Flashcards

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.

An individual retirement arrangement established with funds transferred from another IRA or qualified plan that the owner has terminated.

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. Through 2023, a Roth 401(k) is subject to the RMD rules unless the participant is still working. 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 retirement account that may be funded by individuals whose earned income is less than that year’s threshold. Roth IRAs are always funded with after-tax dollars. Qualified distributions are federally income tax-free.

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.

The rules of conduct are the rules adopted by FINRA to guide members in the observance of high standards of commercial honor and just and equitable practices of trade. They are FINRA’s code of ethics.

An S corporation is a type of business that may have up to 100 shareholders. The shareholders have limited liability. It is a flow-through tax entity. An S corporation files Form 1120S with the IRS each year by March 15th. The shareholders receive Form K-1 with the appropriate distribution of profits or losses.

Safe harbor provisions under ERISA are found in Section 404(c). These provisions protect fiduciaries from liability as it relates to the investments an employee chooses for their retirement account. There are also safe harbor provisions within the Securities Exchange Act of 1943 under Section 28(e). These provisions allow for soft dollar compensation to be paid by broker-dealers to investment advisers.

The sales charge on a mutual fund is the amount added to the net asset value per share to cover the fund’s sales and advertising expenses. When buying a mutual fund share that has a front-end load, the investor will pay the NAV per share plus the sales charge, which equals the offering price (ask).

Schedule K-1 is the form that pass-through tax entities prepare and distribute to the owners of the business showing the distribution of profits or losses for the year. Schedule K-1 is also called Form K-1.

A secondary distribution occurs when an issuer sells additional shares of stock to the public. Different from an initial public offering, in a secondary distribution the shares that are being sold were owned by major stockholders (such as the founder of the company). In a secondary distribution, the proceeds raised are not paid to the corporation but instead are paid to the major stockholders who are selling their shares. A secondary distribution does not increase the number of shares issued. A secondary distribution is also referred to as a secondary offering.

The secondary market, also called the non-issuer market, is where securities are traded from one investor to another (shareholder to shareholder). Listed securities trade on an exchange. The three major exchanges include the NASDAQ Stock Market (a negotiated marketplace), the NYSE (a hybrid/auction marketplace), and the BATS Exchanges (a negotiated marketplace). Non-listed securities trade in the OTC marketplace, such as the Pink List or the OTCBB (Over the Counter Bulletin Board).

Existing shareholders can sell their shares in the IPO if their shares are included in and registered as part of the offering. Most large IPOs include only new shares that the company sells to raise capital. However, in some cases, shares held by existing shareholders are included in the IPO and the shareholders are called “selling shareholders.” The proceeds from the sales by selling shareholders do not go to the company and instead, go to the selling shareholders. When selling shareholders sell shares this is often referred to as a secondary offering.

Section 28(e) of the Securities Exchange Act of 1934 establishes safe harbor provisions related to soft-dollar compensation.

A Section 457 plan is a type of deferred compensation plan that may be established by employees of a state, political subdivision of a state, and any agency of a state. Section 457 plans may also be offered to certain tax-exempt organizations. Churches are not eligible to establish these plans.

Deferred compensation plans for employees of state or local governments. Funded with pre-tax employee contributions.

A sector fund is a mutual fund that focuses the investments that are held within its portfolio on a certain sector of the economy. Sector funds represent a higher level of risk. They are also referred to as specialized funds.

Sector rotation is an active portfolio management strategy that attempts to profit from the expansion and contraction of segments of the economy as the phases of the business cycle change.

SECURE 2.0 increases the age at which RMDs begin to age 73 for those individuals who turn 72 on or after January 1, 2023. Notably, an individual who attains age 72 in 2023 is not required to take an RMD for 2023. The RMD age changes again in 2033 from 73 to 75. SECURE 2.0 also removes the RMD requirement for Roth 401(k) and Roth TSA distributions, beginning in 2024.

A secured bond is a bond secured by the pledge of some specific asset or assets of the issuing corporation. Secured bonds include mortgage bonds, collateral trust certificates, and equipment trust certificates.

As of January 2022, LIBOR is no longer used to issue new loans in the U.S. and has been replaced by the Secured Overnight Financing Rate (SOFR), which many experts consider a more accurate and more secure pricing benchmark. SOFR is based on actual transactions — namely, overnight loans between U.S. financial institutions. These transactions take the form of Treasury bond repurchase agreements, otherwise known as repos agreements. They allow banks to meet liquidity and reserve requirements, using Treasuries as collateral. SOFR comprises the weighted averages of the rates charged in these repo transactions. LIBOR was based on estimates. SOFR is based upon actual transactions, making it a more accurate means of measuring the cost of borrowing money. Because these transactions can be observed by anybody, SOFR is also less easily manipulated.

