General

Industry Regulation

W/out 1929 crash there would be no Federal Securities Act. Acts created regulatory structure founded in 1933, 1934, & 1940.

-Securities Registration Act 1933 "paper act" - requires prospectus & full disclosure filings for all securities considered nonexempt

-1934 Securities Exchange Act "corporate person" - created SEC for purpose of establishing fair & orderly market

-1938 Maloney Act - provided for OTC regulation by NASD now FINRA

Securites Act 1933

-Designed to provide purchasers of new issues (primary market) of securities w/info. regarding issuer.

-Designed to prevent fraud in sale of securities

-Issuers required to register with SEC

Securities

&

Exchange Comission

(SEC)

-Responsible for enforcement of securities laws; doesn't pass approval on investment merits

-President appoints members for 5yr term w advice from Senate

-Issuers required to register w/SEC if interstate commerce channels used to sell issue

- all prospective investors must be provided w/a prospectus

Registration

With

SEC

-Day SEC receives registration is filing date followed by 20 day cooling off period where SEC reviews info.

-Deficiency letter issued to postpone issue/ a stop order to prohibit sale of security if registration statement has material deficiencies

Required information

 in a

Registration Statement

• Description of issuer's business
• Shareholders officers, directors, & underwriter's, & id of all insiders
• Bio data on officers & directors
• Company's capitalization, supported w/ certified financial statements
• Proposed usage of issue's proceeds

-Has red border around cover page

-informs investors registration statement has been filed w/SEC but not yet become effective

-doesn't contain final offering price for issue but may contain a range b/cuz actual solicitation can't occur until effective date

-final prospectus must be delivered to any customer w/in 25 days of effective date

-Exempt under 1933 act from registration & prospectus requirements but still subject to 1933 anti fraud provisions.

• US gov. & Gov. Agency securities
• Municipal Securities
• Issues of nonprofit organizations
• Commercial paper
• Issues of domestic banks & trust companies
• Issues of small business investment companies

Rule 147

Securities Act 1933

States that securities sold w/in borders of 1 state are allowed an intrastate offering provided following conditions are met

• 80% of corp. gross revenue derived from operation w/in 1 state
• 80% of corp. assets are held in 1 state
• 80% of offerings proceeds used to expand operations w/in 1 state
• 100% of purchasers are principal residents of the state

Regulation D of 1933 Securities Act

Regulation exemptions for private placement

• Corp. must have adequate reason to believe buyer is a sophisticated investor
• buyer must be provided with same info. found in prospectus. Info made available in offering memorandaum
• Issuer must receive assurance through investment letter buyer won't make quick sale of offering
• Securities can't be sold to more than 35 non-accredited investors
• offerings can't be advertised through media to general public

Issuer

-Person who issues/proposes to issue security;issuer may assume following duties

• Duty of depositor/manager
• Contractually responsible for assuring payment of certificates for equipment trust certificates / collaterized securities
• Owner of interest when issuing a fractional undivided interest in oil, gas, or other mineral lease

Number of Purchasers

• Corp., partnership,/ other entity counted as 1
• Non contributory benefit plan where trustee make all investment decision
• Clients of investment advisor/customers of a broker/dealer
• Accredited investor

Issuer

Defined

Securites Exchange Act of 1934

• Uniform Practice Code - relates to dealings b/twn member firms covering all transactions in nonexempt securities while providing orderly completion of dealer-to-dealer transactions
• Rules of Fair Practice - relates to member firms dealings w/ public
• Code of Procedure - outlines procedural process in event of violations &/complaints
• Code of Arbitration - concerned w/settling disputes b/twn, dealers/brokers/public

Dealer

any of these entities that perform securities transactions for its own account as part of regular business

Investment Contract

(Howie Case)

Securities

&

Exchange Commission

(SEC)

• composed of 5 commissioners app. by President
• not more than 3 member of same party
• can't engage in any other bus. than serving as commissioner
• Office term 5yrs/until successor appointed 

Member firm can't use FINRA membership in way that would suggest the are endorsed by authority

EX: acceptable to use Member of FINRA

Article III

Qualifications of Members & Associated Persons

Ineligibility for

FINRA Membership

• broker/dealer suspended/expelled from national securities exchange
• broker/dealer barred/suspended for conduct inconsistent w/ just & equitable trade practices
• broker/dealer enjoined by a court from engaging as investment advisor, underwriter, broker, dealer, or any connection w/ securities bus.
• Board of Govenors refuse/discontinue membership to broker/dealer who make false/misleading statement of material fact on membership app.

