Primerica - Series 6

Series 6 Review Student Workbook

FOR INTERNAL USE ONLY. NOT TO BE USED WITH, OR DISTRIBUTED TO, THE PUBLIC. © 2012 Primerica / 12pol100 / 6.12

Checklist 1. Set-up securities profile 2. Submit your U-4 3. Complete the fingerprint process 4. Complete the Pre-Study Material (Kaplan or TesTeachers) 5. Open your exam window 6. Schedule to take the Series 6 exam 5 – 7 days after participating in Prep to Pass 7. Bring a highlighter to the broadcast

Prep to Pass – Series 6 Review

Registered Representative (Series 6) Review

FOR INTERNAL USE ONLY. NOT TO BE USED WITH, OR DISTRIBUTED TO, THE PUBLIC.

Chapter 1 (8 questions) Securities Markets, Investment Securities, and Economic Factors 1-1 Primary Market The New Issue Market Initial Public Offering (IPO) Net proceeds from IPO go to the issuing corporation to raise working capital Underwriter Contracts Best Efforts - Issuer has financial risk All or None - Issuer has financial risk Mini-Max - Issuer has financial risk Stand by - Underwriter has financial risk Firm commitment - Underwriter has financial risk Red Herrings Solicitation for interest in upcoming IPO Cannot purchase stock yet Tombstone Ads Announcing an upcoming IPO Must include disclaimer


1

1-2 Secondary Market Trading of Issued Securities Exchange Market Auction style Physical Location (NYSE) Highest Bidder Over The Counter Market (OTC) Negotiated market Telephone to Telephone or Computer to Computer No physical location Fourth Market – (Instinet) Institutional Trading 1-3 Market Terms Trade Date The recorded date of the transaction Settlement Date (a Regular way settlement) Corporate & municipal securities (T+3) Government Securities (T+1) Cash Trades (Mutual Funds) same day


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1-4 Dividend Dates Declaration Date The day the Board Of Directors authorizes the dividend Record Date The day the shareholder must officially own shares to receive the dividend Ex-Dividend Date Two business days prior to the Record Date Must purchase shares before EX date if you want to receive the dividend Payment Date The date on which the declared dividend will be paid

Ex-Dividend Dates November Sunday

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

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5

6

7

8

9

10

11

12

13

14

15

16

17

22

23

24

Ex-Dividend (A) for OTC & Exchange

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Record Date (A) Ex-Dividend (Ex-Dividend (B) for OTC (A) for Mutual & Exchange Funds)

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20

21

Record Date (B) Ex-Dividend (Ex-Dividend (C) for OTC (B) for Mutual & Exchange Funds)

Record Date (C) (Ex-Dividend (C) for Mutual Funds) Thanksgiving


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1-5 Price Quote Terms Bid Price (“Wholesale”) The smaller number in a quote (NAV) The highest price a buyer is willing to pay You sell at Bid Asked Price (“Retail”) NAV + SC = POP or Asked Larger number in a quote You buy at Asked 1-6 Corporate Securities Equity Securities = Ownership Common Stock Speculative capitalization for investor When you buy common stock you become part owner in corporation


4

Stock Diagram When a company incorporates, they are authorized to issue a certain number of shares.

Capitalize to raise money

1,000,000 Authorized

600,000 Issued

Reasons to Buy Back 1) Employee Stock Option Plan 2) Think Stock will go up 3) No Voting rights 4) Receives No Dividends

400,000 Unissued

200,000 Treasury

400,000 Outstanding

Saved to raise money at a later date

Investing Public

Pre-emptive Right A common stock shareholder’s right to maintain their proportionate share of ownership in the corporation Preferred Stock No voting rights Dividend or Cumulative preferred All the dividends that are in arrears must be paid before the common stockholders can receive any dividends Straight preferred Pays a stated dividend; does not pay dividends that are in arrears Participating preferred Pays a stated dividend and allows shareholders to participate in additional dividends


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1-7 American Depository Receipts Issued by American banks Represents ownership shares in foreign companies Listed on foreign exchanges Reduces currency exchange risk

1-8 Voting rights Statutory voting 1 vote per BOD vacancy per share

Statutory Voting Investor 100 Shares

Director 1 100 Votes





6

Cumulative voting Number of shares x number of vacancies on BOD

Cumulative Voting Investor 100 Shares

Director 1 0 Votes

Director 2 0 Votes

Director 3 0 Votes


7


1-9 Rights, Warrants, Options

Rights

Warrants

Options

Life Span

Short – usually less than 60 days

Long – Usually three to five years, but could be longer

Varies – usually nine months or less, but many be as long as three years

Underlying Instruments

Stocks

Stocks, bonds

Stocks, bonds, indexes, and foreign currencies.