The Securities Act of 1933 is a federal statute enforced by the Securities and Exchange Commission regulating interstate commerce of new securities that are being offered for sale to the public. The Securities Act of 1933 requires the filing of the registration statement and the delivery of the prospectus. It is commonly referred to as the Paper Act.

The Securities and Exchange Commission was created by Congress to protect investors.  The SEC enforces all federal securities laws including the Securities Act of l933, the Securities Exchange Act of l934, the Trust Indenture Act of l939, the Investment Company Act of l940, the Investment Advisers Act of l940, and others. There are five commissioners on the SEC, appointed by the President and confirmed by the Senate. No more than three of the five can come from the same political party. They may not engage in any securities transactions during their time on the Commission.

The Securities Exchange Act of 1934 is the federal legislation that established the Securities and Exchange Commission (SEC). Its purpose is to provide regulation of securities exchanges and the over-the-counter market and to protect investors from unfair and inequitable practices.  The SEA requires the registration of broker-dealers and registered representatives. The SEA is commonly referred to as the People Act.

A securities information processor is a system that consolidates trade and quote information related to U.S. equity securities.

The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation created by an act of Congress to protect clients of brokerage firms that are forced into bankruptcy. Membership is composed of all brokers and dealers registered under the Securities Exchange Act of l934, all members of national securities exchanges, and most FINRA members.  SIPC provides customers of brokerage firms that go broke coverage of up to $500,000 for their cash and securities held by the firm (coverage of cash is limited to $250,000). SIPC does not cover issuer insolvency or market risk.

The definition of the term security is quite broad. It does not include fixed insurance products or commodities. An investor that purchases a security expects that by the management of a third party, they will have more money over time. The term security includes any note, stock, bond, investment contract, debenture, certificate of interest in a profit-sharing plan or partnership agreement, certificate of deposit, collateral trust certificate, and all options.

A self regulatory organization is an organization that has rules of conduct that it expects its members to follow. There are many SROs within the securities industry. FINRA is an SRO. All broker-dealers must be members of FINRA. Registered representatives are registered with FINRA. The MSRB and the CBOE are also SROs.

To sell is the act of conveying ownership of a security for money or other value.

A sell stop is an order that exists on the books of the specialist below the current market price. If a transaction occurs at the trigger price, the stop becomes a market order to sell. Sell stops can be used to limit a long position’s downside risk or they can be used to lock in profit when the inventory position for the stock is lower than the current market price.

Selling away is a prohibited practice. It involves a registered representative engaging in the securities business away from the employing broker-dealer.

Selling dividends is a prohibited practice under FINRA rules. It involves the practice of inducing the sale of investment company shares or common stock by use of an impending dividend.  A registered representative must explain that the amount of the dividend is included within the market price and that the dividend is taxable to the investor. The market price will decrease by the amount of the dividend as of the ex-dividend date, resulting in a lower cost for the client. If the registered representative does not explain how dividends work it would be a violation of the rule that prohibits the selling of dividends.

Bonds and preferred stocks are senior to common stock regarding income distributions and repayment of principal upon liquidation of the company, they are commonly referred to as senior securities.

Simplified Employee Pension Plan. A SEP-IRA is a qualified retirement plan for the self-employed or a small business.

When purchasing a variable insurance product the insurer must keep the money contributed separately from the general investments of the insurance company.  These accounts are called separate accounts.  Separate accounts of life insurance companies must register as investment companies under the Investment Company Act of l940 and are set up as either unit investment trusts or open-end investment companies. There is no guarantee as to the rate of return in a separate account. The insured or the annuitant has the risk in a separate account.

A serial bond issue is one that is issued at once but with differing maturity dates. Most municipal debt offerings are serial bond issues.

A series of options are options of the same class with the same expiration date and the same exercise price.

The Series 24 exam is the general securities principal examination. A person holding this license is responsible for the supervision of the broker-dealer’s business.

The Series 26 exam is the investment company and variable contracts products principal examination. The Series 26 is a limited principal examination, overseeing only those individuals who hold a Series 6 license.

If the nature of a firm’s business includes options trading the firm must have at least one registered options principal (Series 4 exam). This principal will be responsible for supervising a member’s options sales practices with the public as well as the member firm’s investment banking and securities business as it relates to options.

The Series 6 is the investment company/variable products top-off exam. Holding an SIE and a series 6 license allows an individual to sell mutual funds and variable products.

The Series 63 is the agent’s license examination covering state securities laws, the Uniform Securities Act. Most states require a registered representative to hold a series 63 license, in addition to a product license.

The Series 65 exam is the investment adviser representative examination.

The Series 66 exam is the Combined State Law exam, allowing an individual holding a Series 7 to become both an investment adviser representative and an agent in one exam.

The Series 7 is the general securities registered representative exam. An individual holding an SIE and a series 7 license can sell all types of securities, except for commodities futures.

Different from a serial bond, a series bond is issued at once and matures all at once.

A series of options is a class of options having the same expiration date and exercise price. For example, all UTC September 40 calls.