Flashcards
A qualified retirement plan follows the Employees’ Retirement Income Security Act (ERISA). Qualified plan contributions that are made by the employer are tax-deductible to the employer.
Bond prices are quoted in the financial press. Corporate bonds are quoted in points with fractions, up to seven/eighths. Government bonds are quoted in points and up to 31/32nds. The quotes for corporate and government bonds are a percentage of the bond’s face value ($1,000). A corporate bond quoted at 97 ½ would have a price of $975.
Stocks and mutual funds are quoted in the financial press in dollars and cents.
The range is the difference between the security’s high and low price, for a particular period of time.
Bonds are rated for safety by various organizations such as Standard & Poor’s and Moody’s. These firms rate the companies issuing bonds as to their ability to repay and make interest payments. S&P ratings are from AAA, AA, A, BBB to C or D, with AAA representing the highest rating and C or D representing a company in default.
A REIT is a pooled investment vehicle that holds either buildings or mortgages or a combination of the two, in its portfolios. REITs may be listed or unlisted. Listed REITs trade in the secondary market and are used to expose an investor to real estate as an asset class. A mortgage REIT has mortgages in its portfolio. An equity REIT owns properties and depends upon rental income to be successful. It is the hybrid REIT that would have both mortgages and properties in its portfolio.
A realized gain occurs when an investor sells a capital asset for more than its cost basis. Realized gains are taxable. The rate at which the gain is taxed depends upon the investor’s holding period.
A recession is an economic contraction that is defined by at least two consecutive quarters of decline in GDP.
The record date is the date on which the corporation determines which stockholders are eligible for dividends. All stockholders of record on that date receive the dividend even though they may subsequently have sold their stock.
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.
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.
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 two full business days following the trade date for the broker-dealer to deliver the securities and for the buyer to pay for stocks and corporate bonds (T + 2 business days). Government bonds and options settle T + 1 business day, as set by FINRA under the Uniform Practice Code.
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 fourth business day following the trade date (when regular way is T + 2).
The Federal Reserve Board regulation governing loans by banks to brokerage firms to refinance clients’ margin accounts.
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.
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. Unless a participant is still working, minimum distributions from the qualified plan 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.
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.
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.
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.
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 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.
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.
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).
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).
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.
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.