Series 6

primary means of raising business capital. Investors who buy the stock buy a share of ownership in the company's net worth.

as part of its original charter, a corporation receives authorization from the state to issue, or sell, a specific number of shares of stock.

Once authorized, issued stock can be distributed to investors

Stock a corporation has issued and subsequently repurchased from the public. Does no carry the rights to vote and receive dividends

Includes any shares that a company has issued but has not repurchased - that is investor owned stock.

is a measure of how much a common stockholder could expect to receive for each share if the corporation were liquidated. the book value per share is the difference between the historical value of the corporation's tangible assets and liabilities, divided by the number of shares outstanding.

is an arbitrary value the company gives the stock in its articles of incorporation, and it has no effect on the stock's market price/

• Book value =
• Par value =
• Market value = supply and demand price
• Book value = current hypothetical liquidation value of a share
• Par value = an arbitrary accounting value

• stockholders exercise control by electing a BOD voting on corporation policy matters
• - issuance of convertible securities or additional common stock
• - substantial changes in the corporations business, such as mergers or acquisitions
• - election of board members

note: do not vote on dividends period

shareholders can cast one vote for each share of stock owned for each item on the ballot, such as seats on the board of directors

cumulative voting may be advantageous for small shareholders by giving them a greater opportunity to offset the votes of large shareholders by combining all their shares on a single seat

gives investors the right to maintain a proportionate interest in the company's stock by buying enough newly issued shares to maintain their proportionate ownership in the corporation.

protects stockholders from having to pay a corporation's debts in bankruptcy.

an investor who buys shares, which is considered bullish and is expecting the price to rise

involves borrowing shares to sell that the investor must eventually replace, which is bearish and expects the stock to go down in price

note: The difference in the price at which the shares are sold and the lower price at which they are bought to repay the broker/dealer is the investor's profit

an increase in the market price of shares

• 15%
• note: corporations receive a 70% exclusion on dividend income

points

is an equity security because it represents ownership in the corporation. Like a bond it is issued as an income security with a fixed or adjustable dividend

• - owners of preferred stock receive their dividends before common stockholders may be paid.
• - if a corporation goes bankrupt, preferred stockholders have a priority claim over common stockholders

note: preferred stock does not have voting or preemptive rights. Price is also sensitive to interest rates.

• Straight preferred - no special features beyond a stated dividend payment
• Cumulative preferred - dividend is paid in arrears - make up for prior years
• Convertible preferred - owner may exchange each preferred share for shares of common stock
• Participating preferred - owners share of corporate profits that remain after all dividends and interest due are paid
• Callable preferred - the company may buy back from investors at a stated price after a specified date
• Adjustable-Rate preferred - tied to the rates of other interest rate benchmarks, such as Treasury bill and money market rates, and can be adjusted as often as semiannually.

normally distributed by check and usually paid quarterly and taxed as dividend income in the year they are received.

company issues shares of its common stock as a dividend to its current stockholders. a stock's market price per share declines after a stock dividend, but the company total market value remains the same

note: not taxed when received

is the annual dividend (four times the quarterly dividend) divided by the current price of the stock. Stock dividend yield may also be referred to as its current yield

combination of the dividend income and price appreciation or decline over a given period of time

American depository receipts facilitate the trading of foreign stocks in US markets. ADRs are bought and sold in the US securities markets like stock.

note: remember that the stock represented by the ADR is originally traded in a foreign currency, and that dividends are initially paid by the foreign company in that currency; the dividends are simply exchanged for dollars before being passed on to the ADR holder

• - have no voting rights
• - they allow domestic investors purchase foreign issues
• - owners receive dividends in dollars

• - short term
• - exercise below market value
• - may trade with or separate from the common stock
• - offered to exiting shareholders with preemptive rights
• - one right issued per share outstanding

• - long term
• - exercisable above market value
• - may trade with or separate from the units
• - offered as a sweetener fro another security
• - number issued is determined by corporation

is a contract that establishes a price and time frame for the purchase or sale of a particular investment instrument

gives the buyer the right to call ( buy) a security away from someone.

gives the buyer the right to put (sell) a security to someone

bought in the case of a call, sold in the case of a put

can be issued not only by corporations, but by federal state, or local governmental bodies as well. can be secure or unsecured.

is a debt security whether issued by corporations, municipalities, the US government, or its agencies

trust indenture - legal contract between the bond issuer and a trustee representing bondholders

note: Federal and municipal governments are exempt from the trust indenture act provisions

accrues daily and is paid in semiannual installments over the life of the bond. Final interest payment is made when the bond matures, and it is normally combined with repayment of the principal amount

issuer kept no records of purchasers, and securities were issued without an investors name printed on the certificate. Because coupon bonds are not registered, whoever possesses them can collect interest on and either sell or redeem the bond.

buyers name appears on the bond certificate face

when a bond has both principal and interest, which are most corporate bonds.

owner's name printed on the certificate, but the coupons are in bearer form.

note: no longer issued

owners do not receive certificates. All US government and municipal bonds are available only in book-entgry form

Bonds must be fully registered or book-entry, not bearer - the issuer must have the name of the investor entitled to both principal and interest payments on its ownership list. New bonds are issued only in registered form or book-entry form.

an unsecured bond

• - unpaid wages
• - IRS, state, and county taxes
• - Secured debt (bonds and mortgages)
• - Unsecured bonds (debentures)
• - Subordinated debt
• - Preferred stockholders
• - Common Stockholders

secondary

represents the dollar amount of the investors loan to the issuer on a bond, and amount is repaid at maturity.

Accumulation units are used as an accounting measure to determine the annuitant's proportionate interest in the separate account during the growth phase of an annuity, referred to as the accumulation phase. When you contribute premium to your annuity these monies purchase accumulation units. As you continue payments you buy more and more accumulation units, which increase or decrease in value according to the performance of the insurance company's separate account.

Accumulation units help determine the annuitant's proportionate interest in the separate account during the growth (accumulation) phase, and are purchased when premium contributions are made. The actual number accumulated will vary, depending upon the amount and number of the policyowner's premium contributions. Annuity units help determine the amount of each payment during the distribution (annuitiaztion) phase. Upon annuitization of the contract, the policyowner's accumulation units are converted to a fixed number of "annuity units". The value of both units will vary based upon the actual performance of the separate account.

The AIR stands for assumed interest rate, and is the rate of interest an annuity provider uses in calculating the amount of each variable annuity income payment. It is conservatively estimated and projected over the estimated life of the contract, but it is not a guarantee of a specific return.

