Shared Flashcard Set

Details

Series 66
Series 66 laws, etc
309
Finance
Post-Graduate
04/26/2010

Additional Finance Flashcards

 


 

Cards

Term
Securities Act of 1933
Definition
regulates issuing ot corp secu sold to public. IPOs and through subsequent offerings
Term
Exempt securities for USA and SEC
Definition

1) govt

2) commercial paper w/ 9 mos or less

3) religious, educational charitable or not-for-profit

4) RR equip trust

5) securities issued by a federal or state bank, S&L, building and loan assoc, or similar

Term
Not exempt sec under USA
Definition

1) Reg A

2) Rule 147

Term
Regulation A
Definition

exempted under SEC

offered to public w/ total amt of $5 mill or less during any 12 mo pd

simpler filing

Term
Rule 147
Definition

exempt under SEC

offered and sold only to persons resident w/in a single state or territory, where the issuer is a resident and doing business w/in the territory; for 9 mos from date of last sale, resales made only to residents; 80% of issuers gross rec derived from w/in state; 80% of proceeds used w/in state 80% of issuers assets w/in state

Term
Exempt sec under USA and not under Act of 1933
Definition

1) foreign gov securities

2) federal covered securities listed on a national exchange or Nasdaq

3) insurance co securities

Term
Exempt Act of 1933 transactions
Definition

1) transactions by anyone other than issuer, underwriter, or dealer

2) transactions by issuer that dont invovle puclic offering

Term
Registration under SEC
Definition
file registration statement in triplicate; signed by principal exec officer (CEO), principal finc officer (CFO), and a majority of the BOD; must include: purpose, POP, underwriter's commissions of discounts, promotion expenses, expected use of net proceeds, BS, earnings statements for past 3 yrs, name address and bios of insiders and underwriters, copy of underwriting agreement, and copies of articles of incorp
Term
omitting prospectus
Definition
used by investment cos; must meet conditions: any info in advertisement taken from regular prospectus; advertisement must state where to get prospectus; must urge investors to read prospectus before investors; past performance data accompanied by disclaimers and disclosures of load; cant be used to purchase shares, purchase made only via application in prospectus
Term
National conference of commissioners on uniform state laws (NCCUSL)
Definition
org of lawyers devoted to unifying state laws, drafted the original USA as model legislation for the separate states to adopt
Term
tombstone advertisement
Definition
identifies the security, price, and underwriters; not considered a prospectus nor an offering of the security
Term
Statute of limitations for 1933
Definition
earlier of 1 yr after discovery or 3 yrs after date of action
Term
statute of limitations for USA
Definition

civil- 2 yrs after discovery or 3 yrs after act

for criminal offenses - 5 yrs from date of offense, $5k max fine and improsonment of no more than 3 yrs (5-5-3)

Term
Stop order by SEC
Definition
isseud when SEC feels a registration statement isnt complete or is inadequate in a material way; may be isseud before or after effective date; if before amendments need to be filed
Term
Regulation D (Rule 506)
Definition

exemption for offers and sales to no more than 35 persons; doesnt count accredited investors; no general solicitation or general advertising; federal covered securities, no state can impose requirements; federal covered securities and no state may impose registration or qualification requirements, but can impose notice filing requirements

**for USA offered at no more than 10 persons other than institutional investors

Term
Rule 501
Definition

1) institutional investors (banks, ins cos, investment cos, b/d purchasing for own acct, employee ben plans managed by banks, ins cos, or IAs, or employee ben plans w/ assets in excess of $5mill

2) directors, exec officers, and general partners of issuer

3) person whos net worth, or joint, exceeds $1 mill

4) person who has income inexcess of $200k in each of last 2 yrs and in current yr; w/ spousal income = 300k

5) entities made up of accredited investors

Term
Form D
Definition
filed by issuer w/ issues under reg D no later than 15 days after first sale; must include total size of offering, amt sold to date, use of proceeds, names of ppl paid commission
Term
Rule 144
Definition
certain resales of already existing securities could be made w/o filing a complete registration statement; sale of control stock require 144 filing; sale of restricted and control securities
Term
restricted securities
Definition
unregistered securities purchased by investors in a private placement; purchasers sign an investment letter saying they understand the restriction upon resale; legend placed on certificates indicating restriction upon resale; aka letter securitities and legend securities
Term
control person
Definition
corp director, officer, greater than 10% voting SH, or spouse of any; aka insiders or affiliates
Term
Act of 1934
Definition
created SEC; identifies and prohibits certain conduct in the mktplace; confers to SEC disciplinary powers over regulated entities and persons associated w/ them; empowers SEC to require periodic reporting of info by cos w/ publicly traded sec
Term
SEC
Definition
5 ppl, one as chair appted by pres w /advice and consent of senate; administrates all fed laws regulating sec industry except those regulating extension of credit; appted for 5 yr terms and have no other employment; new commissioner appted each yr; no more than 3 of 5 commissioners belong to same party; holds no sec positions; power to register, regulate, and oversee brokerage firms, transfer agents, clearing corps, and SROs (NYSE, AMEX, NASDAQ, FINRA)
Term
Dealer
Definition
regularly engaged  in business of buying and selling securities for his own acct; doesnt include banks, ins cos, investment cos, and any persons engaged in investing, reinvesting, or trading in securities for their own acct, either individually or in some fiduciary capacity, but not as part of regular business
Term
securities info processor
Definition

1) collect, process, prepare for distribution or publication info w/ respeact to transactions in, or quotations for, any nonexempt securit 2) distributing or publishing on a current and continuing basis, info w/ respect to such transactions or quotations

ex: ticker tape, bloomberg and reuters, nasdaq, pink sheets

doesnt include: publication w/ general circulation, SRO (except nasdaq) bank or B/D supplying quotation and transaction info as part of business, radio or tv

Term
transfer agent
Definition
engages on behalf of an issuer of sec in: countersigning certificates; registering the transfer of issuer's sec; exchanging or converting the issuer's securities, trasnferring record ownership of securities by bookkeeping entry w/o physical issuance of sec certificates; doesnt include ins co or separate acct that performs these functions solely w/ respect to variable annuity contraccts or variable policies that it issues or any registered clearing agency
Term
exchange
Definition
org, association, or group of persons providing a mktplace or facilities for bringing together purchasers and sellers of securities; must be registered by filing w/ SEC, which is accepted or denied w/in 90 days of application; must demonstrate: is in public interest, ability to enforce SEC and its own rules, BOD represented by at least one member representing investing public and one representing listed cos, membership in exchange offered only to registered b/d or associated persons
Term
SRO
Definition
national securities exchange or registered securities association, FINRA (largest)
Term
statutory disqualification
Definition
w/ respect to membership or participation in, or association w/ a member of, an SRO if that person: has been expelled or suspended from membership or being associated w/ a member of any SRO, commodities mkt, or futures trading assoc; is subject to any order of the SEC or other regulatory agency denying, suspending or for a pd not exceeding 12 mos, or revoking registration as a b/d, or barring suspension for a pd not exceeding 12 mos his assoc w/ a b/d; found to be cause of any effective suspension, expulsion or order of type describe previously; associated w/ any person known to be a person described previously; been convicted w/in past 10 yrs of securities violation or misdemeanor involving securities dishonesty, bribery, embezzlement, forgery, theft, etc, or any felony; is subject to a temporary or permanent injunction from a competent court of jurisdiction prohibiting him from engaging in any phase of the securities business; willfully violated securities law; or made false or misleading statement in any filinf w/ info requested by an SRO
Term
SEC is the appropriate regulator agency for:
Definition
national securities exchanges; registered securities assoc; members of an exchange or assoc; persons associated w/ a member; applicants to become a mbmers or person assoc w/ a member; MSRB; NO jurisdiction over banks and other finc institutions that are regulated by Fed, OCC, FDIC
Term
groups who must register w/ SEC
Definition

1) brokers/dealers (w/ form BD, SEC has 45 days to accep/reject)

2) securities exchanges

3) national securities associations (NASD, FINRA, and MSRB)

4) corps w/ listed securities, app for registration includes: org, finc structure and nature of business; terms, positions, rights and privileges of diff classes of outstanding sec; terms on which their sec are to be, and have been offered to public, insiders, BS for past 3 yrs; P&L for past 3 yrs

Term
Schedule 13D
Definition
requires beneficial owner of more than 5% of a class equity securities to file a report w/ the issuer, SEC, and sec mkts w/in 10 days of any transaction that results in beneficial ownership of more than 5%; requires name and backgroung of person/entity, origin of money for acquisition, and purpose of acquiring
Term
Section 13(f) filings
Definition
any institutional inv mgr that uses the mail or any means or instrumentality of interstate commerce in the course of its bsiness as an institutional investment mgr, and that exercises investment discretion over an equity port w/ a mkt value on the last trading day in any of the preceding 12 mos of $100 mill or moer, must file quarterly, w/in 45 days of each quarter; purpose to require inst inv mgrs who exercise investment discretion over accts holding certain levels of securities to make periodic public disclosures
Term
Schedule 13G filing
Definition
to ease beneficial ownership requirements for passive investors; thather than filing Schedule 13D, a passive inv whos ownership exceeds 5% of any sec may file 13G; must file w/in 10 days after crossing 5% threshold
Term
passive investor
Definition
person who can certify they didnt purchase or do not hold the securities for the purpose of changing or influencing control over the issuer and hold no more than 20% of the issuer's securities
Term
Section 16 filings
Definition
requires executive officers, directors adn greater than 10% stockholders to file transaction reports before the end of the 2nd business day following the day on which a transaction has been executed in any equity security where they are considered an insider
Term
Regulation T
Definition
delegates bd of governors of Fed to set margin requirements which determine how much credit may be extended by broker/dealers to their customers to purchase certain securities; 50%; credit cant be extended on new issues; mutual funds cannot purchase on margin; once shares owned for 30 days, they may be used as collateral for a margin loan
Term
wash sales
Definition
customer enters a purchase order and sale order at the same time through the same b/d; to create an appearance of activity in  sec
Term
matched order
Definition
enter purchase and sale order at same time w/ diff b/d
Term
civil and criminal penalties for insider trading and statute of limitations
Definition

civil: $1 mill or treble damages

criminal: max 20 yrs

S of L: 5 yrs after the date of hte last transaction

Term
SEC Rule 15c3-1
Definition
establishes minimum net capital requirements for b/d; also requires all b/ds to maintain a fidelity bond to protect against misappropriation, forgery, and similar violations of the firm and its associated persons; minimum bond = $25k
Term
Securities amendments acts of 1975
Definition

main purpose to remove any barriers to competition in the sec industry

1) fixed-commission rates abolished in favor of negotiated commissions

2) developes national mkt system; led to increased efficiency bc of improvement in flow of info; goal was to lessen the reliance on dealers and have more trades take place in an agency capacity