-No member can permit person associated w/ member to engage in investment banking / securites bus. until proper qualifications met.

-Registered reps may terminate FINRA registration w/ written notice. Termination takes 30 calendar days following filing/ such time any action/complaint is pending against rep.Subject to complaint filings up to 2 yrs. following termination

Disciplinary

Proceedings

1. Specific charges shall be brought
2. Member/person associated w/ member shall be notified & given opportunity to defend against charges
3. Record shall be kept
4. Any determination shall include a statement setting for the following:

-rule, regulation deemed to be in violation

-basis upon which findings are made

-sanction imposed

• Cenure
• Fine
• Suspension
• Expulsion

Office

of

Supervisory

Jurisdiction

(OSJ)

Requirements for

Proper Personnel

Supervision

• Maintain records for enforcing supervisory procedure
• Review all transactions of reps
• approve customer accounts and review accounts for detection & prevention of abuses
• Inspect OSJ @ least annually
• Ascertain experience of persons being qualified for registration & monitor them
• Monitor all outside business activities

Securities Investor

Protection Act of 1970

Established procedure for protection of customer funds and securities in event broker/dealer becomes insolvent. Act created Securities Investor Protection Corporation (SIPC)

SIPC

Membership

• Membership mandated by all broker/dealers
• Members must purchase blanket fidelity bond to protect against employee theft/loss of customer securities
• coverage based on firm's scope of operations
• min. coverage requirement $25,000
• SIPC insures accounts up to $500k including $100k in cash & $400k in securities

Investment Advisor

Defined

-person who for compensation engages in bus. of advising others to advisability & merit of purchasing securities. Financial planners provide related service and defined as advisors if they :

• provide advice, analysis/reports concerning securities
• provide those services as regular course of bus.
• receive compensation of services

Investment

Company

Under Investment Co. Act of 1940 defines an issuer in the business of investing, reinvesting, owning, holding/trading in securities. Corp./trust in which investors can pool funds for increased diversification & professional management. Fall in 3 categories

1. Units Investment Trusts (UITs)
2. Management Companies
3. Face Amount Certificate Companies

Insider Trading &

 Securities Fraud

Enforcment Act of 1988

-Person who purchases/sells securities while in possession of nonpublic material information/ communicates such information to another person is in violation of act

-to prevent misuse of info. insiders must report trades in 2 business days

Civil penalties

for

 Insider Trading

Criminal Penalties

for

Insider Trading

Fire Walls / Chinese Walls

internal procedures which limit & control passing of sensitive info. potentially non-public info. b/twn dept. of firm

Certificate of Incorporation

-Legal document filed w/ state that proves company has been brought into existance & describe org. structure & legal formalities.

-May include following info. -

Name, Address, Objectives, Nature of Bus., Authorities, Liabilities, Govenors/directors, Right to amend the certificate

Registration of Principals

-Must pass limited principals investment co. & variable products qualification exam (series 26)

-activities limited to dealing only indirect participation programs as limited principals

-Direct principals programs must pass series 39

Definition of Principal

-person associated w/ member actively engaged  in management of members investment banking/securities business.

-Persons include following

• Sole proprietors
• officers
• Partners
• Managers of OSJ
• Directors of corp.