Both are municipal securities. GOs are issued to benefit the entire municipality and their interest and principal repayment comes from taxes collected. Revenue's are issued to finance a particular municipal facility that will generate income and be self supporting. Revenue bond interest and principal is repaid from the revenue generated by the facility.

The cooling-off period is the time period between when a securities registration statement is filed and that registration becomes effective, meaning it has been cleared for sale to the public. During this time period sales of the security and related activities are prohibited, but a preliminary prospectus (red herring) can be used to solicit indications of interest. In regards to advertising, the only form of advertising allowed during this period is a tombstone advertisement. The time period involved with the cooling-off period is a minimum of 20 calendar days, but it typically takes longer than that for a security to clear registration statements.

A mutual fund's expense ratio compares the fund's expenses (management fees and operating expenses) with the fund's average net assets. The expenses of the fund are: 1) the Board of Directors, 2) the Fund/Portfolio Manager (Investment Advisor), 3) the Custodian, and 4) the Transfer Agent. The expense ratio is always expressed as a percentage and is determined by dividing the fund's total expenses by the fund’s average net assets. Note that the Underwriter's fees are not part of the formula for determining the expense ratio. The Underwriter is compensated separately through the sales charges paid by investors and therefore is not considered an expense of the fund.

In order to protect the investors' assets, the Investment Company Act of 1940 requires each investment company to place its portfolio securities in the custody of a qualified third party (i.e. bank or similar financial institution). The custodian fills this role, and is responsible for the safekeeping of the fund assets, keeping asset records and performing the necessary bookkeeping and clerical functions at the fund level. The custodian must also keep the investment company's assets physically segregated at all times and is paid a fee for its services.

In order for an investment company to be defined as a diversified investment company, and advertise itself as such, it must meet all the requirements of what is referred to as the 75-5-10 rule or test. A minimum of 75% of the investment company's total assets must be invested in securities of companies other than the investment company or its affiliates. No more than 5% of the investment company's total assets can be invested in any one issuer. In addition, no more than 10% of the outstanding voting securities of any one issuer. The remaining 25% of the investment company's total assets may be invested in any manner in which the investment company deems appropriate as related to its investment objective. This means that the fund's overall portfolio could involve having more than 5% of its total assets invested in one company as well as owning more than 10% of the voting shares of one company. As long as the portion that is designated for the 75-5-10 rule meets those necessary requirements the fund would still be defined as a diversified investment company.

The dividend disbursing process for both open-end investment companies and closed-end investment companies involves the declaration date, the ex-dividend date, the record date and the payable date. The differences between these two types of investment companies in regards to this process basically lie with the record date and ex-dividend date. For open-end investment companies the ex-dividend date is set by the Board of Directors and is typically one business day after the record date. For closed-end investment companies the ex-dividend date is set by FINRA and is typically two business days before the record date.

Mutual funds must calculate the net asset value (NAV) of fund shares at least once per business day. While this calculation usually takes place at the close of the business day it can occur at any time during the business day as well. Purchases occur at the NAV plus a sales charge and sales generally occur at the NAV. At the time an order is placed to either buy or sell shares an investor will not know the price they will receive for the transaction until the next calculated NAV. This is what is referred to as forward pricing.

In any given month, if the separate account's performance is higher than the AIR, next month's payment will be higher than this month's. If it is lower than the AIR, next month's payment will be lower than this month's. If it is the same as the AIR, next month's payment will be the same as this month's.

Contributions to an individual annuity are typically done with after-tax dollars, meaning taxes have already been taken out. These after-tax dollars are considered the investor's cost basis and will not be taxed again upon distribution. The earnings, however, have grown tax-deferred and will be taxable upon distribution. After the contract is annuitized, each payment is considered part cost base (untaxable), and part return (taxable as ordinary income). The relative percentage, called the exclusion ratio, is determined by an IRS formula and is the percentage of the distribution that is not taxable to the annuitant.

There are two parties involved with option contracts, a buyer and a seller. For a call option, the buyer (also known as the holder, owner, or being long the option – as in a long call) pays a premium and has the right to buy the underlying security at the strike/exercise price that has been set in the option contract. Buyers of call options have the rights in regards to their call option, and have three choices available to them. They can exercise the option contract, sell it to another investor, or let it expire. Call buyers are hoping that the market price of the underlying security will rise, thus enabling them to exercise their call option and purchase the security at the lower strike price stated in the option contract.

ADRs are US securities used to facilitate investing in foreign stocks. Like all US securities they trade in US markets.

Just as the study material states, many ADRs, but not all ADRs, have voting rights. Holders of ADRs do not have voting rights, however, unless the issuer of the ADR has stipulated that the voting rights associated with the shares held in escrow by the issuer of the ADR will be passed on to the holder. For test questions you do not want to assume that the particular ADR in question has voting rights unless the question specifically tells you they do. With that in mind, on test day we recommend you approach these types of questions with the understanding that an ADR holder has no voting rights unless it is specifically stated that they do regarding the particular ADR in question.

You are correct in stating that from the U.S. investor’s standpoint that everything is done in U.S. dollars. This is done to facilitate Americans trading in foreign equity securities. It is important to remember, however, that the stock represented by the ADR is originally traded in the foreign currency, and that dividends are initially paid by the foreign company in their currency. This is then exchanged into U.S. dollars before being passed on to the ADR holder, which means that the exchange rate at that time will definitely have an effect on how many U.S. dollars this foreign currency amount converts to. Because of this fact, ADR holders have not only the normal business risks that are characteristic of owning stock; they also have currency risk as well.

Yes. With a rollover the account owner takes possession of the assets when moving them from one qualified account to another. This may only be done once per year and must be completed within 60 calendar days. Transfers allow assets to move directly from one qualified plan custodian to another without the account owner taking possession of the assets. There is no limit to the number of times per year a transfer can occur.

A short sale is the sale of a security the investor does not own. The investor initially borrows stock from a broker/dealer and then sells it at the market price. With a short sale the investor is hoping for a decline in the stock’s price so they can then purchase the stock at a lower price (than what they sold it for) and replace the borrowed shares to close their position. Keep in mind, however, that if the stock price increases rather than decline the investor is still obligated to replace the borrowed stock. Since theoretically the price of a stock can rise without limit, the investor in a short sale position has unlimited risk.