3) SEC given power to approve rule changes by exchanges, FINRA, or MSRB

4) requried registration of municipal securities dealers w/ SEC and gave rise to MSRB; banks not regulated by SEC

5) regulate activities of clearing corp, securities depositories, and transfer agents

Term
investment co
Definition

any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities; primarily in the busienss of investing = more than 40% of value of issuer's total assets invested in investment securities; not permitted to make a public offering of securities unless it has a net worth of at least $100k

doesnt include: b/d and underwriters, banks and S&L, ins cos, hodling cos, issuers whos sec are beneficially owned by no more than 100 persons; issuers who trade in investments other than sec

Term
face-amt certificate co
Definition
issues face-amt certificates on the installment plan; face-amt cert represents an obligation on teh part of its issuer to pay a stated sum at a fixed date more than 24 mos after the date of issuance, in consideration of the pmt of periodic installments of a stated amt
Term
unit investment trust
Definition
no BOD adn issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities; the port remains fixed bc no investment advisor; ex: municipal bond trust
Term
open-end
Definition
offering for sale, or has outstanding, any redeemable security of which it is the issuer; redemption price = NAV, calculated every business day at close of mkt; purchase always at NAV + sales charge; redemptions made at next NAV, minus a redemption charge, if any, and must be made w/in 7 days of receipt of redemption request
Term
closed-end
Definition
onetime offering and do not redeem their outstanding shares; pricing based on supply and demand; shares may be purchased or sold in the mktplace at a price above, below, or at NAV
Term
diversified co
Definition
75% of value of its total assets invested so that the securities of any issuer are not greater than 5% of the total assets and no more than 10% of the outstanding voting securities of any issuer are held
Term
ineligibility of certain affiliated persons and underwriters to serve certain positions w/ an investment co, its adviser, or its principal underwriter
Definition
no one may serve as a director, employee, investmetn adviser, member of an advisory bd, officer, or principal underwriter if that person has been: convicted w/in previous 10 yrs, of any felony or misdemeanor involving purchase or sale of any security or arising out of that person's conduct as an underwriter, b/d, investment adviser, or affiliated person, salesman, or employee of an investment co; or permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting in any phase of the securities business
Term
Form N-1A
Definition
registration statement for open-end; describes objective, sales loads, whether they will be concentrating investments in a particular indusrty or group of industries, etc
Term
Rule 12b-1
Definition
pmt of asset-based sales loads by registered open-end mgmt investment cos; permits a mutual fund to act as a distributor of its own shares w/o the use of an underwriter and w/ an asset-based sales load; permits no-load funds to pay commissions to b/d who sell or promote the sale of their fund shares; fee cant exceed .25%; must be paid according to a written plan describing aspects of distribution; 75% of BOD must be uninterested persons, w/ independent chairperson; approved initially by SH and approved and reapproved annually by majority of BOD and those uninterested persons
Term
asset-based sales load
Definition
any direct or indirect financing by a mutual fund of sales or promotional services or activites in connection w/ the distribution of shares
Term
prohibited activities of investment cos
Definition
purchase securities on margin; participate on a joint basis in any trading acct in securities (inv co cant have joint acct w/ someone else); sell any security short; or acquire more than 3% of the shares of another investment co
Term
changes in investment policy by inv co
Definition
majority vote of outstanding stock; ex of changes: change in subclassification (open-end to closed-end, diversified to non); deviation from fundamental policy in its registration statement including change in investment obj; changing nature of business (cease to be an investment co)
Term
investment advisory and underwriter contracts
Definition
contract must be written and approved by majority of SH and BOD that: describes compensation to be paid; will be approved annually by BOD or by majority of SH if to be renewed after first 2 yrs; provides that it may be terminated at any time, w/o penalty, by the BOD or majority of SH on not more than 60 days written notice to investment adviser; and provides for its automatic termination in the event of its assignment
Term
affiliated person
Definition
directly or indirectly owning, controlling, ro holding w/ power to vote, 5% or more of the outstanding shares; any person directly or indirectly controlling, controlled by, or under common control w/ the investment co or any officer, directoy, partner or employee of the investment co
Term
Periodic and other reports of investment cos
Definition
file BS and income statement w/ SEC; semiannually, SH mailed reports including: BS, income statement, listing of amts and values of sec owned, statement of purchases and sales, and staement of remuneration paid by inv co during pd covered by report
Term
currency transaction reports
Definition
filed for each cash transaction that exceeds $10k; applied to cash transactions used to pay off loans, electronic transfer of funds, or purchase of securities; must report wire transfers in excess of $3k; report structured transactions- small deposits totaling more than $10k
Term
National securities mkts improvement act
Definition
bifurcated (split in two) the regulation of investment advisors by creating a new definition: Covered advisor (federal covered advisor) and covered security (federal covered security); state securiteis registration requirements were preempted w/ respect to federal covered securities
Term
North american securities administrators association (NASAA)
Definition
advisory body of state securities
Term
Cease and desist order by administrator
Definition
used upon registered persons who admin believes has engaged or is about to engage in any act or practice constituting a violation of any provision of the USA; can issue w/ or w/o prior hearing
Term
stop order by administrator
Definition
to deny effectiveness to, or suspend or revoke the effectiveness of, any registration statement; applies only to securities
Term
summarily
Definition

acting w/o prior notice (administrator); upon entry of the order the admin must notify all interested parties that it has been entered, the reasons, and w/in 15 days after the receipt of a written request a hearing will be granted

used to: postpone or suspend registration of securities professional or a security pending a final determination of a proceeding relating to a problem and in denying or revoking a specific security or transaction exemption

Term
broker/dealer
Definition
any person engaged in the business of effecting transactions in securities for the accts of others or for its own acct; any person w/ an established place of business in teh state that is in the business of buying and selling securities for the accts of others and/or its own proprietary acct is a b/d and must register in the state as such; doesnt include agents, issuers and banks, savings inst, and trust cos (not engaged in b/d activities), if engaged in b/d activites, must register; also doesnt include b/d that have no place of business in state and deal only w/ other b/d and other finc institutions (banks, S&L, trust cos, ins cos, inv cos, and pension or profit-sharing trusts); doesnt include b/d registered in state w/ clients temporarily in another state
Term
surety bonds
Definition
required by an administrator when a broker/dealer has custody of, or discretionary authority over, clients' funds or securities; limited to amt set by act of 34; may not require bond of a b/d whose net capital is in excess of that required by the SEC; admin can require capital requirements, but cant exceed requirements by fed law
Term
books and records requirements of b/d by admins
Definition
must be preserved for 3 yrs; cant impose recordkeeping requirements in excess of SEC; records subject to preiodic, special, or other examinations by reps of the admin of the b/d's state or any other state the admin deems necessary or appropriate in public interest; must keep electronic communications; admin of any state where the registrant is registered may demand an inspection during reasonable business hrs w/ whatever frequency deemed necessary
Term
agent
Definition
individual who represents a b/d or issuer in effecting transactions; receive commission
Term
exclusion from def of agent for personnel representing issuers
Definition
when effecting transactions in exempt securities; when effecting transactions exempt from registration; when effecting transactions w/ existing employees, partners, or directors of the issuer when no commission or other remuneration is paid or given directly or indirectly for soliciting any person in this state
Term
exempt USA issuer securities
Definition

employee of issuer not an agent when representing an issuer in these exempt securities:

1) US govt and muni sec

2) sec of other govts

3) sec of banks and savings institutions or trust cos

4) comm paper in top 3 categories by rating cos w/ denoms of $50k or more and maturity of 9 mos or less

5) investment contracts used in connection w/ employee's stock purchase, savings, pensions, or profit-sharing plans

Term
exempt USA issuer transactions
Definition

1) isolated nonissuer transactions

2) transactions btwn issuer and underwriters

3) transactions btwn savings institutions or trust cos

4) private placements

Term
investment advisor
Definition
any person who, for compensation and as part of regular business, engages in the business of advising others as to the value of securities or as to the advisabilite of investing or selling them
Term
investment adviser representative
Definition
individual who represents a state-registered investment adviser or federal covered investment adviser performing duties related to the giving of or soliciting for advisory services
Term
Termination of employment for agents and IARs
Definition

agent- if agent terminates employment w/ b/d, both parties must notify admin promptly; if agent terminates employment to join another b/d, all 3 parties notify admin

IAR- if IAR termminates employment w/ IA, notification depends on how IA registered; if state-registered adviser, then firm notifies admin; if federal covered, then IAR notifies admin

Term
consent to service of process
Definition
appts the administrator as the applicant's attny to receive and process noncriminal securities-related complaints against the applicant; all legal documents received by the administrator have the same legal effect as if they had been served personally on the applicant; remains in force permanently
Term
effectiveness of registration w/ administrator
Definition
license of a b/d, agent, IA, or IAR become effective at noon, 30 days after application filed or date amendment is filed and complete; administrator informs employing firm of effectiveness
Term
NOT securities under USA
Definition

1) insurance or endowment policy or annuity contract that ins co promises to pay a fixed sum of money

2) interest in a retirement plan

3) collectibles

4) commodities (precious metals and grains, including futures contracts)

5) condominiums used as personal residence

6) currency

Term
federal covered securities
Definition

cannot be regulated by state securities administrators

1) securities issued by investment cos (mutual funds, UITs, etc)

2) securities offered under rule 506 of Reg D (private placements)

3) sec from govts and munis, unless the muni issuer is located in the state in which the securities are being offered

