I used several test prep companies to pass the series 7
& 66 exams. The following is a stream-lined conglomerate of what I found
usual from those resources:
Series 66 (~76 items)
The Uniform Combined State Law Examination
NASAA – North American Securities Administrators Association
100 multiple choice questions
10 pre-test questions
2.5 hours (150 min) – 1 session
at least 75% to pass
Series 66 Regulation
The Securities Act of 1933 Overview
Regulates the primary market. The two primary
purposes of the Act are:
1. To provide investors with a full and fair
disclosure of all the information needed to make an informed investment
decision
2.
To prevent fraud in the sale of new issues of securities
The Securities Exchange Act of 1934 Overview/Purpose
Regulates
the secondary market, not the primary market. It provided for the creation of
the SEC.
Uniform Securities Act USA
Definitions
Definition of a "Broker-Dealer" under the Uniform Securities Act (B/D)
as
any person engaged in the business of effecting securities transactions in
securities for the accounts of others or for its own account.
Definition of an "Agent" under the Uniform Securities Act USA
Any
individual who represents a Broker/Dealer or an Issuer in effecting or
attempting to effect purchases or sales of securities.
Definition of an "Investment Advisor" under the Uniform
Securities Act
Any
person who: for Compensation engages in the Business of Advising others about
securities directly or indirectly. Remember: "ABC" = Advising,
Business & Compensation.
Definition of "Investment Advisor Representative" under the
Uniform Securities Act
An IAR is anyone who:
1.
Makes recommendations or gives advice about any securities including exempt
securities, 2. Manages client accounts or portfolios, 3. Determines
recommendations given to clients , 4. Solicits, offers, or negotiates for the
sale of or sells investment advisory services, 5. Supervises employees
performing IAR functions.
Definition of "Federal Covered Securities" under the Uniform
Securities Act
Securities
"covered" by federal law (Section 18 of the 1933 Act) and do not need
to register at the State level, but may need to file. The list includes: 1.
securities listed on a national stock exchange (now including NASDAQ), 2.
investment company shares (e.g. mutual fund shares), 3. securities sold to
"qualified purchasers".
Transactions under the Uniform Securities Act
1.
Isolated non-issuer transactions 2. Unsolicited Transactions 3. Fiduciary
Transactions 4. Bonafide Pledges, 5. Underwriter Transactions, 6. Transactions
with Financial Institutions, 7. Private Placement (not more than 10 persons),
8. Mortgage Bonds (units), 9. Pre-organization subscription transactions, 10.
Rights, Warrants, or convertible securities (no commission paid).
Discipline & Penalties of USA
If an Administrator intends to suspend or revoke a registration, what is
the registrant entitled to under the USA?
In any disciplinary proceeding where the
respondent is at risk of being denied his license or having his license suspended
or revoked, he or she is entitled to the following protections:
1. appropriate prior notice
2. opportunity for a hearing
3.
written findings of fact and conclusions
Civil Liabilities for Violations of the Uniform Securities Act
The
maximum compensatory damages that may be imposed by a civil court for violation
of the USA are recovery of the consideration paid, accrued interest, costs of
the litigation, and reasonable attorney's fees. Notes: The statute of
limitations is 3 years after the date of the alleged violation.
Maximum Criminal Penalties for Violations of the Uniform Securities Act
$5,000
fine, imprisonment for 3 years, or both. The statute of limitations for
bringing criminal charges is 5 years after the date of the alleged violation.
Record Keeping Requirements under USA
Once a broker/dealer or investment advisory firm is registered, what are
the recordkeeping requirements under the USA?
Under
the Uniform Securities Act, every registered broker/dealer and investment
adviser shall make and keep records as the Administrator prescribes by rule or
order, except as provided by Federal Law. Records should be preserved for a
period of time prescribed by the Administrator at the State level and should be
preserved for 5 years under Federal Law.
The USA defines a Federal Covered Investment Advisor as an IA who comes
within the definition of an IA in the federal Investment Advisors Act of 1940.
This includes:
1. An advisor to a registered investment
company
2.
An advisor with Assets Under Management (AUM) of $100 million or more (formerly
$25 million or more)
Investment Advisors Act of 1940
Definition of an Investment Company under the Investment Company Act of
1940
A
company that issues its own shares to the public, invests those funds, and manages
a portfolio for the benefit of its shareholders.
Definition of an Investment Adviser under the Investment Advisors Act of
1940
1. Provides Advice about securities
2. Is in the Business of providing advice
3.
Is Compensated in any form for giving advice. Note: Remember "ABC"
The Investment Advisors Act of 1940 defines a federal covered IA as a
person who:
1. Manages assets of $100 million or more
(previously $25 million)
2.