Registration of Representatives

1. Direct Participating Programs
2. Corporate Securities
3. Equity Trader

Continuing Education Requirement

Regulatory & Firm

-Regulatory Element - must be completed by 2nd anniversary date & every 3yrs. thereafter, w/in 120 days of the person's registration anniversary date

-Firm Element - education program maintained by members for covered registered persons. Each member must evaluate training needs  develop written training plan annually

Persons Exempt

from

Registration

• Persons who sole functions limited to clerical duties
• persons not actively engaged in investment banking/securities business
• Associated persons of member firms whose only participation w/in firm is need for nominal corporate officer/ for capital participation
• Persons who effect securities transactions only on floor of exchange

Sales Charge

Compensation Restrictions

No associated person of member shall accept any compensation from anyone other than the member w/ which person is associated. Non-member can make direct payment to those who distribute contract only when following met:

-arrangement is agreed to by member

-member relies on appropriate rule/regulation issued by SEC that applies to sitution of the arrangement.

Cash/Non-cash Compensation

No member/person associated w/ member can directly/indirectly accept/make payments/offers of payments of any non-cash compensation with exception

• Gifts don't exceed annual amount $100/person
• Occasional meal, ticket to sporting event/ theater

Selling

agreement

-No member who is principal underwriter may sell varible contracts through broker/dealer unless

• such broker/dealer is a member
• there's sales agreement in effect b/twn parties. Sales agreement must provide that the sales commission be returned to issuing insurance co.

Refund

of

Sales

Charges

-If security issued by open-end management investment co. is repurchased by issuer/underwriter for issuer's account/ tendered for redemption w/in 7 bus. days

• dealer/broker shall refund to underwriter full concession allowed to dealer/broker on original sale
•  underwriter shall pay to issuer underwriter's share of SC on original sale by under writer

Regulated

Investment

Company

-Company distributes @ least 90% of its investment income back to its shareholders

-taxed on excess capital gains that remain after deduction for distributed capital gains dividends not required to pay tax on net income distributions made to shareholders

Conduit/Pipeline

Theory

Corporate Dividend

Exclusion

Shareholder Responsibility

to Report All Dividends

&

Capital Gain Distributions to

IRS & State TaxAgency

Investment co. provide shareholders with 1099-DIV (to report taxable distributions) &/ 1099-B (to report proceeds from sale of shares)

-Shareholder is responsible to report these income & capital gains

Tax Treatment of

Securities Transactions

-Cost Basis - original price paid for security + SC or

 commissions; redemption fees considered SC & added in when figuring cost basis

-Unrealized gain/loss- increase/decrease in value of security & isn't a taxable event

-Realized gain/loss - when security is sold & gain/loss becomes taxable event

Net Capital Gains & Loss

-Calculated by length of time asset was held & from purchase date to trade date of sale

-Assets held < 1 yr is a short term gain & taxed as ordinary income, held > 1yr long term gain & taxed @ capital gain rate max. 15%, 28% if gains from qualified small bus. stock/from selling collectibles, 25% from selling real property

-Capital loss if investment is sold for less than cost basis; 1st used to offset any capital gains & remaing losses allowed as deduction against ordinary income on dollar - 4 -dollar basis

-Max allowable loss $3000/yr/return & losses in excess carried over into subsequent yrs

3 Methods to Determine

Tax/Cost Basis

of

Security

• Average Share Cost Basis (most common) - Total cost of all shares owned/total # of shares ; once method is chosen can't be changed w/out IRS approval
• FIFO - first in first out assumption investor is redeeming oldest share which becomes cost basis for shares redeemed
• Share Identification - investor keeps track of cost of each share purchased & ids specific shares to be liquidated

Gift

of Securities

-if security received as gift cost basis depends upon relationship of market value of securities to donor's cost basis

-If MV is higher than donor's cost basis the recipient's cost basis = donor's

-If MV is lower than donor's cost basis, recipients basis = mv

Inheritance

of Securities

Reinvested Dividends & Capital Gains

Wash

Sale

- investor repurchases essentially same security in 30 days of sale & loss is disallowed

-applies to 30 days prior & 30 days after sale

Divided into 2 parts

1. client's investment in annuity which is cost basis
2. remaining balance represents investment income the taxable portion