4) securities listed on an exchange

Term
notice filing
Definition
authority of the administrator w/ respect to federal covered securities, usually investment cos registered w/ SEC under the inv co act; may require docs filed along w/ registration statement and any amendments, report of value of securities, and consent to service of process; admin has limtied powers to review any documentation filed w/ his dept
Term
registration by coordination
Definition
most common for securities not federal covered (OTC bulletin board or pink sheets); may be registered by coordination if registration statement has been filed under act o 1933; must supply: consent to service of process, copies of prospectus, articles of incorporation and bylaws, copy of underwriting agreement, amendments, and any other info requested by admin; registration effective same time federal registration becomes effective; must have a statement of max and min offering prices and underwriting discounts on file for 2 business days
Term
registration by qualification
Definition
registrant must supply info required by the adminsitrator; for securities to be only sold in one state and securiteis not eligible for registration by anothe method; info required: info of org, info of insiders, capitalization and long-term debt, est proceeds and use of them, type and amt of securites offered, price, selling and underwriting costs, stock options, prospectus, copy of security and opinion of counsel, BS w/in 4 mos of offering and inc stateent for 3 yrs before BS date; qualification become effective when admin orders and effective for 1 yr from effective date (unless more sec outstanding)
Term
exempt USA securities
Definition
US and CA gov and munis, foreign gov sec, depository institutions, ins cos, public utility securities, fed covered securities, sec issued by nonprofit orgs, issued by cooperatives, sec of employee ben plans, certain money mkt instruments; (comm paper less than $50k and less than 9 mos to maturity and 3 highest ratings by national rating agency)
Term
exempt USA transactions
Definition
isolated nonissuer transactions; unsolicited brokerage transactions; underwriter transactions; bankruptcy, guardian or conservator transactions; insitutional investor transactions; limited offering transactions; preorganization certificates; transactions w/ existing security holders; specified nonissuer transactions; nonissuer transactions by pledges; unit secured transactions; control transactions; rescission offers; transaction exemption established w/ each transaction; admin can deny, suspend, revoke any transaction exemption except for fed covered security; unlawful for anyone to offer or sell any security unless: its registered, transaction is exempt, or its federally covered sec
Term
isolated nonissuer transactions
Definition
secondary transactions that occur infrequently; usually dont involve sec professionals, but can
Term
unsolicited brokerage transactions
Definition
initiated by the client, not the agent; most common
Term
bankruptcy, guardian, or conservator transactions
Definition
by executor, administrator, sheriff, or trustee in bankruptcy
Term
private placement USA
Definition
any offering directed at not more than 10 persons otehr than institutional investors during the previous 12 mos provided that the seller believes the noninstitutional buyers are purchasing for investment only, no commissions is paid for soliciting noninst investors, and no general soliciation or advertising is used; no accredited investors
Term
preorganization certificates
Definition
certificate to subscribe to an issue of securities, issued before teh org of the issuer itself ;exempt is no commission paid for soliciting any subscriber, the number of subscribers doesnt exceed 10, and no payment is made by any subscriber
Term
specified nonissuer transactions
Definition
nonissuer transactions by a registered agent, provided the security has been outstanding for at least 90 days and the issuer has registered a class of securities under act of 1934 or filed and maintained info comparable to that required uneer 1934 w/ the admin for 180 days
Term
nonissuer transaction by pledges
Definition
recieves security as collateral for a loan
Term
unit secured transaction
Definition
transactions in a bond backed by a mortgage or deed of trust provided that the entire mortgage or deed is sold as a unit
Term
control transactions
Definition
mergers, consolidations, or reorganization transactions to which the issuer and the otehr person or its parent or subsidiary are parties
Term
rescission offers
Definition
offers to rescind an improper transaction
Term
administrator may deny or revoke the registration exemption of...
Definition

1) nonprofits

2) investment contract in connection w/ employees' stock purchase, savings, pension, profit sharing, or benefit plan

may deny any exempt transaction

Term
required on registration statement of securities for USA
Definition

1) amt to be issued in state

2) states in which sec is to be offered, but not amts offered in those states

3) any adverse order or judgment w/ offering

Term
filing fee for securities and ongoing reports for USA & who may file
Definition
filing fee based on total offering price; admin may require person who filed the registration stament to file reports to keep the info contained in the statement current and to inform admin of progress of offering; cant be required more than quarterly; most registration statements filed by issuer, but also may be filed bby any selling SH, such as large block by an insider, or a b/d
Term
Sharing in client accts
Definition
agents cannot share in profits or losses of client accts unles the client and b/d supply prior written approval and the acct is jointly owned; gains and losses must be in proportion to the funds invested; clients and a b/d cannot have joint accts; IA and IARs are never permitted to share in the profits or losses in their client's accts
Term
matched purchases
Definition
mkt participants agree to buy and sell securities among themselves to ccreate the appearance of activity in a security; increased volume will induce investors to buy and bid up the price; as price rises, those who initiated the matched purchases sell their securities at a profit
Term
offer or offer to sell
Definition
every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a sec for value; includes: security given or delivered w/ or as bonus on acct of, any purchase of securities or other items constituting part of the purchase; gift of assessable stock; warrant or right to puchase or subscribe to another security
Term
not included in offer or offer to sell
Definition
bona fide pledge or loan; gift of nonassessable stock; stock div; class vote by SH pursuant to the cert of incorp or the appilcable corp statute, or a merger, consolidation, reclassification of securities, or sale of corp assets in consideration of sec of another corp; or act incident to a judicially approved reorganization w/ which a security is issued in exchange for one or more outstanding securities, claims or propoerty interest
Term
legal jurisdiction, USA
Definition
those activities considered to have taken place in the stat as any offer to buy or sell a security, as well as any acceptance of hte offer if the offer: originated in the admin's state, was directed to the admin's state, or is accepted in the admin's state
Term
no legal jurisdiction when made in...
Definition

1) a tv or radio broadcast not originated in the state

2) bona fide newspaper or periodical published outside the state

3) newspaper or periodical published inside the state but w/  more than 2/3 of its circulation outside that state in the last yr

Term
4 powers of administrator
Definition

1) make, amend, or rescind rules and orders

2) conduct investigations adn issue subpoenas

3) issue cease and desist orders and seek injunctions (cant compel compliance w/ orders, so injunction by court requires compliance and impose penalties)

4) deny, suspend, cancel, or revoke registration and licenses

Term
letter of rescision
Definition
offering to buy back securities that were sold in violation of USA to avoid lawsuit; buyer has 30 days after receiving to respond; if buyer doesnt accept or reject after 30 days, he gives up any right to pursue a lawsuit at a later date; if he accepts he may recover: the original purchase price, interest at a rate determined by admin, all attnys fees, minus any income received while sec held
Term
rights of recovery from improper sale of securities
Definition
may recover original purchase price of securities, interest at a rate determined by admin, attny's fees, minus any income received while securities held
Term
rights of recovery from improper investment advice
Definition
buyer recovers: cost of advice, loss as result of advice, interest at a rate determined by admin, and any attnys fees; not entitled to recover original purchase price from adviser
Term
judicial review of orders (appeal)
Definition
ppl affected by order of admin may obtain a review of the order in court by filing a written petition w/in 60 days
Term
SEC Release IA-1092
Definition
interprets definition of invesment advisor to include finc planners, pension consultants, and others who offer investment advice as part of their financial practices; anyone who: provides investment advice, reports or analyses w/ respect to securities, is in the business of providing advice or analyses, and receives compensation, directly or indirectly, for these services; also includes sports and entertainment representatives
Term
financial planner
Definition
make recommendations regarding a person's finc resources or perform analyses that concern securities if such services are performed as part of a business and for compensation; advice clients as to the desirability of investing in securities as an alternative to other investments, such as RE, intangibles, or other assets
Term
pension consultants
Definition
advise employee benefit plans on how to fund their plans w/ securities; advise plans on selection, performance, and retention of investment mgrs
Term
in the business of providing advice
Definition

1) gives advice on a regular basis such that it constitutes a business activity conducted w/ some regularity

2) advertises investment advisory services and presents himself to the public as an investment advisor or as oen who provides investment advice

3) receives separate compensatioin that represents a charge for giving the advice

Term
exclusions from def of IA under federal law
Definition

1) bank or bank holding co

2) lawyer, accountant, teacher, or engineer

3) b/d whose performance of such services is solely incidental to the conduct of his business as a b/d and who receives no special compensation (such as a wrap fee); also applies to reps of b/d

4)publisher of bona fide publication of general and regular circulation as long as the publication is not primarily a vehicle for distributing finc advice

5) any person whose advice relates solely to securities issued or guaranteed by the federal govt

Term
exclusions from definition of IA under state law
Definition

1) banks, savings inst, and trust cos

2) lawyer, accountant, teacher, engineer

3) b/d or agents whos advice is incidental to regular conduct of business and receives no special compensation

4) publication that does not consist of rendering advice on the basis of the specific investment situation of each client

5) IAR

6) any person who is a federal covered advisor

7) any person excluded by IA act of 1940

8) anyone else administrator specifies

Term
IA registration exemption under federal law
Definition

1) advisers whose clients are residents of the state in which the adviser has principal office and place of business and who dont give advice dealing w/ securities listed on any national exchange

2) only clients are insurance cos

3) during the course of the preceding 12 mos had fewer than 15 clients, none of which is an investment co registered w/ the SEC, adn dont hold themselves out to the public as investment advisors; de minimis exemption

Term
federal covered investment advisers
Definition

1) $30 mill or more of assets under mgmt & must register w/ SEC

2) excluded from definition of investment adviser by the IA act of 1940, or

3) under contract to manage an investment co registered under the investment co act of 1940, regardless of the amt of assets under mgmt

4) pensions consultants w/ assets of $50 mill or more under control

Term
IAs exempt from registration under USA
Definition
have no place of business in the state but are registered in another state, provided their only clients in teh state are: b/d registered under the act; investment advisers; institutional investors, including large employee benefit plans; existing clients who are not residents but are temporarily in the state; limited to 5 or fewer clients, other than those previously listed, resident in the state during the preceding 12 mos; or anyone the administrator exempts by rule or order
Term
Form ADV
Definition
standard registration form under IA act; two parts: Part I- filed w/ SEC, asks for info used to review the app, Part II- background and business practices of the IA, must be kept on file and readily accessible at the principal office; SEC has 45 days to grant registration or begin proceedings to deny it; this registration is for federal law
Term
Schedule I
Definition
proves the IA has $25 mill under mgmt; doesnt need $25 mill under mgmt if an adviser for investment cos, but still must file schedule I; must file at least 90 days after last day of fiscal year; used for renewal, not amendments; requried for filing w/ SEC
Term
Changes to ADV that require prompt updating
Definition
change of registrant's name; change in principal business location; change in location of books and records; change to contact person preparing the form; change in organizational structure from partnership to corp, etc; change to any questions regarding disciplinary actions; change in policy regarding custory of customer funds and/or securities; any material changes to either Part I or II of ADV
Term
Form ADV-W
Definition
application to w/draw registration voluntarily; becomes effective 60 days after filing w/ SEC
Term
investment counsel
Definition
principal business consists of acting as an investment adviser and a substanital part of his business consists of rendering investment supervisory services- the giving of continuous advice as to the investment of funds on the basis of individual needs of each client
Term
Financial requirements of IAs
Definition
none under IA act of 1940; but is required that any federal covered IA notify clients of any finc situation that might impair its ability to perform the functions for which it has been contracted; under USA, admin may by rule or order est min finc requirements; may require adviser who has custody of client funds or discretion over a client's acct to post a surety bond or maintain a min net worth; typically, net worth required of IAs w/ discretionary authority is $10k, and w/ custody is $35k; if using surety bond, requirement for either cases is $35k; adviser who doesnt exercise discretion and doesnt maintain custody, but does accept prepmt of fees of more than $500, 6 or more mos in advance, must maintain a positive net worth at all times; exception: IA whose only type of custody is direct deduction of fees, if this adviser meets all of the safeguards required by the admin, then the adviser is exempt from the net worth or bonding requirements; USA specifies action taken by IA whos net worth falls below the required min: by close of next bus day, must notify admin, by close of the day after that must file a finc report w/ admin; when net worth below min requirement, adviser must obtain a bond in an amt of the net worth deficiency rounded up to the nearest $5k
Term
scalping
Definition
practice of an investment adviser, before the dissemination fo a securities recommendation, trades on the anticipated short-run mkt activity that may result from the recommendation
Term
SEC and states require IAs to maintain these books and records
Definition
journal w/ receipts and disbursement records; ledgers reflecting asset, liability, reserve, capital, income, and expense accts; memorandum of each order given by the adviser for purchase/sale, or instruction received by adviser from client, and any modification or cancellation of such orders; checkbooks, cancelled checks, etc; bills or statements paid or unpaid; trial balances, finc statements, internal audit working papers; originals of all communication recieved and sent by advisers related to advice or recommendations, receipt, disbursement, delivery of funds or securties, placing or execution of any order to purchase or sell a security; record of all accts which adviser is vested w/ any discretionary power; powers of attny and evidence of discretionary authority; written agreements btwn adviser and client; copy of each notice, circular, advertisement, etc the adviser circulates to 10 or more ppl (2 or more under USA) and must state reasons for recommendation; record of all securities transactions in which an IA or IAR has, or by reason of such transaction acquires, any direct or beneficial ownership
Term
Rule 204A-1, investment adviser code of ethics, requires:
Definition
copy of IA's code of ethics adopted and implemented pursuant to IA act of 1940; record of any violation and action taken; record of all written acknowledgments for each person who is currently, or w/in the past 5 yrs was, a supervised person of the IA; and each adviser's code of ethis to require an adviser's access persons to periodically report their personal securities transactions and holdings to the chief compliance officer and review those reports by adviser
Term
personal trading procedures for IAs
Definition
prior written approval before access persons can place a transaction; maintenance of list of sec firm is recommending/analyzing, and prohibitions in trading in them; maintenance of restricted lists of issuers about which the firm has inside info and prohibitions on trading in them; blackout pds when client sec trades are being placed or recommendations being made and access persons not permitted to place personal transaction; investment opps offered 1st to clients; prohibitions or restrictions on short-swing trading and mkt timing; trade only through certain b/d or limitations on # of brokerage accts permitted; provide adviser w/ dupilcate trade confirmation and acct statemetns; procedures for assigning new securities analyses to employees whose personal holdings dont present apparent conflicts of interest
Term
3 exceptions to personal securities reporting of IAs; no reports required
Definition

