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- Iowa
- Kaplan University
- Finance
- Finance 100
- Kapla
- Summary
Penny C.
• 91
cards
SECURITIES ACT OF 1933
APPLIES TO NEW ISSUES UNLESS SECURITY OR TRANSACTION IS EXEMPT
1. Examples of exempt securities
a. U.S. government and agency securities
b. State and local municipal bonds
c. Commercial paper-maximum 2 70, day (nine-month) maturity
d. Bank securities (not bank holding companies)
e. Intrastate offerings under Rule 147 ( 80% rule-100% residents, resale rule)
2. Example of exempt transactions-private placements under Regulation D
a. Rule 501-accredited investor
1 .) Institutional investors
2 .) Employee benefit plans over $5 million
3 .) Insiders of the issuer
4.) Individual with individual or joint ( with spouse) net worth greater than $1 million (excluding the net equity of primary residence) or earnings over $200,000/individual or $300,000/joint for the past two years and expected this year
b. File Form D within 15 days of the sale
SECURITIES ACT OF 1933
APPLIES TRANSACTION IS on-exempt securities
3. on-exempt securities
a. Requires filing registration statement with the SEC
b. Requires use of a prospectus
1.) Preliminary prospectus ("red herring") may be used while registration is pending (during "cooling off' period)
a.) No price or effective date, only expected price range
b.) No orders or deposits of money until effective date
2.) No highlighting or other alterations of prospectus is allowed
c. Examples of non-exempt securities
1 .) Corporate stocks and bonds
2.) Options
3 .) Investment company shares
4. Rule 482-0mitting Prospectus a. Legal name for the typical mutual fund advertisement/tombstone ad
SECURITIES EXCHANGE ACT OF 1934
A. CREATED THE SEC
1. Objectives-Regulate the industry (people) and the secondary trading marketplaces
a. Exchanges
b. OTC
B. ANTI-FRAUD PROVISIONS
C. PROVIDED FOR REGISTRATION OF STOCK EXCHANGES AND BROKER-DEALERS (AND ASSOCIATED PERSONS)
D. GRANTS THE FRB AUTHORITY TO REGULATED (REG T)
1. Margin accounts
2. No credit on new issues and options
E. DEFINED CONTROL PERSON-OFFICER, DIRECTOR, MORE THAN 10% SHAREHOLDER, AND IMMEDIATE FAMILY
F. DEFINED DISCRETIONARY ACCOUNT
1. Select the asset and/or the action and/or the amount
2. Written authorization prior to first trade
G. ASSOCIATED PERSON-ANYONE ASSOCIATED WITH A BD, INCLUDING SILENT PARTNERS AND OUTSIDE DIRECTORS, BUT NOT CLERICAL PERSONNEL
INVESTMENT COMPANY ACT OF 1940
A. INVESTMENT COMPANY REGISTRATION UNDER THE ACT
1. Three categories of investment companies
a. Face-amount certificate company
b. Unit investment trust
c. Management companies
1 .) Open-end and closed-end
2. Requirements for investment company registration with SEC
a. Private capitalization of $100,000
b. Clearly defined investment objective
c. Annual financial reports to SEC
1 .) Semiannual to shareholders
B. SHAREHOLDERS' RIGHT TO VOTE
1. Changing nature of business
2. Changing investment objective or policies
3. Changing investment adviser
C. STRUCTURE OF INVESTMENT COMPANIES
1. Board of directors
a. No felonies or securities-related misdemeanors
b. Minimum 40% non-interested
2. Investment adviser to manage portfolio for a fee
a. Two-vear initial contract, renewable annually
b. Maximum 60,day termination
c. Must be in writing
D. GENERAL RESTRICTIONS ON INVESTMENT COMPANY MANAGEMENT
1. Purchase on margin
2. Selling short
3. Speculative options
4. Joint trading account
5. Purchasing greater than 3% of the voting shares of another investment company
E. 128-1 FEES FOR SALES AND PROMOTIONAL EXPENSES
1 . Initial approval: Whole board, independent board, and shareholders
2. Annual renewal and quarterly review: Whole board and independent board
3. Termination: Independent board or shareholders
4. No higher than .25% if using the term no-load
INSIDER TRADING AND SECURITIES FRAUD ENFORCEMENT ACT OF 1988
A. USING INFORMATION NOT AVAILABLE TO THE PUBLIC TO PROFIT OR AVOID A LOSS
B. LIABILITIES AND PENALTIES
1. Up to greater of $1 million or 300% profit made/loss avoided ( civil penalty)
2. 20~year jail term ( criminal penalty)
3. Both tipper and tippee may be held liable
a. Registered representative and broker-dealer may be liable
4. Bounty to informant
C. MISAPPROPRIATION THEORY
1 . Insiders who violate insider trading rules may be liable to contemporaneous traders
2. who did not have insider information for losses sustained
Called private rights of action
3.Penalties and statute of limitations
a. Lawsuits may be initiated up to five years after violation
b. Damages as much as the profits made or the losses avoided
NATIONAL SECURITIES MARKETS IMPROVEMENT ACT OF
1996 (NSMIA)
A.
PREEMPTIVE AUTHORITY OF SEC
B. DUAL REGISTRATION REQUIREMENTS-ELIMINATED
FOR CERTAIN SECURITIES AND INVESTMENT ADVISERS
C. CREATED FEDERAL COVERED CLASS OF ADVISERS SECURITIES-ADVISERS MANAGING $100 MILLION REGISTER FEDERALLY (SEC) AND OR MORE MAY
ORIGINS OF THE UNIFORM SECURITIES ACT (USA)
A. PURPOSE
1. To unify state laws and protect investors
B. USA AS MODEL LEGISLATION
1. First drafted in the mid- 1950s
2. Template or guide that each state uses in drafting state securities laws
3. The exam tests on the template, not individual states' versions.
DEFINITIONS-THE ADMINISTRATOR
Official or agency that administers state securities laws
A. FUNCTIONS OF THE ADMINISTRATOR
1. Inspects registrants (BDs and IAs)
2. Investigates complaints
3. Subpoenas evidence
4. Establishes registration, testing, and fees
5. Denies, suspends, or revokes registration
B. JURISDICTION
1 . The Administrator has power over any offer to buy or sell that:
a. originated in the Administrator's state;
b. was directed to the Administrator's state; or
c. was accepted in the Administrator's state.
2. However, the Administrator does not have jurisdiction merely because a check
was mailed or certificates were sent from the Administrator's state.
DEFINITIONS
A. PERSON
1. In securities law, a person is an entity capable of issuing, dealing in, or investing in
securities, such as the following:
a. Individuals-natural person
b. Businesses ( corporations, partnerships, associations)
c. Governmental units (state, counties, school districts, or political subdivisions)
and many others (see LEM)
2. Learn what is NOT a person:
a. Minors
b. Deceased individuals
c. Those declared mentally incompetent
SECURITY
SECURITY
1. General definition-four prongs:
a. An investment of money is made in
b. A common enterprise where
c. A profit is anticipated
d. Through efforts of third-party management
This is the Howey decision of the U.S. Supreme Court.
C. TYPES OF SECURITIES
1. Anything you would commonly think of, including:
a. stock;
d. certificate of deposit for a security (ADR, ADS); or
e. variable contracts issued by insurance companies (life/annuity).
b. bonds, debentures, and notes;
c. options;
D. NOT SECURITIES
1 . Insurance
a. Fixed insurance policies
b. Fixed annuities
2. Retirement plans (IRA, Keogh)
3. Collectibles (art, stamps)
4. Commodity futures and actual commodities (precious metals, grains)
5. Condominium used as personal residence (e.g., not resort rentals)
6. Currency
ISSUER and NON-ISSUER
ISSUER-PERSON WHO ISSUES OR PROPOSES TO ISSUE A SECURITY:
PRIMARY TRANSACTION
NON-ISSUER-PERSON OTHER THAN ISSUER: SECONDARY
TRANSACTION
Primary Secondary
Issuer---------> Public -------> Public
BROKER-DEALER
1. Person with a place of business in this state engaged in business of effecting securities
transactions for accounts of others (broker) or for own account (dealer)
2. Definition excludes the following persons:
a. Agents (state term for registered representative)
b. Issuer
c. Bank or trust company
d. Person with no office in state who limits clients to issuers of the security,
other broker-dealers, or institutional investors
e. Person with no office in state who directs offers to existing clients who are
not residents of the state
<------ vacation
State A
State B
-------> broker-dealer
INSTITUTIONAL INVESTORS
1. Banks (including savings institutions and trust companies)
2. Employee benefit plans ( e.g., pension or profit sharing plans with assets of at least
$1 million)
3. Insurance companies
4. Investment companies (as defined in the Investment Company Act of 1940)
AGENT (SUPERVISED PERSON) (A NATURAL PERSON)
1. Individual representing a broker-dealer in effecting or attempting to effect purchases
or sales of securities must register as agents.
a. Excluded from the definition
1.) Clerical and administrative personnel
2 .) Board member or capital contribution only ( silent partner)
b. Client moves-agent cannot be registered in new state if the broker-dealer is
not.
2. Individuals representing an issuer in effecting or attempting to effect purchases or
sales of securities must register as agents EXCEPT
a. "Agent" does not include an individual who represents an issuer in effecting
transactions
1.) which are exempted under the USA (exempt transactions);
2 .) in securities issued by one of the five specified exempt issuers ( see
2.3.2.2.l in the LEM);
3.) in federal covered securities; or
4.) with employees of the issuer and no compensation is received.
