Series 6
Class Notes
2nd Edition
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At press time, this edition contains the most complete and accurate information currently
available. Owing to the nature of license examinations, however, information may have
been added recently to the actual test that does not appear in this edition. Please contact the
publisher to verify that you have the most current edition.
This publication is designed to provide accurate and authoritative information in regard
to the subject matter covered. It is sold with the understanding that the publisher is not
engaged in rendering legal, accounting, or other professional services. If legal advice or other
expert assistance is required, the services of a competent professional should be sought.
SERIES 6 CLASS NOTES, 2ND EDITION
©2021 Kaplan, Inc. All rights reserved.
The text of this publication, or any part thereof, may not be reproduced in any manner
whatsoever without written permission from the publisher.
If you find imperfections or incorrect information in this product, please visit www.
kaplanfinancial.com and submit an errata report.
Published in September 2021 by Kaplan Inc.
ISBN: 978-1-0788-1035-7
10 9 8 7 6 5 4 3 2
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CONTENTS
Orientation
v
LESSON 1 .1
Basic Securities: Stocks, Bonds, and Options����������������������������������������������1
LESSON 1 . 2
New Securities: The Primary Market��������������������������������������������������������13
LESSON 1 . 3
Trading Securities: The Secondary Market������������������������������������������������23
LESSON 2 .1
Investment Companies�����������������������������������������������������������������������������31
LESSON 2 . 2
Variable Insurance Products���������������������������������������������������������������������45
LESSON 2 . 3
Investment Taxation���������������������������������������������������������������������������������55
LESSON 3.1
Basic Accounts�����������������������������������������������������������������������������������������59
LESSON 3. 2
Retirement Plans��������������������������������������������������������������������������������������63
LESSON 3. 3
Customer Identification and Investment Security�������������������������������������67
LESSON 3.4
Third-Party Authorizations, Transfers, and Registration Changes��������������73
LESSON 4.1
Customer Account Analysis and Risk�������������������������������������������������������79
LESSON 4 . 2
Suitability and Recommendations������������������������������������������������������������89
LESSON 5.1
Communications with the Public�����������������������������������������������������������101
LESSON 5. 2
Customer Complaint Resolution������������������������������������������������������������107
LESSON 5. 3
Joining and Leaving Firm: Form U4 and U5������������������������������������������111
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ORIENTATION
Thank you for choosing Kaplan Financial Education for your Series 6 Top-off exam
preparation. The purpose of this class is to help prepare you to pass the Investment
Company Products/Variable Contracts Limited Representative Exam (the Series 6
Top-off).
This book will save you time by covering the main points presented in class and
serving as a reference when you review for the exam. Extra space is provided for
your notes.
This course may qualify for continuing education credit in your state. For
information on filing for CE credit, go to www.kaplanfinancial.com.
The Series 6 Top-off exam has 50 multiple-choice questions and a time limit of
90 minutes. You can expect to see up to five additional “experimental” questions
that will not count toward your score. Good luck!
Test Topic
# of Questions
% of Exam
Seeks business for the broker-dealer from customers and potential
customers
12
24%
Opens accounts after obtaining and evaluating customers’ financial profile
and investment objectives
8
16%
Provides customers with information about investments, makes suitable
recommendations, and transfers assets, and maintains appropriate records
25
50%
Obtains and verifies customers’ purchase and sales instructions; processes,
completes, and confirms transactions
5
10%
THE EXAM
„„ 50 questions (plus five unscored)
„„ 90 minutes
„„ Pass/fail based on a statistical adjustment to account for variations in question
difficulty
v
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Orientation
vii
Series 6
Investment Company and
Variable Contracts Products
Limited Representative Exam
1
50 Questions
(Plus 5 experimental unscored)
1 hour, 30 minutes
(90 minutes)
Pass/fail using equating
2
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viii
Orientation
Series 6 Question Breakdown
Test Topic
Number of Questions
Seeks business for the broker-dealer from
customers and potential customers.
12
Opens accounts after obtaining and evaluating
customers’ financial profile and investment
objectives.
8
25
Provides customers with information about
investments, makes suitable recommendations,
transfers assets, and maintains appropriate
records.
Obtains and verifies customers’ purchase and
sales instructions; processes, completes, and
confirms transactions.
5
3
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LESSON
1.1
Basic Securities: Stocks,
Bonds, and Options
1
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2
Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
Lesson 1.1
Basic Securities:
Stocks, Bonds, and
Options
LO 1.a Recall the characteristics of equity, debt, and
option securities.
LO 1.b Calculate investment returns.
4
Common Stock
• Ownership
• Purchase for growth
(capital appreciation)
• Purchase for income
5
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Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
Lesson 1.1
Preferred Stock
3
• Fixed Rate of Return
• Priority over common
shareholders for dividends
and liquidation
• No voting rights
6
Features of Preferred Stock
• Straight (Noncumulative)
• Cumulative Preferred
• Convertible Preferred
• Participating Preferred
• Callable Preferred
• Adjustable-Rate Preferred
7
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4
Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
Debt Securities
• Creditor of the company
• Fixed principal value – usually $1,000
• Generally fixed interest rate (nominal or coupon rate)
Corporate
Bonds
Treasury
Securities
Municipal
Bonds
Money Market
Instruments
(Securities)
8
Corporate Bonds
Secured Bonds
•
•
•
Mortgage
Collateral Trust
Equipment Trust
Unsecured Bonds
•
•
•
•
Debentures
Subordinated Debentures
Guaranteed Bonds
Income Bonds
9
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Lesson 1.1
The U.S. Treasury
Department determines
the quantity and types of
government securities it
must issue to meet
federal budget needs.
Treasury Bill
(T-bills)
5
Lesson 1.1
Treasury Securities
Basic Securities: Stocks, Bonds, and Options
Treasury Notes
(T-notes)
Treasury Bonds
(T-bonds)
Treasury Inflation
Protection Securities
(TIPS)
10
How Much @ Maturity?
Your customer purchased a 2 year TIP Security at par with a coupon rate of 3%. Inflation
has been at a steady 6% for the past two years. The TIPS is now maturing. How much
principal will the customer receive at maturity, and what will the final interest payment be?
There will be 4 6-month periods.
Principal
Interest
@ 6 months
@ 1 year
@ 18 months
@ Maturity (2 years)
11
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6
Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
Government Agencies and
Government Sponsored Entities
Government
National
Mortgage
Association GNMA - Ginnie
Mae
Farm Credit
Administration
Federal National
Mortgage
Association FNMA - Fannie
Mae
Federal Home
Loan Mortgage
Corporation FHLMC Freddie Mac
2
12
Municipal Bonds
A bond issued by a form of government other than the
federal government or agency of the federal
government is a municipal bond.
