GC Series 65 - Need to Practice

1) Weak $ = good for?

2) Strong $ = good for?

1) Selling foreign securities

2) Buying foreign securities

Preferred stock suitability (3)

1) Primary benefit: fixed dividend rate

2) Dividends are NOT guaranteed

3) Corporate investors may receive the corporate dividend exlusion rule

Corporate dividend exlclusion rule (2)

1) Less than 20% ownership: can deduct 50% of dividends received

2) Greater than or equal to 20% ownership: can deduct 65% of dividends received

P/E Ratio (formula)

= common stock market price / EPS

High P/E means

stocks are priced high relavent to current earnings

Low P/E means

stocks are priced low relavent to current earnings

Price-to-Book Ratio (formula)

= common stock market price / book value per share

High PB ratio means

the company is overvalued

Low PB ratio means

the company is undervalued

Monetary Policy (who sets monetary policy and what are the 2 major factors?)

1) The Federal Reserve Board (The Fed)

2) Economic growth (employment)

3) Inflation levels

Fiscal Policy (who sets fiscal policy and what is the focus?)

1) US Congress & the President

2) Focuses on how the federal government collects money and how it spends that money

Keynesian (Demand-Side) Theory

Increased government spending benefits the economy

Supply-Side Theory

Decreased government spending benefits the economy

Howey test - 4 requirements

1) Investment of money

2) Common enterprise

3) Expectation of profit

4) 3rd party effort

Civil liabilities - 3 primary categories

1) Securities sales

2) Securities purchases

3) Investment advice

Criminal penalties for violations of state laws

$5,000 maximum fine & 3 year max jail sentence

Criminal penalties for violations of Federal laws

$10,000 maximum fine & 5 year max jail sentence

Criminal penalties shorcut (Federal: 5-10-5

State: 5-5-3)

statute of limitations - max fine - max jail

Must register as federal covered advisor if (2)

1) Advisors exceeding $110 million AUM

2) Advisors to registered investment companies

Systematic risks (list them)

Market

Purchasing power (inflation)

Interest rate

Reinvestment

Market risk definition

Economic or geopolitical event (ex: wars or changes in international relations) that causes a broad decline in stock values

Purchasing power (inflation) risk definition

Prices across the economy rise, which reduces the purchasing power of money

Market risk mostly applies to...

common stock (and securities that convert into common stock)

Purchasing power (inflation) risk mostly applies to... (3)

1) Debt securities

2) Preferred stock

3) Fixed annuities

Interest rate risk mostly applies to...

1) Debt securities

2) Preferred stock

Interest rate risk definition

The market value of fixed income securities declines when interest rates rise

Reinvestment risk definition

Interest rates fall, and income must be reinvested into new securities with lower yields

Reinvestment risk mostly applies to...

1) Debt securities

2) Preferred stock

Rule 144 Volume Limits

Greater of 1% outstanding shares OR 4-week trading average (4 times per year max)

Restricted Stock (3 points)

1) Unregistered stock held by a non-affiliate

2) 6-mo. holding period

3) No volume limits

Regulation D (which is part of Rule 144)

Allows issuers to offer unregistered stock to private audiences (made up primarily of wealthy and large investors)

Control Stock (3 points)

1) Registered stock held by an affiliate

2) No holding period

3) Volume limits

Control AND Restricted Stock (3)

1) Unregistered stock held by an affiliate

2) 6-mo. holding period

3) Volume limits

When does Form 144 need to be filed?

When an affiliate intends to trade control or restricted stock at any point in the next 90 days (no transaction is actually necessary, just the INTENTION to transact)

MUST register as federal-covered IF (3)

1) >= $110M AUM

2) Advisor to registered investment companies

3) Only providing advice on US government securities

ELIGIBLE to register as federal-covered IF (4)

1) between $100M - $110M AUM

2) Expecting to qualify within 120 days

3) Operating in 15+ states

4) Pension consultant with $200M+ AUM

Must provide a notice filing to the state if you’re a…

federal-covered advisor

Accrual-based accounting definition

Revenues and expenses are recorded when they are created (even if cash payment happens later)

Cash-based accounting definition

Revenues and expenses are recorded when cash actually changes hands

Regulation D (private placement offers)

Rules allowing companies to raise capital by selling unregistered securities to private audiences and accredited investors without full SEC registration.