INVESTMENT ADVISER (SESSION 3)
1. A person in the business of giving advice on securities for compensation
2. Registers with state OR SEC
INVESTMENT ADVISER REPRESENTATIVE (SESSION 3)
1. Individual representing an investment adviser
2. Registers on the state level only
OFFER
1. Attempt to solicit purchase
2. Attempt to dispose of security or interest in security for value
3. Sale of rights, warrants, or convertible security is an offer of the underlying stock
SALE
1 . Transfer for value
a. Bonus of warrants or stock
2. Gifts of assessable stock
3. Sale does not include:
a. gifts of non-assessable stock;
b. stock dividend or stock split (if no payment);
c. bona fide pledge or loan (in short sale-loan of securities); or
d. act resulting from approved merger or business reorganization.
LICENSING AND REGISTRATION REQUIREMENTS OF
PERSONS
REGISTRATION PROCEDURES
1. Application
a. Background and history
b. Convictions (10 years; felonies and securities-related misdemeanors)
c. Financial condition (broker-dealers and investment advisers)
d. Consent to service of process = power of attorney
1.) From applicant to Administrator
2 .) Must accompany new applications for broker-dealers, agents, investment
c. IAR-with federal covered IA, IAR notifies Administrator
d. Effective 30 days after receipt of application to withdraw, but Administrator
retains jurisdiction for one year
4. Broker-dealers (Form BO) and investment advisers (Form ADV)
a. Form of organization
b. Method of business
c. Registration of broker-dealer or investment adviser automatically registers
individual (agent or IAR) who is partner, officer, or director with those
functions
d. Expires December 31 unless renewed (also applies to agent and investment
adviser representative)
e. Successor firms
1.) Merger, acquisition, or sale
2.) New application filed, effective for remainder of year
3.) No additional filing fees
advisers, and investment adviser representatives
3 .) Permanent part of record
4.) Allows Administrator to receive legal papers
5.) Approval for investigation
2. Registration effective date
a. Not until granted registration by state-noon of 30th day
b. Not solely on passing exam
3. Termination procedures
a. Agent-notification to Administrator by both agent and broker-dealer
b. IAR-with state IA, IA notifies Administrator
EXEMPT SHORT-TERM NOTES/DEBT OBLIGATIONS
1 . Promissory notes ( commercial paper)
a. Maximum maturity-nine months (270 days) or less
b. Minimum $50,000 denomination
c. Three highest ratings
SECURITIES ISSUED BY EXEMPT ISSUERS
1. US government and agencies
2. Municipalities
3. Canadian government (federal and political subdivisions but not corporations)
4. Foreign national governments with diplomatic relations (issued or guaranteed by)
5. Banks, savings institutions, and trust companies
6. Insurance companies (stocks and bonds, not variable contracts)
7. Regulated public utility companies and common carriers
8. Charitable, religious, and nonprofit organizations
OTHER EXEMPT SECURITIES-FEDERAL COVERED SECURITIES
1. Exchange- listed securities
2. Nasdaq traded security
3. Investment companies registered under the Investment Company Act
4. Securities or transactions exempted under the Securities Act of 1933
(e.g., Regulation D private placements)
METHODS OF SECURITIES REGISTRATION AND NOTICE FILINGS
1 . Notice filing
a. Administrator may require SEC filed documents
b. Quantity of securities being sold in the state (fee)
For federal covered securities, generally investment company securities
registered under the Investment Company Act of 1940
2. Coordination
a. Coordination of a state registration with federal registration
b. Registration by coordination is accomplished by filing a registration statement
with the Administrator containing:
1.) three copies of latest prospectus filed with the SEC;
2 .) copies of articles of indenture, articles of incorporation, and agreements
among underwriters (if required by the Administrator); and
3.) amendments to prospectus filed with the SEC.
c. Effective at the same time as federal registration if:
1.) registration is on file for specified period (10-20 days);
2 .) a statement of the maximum and minimum offering prices and underwriting
discounts has been on file for two business days; and
3.) no stop order exists.
3. Qualification
a. Primarily for intrastate issues (but can be used for any registration)
b. Any information the Administrator requests
c. Effective when declared so by the Administrator
4. General registration provisions
a. Filing fees
b. Effective for one year from effective date-If underwriters or the issuer are
still attempting to distribute unsold shares, effectiveness of registration may
be extended until all shares are sold.
1.) May be amended after effective date to increase offering size if price
and commissions remain unchanged
c. Administrator may require issuer to file quarterly reports
d. Registration statement may be filed by:
1 .) the issuer;
2 .) a broker-dealer; or
3 .) an interested party, usually a selling stockholder.
POWER OF THE ADMINISTRATOR TO DENY, SUSPEND, OR
REVOKE THE REGISTRATION OF A SECURITY
A. IT MUST BE IN THE PUBLIC INTEREST, AND
1. registration statement is inaccurate, misleading, or incomplete;
2. officer of the issuer has been convicted of a securities-related crime (10 years);
3. security is subject to court injunction;
4. offering is deemed fraudulent;
5. offering expenses or promoter's fees are excessive or unreasonable; or
6. registration has been revoked by the Administrator of another state.
B. ORDER OF THE ADMINISTRATOR
1. Appropriate prior notice
2. Opportunity given for a hearing
3. Written findings of fact and conclusions of law
EXEMPT TRANSACTIONS
A. PREORGANIZATION CERTIFICATES
1. Before incorporation (promise of seed money)
2. Maximum of 10 subscribers and no funds paid in
B. PRIVATE PLACEMENTS
1. Restricted to 10 offers in any 12 consecutive months other than to institutional
clients
2. No immediate resale except for institutions
3. No compensation paid on sales to noninstitutional (retail) buyers
C. ISSUER TRANSACTIONS [BETWEEN ISSUERS AND UNDERWRITERS
(GOING PUBLIC)]
D. WITH FINANCIAL INSTITUTIONS (SOPHISTICATED/PROFESSIONAL
INVESTOR)
1. Investment companies
2. Insurance companies
3. Banks and trust companies
4. Employee benefit plans with not less than $1 million in assets (pension or profit
sharing trusts)
5. Broker-dealers
6. Investment advisers
7. Individuals meeting the SEC definition of accredited investor are not considered
institutional investors for the purpose of this exemption
E. NONISSUER TRANSACTIONS (SECONDARY TRANSACTIONS)
1. Unsolicited non-issuer transactions effected through broker-dealer, Administrator
may request proof
2. Isolated non-issuer transactions
F. FIDUCIARY TRANSACTIONS
1. Include those made by an executor, administrator, trustee in bankruptcy, sheriff,
etc.
UNETHICAL PRACTICES OF BROKER-DEALERS AND
AGENTS
A. MISLEADING OR UNTRUE STATEMENTS
(For a complete listing, see the above heading in your LEM)
1 . Repeating rumors
2. Promising certain services with no intent to deliver
B. NOT STATING (OMITTING) MATERIAL INFORMATION
1. Material facts are those used in making investment decisions.
C. USE OF MATERIAL INSIDE INFORMATION
1. Received after stop or limit order placed?
D. UNSUITABLE RECOMMENDATIONS
E. FAILURE TO DISCLOSURE OF CONFLICTS OF INTEREST
1 . Proprietary products
F. FAILURE TO MAKE DISCLOSURE OF FEES
1. Typically disclosed when a customer account is opened
a. Must be up-to-date
2. Fee changes
a. Typically at least 30 days in advance
1.) Methods used include email, postal mail, or website
3. Disclosure method used
a. Chart
b. List
c. Table
d. Narrative
4. N ASAA Model Fee Disclosure Schedule
a. Template to be used
5. Typical fees include:
a. issuance of a stock certificate;
b. account transfer;
c. wiring funds;
d. margin account interest;
e. annual account fee; or
f. safekeeping of certificates.
6. Not included are:
a. commissions;
b. markups and markdowns; or
c. advisory fees ( all of these belong in other documents).
2. Incentives from program sponsors ( trips, etc.)
3. Financial interest in recommended security (sister is CEO)
4. Favorable research report after bringing company public
G. UNIQUE SITUATIONS
1. Exercising discretion without authority
a. Ability to select asset, action, or amount
b. Time or price is not discretion
1 .) Day order
2. Commingling
3. Sharing customer profits or losses
a. Written consent of client and employing BD
4. Borrowing customer funds or securities or lending money to clients ( unless a lend,
ing institution or an affiliate)
5. Written complaints-contact supervisor
6. Larger than ordinary commissions without disclosure
7. Soliciting sales or purchases in unregistered, nonexempt securities unless in an
exempt transaction
8. Guaranteeing results-minimize losses or assure profit
a. Agent agrees to buy back at original price ( or with a bonus)
b. Guaranteed security-Payment of principal and interest or dividends (not
capital gain), promised by a third party (e.g., parent company for a subsidiary's
debt)
9. Splitting commissions, unless with appropriately registered personnel of same or
affiliated firms-the Administrator can make an exception
POWER OF THE ADMINISTRATOR TO DENY, SUSPEND, OR
REVOKE A LICENSE
A. IT MUST BE IN THE PUBLIC INTEREST AND ONE OF THE FOLLOWING
MUST HAVE OCCURRED:
1. Filing false or misleading application
2. Any felony or securities-related misdemeanor conviction within the last 10 years
3. Willful violation of the USA's ethical trade practices
4. Court injunction/administrative order
5. Disciplinary action by other securities authorities within the last 10 years
6. Dishonest, unethical practice
7. Insolvency
a. In case of agents, if liabilities exceed assets or agent cannot meet obligations
as they mature
b. In case of a broker-dealer or investment adviser, a formal finding of insolvency
is required
8. The applicant is not qualified on the basis of such factors as training, experience,
and knowledge of the securities business.
a. The Administrator may not deny solely on the basis of lack of experience if
the applicant is qualified by training, knowledge, or both.