Advises a registered investment company
Recordkeeping Requirements (# of years) under the Investment Advisors Act
of 1940
Books
and records must be retained for 5 years while in operation and for 3 years
after the IA terminates its business.
Criminal Penalties under the Investment Advisors Act of 1940
Any
person who violates the Investment Advisors Act of 1940 or any SEC rule or
regulation is subject to a fine not exceeding $10,000, imprisonment of 5 years,
or Both.
Series 66 Exclusions & Exemptions
Exempt Transactions under the Securities Act of 1933
1. Private placements (Reg. D Offerings)
2. An investment manager for an insurance
company negotiating with a financial executive of a publically held corporation
to buy a note that matures in four years
3.
Broker transactions that are unsolicited
Exempt Securities under the Securities Act of 1933
1.
U.S. Treasuries and federal agency issues, 2. Municipal securities, 3.
Non-profit issues, 4. Regulation D Offerings, 5. Intrastate Offerings, 6.
Regulation A Offerings, 7. Commercial paper, 8. Promissory notes, 9. Small
Business Investment Companies, 10. Banks and Savings and Loans, 11. Motor
Carriers.
Exclusions & Exemptions under the Investment Advisors
Act of 1940
Exemptions From Registration for IAs under the Investment Advisors Act of
1940
1.
all the clients of the IA live in the same state as the location of the IA's
principal office and the IA doesn't provide advice about listed securities. 2.
the IA's clients are ONLY Insurance companies. 3. the IA has fewer than 15
clients.
Exclusions from the Definition of IA under the Investment Advisors Act of
1940
1.
Banks and bank holding companies. 2. LATE professions when incidental. 3. BDs
and their Agents if the advice is incidental. 4. Publishers of publications
giving general advice. 5. Any person whose advice or services is related ONLY
to US Gov't securities.
Definitions
Exclusions from the Definition of "Agent of an Issuer" under the
Uniform Securities Act
Agents representing issuers in effecting:
1. Exempt transactions
2. SOME exempt securities (US Gov't, Muni,
Canadian Gov't, banks, Promissory Notes)
3. Transactions in certain covered securities
4.
Transactions with investing employees, if no commission is paid
Exclusions to the Definition of IAR under the Uniform Securities Act
1. Perform clerical or ministerial services
or
2.
Sell fixed annuities, not securities.
USA Exclusions from the Definition of Investment Advisor (IA)
1.
IARs - Representatives of IA Firms, 2. Banks, savings institutions, trust
companies, and investment companies, 3. LATE professions, if the advice is
incidental to their practice, 4. B/Ds and their Agents, if the advice is
incidental to the practice, 5. Publishers of any news or business publication
who give general advice, 6. Federal Covered Advisors, 7. Employee Benefit
Plans.
Exclusions From the Definition of an "Agent of a Broker-Dealer"
under the Uniform Securities Act
1.
Represents a B/D in one state and is servicing an existing client who is
temporarily in another state (30 days) or has just moved into another state. 2.
Partners, Officers, or Directors of the BD who do not serve in the capacity or
supervise agents.
Exclusions from the Definition of a "Broker -Dealer" under the
Uniform Securities Act
1. Agents
2. Issuers
3. Banks, savings institutions, and trust
companies
4. NO place of business, and only clients are
institutions
5.
NO Place of business, and whose existing customer is living in another state,
but deals with the B/D in its state
USA Exclusions from the List of Federal Covered Securities
1. Securities issued by non-profit
organizations
2. Municipal bonds issued intra-state only
3. Other intra-state offerings
4.
Securities issued with a guarantee
Exclusions from the Definition of Investment Advisor (IA) under the Uniform
Securities Act
An
IA firm is not required to register under the Uniform Securities Act if the IA
has NO place of business in the State and: 1. their only clients are
Institutions, 2. during any 12 month period, the IA does not direct
communications to and has no more than 5 retail clients in the state. Note that
if the firm has a place of business in the State, registration would be
required.
MISC
Federal Covered Securities that are Exempt from Registration under the USA
and the Securities Act of 1933
1.
US Government Securities, 2. Interstate Municipal Bond Offerings, 3. Securities
that are unregistered and issued as a Private Placement. These securities would
be considered "Federal Covered" since exempted by Federal Law, and
would also be considered "Exempt".
Exemptions from Registration of Federal Covered Investment Advisors under
the Uniform Securities Act
1.
gives advice ONLY on US. Gov't securities, 2. are banks, 3. are publisher of
general advice, 4. are providing advice incidental to the LATE professions
(Lawyers, Accountants, Teachers, and Engineers).
Exempt Securities under the Uniform Securities Act
1.
