Primerica - Series 6

8/18/2019 Primerica - Series 6

1/66

Series 6 Review

Student Workbook


2/66

FOR INTERNAL USE ONLY. NOT TO BE USED WITH, OR DISTRIBUTED TO, THE PUBLIC.

© 2012 Primerica / 12POL100 / 6.12


3/66

PREP TO PASS – SERIES 6 REVIEW

Checklist

1. Set-up securities profile

2. Submit your U-4

3. Complete the fingerprint process

4. Complete the Pre-Study Material (Kaplan or TesTeachers)

5. Open your exam window

6. Schedule to take the Series 6 exam 5 – 7 days afterparticipating in Prep to Pass

7. Bring a highlighter to the broadcast


4/66


5/66


1

Chapter 1 (8 questions)

Securities Markets, Investment Securities, and Economic Factors

1-1 Primary Market

The New Issue Market

Initial Public Offering (IPO)

Net proceeds from IPO go to the issuing corporation to raise working capital

Underwriter Contracts

Best Efforts - Issuer has financial risk

All or None - Issuer has financial risk

Mini-Max - Issuer has financial risk

Stand by - Underwriter has financial risk

Firm commitment - Underwriter has financial risk

Red Herrings

Solicitation for interest in upcoming IPO

Cannot purchase stock yet

Tombstone Ads

Announcing an upcoming IPO

Must include disclaimer


6/66


2

1-2 Secondary Market

Trading of Issued Securities

Exchange Market

Auction style

Physical Location (NYSE)

Highest Bidder

Over The Counter Market (OTC)

Negotiated market

Telephone to Telephone or Computer to Computer

No physical location

Fourth Market – (Instinet)

Institutional Trading

1-3 Market Terms

Trade Date

The recorded date of the transaction

Settlement Date (a Regular way settlement)

Corporate & municipal securities (T+3)

Government Securities (T+1)

Cash Trades (Mutual Funds) same day


7/66


3

1-4 Dividend Dates

Declaration Date

The day the Board Of Directors authorizes the dividend

Record Date

The day the shareholder must officially own shares to receive the dividend

Ex-Dividend Date

Two business days prior to the Record Date

Must purchase shares before EX date if you want to receive the dividend

Payment Date

The date on which the declared dividend will be paid

Ex-Dividend Dates

NovemberSunday Monday Tuesday Wednesday Thursday Friday Saturday

4 5 6 7 8 9 10

11 12

Ex-Dividend (A)for OTC& Exchange

13 14

Record Date (A)(Ex-Dividend(A) for MutualFunds)

15

Ex-Dividend(B) for OTC& Exchange

16 17

18 19

Record Date (B)(Ex-Dividend(B) for MutualFunds)

20

Ex-Dividend(C) for OTC& Exchange

21 22

Thanksgiving

23

Record Date (C)(Ex-Dividend(C) for MutualFunds)

24


8/66


4

1-5 Price Quote Terms

Bid Price (“Wholesale”)

The smaller number in a quote (NAV)

The highest price a buyer is willing to payYou sell at Bid

Asked Price (“Retail”)

NAV + SC = POP or Asked

Larger number in a quote

You buy at Asked

1-6 Corporate Securities

Equity Securities = Ownership

Common Stock

Speculative capitalization for investor

When you buy common stock you become part owner in corporation


9/66


5

Stock Diagram

When a company incorporates,

they are authorized to issue a

certain number of shares.

