Series 26 Series 26 – Training of Representatives

Question Answer
_________ is any person that has purchased securities from an issuer with the intent to resell them. Underwriter
What is Regulation D – Private Placements? Securities that are not sold to the public are exempt from registration
-Must be either institutions or high-net-worth clients (accredited investors) limit of 35 or less
-No general advertising allowed
Who are the different types of accredited investors exempt from registration aside form high net worth individuals? -Banks
-Insurance companies
-Employee benefit plan with assets in excess of $5 million
-Corporation, partnership, or trust not formed for the purpose of making this investment, with assets in excess of $5 million
Insider of an issuer
How does the term accredited investor define a high-net-worth individual? Net worth or joint net worth with their spouse in excess $1 million or who had individual income in excess of $200,000 or joint of $300,000 in the past 2 years
The Securities Exchange Act of 1934 addresses: -Creation of SEC
-Regulation of exchanges, broker/dealers, OTC market
-Regulation of credit by the Federal Reserve Board
-Regulation of insider transactions, short sales, proxies, trading activities, client accounts
-Customer protection rules
What is an affiliated person? Any person who directly or indirectly owns, controls, or holds, with power to vote, 5% or more of outstanding voting securities
Define investment company. Any issuer that is, or holds itself out as being, engaged primarily in the business of investing, reinvesting, or trading in securities – 40% of the value of the issuer's total assets are invested in investment securities.
The definition of investment company does not include what? Holding company or a variable annuity (the separate account in the VA is the investment company)
What is the main function of the principal underwriter? Fund's chief salesperson – responsible for distribution of investment company shares
The definition of redeemable securities always refers to what? Mutual funds, face amount certificates, and UITs
A _____________ is a contract in which the isssuer guarantees payment of a stated sum to the investor on a set date in the future. The investor then pays a discounted amount. Face Amount Certificates
A _____ is an investment company organized under a trust indenture. UIT
How does a UIT work? UIT managers purchase shares of MFs or construct a fixed portfolios, then sell redeemable SBIs – each unit is undivided interest
How do you calculate the NAV of a mutual fund share? Net Assets / # of Shares Outstanding = NAV
Define a diversified company. 75% of value of assets follow:
-No more than 5% of total assets in any one issuer
-No more than 10% of outstanding voting shares in any one issuer
Minimum requirements to register as an investment company with the SEC -Private capitalization of at least $100,000
-Clearly defined investment objective
-Provide semiannual reports to shareholders (all within 90 days of registration)
Define margin. Practice of borrowing money through brokerage firm to purchase securities
The Securities Exchange Act of 1934 prohibits the purchase of new share son margin for the first _____ days of an offering. 30 (since mutual funds are always considered new issue, you cannot buy them on margin)
Define the two parts of a prospectus. -Part I (N1-A): contains any disclosures SEC requires
-Part II: Statement of Additional Information
What is the cooling off period? When filing a security for registration, the issue enters a minimum 20-day cooling off period where the SEC reviews the statement for full and fair disclosure
A preliminary prospectus, also known as a _________, can be used to solicit indications of interest. Red herring
Open-end companies may only issue _________. Common stock – no preferred stock or bonds
Open-end and closed-end companies may take on debt by borrowing from banks, but only if they maintain what asset-to-debt ratio? 3:1
Only closed-end investment companies may issue ________, such as bonds and preferred stock. Senior securities
Directors on the Board can be divided into classes with a term of office of how many years? 1-5
The Investment Company Act of 1940 restricts who may sit on an investment company's BOD. What are those restrictions? 40% of directors need to be noninterested, no individuals convicted of a felony/misdemeanor involving securities, and no loan arrangements between investment company and officer, director, partner, or manager of the fund
To protect the investment company's shareholders, the Act of 40 requires what? -Written contract – approved by majority vote of outstanding shares and noninterested BOD
-Initial max term of 2 years, then extended on annual basis by approval of BOD and majority vote of O.S.
The use of _________ for portfolio transactions is prohibited by the Securities Exchange Act of 1934. margin
Which Act prohibits short selling? Securities Exchange Act of 1934
Which act prohibits investment companies from owning more than 3% of the outstanding shares of another investment company? Securities Exchange Act of 1934
What changes to an investment company requires a majority vote of the outstanding shares? -Borrowing by open-end companies
-Issuing or underwriting other securities
-Sales load policy
-Nature of the business
-Investment policy
What are the termination terms of an investment adviser? -An adviser may be terminated by the BOD or majority vote of shares with 60 days' max written notice
-Will be terminated if the adviser assigns the contract to another person
In addition to having voting instructions for shareholders who can't attend the annual meeting, what must the proxy statement discuss? The factors that form the basis for the recommendation of the BOD that the shareholders approve an investment advisory contract.