1) transactions effected pursuant to an automatic reinvestment plan; purchases or w/drawals made automatically w/ predetermined schedule and allocation

2) w/ respect to securities held in accts over which the access person had no direct or indirect influence or control

3) in the case of advisory firm that has only 1 access person, so long as firm maintains records of holdings and transactions the rule would otherwise require to be reported

Term
5 exceptions to exclude securities trading of access ppl for IAs
Definition

1) govt sec

2) money mkt instruments

3) shares of money mkt funds

4) transactions and holdings in shares of mutual funds, unless IA acts as IA or underwriter for the fund

5) transactions in units of a UIT if the UIT is invested exclusively in unaffiliated MFs

Term
access person
Definition
has access to nonpublic info regarding the portfolio holdings of any reportable fund or is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic; if providing investment advice is the adviser's primary business, all of hte firm's directors, officers and partners are presumed to be access persons
Term
records required under IA code of ethics
Definition
record of each report made by an access person; record of names of persons who are currently, or w/in past 5 yrs were, access persons of the IA; record of any decision, and the reasons supporting the decision, to approve the acquisition of sec by access persons, for at least 5 yrs after the end of the fiscal yr in which the approval is granted
Term
time pd for maintenance of records
Definition
readily accessible for 5yrs; during first 2 yrs, records must be maintained in an appropriate office of the adviser, after that may be preserved in computer or microfilm; partnership articles adn any amendments to them, articles of incorp, charters, minute bookds, adn stock cert books of IA must be maintained in principal office of IA and preserved until at least 3 yrs after termination of enterprise
Term
brochure rule
Definition
delivery of brochure to client at least 48 hrs before entering into an advisory contract or at the time of entering into an advisory contract, if the advisory client has the right to terminate the contract w/o penalty w/in 5 business days after entering into contract; delivered annually thereafter; 2 exemptions from initial delivery requirement: contracts w/ registered investment co and advisers entering into a contract providing solely for impersonal advisory services (publishers of mkt letters) if annual charge for the service is $200 or greater, brochure rule applies
Term
wrap fee program
Definition
client charged a specified fee, or fees not based directly on transactions in a client's acct, for investment advisory services and for execution of client transactions; advisers dont provide part II to clients, instead provide Schedule H of form ADV; not suitable for buy and hold clients bc dont do enough trading to benefit from the fact that commissions are included in the program fee; annual charge based on assets in acct
Term
schedule H
Definition
requires the wrap fee document be filed w/ the SEC and administrator if applicable
Term
independent representative
Definition
acts as agent for advisory client and by law or contract is obliged to act in the best interest of teh advisory client or the limited partners; doesnt control, is not controlled by, and is not under common control with IA and doesnt have and has not had w/in the past 2 yrs a material business relationship w/ IA
Term
qualified custodian
Definition
bank or savings association that has deposits insured by FDIC; registered b/d holding the client assets in customer acts, and a foreign finc institution that customarily holds finc assets for its customers, provided that the foreign finc institution keep the advisory clients' assets in customer accts segregated from its proprietary assets
Term
allowed performance-based compensation under IA contracts
Definition

1) natural person or co that after entering contract has at least $750k under mgmt of hte investment adviser

2) natural person or co that the IA has reason to believe that immediately prior to entering into the contract has a net worth in excess of $1.5mill

3) natural person who is an officer or director of the IA or one of their IARs who has been employed in the industry at least 12 mos

Term
Rules on custody of funds and securities for IAs
Definition
must have a qualified custodian that maintians funds and sec in separate acct for each client; must give notice to clients of qualified custodian's info; acct statements (transactions and amt of funds and each security) sent to clients either by qualified custodian at least quarterly or by adviser, if by adviser he is subject to audit by CPA once per yr, if no discrepancies CPA notifies admin w/in 30 days, if there are notify immediately; client designates independent representative to receive, on his behalf, notices and acct statements; can use MF's transfer agent in lieu of qualified custodian bc he maintains sec for cilent on MF's books; not requierd to comply w/ rules w/ securities that are acquired from issuer in transactions not involving public offering, ownership recorded only on books of issuer in name of client, and transferable only w/ prior consent of issuer or holders of outstanding sec of issuer; need not comply w/ rule w/ clients that are registered investment cos
Term
custody
Definition
holding, directly or indirectly, client funds or securities, or having authority to obtain possession of them; possession of client funds or securities unless received inadvertently and return them to the sender w/in 3 business days (24 hrs w/ admin); arrangement in which adviser authorized to w/draw funds or securities maintained w/ a custodian; any capacity (general partner of a limited partnership, managing member of a limited liability co, or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or acces to client funds or securities
Term
independent representative
Definition
acts as an agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners of a limited partnership and by law or contract is obliged to act in the best interest of the advisory client or the limited partners; doesnt control, is not controlled by, and is not under common control w/ adviser; and doesnt have and has not had w/in past 2 yrs a material business relationship w/ adviser
Term
safeguards for advisor who has custory bc fees are directly deducted from accts
Definition

1) written authorization

2) notice of fee deduction; sent qualified custodian notice of amt of fee to be deducted and sent client an invoice itemizing the fee which includes a formula, amt of assets under mgmt, and time pd covered by fee

3) notice of safeguards; notifies admin in form ADV taht adviser intends to use the safeguards provided previously

4) waiver of net worth or bonding requirements

Term
differences btwn NASAA and SEC custody rules
Definition

1) federal covered advisers using a qualified custodian dont have to include the BS in their brochure; NASAA rule requires BS

2) if fed covered advisor uses a qualified custodian, doesnt require adviser to send invoices or fee calculation statments when deducting fees from client's accts; NASAA believes qualified custodian merely performs a safekeeping function, which isnt to be confused w/ advisers fiduciary duty and books and records requirements that all IAs sent billing statements to clients

Term
disclosure and consent if IAs
Definition
IAR need not disclose personal transactions consistent w/ those recommended to clients; clients given brochure, and sign acknowledgement of receipt; if employed by a b/d, inform of relationship and inform clients they can transact w/ b/ds other than those who employ adviser; disclosure of material disciplinary action, any action taken against the firm or mgmt persons by court or regulatory authority w/in past 10 yrs; includes: state or regulatory proceedings in which adviser or mgmt found to have violated rules or statutes that led to denial, suspension, or revocation or firm's or individual mgmt person's registration, court proceedings (permanent and temp injunction) against firm or mgmt  pertaining to an investment-related activity or any felony, SRO proceedings in which the adviser or mgmt person caused the business to los its registration or the firm or individual was barred, suspended, or expelled, or a fine in excess of $2500 or a limitation was placed on the adviser or mgmt activities
Term
princpal or agency transactions for IAs
Definition
adviser may obtain client consent to a principal or agency transaction after execution, but prior to settlement of transaction; adviser not acting as broker if receives no compensation
Term
IA contracts
Definition

USA- must be in writing; fees must be competitive

federal- can be written or oral; fees be reasonable in view of services rendered

under both, must disclose: services to be provided, term of contract, amt of fee or formula, amt or manner of calculation of any prepaid fee to be returned w/ termination, if there is discretionary power, that no assignment of contract may be made w/o consent of client; if adviser organized as partnership, any change to a minority interest in firm will be communicated to advisory clients w/in a reasonable pd of time, change to majority interest considered assignment

act prohibits certain performance fee arrangements contingent on cap gains or appreciation or waiving fees in event of losses

Term
exceptions from performance fee provisions w/ IAs
Definition
qualified clients defined as: natural person or co that immediately after entering into a contract has at least $750k under mgmt of IA; natural person or co that IA has reason to believe that prior to entering contract has net worth in excess of $1.5 mill; natural person who is an officer or director of IA or one of their IARs who has been employed in industry at least 12 mos
Term
assignment
Definition
any direct or indirect transfer or pledge of an investment advisory contract by the advisor or of a controlling block of the advisers outstanding voting securities by a SH of the adviser; w/ partnership, no assignment considered the result from death or withdrawal of a minority of the partners or from teh admission to the adviser of one or more partners who, after admission will be only a minority interest in the business while a change to majority is considered assignment
Term
agency cross transaction
Definition
adviser or IAR acting on behalf of the firm acts as agent for both its advisory client and the party on the other side of the trade; must obtain prior written consent from the client and clients sent written trade confirmation; cant recommend transaction to both parties
Term
cash referral fees
Definition
IA must be registered; pmt cant be made to solicitor subject to statutory disqualification; must be under written agreement; pmt prohibited unless made in 1 of 3 circumstances: 1) pmts are for the provision of impersonal advisory service 2) paid to person affiliated w/ adviser 3) paid to 3rd party colicitors who arent persons affiliated w/ adviser, in which case must be disclosed and any script or sales approach used by 3rd party is responsibility of adviser
Term
soft-dollar
Definition
allocating certain commissions to pay for the research component; products or services other than execution of securities transactions are obtained by an adviser from or through a b/d in exchagne for the direction by the adviser of client brokerage transactions to the b/d; must be disclosed to clients; must disclose if value of products, research and services provided to an IA is a factor in selecting b/d to execute client trades, must describe in ADV: products, reasearch, and services; if pay higher commissions than those obtainable from other b/ds in return for the products, whether research used for all clients adn any procedures adviser used during last yr to direct client transactions to a particular broker in return for products
Term
chief compliance officer
Definition
responsible for administering the policies and procedures designated to prevent violation of the federal securities laws; must review the policies and procedures annually; identity disclosed in form ADV
Term
penalties of IA act by fed and state
Definition

fed: $10,000 and 5 yrs

state: $5,000 and 3 yrs

enforcement and administration of IA act responsibility of SEC bc IAs have no SRO; SEC and admin have power to censure, place limitations on the activities, functions or operatios of, suspend for a pd not exceeding 12 mos (no max for NASAA), or revoke the registration of any IA if it finds, after a hearing held in fed court system, the penalty is appropriate; appeals w/ federal made to US ct of appeals, w/ state made to state ct of appeals; appeal must be filed w/in 60 days