A defined benefit plan is designed to provide a specific benefit to the participant(s) at some time in the future. In other words, the participant(s) know what the outcome of their retirement plan will be. The amount of benefit is determined by a complicated formula which incorporates various information (including years of service, compensation, and retirement age) and is typically a percentage of the participant’s preretirement compensation. Making sure that specific benefit is there for the participant at that future date is the responsibility of the plan sponsor, meaning the plan sponsor assumes the investment risk. Due to the calculations and procedures involved, defined benefit plans could benefit the more senior and highly compensated employees.With defined contribution plans the participant(s) know what is being contributed to the plan. In other words, the participant(s) know what their input is. These plans also involve the use of a formula, in this case a contribution formula which typically involves a percentage of the participant’s income and could include matching on the part of the plan sponsor up to a certain percentage of the participant’s contribution. These contributions then accumulate until a future date, typically retirement, when the funds will be withdrawn. With these plans the participant does not know what their actual benefit will be and the participant does assume the investment risk. The actual benefit amount will depend upon the amount that has been contributed and the account performance. Defined contribution plans could benefit the younger employees due to the longer time involved that they would have to contribute to the plan.

Any decisions made on behalf of the customer regarding the asset (the security), the action (buy or sell), and/or the amount (number of shares, bonds, etc.) constitute discretion. Although in the typical discretionary account the agent or investment adviser representative will do all three, the rules state that as long as one has the power to make any one of those decisions, or a combination there of, the account is discretionary. In order to exercise discretion in a customer’s account, written authorization must be received from the client. Time and price are not considered discretionary.

Advertising, sales literature, communications sent to 25 or more prospective retail customers within a 30 calendar day period, and communications sent to 25 or more current retail customers within a 30 calendar day period that contain investment recommendations or which promote the services of the broker/dealer firm must all be approved by a principal before it is used. Other correspondence (other than that already covered above) to customers and communications sent to fewer than 25 prospective retail customers within a 30 calendar day period are to be approved by a principal in a timely fashion after its use.

A form letter is an email or letter sent to 25 or more prospective retail clients within a 30 calendar day period. Form letters are considered to be sales literature and must be approved by a principal before its use. Correspondence is a letter or email sent to one or more existing retail customers and fewer than 25 prospective retail customers within a 30 calendar day period. Correspondence is to be approved by a principal in a timely fashion after its use.

These are custodial accounts. With UGMA (Uniform Gift to Minors Act) the assets are managed by a custodian until the minor reaches legal age of majority in the state that the account is titled. With UTMA (Uniform Transfer to Minors Act) when the minor reaches legal age of majority the custodian can withhold transfer of the assets to the new adult up to a certain specified age (25 in most states, 21 in some states).

Speculative (non-investment grade) bond

Bank grade (investment-grade) bond

liquidity and marketability

Debt service

redeemed or redemption

Sinking fund

Call premium

Call protection

Refunding bonds

Bond yield

Current Yield

Yield to maturity

• - US treasury bills, notes, and bonds, and Series EE, HH, and I Bonds
• - New housing Authority bonds (NHAs)
• - Securities of the GNMA

• - Federal Farm Credit Bank (FFCB)
• - Federal Home Loan Mortgage Corporation (Freddie Mac)
• - FNMA or Fannie Mae

General obligation bonds (GOs)

• - Secured bonds
• - Debentures
• - Subordinated debentures
• - Income bonds

Treasury debt

T-Bills

T-Notes

T-Bonds

Treasury receipts

STRIPS

EE Bonds

HH Bonds

I Bonds

Agency Issued Bonds

• - only agency security backed in full by the US government
• - issues pass-through certificates
• - investors receive interest and principal on a monthly basis
• - yields are slightly higher than on Treasury
• - subjected to interest rate and prepayment risk

is a public corporation whose stock trades on the NYSE and was created to promote the development of a nationwide secondary market

is a publicly held corporation that provides mortgage capital

• - Mortgage backed securities that pool a large number of mortgages, usually on single family residences
• - pools of mortgage structures into maturity classes called tranches
• - issued by private sector financing corporations and government-sponsored corporations
• - Yield is higher then Treasury and interest/principle paid monthly
• - interest is subject to federal, state, and local taxes

Municipal Bonds

GOs bond

• - income taxes
• - license fees
• - sales taxes

• - property taxes
• - license fees
• - fines
• - other sources of funds to the municipality

used to finance any municipal facility that generates enough income to support its operations and debt services

note: debt service payments do not come from general or real estate taxes and are not backed by the full faith and credit of the municipality.

Legal opinion

are issued to raise working capital or capital for expenditures such as plant construction and equipment purchases

Secure and unsecure

• when the issuer has identified specific assets as collateral for interest and principal payments
• - Mortgage bonds have real property
• - collateral trust bonds own securities of other companies
• - equipment trust certificates such as railroad, airlines, trucking companies

Unsecured bonds

Guaranteed bonds

Income bonds or adjustment bonds

• - a security that has no reinvestment risk because no semiannual interest payment
• - only way to lock in a return

notes: even though zeros pay no regular interest income, an investor will still owe income tax each year on the amount by which the bond have accreted.

are corporate bonds that may be exchanged for a fixed number of shares of the issuing company's common stock

is often used to assess the volatility of a bond in response to interest rate changes - the longer the duration, the greater the volatility, and thus the risk

- are short-term, liquid debt obligations

provide businesses, financial institutions, and governments a means to finance their short-term cash requirements

• - T-bills that trade in secondary markets
• - Treasury and agency securities with remaining maturities of less than a year
• - Short-term discount notes issued by various smaller agencies

• - Banker's acceptance (BA)
• - Commercial paper (prime paper)
• - negotiable certificates of deposit
• - federal funds loans
• - Loans to broker/dealers

• - Time draft or letter of credit for foreign trade
• - Maximum maturity of 270 days

• - Issued by corporations
• - Unsecured promissory note
• - Maximum maturity of 270 days

• - Issued by banks
• - Minimum face value of $100,000
• - Mature in one year or less
• - Unsecured
• - Interest bearing

Economics

• Our nations annual economic output, all of the goods and services produced within it.
• - personal consumption
• - government spending
• - gross private investment
• - foreign investment
• - total value of exports

- Economist adjust GDP figures to constant dollars rather than compare actual dollars

Measures the rate of increase or decrease in a range of consumer prices (e.g., food, housing, transportation, medical care, clothing, electricity, entertainment, and services).