Use

Allow existing stockholders to maintain their proportionate interest in a company

“Sweetener” attached to issues of stocks and bonds to encourage investors to buy them

Hedging and Speculation

Bullish

Call Defined Buyer has the right to purchase securities at strike price

Bearish

Put Defined Buyer has the right to sell securities

1-10 Debt Securities Bonds are debt securities that represent an investor’s loan to the issuer Bond yields Premium, Face/Par, Discount Nominal Yield or Coupon Rate Current Yield Yield to Maturity


8

Bond Yields (Bond See-Saw) YTM Premium $ ________

CY _____%

NY or CR

NY

Face or Par $ 1,000 Discount $ ________

CY _____%

Annual Interest $ ________ YTM

1-11 Secured Bonds Mortgage Bonds Most common type Backed by real property that the issuer owns Equipment Trust Certificate Backed by a specific piece of equipment Example: Airplanes or Railroad cars Not backed by issuer


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Collateral Trust Certificate Issued by corporations that own subsidiaries companies Stock of the subsidiary company pledged as collateral for their bond issue Example: Pepsi . . . Yum! Brands 1-12 Unsecured Bond (Debentures) Back by only the good faith and credit of the issuing corporation 1-13 Convertible Bonds Allow holders to convert to common shares of the same corporation at a pre-determined price Generally offered at lower interest rate than non convertible because of the value added benefit of converting to common stock 1-14 Bond Features Speculative capitalization for corporations Redemption - On the bonds maturity date the bondholder receives his principle and final interest payment (the debt is considered retired) Call Provision - The issuer has the flexibility to retire the debt prior to maturity Pay debt off early Refinance debt to lower interest rate Not callable for at least 5 years


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1-15 Government Securities Marketable – Transferable

U.S. Government Securities Marketable U.S. Bonds

Minimum Denominations

Interest

Price

T– Bills

(13 – 26 – 52) Weeks or (3 – 6 – 12) Months

$ 1,000

At Maturity

Discount

T–Notes

1 – 10 Years

$ 1,000

1/2 Year

Par

T– Bonds

10 – 30 Years

$ 1,000

1/2 Year

Par

Maturity

Test Tip: _________________________________________________ Non marketable – Redeemable

U.S. Government Securities Sold at Discount “Earns” Interest

Sold at Face Value “Pays” Interest

Series EE

Series HH

Denominations

$50 – $10,000

$500 – $10,000

Purchased or Sold At:

50% Discount

At Face Value in Exchange for Series “E”

Non-Marketable

Agency Bonds – Government National Mortgage Association (Ginnie Mae) the only agency backed by U.S. Government


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1-16 Municipal Bonds (Federally Tax Free) General Obligation (GO bonds) Issuers must have taxing authority Cities and Counties generate tax revenue through property tax (Ad Valorem) States issues are generally secured by income, gasoline, and sales taxes Revenue Bonds Issued to fund a distinct project (Toll Roads, etc.) Not backed by taxation 1-17 Money Market Instruments Treasury Bills Certificate of deposit (CD) Minimum denomination is $100,000 Commercial Paper Short-term debt instrument only issued by highly rated corporations Maximum maturity of 270 days Bankers Acceptance Import and export business Re-purchase Agreement One financial company borrows from another Borrower sells government securities to lender Borrower agrees to buy it back at a higher price, which equals the interest on the loan


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1-18 Monetary Policy Controlled by Federal Reserve Board (FRB) Primary focus is to control inflation Supervise and regulate banks Maintain a stable financial system 1-19 Fiscal Policy Controlled by Federal Government Primary focus is stable economic growth and high levels of employment The Government’s use of taxes and expenditures


13

Notes


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Chapter 2 (23 questions) Securities And Tax Regulations 2-1 Securities Act of 1933 Primary Market Paper Act 2-2 Securities Exchange Act of 1934 Secondary Market People 2-3 Exempted Securities Securities that do not have to register with SEC U.S. Government Securities Municipal Commercial Paper 2-4 Exempted Offerings Regulation D Private Placement Sold to no more than 35 non-accredited investors Accredited investor Any individual that has a net worth of at least 1 million dollars or has earned at least $200,000 for the past 2 years Letter stock


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Regulation A The small issue exemption New issues raising less than 5 million dollars during a 12 month period

2-5 Broker and Dealers

Agency vs. Principal Transactions Agency

Principal

Broker

Dealer

Others

Acts for

Agent

Acts as

Principal

Commission

Paid by

Mark-up

No Risk

Assumes

Self (Owner)

Risk

2-6 Financial Industry Regulatory Authority FINRA Self-Regulatory Organization (SRO) Statutory Disqualification (SD) Promote self-discipline among members Enforce rules of fair practice Member firms can’t misuse FINRA name


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2-7 Registrations of Members Registered Representatives (Series 6) and Registered Principals (Series 26) Must renew registration once every year by the end of the year Non-renewal for 2 years means Rep must retest 2-8 Securities Exchange Commission – (SEC) 5-member board, 5 year term, appointed by President, confirmed by Senate No more than 3 members can be affiliated with any one political party 2-9 Securities Investor Protection Act – (SIPC) Protect investor’s cash and securities in the event their broker becomes insolvent Limits $500,000 in securities or $250,000 in securities and max $250,000 in cash Unlimited protection if all of the securities are registered in the name of the client 2-10 Investment Advisor (IA) Any person who advises for a fee, not a commissions IA managing less than $100 million in assets must register with the state(s) Under SEC regulations, advisors managing between $100-110 million have the option to register with either the state(s) or the SEC If managing in excess of $110 million, the IA must register at the federal level 2-11 Exclusions from IA Banks Lawyers, accountants, teachers, and engineers (L.A.T.E.) The advice must be incidental to their practice and they cannot be paid for that advice Publishers Prep to Pass – Series 6 Review

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2-12 Investment Company Act of 1940 3 types of Investment Companies

Types of Investment Companies U.I.T. (Unit Investment Trust)

Unit Investment Trust issue Shares of beneficial interest

Management Companies

Open-End (Mutual Funds)

Closed End (Stock)

Open-End Investment Companies issue

Closed-End Investment Companies Nonredeemable

Face Amount Certificates (24 Months)