U.S. Treasury or federal agency issues, 2. Municipal securities, 3. Securities
issued/guaranteed by the country of Canada or its provinces, 4. Bank, Savings
and Loan, or Trust company securities, 5. Credit Unions, 6. Insurance company
securities, 7. Securities listed on a registered exchange, 8. Promissory notes,
9. Public Utility or Common Carrier, 10. Investment Contracts, 11. Non-Profits.
Series 66 Annuities
Annuities
A contract issued by a life insurance company
to provide a series of periodic payments (stream of payments) to an
annuitant(s) for life. The key facts of annuities are:
1. They are usually used for retirement
income
2.
They can be fixed or variable in structure
Variable Annuities
Variable
in structure. Premiums paid by annuity holders go into a separate account and
are invested according to the annuity holder's wishes. Variable annuity holders
bear the investment risk of the annuity. Variable annuities participate in market
movements, offering more risk, but the potential for more returns, and they are
classified as securities.
Equity-Indexed Annuities (EIAs)
combine
aspects of fixed and variable annuities. Both risks and returns are typically
greater than those on fixed annuities, but lower than those on variable
annuities. EIAs typically offer a minimum guaranteed return as well as
participation linked to a certain index, which is often capped. Surrender
charges and fees can negate guaranteed returns.
Series 66 Bonds
Bonds
A
debt security issued by either a corporation, the federal government, or a
state government. Investors become a creditor of the issuer and receive
interest payments from the issuer for lending their capital. Interest payments
are made to investors semi-annually.
Par Value of a bond (unless stated otherwise)
$1,000
unless stated otherwise.
As interest rates as a whole go DOWN, existing bond prices will go UP. This
is due to the inverse relationship between overall rates and prices on existing
bonds. As interest rates go down, the new bonds with lower rates are less
desireable, leading to an increase in the price of existing bonds with higher
rates which are more desirable.
As interest rates go Up, bond prices will go
down. This is due to the inverse relationship between overall rates and prices
on existing bonds. As interest rates go up, the new bonds with higher rates are
more desirable, leading to a reduction in the price of existing bonds.
Series 66 Education Accounts
Coverdells and Education
Savings Accounts
Are tax-exempt accounts
for the qualified education expenses of a designated beneficiary to pay for
education expenses.
529 College Plans
Established and
maintained by the states and allow individuals to set up plans to pay for a
student's qualified higher education expenses with tax-free withdrawals.
College Savings 529
Plans
A college savings plan
that allows anyone to contribute to an account that will be used to pay for a
beneficiary's qualified higher education expenses.
Prepaid Tuition 529
College Plans
Allows anyone to
establish an account in the name of a beneficiary where he can "lock
in" the cost of a specific number of academic periods or units at current
prices for use in the future by the beneficiary.
Coverdell - Education
Savings Accounts Contribution Limit
Contribution must be in
cash, is limited to $2,000 per year per beneficiary, and is not tax deductible.
Eligibility is phased out for taxpayers with certain levels of modified AGI.
The program is most suitable for low and middle income taxpayers.
Series 66 Formulas
The Sharpe Ratio Formula
Sharpe
Ratio = (return of the portfolio - risk free return) / Standard Deviation.
Perpetual Payment Formula
You
may be asked to calculate the amount of money necessary to receive a set
payment in perpetuity, assuming a certain rate of return. Step 1: Expected rate
of return / number of payments per year = monthly expected return, Step 2:
Monthly dollar amount / monthly expected return = Funds Needed.
Current Yield on Bonds Formula
Current
Yield = Annual Interest/ Current Market Price
Series 66 IRA
Traditional IRA
Traditional IRA
An
individiual retirement account designed to encourage employed individuals to
save for retirement by providing them with tax incentives. The incentives are
that the contributions to the account are generally tax-deductible (up to
certain limits) and that the taxes on contributions and earnings in the account
are deferred.
Traditional IRAs
Individuals
who ARE active in a retirement plan at work may be able to deduct a
contribution to the IRA, depending upon income limitations on Adjusted Gross
Income.
Traditional IRAs - Contribution Conditions (3 key facts)
1. Contributions may be made annually up to
plan limits
2. Individuals who are at least 50 years old
may make additional contributions called "Catch-Up Contributions"
3.
Contributions may not be made after age 70 1/2
Traditional IRAs - Deductions
Individuals
who are NOT active in a retirement plan at work may deduct ALL of their
contributions up to the annual contribution limitations.
Traditional IRA Distributions
may
begin at age 59 1/2 and are mandatory by 70 1/2.
Roth IRA
Roth IRAs
A
way for individuals to save for retirement. Contribution's to a Roth IRA are
NOT tax-deductible from the owner's gross income but the incentive to invest is
that the withdrawals of contributions and qualified earnings are tax-free if
certain conditions are met.