Capitalize to raise money

Saved to raise

money at a

later date

Reasons to Buy Back

1) Employee Stock Option Plan

2) Think Stock will go up

3) No Voting rights

4) Receives No Dividends

Investing Public

Pre-emptive Right

A common stock shareholder’s right to maintain their proportionate

share of ownership in the corporation

Preferred Stock

No voting rights

Dividend or Cumulative preferred

All the dividends that are in arrears must be paid before the

common stockholders can receive any dividends

Straight preferred

Pays a stated dividend; does not pay dividends that are in arrears

Participating preferredPays a stated dividend and allows shareholders to participate in

additional dividends

1,000,000

Authorized

600,000

Issued

400,000

Unissued

200,000

Treasury

400,000

Outstanding


10/66


6

1-7 American Depository Receipts

Issued by American banks

Represents ownership shares in foreign companies

Listed on foreign exchanges

Reduces currency exchange risk

1-8 Voting rights

Statutory voting

1 vote per BOD vacancy per share

Statutory Voting

Director 1

100 Votes

Director 2

100 Votes

Director 3

100 Votes

Director 4

100 Votes

Investor100 Shares


11/66


7

Cumulative voting

Number of shares x number of vacancies on BOD

Cumulative Voting

Director 1

0 Votes

Director 2

0 Votes

Director 3

0 Votes

Director 4

400 Votes

Investor100 Shares


12/66


8

1-9 Rights, Warrants, Options

Rights Warrants Options

Life Span Short – usually lessthan 60 days

Long – Usually three tofive years, but could be

longer

Varies – usually ninemonths or less, but

many be as long asthree years

UnderlyingInstruments

Stocks Stocks, bonds Stocks, bonds,indexes, and foreigncurrencies.

Use Allow existing stock-holders to maintaintheir proportionate

interest in a company

“Sweetener” attachedto issues of stocks andbonds to encourage

investors to buy them

Hedging andSpeculation

Bullish Call DefinedBuyerhas the right to purchase

securities at strike price

Bearish Put DefinedBuyerhas the right to sell

securities

1-10 Debt Securities

Bonds are debt securities that represent an investor’s loan to the issuer

Bond yields

Premium, Face/Par, Discount

Nominal Yield or Coupon Rate

Current Yield

Yield to Maturity


13/66


9

Bond Yields (Bond See-Saw)

YTM

CY _____%

Premium

$ ________

NY or CR

Face or Par$ 1,000

Discount$ ________

YTM

AnnualInterest$ ________

1-11 Secured Bonds

Mortgage Bonds

Most common type

Backed by real property that the issuer owns

Equipment Trust Certificate

Backed by a specific piece of equipment

Example: Airplanes or Railroad cars

Not backed by issuer

CY _____%

NY


14/66


15/66


11

1-15 Government Securities

Marketable – Transferable

U.S. Government Securities

MarketableU.S. Bonds Maturity

MinimumDenominations Interest Price

T–Bills(13 – 26 – 52) Weeks

or(3 – 6 – 12) Months

$ 1,000 At Maturity Discount

T–Notes 1 – 10 Years $ 1,000 1/2 Year Par

T–Bonds 10 – 30 Years $ 1,000 1/2 Year Par

Test Tip: _________________________________________________

Non marketable – Redeemable

U.S. Government SecuritiesSold at Discount

“Earns” Interest

Sold at Face Value

“Pays” Interest

Non-Marketable Series EE Series HH

Denominations $50 – $10,000 $500 – $10,000

Purchased or Sold At: 50% Discount

At Face Value

in Exchange for Series “E”

Agency Bonds – Government National Mortgage Association (Ginnie Mae) the

only agency backed by U.S. Government


16/66


12

1-16 Municipal Bonds (Federally Tax Free)

General Obligation (GO bonds)

Issuers must have taxing authority

Cities and Counties generate tax revenue through property tax (Ad Valorem)

States issues are generally secured by income, gasoline, and sales taxes

Revenue Bonds

Issued to fund a distinct project (Toll Roads, etc.)