Face Amount Certificate Companies issue debt

2-13 Insider Trading Act 1988 Any person who purchases or sells securities while in possession of material non-public information, or communicates such information to another person is in violation Civil Penalties Not to exceed the greater of $1 million or 3 times the profit gained or loss avoided Criminal Penalties Criminal penalties may also be imposed (up to 20 years in prison) 2-14 Registered Representatives (RR) Must submit U-4 form Must pass qualifying exams (Series 6, 63)


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2-15 Continuing Education Regulatory Element Must be completed by Rep on their second renewal date and then every 3 years thereafter Firm Element Company compliance (Annual Compliance Meeting) once a year 2-16 Exempt from Registration Persons limited to clerical functions 2-17 Cash and Non-cash compensation Gifts cannot exceed $100 annually 2-18 Selling Agreements Can only sell products with which the Rep’s company has a selling agreement 2-19 Selling Dividends Convincing a client to purchase shares of a stock or mutual fund shortly before a dividend is paid so that they will make extra money This is a violation because there is no monetary benefit in acquiring securities shortly before the dividend 2-20 Regulated Investment Company Conduit or Pipeline theory Sub chapter M of the Internal Revenue Code The Investment Company must distribute at least 90% of net investment income so that the tax obligation passes to the shareholders


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2-21 Individual Investor’s Tax Consequences Cost Basis All the after-tax contributions to an investment; includes any sale charges Form 1099 Div Reports taxable distributions taxed at a flat 15% Form 1099 B Reports proceeds on the sale of shares Short-term gain is any gain held less than 1 year Shareholder will be taxed at their ordinary income tax rate Long term gain is any gain held 1 year or longer Shareholder will be taxed at a flat 15% Max capital loss write-off is $3,000 per year 2-22 First In, First Out (FIFO) accounting You will not be taxed until you pull more money out than you put in 2-23 Gift of securities Recipient’s cost basis is same as Donor’s cost basis Recipient only pays tax on the amount above the cost basis when they sell the shares 2-24 Inheritance of securities The amount the recipient receives is their cost basis 2-25 Wash Sale If an individual sells a security at a loss and then repurchases a substantially similar security within 30 days the IRS will disallow the loss.


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2-26 Tax Treatment of Variable Annuity Contracts Accumulation Period Non-qualified annuity units are purchased with after tax dollars, thus creating a cost basis Annuity Period Payments received during annuity period are divided into 2 parts: Cost Basis – the money that has already been taxed Taxable portion – the growth above the cost basis Exclusion Ratio Determines how much is cost basis (already been taxed) and how much is considered growth (taxable) Taxes & Penalties All gains that are received from an annuity are taxed at the ordinary income tax rate of the annuitant 10% IRS penalty if withdrawn before 59 1/2 2-27 Death Benefit Provision of an Annuity The beneficiary will receive the larger amount of money between: How much the annuitant contributed or The value of the annuity on the day they died Any gain that results will be taxed at the Beneficiary’s ordinary income tax rate


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2-28 – 1035 Exchange A non-qualified insurance company contract transfer to another non-qualified insurance company contract Non-qualified annuity to non-qualified annuity Life policy to life policy (not term) Life policy to non-qualified annuity Cannot move annuities into life policies 2-29 Tax Treatment of Variable Life Insurance All investment income grows tax deferred Upon death all proceeds pass to the beneficiary tax-free IRS adds value of policy to deceased’s estate Upon full or partial surrender, FIFO applies Policyholder is not taxed until they pull out more money than they put in A gain would be taxed at policyholder’s ordinary income rate 2-30 Traditional IRA Anyone with earned income who has not reached age 70 1/2 may contribute Max contribution is $5,000 or 100% of earned income, which ever is less Last day to contribute is April 15th of the following year Withdrawals prior to 59 1/2 will be accessed a 10% IRS penalty Catch up provision allows investors who are 50 years old or older to invest up to an extra $1,000 for a total of $6,000 Pay out must begin by the next April 1st after investor turns 70 1/2 Required Minimum Distribution (RMD) penalty is 50% what should have been withdrawn Gains are taxed at the investor’s ordinary income rate FOR INTERNAL USE ONLY. NOT TO BE USED WITH, OR DISTRIBUTED TO, THE PUBLIC.

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2-31 Spousal IRA Allows a non wage-earning spouse to contribute up to $5,000 into their IRA 2-32 IRA Rollover Moving money from IRA to another within 60 days to avoid taxes and penalties Only allowed once every 12 months 2-33 Roth IRA Contribution limits are same as Traditional IRA Contributions are subject to income limits After tax non deductible contributions only Tax free distribution if: Account is open for at least 5 years Withdrawals begin after 59 1/2 RMD does not apply (70 1/2 rule) Penalty free withdrawals for 1st time homebuyer $10,000 lifetime cap Qualified higher education expenses Disabled owner


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2-34 Keogh Plan Only a self-employed person or an employee of a self-employed person is eligible Eligibility rules (“1 – 1 – 1”) Must be 21 years old Must have worked with the company for at least 1 year Must have worked at least 1,000 hours in that year Voluntary employee contributions are allowed up to the lesser of 10% of earned income or $2,500 Max contributions are 20% of pretax income up to $49,000 59 1/2 and 70 1/2 rules apply 2-35 SEP Plan For self employed individuals and their eligible employees Eligibility rules: 21 years old Worked for same employer 3 out of the last 5 years Has received $550 in compensation from the employer Employer contributions only Max contribution is the lesser of 25% of gross earning or $49,000 2-36 Simple IRA Plan Small business plan No more than 100 eligible employees Any employee that make $5,000 during the previous year Employees may contribute to their account up to the annual limit