Note: most commonly used tool to measure rate of inflation.

continual increase in prices at the consumer level.

notes: increased inflation drives up interest rates of fixed-income securities, which drives down bond prices. Decrease in the inflation rate have the opposite effect: inflation declines, bond yields decline and prices rise

• example:
• - IF inflation increases AND interest rates go up THEN bond prices go down THUS bond yields go up
• - IF inflation decreases AND interest rates go down THEN bond prices go up THUS bond yields go down

is a decline in prices and usually takes place during a severe recession when unemployment is on the rise

periods of economic expansion are historically followed by periods of economic contraction in a pattern

• - Expansion
• - Peak
• - Contraction (decline)
• - Trough

an increased business activity - increasing sales, manufacturing, and wages

business will grow and reach its upper limit

when business activity begins to decline from peak

Occurs when the GDP declines for six consecutive months (two quarters)

When business activity stops declining and levels off

When a decline in real output of goods and services (GDP) last for six consecutive quarters.

conducts monetary policy by influencing the money supply, which in turn affects interest rates and the economy

• - Changes in reserve requirements
• - Changes in the discount rate (on loans to members banks)
• - Open-market operations (buying and selling Treasury securities)

Commercial banks must deposit a certain percentage of their depositors money with the Federal Reserve

A small change in the reserve requirement may have an exaggerated result in terms of the money supply

The interest rate that banks charge each other for such loans

The interest rate the Fed charges its members for short-term loans

note: Lowering the discount rate reduces the cost of money to banks, which increases the demand for loans. Raising the discount rate increases the cost of money and reduces the demand for loans.

was created to direct the FRB's pen market operations

notes: When the Fed wants to expand (or loosen) the money supply, it buys securities from banks. When the Fed wants to contract (tighten) the money supply, it sells securities to banks.

• - Federal spending
• - Money raised through taxation
• - Federal budget deficits or surpluses

• - Reduce the rate of inflation by reducing aggregate demand for goods and services if price levels are excessive
• - Increase the rate of inflation by increasing aggregate demand if low inflation is causing unemployment and economic stagnation

note: If the FRB eases interest rates, the money supply increases, making credit easier to obtain and increasing overall liquidity. Fiscal policy is considered an inefficient way to solve short-term economic problems

Base rate on corporate loans at large US money center commercial banks

Charge on loans to broker/delers with stock as collateral

The flow of money between the US and other countries

If the US dollar strengthens in value from 1.3 Swiss francs to 1.4, then goods priced in the Swiss francs will look cheaper to a US importer of Swiss goods. Exporters, on the other hand, profit if their own currency becomes weaker. If the US dollar weakens in value from 1.3 Swiss francs to 1.2, then goods priced in the US dollars look less expensive to Swiss buyer and a US exporter will be able to sell more.

Is a corporation or trust that pools investors money and then invests that money in securities on their behalf. Like corporate issuers, investment companies raise capital by selling shares to the public

• - Face-amount certificate (FAC)
• - Unit investment trust
• - Management investment companies

Is a contract between an investor and an issuer in which the issuer guarantees payment of a stated (face amount) sum to the investor at some se date in the future

• - are classified as investment companies
• - pay a fixed rate of return
• - do not trade in the secondary market but are redeemed by the issuer

Is an investment company organized under a trust indenture

note: The advantage to the investor is that they own a diversified interest but do not pay a management fee

• - They do not have BOD (they have trusts)
• - They do not employ investment advisors
• - They do not actively manage their own portfolios
• - UIT are investment companies as defined under the Investment company act of 1940

purchases a portfolio of bonds and terminates when the bonds in the portfolio mature.

Purchases shares of an underlying mutual fund

They actively manages a securities portfolio to achieve a stated investment objective.

note: two types of management investment companies - open-end and close-end

• - Capitalization fixed; single offering of shares
• - Issues common and preferred stock and debt securities
• - Share traded full only
• - Offerings and trading initial primary offering; secondary trading OTC or on an exchange; does not redeem shares
• - Pricing CMV + commission; price determined by supply and demand
• - Shareholders rights dividends (when declared); does not redeem shares
• - Ex Date SEt by SRO

note: Bid price (price at which the investor can sell) and the ask price (price at which the investor can buy.

• - Unlimited; continuous offering of shares
• - Issues common stock only; no debt securities; permitted to borrow
• - Share traded fractional
• - Offerings and trading sold and redeemed by the fund only; continuous primary offering; must redeem shares
• - Pricing selling price determined by formula in the prospectus
• - Shareholders rights dividends (when declared); voting
• - Ex Date set by BOD

Under the Investment Company Act of 1940 one must meet the requirements of the 75-5-10 test

• - At least 75% of the funds total assets must be invested in securities issued by companies other than the investment company itself or its affiliates
• - The 75% must be invested in such a way
• - no more than 5% of the funds total assets are invested in the securities of any one issuer
• - The fund may not own more than 10% of the outstanding voting securities of any one issuer

note: there are no conditions attached to the remaining 25%

Some investment companies choose to concentrate their assets in an industry or a geographic area, such as health care stocks, technology stocks

do not currently have to register with the SEC, and it requires that its buyers be accredited investors

note: Hedge funds are indirectly available to ordinary investors through mutual funds called funds of hedge funds

Similar to an index mutual fund. The difference is that the ETF trades like a stock on the floor of an exchange and, in this way, is similar to a closed-end investment company. Can be purchased on margin and sold short.

note: Expenses fee is quite low

Real estate investment trust is a company that manages a portfolio of real estate investments to earn profits for shareholders. Shareholders receive dividends from investment income or capital gains distributions.

The guidelines of Subchapter M of the Internal Revenue Code, by receiving 75% or more of its income from real estate and distributing 90% or more of its taxable income to its shareholders

• - The company is in the business of investing in, reinvesting in, owning, holding, or trading securities
• - 40% or more of the companies assets are invested in securities (government securities and securities of majority-owned subsidiaries are not used in calculating the 40% requirement)

• - Net assets of at least $100,000
• - A clearly defined investment objective
• - A registration statement, which includes the prospectus, must be filed with the SEC before securities may be sold to the public

• - Mutual funds must always be sold with a prospectus because they are continuous primary offerings. New securities must always be sold with a prospectus
• - Closed-end funds must be sold with a prospectus in their IPO only. When they are trading in the secondary market, closed-end funds need not be sold with a prospectus
• - Financial information in a prospectus in use for more than nine months may be no more than 16 months old. The Securities Act of 1933 requires that information disclosed to an investor is reasonably current.

