primerica - series 6
TRANSCRIPT
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Series 6 Review
Student Workbook
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FOR INTERNAL USE ONLY. NOT TO BE USED WITH, OR DISTRIBUTED TO, THE PUBLIC.
© 2012 Primerica / 12POL100 / 6.12
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PREP TO PASS – SERIES 6 REVIEW
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 afterparticipating in Prep to Pass
7. Bring a highlighter to the broadcast
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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
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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
NovemberSunday Monday Tuesday Wednesday Thursday Friday Saturday
4 5 6 7 8 9 10
11 12
Ex-Dividend (A)for OTC& Exchange
13 14
Record Date (A)(Ex-Dividend(A) for MutualFunds)
15
Ex-Dividend(B) for OTC& Exchange
16 17
18 19
Record Date (B)(Ex-Dividend(B) for MutualFunds)
20
Ex-Dividend(C) for OTC& Exchange
21 22
Thanksgiving
23
Record Date (C)(Ex-Dividend(C) for MutualFunds)
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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 payYou 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
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Stock Diagram
When a company incorporates,
they are authorized to issue a
certain number of shares.
Capitalize to raise money
Saved to raise
money at a
later date
Reasons to Buy Back
1) Employee Stock Option Plan
2) Think Stock will go up
3) No Voting rights
4) Receives No Dividends
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 preferredPays a stated dividend and allows shareholders to participate in
additional dividends
1,000,000
Authorized
600,000
Issued
400,000
Unissued
200,000
Treasury
400,000
Outstanding
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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
Director 1
100 Votes
Director 2
100 Votes
Director 3
100 Votes
Director 4
100 Votes
Investor100 Shares
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Cumulative voting
Number of shares x number of vacancies on BOD
Cumulative Voting
Director 1
0 Votes
Director 2
0 Votes
Director 3
0 Votes
Director 4
400 Votes
Investor100 Shares
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1-9 Rights, Warrants, Options
Rights Warrants Options
Life Span Short – usually lessthan 60 days
Long – Usually three tofive years, but could be
longer
Varies – usually ninemonths or less, but
many be as long asthree years
UnderlyingInstruments
Stocks Stocks, bonds Stocks, bonds,indexes, and foreigncurrencies.
Use Allow existing stock-holders to maintaintheir proportionate
interest in a company
“Sweetener” attachedto issues of stocks andbonds to encourage
investors to buy them
Hedging andSpeculation
Bullish Call DefinedBuyerhas the right to purchase
securities at strike price
Bearish Put DefinedBuyerhas 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
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Bond Yields (Bond See-Saw)
YTM
CY _____%
Premium
$ ________
NY or CR
Face or Par$ 1,000
Discount$ ________
YTM
AnnualInterest$ ________
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
CY _____%
NY
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1-15 Government Securities
Marketable – Transferable
U.S. Government Securities
MarketableU.S. Bonds Maturity
MinimumDenominations 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
Test Tip: _________________________________________________
Non marketable – Redeemable
U.S. Government SecuritiesSold at Discount
“Earns” Interest
Sold at Face Value
“Pays” Interest
Non-Marketable 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”
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 onthe 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
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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 orhas 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
OthersActs for
Self
AgentActs as
(Owner) Principal
CommissionPaid by
Mark-up
No Risk Assumes 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
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2-12 Investment Company Act of 1940
3 types of Investment Companies
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 isin 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)
U.I.T.(Unit Investment Trust)
Face AmountCertificates(24 Months)
Open-End(Mutual Funds)
Closed End(Stock)
Unit Investment
Trust issue Shares
of beneficial
interest
Open-End
Investment
Companies
issue
Closed-End
Investment
Companies Non-
redeemable
Face Amount
Certificate
Companies
issue debt
ManagementCompanies
Types of Investment Companies
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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 adividend 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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2-26 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
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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 oldMust 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 employeesAny 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
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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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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 thesuitability 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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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 numberof shares
• Full shares only
• Continuous primary offering ofunlimited number
• Full or fractional shares
Trading Shares(Redeeming) Secondary market exchangeor OTC No secondary market, redeemedby the fund
Types of Shares
(Capitalization)
Common, preferred, or debtsecurities
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 Suitable For
Growth Common Stocks
Long-term investors seekingcapital appreciation
Conservative Growth Blue-Chip, Large-Cap stocks
Aggressive Growth Small-Cap, and Mid-Cap stocks
Equity Income Common and Preferred Stocks Investors who want incomealong with some small potentialfor capital appreciation
Growth and Income Stocks People who want both capitalappreciation and income
Bond Funds Debt Securities (Fixed Income) Those primarily interested incurrent income
U.S. Government Bonds Treasury Securities People who want income and a
high degree of safetyMunicipal Bond Funds Municipal Securities Investors who want tax-exempt
income
Corporate Bond Funds Investment-Grade Corporate Bonds Investors who need income
High-Yield Funds Non-Investment-Grade Corporate Bonds(Junk Bonds)
Investors who want high incomeand are willing to accept a highdegree of capital risk
Balanced Funds Mixture of Stocks, Bonds, and CashEquivalents (Money-Market Instruments)Will always have some of each
Investors who want to havesomething in all three classesof assets
Asset AllocationFunds
Stocks, Bonds, and Cash EquivalentsThe proportions may be changed and thepercentage in any class could drop to zero
Investors who wantdiversification among assetclasses in a single fund
Index Funds Securities selected to mirror aparticular index
Investors who want to peruse apassive investment strategy andwant low fees
Specialized orSector Funds
Securities of one industry orgeographic area
Investors willing to assume morerisk in exchange for a higherpotential return
Foreign Funds Non-U.S. Securities Investors willing to assume extrarisks and who want to diversifyoutside the U.S. markets
Emerging Market Funds Securities of emerging market countries Aggressive investors only
Money-MarketFunds
Cash Equivalents (T-Bills, CommercialPaper, Negotiable CDs, and Banker’sAcceptances)
Short-term investors who wantliquidity and safety
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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 sharesRedeem 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 monthInvestments 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
Investor
Number of Shares Purchased
1 2 3 4 5 6Total Shares
Purchased
A 25.00 20.00 16.67 14.28 12.50 1 1 .1 1 99.56
B 25.00 40.00 66.67 100.00 50.00 25.00 306.67
Investor
Growth in Value of the Shares
AmountInvested
Total Numberof Shares
Average CostPer Share
EndingValue
A $1,200 99.56 $12.05 $1,792.08
B $1,200 306.67 $3.91 $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 thepromotion 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 receivea 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
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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 identityof 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 informationPrivacy 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 accountEither 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-in-
law, 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
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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 incash. 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 capitalgain. 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 theaccount
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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