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Employer must contribute either by: 2% method or 3% $ for $ match Employees are immediately 100% vested on employer’s contributions 2-37 – 529 Plans State sponsored college saving plans No income limits After tax non deductible contributions only Withdrawals are tax free when used for higher education expenses Non-qualified withdrawals are subject to a 10% penalty and ordinary income tax on gains Investor can switch beneficiaries if the child decides not to go to college 529s allow for accelerated gift tax limits 5 years worth of contributions ($13,000 x 5 = $65,000) per parent 2-38 Educational IRA Income limits apply No contributions can be made after the child turns 18 years old Max annual contribution is $2,000 After tax non deductible contributions only Tax free withdrawals for elementary, secondary or college costs


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2-39 Defined Contribution Plans Profit Sharing Plans No profit, no sharing The only qualified plan that has no mandatory annual contribution 401 (k) Plans Pre-tax contributions, grows tax deferred No mandatory matching Employee picks where money goes Employees are always 100% vested on their contributions Distributions prior to 59 1/2 will receive a 10% penalty All withdrawals will be taxable 403 (b) Plans Public school employees, non-profit hospitals, and churches Contributions are made by salary deduction Distributions made prior to 59 1/2 will receive a 10% penalty All withdrawals will be taxable 2-40 Deferred Compensation Plans Non-qualified plan in which the employer promises to pay retirement benefits to employee in the future 457 plans are available to state and local government employees Police, Fire fighters, school teachers After tax/non-tax deductible contributions


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Chapter 3 (18 questions) Marketing, Prospecting, And Sales Presentations 3-1 Prospectus Current prospectus must be updated at least annually Anything a reasonable shareholder needs to know before they invest must be included in the prospectus A current prospectus must be delivered prior to or during the sale The funds current portfolio is not included in the prospectus 3-2 Statement of Additional Information SAI must be attached to the prospectus to keep it current SAI does not extend the life of a prospectus 3-3 Unlawful Representation SEC no approval clause RR can never imply the SEC has approved them or the securities they are selling 3-4 SIPC Created to protect investors in the event their brokers go bankrupt Limits are $500,000 in securities and a max of $250,000 in cash per separate customer Example: Husband, wife, and joint accounts) Unlimited protections if all the securities are registered in the client’s name 3-5 Advertisements Defined as materials used in the media Newspapers, magazines, radio, and television Prep to Pass – Series 6 Review

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3-6 Sales Literature Defined as any written or electronic communication made generally available to the public Reprints, telemarketing scripts, performance reports, and circulars 3-7 Approval, Record Keeping and Filing Requirements Advertisements and Sales Literature must be kept on file for 3 years Advertisements and Sales Literature must be filed with FINRA within 10 days after use 3-8 Telemarketing Calling people you don’t know to try to get them to buy something No private residence can be called before 8:00 am their time or after 9:00 pm in their local time zone Established business relationship Telemarketer has made a financial transaction within 18 months of call The telemarketer is the Broker/Dealer of record on the client’s account The person contacted the telemarketer within 3 months of the call Personal Relationship Family, friends, and acquaintances 3-9 Tombstones Advertisement Advertises an upcoming IPO Not considered a prospectus Disclosure must be included at bottom of Tombstone


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3-10 Free riding and Withholding A practice where an underwriter does not make a legitimate public offering of a hot issue, but instead holds back shares for its own use 3-11 Front Running Policy The unethical practice of a broker buying a security for himself just before his brokerage firm makes a large purchase 3-12 Supervisory System Each member firm must supervise the activities of each of their RRs All supervisory systems must be in writing Member firm must designate principals (S26) to supervise the activities of their RRs Must designate an Office of Supervisory Jurisdiction (OSJ) in each location Member firms must conduct an internal audit of each office at least annually All transactions must be reviewed and endorsed in writing by the Registered Principal 3-13 Customer Complaints Written complaint is defined as any written communication from a client to the member firm regarding the activities of their reps in regards to transactions, securities, or funds OSJs must maintain a file of: All written complaints Any action taken on such complaints


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3-14 Selling Away When a broker solicits a potential customer to purchase a security not offered or held by his brokerage firm We don’t sell it, you can’t sell it


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Chapter 4 (13 questions) Evaluation Of Customers 4-1 Types of Investment Risk Business/Credit Risk Risk that an issuer may not be able to meet interest or principal payments Interest Rate Risk Threat of suffering a loss due to a change in the interest rate Purchasing Power Risk (Inflationary Risk) Investing in a fixed income security over a long period of time Taxability Risk that changes in the tax law would adversely affect the profitability of your investment Market Risk If you are invested in the market, you have risk


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4-2 Suitability Factors Recommending suitable investments for a specific client is not an exact science RR has to make a judgment based on the totality of information obtained from the client RR must ask the client questions pertaining to: Invest objective (Goal for money) Time frame (How long) Financial status (Can they afford it) Risk tolerance RR should use a client profile questionnaire that the client signs to verify that the suitability evaluation has been done 4-3 Investment Objectives Of Clients Determining a client’s investment objective is critical to the overall success of the plan Types of Investment Objectives Preservation of capital - Maximum protection against loss of principal Current income - Income now as opposed to sometime in the future Growth - Seeking capital growth over a long period of time; more volatility in the short term 4-4 Risk Tolerance Of Clients Defined as degree of uncertainty that investors can tolerate with regards to a negative change in the value of their portfolio An asset allocation questionnaire will assist the RR in determining the client’s risk tolerance