• General Obligation Bond
• Revenue Bond
13
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Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
8% Corporate Bond Yield, Customer is in the 40% Tax Bracket
Lesson 1.1
Compare the Yields: Taxable vs. Tax Free Interest
7
5% Muni Bond Yield, Customer is in the 40% Tax Bracket
14
Compare the Yields: Taxable vs. Tax Free Interest
8% Corporate Bond Yield, Customer is in the 20% Tax Bracket
5% Muni Bond Yield, Customer is in the 20% Tax Bracket
15
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8
Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
Bond Ratings
Investment Grade
Major Credit Rating Agencies
• Moody’s
• Moody’s: Aaa, Aa, A, Baa
• Standard and Poor’s (S&P)
• S&P & Fitch: AAA, AA, A, BBB
• Fitch
Non-Investment Grade
Points to Remember
• Speculative, High Yield, Junk
• The more “A”s (or “a”s) the better
• Ba (Moody)/ BB (S&P) and below
• Intermediate grades not tested
• Fitch uses the same scale as S&P
16
Volatility: Inverse Relationship
17
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Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
Call Feature
– A Callable
Bond
Put Feature
– A Puttable
Bond
Lesson 1.1
Bond Features
9
Conversion
Feature
– A Convertible
Bond
18
Money Market Instruments
(Securities)
High quality
Liquid
1 year or less
to maturity
19
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10
Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
Buy
Sell
Options
An option is a
contract that gives
the buyer a right to
do something with an
underlying security
over time, usually
nine months.
Call
Right to Buy
Bullish
Obligations to Sell
Bearish
Put
Right to Sell
Bearish
Obligation to Buy
Bullish
20
Calculating Investment Returns
Current Yield
Capital Gain and
Capital Losses
Total Return
Sales Proceeds –
Annual Income ($$)/
Adjusted cost basis =
(Income received +
Current market value
capital gains if positive
gains [or – losses]) /
capital losses if negative
cost basis
21
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Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
ABC Stock CMV is $25/share. ABC pays a dividend of $0.25/share
Lesson 1.1
Calculate Current Yield
11
Buystuff Inc. stock is trading at $44 and has earnings of $1/share of which $0.55 is paid as a quarterly
dividend.
Sierra Verde Coffee stock is trading at $24 and has earnings of $1/share of which $0.30 is
paid as a quarterly dividend.
22
Calculate Gains and Losses
Jose purchased 100 shares of ABC stock three years ago for $27 a share. He sold the shares
last week for $52 a share. What were the results of his investment?
Chris sold BuyStuff stock short at $44/share. After six months Chris closed the position at
$46/share. What was Chris’ gain (or loss) per share?
23
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12
Lesson 1.1
Basic Securities: Stocks, Bonds, and Options
Calculate Total Return
Patricia purchased ABC common stock one year ago for $20/share. ABC pays a dividend of
$0.25/share. She sells the stock for $24/share.
Vidocq purchased a CSI Inc. 5½% Debentures at 110. After holding the bond for one year he
sold it for 105.
24
Test Prep Question
A company currently has earnings of $4 and pays a $.50
quarterly dividend. If the market price is $40, what is the
current yield?
A. 1.25%
B. 5%
C. 10%
D. 15%
25
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LESSON
1.2
New Securities: The Primary
Market
13
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14
Lesson 1.2
New Securities: The Primary Market
Lesson 1.2
New Securities:
The Primary
Market
LO 1.c Recall the process for bringing new issues to
market.
LO 1.d Differentiate the types of disclosure
requirements.
LO 1.e Determine what issues are exempt from
registration under the Securities Act of 1933.
26
Primary and Secondary
Market
Primary Market
Issuer sells to
investor in order to
raise capital.
Secondary Market
VS
Investors sell
securities to
investors.
27
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Lesson 1.2
New Securities: The Primary Market
Corporation
Municipality
Lesson 1.2
Bringing New Issues to Market
15
Federal government,
Agencies & GSEs
28
Securities Act of 1933
Requirements for New Issues
Register with
Prospectus
the Securities
Delivery
and Exchange
Commission
(SEC)
29
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16
Lesson 1.2
New Securities: The Primary Market
Participants in a Corporate New Issue
The Issuer
The company wishing to raise capital.
The Underwriter
Investment banker, broker-dealer that
specializes in underwriting new issues.
30
Types of Underwriting Agreements
Best Efforts Underwriting
Firm Commitment Underwriting
(Investment Banker Acting as Principal)
(Investment Banker Acting as Agent)
VS
• All-or-none (AON)
• Mini-max
• Acting as principals
• Underwriters are at risk
31
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Lesson 1.2
New Securities: The Primary Market
The Registration Process
Registration
Statement
Filed
Lesson 1.2
Registration of Securities
17
Final
Prospectus
Cooling-off
Period
32
Activities During Cooling-off Period
Allowed
• Distribute preliminary
prospectus
• Publish tombstone
advertisements
• Gather indications of
interest
33
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Not Allowed
• Offer securities for sale
• Distribute final prospectus
• Disseminate advertising
material
• Disseminate sales literature
• Take orders
• Accept postdated checks
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18
Lesson 1.2
New Securities: The Primary Market
Test Prep Question
During the cooling-off period of a new securities registration, a
registered representative would be allowed to
A. send prospects a preliminary prospectus with notations
attached to call attention to areas of interest to the investor.
B. send prospects sales literature relating to the issue.
C. accept nonbinding indications of interest.
D. take a check for a proposed purchase, provided the check is
postdated after the effective date.
34
Description of
Offering
History of
Business
Preliminary
Prospectus
SEC
Disclaimer
35
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AKA: Red
Herring
Description of
Management
Use of
Proceeds
06/08/21 3:23 PM
Lesson 1.2
Offering
Date
Preliminary
Final
Prospectus
Description
of Offering
History of
Business
Prospectus
AKA: Red
Herring
SEC
Disclaimer
19
Lesson 1.2
Offering
Price
New Securities: The Primary Market
Description of
Management
Use of
Proceeds
36
What’s in a Prospectus?
Red Herring
Final
Official Statement
Offering Circular
POP
Effective Date
Use of Funds
Business
History
Tax Revenue
SEC Disclaimer
37
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20
Lesson 1.2
New Securities: The Primary Market
Exempt Transactions
Rule 147
Regulation D
Small and Medium
Intrastate Offering
Private
Sized Offerings
Rule
Placements
• Offerings that take place in one
• Unlimited capital can be
Regulation A
• Provides two offering tiers
• Tier 1: Max of $20 Million
• Tier 2: Max of $75 Million
state
raised
• Securities may not be resold to
non-residents for six months
• Lettered stock, legend
stock
after initial purchase
• 80% rule
38
Private Placements
•
•
•
Regulation D Rule 506(c)
Regulation D Rule 506(b)
JOBS Act of 2009
Original Rule – Still Available
Securities are offered under
Regulation D exemption
All purchases must be
accredited investors
Business must take reasonable
steps to verify purchases are
accredited
•
•
•
Securities are offered under
Regulation D exemption
Up to 35 non-accredited
investors
No general solicitations
(advertising) allowed
39
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Lesson 1.2
New Securities: The Primary Market
Investment Banker sells to public on behalf of issuer
Lesson 1.2
What Type of Offering?
21
Underwriter sells IPO shares from its own inventory
ABC Corp sells $15,000,000 in bonds
BuyStuff Inc. sells $45,000,000 in preferred stock
Sierra Verde Coffee offers shares exclusively to
residents of its home state
40
Lil’ Gym Corp offers shares exclusively to accredited
investors
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LESSON
1.3
Trading Securities:
The Secondary Market
23
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24
Lesson 1.3
Trading Securities: The Secondary Market
Lesson 1.3
Trading Securities:
The Secondary
Market
LO 1.f Define the function and procedures of
securities trading in the secondary market.