Is the use of money borrowed from a bank through a brokerage firm to purchase securities.

note: SEC rules prohibit the purchase of mutual fund shares on margin.

• - Issue no more than one class of security
• - Maintain a minimum asset-to-debt ratio of 300%

note: asset-to-debt ratio, the answer to the question is 3:1 or 300%. but, if you are asked about the debt-to-asset ratio, the correct answer would be 1:3 or 33 1/3%

The Securities Act 1933

• - The prospectus that must be furnished to every person to whom the company offers the securities
• - The document containing information that need not be furnished to every purchaser but must be made available for the public inspections.

• - Purchasing securities on margin
• - Selling securities short
• - Participating in joint investment or trading accounts
• - Acting as distributor of its own securities (except through underwriter)
• - Selling uncovered options

One shareholder holding 51% of all the shares outstanding can determine a vote's outcome

note: not a majority vote of shareholders

Is an insurance product designed to provide retirement income. The term annuity refers to a stream of payments guaranteed for some period of time - for the life of the annuitant, until the annuitant reaches a certain age, or a specific number of years

It will result in a 10% penalty in addition to full income tax on anything over cost basis

Investors pay premiums to the insurance company that are invested in the company's general account

note: this product is not a security

Are currently popular among investors seeking market participation but with a guarantee against loss

note: If the index does well, the annuitant is credited with a specified percentage of the growth of the index - typically 80% or 90% of the growth. This is known as the participation rate. If the index does poorly the annuitant may receive the EIA's minimum guaranteed return - typically 3% or 4%. There is a cap and they have longer surrender charge

Keeps pace with inflation and the investor assumes the investment risk rather than the insurance company. Agent must be licensed for both security and insurance

To have the advantage of both the fixed and variable annuities. The investor contributes to both the general and separate accounts, which provides for guaranteed payments as well as inflation protection

• Pricing - NAV calculated once per business day
• Share value - Depends on performance of fund
• Regulated by - Act of 1933, Act of 1934, investment company Act of 1940, Investment Advisers Act of 1940
• Fees paid to - Portfolio manager

• Pricing - Unit value calculated once per business day
• Share value - Depends on performance of separate account
• Regulated by - Act of 1933, Act of 1934, investment company Act of 1940, Investment Advisers Act of 1940
• Fees paid to - Separate account manager

Insurance company contributing an additional 3 -5% to the premium payment. Bonus Annuities also allow withdrawal of 10-15% of premiums, or all of earnings, whichever is greater, without a penalty from the insurance company (though there may be the federal 10% penalty and income tax to be paid)

Most annuities, both fixed and variable, are sold with little or no sales charge. Instead there is a surrender charge for early termination

note: surrender period is longer for bonus annuities and generally the longest for index annuities

This is known as the annuities growth phase

This would be the annuity payout phase

Accumulation unit values are computed daily on a forward pricing basis. The annuity unit values are computed monthly based on actual performance versus the assumed interest rate (AIR)

Assumed interest rate is a conservative projection of the performance of the separate account over the estimated life of the contract

note: AIR only applies if the investor annuitizes

• - If separate account performance is greater than the AIR, next months payment is more than this months
• - If separate account performance is equal to the AIR, next months payment stays the same as this months
• - If separate account performance is less than the AIR, Next months payment is less than this months

His cost base is the total amount he has invested. He will be liable for income tax on the growth plus a 10% penalty on the growth if he is under the age of 59 1/2

• - Life annuity (also known as straight life or life only)
• - Life annuity with period certain
• - Joint life with last survivor annuity
• - Unit refund option

The insurance company will pay the annuitant for life. When the annuitant dies, there are no continuing payments to a beneficiary. Money remaining in the account reverts to the insurer.

The annuitant is guaranteed monthly income for life with this option, but if death occurs within the period certain, a named beneficiary receives payments for the remainder of the period.

If value remains in the account after the death of the annuitant, it is payable in a lump sum to the annuitants beneficiary.

Also known as permanent or cash value insurance and provides protection for the whole of life

Unlike term insurance, which provides only a death benefit, whole life insurance combines a death benefit with an accumulation, or a savings element referred to as cash value

note: insurer invest reserves in conservative investments (bonds, real estate, mortgage loans)

The purpose is to let the customer assume some investment risk in an attempt to get inflation protection for his death benefit. Contains both a general account and a separate account.

Variable life policies provide policy owners on investment results but may never fall below a certain amount and is invested in the general account

note: The death benefit will never be less than the minimum guaranteed, even if the separate account performs poorly.

Is issued with a minimum guaranteed death benefit

note: The premium is calculated according to the policy owners age and sex and the policy face amount at issue

Is a type of variable life insurance with flexible premiums (and thus flexible death benefit.

• - Scheduled premium
• - Fixed death benefit
• - Premiums to general account
• - Guaranteed cash value

• - Scheduled premium
• - Minimum guaranteed plus variable death benefit
• - Premiums to general and separate account
• - No guaranteed cash value

• - Flexible premium
• - Variable death benefit
• - Premiums to separate account
• - No guaranteed cash value

• - The administrative fee
• - The sales load
• - The state premium taxes

note: The allowable sales load on variable life insurance is the equivalent of an average of 9% of premium per year, computed over a 20-year period. The sales charge may be front-end loaded to 50% of the first years premium, but must average out to 9% over 20-years.

• - Mortality risk fee (cost of insurance)
• - expense risk fee
• - investment management fee

note: mortality risk fee covers the risk that the policy owner may live for a period other than that assumed

The quick way of remembering the charges deducted from the gross premium

• - a Guaranteed minimum provided by the portion of funds invested in the general account
• - a variable death benefit provided by those invested in the separate account

note: The variable death benefit is typically adjusted annually, while the cash value is computed monthly. Should the separate account returns be less than the AIR, the contracts death benefit may decrease; however, it may never fall below the amount guaranteed at issue

• - Death benefits are calculated annually
• - Cash value is calculated monthly
• - Unit values are calculated daily

• - If the separate account performance for the year is greater than the AIR, the death benefit will increase
• - if the separate account performance for the year is equal to the AIR, the death benefit will stay the same
• - If the separate account performance for the year is less than the AIR, the death benefit will decrease

note: The AIR has no effect on cash value accumulation in a variable life policy.