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4-5 Recommendations To Customers If a customer insists on purchasing a security that the RR feels is unsuitable, the RR may execute the order: The RR should mark order unsolicited and The RR should obtain a written statement that the order was not recommended for the client 4-6 Churning Excessive trading in a client’s account solely to generate commissions 4-7 Trading In Mutual Fund Shares Commonly known as Switching Moving a mutual fund client from one fund family to another solely to generate a commission for the RR 4-8 Recommending Purchases Beyond Customers Capability It is a violation of the standard of fair dealings to recommend to a customer to borrow money to invest or to reach a breakpoint


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Notes


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Chapter 5 (26 questions) Product Information 5-1 Comparison Of Closed End - Open End Funds Comparison of Closed End and Open End Funds Closed End (Stocks)

Open End (Mutual Funds)

Buying Shares

• Single IPO of a fixed number of shares • Full shares only

• Continuous primary offering of unlimited number • Full or fractional shares

Trading Shares (Redeeming)

Secondary market exchange or OTC

No secondary market, redeemed by the fund

Types of Shares (Capitalization)

Common, preferred, or debt securities

Common shares only

Share Pricing

Supply and demand

NAV + SC = POP

Shareholder Rights

• Voting • Dividends • Preemptive rights

• Voting • Dividends

5-2 Mutual Fund Features and Characteristics Max sales charge is 8.5% Professional management-is one of the greatest advantages to investing in mutual funds, especially for the smaller investor All research and analysis is conducted by Mutual Fund management Each fund has a specific objective stated in the prospectus Shareholders have voting rights through proxies


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Types of funds

Type

Portfolio

Growth

Suitable For

Common Stocks

Conservative Growth Aggressive Growth

Blue-Chip, Large-Cap stocks

Long-term investors seeking capital appreciation

Small-Cap, and Mid-Cap stocks

Equity Income

Common and Preferred Stocks

Investors who want income along with some small potential for capital appreciation

Growth and Income

Stocks

People who want both capital appreciation and income

Bond Funds

Debt Securities (Fixed Income)

Those primarily interested in current income

U.S. Government Bonds

Treasury Securities

People who want income and a high degree of safety

Municipal Bond Funds

Municipal Securities

Investors who want tax-exempt income

Corporate Bond Funds

Investment-Grade Corporate Bonds

Investors who need income

Non-Investment-Grade Corporate Bonds (Junk Bonds)

Investors who want high income and are willing to accept a high degree of capital risk

Balanced Funds

Mixture of Stocks, Bonds, and Cash Equivalents (Money-Market Instruments) Will always have some of each

Investors who want to have something in all three classes of assets

Asset Allocation Funds

Stocks, Bonds, and Cash Equivalents The proportions may be changed and the percentage in any class could drop to zero

Investors who want diversification among asset classes in a single fund

Index Funds

Securities selected to mirror a particular index

Investors who want to peruse a passive investment strategy and want low fees

Specialized or Sector Funds

Securities of one industry or geographic area

Investors willing to assume more risk in exchange for a higher potential return

Foreign Funds

Non-U.S. Securities

Investors willing to assume extra risks and who want to diversify outside the U.S. markets

Emerging Market Funds

Securities of emerging market countries

Aggressive investors only

Money-Market Funds

Cash Equivalents (T-Bills, Commercial Paper, Negotiable CDs, and Banker’s Acceptances)

Short-term investors who want liquidity and safety

High-Yield Funds


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5-3 Structure And Function Of A Mutual Fund’s Board Of Directors Board of Directors must be structured so a minimum of 40% be unaffiliated (from the outside) 60% can be employees, underwriters, or its advisor 5-4 Functions Of Investment Advisor The IA is elected by the BOD to manage the fund’s portfolio The IA is paid a fee based on the percentage of AUM over a specific period of time This fee is classified as an operating expense of the fund The IA must conform to the objectives of the fund stated in the prospectus 5-5 Functions Of Custodian Mutual funds are required to have national bank or any qualifying institution to act as its custodian Duties of the custodian include: Safeguard the physical assets Perform payable and receivable functions Register the receipt of interest and dividends for the fund Custodian does not perform any management, supervisory or investment functions Custodian is not involved in the selling of any MF shares


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5-6 Functions of Transfer Agent Shareholder services The transfer agent is contracted by the fund to perform basic clerical functions: Issue the shares Redeem the shares Distribute the dividends and capital gains 5-7 Shareholder Rights Voting rights by proxy Approving investment objective or policies changes Approving investment advisory agreement Approving changes in fees Electing directors but not officers 5-8 Automatic Reinvestment Mutual funds typically offer automatic reinvestment of dividends and capital gains at NAV (without sales charge) 5-9 Dollar Cost Averaging Investing a fixed amount of money systematically over a period of time Reduces average cost per share


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Dollar Cost Averaging Which would you prefer? Tracking two $200.00 per month Investments for Six months Both Investments start out at the same price per share. Share Price $18