LO 1.g Identify transaction procedures and unethical
practices.
41
Broker
Broker
vs
Dealer
Dealer
Other terms:
• Agent
• Agency
Other terms:
• Principal
• Market Maker
Buys and sells on
behalf of the customer
(no inventory)
Buys into inventory,
sells from inventory
(maintains inventory)
Charges commission
Profits on the difference
between the buy and sell
price (spread, mark-up,
mark-down)
Little capital at risk
Significant capital at risk
42
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Lesson 1.3
Trading Securities: The Secondary Market
25
Transactions
1
2
3
Buy or sell
Name of security
Number of
shares or bonds
4
Account name and
number
7
Solicited or unsolicited
5
Account type
8
Discretionary authority
exercised or not
9
Time stamp when
entered, executed,
changed, or canceled
6
Price and time limits
Lesson 1.3
Order Ticket
43
Settlement
Regular Way
Settlement
• Corporate + Munis (T+2)
• Mutual funds “settle”
01_S6_CN_Lessons_1.indd 25
• Same day a trade is
executed
• Govies T+1
44
Cash Settlement
• Stock or bonds sold
the next time the NAV is
must be available on the
calculated
spot for delivery
Regulation T
• Payment due four
business days after
trade date
• S+2, or T+4
Stocks normally trade in “Round” lots of 100
shares. Lots less than 100 are termed “Odd” lots.
06/08/21 3:24 PM
26
Lesson 1.3
Trading Securities: The Secondary Market
Fair Dealing Violations
● Unsuitable recommendations
● Short-term trading of mutual funds
● Setting up fictitious accounts
● Making unauthorized transactions or
use of funds
● Recommending purchases
inconsistent with the customer’s
ability to pay
● Committing fraudulent acts
● Guaranteeing customers against loss
45
Test Prep Question
The conduct rules prohibit all of the following practices EXCEPT
A. failing to state a material fact in making a mutual fund recommendation to
a customer.
B. presenting third-party research reports to clients with disclosure
that they were prepared by others.
C. borrowing from a customer's account without the customer's knowledge
but with the intent of paying the loan back in a timely fashion.
D. encouraging an investor to purchase a mutual fund share just before the
ex-date.
46
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Lesson 1.3
Trading Securities: The Secondary Market
47
Monitoring
Telemarketing
Activities
60 Days to
Implement
3 Years
Lesson 1.3
Tape Recording
(FINRA Rule 3170)
27
Quarterly
Reports
Execution and Interpositioning
Exercise Reasonable Care
Interpositioning
Payment for order
flow
Prohibited practice
when simply to
generate commissions
48
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28
Lesson 1.3
Trading Securities: The Secondary Market
FINRA Rule 2273 Rules
Educational Communication
May create a conflict of interest
Some assets may not be directly transferable
Potential costs
49
Difference in products
FINRA Rule 2273 Exception
Educational Communication Exception
Former customer
Not interested
Later decides to transfer assets
50
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Lesson 1.3
Trading Securities: The Secondary Market
When seeking to transfer a previous customer’s account to a new BD, which of
the following is NOT required?
Lesson 1.3
Test Prep Question
29
A. Educational material to the firm.
B. A signed TIF from the customer.
C. Disclosure that assets may not be directly transferable.
D. Disclosure of the differences in services between current firm and recruiting
firm.
51
Report an Error in Execution
Designated
Principal
Immediately in
Writing
Record Retained
for 3 years
52
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30
Lesson 1.3
Trading Securities: The Secondary Market
Unethical Trading
Practices
Painting
the
Tape
53
01_S6_CN_Lessons_1.indd 30
Marking
the
Close
Payments
Designed to
Influence Market
Prices
Spreading
False
Information
Front Running
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LESSON
2.1
Investment Companies
31
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32
Lesson 2.1
Investment Companies
Lesson 2.1
Investment
Companies
LO 2.a Identify the different types of investment
companies.
LO 2.b Relate the purchase and liquidation process
for different investment companies.
LO 2.c Differentiate the fees, sales charges, and
expenses for investment companies.
54
Investment Companies
Unit Investment Trusts (UIT)
Management Companies
Face Amount Certificates
55
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Lesson 2.1
Open-End
Investment Companies
33
Closed-End
Continuous offering
Single offering
Issues
Common stock only
Common, preferred,
and debt
Shares
Full or fractional
Full only
Offerings and
Trading
Sold and redeemed by the fund
IPO, Secondary markets after IPO
Pricing
Price determined by formula
Determined by supply and demand
Shareholder
Rights
Dividends (when declared); voting
Dividends (when declared); voting
Ex-Date
Set by BOD
Set by exchange/SRO
Lesson 2.1
Capitalization
56
Open or Closed-End?
Nav (bid)
POP (ask)
9.50
10.00
10.00
9.50
9.00
10.00
10.00
10.00
Open, closed or both?
57
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34
Lesson 2.1
Investment Companies
Test Prep Question
All of the following transactions are permitted in a mutual
fund’s portfolio EXCEPT
A. buying index options.
B. buying junk bonds.
C. buying shares of other mutual funds.
D. buying stock on margin.
58
Test Prep Question
Where can open-end investment company shares be
purchased and sold?
A. In the secondary marketplace
B. From the open-end company
C. On the OTC market
D. Only on regional exchanges
59
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Lesson 2.1
Investment Companies
35
Disclosure Documents for Mutual Funds
60
Summary
Prospectus
(Rule 498)
Statement of
Additional
Information
Lesson 2.1
Full
(Statutory)
Prospectus
Omitting
Prospectus
(Rule 482)
Stock/Equity Funds
Growth/
Value/
Blend
Equity
Income
Equity
Index
Option
Income
Large/Mid
/Small Cap
61
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36
Lesson 2.1
Investment Companies
Bond Funds
1
2
3
4
Corporate
Bond
Funds
Tax-Free
(Tax-Exempt)
Bond Funds
U.S.
Government
Funds
Agency
Funds
62
Balanced and Money Market Funds
Balanced Funds
• A balanced mix of …

Stocks

Bonds
Money Market Funds
•
•
•
Holds money
market securities
Stable NAV
($1.00)
May have a check
writing feature
63
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Lesson 2.1
Investment Companies
37
Mutual Funds
Net Asset Value (NAV)
Total assets – liabilities = net assets of the fund
Lesson 2.1
Net Assets
= NAV
Shares Outstanding
64
Calculate NAV
Total Assets: $100,010,000.00
Liabilities: $10,000.00
10,000,000 outstanding shares
Net Assets: $100,010,000.00 – $10,000.00 = $100,000,000.00
100,000,000
10,000,000
=
$10/share NAV
65
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38
Lesson 2.1
Investment Companies
New Purchases (Money In)
Add $100,000 of new money
$100,000 ÷ $10 NAV = 10,000 new shares
$100,100,000.00 net assets
10,010,000
shares
= $10 NAV
66
Redemptions (Money out)
Cancel 10,000 shares @ $10/share and distribute $100,000
10,000,000 – 10,000,000 = 9,990,000 shares
100MM – 100k = 99,900,000 net assets
$99,900,000.00 net assets
9,990,000
shares
= $10 NAV
67
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Lesson 2.1
Investment Companies
39
Fees and Sales Charges
Fees
Sales Charges
Charges applied by a
charged by broker-dealers for
fund sponsor for buying
trades in the secondary
shares of a mutual fund.