Not backed by taxation

1-17 Money Market Instruments

Treasury Bills

Certificate of deposit (CD)

Minimum denomination is $100,000

Commercial Paper

Short-term debt instrument only issued by highly rated corporations

Maximum maturity of 270 days

Bankers Acceptance

Import and export business

Re-purchase Agreement

One financial company borrows from another

Borrower sells government securities to lender

Borrower agrees to buy it back at a higher price, which equals the interest onthe loan


17/66


13

1-18 Monetary Policy

Controlled by Federal Reserve Board (FRB)

Primary focus is to control inflation

Supervise and regulate banks

Maintain a stable financial system

1-19 Fiscal Policy

Controlled by Federal Government

Primary focus is stable economic growth and high levels of employment

The Government’s use of taxes and expenditures


18/66


14

Notes


19/66


15


Securities And Tax Regulations

2-1 Securities Act of 1933

Primary Market

Paper Act

2-2 Securities Exchange Act of 1934

Secondary Market

People

2-3 Exempted Securities

Securities that do not have to register with SEC

U.S. Government Securities

Municipal

Commercial Paper

2-4 Exempted Offerings

Regulation D

Private Placement

Sold to no more than 35 non-accredited investors

Accredited investor

Any individual that has a net worth of at least 1 million dollars orhas earned at least $200,000 for the past 2 years

Letter stock


20/66


16

Regulation A

The small issue exemption

New issues raising less than 5 million dollars during a 12 month period

2-5 Broker and Dealers

Agency vs. Principal Transactions

Agency Principal

Broker Dealer

OthersActs for

Self

AgentActs as

(Owner) Principal

CommissionPaid by

Mark-up

No Risk Assumes Risk

2-6 Financial Industry Regulatory Authority

FINRA

Self-Regulatory Organization (SRO)

Statutory Disqualification (SD)

Promote self-discipline among members

Enforce rules of fair practice

Member firms can’t misuse FINRA name


21/66


17

2-7 Registrations of Members

Registered Representatives (Series 6) and Registered Principals (Series 26)

Must renew registration once every year by the end of the year

Non-renewal for 2 years means Rep must retest

2-8 Securities Exchange Commission – (SEC)

5-member board, 5 year term, appointed by President, confirmed by Senate

No more than 3 members can be affiliated with any one political party

2-9 Securities Investor Protection Act – (SIPC)

Protect investor’s cash and securities in the event their broker becomes insolvent

Limits

$500,000 in securities or $250,000 in securities and max $250,000 in cash

Unlimited protection if all of the securities are registered in the name of the client

2-10 Investment Advisor (IA)

Any person who advises for a fee, not a commissions

IA managing less than $100 million in assets must register with the state(s)

Under SEC regulations, advisors managing between $100-110 million have the option

to register with either the state(s) or the SEC

If managing in excess of $110 million, the IA must register at the federal level

2-11 Exclusions from IA

Banks

Lawyers, accountants, teachers, and engineers (L.A.T.E.)

The advice must be incidental to their practice and they cannot be paid for that advice

Publishers


22/66


18

2-12 Investment Company Act of 1940

3 types of Investment Companies

2-13 Insider Trading Act 1988

Any person who purchases or sells securities while in possession of material

non-public information, or communicates such information to another person isin violation

Civil Penalties

Not to exceed the greater of $1 million or 3 times the profit gained or loss avoided

Criminal Penalties

Criminal penalties may also be imposed (up to 20 years in prison)

2-14 Registered Representatives (RR)

Must submit U-4 form

Must pass qualifying exams (Series 6, 63)

U.I.T.(Unit Investment Trust)

Face AmountCertificates(24 Months)

Open-End(Mutual Funds)

Closed End(Stock)

Unit Investment

Trust issue Shares

of beneficial

interest

Open-End

Investment

Companies

issue

Closed-End

Investment

Companies Non-

redeemable

Face Amount

Certificate

Companies

issue debt

ManagementCompanies

Types of Investment Companies


23/66


19

2-15 Continuing Education

Regulatory Element

Must be completed by Rep on their second renewal date and then every 3 years

thereafter

Firm Element

Company compliance (Annual Compliance Meeting) once a year

2-16 Exempt from Registration

Persons limited to clerical functions

2-17 Cash and Non-cash compensation

Gifts cannot exceed $100 annually

2-18 Selling Agreements

Can only sell products with which the Rep’s company has a selling agreement

2-19 Selling Dividends

Convincing a client to purchase shares of a stock or mutual fund shortly before adividend is paid so that they will make extra money