Term
Economic growth and tax relief reconciliation act of 2001
Definition
permits individuals age 50 and older to make additional contributions to their IRAs of $1000 
Term
SEP IRAs
Definition
self-employed individuals and corps may contribute the lesser of 25% of their postcontribution incomes or $49k in tak-deductible dollars each yr to SEP IRAs established by employees; employee must be at leaset 21 and have performed services for at least 3 of the last 5 yrs and have received at least $550 in compensation from the employer in the current yr; employer must make available to all employees and contribute the same percentage for each; participants are fully vested immediately; employer contributions are tax deductible to the employer and taxed to employee when withdrawn
Term
substantially equal periodic pmt exception
Definition
under IRS rule 72t; if you receive IRA pmts at least annually based on your life expectancy, the withdrawals are not subject to the 10% penalty of withdrawals before 59 1/2
Term
Coverdell ESAs
Definition
after-tax contributions for student beneficiaries; contributions made w/ cash and on or before 18th bday unless beneficiary is special needs; when used for education, earnings not taxed; max annual cnotribution is $2k per beneficiary; can by used for all yrs of education; can contribute up to apr 15 of following yr; must be used by age 30
Term
ineligible investments for IRAs and ineligible investment practices
Definition

collectibles, muni bonds, muni bond funds, and UITs

no short sales, speculative option strategies, or margin acct trading

Term
rollovers
Definition
acct owner take temporary possession of acct funds to move acct to another custodian; only once per 12 mo pd and must be completed w/in 60 days of withdrawal; payor of distribution must withhold 20% as withholding tax and participant still must rollover 100%
Term
rollovers by nonspouse beneficiaries of certain retirement plan distributions
Definition
nonspouse beneficiaries can roll over qualified retirement plan distributions to an inherited traditional IRA; muse be made via direct trustee-to-trustee transfer, and any checks made out to the beneficiary are not eligible for rollover; IRA must be set up as inherited IRA, w/ minimum distributions taken under the rules that apply to beneficiaries
Term
direct rollovers from retirement plans to roth IRAs
Definition
client must report the entire amt converted into the Roth as ordinary income in the yr of rollover and have modified AGI of $100k or less not counting the amt converted
Term
section 529 plans
Definition
prepaid tuition & college savings plans; no federal or state tax upon withdrawal when used for education; can rollover unused funds to a member of the beneficiary's family; contributions w/ after-tax dollars; can contribute up to $65k/yr; donor retains control of assets and can take money back; plans considered "municipal fund securities" and require delivery of an official statement, sometimes called offering circular; residents of states afforded income tax deduction or credit for a portion of their contribution
Term
prepaid tuition
Definition
sponsored by state govs and have residency requirements; covers tuition and mandatory fees only, some have room and board option; age/grade limits; limited enrollment pd
Term
college savings plans
Definition
can be used at any college; covers all qualified expenses; contribution limit of $250k; no state guarantee; no age limit
Term
Keogh Plans
Definition
ERISA qualified plans intended for self-employed individuals and owner-employees of unincorporated business conccerns or professional practices; can contribute $49k pre-tax; can also maintain an IRA; if have employees, they must be covered at the same contribution percentage as the owner for the plan to be nondiscriminatory; only earnings from self-employment count towards max contribution; income and gains taxed upon withdrawal
Term
403(b) Plans
Definition
tax-deferred plans for employees of public school systems, and tax-exempt, nonprofit orgs called 501(c)3 orgs (churches, trade schools, zoos, private hospitals, charitable institutions, etc); aka tax-sheltered annuities, so invest in annuities; must be 21 and completed 1 yr of service; plan must be in writing and made through a plan instrument, trust agreement, or both; employer must remit plan contributions to an annuity contract, a mutual fund or other approved investment; max $49k per yr
Term
qualified plans
Definition
employer-sponsored retirement plan that gets special tax treatment and comply w/ ERISA; must be established under a trust agreement; contributions tax deductible; plan approved by IRS; cant discriminate; tax on accum is deferred; all w/drawals taxed; plan is a trust
Term
ERISA guidelines
Definition
if offered, all employees 21 and up must be covered if they have completed 1 yr of services and work 1000 hrs per yr; funds segregated from corp assets; employees entitled to their entire benefit amts w/in a certain time, even if no longer work for employer; must be in writing, and employees must be kept informed of plan benefits, availability, acct status, and vesting procedure no less frequently than annually; uniformly applied formula determines employee benefits and contributions; apply to private sector (corp) plans only, not plans for fed or state govt workers
Term
Uniform prudent investor act
Definition
to update trust investment laws; acceptance of modern portfolio theory; standard of prudence applied to any investment as part of the portfolio; trade-off btwn risk and return is fiduciary's primary consideration; all categorical restrictions on types of investments removed; diversify investments accepted; delegation of investment functions permitted (under ERISA cant delegate fiduciary duties, but can delegate investment mgmt responsibilities to a qualified invesment mgr)
Term
prudent expert rule
Definition
fiduciary must act w/ care, skill, prudence, and diligence under the circumstances then prevailing that a prudent professional would use; trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise
Term
safe harbor provisions of section 404(c)
Definition
fiduciary is not liable for losses to the plan resulting from the participant's selection of investment in his own acct, provided the participant exercised control over the investment and the plan met the detailed requirements of a Dept of labor regulation (404c)
Term
404(c) regulation
Definition

investment selection- participant is able to materially affect port return potential and risk level, choose btwn at least 3 investement alternatives, and diversify his investmetn to minimize the risk of large losses

investment control- allow employees to exercise independent control over the assets in their acct by letting them make their own choices among investment options cos have selected (at least 3); informing employees they can change their investment allocations at least quarterly; fiduciary isnt relieved from monitoring the performance of the investment alternatives being offered adn replace them when necessary

communicating required info- make info available upon request; statement that plan is to be a 404(c) plan and fiduciaries are relieved of liability; describe risk and return characteristics of each investment alternative available; explain how to give investment instructions; allow real-time access to employee accts either by telephone or internet

Term
profit-sharing plans
Definition
need not have predetermined contribution formula; to be qualified, must have substantial and recurring contributions; offer employees greatest amt of contribution flexibility; can skip contributions in yrs of low profits; easy to install, administer, and communicate
Term
401(k) plan
Definition
employee directs employer to contribute a % of his salary to retirement acct; permit employer to make matching contributions up to a set % of the employee-directed contributions; type of defined contribution plan; all contributions made w/ pretax dollars; permitted to make withdrawals w/ max limits and amt not eligible for rollover and taxable as ordinary income; can also take loans w/o tax, max amt is vested share or $50k and carry a reasonable rate of interest
Term
Roth 401(k) plans
Definition
after-tax contributions w/ tax-free withdrawals and doesnt have to be 5 yrs old for withdrawal; has employer-matching contributions deposited into a regular 401(k) that is taxable upon withdrawal; employees contribute to either; no income limit restrictions for participants and require w/drawals @ 70 1/2
Term
self-employed 401(k) plans
Definition
allow sole proprietorships to set up and cnotribute to a 401k; administrator of plan must be business owner or spouse; to contribute, businessowner may have no full-time employees other than himself and his spouse; tax-deferred contributions; bc covered individual is owner and employee, offers highest possible contribution level of any defined contribution plan
Term
top-heavy plan 401k plan
Definition
disproportionate amt of benefit goes to key employees; plan tested on annual basis to ensure it complies w/ regulation
Term
safe harbor 401k plans
Definition
plan doesnt have to undergo annual top-heavy testing if all employees, even those who dont elect to participate in the plan, receive a min employer-sponsored contribution equal to 3% of earnings w/ immediate vesting
Term
section 457 plans
Definition
deferred comp plan that may be used by employees of state, politital subdivision of a state, and any agency or instrumentality of a state; also offered to employees of certain tax-exempt orgs (not churches); employees can defer compensation and the amt deferred is not reportable for tax purposes; exempt from ERISA, nongovt plans un-funded and govt plans funded; not required to follow nondiscrimination rules; for tax-exempt orgs limited to covering only highly compensated employees, while any employees of govt can participate; distributions cant rollover to IRA, but now early w/drawal penalty; can have 403(b) too and make max contributions to both; loans not permitted and requirements for w/drawal stricter
Term
distribution amt rules
Definition
all traditional IRAs and SEPs treated as a single acct and must be liquidated at least to the extent of percentages specified in IRS tables; qualified plans not aggregated and distributions from one not affected by another
Term
distribution exceptions from penalty
Definition

exempt from penalty by qualified and 401k: death, disability, separation from service after 55, certain medical, QDROs, to reduce excess cont or deferrals, and as substantially equal pmts over life

exempt from IRAs and SEPs: death, disability, medical, to reduce excess cont or deferrals, as substantially equal pmts over life, first-time home purchase, higher ed expense, health ins premiums while unemployed

Term
nonqualified plan
Definition
doesnt allow employer current tax deduction for contributions at the time they are made; instead receives tax deduction when money paid out to employee; no nondiscrimination rules; not subject to same reporting and disclosure requirements; must be in writing and communicated to participants; earnings taxed when withdrawn; include payroll deduction plans and nonqualified deferred comp plans; excess over cost base taxed; plan isnt a trust
Term
payroll deduction plans
Definition
deducted from employee's check on a weekly, monthly, or quarterly basis as authorized by employee; money deducted after taxes are paid and may be invested in investment vehicles at employee's option
Term
nonqualified deferred comp plan
Definition

agreement usualy includes: conditions and circumstances under which some or all of the benefits may be forfeited, such as if employee moves to a competing firm; statement that employee not entitled to any claim against employer's assets until retirement, death, or disability; disclaimer that the agreement may be void if firm suffers a business failure or bankruptcy

co directors not considered employees for eligibility for def comp plan and cant participate; plans may be unfunded, in which case comp paid from firm's operating assets; if funded, advantages of tax deferral are lost; many plans are informally funded through life ins or trust agreements