Lesson 2.1
Commissions, or fees, are
market.
68
Loads
Front-End Loads
Back-End Loads
• Class A shares
• Class B shares
• Difference between POP and NAV
• Contingent deferred sales load
Level Loads
No-Loads
• Class C shares
• Asset-based fees
• Fund does not charge any type
of sales load
69
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40
Lesson 2.1
Investment Companies
NAV + SC = POP
When the NAV and POP are know, the sales charge percentage can be
determined.
POP ($10) – NAV ($9.50) = ($.50)
= Sales charge percentage (5%)
POP ($10.00)
If the dollar amounts for the NAV and percentage for sales charges are
specified, the formula for determining the POP of mutual fund shares is:
NAV ($9.50)
100% – sales charge percentage (5%)
= POP ($10.00)
70
Calculate Sales Charge
NAV
POP
9.50
10.00
=
22.00
22.92
=
114.00
124.59
=
71
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Lesson 2.1
Investment Companies
41
Calculate POP
NAV
9.50
SC
5%
Lesson 2.1
NAV ÷ (100% - SC) = POP
72
Calculate NAV
POP
10.00
SC
5%
POP X (100% - SC) = NAV
73
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42
Lesson 2.1
Investment Companies
Investment Company Offerings
ACCUMULATION PLANS
Dollar Cost Averaging (DCA)
74
Investment Company Offerings
DCA Example
• The average price per share is the sum of the prices paid
divided by the number of investments: $114 ÷ 4 = $28.50.
• The average cost per share is the total amount spent divided
by the number of shares purchased: $2,400 ÷ 90 = $26.67.
• In this case, the average cost is $1.83 per share less than the
average price.
• Using DCA—the average cost will always be less than the
average price.
75
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Lesson 2.1
Investment Companies
43
Test Prep Question
Which of the following is a viable method to reduce the
impact of a fluctuating market?
A. Dollar cost averaging
Lesson 2.1
B. Lump-sum investing
C. Timing the market
D. By reacting to defensive recommendations
76
Mutual Fund Withdrawal Plans
%
Fixed-Dollar Plan
Fixed-Percentage
Fixed-Time Plan
Fixed-Share Plan
77
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02_S6_CN_Lessons_2.indd 44
06/08/21 3:26 PM
LESSON
2.2
Variable Insurance Products
45
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46
Lesson 2.2
Variable Insurance Products
Lesson 2.2
Variable Insurance
Products
LO 2.d Recall the characteristics of variable annuities.
LO 2.e Recall the characteristics of Variable Life
Insurance.
78
Designed
to provide
retirement
income
Withdrawals
before 59½ =
10% penalty
Stream of
payments
guaranteed
Surrender
charges may
apply upon
withdrawal
Annuities
79
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Lesson 2.2
Variable Insurance Products
47
Invested in the company’s general account
Fixed
Annuities
A guaranteed payout
Insurer bears the investment risk
Owner bears purchasing power (inflation risk)
Lesson 2.2
Index annuity is a type of fixed annuity
8
80
0
Variable
Annuities
Opportunity to keep pace with inflation
Investor assumes investment risk
VAs are considered securities
Suitability is primary consideration
8
81
1
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48
Lesson 2.2
Variable Insurance Products
1035 Exchange
● Exchange policies without tax
liability
● Transfer of cash value from
annuity to annuity, life to life,
and life to annuity
● Cannot be used for transfers
from annuity to life
82
Purchasing Annuities
Lump-sum
payment or
monthly, quarterly,
annually
Deferred
Annuity
Immediate
Annuity
Bonus
Annuity
83
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Lesson 2.2
Variable Insurance Products
49
Annuity Sale Charges
No stated
maximum sales
charge
$
Surrender charge
(CDSC)
Lesson 2.2
Fair and
reasonable
Sold with little or
no sales charge
84
Accumulation
vs
Payout
Accumulation phase
Annuity phase
Accumulation units
Annuity units
85
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50
Lesson 2.2
Variable Insurance Products
Investment
return
vs
Amount of $
AIR
in contract
Annuitization
Payout
Option
Gender
If the investor chooses
annuitization, the
amount of the monthly
check is dependent on
several factors:
Age
86
86
$
Accumulation Units
Positive Investment
Performance
-orAdd Funds
Account
value
Increases
Negative Investment
Performance
-orWithdraw Funds
Account
value
Decreases
Annuitization Units
Performance
Exceeds AIR
Performance
Equal to AIR
Monthly
Payment
Increases
87
02_S6_CN_Lessons_2.indd 50
Performance Below
AIR
Monthly
Payment
Reduces
Monthly Payment Unchanged
06/08/21 3:26 PM
Lesson 2.2
Variable Insurance Products
51
AIR in Application
AIR = 5%, Initial monthly income is $1,000
1st month
6%
$1,000
5th month
5%
3rd month
5%
$1,010
$1,020
$1,010
4th month
4%
$1,010
Lower
6th month
3%
Lesson 2.2
2nd month
6%
$1,020
Higher, Lower, or unchanged?
88
Suitability
Funded with available cash
Not needed for immediate lump sum
Must have tolerance for market risk
Must have maximized all available qualified plans
89
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52
Lesson 2.2
Variable Insurance Products
VA Suitability: True or False
Funding a VA with borrowed funds
VAs are a good alternative to 401k
and IRA plans
VAs are a great place for education
savings
VAs are a good idea for the risk
averse investor
90
Variable
Life
Insurance
Fixed, scheduled premium
Part in a general account and
part in a separate account
Assumed interest rate and
variable death benefit
• Payable under VL policy
• Annual basis
91
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Lesson 2.2
Variable Insurance Products
53
Characteristics of Variable Life Insurance
Hypothetical Illustrations
• Maximum projected return
is 12%
• If projection is done at
a projection of 0%
• Borrow against cash value
Contract Exchange
• Contract exchange provision
• Received income tax free
must be available for a
• Minimum percentage 75%
minimum of 2 years
after 3 years
• Death benefit pays
outstanding loans
• If cash value is negative, 31
• No medical underwriting is
required for exchange
• Based on original contract
age
Lesson 2.2
12%, you must also include
Loans
days to make positive,
otherwise policy lapses
92
Characteristics of Variable Life Insurance
Sales Charge
• May not exceed 9%
• Maximum of 20 years
Refund Provisions
• Free-look period for 45 days
from execution or for 10 days
from delivery
• Only cash value refunded after
2 year period is lapsed
Suitability of Variable
Life Insurance
• Must have Life insurance need
• Applicant comfortable with
separate account and
knowing cash value is not
guaranteed
• Applicant must understand
variable death benefit feature
• Prospectus delivered prior to
or at time of solicitation
93
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54
Lesson 2.2
Variable Insurance Products
Life Insurance Comparison
Whole Life
Fixed Premium
Variable Life Universal Life
Fixed Premium
Guaranteed Cash
Value
No Guaranteed Cash
Value
Guaranteed Death
Benefit
Minimum Guaranteed
Death Benefit
Prem. to General
Account
Prem. to Guaranteed
Account for Min
DB/Excess to Sep
Account
Flexible
Premium/Death
Benefit
No Guaranteed Cash
Value
No Minimum
Guaranteed Death
Benefit
Prem. to Sep Acct
Term Life
Fixed Premium
No Cash Value
Guaranteed Death
Benefit
Premium to General
Account
94
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LESSON
2.3
Investment Taxation
55
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56
Lesson 2.3
Investment Taxation
Lesson 2.3
Investment
Taxation
LO 2.f Differentiate long-term capital gains, shortterm capital gains, and income taxation, including
reinvestments.