A

$16 $14 $12 $10 $8

B

$6 $4 $2 $0 Month

1

2

3

4

5

6

Number of Shares Purchased Investor

1

2

3

4

5

6

Total Shares Purchased

A B

25.00 25.00

20.00 40.00

16.67 66.67

14.28 100.00

12.50 50.00

1 1 .1 1 25.00

99.56 306.67

Growth in Value of the Shares Investor

Amount Invested

Total Number of Shares

Average Cost Per Share

Ending Value

A B

$1,200 $1,200

99.56 306.67

$12.05 $3.91

$1,792.08 $2,453.36


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5-10 Exchange Privileges Within Families Of Funds Moving money from one Mutual Fund to another Mutual Fund within the same family of funds There will be no additional sales charge The IRS always counts an exchange as a sale and must be reported regardless of gain or loss Shareholder will not be taxed until they transfer more money to the new fund than they put in (FIFO) 5-11 SEC Rule 12b-1 12b-1 is a fee charged to the investor to cover expenses associated with the promotion and distribution of the fund Allowable expenses include: Printing of sales literature Distribution of sales literature Advertising Commissions The 12b-1 fee must be originally approved and annually approved by: The majority of the fund’s Board of Directors The majority of the outstanding voting shares Requirement to terminate the 12b-1 The majority vote of the non-interested Board of Directors The majority of the outstanding voting shares


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5-12 Forward Pricing NAV is calculated once every business day at 4:00 pm EST Client receives next calculated NAV from when their funds post at the fund company Example: Client’s funds post 2 pm Monday, so the client will receive Monday close of business. NAV Client’s funds post 5 pm Friday, so client receives Monday close of business NAV Redemption of shares works the same way 5-13 Share Classes Class A Shares Known as “front end load” A percentage of all new money invested goes to SC Investor may be able to take advantage of breakpoints and rights of accumulation A shares are not good for an investor with a short time horizon A shares typically have low 12b-1 fees Class B Shares Shares are purchased at NAV (no upfront sales charge) but have a potential back-end load charge (CDSC) Class B shares are most beneficial for long-term investors (5-8 years) Class B shares convert to A shares after a period of time, this is beneficial because A shares have a lower annual expense charge No breakpoints for B share investors Class C Shares Better for short-term investors Carries higher 12 – b – 1 fee


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5-14 Breakpoint The dollar amount for the purchase of the fund’s shares that qualifies an investor for a reduced sales charge (load) Investment clubs and co-ops are excluded from breakpoints Amount of Purchase at Offering Price ($)

Sales Charge as % of Offering Price

Less than $25,000

5.00%

$25,000 but less than $50,000

4.25%

$50,000 but less than $100,000

3.75%

$100,000 but less than $250,000

3.50%

$250,000 but less than $500,000

2.00%

$500,000 but less than $1,000,000

0.50%

$1,000,000 and above

0.00%

5-15 Letter Of Intent (LOI) A letter of intent allows an investor to qualify for the sales discounts without initially investing the entire amount required A Letter of Intent is good for 13 months An investor can back-date a Letter of Intent for 90 days Only contributions count towards Letter of Intent, not accumulation 5-16 Rights Of Accumulation The investors have a right to receive cumulative quantity discounts when purchasing shares of a mutual fund The investors are permitted to combine assets from their accounts and the accounts of their immediate family (spouse, children under age 21, and financially dependent family members) Appreciation of the shares are considered


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5-17 Timely Payment By Fund ICA’40 requires mutual fund companies to pay redemption proceeds within 7 calendar days 5-18 Variable Contracts The underlying assets held in VA or VL must be kept in the insurance company’s separate account No guaranteed return on investment Investor bears the risk Resistant to inflation Variable annuities and Variable life are over seen by the SEC and the State Board of Insurance RRs must have both a securities license and life insurance license to sell VAs and VLs Variable annuities offer payments for life Money invested into a VA grows tax deferred VA investors have voting rights All growth that is received from an annuity is taxed at the annuitant’s ordinary income tax rate Max sales charge is 8.5% 5-19 Types of Variable Annuities Immediate Annuity Can only be funded by a single lump sum Payment begins 1 payment period after a lump sum deposit into the contract


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5-20 Deferred Annuity An annuity that can be purchased by either a single lump sum (single premium deferred annuity) or is purchased through periodic payments (flexible premium deferred annuity) Payments can’t begin before at least 1 year from date of purchase 5-21 Fixed Annuity The insurance company guarantees principal and interest rate Money must be held in the general account Money grows tax deferred Subject to inflationary risk (purchase power risk) insurance company bears the risk The growth is taxed at the annuitant’s ordinary income tax rate 5-22 Settlement Options Straight-life Annuity Highest monthly payment This option carries the most risk When the annuitant dies the payments stop Life Annuity with Period Certain The annuitant will be paid for their lifetime If the annuitant dies before the period certain then the beneficiary will either receive a lump sum or continue to receive payments until the period certain is over The most common period certain options are (10 year, 15 year, and 20 year)


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Joint and Last Survivor Life Annuity Payment is made to 2 people, if 1 dies the payments continue to be made to the surviving annuitant until they die, all payments stop at that time Combination Fixed and Variable Annuity Pay-out This is a combination of guaranteed fixed dollars for a base income and variable dollars as a hedge against inflation 5-23 Contractual Provisions Mortality Guarantee This guarantees the annuitant that they will not out live their money (payments for life) Expense Guarantee This establishes the max the insurance company can charge the contract These provisions would be listed in the contract as the M & E charge The max sales charge for a VA is 8.5% 5-24 Assumed Interest Rate The AIR is part of annuity contract and is used to calculate the amount of each annuity payment The AIR remains fixed; it never changes To calculate the next month’s payment, follow these rules: If AIR is greater than the rate of return of the separate account, the payment will be lower than the previous month If AIR is lower than rate than the rate of return of the separate account, the payment will be higher than the previous month If AIR is the same as the rate of return of the separate account, the payment will be the same as the previous month


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Example: AIR = 4% March separate account return is 5% - payment is higher than previous month April separate account is 3% - payment is lower May separate account is 4% - payment is the same as separate account is June separate account is 7% - payment is higher July separate account is 5% - payment is higher 5-25 Similarities Between Whole Life And Variable life Death Benefit Both have a fixed minimum death benefit Premium Payments Generally paid in fixed amounts at fixed intervals Loans Both policies allow for loans, however: With Whole life policyholder can borrow 100% of cash value With VL policyholder can only borrow a percentage of the cash value 5-26 Features of Variable Life Max sales charge is 9% Proceeds past to beneficiary tax free Value of policy is included for estate tax purposes Policyholder has voting rights Conversion Privilege Allows Variable Life to convert to whole life or universal life without proof of insurability Money is held in the separate account FOR INTERNAL USE ONLY. NOT TO BE USED WITH, OR DISTRIBUTED TO, THE PUBLIC.

