Flashcards
12b-1 fees are asset-based sales charges used to reimburse a fund for sales and advertising expenses. For a fund to call itself a no-load, it must have a 12b-1 fee of no more than ¼ of 1% of net assets. The maximum allowable 12b-1 fee is ¾ of 1% of net assets. 12b-1 fees are operating expenses that have the effect of lowering dividends. They are often referred to as trailer fees because they will affect the investor’s yield for as long as they own the shares.
An accredited investor is a term that is defined under Regulation D, rule 501. Accredited investors can purchase private placements. An individual can meet the definition of an accredited investor in one of two ways. First, based upon their adjusted gross income. An individual is considered an accredited investor if they have an adjusted gross income above $200,000 in the preceding two years and reasonably expected to be so this year if single, or over $300,000 if they are married filing jointly. The second way an individual can meet the definition of accredited investor is by having a net worth above $1 million, excluding the value of their primary residence. The net worth calculation would include the assets of a spouse and any minor children, but not adult children or friends.
A person’s AGI comes from their income tax return. AGI is gross income minus certain adjustments to income such as deductible IRA contributions and net capital losses. AGI is the basis for determining a person’s taxes owed.
The Administrator is the person responsible for administering a state’s securities laws.
An advertisement is any material designed for use by newspapers, magazines, radio, television, telephone recordings, or any other public medium to solicit business. Advertising may not be sent to clients considering a new issue unless accompanied by a prospectus.
As defined by the Investment Company Act of l940, the term affiliated person of another person includes any person directly or indirectly controlling, controlled by, or under common control with, such other person.
Agency basis refers to a transaction in which the broker-dealer acts for the client, charging a commission on the transaction. The broker side of broker-dealer.
An agency cross transaction is a transaction in which the investment adviser represents both the party buying and the party selling the security.
An agent is an individual who affects securities transactions for the accounts of others. Agents most commonly represent broker-dealers. An individual representing an issuer in the sale of non-exempt securities or through non-exempt transactions would also be required to register as an agent. Most states require a series 63 license to register in that state as an agent. This individual is also referred to as a registered representative when they hold either a Series 6 or Series 7 license.
American depository receipts are used to facilitate U.S. trading in foreign corporations. The ADR trades in the United States and is denominated in U.S. dollars. ADRs are used to diversify an investor’s portfolio.
The annuitant is the annuity contract holder.
An annuity is a contract between an insurance company and an individual (the annuitant). An annuity generally guarantees lifetime income to the person on whose life the contract is based in return for a lump sum or a periodic payment to the insurance company. Annuities offer tax-deferred earnings during the pay-in period. They may or may not be annuitized. If an annuitant dies without annuitizing their beneficiary will receive either the balance in the account or the premiums paid in, whichever is higher.
Arbitrage is dealing in differences. Arbitrage is legal.
The ask price is the price at which the dealer is willing to sell the stock to an investor or another dealer. The ask price of an open-end mutual fund share is what the client will pay to purchase the share.
An asset is something that is owned by either an individual or a business. Assets are found on the balance sheet. Assets include current assets, fixed assets, and intangible assets.
Audited financials are financial statements that have been verified by an independent certified public accountant (CPA). Audited financials include a company’s annual report (10-K filing with the SEC).
Banker’s acceptances are letters of credit from a bank guaranteeing payment of a debt. Generally, bankers’ acceptances are used in the import and export business. They are short-term, money market instruments.
The bid price is the price at which a dealer is willing to buy stock from an individual or another dealer. The client sells at the bid. On an open-end mutual fund share, the client redeems at the bid. The bid price of an open-end mutual fund is also called the redemption price, or net asset value per share.
Blue Sky laws are state securities laws, the Uniform Securities Act.
Bona fide means genuine, authentic, and real.
A breakpoint sale involves the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions so as to share in the higher sales charges applicable. Breakpoint sales are a violation of the Rules of Fair Practice.
Breakpoints are the schedule of sales charge discounts offered by a mutual fund for a lump sum or cumulative investment. Eligibility requirements for breakpoints must be disclosed in the prospectus.
The brochure is the written disclosure document that an investment adviser must deliver to all new clients. The firm brochure is Part 2A of Form ADV.
The brochure supplement is the written disclosure document that must be given to new clients describing the investment adviser representative’s background. The brochure supplement is Part 2B of Form ADV.