9. Firm's failure to supervise employees
10. Failure to pay filing fees
B. CANCELLATION OF REGISTRATION (NON-PUNITIVE)
1. Out Of Business (Mail Returned-No Forwarding Address)
2. Legally Declared Mentally Incompetent
3. Deceased
PROCEDURES AND PENALTIES
A. ADMINISTRATOR
1. Enforcement of all antifraud provisions
2. Must give notice of action to be taken
a. Must give opportunity for hearings
b. Must provide written findings
3. Summary orders to postpone or suspend until final determination is reached
a. No prior notice or hearing
b. Must hold hearing within 15 days of written request
4. Issue cease and desist order for suspected improper activity
a. With or without a prior hearing
b. If cease and desist order is ignored, can apply to courts for an injunction
5. May proceed against firm if principal is disqualified
6. May not proceed against firm if only agent or IAR is disqualified
FIRM
PRINCIPAL
REGISTERED
PERSON
7. May investigate and subpoena in any state where registered, whether or not the
firm has an office in the state
8. 60day appeal of order-Appeal does not act as a stay unless ruled otherwise by
the court.
B. CRIMINAL PENALTIES
1. Willful violation of the USA
2. Fines to $5,000, jail up to three years, or both
3. Statute of limitations is five years for fraudulent activity
C. CIVIL LIABILITIES
1. Unlawful sale
a. Must be within two years of discovery or three years of violation, whichever
occurs first
b. Rights of buyer
1.) Recover money plus reasonable interest (or state's legal rate) minus
income received during period
2 .) Court costs and attorney fees, but not damages
2. Right of rescission-30 days' notice: If buyer receives offer of rescission and fails to
accept or reject within 30 days, may not sue
3. Rights of advisory client: Recovery of advisory fees, losses on recommendations,
court plus legal fees minus income received
COMMUNICATIONS WITH CLIENTS AND PROSPECTS
A. SOCIAL MEDIA INCLUDING EMAILS AND TEXT MESSAGES
1 . Regulatory concerns
a. Content, not method of delivery
b. Compliance same as in written communications
c. Agent's use of personal tools for business use
d. Supervision of recordkeeping and training
B. ADVERTISING
1. Can't be deceptive or misleading
2. Highlighting or excerpting a prospectus
3. Broker-dealer's website is advertising
a. Distinguish between what is and is not a recommendation
1.) Libraries of research reports, news and quotes, screening tools, etc. are
not recommendations.
2 .) Targeted email or pop-up, list of specific securities to reach client's
goals, buy recommendations from a specific sector, etc. are
recommendations.
C. SOCIAL MEDIA FOR AGENTS
1. Personal devices
2. Obtaining proper approvals
a. Tweets (after first) probably not-Linkedln, probably yes
3. Linking to third-party sites
a. Entanglement and adoption
D. SUPERVISORY ACTIONS TO BE TAKEN BY THE BROKER-DEALER
1. Policies and procedures in place for training and education
2. Applies to both supervisory personnel and agents
3. Initial and annual training recommended
4. Monitoring
INVESTMENT ADVISERS ACT OF 1940/UNIFORM
SECURITIES ACT
A. DEFINITION OF INVESTMENT ADVISER UNDER THE 1940 ACT/USA -
3 PRONG TEST
1. Gives advice on securities
2. As part of a regular business
3. For which compensation is received
4. Frequently referred to as IA on the exam
B. RELEASE IA-1092 (1987} EXPANDED THOSE INCLUDED IN THE
DEFINITION
1. Financial planners
a. Person who advises clients to select from among a variety of financial
products
b. Person who recommends mixture of securities, insurance products, and real
estate-a comprehensive financial plan
c. Compensated for investment advice
2. Pension consultants
a. Advise employee benefit plans on funding, alternative investments, performance
evaluation, and adviser selection
3. Sports and entertainment representatives
a. Provide entertainers and sports figures with contract negotiation, tax
planning, budget, and money management (including investment
recommendations)
C. EXCLUSIONS FROM DEFINITION
1. Banks, savings institutions, and trust companies
a. Bank owned subsidiary giving advice is not excluded
2. Professionals providing incidental advice
a. Lawyers, accountants, teachers, engineers (LATE) if advice is incidental to
their profession or practice
b. Subject to registration if they charge specific fees for investment advice
3. Broker-dealers, if no special compensation
a. Advice solely incidental to their business
b. Wrap fee programs will lose this exclusion
4. Publishers (general and regular circulation)
a. "Market event" driven loses exclusion
Sa. Persons advising solely on government securities (IA of 1940)
Sb. Investment adviser representatives (USA)
D. EXEMPT FROM SEC REGISTRATION AS INVESTMENT ADVISERS
1. Intrastate advisers-clients and offices in single state
a. No advice on listed securities on national exchanges
b. No clients are "private funds"
c. Register with the state
2. Foreign private advisers
a. AUM in the United States of less than $25 million
b. Fewer than 15 U.S. clients
c. No investment company clients
d. Does not hold itself out as an IA
e. No place of business in the United States
3. Adviser to "private funds"
a. Issuer is not proposing a public offering of its securities, and its outstanding
securities are:
1.) owned by a maximum of 100 investors; or
2 .) exclusively qualified, $5 million/$25 million (individuals/entity)
b. Adviser's AUM in the United States of less than $150 million
c. Generally an ERA and subject to anti-fraud rules
4. Only clients are insurance companies
E. EXEMPT FROM STATE REGISTRATION AS INVESTMENT ADVISERS
1. De minimis: No place of business in the state and fewer than six retail (individual)
clients in preceding 12 months
2. No place of business in the state and deals only with institutions, broker-dealers,
or other investment advisers
3. Private fund adviser: Same as SEC, except fund with <101 investors: $1 million
with IA or $2 million net worth
4. Federal covered adviser
FEDERAL COVERED ADVISERS
1 . Buffer of $ 20 million
a. Once SEC registered, can remain with $90 million
2. Manager of registered investment company (any size)
3. Pension consultant ($200 million is eligible)
4. If registration would be required in 15 or more states
5. Federal covered advisers need not register with states; however, they may be
required to pay filing fees.
INVESTMENT ADVISER REPRESENTATIVES: INDIVIDUALS SUPERVISED
BY INVESTMENT ADVISERS
1. Partners, officers, or directors ( with active role)
2. Employees and associates making recommendations, managing accounts, and
soliciting advisory services, but not clerical and administrative personnel
3. If with a state-registered adviser, registers as an IAR unless meeting de minimis
requirements
4. If with a federal covered adviser, only registers in those states where maintaining a
place of business
5. Relationship of financial professionals
a. Broker-dealers earn commissions or mark-ups by effecting transactions in
securities for themselves or their clients.
b. Investment advisers are compensated for giving advice.
c. When client accepts IA's advice, the client or IA directs the trade to a BD
for execution
.
Broker Dealer
• Primary business function is executing
transactions in securities
• Compensation is earned in the form of
commissions and markups (markdowns)
Agents
• Individuals employed by brokers/dealers to
handle their customer orders to buy or sell
securities
• Separate function from an IAR (although
many in large firms wear both hats)
Investment Adviser
• Primary business function is giving advice
• Compensation is earned in the form of fees
or other charges, generally based on the
amount of assets managed
IARs
• Individuals employed by investment
advisers to give advice to their clients
• After an IAR advises a client about a
specific security, the next step is to contact
the broker-dealer where that client
maintains a brokerage account to give the
buy/sell order to an agent
INVESTMENT COUNSEL
Principal business is the giving of investment advice
Investment supervisory services= giving continuous advice on the basis of individual client needs.
INITIAL REGISTRATION PROCEDURES
1. File Form ADV Part IA-information includes:
a. business name;
b. past five years' business and current affiliations of control persons;
c. educational background;
d. nature of business;
e. balance sheet certified by public accountant;
f. scope of authority over client funds;
g. compensation arrangement;
h. criminal record;
i. portion of business devoted to providing investment advice;
j. registration of an investment adviser automatically registers, as an IAR, any individual
who is a partner, officer, or director involved in the advisory business; and
k. Form ADV Part 1B (state covered advisers only).
2. Pay filing fee
a. Effective noon of the 30th day for USA
b. Effective within 45 days for SEC
3. Other required filings
a. Update Form ADV annually
1.) Within 90 days of fiscal year's end
2.) Show assets under management (AUM) to verify continued SEC
registration; must have at least $90 million in AUM
3 .) Pay appropriate renewal fees
b. Change in management, state of location, or form of business requires the IA
to file an amended Form ADV promptly.