LO 2.g Recall the Pipeline theory of taxation and how
it applies to investment companies.
95
Wash Sale
Re-Establish
position within
30 days before
or after loss
In the same or
substantially
identical security
May not use loss
for tax purposes
96
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Lesson 2.3
Investment Taxation
57
Pipeline Theory of Taxation
Mutual Fund in the Middle (Conduit)
$$$
Dividends
and
Interest
Lesson 2.3
$$$
Dividends
97
Conduit Tax Theory
Who pays taxes? On how much Income?
Div: (+)
Int: (-)
Exp:
NII:
Retains:
Distributes:
100,000
900,000
500,000
600,000
100,000
1,000,000
Retains:
Distributes:
50,000
950,000
Retains:
Distributes:
150,000
850,000
98
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02_S6_CN_Lessons_2.indd 58
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LESSON
3.1
Basic Accounts
59
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60
Lesson 3.1
Basic Accounts
Lesson 3.1
Basic Accounts
LO 3.a Recall the different types of accounts and
account registrations.
LO 3.b Identify the requirements and approvals
needed for opening different types of accounts.
99
Different Types of Customer Accounts
Individual
Accounts
100
03_S6_CN_Lessons_3.indd 60
Joint
Accounts
Business
Accounts
Fiduciary
Accounts
2
10/07/21 4:40 PM
Lesson 3.1
Basic Accounts
61
What Type of Account Would You Open?
1. Married couple concerned about ease of service
and transfer
2. Single person who wants to designate a
beneficiary for the account
3. Wealthy couple who have established a trust
4. Brother and sister putting money aside to
buy a house for a parent
5. Individual owner of a small, unincorporated
business
101
6. Four joint owners of an unincorporated
business
Lesson 3.1
Basic Account Information
● Tax Identification Number
● Date of Birth
● Government Issued Photo ID
● Employed by Brokerage Firm?
● Owns More Than 10% of a
Company
102
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62
Lesson 3.1
Basic Accounts
FINRA RULE 3210
Requires an associated person to obtain prior written consent of their employer when
opening an account.
The spouse of an
associated person.
A child of the
associated person
or associated
person’s spouse
Related individual
over whose
account the
associated person
has control
Any other
individual over
whose account the
associated person
has control
103
Important to Remember:
Margin and Options
Margin Accounts
The Credit Agreement
Options Accounts
Reasonable basis that
options are suitable
The Hypothecation Agreement
Acceptance by a Registered
Option Principal
The Consent-to-Loan Agreement
(optional)
Agreement signed and
returned within 15 days
104
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LESSON
3.2
Retirement Plans
63
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64
Lesson 3.2
Retirement Plans
Lesson 3.2
Retirement Plans
LO 3.c Group qualified and nonqualified retirement
plans.
LO 3.d Recall the characteristics of different
retirement plans.
LO 3.e Identify characteristics of employersponsored plans.
LO 3.f Define ERISA and its application to privatesector retirement plans.
105
Qualified Plans
Nonqualified Plans
● Contributions tax deductible
● Contributions NOT tax deductible
● Plans approved by the IRS
● Plan does NOT need IRS approval
● Plan cannot discriminate
● Plan CAN discriminate
● Tax on accumulation is deferred
● Tax on accumulation is deferred
● All withdrawals taxed
● Excess over cost base taxed
● Plan must be a trust
● Plan may be a trust, but not required
106
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Lesson 3.2
Retirement Plans
65
Characteristics of Retirement Plans
Qualified
Nonqualified
SelfSponsored
IRA
(acts like)
Annuities
Employer
Sponsored
Defined
Benefit/
Contribution
Deferred
Compensation
107
Lesson 3.2
Traditional and ROTH IRAs
Traditional IRA
ROTH IRA
Tax Free Growth
Taxable Distribution
Early Withdrawal Penalty
Tax Free Distribution
Deductible Contribution
After Tax Contribution
RMDs
Funded with Earned Income
108
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66
Lesson 3.2
Retirement Plans
Employee Retirement
Income Security Act of 1974
(ERISA)
The Employee Retirement
Income Security Act (ERISA)
was established to prevent
abuse and misuse of pension
Participation
Funding
Vesting
Communication
Nondiscrimination
funds.
Beneficiaries
109
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LESSON
3.3
Customer Identification and
Information Security
67
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68
Lesson 3.3
Customer Identification and Information Security
Lesson 3.3
Customer
Identification and
Information
Security
LO 3.g Recall the components of a Customer
Identification Program (CIP) and the Know Your
Customer (KYC) rule.
LO 3.h Identify customer protection and information
security rules.
110
Customer Identification Program
(CIP)
Customer name and date of birth
Address (But if you don’t have an address):
• Residential or business street address
• Army Post Office (APO) or Fleet Post Office
(FLO)
• Address of next of kin
Social Security number or tax ID number
Valid government issued photo ID
111
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Lesson 3.3
Customer Identification and Information Security
69
Test Prep Question
All of the following are suitable for a CIP EXCEPT
A. An out-of-state driver’s license.
B. Last year’s passport.
C. A military ID for a retired Sergeant.
D. An individual’s Post Office Box number.
112
Lesson 3.3
Know Your Customer
The know your customer (KYC) rule places
an obligation on the firm and associated
person to seek information from
customers. Customers are not required to
provide all information asked.
When you have a clear understanding of
your customer’s circumstances, needs, and
objectives you are better able to make
113
03_S6_CN_Lessons_3.indd 69
suitable recommendations to them.
10/07/21 4:40 PM
70
Lesson 3.3
Customer Identification and Information Security
What would you ask them?
Beaux is 60 years old and thinking about
retirement. He tells you he has $500,000 in a
401k plan with his current employer and would
like to know how he should invest it, and how
soon he might be able to retire.
What information would you like to know to
help answer Mr. Beaux’s question?
114
Test Prep Question
Before recommending any investment to a customer, a
representative must make a reasonable effort to obtain
all of the following EXCEPT
A.
B.
C.
D.
Financial status
Tax payments
Investment objectives
Nonfinancial objectives
115
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Lesson 3.3
Customer Identification and Information Security
71
Regulation S-P
Disclosures
Right to Opt
Out
• Information that
my be disclosed
• Opportunity to
direct that
information not be
disclosed
• Explanation of how
to opt out
• Opt out of sharing
NPI
• Notice must
identify what is
applicable
• Clearly explain how
to opt out
116
Lesson 3.3
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LESSON
3.4
Third Party Authorizations,
Transfers, and Registration
Changes
73
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74
Lesson 3.4
Third Party Authorizations, Transfers, and Registration Changes
Lesson 3.4
Third Party
Authorizations,
Transfers, and
Registration
Changes
LO 3.i Classify the types of third party account
authorizations.