Term
violations of suitability requirement
Definition

1) recommend securities w/o regard to customer financial situation, needs, or investment objectives

2) induce transactions to get commission

3) recommend a security w/o reasonable grounds

4) fail to sufficiently describe the important facts and risks concerning a transaction or security

Term
REITs
Definition
manages a port of RE investments to earn profits for SH; publicly traded and serve as source of long-term finc for RE projects; own commercial property (equity REIT), own mort on comm prop (mort REID), or both (hybrid); organized as trusts in which investors buy shares or certificates of beneficial interest on stock exchanges or in the OTC mkt; avoid being taxed as a corp by receiving 75% of income from RE and distributing 90% or more of its taxable income to SH; owners hold undivided interest in pool; neg correlation to stock mkt; have reasonable income and/or potential capital appreciation; risk lies w/ quality of mgmt
Term
debenture
Definition
unsecured debt
Term
why invest in bonds?
Definition

safety of principal; steady stream of income; fixed maturity date; possibility of high income w/ speculative bonds

taxable as ordinary income; w/ municipal bonds, no federal or state tax

Term
t-bills
Definition
issued @ discount; issued weekly; mature 1 yr or less; no stated IR; highly liquid; risk-free
Term
t-notes and t-bonds
Definition
pay semiannual interest; notes = 2-10 yrs; bonds = 10-30 yrs; mature at par value
Term
TIPS
Definition
issued w/ fixed IR but principal amt adjusted semiannually by amt equal to change in CPI; interest pmt equals IR x new principal; have lower IR than conventional fixed-rate t-notes; exempt from state and local income taxes, but have fed taxes; when principal adjusted, increase is reportable income for that yr even though the increase wont be received until the note matures
Term
FNMA
Definition
traded on NYSE; purchases and sells RE mortgages, esp those insured by FHA and VA; issued mortgage-backed bonds that can be purchased by individual investors; safe; issued at par and pay semiannual interest; only book entry; interest taxed by state and locally
Term
GNMA
Definition
owned by fed govt; modified pass-through certificates that represetn an interest in pools of FHA-insured mortgages or VA or FHA-guaranteed mortgages; pass-through- as homeowners make their monthly mortgage pmts, they are collected in the pool and the shares pass through to the investor; pmts received monthly and consist of interest and principal; carry a minimum denom of $25k and backed by full faith and credit of fed govt; interest taxed by state and locally
Term
why invest in agency securities?
Definition
very high safety; higher income than treasury securities; some free from state income tax; but have pre-payment risk (w/ mortgage-backed securities)
Term
zero-coupon bonds
Definition
issued at discount; even though no interest pmts, IRS requires issuer to send form 1099-OID indicating taxable interest to be reported each yr; more volatile than other bonds; when issued by corp or muni, high level of credit risk; when issued by treasuries (STRIPS), no credit risk; allow investors to lock in yield w/ no reinvestment risk; useful when there is a target goal (college)
Term
money mkt securities
Definition
safe; liquid; no IR risk or inflation risk; store money needed soon; rate of return low, so not suitable for long-term invesments; fluctuating income due to short-term maturities, principal always reinvested at a diff rate
Term
exchange traded fund
Definition
invests in a specific index; trade like stock; investor takes advantage of price changes that are due to the market, rather than just the underlying value of the stock in the port; can be purchased on margin and sold short; expenses lower than mutual funds
Term
hedge fund
Definition
doesnt register w/ SEC; can adopt riskier investment policies such as arbitrage strategies and short positions during bearish mkts; may use leverage and derivatives such as options and futures; primary aim to reduce volatility adn risk while attempting to preserve capital adn deliver positive returns under all mkt conditions; mgmt fees much higher; charge performance-based fees; investment limited to institutional clients and wealthy individuals (accredited investors) indirectly available to ordinary investors through mutual funds of hedge funds; limited liquidity; designed to generate positive returns in rising and falling mkts; may reduce port risk and volatility and increase returns
Term
limited partnerships
Definition
allow economic consequences of business to flow through to investors; pay no divs, instead pay income, gains, losses, deductions and credits directly to investors; limited liability; borrow money in nonrecourse loans, meaning GP assume responsibility for repmt; ownership called interests; economically viable; can make use of potential tax benefits; suitability requirements may require submission of personal finc statements; illiquid; ownership of DPP results in higher percentage of returns selected for audit
Term
annuity unit
Definition
determines amt of each pmt to annuitant during payout in a variable annuity; number of units doesnt change, but the value of each fluctuates w/ separate acct port's value; number of unites based on value of contract when payout begins and other variable (payout option, age, sex)
Term
taxation of annuities
Definition
if not employer-sponsored, contributions made w/ after-tax dollars and not taxable when annuitized; on w/drawal, amt exceeding cost basis taxed as ordinary income; random w/drawals taxed under LIFO- earnings presumed to be last monies to hit acct; lump-sum w/drawals also use LIFO, but if beofre 59 1/2, earnigns portion taxed as ordinary and additional 10%
Term
equity indexed annuities
Definition
credits interest to the owner's acct, using a formula based on the performance of a particular stock index such as S&P; if index does well, annuitant credited w/ percentage of growth of index; popular among retirement investors; if does poorly, receive minimum guaranteed return; not regulated as securities
Term
universal life
Definition
pay higher interest rates than whole life; provide greater flexibility, bc allow policyowners to adjust death benefits and/or premium pmts; death protection resembles one-year renewable term insurance and cash acct grows according to IR; premium pmts first paid towards ins protection, w/ remaining balance used to build cash value; can increase or decrease death benefit; premium amts can be changed; interest earned by cash acct varies; minimum guaranteed interest rate; two options for payout: 1- level death benefit equal to policy's face amt, as cash value increases, net death protection decreases over teh life of the policy, like a whole life; 2- increasing death benefit equal to policy's face amt plus the cash acct, like combo of level term ins and increasing cash value; whole life permits cash w/drawal
Term
variable life ins
Definition
unlike whole life, whose investments determined by ins co, premiums put in separate acct in which insured has some choice on investments so customer assumes some risk; has minimum guaranteed death benefit; can make loans, min % to be made available is 75% after policy in force for 3 yrs; have right to exchange for fixed-benefit WLI contract in no less than 24 mos w/o evidence of insurability; contract holders have 1 vote per $100 of cash value funded by separate acct; investor bears investment risk
Term
fixed-premium VLI
Definition
minimum guaranteed death benefit determined at issue; premium calculated according to insured's age adn sex and policy's face amt; once premium determined and expenses deducted, the net premium is invested in a separate acct the policyowner selects
Term
universal variable life ins
Definition

flexible premiums and death benefit; premiums invested only in separate acct, and only a variable death benefit; insured can increase or reduce premiums, but must maintain a minimum cash value, and death ben adjusted appropriately; charges deducted from gross premiums: admin fees (one time), sales load (9%/yr over 20 yrs), state premium taxes

charges deducted from separate acct: mortality risk fee (cost of ins), expense risk fee (covers the risk that the cost of administering and issuing the policy may be greater than assumed) and investment mgmt fee (cost of mgmt of separate sub-accts)

Term
taxing of life ins
Definition
premiums nondeductible; proceeds to beneficiary exempt from federal income tax; if insured holds incidents of ownership, entire benefit included for federal estate tax purposes in insured's estate
Term
irrevocable life insurance trust
Definition
life ins acquired by or transferred to an irrevocable life insurance trust; premiums paid may qualify for annual gift tax exclusion ($13k per year)
Term
writing calls
Definition
protect a long stock position by offsetting any loss on sale of the stock by the premium amt; used to speculate on decline in stock price
Term
buying puts
Definition
investor who doesnt own stock expects decline, buys stock at lower price and forces sell at higher; expect stock he owns to decline buy put and forces higher price
Term
long stock and long puts
Definition
protect against decline in mkts; investor sell stock by exercising put or sell put at profit; called portfolio insurance; useful for mgrs of large ports
Term
long stock and short calls
Definition
covered call writing; reduces risk of long stock position and generates income; limits potential gain; reduces stock cost by premium amt
Term
short stock and long calls
Definition
investor who sells stock short sells borrowed stock, expecting price to decline; short seller must buy stock to repay the stock loan and hopes to do so at a lower price; short seller can buy calls to protect against a price rise
Term
short stock and short puts
Definition
covered put writing; potential loss unlimited
Term
forward contract
Definition
for commodity users and producers to arrange for the exchange of the commodity at a time agreeable to both; for agricultural items; contract nonstandardized; not easily transferred; illiquid; components: quantity, quality, time of delivery, place for delivery, price paid
Term
futures contracts
Definition
exchange-traded obligations; buyer estabilshes long position and obligated to take delivery of commodity; seller goes short and obligated to deliver, if he doesnt own, potential loss unlimited; as prices change, gains and losses computed daily; gains credited, losses debited; clearinghouses enable futures positions to be offset easily prior to delivery; components of contract: quantity, quality, time for deliver, and location
Term
quote, bid, offer
Definition

quote = market maker's current bid and offer on a security

bid = highest price dealer will buy

offer = lowest price dealer will sell

Term
fill or kill
Definition
executed in full immediately or canceled
Term
immediate or cancele
Definition
executed immediately in full or in part; any part that remains unfilled is canceled
Term
all or none
Definition
must be executed in full, but not immediately
Term
buy stop orders
Definition
protect against loss in short stock position; protect gain from short stock position; establish long position when a breakout occurs above the line of resistance
Term
sell stop orders
Definition
protect against loss in a long stock position; protect a gain from a long stock position; establish a short position when a breakout occurs below the line of support
Term
Joint acct agreement
Definition
singatures of all owners; any or all tenants may transact business; checks made payable to names in which acct is registered and must be endorsed for deposit by all tenants; mail sent to a single address; to be in good delivery form, securities sold from joint acct must be signed by all tenants
Term
TIC
Definition
tenants fractional interest retained by that tenant's estate; ownership may be divided unequally; if one owner dies or declared incompetent, all pending transactions and outstanding orders must be canceled immediately
Term
JTWROS
Definition
deceased tenant's interest passes to surviving tenants; equal and undivded interest in cash and securities in acct
Term
TOD
Definition
simplest way to keep assets held in brokerage accts from becoming subject to probate upon client's death; doesnt avoid estate taxes if applicable; will doesnt control who inherits assets; only for JTWROS
Term
settlor
Definition
supplies property for the trust; property also referred to as principal or corpus; party aka maker, grantor, trustor, or donor
Term
trustee
Definition
individual or other party holding legal title to property held for the benefit of another person; must administer the trust by following trust agreemend or will; must perform in interest of beneficiaries
Term
simple trust
Definition
distributed during the yr its received; if trust doesnt distribute all of its net income at least annually, its a complex trust; trustee not empowered to distribute trust principal
Term
complex trust
Definition
may accumulate income; permitted deductions for distributions of net income or principal; capital gains are part of distributable net income unless reinvested; trustee may distribute trust principal according to trust terms
Term
testamentary trust
Definition
any trust that comes into being through a will; terms of the trust can provide for pmt of income of principal or both to the beneficiaries; trustee is legal owner of propertyand has authority to control mgmt of assets; doesnt reduce grantors income or estate tax exposure
Term
inter vivos trust
Definition
settlor transfers proprty into trust and either appts himself or someone else to act as trustee; avoidance of probate, but not estate taxes
Term
revocable trust
Definition
must be a living trust bc only the living grantor has the power to change or revoke (undo) the trust; at grantor's death, trust becomes irrevocable; no estate tax ben available; value of any trust assets in which the grantor retains power to revoke the trust and again own the trust property outright is includable in the grantor's estate
Term
irrevocable trust
Definition
settlor must give up all ownership in property transferred into the trust; property placed in an irrevocable trust is usually not includable in the trustor's estate for federal estate tax purposes
Term
exceptions to effectiveness of an irrevocable trust to reduce estate taxes
Definition