4. Withdrawal on ADVW
a. Effective 30th day for USA
b. Effective 60th day for SEC
INVESTMENT ADVISER BROCHURE RULES
1. Brochure is Form ADV Part 2A ( describes the firm) and Supplement, Form ADV
Part 2B (personnel).
a. Updated annually at time of updating amendment
b. Contains required "disclaimer"
2. Deliver to a client or prospective client the current brochure before or at the time
of entry into an investment advisory contract with that client.
a. Delivered 48 hours before, or at time of contract, with five business days'
right to rescind without penalty (USA)
3. Deliver to each client, annually within 120 days after the end of the fiscal year, if
there are material changes in the brochure since last annual updating amendment:
a. A free current brochure
b. A summary of material changes to the brochure including an offer to provide
a copy of the updated brochure and information on how a client may obtain the brochure
c. May be delivered electronically
d. If no material changes, no brochure or summary
4. Must include balance sheet if investment adviser requires prepayment of fees of
5. Disclosure of material legal or disciplinary action within past 10 years, including
fines of $2,500 or more
a. Prompt amendment required for material changes
6. Exemptions-investment adviser does not have to deliver brochure if the advisory
clients are limited to the following:
a. Investment companies
b. Impersonal advice (subscriptions)-cost under $500
more than $1,200 ($500 USA), 6 months or more in advance, or custody (USA)
WRAP FEE BROCHURE
1. Charge a fixed fee for portfolio management, advice, and execution
2. Wrap fee brochure based on Appendix 1 of Form ADV Part 2A must be provided
in lieu of standard brochure and must disclose that wrap fee may cost more than
purchasing services separately
3. Must identify whether any of its related persons is a portfolio manager in the wrap
fee program and, if so, describe the associated conflicts
INVESTMENT ADVISER CONTRACTS
1. The following are required disclosures under the Investment Advisers Act of 1940
and the North American Securities Administrators Association's (NASAA)
Model Rule on Unethical Business Practices of Investment Advisers, Investment
Adviser Representatives, and Federal Covered Advisers:
a. Services to be provided
b. Duration of the contract
c. Advisory fee
d. Formula for computing advisory fee
e. Amount of prepaid fee returned if contract is terminated
f. Whether discretion is granted
g. Assignment only with consent
h. Notification to clients of changes in advisory partnerships
i. Written requirement
1 .) Required under USA
2 .) Not required under Investment Advisers Act of 1940
3 .) Required under Investment Advisers Act of 1940
COMPENSATION RESTRICTIONS
1. Generally no performance-based compensation
2. Performance-based compensation is allowed if:
a. it is for a qualified client
1.) Any person with a specified minimum amount of assets under man,
agreement or net worth of a specified minimum amount (for individuals,
spouse counts too)
2 .) Executive officers or IARs of the adviser
b. NASAA requires disclosure of:
1.) incentive for greater risk taking;
2 .) compensation may be on unrealized gains; and
3 .) why the index used was chosen.
3. No waiving of fees/refunding for under performance
4. No profit-sharing arrangement; no rebating commissions on mutual funds
DIRECTED TRANSACTIONS
1 . Adviser directs client to broker-dealer with reasonable charges for services
performed
2. Client directs investment adviser to use specific broker-dealer
ETHICAL BUSINESS PRACTICES OF INVESTMENT ADVISERS
A. FIDUCIARY RESPONSIBILITY
1. Have reasonable and independent basis for investment advice
2. Act in clients' best interest.
a. Suitability ( usually unsuitable-blanket recommendations)
b. Clients' interests come first
3. Best execution: Does not always require lowest commissions; must consider all
services being rendered
4. Recognize limitations of own capabilities
5. Avoid conflicts of interest
a. Disclose ownership in recommended securities
b. Disclose gifts or incentives associated with recommended product
c. Advisers must notify clients if they are a representative of a broker-dealer
and will recommend purchase of products through that broker-dealer to receive a commission
d. Disclose if recommending products of only the broker-dealer or insurance
company with whom they are associated
e. Disclose that client may execute through other broker-dealers
f. Disclose amount of compensation when:
1.) the transaction is through a broker-dealer with whom the adviser is
associated;
2 .) compensation is received from an issuer; or
3 .) compensation is received for the sale of nonsecurities products.
g. Disclose personal trades if:
1.) inconsistent with advice given to client; or
2 .) investment adviser benefits from client acting on recommendation.
6. No market manipulation
a. Matched orders
b. Wash trades
c. Painting the tape
7. No unauthorized disclosure of confidential client information is allowed unless:
a. the client has consented;
b. the information is required by a court or the IRS; or
c. the account is joint with spouse.
8. No front running
DISCLOSURE OF CAPACITY
1. Acting as principal or agent in purchase or sale of recommended securities
a. Written disclosure to client before completion of the transaction
b. Client's consent before completion of the transaction
2. Agency cross transaction: Representing both sides of a trade involving an advisory
client
a. Client executes a written consent prospectively authorizing these
transactions
b. Written disclosure to client before completion of the transaction
c. Can't recommend the trade to both parties
DISCLOSURE OF FINANCIAL IMPAIRMENT
1. Disclosure is required if the adviser:
a. has discretion;
b. has custody over customer funds or securities;
c. requires prepayment of more than $500 in fees, six or more months in
advance (state); or
d. requires prepayment of more than $1,200 in fees, six or more months in
advance (federal).
INVESTMENT ADVISER ADVERTISING
1. Advertisements include any notice, circular, letter, website or other written cornmunication
addressed to more than one person, or any report, chart, or formula
used in making investment decisions.
2. Identification
a. Name of firm
b. Name of preparer if material is prepared outside the firm
c. Date of first use
d. Identification of information not current
3. Past performance
a. Can be used if the following disclaimer and disclosure are included:
1 .) No assurance of future results
2 .) Includes all gains and losses over a minimum of one year
4. Testimonials prohibited
a. "Like" on Facebook or endorse on Linkedln
5. Offers of free service permissible (no obligations)
6. Other advertising prohibitions
a. Implying extensive research facilities when not a fact
b. Misleading or inconsistent clauses and caveats; hedge clauses
c. Implying approval by regulators
d. Use of abbreviation RIA or IAR
e. Use of titles not earned (MBA, JD, CPA, CFP)
f. Lack of disclosure of outside data sources
g. Charts and formulas-explain limitations/difficulties
NET WORTH REQUIREMENT FOR INVESTMENT ADVISERS
1. Discretion only, no custody of funds/securities-$10,000
2. Custody of funds/securities-$35,000, unless having custody solely due to:
a. direct fee deduction; or
b. advising pooled investment vehicles subject to an annual audit.
3. Notify Administrator when below required net worth by end of next business day
4. File a financial report with Administrator within one business day of notice,
including a statement of the number of client accounts
CUSTODY OF CUSTOMER FUNDS AND SECURITIES
1. Definition
a. Holds customer cash or securities
b. Authority to disburse funds from bank account without client's consent
c. Automatic fee payments considered custody
d. If custody only because of (c.), IA is not required to meet the USA's net
worth or bonding requirements for advisers with custody
2. Rules
a. USA requires notification to the Administrator, unless state law prohibits
custody
b. Must be segregated and marked to identify ownership
c. Written notice to client of location and notification of changes
d. Complete and accurate records of deposits and account activity
e. Quarterly itemized statement to customer
f. Use a qualified custodian; if not
1.) Annual surprise independent audit
g. If not keeping custody, NASAA requires certificates and funds inadvertently
sent returned within three business days ( third-party checks forwarded to third
party within three business days)
PAYMENT FOR CLIENT SOLICITORS UNDER INVESTMENT ADVISERS
ACT OF 1940
1. Must have written agreement (disclose conflicts of interest)
a. Description of activities and compensation
b. Agreement to provide adviser's brochure and solicitor's disclosure document
to customer ( disclose if higher cost will result)
c. The IA receives acknowledgment from client that both documents have
been received
2. Third-party solicitors for covered advisers are not required to be registered as an
IAR (employees of the IA who solicit are)
SOLICITORS FOR STATE-REGISTERED ADVISERS WHO ARE ASSOCIATED
WITH OR EMPLOYEES OF THE IA MUST BE REGISTERED (IAR).
SOLICITORS FOR STATE-REGISTERED ADVISERS WHO ARE ASSOCIATED
WITH OR EMPLOYEES OF THE IA MUST BE REGISTERED (IAR).
REPORTING REQUIREMENTS UNDER STATE/FEDERAL LAWS
1 . Maintain required books and records ( including electronic communications) for
five years
a. Kept at the principal office for two years
b. May be kept in normally accepted manner (microfiche, digital, etc.) pro,
vided records can be read and copied
2. Advisers performing investment supervisory services must keep separate records
for each client
ADDITIONAL PROHIBITIONS UNDER NASAA'S MODEL RULE ON
UNETHICAL BUSINESS PRACTICES OF INVESTMENT ADVISERS,
INVESTMENT ADVISER REPRESENTATIVES, AND FEDERAL COVERED
ADVISERS
1. The policy permits IAs oral authorization for discretionary accounts for 10 business
days after initial trade
2. Charging the customer an unreasonable fee: NASAA says that charges must be
competitive
3. Entering into or renewing an advisory contract unless in writing
4. Use of third-party reports without disclosure
5. Improper use of waivers
6. Failing to disclose conflicts of interest
SEC AUTHORITY UNDER THE ACT OF 1940
1. May subpoena, seek court injunctions, refer evidence for criminal proceedings,
hold hearings, and issue rules and orders
2. Appeal of SEC order must be within 60 days; appeal to U.S. Court of Appeals by
written petition
3. Criminal penalties-federal level ($10,000 fine, five years' imprisonment, or both)
4. May suspend up to 12 months
COMPENSATION
A. ANY ECONOMIC BENEFIT-RECEIVED FROM ANY SOURCE
B. SOFT DOLLARS
1. Noncash compensation from broker-dealers for directed business
2. Allowable soft-dollar payments under safe harbor provision of Section 28(e) of
Securities Exchange Act of 1934
a. Research reports
b. Software
c. Services for benefit of clients
d. Seminar registration fees
3. Soft-dollar payments not protected by Section 28(e)
a. Reimbursement for travel expenses to seminars
b. Furniture, equipment, or non-customer-related services
c. Rent
CYBER SECURITY AND DATA PROTECTION
A. NASAA 2014 PILOT SURVEY
1 . Cyber preparedness
a. Threats and vulnerabilities
2. Cybersecurity compliance program
a. Written policies, procedures, or training programs
1 .) Safeguarding client information
2 .) Red flags for identity theft
3. Cybersecurity and social media
a. Written policies, procedures, or training programs
1.) Social media for business purposes
4. Cyber incidents
a. If there have been any, has the firm "plugged the gap"
5. Cyber disposal
a. Procedures for disposing storage devices
6. Cybersecurity safeguards
a. Encryption
b. Anti-virus and anti-rnalware
c. Email security
1 .) Authentication
METHODS FOR PROTECTING THE FIRM AND ITS CUSTOMERS
1 . Strong methods of authentication
2. Anti virus software installed on electronic devices used to access client information
a. How often are updates downloaded to anti virus software?