LO 3.j Identify the procedure for account registration
changes and transfers.
117
Third Party Authorizations
Fiduciary duty
Discretion
(Discretionary Trading
Authority)
Power of Attorney
(POA)
118
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Lesson 3.4
Third Party Authorizations, Transfers, and Registration Changes
75
Will you need discretionary authority for the trade?
“The market is falling! We’re all going to die! Sell
everything!”
“This correction is nerve wracking. Please liquidate the
weaker positions in my account by 50%.”
“Buy 100 shares of the best retailer available.”
“Sell all the shares in my account priced below $10 a
share.”
“Sell half the shares of BuyStuff Inc. from my account”
“I need $100,000 for a new fishing boat. Sell securities
from my account to raise the cash. Say about half from
stocks and half from bonds.”
119
Lesson 3.4
Case Study: Fiduciary Duty
Rocky Mountain Advisors is a dual-registered Broker-Dealer and
Investment Adviser. Over a six-year period Rocky Mountain placed their
customer’s money into a number of mutual funds from which the firm
received ongoing 12b-1 fees, even though less expensive shares were
available for the same funds. Further, Rocky Mountain entered into a fee
sharing arrangement with the firm’s Clearing Broker for investing and
holding client funds in certain investments, then directed the Clearing
Firm to markup certain fees that Rocky Mountain would receive through
the clearing firm. This created indirect payments that came from
customers and were ultimately received by Rocky Mountain Advisors.
These payments were not disclosed in the firm’s ADV.
Did Rocky Mountain Advisors breach their fiduciary duty to their
clients? If so, in what way?
120
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76
Lesson 3.4
Third Party Authorizations, Transfers, and Registration Changes
Case Study: Fiduciary Duty
Outcome:
The SEC charged the firm with breaching their fiduciary duty to
clients by failing to disclose compensation, failure to act in the
client’s interest in investment recommendations, and placing the
firm’s interest before the client’s interest.
The case is still before the court, but it seems likely that the firm
will choose to admit wrongdoing and pay a negotiated penalty
and compensation to clients.
121
Changing Registration
Individual
Accounts
122
03_S6_CN_Lessons_3.indd 76
Joint
Accounts
Business
Accounts
Fiduciary
Accounts
Trusts
Guardianships
Custodial
2
10/07/21 4:41 PM
Lesson 3.4
Third Party Authorizations, Transfers, and Registration Changes
77
Transferring an Account
STEP 01
Customer signs Transfer
Initiation Form (TIF),
sent to ACATS by
receiving firm (new)
STEP 02
Automated Customer
Account Transfer
Service (ACATS)
STEP 03
Sent to carrying firm from
the receiving firm through
ACATS
STEP 04
One business day
to validate, 3 days
to complete after
validation
123
Lesson 3.4
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03_S6_CN_Lessons_3.indd 78
10/07/21 4:41 PM
LESSON
4.1
Customer Account Analysis
and Risk
79
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80
Lesson 4.1
Customer Account Analysis and Risk
Lesson 4.1
Customer Account
Analysis and Risk
LO 4.a Identify the components of customer account
analysis.
LO 4.b Apply portfolio analysis theories.
LO 4.c Employ fundamental analysis in
recommendations.
LO 4.d Classify investment risk.
LO 4.e Recall specific disclosure requirements for
certain transactions.
124
Analyzing Customer
Accounts
Asset Allocation
Capital Asset Pricing Model
“A proper analysis of a
customer’s existing portfolio is
an important part of
Modern Portfolio Theory
Beta Coefficient
understanding a customer’s
circumstances.”
Alpha
125
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Lesson 4.1
Customer Account Analysis and Risk
81
Case Study: Asset Allocation
Your customer is ready to retire now at age 65. They
describe themselves as having a moderate tolerance
for risk. They are very concerned with the impact of
inflation on the portfolio, whose primary objective is
to provide supplemental income for retirement.
What mix of income producing securities, equities,
and cash investments would you recommend?
126
ALPHA
The Formula:
Actual return
M
Market return
B
Beta
R
(M * B) = Alpha
Lesson 4.1
R
• Alpha is the difference between a security’s actual
return and its expected return based on Beta.
• A positive Alpha indicates the security outperformed
expectations, negative means underperformance.
127
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82
Lesson 4.1
Customer Account Analysis and Risk
Alpha Example
Lenerd Engineering is a mid-sized public technology company. Last year Lenerd stock
returned 10.1% and has a beta of 0.8. Over the same year the return of the S&P 400 (an
index of mid-cap companies) gained 13%.
What is Lenerd stock’s Alpha?
128
R
(M * B)
Alpha
10.1
(13 * 0.8)
Alpha
10.1
10.4
-0.3
Lenerd’s Alpha of -0.3 indicates that the stock underperformed expectations.
Calculating Alpha
Formula: Actual Return – (index * Beta) = Alpha
Actual Return: 12%, Index: 10%, Beta: 1.1
129
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Lesson 4.1
Customer Account Analysis and Risk
83
Calculating Alpha
Actual Return: 7.2%, Index: 12%, Beta: .6
Actual Return: 16%, Index: 12%, Beta: 1.5
130
Fundamental Analysis
Four Stages of the Business Cycle
Lesson 4.1
Peak
Expansion
Contraction
Recovery
131
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Trough
09/08/21 7:05 PM
84
Lesson 4.1
Customer Account Analysis and Risk
Types of Industries and the Business Cycle
Cyclical Industries
Defensive Industries
Steel, heavy equipment, auto industry, capital goods
Food, pharmaceuticals, tobacco,
utilities
Growth Industries
Countercyclical Industries
Industry growing faster than economy
Gold, gold mining stocks
Special Situation Stocks
Unusual profit potential resulting from
nonrecurring circumstances
132
Corporate Financials
Balance Sheet
assets = liabilities + owners’ equity
OR
assets – liabilities = owners’ equity
133
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Lesson 4.1
Customer Account Analysis and Risk
85
Balance Sheet Example
Assets
Current Assets
Cash
Accounts rec.
Inventory
Total current assets
5,000,000
10,000,000
15,000,000
30,000,000
Fixed Assets
Buildings, furniture
Land
Total fixed assets
Intangibles (good will)
Total assets
20,000,000
50,000,000
70,000,000
5,000,000
100,000,000
Liabilities and Net Worth
Current Liabilities
Accounts payable
Wages
Taxes payable
Total current liabilities
Long-term liabilities
8% 20-year convert. @ $50
Total liabilities
Net worth
Preferred stock $100 par
Common stock $1 par
Capital in excess of par
Retained earnings
Total net worth
1,000,000
4,000,000
1,500,000
6,500,000
40,000,000
46,500,000
20,000,000
10,000,000
5,500,000
18,000,000
53,500,000
Total liabilities and net worth
100,000,000
134
Market
Lesson 4.1
Systematic
Investment
Risks
Inflation
Interest
Reinvestment Risk, Call Risk, and Currency Risk have traits of
both Systematic and Non-systematic risk.
