Flashcards
Red flags are warning signs. Broker-dealers must have anti-money laundering programs that are alert for red flags. Privacy requirements also require financial services firms to look out for red flags related to identity theft and misappropriation of client funds.
A red herring is a preliminary prospectus used for informational purposes only. It cannot offer a security for sale. Also known as a preliminary prospectus.
Open-end mutual funds issue redeemable securities. Redeemable securities do not trade in the secondary market. The transfer agent of a mutual fund must redeem mutual fund shares within seven calendar days of the request, at the price next determined after the redemption request was received.
Redemption of a mutual fund share is the return of a client’s interest (net asset value per share). By law, open-end mutual fund shares must be redeemed within seven calendar days.
A refund life annuity is a life annuity that provides that a guaranteed number of units will be paid. If the annuitant dies before they are paid, the remaining units are paid to a beneficiary.
Refunding is a procedure in which the issuer of a bond retires the debt by using the proceeds received from the sale of another debt issue.
A registered options principal is responsible for approving new clients who desire to engage in options trading. This approval must be in writing.
Broker-dealer firms must have at minimum two registered principals unless the firm is a sole proprietorship (then it can have only one). Series 24 is the license to be registered as a general securities principal. Firms must also have at least one individual registered as a financial and operational principal (series 27). If the firm offers options trading it must also have at least one registered options principal (series 4). It is the registered principals of a firm that are responsible for managing and supervising the daily activities of the firm.
The term registered representative refers to the individual who works for the broker-dealer in the securities or investment banking business. Registered representatives are registered with FINRA. At the state level, these same individuals are referred to as agents.
The registrar is the entity that keeps track of the issuer’s outstanding securities.
When an issuer has not sold securities across state lines before they must follow the rules of registration by coordination, under the Uniform Securities Act. Registration by coordination is a form of dual registration, with a full registration statement being filed at both the state and federal levels. The security may be sold in a state when it is cleared for sale federally by the SEC.
When an issuer has sold securities before and will be selling more securities across state lines they must follow the rules of registration by notification, under the Uniform Securities Act. A full registration statement must be filed with the SEC, but at the state level, a short form of registration may be filed (notice filing). The new issue may be sold in a state when it is cleared for sale federally by the SEC.
Registration by qualification is used when an issuer will be selling new securities in one state only, and intrastate offering. The full registration statement is filed with the Administrator. The security may be sold in the state when it is cleared for sale by the state. A security that has been registered by qualification may only be purchased by residents of that state for the first six months. After six months, the issue is freely saleable across state lines.
Before securities can be offered to the public, they must be registered under the Securities Act of l933. The statement that discloses all the pertinent information about the corporation that wants to make the offering is the registration statement. This statement is submitted to the SEC in accordance with the requirements of the l933 Act.
A regressive tax is the same no matter a person’s income. Sales tax is a regressive tax. Regressive taxes hurt low-income earners.
Regular way settlement is a type of delivery that allows for one full business day following the trade date for the broker-dealer to deliver the securities and for the buyer to pay. Regular way settlement is set by FINRA under the Uniform Practice Code. All securities (stocks, corporate bonds, Government bonds, and options settle T + 1 business day.
A regulated investment company is an investment company that follows IRC Subchapter M, acting as a conduit for income distributions. If 90% of income is passed through to shareholders, the company is not subject to tax on the distributed earnings, only on the earnings that the company retained. If the company does not meet the 90% minimum then 100% of the fund’s net investment income is taxable at the fund level.
SEC Regulation D is the federal private placement rule. A private placement is a type of securities transaction in which very specific rules are followed. A private placement allows for the legal sale of unregistered non-exempt securities. Regulation D allows for the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors.
Title V of the Gramm-Leach-Bliley Act (GLBA) required that the SEC and certain other federal agencies adopt rules relating to the privacy of nonpublic personal information of consumers and customers. Regulation S-P includes the securities industry’s privacy rules.
Regulation T is the Federal Reserve Board regulation that governs the amount of credit brokerage firms and dealers may extend to clients for the purchase of securities in a margin requirement. Regulation T sets the initial margin requirement at 50% of the market value or $2,000 whichever is greater, not to exceed the value of the securities being purchased. Regulation T also governs cash accounts by establishing the latest that a customer can pay. A customer purchasing securities must pay no later than by the end of the third business day following the trade date (when regular way is T + 1).
The Federal Reserve Board regulation governing loans by banks to brokerage firms to refinance clients’ margin accounts.
Regulatory risk is the risk that a change in regulations could harm the operation of a business.
In a margin account, the client pledges their securities in the margin account as collateral for the loan in a process called hypothecation. Rehypothecation occurs when the broker-dealer pledges those same securities again, this time to the bank, for the loan that the broker-dealer will then offer to the client in their margin account.
For mutual funds, distributions (dividends and gains) may be reinvested in the fund to purchase additional shares instead of being sent to shareholders. Reinvested distributions are subject to tax. Reinvestment distributions increase the investor’s cost basis.
The remainderman is the person to whom the assets in the trust are distributed at the end of the trust’s lifespan.