IRS  life expectancy multiplier used to determine % of each payment that's taxable; different schedules depending on settlement option

Taxation of

Annuity Payment

-Proceeds exempt from federal income taxes but subject to federal estate taxes under following circumstances

• insured owner of the life insurance policy @ time of death
• no beneficiaries, estate was beneficiary
• insured transferred ownership of policy w/in previous 3 yrs

1035 Exchange

-exchange of life policies & annuities may occur as non taxble exchanges. Following exchanges allowable:

• Life insurance policy for another life policy, endowment contract, annuity contract
• Endowment contract for another endowment contract/ annuity contract
• Annuity contract for annuity contract

Qualified Retirement

Plan

• Must be for exclusive benefit for employees & beneficiaries
• Must be formally written & communicated to employees
• Can't discriminate in favor of "prohibited group"
• Participation in plan must not be geared toward prohibited group
• plan must be permenant
• plan must be approve by IRS
• Plan must have vesting requirements

Tax Advantages of Qualified Retirement

Plan

• Employer contributions tax deductible as bus. expense & not taxed to income to employee
• earnings in plan accumulate tax deferred
• Lump sum distributions to employees eligible for favorable tax treatment

Taxation of Distributions

Distributions prior to 59 1/2 impose 10% penalty the exceptions are:

• Death of participant
• Participant's disability
• Divorce decree
• Series of = payments over participant's life expectancy
• Loan from plan
• part of qualified rollover
• Education expense
• Down payment on 1st home
• medical expenses 7.5% of owners income during disability

Individual Retirment Account

(IRA)

-anyone who hasn't reach 70 1/2 can have ira

-purpose is for tax deferral on only investment earnings in account,

-IRA lesser of following amounts $5000/100% annual compensation

excess contribution penalty 6%

-tax payers over 50 can make catch up contribution up to $1000

-Subject to regular taxation & 10% penalty for early w/drawal

Distribution Rules

for Traditional IRA

- W/drawals can occur any time after account holder reaches 59 1/2

-distributions must begin following calendar yr. from which person reaches age 70 1/2 or 50% penalty; can be received as lump sum/ periodic payments

Distribution after Owner's Death

-Beneficiary can cash in IRA w/out penalty. If distributuions have not started the beneficiary has other options:

• all funds w/drawn by end of 5th yr. following owner's death
• funds may be w/drawn based on beneficary's life expectancy
• if beneficiary is surviving spouse survivor may elect to treat funds in IRA as their own & roll them over into own IRA

Roth IRA

-Contributions can continue beyond age 70 1/2

-Contributions & earnings may be w/drawn tax free as long as account open for @ least 5 years

-Limits same as IRA

Roth IRA Qualified

Distributions

• Payments made after 5 yr. period beginning with 1st taxable yr. which Roth IRA contribution was made
• Payments made on/after date indiv. reaches 59 1/2
• Payments made b/cuz indiv. is disabled
• Distributions made to beneficiary/estate after indiv.'s death
• Distributions made as down payment on 1st home up to $10,000

Not taxed for qualified distributions

Keogh/10 Plans

Purpose & funding

-qualified retirement plan set up by self employed individuals

Similars to SEPs to give both employer & eligble employees opportunity to participate in retirement plan & allow for deductability for employer/sponsor contributions

-min. funding standard must be paid into plan

-may only w/draw prematurely for permanent disability/medical care

Keogh/HR 10 Plans

Eligibility & Employee Coverage

-self employed indiv.

-employees who work for corp. but have additional income from self employment are eligible

- @ least 21, employed 1yr., work min. of 1000 hrs/yr., non seasonal

-purpose is to define full time employee

-employers earning $100k> must give employees 7.5%/ same % they contribute 

Keogh/ HR 10 Plans

Contribution limits

-Max. annual contribution of 20% pretax earnings not to exceed $46,000

-Employees can make voluntary contribution of after tax dollars the lesser of 10%/$2500 of income

-Contributions + investment returns accumulate tax deffered until w/drawn

-Distributions taxed as ordinary income in yr. received, 6% penalty for excess contributions, 10% early w/drawal penalty

-Distributions begin @ 70 1/2

Simplified Employee

Pension Plan

(SEP)

-allow self employed individuals to contribute retirement in greater amounts than traditional IRA

-

-Eligible employees meet following requirement

• 21
• worked for same employer in @ least 3-5 yrs.
• Received @ least $500 in compensation from employer for yr.