135
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86
Lesson 4.1
Customer Account Analysis and Risk
Non-Systematic
Investment Risks
●
●
●
●
●
●
Business Risk
Capital Risk
Timing Risk
Credit Risk
Liquidity Risk
Legislative/Political/Social
Risk
136
Identify the Risk
ABC Corp. stock experiences a sharp drop in value in line with a
serious market correction.
Seabird Airlines stock drops due to the passage of a bill that will
impact the firm.
137
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Lesson 4.1
Customer Account Analysis and Risk
87
Identify the Risk
The FRB increases the Discount Rate and your bond portfolio
declines.
BuyStuff stock is negatively impacted by a poorly planned and
offensive advertising campaign.
138
Test Prep Question
Lesson 4.1
When analyzing risks and rewards for your customer, you express a
concern that market volatility must be seen as having a potential
negative impact on the customer’s portfolio. Which of the following
will best present that understanding?
A. Speculation risk
B. LIFO risk
C. Systemic risk
D. Business risk
139
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88
Lesson 4.1
Customer Account Analysis and Risk
Specific Disclosures
Illiquid
Investments
Options
Surrender Fees
and
Deferred Sales
Charges
140
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LESSON
4.2
Suitability and
Recommendations
89
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90
Lesson 4.2
Suitability and Recommendations
Lesson 4.2
Suitability and
Recommendations
LO 4.f Differentiate financial and non-financial
considerations in customer circumstances.
LO 4.g Apply suitability standards in customer
recommendations.
141
Making Suitable Recommendations
Check the
Foundation
• Insurance needs
met?
• Sufficient cash
reserves?
Financial
Considerations
Nonfinancial
Considerations
• Balance Sheet
• Age
• Income Sheet
• Marital status
• Employment
• Ages of dependents
• Risk tolerance
• Educational needs
142
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Lesson 4.2
Suitability and Recommendations
91
Test Prep Question
Which of the following would most likely contain an entry
for the monthly expenses of your customer?
A. Income Statement
B. Tax Return
C. Investment objectives list
D. Balance sheet
143
Investment Objectives
Lesson 4.2
Preservation of
Capital
Capital Growth
Speculation
Liquidity
Tax Advantages
Current Income
144
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92
Lesson 4.2
Suitability and Recommendations
Recommendations
for
Preservation of
Capital
●
Money Market Funds
●
Money Market Securities
●
Certificates of Deposit
●
Treasury Securities
1
145
4
5
Recommendations
for
Current Income
●
Bonds
●
Bond Funds
●
Equity Income Funds
●
Option Income Funds
1
146
4
6
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Lesson 4.2
●
●
Recommendations
for
Capital
Appreciation
(Growth)
●
Suitability and Recommendations
93
Common Stock
Common Stock Mutual
Funds
Equity Real Estate
1
147
4
7
Money Market Securities
●
Money Market Funds
●
Cash and Demand
Lesson 4.2
Recommendations
for
Liquidity
●
Deposit Accounts (DDAs)
●
T-bills
1
148
4
8
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94
Lesson 4.2
Suitability and Recommendations
Recommendations
for
Speculation
●
DDPs
●
Commodities and
Commodity Futures
●
Options
●
High-Yield Bonds
●
Precious Metals
●
Sector Funds
●
Municipal Bonds
●
Municipal Bond Funds
●
Tax-advantaged DPPs
1
149
4
9
Recommendations
for
Tax Advantaged
Investments
1
150
5
0
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Lesson 4.2
Suitability and Recommendations
95
Mutual Fund
Suitability Exercise
151
Lesson 4.2
1. Andy Jones, 52, and Patty Jones, 56, have a large investment portfolio
concentrated in stocks and stock mutual funds, including an
international fund. They maintain their cash reserves in a money
market account at their local bank. Andy is employed as a consultant,
where he earns a $400,000/year salary. The Joneses are seeking a safe
investment because they will need to liquidate a portion of their
portfolio when Andy retires in about 5 years. They also recognize the
need for additional diversification of their portfolio.
A. Spencer Cash Reserve Fund
B. MacDonald Balanced Fund
C. Spencer Tax-Free Municipal Bond Fund
D. MacDonald Stock Index Fund
152
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96
Lesson 4.2
Suitability and Recommendations
2. Sarah Davis, 30, and Jim Davis, 32, have been married for 4 years.
Both work and they have no children, so their disposable income is
relatively high. They live in the suburbs and plan to buy a
condominium downtown so they can enjoy some of their favorite
activities on the weekends. They need a safe place to invest the
amount they have saved for their down payment for about 6 months
while they shop for the perfect unit.
A. ATF Biotechnology Fund
B. ATF Capital Appreciation Fund
C. Spencer Cash Reserve Fund
D. Laramie Equity Income Fund
153
3. Adam Garcia is 26 and earns $45,000/year as an advertising
executive. He already has accumulated $5,000 in a savings account
and is seeking a secure place to invest the amount and begin a
periodic investment plan. He knows his long-term time-frame means
he should be willing to take some risk, but he is uncomfortable with
the thought of losing money. Adam would prefer moderate overall
returns rather than high returns accompanied by high volatility.
A. Spencer Tax-Free Municipal Bond Fund
B. MacDonald Balanced Fund
C. XYZ Government Income Fund
D. MacDonald Stock Index Fund
154
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Lesson 4.2
Suitability and Recommendations
97
4. Mark Blair is a retired widower, 72, seeking a moderate level of
current income to supplement his Social Security benefits and his
company pension plan. Mark is a Depression-era grandfather of 6
with a conservative attitude toward investments. An equally
important goal for him is capital preservation.
A. MacDonald Stock Index Fund
B. Spencer Tax-Free Municipal Bond Fund
C. XYZ Government Income Fund
D. ATF Overseas Opportunities Fund
155
Lesson 4.2
5. Helen Wong is 29 and is seeking a long-term growth investment. She
is concerned about the loss of purchasing power as a result of
inflation and often complains about high commissions and charges
that reduce her investment returns. When she was in college, she
took a few economics courses and firmly believes that securities
analysts cannot consistently outperform the overall market.
A. MacDonald Balanced Fund
B. MacDonald Stock Index Fund
C. Spencer Cash Reserve Fund
D. ATF Biotechnology Fund
156
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98
Lesson 4.2
Suitability and Recommendations
6. Gina and Peter Stout, both 42, have two children, ages 14 and 12.
The Stouts have spent the past 10 years accumulating money to
provide for their children’s education. Their oldest child will enter
college in 4 years and they are not willing to take risks with the
money they worked hard to accumulate. They need a safe investment
that provides regular income to help them meet tuition payments.
A. Laramie Equity Income Fund
B. ATF Capital Appreciation Fund
C. Spencer Cash Reserve Fund
D. MacDonald Investment-Grade Bond Fund
157
7. Pat Long, 60, and Sadie Long, 58, are married and have raised 3
children. Both have decided to retire this year and are looking
forward to an active retirement. They have accumulated a nest egg of
about $1 million, which they plan to use to travel the world, pursue
their hobbies, and care for their health. Both are concerned about
rising inflation and are comfortable with a reasonable level of risk.