1) grantor retains life interest, or life income

2) grantor retains a reversionary interest in the trust that is considered more than incidental; grantor may receive property back from the trust; treated as owner when have reversionary interest if value exceeds 5% of value of that portion

3) grantor retains general power to direct to whom trust property will pass

4) grantor transfers one or more life ins policies into an irrevocable life ins trust while retaining certain incidents of ownership, including ability to amke loans from policy cask values and/or change beneficiaries

Term
taxation of trusts
Definition
based on what is distributed and what is retained; trust or estate reaches highest tax bracket when has undistributed income in excess of $11,150; tax-exempt interest from municipal bonds remains tax exempt to trust beneficiaries; regardless of whether trust income is actually distributed to beneficiaries, each ben considered to be in receipt of taxable income, even if the beneficiary doesnt actually receive the income
Term
Distributable Net Income
Definition
most trusts and estates distribute their income; determines amt of income that may be taxable to beneficiaries (or the grantor in the case of a living trust); commissions and other fees charged for buying and selling securities held in a trust are subtracted from the trust's DNI; realized capital gains that are reinvested in the corpus of the trust are not considered part of the DNI
Term
bypass trust
Definition
used to take adv of lifetime estate tax exclusion; commonly used btwn spouses; amt to leave the other unlimited, upon death of the survivor, all that remains is that person's lifetime exclusion; upon death of other, first $3.5 million (amt excluded under "unified credit" of what is left isnt taxed, but everything above will be; using bypass trust, 1st to die could have left $3.5 mill to children, so not so much of 2nd to die's estate taxed
Term
Generation skipping trust
Definition
used to pass money from family members to other family members more than one generation removed (grandchildren, great-grandchildren); instead of assets being taxed upong death of parents adn again when their children pass them to the grandchildrean, one level of estate taxation is eliminated; enables family to leave up to $7 mill w/o any estate tax liability
Term
estate acct
Definition
custodial acct that is directed by an executor on behalf of the beneficiary or beneficiaries of an estate; executor makes investement, mgmt, and distribution decisions for the acct; taxation of undistributed income same as trusts
Term
partnership
Definition
formed under partnership agreement that identifies goals and purpose; easy to form and dissolve; not suited for raising large sums of capital; profits and losses flow through to investors, avoiding double taxation of profits at business and individudal levels
Term
limited partnership
Definition
mgmt and liability assigned to general partner while limited partners are passive and have liability limited to their investment
Term
LLC
Definition
combines business of incorporation (limited liability) w/ tax adv of partnership (flow-through of taxable earnings); owners are members (not SH) and arent personally liable for the debts of the LLC; can have unlimited members; members file taxes on form K-1
Term
S corporations
Definition
taxed like a partnership; offers investors limited liability associated w/ corps in general; profits and losses passed through directly to SH in proportion to their ownership; cant have more than 100 SH or more than one class of stock, none of whom may be a nonresident alien; losses on stock may be claimed only to extent of an investor's basis in the shares which includes money contributed or lent to corp; form K-1 for filing taxes
Term
C corporations
Definition
distinguishes co as separate entity from its owners; corps officers and directors are shielded from personal liability for corp's debts and losses; creditors cant reach SH assets; income tax applies to the corp as an entity rather than being passed through to the SH; divs are subject to double taxation; file taxes on form 1120
Term
margin acct
Definition
allow customers to control investments for less money than they would if they were to buy the securities outright bc allows customer to borrow for investing; also source of cash, if customer has fully paid securities in acct a b/d can lent money against those securities up to the margin limit; customers must meet minimal suitability requirements before opening; securities bought on margin held in street name
Term
UGMA/UTMA
Definition
provide way to make gifts of money and securities to minors; UTMA more flexible and expands types of property you can transfer and provides you can make other types of transfers besides gifts; managed by a custodian who can buy or sell securities, exercise rights or warrants, and liquidate, trade, or hold securities; may use property in acct in any way custodian deems proper for minor's support, education, maintenance, general use, or benefit; cant purchase on margin; must reinvest all cash proceeds, divs, adn interest; investment decisions consider a minor's age; inappropriate investments: commodity futures, naked options, and high-risk securities; covered call writing allowed; rights and warrants must be exercised or sold; gifts irrevocable; one custodian and one minor; securities registered in custodian's name for the benefit of the minor
Term
taxation of UTMA/UGMA
Definition
kiddie tax- minor must file annual income tax return and pay taxes on any income exceeding $1,900 produced by UGMA/UTMA at the parent's top marginal tax rate, regardless of source of gift, until minor reaches 19, unless a full-time student in which case it is 23; when no longer covered by kiddie tax, acct taxed at minor's tax rate; in most states its custodian's responsibility to see taxes paid
Term
UTMA differences from UGMA
Definition
can incest in RE, certain partnership interests, and other types of intangible property; custodian can delay transferring assets to minor until he becomes 21 or 25, depends on state statute
Term
durable power of attny
Definition
designated person maintains power over the acct even upon the grantor's incapacitation, whether due to physical or mental causes; mostly used for aging parents; upon death of either principal to the durable power of attny, the power is terminated
Term
preservation of capital
Definition
CDs, highly rated bonds, savings accts, and money mkt funds; reduce mkt risk (little or no mkt price fluctuation), but sacrifice higher income; exposed to inflation bc fixed income investments
Term
investors seeking current income
Definition
invest in individual securities or mutual funds that invest in fixed-income investments such as: govt bonds and notes and agency bonds, corp bonds and notes, preferred stock, and utility co stock; money mkt mutual funds funds invest in safe, short-term instruments and are structured so principal doesnt fluctuate, have low yields; bonds of corps w/ low credit ratings yield high, uneven income w/ principal subject to credit risk; time investor expects to remain holding investment is the primary concern in choosing what income-producing investment
Term
investors seeking capital growth
Definition
stock investments preserve and increase buying power over and above inflation rate, but subject to short-term volatility; aggressive growth stocks appropriate for ppl w/ high tolerance for risk and ability to remain invested for many yrs; large cap stock funds better for older investors who need to liquidate investmetn in 3-5 yrs, or more conservative investors
Term
speculative investments
Definition
offer opportunity to earn substantial returns but carry a lot of risk; highly volatile stock, high-yield (junk) bonds, options on stocks or stock indexes, and commodity futures
Term
Asset and income shifting
Definition
shift investment assets and income to a person in a lower tax bracket; placing asset in parent's name will remove the income from client adn let the parent receive te income directly w/ little or no tax liability; trusts can be used to shift assets and income
Term
asset allocation
Definition
spreading of portfolio funds among different asset classes; proponents believe the mix of assets w/in a port, rather than individual stock selection, is the primary factor underlying port performance; 3 types of assets: stock (w/ subclasses based on mkt cap, value vs growth, and foreign eq), bonds (w/ subclasses based on maturity and issuer), and cash (focuses mainly on standard risk-free investment, the 90-day t-bill and other short term money mtk instruments); sometimes tangible assets (RE or precious metals) are part of asset allocation bc they reduce inflation risk; institutional investors and some high net worth individuals use hedge funds, private equity, adn venture capital as alternative investment classes
Term
strategic asset allocation
Definition
passive strategy; standard model subtracts person's age from 100 to determine % of port to be invested in stocks; uses rebalancing, if mkt doest better than expected, client's proportion of stocks to bonds would be out of balance, so quarterly stocks would be sold and bonds purchased (or funds would be placed in cash) to bring proportions back to desired levels; includes constant dollar plan and constant ratio plan
Term
constant dollar plan
Definition
goal to maintain constant dollar amt in stocks, moving money in and out of money mkt fund when necessary
Term
tactical asset allocation
Definition
active strategy; short-term portfolio adjustments that adjust port mix btwn asset classes in consideration of current mkt conditions; if mkt to do well, allocate more to stock; if mkt to decline, allocate more to bonds and cash
Term
sector rotation
Definition
mgrs attempt to buy into next sector of the experience a move up according to the business cycle; when an industry sector reaches the peak of its move in business cycle, it should start to sell the sector; recommended to be in more than one sector at the same time; buy into the sector that is rising and hold until it turns down, when it turns down the advisor rotates its clients to teh next sector that it rising toward the top and expected to outperform; hold a min of 3 sectors in a port: one on the rise, one at the top, and one starting to decline
Term
growth port mgrs
Definition
focus on stocks of cos whose earnings are growing faster than others and expected to continue; bc rapid growth in earnings often priced into the stocks, growth inv mgrs likely to buy stocks at the high end of their 52 wk price range
Term
value port mgrs
Definition
concentrate on undervalued or out-of-favor securities whose price is low relative to the cos earnings or book value and whose earnings prospects are believed to be unattractive by investors adn sec analysts; buy undervalued sec before the co reports positive earnings; buy stocks at the bottom of their 52 wk price range
Term
divident reinvestment plans
Definition
SH entitled to purchase additional shares from issuer using their cash div, paying little or not commission and often at a discoutn to mkt price
Term
taxation of reinvested distributions
Definition
distributions are taxable to SH whether they are taken in cash or reinvested; issuer must disclose whether each distribution comes from income or realized capital gains; form 1099-DIV send to SH after close of year and details tax info related to distributions; divs reported as div income and taxed as either ordinary income or as a qualifying div w/ a max rate of 15%; cap gains reported as long-term cap gain
Term
alimony & child support
Definition

alimony- pmt to an ex-spouse; deductible to spouse making the pmts and includable in income tax for purposes by spouse receiving them

child support- not deductible by parent who pays it and not includable as income by recipient 