Employees Excluded from

SEP

-employees covered by union agreement whose retirement benefits were bargined for

-Nonresident alien employees

Advantages to

Simplified Employee Pension

(SEP)

-Contributions tax deductible & bus. pays no taxes on earnings on investments

-Funded solely by employer contributions and not locked into making annual contributions

-Employees immediately 100% vest

-Sole proprietors & partnerships can set up SEP

Low administrative costs

Savings Incentive Match Plan for Employees

(Simple)

 IRS Plan

-available to small businesses that employee  not more than 100 employees receiving @ least $5000 in compensation from employer

- to establish employer must not have qualified plan in place

-funding comes from voluntary employee salary deferral w/ no % salary limit

-Mandatory employer Dollar -4-dollar match up to 3% of employees salary

-participants immediately 100% vested

-premature distribution penalty 25% in 1st 2 yrs participation 10% after 2 yrs

529

-State sponsered college savings plan

-Contributions grow tax-deferred & w/drawal tax free when used for higher education

-non qualified w/drawal subject to 10% penalty

-advantage liberal contribution limits

-allows for accelerated gift of 5 yrs worth of contributions $55,000 for single donors

-no gift tax liabilty

Coverdell

Educational Savings

(CESA)

-trust/custodial account created for purpose of paying qualified educational expense

- if gross income < $110k you can contribute

-allowed to build up tax free & contributions non deductible

-taxpayer may deposit $2000/yr into education IRA

-10% penalty if amounts w/drawn exceed qualified higher education expense

1. Defined Benefits Plan - employer specifies an amount of benefits promised to employee @ retirement date & responsible for maintaining adequate funds to provide promised benefit; designed for older employees nearing retirement age; appropriate for high salaried owners & key employees
2. Defined Contribution Plan - usually tied to comp. profits so employer not obligated to provide certain specified benefit; plans favor young people just starting out

Defined Contribution Plans

• Funding - employers allowed full discretion w/ regard to making contributions into profit sharing plan; max annual contribution 25% total employee compensation
• Profit Sharing Plans - employers allow employees to share in profits of co.
• 401k plans - allow employees to take reduction in current salaries by deferring amounts into retirement plan; company can match employer contribution. Can be arranged as 1. Pure salary reduction plan  2. Bonus plan 3. Thrift Plan

403(b)

plan

-referred to as tax deferred annuity available to employees of certain non profits

-contribution limit made through salary reduction $15,500

-contributions used to purchase annuities, cds, mutual funds, investment securities

Employee Retirement

Income Security Act

(ERISA)

-protect employees in private sector against abuse & discrimination in pension & retirement plans. Guidelines

• Eligibility rules for plan participation
• Proper accounting & administration of plan funds
• Vesting schedules for employer contributions
• Non-discrimination
• Naming of beneficiaries
• Communication of plan rule & benifits to employees

Summary Feature of Deferred Compensation

-Non qualified plan where employer promises to pay retirement benefits to employee in future

• Contributions currently not tax deductible
• Plan doesn't require IRS approval
• Employer may discriminate in plan offering
• Funds in plan grow on tax deferred basis
• Any excess over cost base is taxed when received

Mutual Funds

Sales Charge

• Mutual funds purchased @ POP, which includes sales charge
• SC becomes a part of original cost of security for tax purposes
• if fund charged redemption fee it's also included

Investment Advisor

Registration

Exemption

Exempt from registration if following conditions met

• they have no place of businees in state & clients are other investment advisors, brokerage dealers, banks, trust comp., & other financial institutions, insurance comp. investment comp, employee benefits plans (w/assets @ least $1million)