Regulation T (2)

1) Prevents investors from borrowing too much money

2) Requires investors to deposit 50% of the purchase price for initial margin transactions

CAPM formula

Expected return = risk-free rate + (beta x (market rate - risk-free rate))

Classes of mutual fund shares (load means sales charge)

Class A = front-end load

Class B = back-end load

Class C = level load

Class A shares

Sales charge collected when an investor purchases shares

Class B shares (also called contingent-deferred sales charge aka CDSC)

Sales charge is paid when the investor sells (redeems) shares

Class C shares (3)

1) Ongoing marketing fees

2) Most significant cost is 12b-1 fees

3) Sometimes theres a 1-year CDSC fee (avoided if held for one year)

Special purpose acquisition companies (SPACs) aka blank check companies (2)

1) Raise money from investors without having a defined operating business at offering

2) Instead, the SPAC commits to acquiring or merging with another business within 2 years

Dividend discount model

A tool investors use to estimate the present value of a stock based on the future cash flows its expected to pay, while accounting for the time value of money

Dividend growth model

Value a stock with a growing dividend

Intrinsic value of calls (2)

1) Go in the money (gain intrinsic value) when the market rises

2) Go out the money (lose intrinsic value) when the market falls

Intrinsic value of puts (2)

1) Go in the money (gain intrinsic value) when the market falls

2) Go out the money (lose intrinsic value) when the market rises

Option premiums can be calculated using what formula?

Premium = intrinsic value + time value

What’s the discounted cash flow model used for?

Estimate what future money is worth today

Discounted cash flow model formula

PV = FV / (1 + discount rate)^# of years

Cumulative preferred stock

Issuer must pay any skipped dividends to preferred stockholders at some point in the future

Straight preferred stock

Issuer never makes up skipped dividends

Stop (loss) orders two step process (2)

1) Order triggers when the market reaches the stop price

2) Order becomes a market order and fills at the next available price

A buy stop (loss) order triggers when…

the price rises

A sell stop (loss) order triggers when…

the price falls

Stop order vs stop limit order (2)

1) Stop order is treated as a market order at trigger

2) Stop limit order is treated as a limit order at trigger.

Covered call (income strategy)

go long stock and short a call option

Non-punitive actions (2)

1) Withdrawals (voluntarity end registration)

2) Cancellations (person can’t voluntarily end registration so the state admin. does it for them)

Form ADV Part 1 Important Disclosures (5)

1) Basics of the business (name, EIN, address, contact person)

2) Other jurisdictions (registration in other states)

3) Business structure (LLC, Corp, etc?)

4) Business dynamics (firm execs, products & services, AUM, custody)

5) Business history (qualifications, legal actions, criminal events)

Form ADV Part 2a (the brochure) - what does it do?

Explains how the adviser operates, how it gets paid, and where conflicts of interest may exist

Form ADV Part 2a (the brochure) - actual disclosures (6)

1) General business characteristics

2) Fees and compensation

3) Types of clients

4) Investment philosophy

5) Disciplinary info

6) Conflicts of interest

Form ADV Part 2b (the brochure supplement) (6)

1) Educational background

2) Business experience

3) Disciplinary information

4) Other business activities

5) Additional compensation

6) Supervision details

Requirements to perform an agency cross transaction ()

1) Written disclosure provided to the client

2) Written approval from the client

3) Confirmation with trade details provided by settlement

4) Annual disclosure provided to all clients regarding these transactions

5) Recommendation may not be made to both clients