This is a violation because there is no monetary benefit in acquiring securities shortly

before the dividend

2-20 Regulated Investment Company

Conduit or Pipeline theory

Sub chapter M of the Internal Revenue Code

The Investment Company must distribute at least 90% of net investment income so

that the tax obligation passes to the shareholders


24/66


25/66


21

2-26 Tax Treatment of Variable Annuity Contracts

Accumulation Period

Non-qualified annuity units are purchased with after tax dollars, thus creating a

cost basis

Annuity Period

Payments received during annuity period are divided into 2 parts:

Cost Basis – the money that has already been taxed

Taxable portion – the growth above the cost basis

Exclusion Ratio

Determines how much is cost basis (already been taxed) and how much is

considered growth (taxable)

Taxes & Penalties

All gains that are received from an annuity are taxed at the ordinary income tax

rate of the annuitant

10% IRS penalty if withdrawn before 59 1/2

2-27 Death Benefit Provision of an Annuity

The beneficiary will receive the larger amount of money between:

How much the annuitant contributed or

The value of the annuity on the day they died

Any gain that results will be taxed at the Beneficiary’s ordinary income tax rate


26/66


22

2-28 – 1035 Exchange

A non-qualified insurance company contract transfer to another non-qualified

insurance company contract

Non-qualified annuity to non-qualified annuity

Life policy to life policy (not term)Life policy to non-qualified annuity

Cannot move annuities into life policies

2-29 Tax Treatment of Variable Life Insurance

All investment income grows tax deferred

Upon death all proceeds pass to the beneficiary tax-free

IRS adds value of policy to deceased’s estate

Upon full or partial surrender, FIFO applies

Policyholder is not taxed until they pull out more money than they put in

A gain would be taxed at policyholder’s ordinary income rate

2-30 Traditional IRA

Anyone with earned income who has not reached age 70 1/2 may contribute

Max contribution is $5,000 or 100% of earned income, which ever is less

Last day to contribute is April 15th of the following year

Withdrawals prior to 59 1/2 will be accessed a 10% IRS penalty

Catch up provision allows investors who are 50 years old or older to invest up to an

extra $1,000 for a total of $6,000

Pay out must begin by the next April 1st after investor turns 70 1/2

Required Minimum Distribution (RMD) penalty is 50% what should have

been withdrawn

Gains are taxed at the investor’s ordinary income rate


27/66


23

2-31 Spousal IRA

Allows a non wage-earning spouse to contribute up to $5,000 into their IRA

2-32 IRA Rollover

Moving money from IRA to another within 60 days to avoid taxes and penalties

Only allowed once every 12 months

2-33 Roth IRA

Contribution limits are same as Traditional IRA

Contributions are subject to income limits

After tax non deductible contributions only

Tax free distribution if:

Account is open for at least 5 years

Withdrawals begin after 59 1/2

RMD does not apply (70 1/2 rule)

Penalty free withdrawals for 1st time homebuyer

$10,000 lifetime cap

Qualified higher education expenses

Disabled owner


28/66


24

2-34 Keogh Plan

Only a self-employed person or an employee of a self-employed person is eligible

Eligibility rules (“1 – 1 – 1”)

Must be 21 years oldMust have worked with the company for at least 1 year

Must have worked at least 1,000 hours in that year

Voluntary employee contributions are allowed up to the lesser of 10% of earned

income or $2,500

Max contributions are 20% of pretax income up to $49,000

59 1/2 and 70 1/

2 rules apply

2-35 SEP Plan

For self employed individuals and their eligible employees

Eligibility rules:

