
        Laws
        
        Unique
- - - - stock prices
    - - industrial production
    - - CPI (inflation rates)
        
        based on avg cost of goods/services purchased by consumers over a time
  - - - assets
        
        goodwill
        
        fixed assets
        
        equipment, buildings
        
        current assets
        
        AR, cash
      - liabilities
    - - Current Market Price/Earnings per share
      - Fast growing company will have high PE
      - Slow growth companies have lower PE
- - - - growth stocks
    - - bonds
      - Discounted Cash Flow Formula
        
        used to calculate present value of future cash flows
- - - - Mutual
        
        Shareholders cannot vote on security selection
      - Specialized
      - Hedge
    - - Good Inflation Hedge
      - High Liquidity
      - Large Cap (Blue Chip)
        
        less volatile
      - Medium Cap
        
        medium volatility
      - Small Cap
        
        more volatile
      - sale of stock taxed at capital gains rate
      - Preferred Stock
        
        income producing
        
        taxed 1/2 for businesses
    - - eliminate interest rate risk
  - - - Bills
      - Bonds
        
        TIPS
        
        Best Inflation Hedge
        
        Principle increase by 1/2 of annual inflation every 6 months
        
        Municipal
        
        free from state/federal income tax
        
        still capital gains tax
        
        Zero-coupon
        
        discounted with no interest payments
        
        highly volatile
      - Notes
      - Prices vary inversely with interest rates
    - - short term, highly liquid, safe, debt security
    - - maturity determines cash flow
  - - - death benefit = greater of total premiums or current market value
      - death benefit above cost basis taxed as ordinary income
      - Qualified
        
        uses pre-tax dollars
      - Non-qualified
        
        uses after tax dollars
      - never taxed as capital gains
      - sometimes contribution limits
      - 10% withdrawal penalty before 59.5
      - Variable
        
        potential to keep pace with inflation
        
        death benefit = greater of premiums paid or CMV
        
        ordinary income tax above premiums
        
        benefit as lump sum or in payments
    - - Variable Life
      - Term
        
        Renewable Level Term
      - Surrender charges never apply to death benefit
      - Death benefit free from all taxes
      - Whole Life
      - Universal
        
        flexible premiums, cash value, and death benefit
  - - - ETNs
    - - nonexempt, unregistered securities
        
        unlimitied institutional buyers
        
        max of 10 noninstitutional in 12 month period
      - less regulated
  - - - Max $2000/yr
      - limited to people within certain income limits
      - reverts to beneficiary
    - - for qualified higher-education expenses only
      - 10% penalty on earnings for non-qualified expenses
      - generally super high cotribution limits (differs state to state)
      - reverts to donor
- - - - Buy above X
    - - Buy below X
    - - Sell below X
    - - Sell above X
- - - - most in need of succession planning
  - - - discretionary policy
        
        written authority received within 10 business days or no discretion
  - - - Partners, Offciers, Directors auto-registered during firm registration
    - - Definition
        
        (1) Specific financial advice, (2) oral or written, (3) for a fee
      - Federally Covered
        
        Assets maintained at $90M+ AUM
        
        Managing a registered investment company
        
        Assets at $100M+ at time of registration
      - State Covered
      - may maintain custody of client funds
      - minimum net worth requirements
    - - Coordination: Federal
      - Qualification: SINGLE state
  - - - shares trade in secondary market (exchange)
      - may trade at premium or discount to NAV
      - Fixed capital structure