• - 75% of the cash value must be available for poliy loan after three year
• - The insurer is never required to loan 100% of the cash value. Full cash value is obtained by surrendering the policy to the insurer
• - If, due to poor separate account performance, the loan exceeds the policy cash value, the policy owner must make payment to the insurer within 31 days
• - If the insured dies with a loan outstanding, the death benefit is reduced by the amount of the loan
• - If the insured surrenders his contract with a loan outstanding, cash value is reduced by the amount of the loan.

• - The contract exchange provision must be available for a minimum of two years
• - No medical underwriting (evidence of insurability) is required for the exchange

note: The new WLI policy has the same contract date and death benefit as the minimum guaranteed in the VLI contract. The premiums equal the amounts guaranteed in the new WLI contract (as if it were the original contract)

• - Because variable life is considered a contractual plan, the maximum sales charge over the like of the contract is 9%
• - A policy owner who wants a refund within 45 days receives all money paid
• - Refund provisions are for two years
• - For the first year, the refund is sales charges in excess of 30% of the premiums paid plus the cash value
• - For the second year, the refund is sales charges in excess of 10% of the premium paid plus the cash value
• - Thereafter, the policy owner has access to the cash value only

Contract holders receive one vote per $100 of cash value funded by the separate account. Contract holders must be given the right to vote on matters concerning separate account personnel at the first meeting of contract holders within one year of beginning operations.

note: Do not confuse the voting rights of variable annuities and variable life. Variable annuities and mutual funs are the same: one vote per unit (share). Variable life is one vote per $100 of cash value

Upon the death of the insured, the beneficiary(s) generally have several choices as to how they would like to receive the proceeds

• - Lump sum
• - Second to Die
• - Annuity

The proceeds are paid out as one lump sum

The policy pays upon the death of the second of two insured people.

note: technically this is not a settlement option; it is a form of policy

The beneficiary may opt to either place the proceeds into a deferred annuity or take an immediate annuity

note: the beneficiary my choose interest only by leaving the principal with the insurance company and receives a monthly check based on interest earned in the account

The tax bracket is defined as the percent tax due on the next dollar the individual will receive

Receipts from selling securities for a more than was originally paid for it falls under the capital gains tax.

The dividend distributions are paid from net investment income and are paid on a quarterly basis

Includes gross investment income- dividend and interest income from securities held in the portfolio - minus operating expenses

net investment income = dividends + interest - expenses of the fund (D+I-E=)

note: dividends from net investment income are taxed as ordinary income to the shareholder. Maximum income tax rate is 15%. A short-term gain is identified distributed, and taxed as a dividend distribution, not qualifying for the 15% tax rate

A fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount

Ordinary income is income that is received from dividends from stock and interest from bonds

Is sent to shareholders after the close of the year, details tax information related to distributions for the year. This enables the investor to enter the proper information on the investors form 1040

note: Dividends must be reported as ordinary income; long-term capital gains distributions must be reported on the investor's capital gains schedule

Divide annual dividend paid from net investment income by the current offering price

Annual dividend divided by POP

note: Mutual fund yield is found exactly like the current yield on common stock. Never include capital gains in the calculation of current yield

If dividends and capital gains distributions were reinvested

The day after the record date

note: the ex-date and ex-dividend date are interchangeable for mutual funds and would be determined by the BOD; however, is the next business day after the record date

A registered representative encourages an investor to purchase funds shares before a distribution because of this tax liability and would be a violation under FINRA

note: Not only are investors subject to taxation, they have also experienced an immediate depreciation in the value of their shares.

Is the amount of money invested on which taxes have been paid. Upon liquidation, cost base represents a return of capital and is not taxed again.

note: To find the cost basis of mutual fund shares, add the price paid and all reinvested distributions.

Total value of funds shares - cost base = taxable gain or loss

• - FIFO
• - Share identification
• - Average basis

When shares are sold, the cost of the shares held the longest is used to calculate the gain or loss

note: If the investor fails to choose the accounting method, the IRS assumes the investor liquidates shares on a FIFO basis

The investor keeps track of the cost of each share purchased and used this information when deciding which shares to liquidate. He then liquidates the shares that provide the desired tax benefit.

The shareholder calculates average basis by dividing the total cost of all shares owned by the total number of shares.

• - If an investor neglects or fails to include their tax ID number (social security number) when purchasing mutual funds shares, the fund must withhold 28% of the distributions to the investor as a withholding tax.
• - Corporations that invest in other companies stock may deduct 70% of dividends received from taxable income

• - Funds that comply with subchapter M (conduit theory) are known as regulated investment companies
• - Mutual fund yield is calculated by dividing the annual dividend by the POP. Capital gains distributions are not included
• - If asked the ex-date of a mutual fund, the best answer is as determined by the BOD; otherwise, choose the business day after the record date
• - Dividends and capital gains are taxable whether reinvested or taken in cash
• - An investor's cost basis in mutual fund shares is what was paid to buy the share plus reinvested dividends and capital gains distributions
• - The IRS always assigns FIFO for share liquidation unless the investor chooses a different method
• - $3,000 of net capital loss may be used as deduction against ordinary income each tax year. Unused capital loss may be carried forward indefinitely.
• - There is no tax exclusion available on dividends paid to individuals but corporations may exclude 70% of dividends received from taxation.
• - Although an exchange from one fund to another within the same family is not subject to a sales charge, it is a taxable event. Any gain or loss on the shares sold is reportable at the time of the exchange
• - When a shareholder dies, this shares are assigned a cost basis equal to the value of the shares on the date of death

• Qualified plan - allow pretax contributions to be made
• Non qualified plan - contributions only with after-tax money

• - Contributions currently tax deductible
• - Plan approved by the IRS
• - Plan may not discriminate
• - All withdrawals taxed
• - Plan is a trust
• - Strict IRS and labor department reporting and disclosure
• - Plan must be in writing
• - Tax on accumulation is deferred

• - Contributions not currently tax deductible
• - PLan does not need IRS approval
• - Plan may discriminate
• - Excess over cost base taxed
• - Plan is not a trust
• - Limited reporting and disclosure
• - PLan must be in writing
• - Tax on accumulation is deferred

• - Deferred compensation
• - Payroll deduction programs
• - Section 457 plans

note: Both plans may be used to favor certain employees (typically executives) and because these plans may be discriminatory plans, the employer may choose to provide benefits to certain employees but exclude others.

Is a contractual agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. It is assumed that the employee will be in a lower tax bracket at retirement age.