21 years old

Worked for same employer 3 out of the last 5 years

Has received $550 in compensation from the employer

Employer contributions only

Max contribution is the lesser of 25% of gross earning or $49,000

2-36 Simple IRA Plan

Small business plan

No more than 100 eligible employeesAny employee that make $5,000 during the previous year

Employees may contribute to their account up to the annual limit


29/66


25

Employer must contribute either by:

2% method or

3% $ for $ match

Employees are immediately 100% vested on employer’s contributions

2-37 – 529 Plans

State sponsored college saving plans

No income limits


Withdrawals are tax free when used for higher education expenses

Non-qualified withdrawals are subject to a 10% penalty and ordinary income tax on gains

Investor can switch beneficiaries if the child decides not to go to college

529s allow for accelerated gift tax limits

5 years worth of contributions ($13,000 x 5 = $65,000) per parent

2-38 Educational IRA

Income limits apply

No contributions can be made after the child turns 18 years old

Max annual contribution is $2,000


Tax free withdrawals for elementary, secondary or college costs


30/66


26

2-39 Defined Contribution Plans

Profit Sharing Plans

No profit, no sharing

The only qualified plan that has no mandatory annual contribution

401 (k) Plans

Pre-tax contributions, grows tax deferred

No mandatory matching

Employee picks where money goes

Employees are always 100% vested on their contributions

Distributions prior to 59 1/2 will receive a 10% penalty

All withdrawals will be taxable

403 (b) Plans

Public school employees, non-profit hospitals, and churches

Contributions are made by salary deduction

Distributions made prior to 59 1/2 will receive a 10% penalty

All withdrawals will be taxable

2-40 Deferred Compensation Plans

Non-qualified plan in which the employer promises to pay retirement benefits to

employee in the future

457 plans are available to state and local government employees

Police, Fire fighters, school teachers

After tax/non-tax deductible contributions


31/66


27


Marketing, Prospecting, And Sales Presentations

3-1 Prospectus

Current prospectus must be updated at least annually

Anything a reasonable shareholder needs to know before they invest must be included

in the prospectus

A current prospectus must be delivered prior to or during the sale

The funds current portfolio is not included in the prospectus

3-2 Statement of Additional Information

SAI must be attached to the prospectus to keep it current

SAI does not extend the life of a prospectus

3-3 Unlawful Representation

SEC no approval clause

RR can never imply the SEC has approved them or the securities they are selling

3-4 SIPC

Created to protect investors in the event their brokers go bankrupt

Limits are $500,000 in securities and a max of $250,000 in cash per separate

customer Example: Husband, wife, and joint accounts)

Unlimited protections if all the securities are registered in the client’s name

3-5 Advertisements

Defined as materials used in the media

Newspapers, magazines, radio, and television


32/66


28

3-6 Sales Literature

Defined as any written or electronic communication made generally available to

the public

Reprints, telemarketing scripts, performance reports, and circulars

3-7 Approval, Record Keeping and Filing Requirements

Advertisements and Sales Literature must be kept on file for 3 years

Advertisements and Sales Literature must be filed with FINRA within 10 days

after use

3-8 Telemarketing

Calling people you don’t know to try to get them to buy something

No private residence can be called before 8:00 am their time or after 9:00 pm in

their local time zone

Established business relationship

Telemarketer has made a financial transaction within 18 months of call

The telemarketer is the Broker/Dealer of record on the client’s account

The person contacted the telemarketer within 3 months of the call

Personal Relationship

Family, friends, and acquaintances

3-9 Tombstones Advertisement

Advertises an upcoming IPO

Not considered a prospectus

Disclosure must be included at bottom of Tombstone


33/66


29

3-10 Free riding and Withholding

A practice where an underwriter does not make a legitimate public offering of a hot

issue, but instead holds back shares for its own use

3-11 Front Running Policy

The unethical practice of a broker buying a security for himself just before his

brokerage firm makes a large purchase

3-12 Supervisory System

Each member firm must supervise the activities of each of their RRs

All supervisory systems must be in writing

Member firm must designate principals (S26) to supervise the activities of their RRs