Remuneration is money paid for work performed.
A repurchase agreement is a device for using government securities as collateral for a short term loan; a borrower will sell an investor the securities with the agreement that he will repurchase the securities a few days later at a set price, higher than the original selling price. Repos are money market instruments.
Qualified plans, including traditional IRAs, are subject to the required minimum distribution rules. Minimum distributions must begin no later than April 1st of the year after the participant turns 73. This age is subject to legislative risk. The age for RMDs is set to rise to age 75 in 2033. If a participant is still working and reaches RMD age they are not required to begin distributions from their current employer’s qualified plan, but they would be required to begin traditional IRA distributions.
Rescission is the act of buying back securities from a client that were inadvertently sold in violation of state law. To rescind the contract is to make it go away. When offering a client the right of rescission, the registered representative must offer to pay what was paid for the security, plus interest (as set by the Administrator), minus any income received. An offer of rescission is good for 30 days. If the client does not take up the registered representative’s offer, after 30 days the client may no longer sue the representative.
The reserve requirement is how much cash and readily convertible into cash the bank must have on hand. It’s a percentage of the deposits held by the bank.
Resistance is the highest the security’s price has been historically, it is used by technical analysts.
Under FINRA rules a retail communication is a written communication (including electronic) that is distributed or made available to more than 25 retail investors in any 30-calendar day period. Retail communications are subject to the principal pre-approval requirement under FINRA rules.
A retail investor is an individual or a noninstitutional client.
Retained earnings are one of the four components of a company’s shareholders’ equity. Retained earnings represent the cumulative total of the company’s net profits and losses over time. A company’s retained earnings are found on its balance sheet.
A revenue bond is a type of municipal bond that is issued to provide capital for the construction of a revenue-producing facility. The interest and principal payments are backed to the extent that the facility produces revenue to pay. Revenue bonds are often used to finance toll roads, stadiums, and airports. Revenue bonds have a higher risk to the investor than general obligation bonds, thus they pay a higher nominal yield.
In a reverse stock split the shareholder will have fewer shares at a higher price per share. Reverse splits are often done to ensure that the stock’s market price does not get so low that the stock gets delisted. In a reverse split, just like in a stock split, the investor’s overall market value remains unchanged.
A revocable trust is a trust that may be changed at any time by the grantor. A revocable trust does not offer asset protection. With a revocable trust, the income is distributed to the grantor during his or her lifetime. After the grantor’s death the property transfers to the beneficiaries.
Rights, also called stock rights, are stock purchase options issued to existing stockholders only. The right is an option to purchase a company’s new issue of stock at a predetermined price that is less than the price the shares will be offered to the general public. An investor who exercises the rights will maintain proportionate ownership (preventing dilution). The right is issued for a short period of time, normally for 30 days, with the option expiring after that time. Rights may also be sold in the secondary market.
The right of accumulation allows a client to qualify for reduced sales charges at any time that the aggregate value of the shares previously purchased and the shares currently being purchased in the account go over a breakpoint. If a mutual fund offers the right of accumulation it will describe this right in the fund’s prospectus.
In a rights offering the existing shareholders are given the right to buy additional shares at a fixed price to maintain their proportion of ownership (prevent dilution). A right is a short-term option that is good for 30 days.
Risk-adjusted return is the return on an investment adjusted for the market risk it carries. The Sharpe Ratio is often used to measure risk-adjusted return.
Risk-free return is the rate of return found on a 13-week treasury bill.
The risk premium is the amount of return over the risk-free return that an investor expects to earn to account for the additional risk in the investment.
Risk tolerance is a subjective measurement of how comfortable an investor is with losing some or all of the original amount invested.
A rollover involves the transfer of funds from one qualified plan to another. In a direct rollover, the funds are paid directly to the new qualified plan. If instead the funds are paid to the individual, the entire account balance must be deposited into the rollover account within 60 days, to defer taxes. Only one indirect rollover is allowed in 365 days.
A Roth 401(k) is a qualified plan that an employer may allow an employee to fund with after-tax dollars. With a Roth 401(k) there is no five-year rule. Earnings that are paid out on or after 59 ½ are federally income tax free. Beginning in 2024, under SECURE 2.0, Roth 401(k)s are no longer subject to RMDs. There is no income limitation on funding a Roth 401(k), but not all employers offer them.
A Roth IRA is an individual retirement account that may only be funded by individuals with earned income, who do not earn too much (phaseout AGI varies each year). Roth IRAs are always funded with after tax dollars. If a distribution is made from a Roth that has been open for a minimum of 5 years and that is paid out on or after age 59 ½, the earnings are tax-free. Roth IRAs are not subject to the required minimum distribution rules.
A round lot is a fixed unit of trading, 100 shares or five bonds.
SEC Rule 144 governs the sale of restricted stock and control stock. There are holding period requirements for restricted stock. There are volume limitations for the sale of control stock. Form 144 must be filed when the sale of control stock exceeds the threshold limit.
SEC Rule 147 is the rule that allows a new issue that is going to be sold in one state only (intrastate) to be an exempt security federally. Under Rule 147 the shares must be registered at the state level only.