3. Where is data backed-up and is it encrypted?
4. Does your firm allow remote access to servers or workstations via a virtual private
network (VPN) or similar technology?
5. Does your firm use free Cloud services such as iCloud, Dropbox, or Google Drive,
to store personal and confidential client information?
6. Does your firm utilize your firm's website to use or access client information data?
7. Does your firm's website include a client portal?
8. Protecting against ransomware
a. Malware for data kidnapping
1 .) Attacker encrypts the victim's data
2 .) Demands payment for the decryption key
b. Use a layered approach
1.) Anti-virus
2 .) Web filtering
3.) Firewalls
c. Back-up data
1.) Often
2 .) Keep old uninfected files available
3.) Offline
REGULATION S-P-FIRMS MUST ADOPT POLICIES AND PROCEDURES
TO ADDRESS THE PROTECTION OF NONPUBLIC PERSONAL
INFORMATION.
1. Initial and annual notice to customers
a. Customers have an ongoing relationship
2. Initial notice only to consumers
a. Consumers obtain a product or service and have no further contact with the
firm
3. Opt-out methods must be easy
a. Writing a letter is not, an email is
Equity Securities
A) Common Stock
1. Benefits of common stock ownership.
a. capital growth - Hedge against inflation, historically high real returns.
b. Income - Dividends, if declared by the board of directors, can be Cash or Stock.
c. Easily transferable (liquidity).
2. Risk of common stock ownership - Risk price fluctuations in overall market and Risk of business decline or failure due to poor management decisions or inability to meet debt obligations.
that could lead to reduce or eliminated dividend or can reduced earnings = lower market price.
B) Preferred Stock
1. characteristics
a. Equity security with fixed(stated) dividend.
b. purchased for income purpose.
2. Benefits of preferred stock ownership
a. Preference over common
1.) Dividends
2 .) Liquidation
3. Risks of preferred stock
a. Because dividend is fixed, there is inflation risk and interest rate risk.
b. Dividends are not guaranteed.
C. VALUATION METHODS
1. Technical analysis
a. Analyst charts a stock's market price and volume over a period of time
1 .) Determine trends
2 .) Support and resistance
3 .) Moving averages
b. Used to minimize timing risk
c. Major technical theories include:
1 .) Short interest
2.) Odd-lot
3 .) Advance/decline
2. Fundamental analysis
a. Looks at the company's financial statements (Session 11)
b. Stock's price should reflect earnings or dividend growth or decline
c. Used to minimize business risk
3. Dividend Models
a. Dividend Discount Model (DOM)
1.) Present value of future dividends using discounted cash flow (DCF)
computation ( Session 5)
b. Dividend Growth Model (DGM)
1.) Assumes growth of dividends
FIXED INCOME SECURITIES
A. DEBT FINANCING - PRIMARILY BONDS
1. Par (face) value - $1,000 each bond
2. Par value x stated interest rate = annual interest
a. Semi-annual interest payments
3. Principal paid off at maturity (10, 20, or more years)
a. Priority of interest and repayment of principal
4. Bond pricing
a. Quoted as percentage of par
b. Par, premium, or discount
FIXED INCOME SECURITIES - YIELD RELATIONSHIPS
A. RELATIONSHIP OF YIELDS
1 . Coupon, nominal, stated
a. Fixed at issuance
2. Current yield
a. Annual interest + current market price
b. Above coupon if at a discount
c. Below coupon if at a premium
3. Yield to maturity
a. Yield if held to maturity
1.) Includes gain if bought at discount
2 .) Includes loss if bought at premium
4. Yield to call
a. Realized yield if bond is called
1.) Loss of premium more quickly lowers return
VALUATION FACTORS OF FIXED INCOME SECURITIES
1. Ratings and their effect on valuation - Values from AAA, AA,A,BBB,BB,B,C,CC,DD
2. Parity price of convertible bonds
a. Bond is convertible into fixed # of common shares
b. Price when bond and stock are at equal value
3. Duration
a. Measures volatility of bond prices by weighting the time the bond interest
takes to pay for the bond
b. Longer duration means higher bond volatility
1 .) Interest rates up, bond price down; interest rates down, price up based
on duration
2 .) Zero coupon bond's duration is maturity-most volatile
3.) If maturities are the same, lowest coupon has longest duration and
highest coupon has shortest duration (least sensitive)
4.) If coupons are the same, latest maturity has longest duration and
soonest maturity has shortest duration (least sensitive)
5.) Convexity is a more sophisticated measurement of sensitivity to inter,
est rate changes
4. Discounted Cash Flow
a. Commonly used to value debt securities
b. Price will always reflect a yield equal to current market interest rates for com,
parable risk
1.) Take the income payments scheduled to be received over a given
future period and adjust that for the time value of money
a.) Discount rate based on current market interest rates
2.) Take the future principal repayment-use the discount rate to compute the present value
3 .) The value of the bond is the present value of its cash flow stream.
a.) The higher the discounted cash flow ( the sum of present value of
the income and principal) the higher the value of the bond
c. When used with equities, it is the dividend discount model
1.) Only dividends, no maturity value
FIXED INCOME SECURITIES (SERIES 65 ONLY)
A. U.S. GOVERNMENT SECURITIES
The safest issuer of debt in terms of default risk in the United States-interest taxexempt
at the state and local level
1. Active secondary trading (negotiable)
a. Tbills
b. TNotes
c. TBonds
d. Treasury Inflation Protection Securities (TIPS)---offer inflation protection
1.) Semiannual adjustment to principal based on CPI
2. Benefits of government issues include the following:
a. Safety
b. Liquidity
c. Best place to be when recession and deflation are predicted
3. Risks of government issues include the following:
a. Lower yields
b. Interest rate risk
1.) Inverse relationship between interest rates and bond prices
c. Inflation risk ( except TIPS)
B. GOVERNMENT AGENCY ISSUES
1 . Government National Mortgage Association ( GNMA or Ginnie Mae)
a. Only agency issue backed by the full faith and credit of the U.S. government
b. Pass-through certificate, monthly income
2. Federal National Mortgage Corporation (FNMA or Fannie Mae)
a. Pass-through certificate, semi-annual income
3. Cash flow analysis on pass-through securities uses average maturities
C. TYPES OF CORPORATE BONDS
1. Secured
2. Unsecured
a. Subordinated debt
3. High-yield bonds
4. Zero-coupon bonds
a. Issued at a deep discount
b. Appropriate for "target" investments
c. No reinvestment risk
d. High volatility
e. Generates "phantom" income
D. BENEFITS
1. A predictable stream of income ( interest payments made semiannually)
2. Repayment of principal at specified maturity date (bonds held to maturity have no
interest rate risk as to principal)
3. Prior claim on issuer's assets
a. Secured bonds have pledged assets.
b. Debentures have priority over any equity.
E. RISKS OF CORPORATE BONDS
1. Default risk
a. Creditworthiness of issuer
1.) High-quality versus low-qualitv debt
2. Interest rate risk
a. Common to all fixed income investments
3. Call risk
a. Call protection
4. Reinvestment risk
a. Interest payments and return of principal
5. Inflation (purchasing power) risk
a. Fixed payments lose buying power
F. MUNICIPAL BONDS
1. Issued by a form of government other than the federal government or agency of
the federal government
a. Interest exempt from federal taxes
b. Exemption may also apply at state and local level
c. Capital gains subject to taxation
2. Types of municipal issues
a. General obligation (GO) bonds
1 .) Backed by full faith and credit (taxes)
a.) Issuer's authority to tax
b. Revenue bonds
1.) Backed by specific revenue source, tolls, user fees
3. Benefits of municipal bonds
a. Low default risk
b. Tax-free income
1 .) Attractive to those in high federal tax brackets
4. Risks of municipal bonds
a. Interest rate risk
b. Inflation risk
c. Possible exposure to the alternative minimum tax (AMT)
Cash Equivalents and Cash
A. MONEY MARKET INSTRUMENTS (CASH EQUIVALENTS)
1. Used to finance short-term cash requirements
2. Characteristics
a. High-quality debt
b. Short-term (one year or less to maturity)
c. Issued at a discount, except CDs
3. Issuers
a. Corporations---commercial paper
b. Banks-negotiable (jumbo, $100,000 minimum) CDs
1 .) No prepayment penalty
2.) Insured by FDIC (to $250,000)
c. U.S. government-All T,bills as well as bonds and notes in the secondary
market with one year or less remaining to maturity
4. Rates
a. London Interbank Offered Rate (LIBOR) is the rate of interest at which
banks borrow short-term funds from each other in London
5. Benefits of money market securities
a. Safety
b. Liquidity
6. Risks of money market securities
a. Low yields
b. Not suitable for Long-term investors
B.CASH
1. Insured bank deposits
a. Demand Deposit Accounts (DDA)
b. Insured bank CDs
1.) First choice for capital preservation
2 .) No interest rate risk
Pooled Investments
INVESTMENT COMPANY SECURITIES
There are three classifications of investment company securities under the Investment Company
Act of 1940: face amount certificates, unit investment trusts, and management companies.