Must designate an Office of Supervisory Jurisdiction (OSJ) in each location

Member firms must conduct an internal audit of each office at least annually

All transactions must be reviewed and endorsed in writing by the Registered Principal

3-13 Customer Complaints

Written complaint is defined as any written communication from a client to the

member firm regarding the activities of their reps in regards to transactions,

securities, or funds

OSJs must maintain a file of:

All written complaints

Any action taken on such complaints


34/66


35/66


31


Evaluation Of Customers

4-1 Types of Investment Risk

Business/Credit Risk

Risk that an issuer may not be able to meet interest or principal payments

Interest Rate Risk

Threat of suffering a loss due to a change in the interest rate

Purchasing Power Risk (Inflationary Risk)

Investing in a fixed income security over a long period of time

Taxability

Risk that changes in the tax law would adversely affect the profitability of

your investment

Market Risk

If you are invested in the market, you have risk


36/66


32

4-2 Suitability Factors

Recommending suitable investments for a specific client is not an exact science

RR has to make a judgment based on the totality of information obtained from

the client

RR must ask the client questions pertaining to:

Invest objective (Goal for money)

Time frame (How long)

Financial status (Can they afford it)

Risk tolerance

RR should use a client profile questionnaire that the client signs to verify that thesuitability evaluation has been done

4-3 Investment Objectives Of Clients

Determining a client’s investment objective is critical to the overall success of the plan

Types of Investment Objectives

Preservation of capital - Maximum protection against loss of principal

Current income - Income now as opposed to sometime in the future

Growth - Seeking capital growth over a long period of time; more volatility in

the short term

4-4 Risk Tolerance Of Clients

Defined as degree of uncertainty that investors can tolerate with regards to a negative

change in the value of their portfolio

An asset allocation questionnaire will assist the RR in determining the client’s risk

tolerance


37/66


38/66


34

Notes


39/66


35


Product Information

5-1 Comparison Of Closed End - Open End Funds

Comparison of Closed End and Open End Funds

Closed End (Stocks) Open End (Mutual Funds)

Buying Shares • Single IPO of a fixed numberof shares

• Full shares only

• Continuous primary offering ofunlimited number

• Full or fractional shares

Trading Shares(Redeeming) Secondary market exchangeor OTC No secondary market, redeemedby the fund

Types of Shares

(Capitalization)

Common, preferred, or debtsecurities

Common shares only

Share Pricing Supply and demand NAV + SC = POP

Shareholder

Rights

• Voting

• Dividends

• Preemptive rights

• Voting

• Dividends

5-2 Mutual Fund Features and Characteristics

Max sales charge is 8.5%

Professional management-is one of the greatest advantages to investing in mutual

funds, especially for the smaller investor

All research and analysis is conducted by Mutual Fund management

Each fund has a specific objective stated in the prospectus

Shareholders have voting rights through proxies


40/66


36

Types of funds

Type Portfolio Suitable For

Growth Common Stocks

Long-term investors seekingcapital appreciation

Conservative Growth Blue-Chip, Large-Cap stocks

Aggressive Growth Small-Cap, and Mid-Cap stocks

Equity Income Common and Preferred Stocks Investors who want incomealong with some small potentialfor capital appreciation

Growth and Income Stocks People who want both capitalappreciation and income

Bond Funds Debt Securities (Fixed Income) Those primarily interested incurrent income

U.S. Government Bonds Treasury Securities People who want income and a

high degree of safetyMunicipal Bond Funds Municipal Securities Investors who want tax-exempt

income

Corporate Bond Funds Investment-Grade Corporate Bonds Investors who need income

High-Yield Funds Non-Investment-Grade Corporate Bonds(Junk Bonds)

Investors who want high incomeand are willing to accept a highdegree of capital risk