Term
passive income
Definition
from rental property, limited partnerships, and enterprises in which an individual doesnt actively participate; for the general partner, the income from a limited partnership is earned income, for limited partner the income is passive
Term
alternative minimum tax
Definition
ensures high-income taxpayers dont escape federal income taxes; certain items that receive favorable tax treatment must be added back into taxable income for the AMT and include: accelerated depreciation on property placed in service after 1986; certain costs associated w/ limited partnership programs, such as R&D and excess intangible drilling costs; local tax and interest on investments that dont generate income; tax-exempt interest on private purpose muni bonds issued after 8/7/86; incentive stock options to the extent that the FMV of the employer's stock is in excess the strike price of the option
Term
net capital gains and losses
Definition
add short- and long-term capital gains/losses; if results in gain, rate is 15%; capital losses are deductible against earned income up to $3k per year; any losses not deducted in a taxable yr may be carried forward indefinitely as a deduction to offset capital gains in future yrs
Term
wash sales for tax purposes
Definition
investor cant use capital losses to offset gains or income if the taxpayer sells a secuirty at a loss and purchases the same or identical security w/in 30 days before or after the trade date establishing the loss; 3 qualities of debt securities in determining whether they are identical: maturity, coupon, issuer
Term
margin interest
Definition
tax-deductible expense, except for interest expense incurred in purchase of munis bc its federally tax exempt; can deduct interest expenses to the extent they dont exceed their net investment income, which includes interest income, divs, and all cap gains
Term
estate taxes
Definition
gross estate includes all interests in property held by and individual at time of death; certain expenses deducted (funeral expenses and debts) to arrive at adjusted gross estate; then unlimited marital and charitable deductions subtracted to arrive at taxable estate; estate taxes due 9 mos after death; can value property in gross estate as of date of death, or as of a date which is 6 mos after death
Term
gift taxes
Definition
up to $1mill in lifetime gifts may be made w/o incurring gift tax; can give up to $13k per year to any member of individuals w/o generating federal gift tax; unlimited btwn spouses, but if not a citizen limited to $133,000; tax responsibility of donor
Term
tax of foreign securities
Definition
div and interest income received from foreign sec subject to 15% w/holding tax by the investor's country of citizenship; a foreign tax credit allows investors to reclaim the w/held income on their tax returns
Term
future value
Definition
= PV x (1+r)^t; reflects compound rate of return
Term
present value
Definition
= FV/(1+r)^t; the term (1+r)^t si teh discount factor in both FV and PV
Term
rule of 72
Definition
shortcut for determining number of yrs for an investment to double in value; divide 72 by the interest rate the investment pays; 72/i
Term
total return
Definition
income plus growth of principal from an investment; normally refers to an investment's return over a 1 yr pd; divide income and growth by original investment for percentage
Term
current yield
Definition

common stock- expresses annual div payout as a percentage of stock price; div/value

debt security- expresses annual interest payout as a percentage of the current mkt price of the security; interest/value

Term
yield to maturity
Definition
takes into acct the gain or loss the investor will have when the bonds are redeemed at maturity; when an investor pays less, he will make a profit in addition to interest; when pays more will suffer loss if holds to maturity; if coup lower than CY, sell at disc; if coup higher than CY, sells at premium
Term
holding period return
Definition
total return expressed as a % of an investment over a variable time pd; same as total return, but total return is computed on an annual basis adn HPR can be computed for any pd
Term
annualized return
Definition
return an investor would have received had he held an investment for one yr; multiply actual return received by number of days in the yr divided by number of days an investment is held
Term
after-tax return/yield
Definition
reduce investment's return by the tax rate; take return and multiply by 1-tax rate
Term
real return
Definition
adjusted for inflation
Term
IRR
Definition
disc rate that makes FV of investment equal to its present value; determined through iteration; YTM of a bond is its IRR bc its the interest rate that equates the value of the bond's future cash flows w/ its current price; takes into consideration time value of money
Term
time-weighted returns
Definition
determines IRR by evaluating the performance of port managers w/o influence of additional investor deposits or w/drawals
Term
dollar-weighted returns
Definition
determines IRR that an individual investor earned on the basis of the investor's particular cash flow into and out of port; used to evaluate the overall return for the port
Term
BV per share
Definition

liquidation value of the enterprise; what is left to common SH

(net tangible assets - liabilities - par value of preferred stock)/# share of common

Term
form 8-K
Definition
reports newsworthy events to SEC, making it available to public; includ change in mgmt, change in cos name, mergers, acquisitions, bankruptcy filings, and major new product intros or sale of a product line; also filed when member of BOD resigns over a disagreement; used only by domestic issuers
Term
Form 10-K
Definition
annual report; comprehensive overview of the cos business and finc condition and includes finc statements that have been audited by an independent accountant; not what is sent to SH, this is more detailed about finc info
Term
Form 10-Q
Definition
filed quarterly; contains unaudited finc statements; for all cos, except those w/ a public float of less than $75 mill, must be filed w/in 40 days of each of 1st 3 fiscal quarters of the yr; w/ smaller firms, filed w/in 45 days of end of quarter
Term
Annual reports
Definition
received by all SH; most detailed info you can get on cos finc position; professionally prepared used for mkting and providing info
Term
beta
Definition
measure of volatility in relation to overall mkt; 1 = moves in line w/ mkt; greater than 1 = more volatile; less than 1 = less volatile than mkt; negative beta = moves in opposite direction of mkt; measures systematic risk - risk w/ mkt in general; high betas = greater capital gains in rising mkt and greater losses in declining mkt
Term
correlation
Definition
securities move in same direction; strong or perfect correlation means two sec prices move in perfect positive linear relationship w/ each other; ranges from   -1 to +1; perfect corr = +1; unrelated price movements = 0; if perfect opposites = -1; index funds attempt to achieve perfect corr w/ index they are mirroring
Term
standard deviation
Definition
measure of volatility of an investment's projected returns; larger = larger a security's returns expected to deviate from its avg return, and greater the risk; expressed in terms of %; secc will vary w/in 1 std dev 2/3 of the time and w/in 2 std devs 95% of the time; includes systematic and nonsystematic risk, making it a measure of total risk inherent in investing in that sec
Term
sharpe ratio
Definition
calculated by subtracting the risk-free rate from the overall return of the port; the result (which is the port's risk premium) is then divided by the std dev of the port (R-Rf/sd); measures amt of return per unit of risk taken; the higher, the better or more return per unit of risk taken; risk-adjusted return as a measure of an investment's std dev
Term
duration
Definition
time in yrs for a bond to pay for itself; also used to measure % change in price of bond as a result of a small change in IR; % change in price = +/- duration x change in IR (increase in IR, use -, dec in IR, use +); lower coup rate = greater duration; higher coup = lower duration; higher duration = more its value will change for a 1% change in IR
Term
discounted CF
Definition
take future expected FCF and discount it to arrive at a PV; higher the DCF, the more valuable the investment
Term
benchmark portfolios
Definition

large cap- S&P 500

mid cap- S&P 400

small cap- Russell 2000

International stocks- EAFE

capitalization = # outstanding shares; large cos stock price changes have greater effect on index; beta measured against S&P500 composite index

Term
S&P 500
Definition
4 groups: 400 industrials, 20 transportation cos, 40 public utilities, 40 finc institutions; base-weighted indes using base pd of 1941-1943 equal to 10; cap-weighted index (mkt value-weighted)
Term
NYSE index
Definition
covers all common stocks listed on NYSE, more than 3000 diff cos; provides most comprehensive measure of activity on NYSE; base-weighted, w/ base of 12/31/95, and base id 50; cap-weighted index
Term
DJIA
Definition
best known; 30 industrial stocks among best-known corps in the world; price-weighted, so truly an avg; add prices of one share for each of 30 cos and divide by 30, has been adjusted for stock splits; 3 other avgs: 20 transportations, 15 utilities, and composite of all 65
Term
NASDAQ composite index
Definition
covers more than 3000 OTS cos; base pd of 2/5/71 and index # of 10; also a cap-weighted index
Term
EAFE
Definition
index of foreign stocks; mkt cap weighted; EAFE = europe, australia, and far east; selection of stocks from 21 developed countries outside the US and canada; most common benchmark for foreigh stock funds
Term
efficient mkt hypothesis
Definition
security prices adjust rapidly to new info w/ security prices fully reflecting all available info; mkts effeciently priced as a result; aka random walk theory- throwing darts at listings as good as selecting stocks; no way to accurately predict stock prices and a passive strategy is probably the most suitable for investment success
Term
weak EMH
Definition
current asset prices already reflect all past info relating to price and vol; knowing price and vol info doesnt give much "strength" in understanding where a cos stock is likely to go; having this info couldnt enable anyone to beat the mkt; price and vol info is basis of technical analysis
Term
semi-strong EMH
Definition
"stronger" than weak bc data reported includes price, vol, and info reported in finc statements, cos announcement, economic factors, etc; believe cant beat mkt w/ this info and finc statement analysis wont insure stock mkt success
Term
strong EMH
Definition
includes private and insider info; in an efficient mkt, even this ingo is so rapidly assimilated and reflected in mkt prices that trading profits cant be assured; all info, whether public or private, is fully reflected in a security's current mkt price; belief is that mkt looks ahead and projects based on anticipated future corp developments
Term
modern port theory
Definition
attempts to quantify and control port risk; emphasizes determining the relationship btwn risk and reward in the total port rather than analyzing specific securities; derived from CAPM- states that pricing of a stock must take into acct systematic and unsystematic risk; investor should be rewarded for risks taken so higher the risk, higher the return; focuses on relationship among all investments in a port, instead of particular stocks; theory that specific risk can be diversified away by building ports of assets whos returns arent correlated; MPT diversification allows investors to reduce risk in a port while simultaneously increasing expected returns; diversification reduces risk only when assets whose prices move inversely, or at diff times, in relation to each other are combined, which is accomplished by including assets w/ a neg corr; port w/ least amt of volatility will do better than one w/ a greater amt of volatility
Term
capital mkt line
Definition
from CAPM; provides and expected return based on level of risk; equation uses: expected return of port, risk-free rate, return of mkt, std dev of mkt, and std dev of port; provides an expected return for a port based on expected return of mkt, the risk-free rate of return, adn std dev of port in relation to std dev of mkt; used to evaluate diversified ports
Term
security mkt line
Definition
derived from CML; allows us to evaluate individual securities for use in a diversified port; uses: expected return for asset, risk-free rate, return on mkt, beta of asset; determines expected return for a security on bases of its beta and expectations about the mkt and risk-free rate; want to determine how much over the risk-free rate we should earn for taking the investment risk
Term
expected return
Definition
Rf + beta(mkt exp retun - Rf) = stock's expected return
Term
optimal port
Definition
one that returns highest rate of return consistent w/ the amt of risk an investor is willing to take; port that makes teh best trade-off btwn risk and reward for a given investor's investment profile
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