A. MANAGEMENT COMPANIES
1. Open end
a. Continuous public offering
b. Redeemable shares
2. Closed end
a. Defined number of shares
b. Trade on exchanges; OTC
c. Country funds
Open-end Company Closed-end Company
Continuous primary offering Shares fixed
Prospectus required No prospectus after I PO
Must redeem shares Shares not redeemable
Issues common stock only Issues common stock,
Preferred
and/or bonds
No secondary trading Secondary (exchange/OTC)
Price by formula Price by supply and demand
81/2% maximum sales charge Commissions
INVESTMENT COMPANY SECURITIES PRICING
1. Closed-end priced via supply and demand
a. Can be at a discount to or premium over NAY
2. Open-end priced via a formula:
NAY per share= (assets - liabilities) + number of shares
a. Forward pricing
3. 12b- 1 fees
a. Used for marketing and promotion
b. Annual expense charged against fund's asset-reduces NAY
1 .) Paid on a quarterly basis
c. The maximum l Zb-I fee for marketing and promotion is .75%
1.) No load funds are limited to .25%
4. Mutual fund share classes
a. Class A shares (frontend load)
1.) Investors pay sales charge on each purchase
b. Class B shares (backend load [CDSC])
1 .) Investors pay declining charge at redemption
2 .) Higher 12b 1 fee than Class A
c. Class C shares (level load)
1.) Purchase at NAY with 1 % CDSC for 1 year
2 .) Higher 12 b- 1 fee than Class A
5. Reduction in Sales Charges (A shares)
a. Breakpoints
$ Invested Sales Charge
$0 to $24,999 6.00%
$25,000 to $49,999 5.50%
$50,000 to $99,999 5.00%
$100,000 to $249,000 4.00%
$250,000 to $499,999 3.00%
$500,000 to $999,999 2.00%
$1,000,000+ 0.00%
1 .) Individuals and spouses
2 .) Parent and dependent children
3 .) Entity formed for a business purpose
b. Not an investment club
c. Breakpoint sale (violation under FINRA and NASAA)
1.) Selling beneath the breakpoint
BENEFITS OF INVESTMENT COMPANY SECURITIES
1. Diversification
2. Professional management
3. Liquidity
4. Low minimum initial investment
RISKS OF INVESTMENT COMPANY SECURITIES
1. Market risk for equity funds
2. Interest rate risk for bond funds
3. Fees and expenses
4. No control over manager's timing of purchases or sales
EXCHANGE-TRADED FUNDS (ETFs)
A. EXCHANGE-TRADED FUNDS (ETF)
1 . Traded on exchanges or Nasdaq
a. Intra-day price fluctuations
b. Can be bought on margin and sold short
2. Typically tracks an index
a. Possibly lower expense ratio than index fund
b. Possibly more tax efficient than mutual fund
c. Commissions to buy and sell
REAL ESTATE INVESTMENT TRUST (REIT)
DefiniA. REAL ESTATE INVESTMENT TRUSTS (REITs)
1. Tradable units in portfolio of real estate or mortgages
a. Equity trusts-invest in portfolio of operating real estate
b. Mortgage (debt) trusts-loan money for mortgages to owners of real estate or
invest in (purchase) existing mortgages
1.) Revenues generated primarily by the interest that they earn on the
mortgage loan
c. REITs are not "flow-through'' vehicles like DPPs
1 .) Must distribute at least 90% of net income
2 .) Losses do not flow-through
d. Historically exchange listed
1.) Non-traded REITs require extra suitabilitytion
ALTERNATIVE POOLED INVESTMENTS
A. ETNS, LEVERAGED ETFS, AND INVERSE FUNDS
1. Generally for sophisticated investor
2. Stricter suitability requirements
B. EXCHANGE-TRADED NOTES (ETNS)
1. Also known as equity-linked notes (ELNs)
2. In spite of the name, are debt instruments
3. Return linked to market-index or benchmark
4. Credit risk-unsecured debt of issuer
C. LEVERAGED ETFS
1. Attempt to return a multiple of index
a. 2x or 3x
b. Losses multiplied as well
D. INVERSE FUNDS
1. Attempt to return opposite of index (e.g. benchmark falls 2%, fund increases 2%)
2. Can also be 2x or 3x leveraged
3. Inverse and leveraged---daily or weekly reset-not for long-term investors
Insurance-Based Products
A. LIFE INSURANCE
1. Types of Life Insurance
a. Term life (TL) for a fixed term (e.g., 1, 5, 10, or 20 years)
1 .) No cash value
2 .) Renews with same face but higher premium
b. Whole life (WL)
1 .) Fixed premium
2 .) Guaranteed death benefit and cash value
c. Universal life (UL)
1 .) Flexible premiums and face amount
2 .) Cash value not guaranteed
3 .) May be over funded
d. Variable life (VL)
1.) Scheduled (fixed) premium
2 .) Guaranteed death benefit
3 .) Cash value not guaranteed
a.) Based on performance of separate account
Insurance-Based Products ANNUITIES
A. ANNUITIES
1. Fixed annuity
a. Amount of monthly income is guaranteed
b. Not a securities product
2. Variable annuity
a. Insurance product
1.) Mortality guarantee (lifetime income)
b. Securities product
1 .) Separate account with sub-accounts
a.) Specifically for annuity
b.) Units are purchased versus shares of a mutual fund
2 .) Possible hedge against inflation
c. Separate account versus mutual fund
1.) Tax deferral versus current taxation
a.) All growth within annuity is tax deferred
b.) Participate in the equities market with expenses generally higher
than mutual fund with the same objective
d. Funding
1.) Single premium deferred annuity (accumulation units)
2.) Periodic payment deferred annuity (accumulation units)
3.) Single premium immediate annuity (annuity units)
e. Distributions
1.) Random withdrawals
2 .) Annuitize
a.) Straight life
b.) Life with period certain
c.) Joint life with last survivor
Taxation of Annuities
1.) Contributions not through employer-sponsored retirement plans are
made with after-tax dollars
a.) Deposits are cost basis
b.) Growth (earnings) are tax deferred
c.) Everything above cost basis is taxed as ordinary income upon
distribution
d.) Withdrawals are taxed LIFO
• If under 59 Vz, 10% tax penalty on earnings
e.) Annuitize
• Exclusion ratio
Benefits Disadvantages
Lifetime retirement income Market risk
Tax-deferred growth Expenses higher than mutual fund
Possible inflation hedge Possible surrender charges
Section 1035 tax-free exchange Tax penalty for early withdrawal
3. Index annuities
a. Cash values tied to the performance of an index
1.) Participate (generally with a "cap") in the gains but not the losses
b. Designed to reduce the purchasing power risk of fixed annuities without the market risk of a variable annuity
c. Not regulated as a security
1.) Any registered personnel selling this product must comply with suitability and disclosure requirements.
Derivative Investments- OPTION CONTRACTS
A contract through which the seller gives the buyer the right, but not the obligation, to
buy or sell a specified number of shares at a predetermined price within a set time period
B. PARTICIPANTS
Contract
Buyer
Seller
Purchaser or holder
Writer
Long position
Short position
Pays premium
Receives premium
Owns the right
Is in control
Takes on obligation
C. THE OPTION CONTRACT
D. STANDARDIZED TERMS
1. Underlying asset
2. Expiration month
a. LEAPS may be written for up to 39 months, all others a maximum of
nine months
3. Exercise (strike) price efinition
TYPES OF OPTIONS
1. Calls
a. Owner has right to buy stock
b. Seller has obligation to sell
2. Puts
a. Owner has right to sell stock
b. Seller has obligation to buy
F. BENEFITS OF USING OPTIONS
1. Buying options (long, holder)
a. Leverage increases return percentage
b. Less capital at risk
c. Long put has less risk than short stock sale
d. "Insurance" (hedging)
1.) Use opposite strategy
2 .) Long stock position ( or portfolio) strategy is bullish-risk is declining
market-buy a put
3.) Short stock position-strategy is bearish-risk is rising market-buy a
call
2. Selling options ( short, write)
a. Income from the premium
b. Partial hedge
1 .) Call hedges long stock position to extent of premium
2 .) Put hedges short stock position to extent of premium
G. RISKS OF USING OPTIONS
1. Long
a. Guess wrong-lose most or entire premium paid
b. Time decay---option expires
c. Inability to exercise
1.) European style-exercise only at expiration date (EE)
2 .) American style-exercise any time (AA)
2. Short
a. Profit generally limited to premium received
b. Uncovered call has unlimited risk
SUMMARY OF BASIC OPTION POSITIONS
FORWARD AND FUTURES CONTRACTS
A. FORWARD CONTRACTS (COMMITMENTS)
1 . T wo-party contract
2. N onliquid
3. N onstandardized
4. Terms negotiated
a. Quantity
b. Quality
c. Time
d. Place
e. Price
B. FUTURES CONTRACTS-EXCHANGE REGULATED
1. Quantity
2. Quality
3. Time
4. Place
5. Price
6. Producers (selling forwards or futures)
a. Decrease volatility
b. Limit future price risk
c. Lock in profit
7. Consumers (buying forwards or futures)
a. Decrease volatility
b. Lock in expenses
C. CUSTOMER FORWARD OR FUTURES POSITIONS
1. Long (buyer)
a. Obligated to take delivery
2. Short (seller)
a. Obligated to make delivery
When investors trade futures contracts, they do not generally expect delivery
of the commodity, but with forward contracts, investors generally do expect delivery of the commodity.
