Series 66

Current Yield (CY) Formula

Annual Income ÷ Market Price

Total Return Formula

(All Gains + Losses) ÷ Original Investment

Real Rate of Return Formula

Actual Return - Inflation Rate

Rule of 72 (Years to Double)

72 ÷ Rate of Return

Alpha Formula

Actual Return - Expected Return

Sharpe Ratio Purpose

Measures risk-adjusted return (Return - Risk-Free Rate ÷ Standard Deviation)

Broker-Dealer (BD) Definition

A person in the business of trading securities for others or themselves

Investment Adviser (IA) "ABC"

Advice as a regular Business for Compensation

Agent Definition

An individual representing a BD or issuer in trading securities

IAR Definition

A partner, officer, or employee of an IA who provides advice

The "De Minimis" Rule

No state registration needed if an IA has 5 or fewer retail clients in that state

The "Vacation" Rule

No registration needed if only working with existing clients visiting a state

Record Retention: IA vs. BD

IAs must keep records for 5 years; BDs for 3 years

Person vs. Non-Person

A "Person" is any legal entity. "Non-persons" are minors, the deceased, or the incapacitated

Market Order

Executed immediately at the next available price; execution is guaranteed

Limit Order

Executed at a specific price or better; price is guaranteed but execution is not

Churning

Excessive trading in a client's account to generate commissions

Selling Away

Performing securities trades outside of your firm without permission

Material Fact

Any fact that might influence a person's investment decision

TOD Account

Transfer on Death; assets go to beneficiaries and avoid probate

JROS Account

Joint Tenants with Rights of Survivorship; survivor owns everything; avoids probate

TIC Account

Tenants in Common; ownership is split; deceased's share goes to their estate (probate)

Discretionary Trade

When the pro chooses the Asset, Amount, or Action (Buy/Sell)

Systemic Risk

Market-wide risk that cannot be diversified away (e.g., Interest Rate or Inflation risk)

Non-Systematic Risk

Risks unique to a specific company; can be reduced by diversifying (e.g., Business risk)

Treasury Bill (T-Bill)

Short-term (1 year or less), issued at a discount with no interest payments

General Obligation (GO) Bond

Municipal bond backed by taxes; requires voter approval +1

Revenue Bond

Municipal bond backed by user fees (tolls, etc.); no voter approval needed +1

Mutual Fund (Open-End)

Pooled fund that is redeemable and always trades at NAV + sales charge +1

Closed-End Fund

Pooled fund that trades on the market like a stock; price is based on supply/demand +1

Front (Question/Concept)

Back (Answer/Definition)

State Criminal Penalties (5-5-3 Rule)

5-year statute of limitations; $5,000 max fine; 3-year max jail sentence +1

Federal Criminal Penalties (5-10-5 Rule)

5-year statute of limitations; $10,000 max fine; 5-year max jail sentence +1

State Civil Statute of Limitations

3 years from the violation or 2 years from discovery (whichever is sooner)

Right of Rescission

Offer to buy back a security at cost + interest + legal fees, minus income; client has 30 days to respond

IA Registration: State vs. Federal

State if AUM < $100M; Federal (SEC) if AUM > $110M; choice if between $100M-$110M +1

Mandatory Federal Registration

Required for advisers with >$110M AUM or those advising registered investment companies

De-registration Requirement

An SEC-registered IA must return to state registration if AUM falls below $90M

Federal Covered Securities

Exchange-listed securities, Investment Company shares, and Reg D offerings; exempt from state registration +1

Custody Definition

Holding client funds, holding a 3rd party check >3 business days, or having access to an outside account

Custody Net Worth Requirement

IA must maintain $35,000 net worth (compared to $10,000 if they only have discretionary authority)

SEC Registration Methods

Notice Filing (easiest, for fed-covered), Coordination (SEC + State), and Qualification (hardest, State only) +2

Securities Act of 1933 Focus

Primary market; requires issuers to provide disclosures via a prospectus

Securities Exchange Act of 1934 Focus

Secondary market; regulates participants (BDs, Agents) and created the SEC

Accredited Investor (Individual)

$1M net worth (excluding primary home) OR $200k annual income ($300k joint)

Performance-Based Fees

Only allowed for "Qualified Clients" ($1.1M with adviser or $2.2M net worth)

Soft Dollar - Allowed vs. Prohibited

Allowed: Research, seminars, newsletters. Prohibited: Travel, furniture, office equipment

Agency vs. Principal Compensation

Agency (Broker): Commission. Principal (Dealer): Markup or Markdown

Bond Price/Yield Relationship

Inverse: When interest rates rise, bond prices fall

Duration Definition

A bond's sensitivity to interest rate changes (higher duration = more risk)

Yield to Maturity (YTM)

Total return if held to the end; includes interest and gain/loss from discount/premium