What are the factors that are typically included in the proxy statement? -Investment performance of the fund and investment adviser
-Cost of services and profits to be realized
-Extent to which economies of scale would be realized as fund grows
-Whether fee levels reflect these E of S for investor benefit
Adviser Compensation – how are their fees earned? Typically a set annual percentage of the' portfolio asset value, paid from the fund's net assets
Which 2 SEC and Advisers Act of '40 Rules require that mutual funds and their advisers adopt written procedures designed to prevent violation of federal securities laws? SEC Rule 38a-1 for mutual funds and Rule 206(4) – 7 of the Investment Advisers Act of 1940
Describe the functions of the custodian. Safekeeping role – most of the investment company's clerical function, deposits and transferring for securities
Describe the functions of the transfer agent. Issuing, redeeming, and cancelling of shares; sending customer confirmations; sending fund distributions A
An underwriter is prohibited from maintaining an inventory of _______. Open-end company shares – they're only sold to underwriter at current NAV as needed to fill customer orders
________ of the 1940 Act allows a no-load fund to charge a fee to cover its expenses for acting as its own distributor, which is not typical of a mutual fund. Section 12b-1
The underwriter's compensation comes from _______. Sales charges
How often is a 12b-1 fee charged? quarterly
12b-1 fees can't exceed _____ of fund's average net assets per year .75%
FINRA imposes an annual ___ cap on shareholder service fees. .25%
Unlike the usual 40% requirement, a simple __________ must be comprised of noninterested directors. majority of BOD
Who approves the 12b-1 fee? Majority of 1. Outstanding Shares 2. BOD 3. Noninterested directors
Termination of a 12b-1 fee plan may be terminated at any time by? Majority of 1. Noninterested directors 2. Outstanding shares
The Investment Company ACt of 1940 requires shareholders receive financial reports at least ________. semiannually
Shareholders receive an annual audited report which contains what? -IC's balance sheet
-Valuation fo securities in portfolio
-Statement of compensation to BOD, IA
-Value of securities purchased and sold
-Discussion of BOD's approval of IA contract
Each prospectus discloses the person running day-to-day management of the fund's portfolio, but which funds are excluded from this requirement? Money market and index funds
Each MF investor owns an _______ interest in the fund's portfolio. Undivided
When comparing funds, what should investors take into consideration? Past performance
Costs of investing
Portfolio turnover
Services offered
Tenure and track record of fund manager
How are expense ratios calculated? Fund's Expenses / Average Net Assets
What is the typical expense ratio for stock funds? Bond funds? Stock funds: 1 – 1.5% of fund's average net assets
Bond funds: .5 – 1%
What factors are included in calculating a mutual fund's expense ratio? BOD stipend
Investment adviser fee
Custodian fee
Transfer agent fee
12b-1 fee
What is NOT included in a mutual fund's expense ratio? Sales load
The nature of the capital gain and the dividend distributions are disclosed on the Form ______ and mailed in January. 1099
It is not uncommon for an aggressive growth fund to show an annual turnover rate of _______. 100%
Only a FINRA member acting as a _______ may buy fund shares at a discount from the POP. dealer/underwriter
What are the different methods a fund can use to distribute shares to the public? Fund to Underwriter to Dealer to Investor
Fund to Underwriter to Investor
Fund to Investor (no-load)
Explain the method of Fund to Underwriter to Dealer to Investor. Investor gives order to dealer. Dealer places order with UW. UW purchases shares from fund at current NAV. Underwriter sells shares to dealer at NAV + UW's concession. Dealer sells shares to investor at full POP.
Explain the method of Fund to Underwriter to Investor. Underwriter acts as dealer and uses its own salesforce to sell shares. Fund sells shares to UW at current NAV. UW adds sales charge and sells shares to investor at POP.
Under FINRA rules member firms must transmit customer payments to the fund within ___ business days of the trade date OR __ business day of receipt, whichever is later. 3, 1
12b-1 fees cannot exceed what percent in a Class A share? .25%
Class A shares typically have lower or higher expense ratios than other share classes? Lower
If a fund does not offer breakpoints and rights of accumulations, what is the max sales charge they can assess? 6.25%
What is the combination privilege? The ability to purchase shares of other funds in the same family to build towards a breakpoint
Class C shares have a level load – a 12b-1 fee of up to ___ that persists for the life of the account. .75%
There may be a small back-end load on a Class C share, but how does it work? It may only be levied for the first year
In terms of expense ratios, how are mutual fund class shares rated? Class B, Class C, Class A
When exchanging one fund for another in the same fund family, the exchange must take place within ____ days of the redemption. 30
When exchanging one fund for another in the same fund family, does the dealer receive compensation or no compensation for the reinvestment? No compensation
When exchanging one fund for another in the same fund family, the redemption MAY/MAY NOT involve a refund of sales charges. May not
Period payment plans for investment in mutual funds could be purchase from unit investment trusts known as ______ _____ ____, up until recently (they are no longer sold). contractual plan companies
Explain how the Act of 1940 allows contractual plans to levy sales charges. They may collect up to 50% of any payments made during the first 12 months as a sales charge, b ut must reduce the load after that so that the maximum over the life of the plan does not exceed 9%
Explain how the Act of 1970 amended how contractual plans levy sales charges. Spread load – May collect up to 20% of any given payment as a sales charge, average over the first 4 years if 16%, then reduced to insure max over life is 9%