Alternative Investments (ALTs)
DIRECT PARTICIPATION PROGRAMS (DPPs)
A. FLOW THROUGH OF INCOME AND EXPENSES
1. Previously called tax shelters; economic consequences of the businesses flow
through to investors, not a corporation, thus no dividends.
B. USUALLY ORGANIZED AS LIMITED PARTNERSHIPS
1. Limited liability
a. At least one general partner ( the active investor) and one limited partner
( the passive investor)
b. Limited partners take no management role
C. INVESTMENT CONSIDERATIONS
1. Economic viability
a. Potential for profit must exist
2. Cash flow
a. Lease or rental payments
b. Sale of product (oil/gas)
3. Capital gains
a. Selling assets
D. BENEFITS
1. Passive losses flow through to investors
a. As with any new business, early years operate at a loss
b. Can offset passive income with passive losses
c. Loss limited to invested capital plus capital contributions committed for but
not yet made
2. Tax credits
E. RISKS
1. Limited or no liquidity
a. Nontransferable without general partner's consent
TermHEDGE FUNDS
A. INVESTMENT VEHICLES THAT USE SOPHISTICATED STRATEGIES
1 . Leveraging through margin
2. Short selling
3. Arbitrage
B. NOT REQUIRED TO REGISTER WITH THE SEC
1. Advisers to the fund generally are registered
C. LIMITED LIQUIDITY
1. Usually issued as limited partnership interests
a. Lock-up period
D. HIGH EXPENSES
1. Management generally receives a base+ performance fee (2 + 20)
2. Management generally has a partnership interest ("skin in the game")
E. ACCREDITED (OR QUALIFIED) INVESTORS ONLY
ALTERNATIVE INVESTMENTS - INVESTMENT REAL ESTATE
A. ACTIVE RATHER THAN PASSIVE ROLE AS WITH REITs AND DPPs
1. Buying single family homes
a. Repair and flip for gains
b. Hold and rent for steady income
B. BENEFITS
1. Historical hedge against inflation
2. Rental income may be partially tax sheltered
3. Highly leveraged can lead to greater profits
4. Usually not correlated with stock market returns (Session 12)
C. RISKS
1. Not generally very liquid
2. Inability to find renters
3. High leverage in down market
4. Poor management skills
COMMODITIES, INCLUDING PRECIOUS METALS
DA. TYPES OF COMMODITIES
1. Agricultural ( corn)
2. Animal-based (pork bellies)
3. Natural resources ( crude oil)
4. Industrial metals (copper)
s. Precious metals (gold)
B. BENEFITS OF INVESTING IN COMMODITIES
1 . Potential hedge against inflation
2. Diversification
a. Not correlated to stock market returns
3. Profit potential
C. RISKS OF COMMODITY INVESTING
1. Loss of principal
2. Volatility
3. Foreign market risk
a. Currency and political
4. High spreads (precious metals)
5. Lack of income
Economic Factors and Business
Information - Basic Economic Concepts and
Financial Reporting
ECONOMICS AND ANALYSIS
A. FUNDAMENTALS OF COMPANIES
1 . Quality of management
2. Market share
3. Product pipeline
4. Financial statements
a. Balance sheet
b. Income statement
1. Financial statements
a. Balance sheet
1 .) Assets = liabilities + net worth
2 .) Assets - liabilities = net worth
Assets Liabilities
Net worth
2. Calculations used in balance sheet analysis
a. Book value
40MM Net worth
- 20MM Preferred stock
- 5MM Intangibles (includes goodwill)
= 15MM Book value
-:- 1 MM Number of common shares outstanding
= $15 Book value per common share
b. Liquidity (balance sheet)
1.) Working capital
Current assets - current liabilities
40,000,000 - 10,000,000
2 .) Current ratio
Current assets / current liabilities
40,000,000 I 10,000,000
3.) Quick ratio (acid-test)
( Current assets - inventory) / current liabilities
( 40,000,000 - 20,000,000) I 10,000,000
c. Capitalization
1.) Total capitalization
long-term debt + net worth ( equity capital)
50,000,000 + 40,000,000
2 .) Debt ratio
long-term debt + total capitalization
50,000,000 + 90,000,000
VALUATION RATIOS
A. PRICE-TO-EARNINGS RATIO (PE)
CMV /EPS
B. PRICE-TO-BOOK RATIO
Market price of stock
/Book value per share
ECONOMIC FACTORS AND BUSINESS INFORMATION
The following is for Series 65 only.
A. TOP DOWN
1. Economy
2. Industry
3. Company -GDP -->,CPI,-->Industry,-->ABC Corporation
B. ECONOMY
1. GDP
2. CPI
3. Economic indicators
a. Leading
b. Coincident
c. Lagging
a. Sector rotation
1 .) Follows the business cycle
2 .) Sell those sectors that are peaking
3 .) Buy those sectors that are expanding
C. INDUSTRY
1. Defensive (noncvclical)
2. Cyclical
3. Counter-cvclical
SEC FILINGS
A. FORM 8-K
1. Event driven
a. Sale of significant asset
b. Management change
c. Change of company name
d. Bankruptcy filing
e. Resignation of disgruntled board member
2. Relocation of a subsidiary would not trigger
3. Filed within four business days of event
B. FORM 10-K
1 . Annual audited financial report
a. Must use independent accountant
C. FORM 10-Q
1. Quarterly financial report
D. ANNUAL REPORT
1. Sent to stockholders-may use Form lOK
Methods of Quantitative Analysis
TIME VALUE OF MONEY
A. FUTURE VALUE
1. What will an investment made today at a given rate be worth at some point in the
future?
2. Reflects compound rate of return
3. Factors taken into consideration
a. Initial capital
b. Time capital will remain invested
c. Anticipated rate of return
d. Unknown is ending (future) value of the initial capital if assumptions are met
Example: If one invests $10,000 today at 8% interest, what will it be worth
in 9 years?
B. PRESENT VALUE
1. How much needs to be invested today at a given rate to equal a specified value at
a point in the future?
2. Factors taken into consideration
a. Future goal
b. Time to reach the goal
c. Anticipated rate of return
d. Unknown is today's (present) value-the required contribution to reach the
goal
Example: If one needed $25,000 in 12 years and was able to earn a 6% rate
of return, how much would need to be invested today to reach that goal?
C. RULE OF 72
1. Approximate formula for doubling of investment
2. 72 + return percentage = years to double
3. 72 + number of years= percentage return needed to double
EXAMPLE: If you can earn 4 % , divide 72 by 4 = 18 years' time to double your money
EXAMPLE: If you have 3 years, divide 72 by 3 = 24 % earnings needed to double your
money
D. NET PRESENT VALUE (NPV)
1. Subtract cost of the investment from the present value of the future returns (DCF)
2. Positive NPV is desirable
a. Cost of bond is $940; if present value is $990
b. NPV is +$50 - make the investment
c. If present value is $900, NPV is -$40 = No
E. INTERNAL RATE OF RETURN (IRR)
1. The discount rate that results in a net present value of zero for a series of future
cash flows
a. In our $25k example above, IRR= 6%
b. Rate of return needed to get from PV to FV
2. Yield to maturity of a bond reflects IRR
3. Expressed as a percentage, not dollar amounts
DESCRIPTIVE STATISTICS
A. MEASURES OF CENTRAL TENDENCY
1. Mean
a. Arithmetic mean-simple average
b. Geometric mean-always lower ( unless all returns equal)
2. Median
3. Mode
4. Range/mid-range
B. BETA()
1. Measure of stock's co-movement relative to benchmark
2. Measures systematic risk: risk associated with the market in general, not the total
risk that pertains to a specific security
= 1 Average risk investment
> 1 Above Average risk investment
< 1 Below Average risk investment
= 0 Riskless investment
C. STANDARD DEVIATION (er)
1. Measures the volatility of an investment compared with past returns
2. Standard deviation measures a security's dispersion of returns versus its historical
performance (mean)
3. Systematic risk = beta
4. Standard deviation measures total risk (systematic risk and unsystematic risk)
5. Used in computing Capital Market Line
6. Volatility within 1 CJ Y3 of the time; within 2 CJ 95% of the time
D. ALPHA (a)
1. Compare the actual return in excess of the risk-free rate to the expected return
a. If higher, positive alpha
b. If lower, negative alpha
c. If the same, zero alpha
Alpha Example:
The Risk-free rate (RF) is 3 % . Stock A has a beta of 1.0; Stock
B has a beta of 1.4. Stock A has a return of 13 % ; Stock B has
a return of 19%. What is Stock B's alpha?