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Chapter 6 (12 questions) Opening And Servicing Customer Accounts 6-1 Account Documentation It is important for a RR to obtain essential facts about a customer opening an account Customer name and residence Whether or not they are of legal age Signature of RR 6-2 Bank Secrecy Act Designed to help identify the source, volume, and movement of money transported into or out of the US Banks are required to maintain records of all financial transactions and to report any suspicious transactions Transmittal of funds in excess of $ 3,000, B/D must: Obtain specific information about the transmitter and the recipient Must keep transmittal order For transactions exceeding $10,000 B/D must file a currency transaction report (CTR) This could be a single transaction or multiple transactions that exceed $10,000 during a single business day Patriot Act of 2001 Amended The Bank Secrecy Act Financial Crime Enforcement Network (FINCEN) answers to the Department of the Treasury FINCEN enforces anti-money laundering programs


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6-3 Anti-Money Laundering Compliance Program Every member firm must develop and implement a written AML program Customer identification program The part of a new account application where the RR must verify the identity of the customer by seeing and documenting a non-expired Government issued picture ID (driver’s license, military ID, or passport) Suspicious activity report (SAR) and describe suspicious activities 6-4 Privacy and Opt-Out Notices B/D must make customer aware of the company’s privacy policy with respect to customer’s non-public information Privacy policy flier must be given to customer at time of sale Must be sent to customer annually Customer has right to opt-out by sending form Company website does not need to be on the notice or flier 6-5 Forms Of Ownership Registration of accounts 6-6 Individual Accountants Registered in the name of one individual 6-7 Joint Tenants With Rights Of Survivorship (JTWROS) Each owner owns 100% of the account Either party may transact business in the account Sole ownership passes to the surviving tenant Typically used by married couples


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6-8 Tenants In Common (TIC) Each tenant owns a percentage of the account When a tenant dies their percentage is added to their estate All tenant signatures are required for trading in the account 6-9 Custodial Accounts Uniform Gift to Minors Act (UGMA) One minor and one custodian per account All securities are registered in the minor’s name Contributions to the account are considered an irrevocable gift to the minor UGMA account must include custodian’s name, the name and social security number of the minor As of 2011, The Kiddie tax rule applies to children under age 19 (or 24 if full-time student and claimed as dependent on parent’s tax return) The first $950 of unearned income is tax free The next $950 is taxed at the child’s rate Unearned income over $1,900 is taxed at the parent’s top marginal bracket Tax liabilities are the minor’s responsibility Age of majority for UGMA is 18 Uniform Transfer to Minors Act (UTMA) Age of majority for UTMA is between 18 and 25


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6-10 Customers Securities or funds RRs cannot, in any way, guarantee a profit to the customer For a RR to share in a client’s account: The agreement must be in writing The RR must share in direct proportion to the profits and/or the losses 6-11 Borrowing or Lending To A Customer It is not permitted unless: Existing written procedures are in place by B/D The customer is a member of the RR’s immediate family 6-12 Immediate Family Parents, grandparents, spouses, mother-or father-in-law, sibling, sister-or brother-inlaw, daughter or son-in-law, children, grand children, cousins, aunts, uncles, nieces and nephews 6-13 Influencing Employees of Other Members B/Ds may not pay compensation to employees of other members except: The employing firm gives written permission Gifts less than $100 6-14 Code of Arbitration Simplified Arbitration For claims under $25K Eligible claims for submission Between or among members Between members and associated persons Between members, associated persons and public customers FOR INTERNAL USE ONLY. NOT TO BE USED WITH, OR DISTRIBUTED TO, THE PUBLIC.

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6-15 Federal Reserve Board/Regulation T The FRB was granted authority, under Reg T to establish margin requirements for B/Ds The margin requirement now is 50%; this means you can borrow up to 50% of the value of your account with your B/D Must pay B/D within 7 business days or your account will be frozen for 90 days Once your account is frozen you can only do cash trades The B/D may apply to FINRA in writing and they may grant an extension of time; if not, account is frozen 6-16 Holding Mail The broker may hold customer’s mail, if request is made in writing Mail may be held for 2 months for domestic travel Mail may be held for 3 months for foreign travel


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Notes


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Practice Questions For Series 6 Review


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Chapter 1 1. A 6% bond is selling to yield 4.5%. The next time interest is paid, an investor who owns $1,000 face amount of the bonds will receive: A. $45 B. $22.50 C. $60 D. $30 Answer D, $30, is correct. The bond is a 6% bond. The total amount paid each year on the bond is $60 but the amount for an individual, semi-annual interest payment, is $30. The phrase “the next time interest is paid” in the question is important in getting this one right. 2. A bond offered at face value has a nominal yield: A. less than its yield to maturity B. more than its current yield C. more than its yield to maturity D. equal to the nominal yield Answer D, equal to the nominal yield, is correct. When a bond is selling at par, its coupon or nominal rate, current yield and yield to maturity are all the same.