Balanced Funds Mixture of Stocks, Bonds, and CashEquivalents (Money-Market Instruments)Will always have some of each

Investors who want to havesomething in all three classesof assets

Asset AllocationFunds

Stocks, Bonds, and Cash EquivalentsThe proportions may be changed and thepercentage in any class could drop to zero

Investors who wantdiversification among assetclasses in a single fund

Index Funds Securities selected to mirror aparticular index

Investors who want to peruse apassive investment strategy andwant low fees

Specialized orSector Funds

Securities of one industry orgeographic area

Investors willing to assume morerisk in exchange for a higherpotential return

Foreign Funds Non-U.S. Securities Investors willing to assume extrarisks and who want to diversifyoutside the U.S. markets

Emerging Market Funds Securities of emerging market countries Aggressive investors only

Money-MarketFunds

Cash Equivalents (T-Bills, CommercialPaper, Negotiable CDs, and Banker’sAcceptances)

Short-term investors who wantliquidity and safety


41/66


42/66


38

5-6 Functions of Transfer Agent

Shareholder services

The transfer agent is contracted by the fund to perform basic clerical functions:

Issue the sharesRedeem the shares

Distribute the dividends and capital gains

5-7 Shareholder Rights

Voting rights by proxy

Approving investment objective or policies changes

Approving investment advisory agreement

Approving changes in fees

Electing directors but not officers

5-8 Automatic Reinvestment

Mutual funds typically offer automatic reinvestment of dividends and capital gains

at NAV (without sales charge)

5-9 Dollar Cost Averaging

Investing a fixed amount of money systematically over a period of time

Reduces average cost per share


43/66


39

Dollar Cost Averaging

Which would you prefer?

Tracking two $200.00 per monthInvestments for Six months

Both Investments start out at the same price per share.

Share Price

$18 A

$16

$14

$12

$10

$8 B

$6

$4

$2

$0

Month 1 2 3 4 5 6

Investor

Number of Shares Purchased

1 2 3 4 5 6Total Shares

Purchased

A 25.00 20.00 16.67 14.28 12.50 1 1 .1 1 99.56

B 25.00 40.00 66.67 100.00 50.00 25.00 306.67

Investor

Growth in Value of the Shares

AmountInvested

Total Numberof Shares

Average CostPer Share

EndingValue

A $1,200 99.56 $12.05 $1,792.08

B $1,200 306.67 $3.91 $2,453.36


44/66


40

5-10 Exchange Privileges Within Families Of Funds

Moving money from one Mutual Fund to another Mutual Fund within the same family

of funds

There will be no additional sales charge

The IRS always counts an exchange as a sale and must be reported regardless of

gain or loss

Shareholder will not be taxed until they transfer more money to the new fund than

they put in (FIFO)

5-11 SEC Rule 12b-1

12b-1 is a fee charged to the investor to cover expenses associated with thepromotion and distribution of the fund

Allowable expenses include:

Printing of sales literature

Distribution of sales literature

Advertising

Commissions

The 12b-1 fee must be originally approved and annually approved by:

The majority of the fund’s Board of Directors

The majority of the outstanding voting shares

Requirement to terminate the 12b-1

The majority vote of the non-interested Board of Directors

The majority of the outstanding voting shares


45/66


41

5-12 Forward Pricing

NAV is calculated once every business day at 4:00 pm EST

Client receives next calculated NAV from when their funds post at the fund company

Example:Client’s funds post 2 pm Monday, so the client will receive Monday close of

business. NAV Client’s funds post 5 pm Friday, so client receives Monday close

of business NAV

Redemption of shares works the same way

5-13 Share Classes

Class A Shares

Known as “front end load”

A percentage of all new money invested goes to SC

Investor may be able to take advantage of breakpoints and rights of

accumulation

A shares are not good for an investor with a short time horizon

A shares typically have low 12b-1 fees

Class B Shares

Shares are purchased at NAV (no upfront sales charge) but have a potential back-end

load charge (CDSC)