Callable Bond Risk

Call Risk: Issuer buys bond back when rates fall; investor must reinvest at lower rates

Zero-Coupon Bond Risk

No reinvestment risk (no interest to reinvest), but high interest rate risk (volatility)

Municipal Bond Suitability

Best for investors in high tax brackets due to federal tax-exempt interest

Traditional IRA vs. Roth IRA

Traditional: Pre-tax $, taxed at withdrawal. Roth: After-tax $, tax-free withdrawal

Defined Benefit Plan

Employer promises a specific payout at retirement (e.g., a pension)

Defined Contribution Plan

Payout depends on investment performance (e.g., 401k); employee bears risk

403(b) Plan Eligibility

For employees of non-profits (schools, hospitals, churches)

Qualified vs. Non-Qualified

Qualified: IRS-approved, pre-tax contributions. Non-Qualified: No tax break on way in

Cost Basis

The total price paid for an investment; used to calculate capital gains/losses

Wash Sale Rule

Cannot claim a loss if you buy a "substantially identical" security 30 days before/after sale

Dividend Taxation (Qualified)

Taxed at the lower long-term capital gains rate (0%, 15%, or 20%)

Variable Annuity Risk

Investment risk is on the annuitant (buyer); the payout varies with the market

Fixed Annuity Risk

Investment risk is on the insurance company; payout is a guaranteed fixed amount

Whole Life vs. Term Life

Whole: Lifetime coverage + cash value. Term: Coverage for a set period, no cash value

Equity Indexed Annuity (EIA)

Tracks an index (like S&P 500) with a guaranteed floor to prevent loss

Step-Up in Basis

At death, assets are valued at current market price for heirs, erasing capital gains taxes

Treasury Note

2-10 years, pays semi-annual interest

Treasury Bond

Up to 30 years, pays semi-annual interest

STRIPS

long-term, up to 30 years, zero coupon

TIPS

Long-term, pays semi-annual interest, par adjusted for inflation ever 6 months, greater of original or adjusted par paid at maturity

Broker-Dealer (BD) Definition

A person in the business of effecting securities transactions for others or their own account

BD Registration Form

Form BD

BD Registration Exclusions

Agents, issuers, and banks

Investment Adviser (IA) "ABC" Rule

Advice as a regular Business for Compensation

IA Registration Forms

Form ADV (Parts 1, 2A, 2B) for registration; Form ADV-W for withdrawal +1

IA "LATE" Exclusions

Lawyers, Accountants, Teachers, and Engineers whose advice is incidental

Agent Definition

An individual representing a BD or issuer in effecting securities transactions

Agent Registration Forms

Form U4 to register; Form U5 to withdraw (filed by both agent and BD)

Agent Registration Exclusions

Clerical roles or representing an issuer in exempt securities/transactions +1

Investment Adviser Rep (IAR) Definition

Any partner, officer, director, or employee of an IA who provides advice

IAR Registration (Form U4)

If representing a State IA, the IA files; if representing a Fed IA, the IAR files

The "Vacation" Rule

No registration needed if only engaging current clients visiting a state

The "Institution" Rule

No registration needed if a person has no office in the state and only engages institutional clients

The "De Minimis" Rule

For IAs/IARs: No registration if there are 5 or fewer retail clients in a state

Record Retention: IA vs. BD

IAs: 5 years; BDs: 3 years +1

Definition of a "Person"

Any individual or organization able to enter a binding contract

"Non-Persons"

Minors, the deceased, and those declared mentally incapacitated

State Administrator Powers

May deny, suspend, or revoke registration if in the public interest and the law was broken +1

Administrator Jurisdiction

Exists if a client or professional is in the state during an offer or transaction +1

Criminal Penalties (State)

5-5-3 Rule: 5-year statute of limitations, $5,000 max fine, 3-year max jail sentence +1

Civil Liabilities (State)

3-2 Rule: 3-year statute of limitations or no more than 2 years post-discovery +1

Right of Rescission

Offer to buy back security at original cost + interest + legal fees - income; client has 30 days to respond

Federal Covered Adviser (AUM)

Mandatory: >$110M AUM; Eligible: $100M-$110M AUM or operating in 15+ states

Federal Covered Adviser (De-registration)

Must return to state registration if AUM falls below $90 million

Federal Covered Securities

SEC-registered and state-exempt; includes exchange-listed, investment company shares, and Reg D offerings

Custody Definition

Holding client funds, holding a 3rd party check >3 business days, or having access to an outside account

Custody Requirements (IA)

Inform state on Form ADV, annual surprise audit (Form ADV-E), and send quarterly statements

Custody Net Worth

Must maintain $35,000 net worth (vs. $10,000 for discretionary authority only)

Definition of an "Offer"

Any attempt to dispose of, or solicitation of an offer to buy, a security for value