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Chapter 2 1. A customer has a cash account that has securities with a market value of $200,000 and $300,000 in cash. The customer also has a joint account with her husband that has securities with a market value of $300,000 and $200,000 in cash. If the B/D were to become insolvent, the customer would be covered under SIPC for cash and securities of: A. $500,000 cash and securities for both accounts B. $1,000,000 total for both accounts C. $250,000 cash for her account and $250,000 cash for the joint account D. $450,000 cash and securities for her account and $500,000 cash and securities for the joint account Answer D is correct. There are two separate customers, each entitled to the $500,000 SIPC protection but since SIPC only covers up to $250,000 in cash, the customer will not get full coverage for the $300,000 cash in her account. 2. In June, a customer invested $10,000 in the XYZ Mutual Fund. In December of the same year, XYZ distributed a capital gain on securities it had held for three years. In May of the next year, the customer decided to redeem her shares for a capital gain. How are both of the capital gains treated for taxation purposes? I. The capital gain distribution is treated as long term II. The capital gain from redemption is treated as long term III. The capital gain from redemption is treated as short term IV. The capital gain distribution is treated as short term A. I and III B. II and IV C. I and II D. III and IV


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Answer A, I and III, is correct. The tax payable on capital gains depends on the holding period of the security sold or redeemed. The mutual fund had held the securities for three years prior to the sale, making the capital gain long term. The capital gain from the redemption took place after the mutual fund shares had been held for less than a year, making the capital gain short term. 3. Jack is the annuitant in a variable plan, and Donna is the beneficiary. Upon Jack’s death, during the accumulation period, Donna takes a lump-sum payment. What is her total tax liability? A. The entire amount is taxed as ordinary income, because it is not like life insurance B. The proceeds, minus Jack’s cost basis, taxed as ordinary income, at Donna’s tax rate C. None, because it is the proceeds from a life insurance company D. The ordinary income on the proceeds over the coast basis, plus 10% of the net gain (if any), if Donna is younger than 59 1/2 years old Answer B is correct. Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment, minus the deceased’s cost basis in the investment.


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Chapter 3 1. Which of the following statements regarding Cold-Calling are TRUE? I. Faxes may be sent at any time of the day on an unsolicited basis II. Upon request, contact names must be placed on a Do-Not-Call list and the request must be honored III. Cold calls may not be made before 8:00 am or after 9:00 pm in the contact’s time zone IV. The rule imposes a time limit on the length of a call to a customer A. III and IV B. I and IV C. I and II D. II and III Answer D, II and III, is correct. The Cold-Calling Rule restricts the time during which cold callers may telephone prospects but does not restrict conversations with customers. Faxes may not be sent to the homes or offices of non-customers unless requested. B/Ds must maintain Do-Not-Call lists and train their representatives in their use.


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Chapter 4 1. Which of the following statements regarding the suitability of investment recommendations are TRUE? I. A client’s investment objectives, prior investment experience, financial profile, and risk tolerance aid in determining suitability II. Suitability will vary with each investor III. Only the client is responsible for learning about the investments that are purchased IV. Growth and income mutual funds are suitable for all investors A. III and IV B. II and III C. I and III D. I and II Your answer D, I and II, is correct. Knowledge of the client’s investment objectives, investment experience, financial and tax status, and risk tolerance all contribute to an understanding of a client’s suitability. No two investors have precisely the same investment needs and characteristics.


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Chapter 5 1. Which of the following are among the objectives of a balanced fund? I. Tax advantages II. Exploitation of special circumstances III. Capital appreciation IV. Income A. II and III B. III and IV C. I and IV D. I and II Answer B is correct. Balanced funds, also known as hybrid funds, invest in stocks for appreciation and bonds for income. The relative proportion of each is adjusted by the fund manager. 2. A shareholder invested in a mutual fund and has signed a letter of intent to invest $50,000. Her original investment was $15,000 and her account value is $20,000. For her to complete the LOI, she must deposit: A. $15,000 B. $30,000 C. $37,000 D. $35,000 The correct answer is D, $35,000. Under an LOI, the full contribution is requested for the letter to be completed. Appreciation is not considered.


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3. If your customer invests in a variable annuity and chooses to annuitize at age 60, which of the following statements are TRUE? I. He will receive the annuity’s entire value in a lump-sum payment II. He may choose to receive monthly payments for the rest of his life III. The accumulation unit’s value is used to calculate the total value of the account IV. The annuity unit’s value represents a guaranteed return A. II and III B. I and IV C. II and IV D. I and III The correct answer is A. When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account’s current value. An annuity factor is taken from the annuity table, which considers, for example, the investor’s sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account’s performance. 4. Your client owns a variable annuity contract with an AIR of 5%. In April, the actual net return to the separate account was 7%. If this client is in the payout phase, how would her May payment compare to her April payment. A. It cannot be determined until the May return is calculated B. It will be lower C. It will stay the same D. It will be higher Answer D is correct. If the separate account of a variable annuity with an AIR of 5% had actual net earnings of 7% in April, the May payment will be higher than the April payment.


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Chapter 6 1. To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes: I. Name II. Verbal assurance that the customer is of legal age III. A street address, unless the primary mailing address is a post office box located in the state of residence IV. A taxpayer identification number A. III and IV B. II and III C. I and IV D. I and II Your answer C, I and IV, is correct. Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A post office box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver’s license or passport.


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Notes


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Primerica - Series 6

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