Note: these plans are not available to company board members because they are not considered employees for retirement planning purposes

Allow employees to authorize their employer to deduct a specified amount for retirement savings from their paychecks. The money is deducted after taxes are paid

Are non-qualified retirement plans set up by state and local governments and tax-exempt employers for their employees. They function as deferred compensation plans in which earning grow tax deferred and growth and accumulation are taxed only at the time of distribution.

note: 401(k) plans are considered salary reduction plans, not payroll deducted plans

IRAs were created to encourage people to save for retirement in addition to other retirement plans in which they participate. Anyone who has earned income is allowd to make an annual contribution of up to $5,000 or 100% of earned income, whichever is less.

notes: Earned income is work from wages, salaries, bonuses, commissions, tips, and alimony. If contribution limit is exceeded, a 6%excess contribution penalty applies to the amount over the allowable portion.

Distribution may begin without penalty after age 59 1/2 and must begin by April 1 of the year AFTER the individual turns 70 1/2. Distribution before age 59 1/2 are subject to a 10% penalty as well as regular income tax

• - Death
• - Disability
• - Purchase of a principal residence by a first-time homebuyer
• - Education expenses for the taxpayer, a spouse, child, or grandchild
• - Medical premiums for unemployed individuals
• - Medical expenses in excess of defined AGI (Adjusted gross income

note: If distributions do not begin by April 1 of the year after the individual turns 70 1/2, a 50% insufficient distribution penalty applies

• - Collectables (antiques, gems, rate coins, works of art, stamps
• - Life insurance contracts
• - Municipal bonds

• - Short sales of stock
• - Speculative option strategies
• - margin account trading

• - Stocks and bonds
• - Mutual funds (other than municipal bond funds)
• - UIT
• Government securities
• - US government-issued gold and silver coins
• - Annuities

Individuals may move their investments from one IRA to another IRA or from a qualified plan to an IRA. Rollovers may take place once in a 12-month period and must be completed within 60 days; 100% of the funds withdrawn must be rolled into the new account or they will be subject to tax and a 10% early withdrawal penalty if applicable. Transfers occur when the account assets are sent directly from one custodian to another, and the account owner never takes possession of the funds. There is no limit on the number of transfers that may be made during a 12 month period.

• - Maximum contribution of $5,000 per year per individual
• - $6,000 after age 50
• - Contributions are not tax deductible
• - Any "qualified distribution" from a Roth IRA is free from federal income taxes
• - Distributions are not required to begin at age 70 1/2
• - No 10% early distribution penalty for death, disability, and first-time home purchase

• - Contribution limit is $2,000 per year per child under age 18
• - Contributions may be made by adults other than parents; total for one child is still $2000
• - Contributions must cease after the child's 18th birthday
• - Contributions are not tax deductible
• - Distributions are tax free if taken before age 30 and used for education expenses
• - Under most circumstances, if the money is not used, the money is distributed to the beneficiary (the child), and earnings are subject to ordinary income tax plus a 10% penalty.

• - Prepaid tuition plan: allow donors to lock in current tuition rates by paying now for future education costs.
• - College savings plan

• - College savings plan may be set up in more than one state, though the allowable contribution amount varies from state to state
• - There are no income limitations on making contributions to a 529 plan
• - Contributions may be made in the form of periodic payments, but contributions follow the tax rules for gifts, They are thus limited to $13,000 per year per donor, though the donor may contribute $65,000 in one year (or married couple may contribute $130,000 in one year) but then may make no more contributions for five years.
• - There are few restrictions on who may be the first beneficiary of a 529 plan. However, if the beneficiary is redesignated, the new beneficiary must be a close family member of the first
• - The assets in the account remain the property of the donor, even after the beneficiary reaches legal age. However, if the account is not used for higher education, and the IRS concludes that the plan was not established in good faith, it may impose fines and other sanctions

The employer simply contributes a specified fraction of the employee's compensation up to an indexed maximum

Is a qualified plan that offers ease of administration to small-business owners. Employees open IRAs and the employer makes contributions on their behalf.

note: An employer is allowed to contribute up to 25% of an employee's salary. Any employee that is at least 21 years of age, has worked for the employer for three of the past five years, and has received a minimum level of compensation in the current year.

Are retirement plans for business with fewer than 100 employees that have no other retirement plan in place. The employee makes pretax contributions into a SIMPLE up to the indexed contribution limit. The employer makes matching contributions, with no upper limit as to the percentage matched, as long as the total contributed does not exceed the indexed dollar limit.

Are qualified plans intended for self-employed persons and owner-employees of unincorporated business or professional practices who file Schedule C, such as doctors or lawyers. Business must show a profit to qualify

A person may make contributions to a Keogh until age 70 1/2. Employers must make contributions into the plans of their eligible employees in an amount equal to their own post contribution percentage

• - Have worked at least 1000 hrs in the year
• - Have completed one or more years of continuous employment
• - Is at least 21 years of age

May be set up by a business with no full-time employees - only the owner(s), Spouse(s), and part-time employees. Plans offer higher contribution limits than other plans, greater flexibility as to when and how often contributions will be made, and penalty-free loans from the plan's funding, provided the loan is paid back on time. The business can be a sole proprietorship, a partnership, or a C Corporation, S Corporation, limited liability corporation.

• Are a form of Tax-sheltered Annuity (TSA)
• - Public educational institutions
• - Private schools
• - Tax-exempt organizations
• - Religious organizations

note: The deferred amount is excluded from the employee's gross income and earnings accumulate tax free until distribution. Students may not participate in a 403(b) because it is only available to employees

• - Defined benefit plan: promises a specific benefit at retirement that is determined by a formula involving typical retirement age, years of service, and compensation level achieved
• - Defined contribution plan: are easier to administer. The current contribution amount is specified by the plan; however, the benefit that will be paid at retirement is unknown.

Are type of defined contribution plan that allows the employee to elect to contribute a specific percentage of salary to a retirement account. Contributions are excluded from the employee's gross income and accumulate tax deferred

Requires after-tax contributions but allows tax-free withdrawals, provided the plan owner is at least 59 1/2- though unlike a Roth IRA, there are no income limitations on who may have such a plan.

• A participant must begin to receive distributions from his qualified retirement plan by April 1 of the later of the following year
• - The first year after the calendar year in which he reaches age 70 1/2
• - The first year after the calendar year in which he retires from employment with the employer maintaining the plan

note: If you are still working for that employer and are over 70 1/2 minimum distributions are not required until after you retire.