A. Spencer Tax-Free Municipal Bond Fund
B. XYZ Government Income Fund
C. Laramie Equity Income Fund
D. MacDonald Stock Index Fund
158
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Lesson 4.2
Suitability and Recommendations
99
8. Amy Cain, 50, and Eric Cain, 48, have a combined annual income of
more than $200,000. Their portfolio consists of common stocks and
bonds that offer a wide range of safety and return potential. The
Cains are becoming even more concerned about the effects of rising
inflation in the U.S. economy. They are seeking to invest a small
percentage of their portfolio in a fund that will provide additional
diversification.
A. ATF Biotechnology Fund
B. XYZ Government Income Fund
C. MacDonald Stock Index Fund
D. ATF Overseas Opportunities Fund
159
Lesson 4.2
9. Mike and Mary Cole are both 34 and employed in their computer
software business. They have one daughter, age 4. The Coles want to
begin accumulating the money required to send their daughter to
one of the nation’s top universities in 14 years. In addition, they have
not yet begun to accumulate money for their retirement.
A. MacDonald Balanced Fund
B. Laramie Equity Income Fund
C. ATF Capital Appreciation Fund
D. Spencer Tax-Free Municipal Bond Fund
160
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100
Lesson 4.2
Suitability and Recommendations
10. Liz Scott, 45, is single and in search of maximum capital
appreciation. She inherited a substantial amount of money a few
years ago and has taken an active interest in managing her
investments. Her portfolio is diversified among common stocks, taxexempt bonds, international investments, and limited partnerships.
She has a long-term time frame and is not averse to risk.
A. Laramie Equity Income Fund
B. ATF Capital Appreciation Fund
C. MacDonald Balanced Fund
D. ATF Biotechnology Fund
161
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LESSON
5.1
Communications with the
Public
101
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102
Lesson 5.1
Communications with the Public
Lesson 5.1
Communications
with the Public
LO 5.a Define the three main categories of types of
communications with the public, their characteristics,
and approval requirements.
LO 5.b Identify other communications by
characteristics and approval requirements.
162
General Communication Standards
All of a member’s communications with the
public—institutional, retail, and correspondence—
must be based on principles of fair dealing and
good faith and provide a sound basis for evaluating
the facts in regard to any particular security or
type of security, industry discussed, or service
offered.
163
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Lesson 5.1
Communications with the Public
103
Types of Communication with the Public
Three Main Categories
Institutional
Retail
Correspondence
Any written communication made available only to institutional investors.
Any written communication made available to more than 25 retail investors
within any 30-calendar-day period.
Any written communication made available to 25 or fewer retail investors
within a 30-calendar-day period.
164
Other Communications
Public Appearance
Independently Prepared Reprint
(IPR)
Research Reports
Generic Advertising (SEC Rule 135a)
165
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Variable Life and Variable Annuities
Lesson 5.1
Electronic
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104
Lesson 5.1
Communications with the Public
What Is It?
Rep Jones sends a research report to 42 existing customers.
Seacoast Securities prepares an article for a mutual fund’s
quarterly customer newsletter.
Terry sends birthday cards to the twelve customers having
birthdays this month.
166
What Is It?
Rep Susan wants to mail copies of an article from the Wall
Street Journal to her customers.
Juan would like to send a letter to 30 of his best customers
about the firm’s new asset allocation service.
167
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Lesson 5.1
Communications with the Public
105
Recordkeeping and Filing Requirements
• Retail communications file maintained
for three years
• Retained copies of correspondence
• Preparer names kept for three years
• Electronic correspondence subject to
three years
Retail communications are subject to
routine spot checks.
168
Test Prep Question
A first-year broker-dealer posts an ad in a newspaper, which appeared
on May 5 and again on August 14, to recruit Series 6 registered
representatives. How long must the broker-dealer maintain records of
this?
169
05_S6_CN_Lessons_5.indd 105
Lesson 5.1
A. Three years from May 5
B. Three years from the date the advertisement was filled
C. Three years from August 14
D. Until December 31
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106
Lesson 5.1
Communications with the Public
Exemptions from Filing and Spot Checks
Institutional Communications
Press releases available to media only
Retail communications posted in an online interactive forum
Reprint or excerpt
Press release issued by closed-end investment company
Retail communications that do not make any financial recommendation
170
Networking Between Members and Financial Institutions
Rule 3160
Clearly identified person
Clearly displayed name
Services and deposit taking in
separate location
Not FDIC insured
No bank guarantee
May lose value
171
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LESSON
5.2
Customer Complaint
Resolution
107
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108
Lesson 5.2
Customer Complaint Resolution
LO 5.c Recall customer complaint procedures.
Lesson 5.2
Customer
Complaint
Resolution
LO 5.d Recognize the formal resolution methods and
disputes-reporting requirements, including
arbitration.
172
Customer Complaints
When a customer delivers a written complaint to the representative of a firm,
the first step is to immediately forward the complaint to a principal of the firm.
Record Keeping and
Filing
Withdrawing a
complaint
Availability of Manual
173
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Lesson 5.2
Customer Complaint Resolution
109
Complaint Resolution
Mediation
Arbitration
Initiation of
Proceedings
Selection of
Arbitrators
Arbitration
Thresholds
and
Simplified
Arbitration
Awards
Statute
Of
Limitations
174
Test Prep Question
Which of the following arbitration thresholds would require
more than a single arbitrator?
175
05_S6_CN_Lessons_5.indd 109
Lesson 5.2
A. $50,000 or less
B. At least $50,000, but less than $100,000
C. Less than $100,000, but more that $60,000
D. More than $100,000
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110
Lesson 5.2
Customer Complaint Resolution
Code of Procedure
25 days to respond
Hearing
Sanctions
Appeals
176
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LESSON
5.3
Joining and Leaving a Firm:
Form U4 and U5
111
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112
Lesson 5.3
Joining and Leaving a Firm: Form U4 and U5
Lesson 5.3
Joining and
Leaving a Firm:
Form U4 and U5
LO 5.e Identify the use and filing requirements of
Forms U4 and U5.
177
Form U4
To register an associated person
of a member firm with FINRA, the
member fills out and submits
Form U4, but registration is not
effective until the person passes
the appropriate qualification
exam(s).
Name, address, aliases
5 year residency
10 year employment
history
Charges, arrests, or
convictions
Any yes to charges above,
provided on DRP pages on
Form U4
178
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Lesson 5.3
Joining and Leaving a Firm: Form U4 and U5
113
Statutory Disqualification
Rejection of Application
• Expelled or suspended from
membership or participation in
any other SRO
• Misstatements made on
application for membership
• Any felony conviction or
• Under an SEC order denying,
misdemeanor conviction
suspending, or revoking
involving securities or money
registration
within past 10 years
• Cause of another BD being
expelled or suspended
179
Automatic Disqualification
• Court injunctions prohibiting
from acting as IA, BD, or
underwriter
Termination: Form U5
Discharged
Permitted to resign
Deceased
Voluntary
05_S6_CN_Lessons_5.indd 113
Lesson 5.3
Other
180
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114
Lesson 5.3
Joining and Leaving a Firm: Form U4 and U5
181
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