The broker is the role of a brokerage firm when it acts as an agent for customers and charges the customers a commission for its services.
A broker-dealer is a person in the business of buying and selling securities, either for themselves or for their clients. Broker-dealers file Form BD to register as a firm. Broker-dealers are registered with the SEC, self-regulatory organizations (SROs), and in each state in which they do business.
A cash account is a brokerage account in which the client must pay for the securities within one business day, under regular way settlement (T + 1).
Cash equivalents are securities that are the most liquid, the “safest” on the risk spectrum. Money market instruments are sometimes referred to as cash equivalents.
The Chicago Board Options Exchange (CBOE) is where listed options trade in the United States.
A cease and desist order instructs a person to abstain from an action. The Administrator can issue a cease and desist order when he knows or has a reason to believe an individual or firm is about to commit a violation of the Uniform Securities Act. It may be issued with or without a prior hearing.
There are two types of certificates of deposit. Negotiable CDs and bank CDs. Negotiable CDs are issued by commercial banks, representing bank borrowing for a short period of time. Negotiable CDs are sold by the bank to institutional clients. Negotiable CDs have high face amounts and trade in the money market. Negotiable CDs are securities. Bank CDs are sold by the bank to retail clients. With a bank CD, the client has liquidity risk for the time period in which they have committed their deposit. In exchange for this deposit, the bank will pay the client a competitive interest rate. Bank CDs are not securities.
The China Wall is the delineation that a firm must have between the trading desk and the research department. The Chinese wall is also called an information barrier.
Churning occurs when there is trading in a customer’s account that is excessive in size or frequency. The term suggests that the registered representative ignores the objectives and interests of clients and seeks only to increase commissions. Churning is often done in discretionary accounts. Churning is a violation of FINRA’s Rules of Fair Conduct.
FINRA’s code of arbitration provides a method of handling securities-related disputes or clearing controversies between members, public customers, clearing corporations, or clearing banks. Any claim, dispute, or controversy subject to arbitration is required to be submitted to arbitration. FINRA members and registered representatives must arbitrate. If the customer has signed a pre-dispute arbitration agreement as part of the account opening process, then the customer must also arbitrate. There is no appeal.
FINRA’s code of procedure has the penalties for violation of FINRA rules.
Commercial paper is a corporate money market instrument that consists of signed promissory notes issued by the corporation to raise short-term funds. The notes are sold at a discount with full payment on demand at maturity. Commercial paper is not required to be registered with the SEC if maturing in nine months (270 days) or less.
Commingling occurs when a broker-dealer mixes firm securities with those owned by their clients. It is also considered commingling when the firm mixes a client’s fully-paid securities with their margin securities.
The broker-dealer when acting as a broker charges the client a commission. The commission is the cost charged to the client for the purchase and/or sale of securities.
The confirmation is sent to the client on or before the settlement date. The confirmation includes the trade date, settlement date, type of security purchased, and any monies owed.
A control person includes: a director or officer of an issuer and a shareholder who owns more than 10% of any class of a corporation’s outstanding securities, as well as their immediate family members.
Securities held by control persons are referred to as control securities.
The cooling-off period is the time between the filing date of a registration statement and the effective date of the registration. Twenty days is the minimum cooling-off period, it is usually longer.
A corporation is a form of business organization in which the total worth of the organization is divided into shares of stock, each share representing a unit of ownership. By law, a corporation has certain rights and responsibilities. It is characterized by a continuous life span and the limited liability of the owners.
The Investment Company Act of l940 requires the fund’s assets to be held by an independent custodian. The custodian is responsible for the safekeeping of all securities and cash held by the fund. Typically, a commercial bank will perform the duties of a custodian, as appointed by the directors. The securities in the portfolio are registered to the custodian.
Custody includes having physical custody of a customer’s cash and/or securities, or having the authority to obtain possession of them.
Dark pools are where many institutional transactions take place. Dark pools are alternative trading systems run by large broker-dealers, offered to their best clients. Trading information from dark pools is very limitedly disclosed.
A day order is an order that is valid for that day only. If it is not executed by the close of business that day it is canceled.
A dealer is a person who deals in the buying and selling of securities as a principal, for the firm’s account.
A debenture is an unsecured bond. Debentures are backed only by the good faith of the corporation. Repayment of the debt is based on the company’s promise to repay.
A direct participation program is usually formed as a limited partnership. They are illiquid due to the fact they do not trade in the secondary market.