• Was established to prevent abuse and misuse of pension funds. ERISA guidelines apply to private sector (corporate) retirement plans and certain union plans - not public plans like those for government workers
• - set up the guidelines such as 21 years or older and have performed one year of full-time service (1000 hrs) to participate.
• - Funds must be kept separate from other corporate assets.
• - Employees are entitled to their entire retirement benefit within a certain number of years of service, even if they leave the company
• - The plan document must be in writing, and employees must be given annual statements of account and updates of plan benefits
• - All eligible employees must be treated impartially through a uniformly applied formula.
• - Beneficiaries must be named to receive an employees benefits at death

note: ERISA applies to private sector plans (corporate) only.

Member firms and their personnel are required to cooperate in any investigation conducted by FINRA, giving information verbally or in writing or making records available in a timely fashion.

Any sale of securities outside an associated person's regular business and his employing member.

note: Private Securities Transactions are known as "selling away"

• - Provide prior written notice to his employer
• - Describe in detail the proposed transaction
• - Describe in detail his proposed role in the transaction
• - Disclose if he has or may receive compensation for the transaction

The purchase of a limited partnership unit or mutual fund shares, is not considered an outside employment or business activity.

• - Recommending any investment unsuitable for the customers financial situation and risk tolerance
• - Short-term trading of mutual funds
• - Setting up fictitious accounts to transact business that otherwise would be prohibited
• - Making unauthorized transactions or use of funds
• - Recommending purchases that are inconsistent with the customers ability to pay
• - Committing fraudulent acts, such as forgery or the omission or misstatement of material facts

• - 3 years from the alleged violation and within one year of its discovery.
• - No dollar limit is placed on damages in lawsuits based on allegation of manipulation

Excessive trading in a customer's account and is an abuse of fiduciary responsibility

States that no member or person associated with a member broker/dealer shall, directly or indirectly, give or permit to be given anything of value, including gratuities, in excess of $100 per individual per year to any principal, employee, or representative of another member firm where the payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity.

• - gifts that do not exceed annual amount per person currently fixed at $100 and are not preconditioned on achievement of a sales target (pens, calendars are ok)
• - An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target. Season tickets would not be acceptable.
• - Payment or reimbursement by fund underwriters in connection with meetings held by the underwriter or by a member for the purpose of training or education of associated person of a member

Is when a registered representative encourages an investor to purchase shares before a distribution because of this tax liability

A customer unknowingly buys investment company shares in an amount just below an amount that would qualify the investment for a reduction in sales charges. As a result, the customer pays a higher dollar amount in sales charges, which reduces the number of shares purchased and increases the cost basis per share

• - There is an immediate family relationship between the representative and the customer.
• - The customer is in the business of lending money (e.g. banks)
• - The customer and the representative are both registered persons with the same firm
• - The customer and the representative have a personal relationship outside of the broker-customer relationship
• - The customer and the representative have a business relationship outside of the broker-customer relationship.

note: other than the first two cases above, before borrowing from or lending to a customer, a representative must advise his firm in writing and receive written permission

• - Affiliations between an adviser and any product suppliers
• - Compensation arrangements for advisory services to clients in addition to compensation from such clients fro such services
• - Charging a client a fee for providing investment advice when the adviser or the advisers employer will receive a commission for executing securities transactions based on that advice

An agent may share in an account with a customer if the agent has written consent from both the customer and the employing firm and shares in profit and losses proportionate to his contribution. In this situation, it is permissible to commingle agent and customer funds.

note: A firm and a customer may never have a joint account.

Broker/dealer and investment advisor

Transactions intended to portray an artificial market for a stock.

The practice consists of arranging for a deceptively large volume of trades to generate the illusion that there is more interest in a particular security than there really is.

Consists of selling simply to keep the price below a certain level.

Consists of buying simply to keep the price above a certain level

note: This is lawful with new issues if it is done by the underwriter and if it is provided for in the prospectus)

Is buying and/or selling to keep the price within a certain range

Is the unethical business practice of a broker/dealer or one of its representatives placing a personal order ahead of a previously received customer order

Fined up to $1 million, sentenced to prison for up to 10 years, or both. The maximum fine is $2.5 million for other than a natural person (broker/dealers or other businesses)

• - COP handles complaints
• - COP handles trade practice complaints

• - COA handles disputes between members, or any problem between parties associated with the securities industry
• - Is the industry choice over civil court because it is cheaper. There are no appeals, and decisions are binding on all parties

Established the US Treasury Department as the lead agency for developing regulations in connection with anti-money laundering programs and requires broker/dealers to establish internal compliance procedure to detect abuses.

note: more concerned with where the funds are going

• - verify the identity of any new customer
• - Maintain records of the information used to verify identity
• - Determine whether the person appears on any list of known or suspected terrorist or terrorist organizations.

• - Customer name
• - Date of birth
• - Address
• - SSN
• - For non-US person taxpayer ID, passport #

note: An exception is granted to persons who do not currently have, but who have applied for SSN

-Excess of $10,000 ($10,001)

note: Any electronic fun transfer (wire transfer) in excess of $3,000 must be reported.

$5,000 or more

• - Customers are not concerned about accounts or products losing value or alternates, which offer better potential returns or lower transactions costs
• - Clients supply inadequate, false, or misleading information
• - Clients decline to engage in a transaction when they know that a CTR will be filed, or they attempt to structure smaller transactions to avoid the filing of a CTR
• - Funds are moved in and out of accounts in short period of time
• - There are wire transfers to foreign countries or offshore accounts, particularly when coming from the proceeds of a loan
• - Customers with a known criminal background begin to conduct transactions substantial in number or size

• Placement - is the stage when funds are moved into the system (most vulnerable to detect)
• Layering - is the stage when a confusing set of transactions is conducted to make the origin of the funds unclear
• Integration - is the stage when the funds are invested in legitimate enterprises

• - Establish and implement policies and procedures that can be reasonably expected to detect and cause reporting of suspicious transactions
• - Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with anti-money laundering requirements
• - Provide for independent testing for compliance to be conducted by member personnel or by a qualified outside party
• - designate an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program
• - Provide ongoing training for appropriate personnel.

Within the US Treasury Department and maintains a list of individuals and entities viewed as a threat to the US

Those identified on the list are subject to specific governmental sanctions

note: Each blocked transaction must be reported to OFAC within 10 days of their occurrence.