Solution:
Expected return = (Market - RFR)(Beta)
Expected return = (13 % - 3 %)(1.4) = 14 %
Actual return over RFR = 19% - 3% = 16%
Alpha= 16% -14% = +2% (positive alpha)
Types of Risk
TYPES OF RISK
A. SYSTEMATIC RISK
1. Risk that overall market conditions will affect individual securities adversely
regardless of specific company's circumstances
a. Cannot be diversified away
2. Examples of systematic risks
a. Market risk
1.) Usually measured by beta
b. Interest rate risk
1.) As interest rates go up, fixed income prices go down and vice versa
2 .) Long term versus short term
a.) Long term debt more volatile (longer duration)
3 .) Low coupon versus high coupon
a.) Low coupon debt more volatile (longer duration)
c. Inflation (purchasing power) risk
1.) Erosion of the buying power of the local currency unit
2 .) Greatest impact on fixed dollar investments
3 .) TIPS offer protection
B. UNSYSTEMATIC RISK
1. Risk that a business will fail or perform poorly as a result of specific characteristics
of the company or industry in which it operates
a. Can be diversified away
2. Examples of unsystematic risk
a. Business Risk
1.) Loss of investment due to specific failure of the business
• Labor problems
• Poor management decisions
• Lawsuits
b. Credit ( default) Risk
1.) Minimize through higher ratings
2 .) Applies to debt securities, not equity
3 .) Sometimes referred to as financial risk when too much leverage
employed
c. Regulatory Risk
1.) Vulnerability to adverse changes in regulations (EPA, FDA, EEOC,
etc.)
d. Legislative or Political Risk
1 .) Vulnerability to adverse legislation ( tax laws)
e. Sovereign Risk
1.) Risk that a government could default on its debt (sovereign debt) or
other obligations
f. Liquidity Risk (marketability)
1.) Speed or ease of converting an investment into cash
2 .) Virtually nonexistent with listed/Nasdaq securities and mutual funds
C. OPPORTUNITY COST
1. Rate given up on one investment to invest in another
2. Involves both systematic and unsystematic risk
D. LIQUIDATION PRIORITY-CAPITAL STRUCTURE
1 . Secured debt
2. General creditors (including debentures)
3. Subordinated debt
4. Preferred stockholders
5. Common stockholders
Client Investment
Recommendations and
Strategies -Type of Client
TYPE OF CLIENT
A. NEW ACCOUNT AGREEMENT
1 . Basic customer information
a. Name, of legal age, employment
2. Customer identification program ( CIP)
a. From USA Patriot Act - anti-terrorism
b. DOB, physical address and TIN
3. Financial information and objectives
B. SUITABILITY-APPLIES TO ALL
1. Understanding of customer objectives required
2. Adviser acts in fiduciary capacity
C. DIFFERENT CLIENT ACCOUNTS
1. Individual-one beneficial owner
a. Includes a sole-proprietorship
2. Joint-two or more legal persons with control
a. A minor cannot open a joint account with an adult; must be of legal age to
sign joint account agreement.
b. JTWROS-equal ownership, passes to survivor
c. Tenants in Common-can be unequal, passes to estate
d. Tenancy by the entirety
1.) Limited to spouses
2 .) Permission of spouse needed before sale or gift of interest
3.) Primarily for real estate
e. Checks must be made out in the names of all owners.
f. Distribution of money or certificate must be endorsed by all owners-may be
sent to one address.
g. Any owner whose name is on the account has control over the assets (except
tenancy in the entirety).
h. Transfer on death (TOD) is okay for all except TIC (avoids probate on first
to die, but not estate tax).
3. Business accounts
a. Sole proprietorship
1.) Unlimited liability
2 .) Suitability of the individual
3.) Simplest business to form and dissolve
b. Partnerships
1 .) An unincorporated association of two or more people
2 .) Income and losses flow through
a.) If formed as a limited partnership, management (and liability) is
assigned to the general partner. Limited partners are passive and
liability is limited to their investment plus any funds committed to.
3.) Easy to form and easy to dissolve
4.) Suitability is combined/collective objectives of all of the partners
c. Limited liability company (LLC)
1 .) Limited liability, taxed like a partnership
2.) Unlimited number of members (rather than shareholders)
3 .) Easy to form, easy to dissolve
4.) Suitability similar to partnerships
d. S corporations
1.) Limited liability, taxed like a partnership
2.) Limited to 100 shareholders
3.) Suitability similar to partnerships
e. C corporations
1.) Shareholders' risk limited to investment
2 .) Corporation is taxable entity
3 .) Best for raising large amounts of capital
4.) Suitability of the entity, not the shareholders
FIDUCIARY ACCOUNTS-TRUSTS AND ESTATES
A. ALL TRUSTS
1. Trustee follows the terms of the trust
a. Adhere to Uniform Prudent Investor Act (UPIA)
B. LIVING TRUSTS
1. Grantor/settlor transfers assets (corpus) to trustee/trust while the grantor/settlor is alive
2. Can be revocable or irrevocable
a. Revocable living trusts (grantor trust)
1 .) Grantor can be trustee, beneficiary, or both
2.) Income or corpus can go to grantor(s) or beneficiaries
3.) Terms of trust may be altered; grantor may amend or revoke the trust
4.) Grantor is responsible for tax on trust income
5.) Assets remain in grantor's taxable estate
b. Irrevocable living trust
1 .) Trustee and beneficiary cannot be the grantor
2 .) Terms of the trust cannot be altered
3 .) Grantor may avoid income and estate tax. Income is taxed to the
beneficiaries if distributed, otherwise to the trust
4.) Irrevocable Life Insurance Trust (ILIT) is a popular example
C. MAY BE A SIMPLE TRUST OR A COMPLEX TRUST
1. Simple trust must distribute DNI each year.
a. Income from dividends and interest
b. Rents
c. Realized capital gains not reinvested in the corpus
d. Less: trust expenses
2. Simple trust may not distribute corpus
3. Complex trust may retain income
4. Complex trust may distribute corpus
5. 39.6% tax bracket reached at $12,400 (2016) of undistributed income
D. TESTAMENTARY TRUST
1 . Settlor retains control over assets until death
2. Trust is irrevocable ( can't change things after death)
a. Property passes into the trust by way of the will and must go through the
probate court process
b. Does not reduce grantor's income or estate tax liability
3. Trustee is responsible for managing the trust until termination
E. ESTATE-CUSTODIAL ACCOUNT DIRECTED BY AN EXECUTOR OR
ADMINISTRATOR (INTESTATE) ON BEHALF OF BENEFICIARIES
1 . Fiduciary relationship
2. Suitability in accordance with UPIA
F. MISCELLANEOUS
1 . Per stirpes-assets pass to descendants of deceased beneficiary
2. Per capita-assets are divided among surviving beneficiaries only
3. Intestate-if the deceased died intestate ( without a will), the personal representative
is an administrator (state appointed), rather than an executor.
Client ProfileTerm
CLIENT PROFILE
A. CLIENT PROFILES
1 . Financial status
a. What is on a family balance sheet?
b. Shows what is available for lump sum investment
c. What is on a family income statement?
1 .) Determine cash flow
2 .) Shows what is available for periodic investing
2. Life insurance
a. Capital needs analysis
1.) Used to calculate life insurance needs
a.) Assets and liabilities
b.) Future earnings
c.) Inflation
2 .) Market volatility is not a consideration
3. N onfmancial considerations
a. Attitudes
b. Demographics
c. Experience
d. Values
4. Elements of risk tolerance
a. Liquidity requirements
b. Investment time horizon-short/long
c. Current investment holdings
d. Attitude toward volatility
5. Type of client
a. lndi vidual/business/trust/ institution
6. Client characteristics
a. Conservative (low risk)
b. Aggressive (high risk)
7. Behavioral finance
a. Behavioral biases can cause investors to make financial decisions that are
irrational. Examples of those biases include:
1 .) Overconfidence ( investors overestimate their ability)
2 .) Conservatism (hard to change prior beliefs, even with new
information)
3 .) Herd behavior ( market drop - panic selling)
B. FINANCIAL GOALS
1. Preservation of capital
a. Client cannot afford loss of principal
b. Appropriate investments include insured bank CDs and money market funds
c. Client risks loss of purchasing power
2. Current income
a. Government, agency, municipal, corporate bonds
b. Preferred stocks
c. Common stocks
1.) Public Utilities
d. Bond funds
e. Equity income funds
3. Capital appreciation
a. Common stock
b. Equity mutual funds or growth ETFs
4. Speculation
a. Options
b. High-yield bonds
c. Commodities
5. Diversification
a. Asset allocation
1 .) Foreign stock funds
2 .) Tangible assets for inflation protection
6. Passive investing
a. Index funds; ETFs
1.) Low cost
7. College tuition
a. Zero-coupon bonds (STRIPS) maturing when tuition is due
b. Coverdell ESA, Section 529 plans
8. Retirement planning
a. Social Security
b. Pensions/401 (k)
c. Annuity, IRA, etc.
9. Tax planning
a. Tax deferral
b. Tax-free income
1 0. Time horizon
a. Helps determine suitability of recommendations
b. Social Security
c. Disability insurance
TermPortfolio Management Styles,
Strategies, and Techniques
DASSET ALLOCATION
A. SPREADING PORTFOLIO FUNDS AMONG DIFFERENT ASSET CLASSES
1 . Cash and cash equivalents
2. Fixed-income investments
3. Equities
a. Domestic
b. Foreign
4. Tangible assets
a. Real estate
b. Precious metals
B. STRATEGIC ASSET ALLOCATION-LONG TERM
1. Passive investment strategy
2. Percentages determined based on client
a. 60% equity/40% debt-very common
b. 70% debt/30% equity-retiree
3. Periodic rebalancing
4. Buy and hold
5. Frequently use index funds or ETFs
6. Low investor costs
C. TACTICAL ASSET ALLOCATION-SHORT TERM
1. Active management strategy
2. Undervalued purchased/overvalued sold
3. Current market condition
4. Market timing
5. High investor costs
a. Trading costs (commissions)
b. Capital gains taxes
GROWTH PORTFOLIOS
A. EARNINGS GROW FASTER THAN SIMILAR COMPANIES/OVERALL
MARKET
1. Generally high P/E's
2. Looking for earnings momentum
3. Low dividend payout ratio
4. Likely to trade at higher end of 52week trading range
VALUE PORTFOLIOS
A. UNDERVALUED OR OUT-OF-FAVOR SECURITIES
1. Generally low P/E ratios
2. Higher dividend payout ratio
3. Focus on financial statements
a. Hidden value may include "rainy day" fund
4. Likely to trade at the lower end of 52week trading range
OTHER PORTFOLIO MANAGEMENT STYLES
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