Explain how the Act of 1940 allows for contractual plan reimbursements. 45-day free look: refund NAV and all sales charges
45 days to 18 months: refund NAV and SC-15%
After 18 months: NAV
Explain how the Act of 1970 allows for contractual plan reimbursements. 45 day free look: refund NAV and all sales charges
After 45 days: NAV
Be able to explain dollar cost averaging. Draw out a table…
Explain the different withdrawal plans offered by some mutual funds. Fixed Dollar, Fixed Percentage/Share, Fixed Time
Explain the Withdrawal Plan Disclosure. Stress to the investor that it is possible to exhaust the account by over withdrawing, and in a down market it is possible to exhaust the account even with a small withdrawal
How does a wrap account work? Brokerage firms offer money management services through a wrap account, where the investor pays a fixed percentage of assets as management fee instead of paying a commission for each transaction – aver 1-3% for equity and 1.25-1.75% for fixed income
If an investor does not actively trade, a _________ account is probably unsuitable as the cost of maintaining the account is hard to justify. fee-based (wrap) account
Annuity – explain direct and indirect investments. Direct – money is invested in a portfolio of securities managed by insurance company's second account
Indirect – separate account holds mutual fund shares purchased in contract holder's benefit and doesn't manage the securities
Variable contracts are considered most suitable for someone who can fund the contract with _____. Cash
What would be considered unsuitable to recommend to an investor to fund a variable contract? Cashing out a life insurance policy or another annuity, refinancing a home to withdrawing equity from a home to purchase
Withdrawals from a VA are tax-deferred so there would never be a reason to place one in a tax-favored account, like an ______. IRA
In regards to other retirement savings vehicles, when would a VA be a suitable recommendation? When the max contributions to all other vehicles have been made – supplementing income one is already anticipating
What is a combination annuity? Provides a minimum guaranteed payment plus payments that keep up with inflation – contributes to both a fixed and variable account
When presenting an index annuity, in order for the guarantees to kick in, the policy must be held to term, perhaps as long as ___ years. 15
Which FINRA rules states that VA sales charges have no maximum and must be reasonable? Rule 2320
A SPIA usually begins payouts within ____ days. 60
The number of annuity units credited to the annuitant's account is based on the initial annuity unit value and what other variables? Payout option selected, accumulated value of account, age, sex, and AIR
_____ is the basis for projecting earnings for a variable annuity. AIR
Contributions to an annuity are made with ___-tax dollars. After
If an annuity holder dies during the accumulation stage, his beneficiary will receive what? Value of account of original investment amount, whichever is greater
For company retirement plans, employees must be covered within a reasonable time according to ERISA, usually within __ years of employment. 3
How does vesting work for qualified plans? Fully vested in own contributions, may take certain period of time for employer funded benefits
What are the two types of nonqualified plans? Payroll deduction plans (after tax) and deferred compensation plans
How does a 457 plan work? Employee defers a portion of compensation, which is not reportable for taxes, and therefore receives deduction each year for amount deferred
True or False: there is no 10% penalty tax for early withdrawals on 457 plans. True
ERISA requirements apply to pension plans established by ______ organizations. Private
Taxpayers may appoint IRA _____ of their choice, selecting from securities broker/dealers, banks and savings institutions, carriers, credit unions, and mutual fund distributors. custodians
The only permissible contribution to an IRA is ____. Cash
What are ineligible investments for an IRA? -Collectibles – antiques, gems, rare coins, stamps, works of art
-Life Insurance
-Tax-free muni bonds
A rollover must occur within ___ days. 60
Under Section ____, an IRA holder under 59 1/2 may avoid the 10% penalty tax for early withdrawal if he receives payments as part of a series of substantially equal periodic payments made for the life of the individual. 72(t)
What are the contribution limits of a Coverdell and when must a student deplete funds before being subject to income tax and penalty tax? $2000, age 30
Contributions to a Coverdell ARE/ARE NOT tax deductible. Are not
What are the income limits of a 529 plan? No income limits
____ plans are qualified individual retirement plans that offer self-employed people and small businesses to contribute money to an IRA that the employee sets up to receive employer contributions. SEP (Simplified Employee Pension) Plans
What is the eligibility/participation, vesting, and taxation of SEPs? Eligibility/Participation: 21 years old, 3-5 years employed, minimum compensation
Vesting: Fully vested immediately
Taxation: Tax deductible for employer, taxed to employee at withdrawal but may deduct contributions they make from taxable income
A ____ Plan is for small businesses of 100 employees or less. SIMPLE (Savings Incentive Match Plan for Employees)
What are the 2 choices employers have in determining their contributions to SIMPLE IRA plans? 1. 2% nonelective contributions
2. Dollar-for-dollar match up to 3%
What 2 tax advantages do TSAs have? Contributions are excluded from participant's gross income, earnings accumulate tax-free until distribution.
______ plans are ERISA-qualified plans for self-employed individuals. Keogh
Variable life insurance has a fixed, scheduled premium but differs from whole life insurance. How? Fixed premiums but they're split – portion is placed in general assets of company to guarantee minimum DB and other is placed in separate account
How often will you have to do CE? 2nd year, and every 3 years after
How often does the firm element require member firms to prepare training plans regarding new regulatory developments, performance, and supervisory needs? Annually