Roth IRA Contributions Conditions
1.
Contributions may be made annually pursuant to limitations on annual
contributions and limitations on income, 2. Individuals who are at least 50
years old may make additional contributions called "Catch-up
Contributions", 3. Contributions are NOT tax deductible (After-tax dollars
are used), 4. Contributions may continue to be made after age 70.5.
Roth IRAs - Qualified Distributions
Distributions
withdrawn from the Roth IRA account which meet specific Roth IRA requirements
and are tax-free.
TermRoth IRAs – Non-Qualified Distribution
A
portion of a Roth IRA distribution that will be included in the account owner's
gross income. Generally such a distribution will be subject to a 10% early
withdrawal penalty.
Series 66 Options
Buying Calls
Gives the buyer the
Right to purchase the underlying security or future at a set exercise price for
a limited period of time. The investor that buys calls wants the market price
of the underlying asset to rise.
Selling Calls
Obligates the seller to
sell the underlying security or future at a set exercise price for a limited
period of time, if exercised. The investor that sells calls wants the market
price of the underlying asset to remain the same or fall in price modestly.
Buying a Put
gives the buyer the
Right to sell the underlying security or future at a set exercise price for a
limited period of time. The investor that buys a put wants the market price of
the underlying asset to go Down.
Short Puts
Selling a Put obligates
the seller to buy the underlying security or future at the set exercise price
for a limited period of time, if exercised. An investor that sells puts wants
the market price of the underlying asset to remain the same or rise modestly.
Series 66 Orders
Stop Order
An
order that becomes a market order if a trade takes place at or through the
price stated in the stop order. A stop order can be used to protect a profit on
a long stock position or limit losses on a short stock position, but does NOT
assure a specific price of execution, since the order turns into a market
order.
Market Order
An
order to buy or sell a security at the best price available when the order
reaches the trading floor.
Limit Order
An
order to buy or sell a security at a specific price or better.
Series 66 Misc
Present & Future Value
Future Value
Calculations
are used to determine what the value of a fixed sum of money invested today
will be worth at a future date taking into consideration compounding with an
expected or fixed rate of return.
Present Value
A
form of discounted cash flow analysis which attempts to determine whether or
not a specific investment or project will meet its expected rate of return. It
involves discounting a future value back to today's price to determine whether
or not the investment today will be worth returns in the future.
Bid & Ask Price
Bid Price
Price
that a market maker will pay and that a customer will receive when a customer
sells a security with a market order.
Ask Price
The
price that a market maker receives and that a customer pays when the customer
buys a security with a market order.
Discretion
Discretionary Authority for Broker/Dealers under the NASAA
A
broker/dealer must obtain PRIOR WRITTEN discretionary authority from a client
BEFORE exercising discretion in a client's account. Broker/dealers do NOT have
a 10-day grace period where verbal authorization is adequate like IA firms.
Discretionary Authority for Investment Advisers under the NASAA
An
investment adviser is permitted to exercise discretion in a client's account
with written approval. The Investment Adviser also has a 10-day period during
which discretionary authority is permitted on verbal authorization by a client,
pending the client sending in written discretionary authority. This is only the
case for IA's under the NASAA.
MISC
To whom does the trustee owe a duty?
A
trustee who invests and manages trust assets owes a duty to the Beneficiaries
of the trust to comply with the prudent investor rules set forth in this act
and act in a fiduciary capacity.
Selling Short
A
short sale is the sale of a stock by a customer who has borrowed the stock from
their B/D. A short seller generally expects the market price of the stock to
decline.
Performance-Based Fees
A
fee based on the performance and gains of a specific investment or a portfolio
that is under management. Under the USA, performance-based fees are prohibited
unless permitted by rule or order by the Administrator of a State. Under the
Investment Advisors Act of 1940, performance-based fees are permitted, but only
when a client is considered a "Qualified Client".
Order of Claims Upon Company Liquidation
1. Taxes
2. Secured Creditors
3. Unsecured Creditors
4. Preferred Stockholders
5.
Common Stockholders
The Time Value of Money
A
dollar in hand today is worth more than a dollar to be received in the future
due to inflation.
Over the Counter Markets (OTC)
Consists
of securities that are not traded on a registered stock exchange (unlisted
securities). Securities are traded from broker/dealer inventory by
marketmakers. The OTC Market is considered to be a negotiated market.
Exchange Markets
An
auction market where buyers and sellers represented by floor brokers meet to
trade securities "listed" on the exchange or where the trades are
executed through an electronic execution system. It is considered to be an
auction market. The designated marketmaker, formerly known as the Specialist,
oversee's trading and handles the limit order book for specific securities.
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