Class B shares are most beneficial for long-term investors (5-8 years)

Class B shares convert to A shares after a period of time, this is beneficial

because A shares have a lower annual expense charge

No breakpoints for B share investors

Class C Shares

Better for short-term investors

Carries higher 12 – b – 1 fee


46/66


42

5-14 Breakpoint

The dollar amount for the purchase of the fund’s shares that qualifies an investor for a

reduced sales charge (load)

Investment clubs and co-ops are excluded from breakpoints

Amount of Purchase at Offering Price ($) Sales Charge as % of Offering Price

Less than $25,000 5.00%

$25,000 but less than $50,000 4.25%

$50,000 but less than $100,000 3.75%

$100,000 but less than $250,000 3.50%

$250,000 but less than $500,000 2.00%

$500,000 but less than $1,000,000 0.50%

$1,000,000 and above 0.00%

5-15 Letter Of Intent (LOI)

A letter of intent allows an investor to qualify for the sales discounts without initially

investing the entire amount required

A Letter of Intent is good for 13 months

An investor can back-date a Letter of Intent for 90 days

Only contributions count towards Letter of Intent, not accumulation

5-16 Rights Of Accumulation

The investors have a right to receive cumulative quantity discounts when purchasing

shares of a mutual fund

The investors are permitted to combine assets from their accounts and the accounts

of their immediate family (spouse, children under age 21, and financially dependent

family members)

Appreciation of the shares are considered


47/66


43

5-17 Timely Payment By Fund

ICA’40 requires mutual fund companies to pay redemption proceeds within

7 calendar days

5-18 Variable Contracts

The underlying assets held in VA or VL must be kept in the insurance company’s

separate account

No guaranteed return on investment

Investor bears the risk

Resistant to inflation

Variable annuities and Variable life are over seen by the SEC and the State Board of

Insurance

RRs must have both a securities license and life insurance license to sell VAs and VLs

Variable annuities offer payments for life

Money invested into a VA grows tax deferred

VA investors have voting rights

All growth that is received from an annuity is taxed at the annuitant’s ordinary income

tax rate

Max sales charge is 8.5%

5-19 Types of Variable Annuities

Immediate Annuity

Can only be funded by a single lump sum

Payment begins 1 payment period after a lump sum deposit into the contract


48/66


44

5-20 Deferred Annuity

An annuity that can be purchased by either a single lump sum (single premium

deferred annuity) or is purchased through periodic payments (flexible premium

deferred annuity)

Payments can’t begin before at least 1 year from date of purchase

5-21 Fixed Annuity

The insurance company guarantees principal and interest rate

Money must be held in the general account

Money grows tax deferred

Subject to inflationary risk (purchase power risk) insurance company bears the risk

The growth is taxed at the annuitant’s ordinary income tax rate

5-22 Settlement Options

Straight-life Annuity

Highest monthly payment

This option carries the most risk

When the annuitant dies the payments stop

Life Annuity with Period Certain

The annuitant will be paid for their lifetime

If the annuitant dies before the period certain then the beneficiary will either receivea lump sum or continue to receive payments until the period certain is over

The most common period certain options are (10 year, 15 year, and 20 year)


49/66


45

Joint and Last Survivor Life Annuity

Payment is made to 2 people, if 1 dies the payments continue to be made to the

surviving annuitant until they die, all payments stop at that time

Combination Fixed and Variable Annuity Pay-out

This is a combination of guaranteed fixed dollars for a base income and variable

dollars as a hedge against inflation

5-23 Contractual Provisions

Mortality Guarantee

This guarantees the annuitant that they will not out live their money (payments for life)

Expense Guarantee

This establishes the max the insurance company can charge the contract

These provisions would be listed in the contract as the M & E charge

The max sales charge for a VA is 8.5%

5-24 Assumed Interest Rate

The AIR is part of annuity contract and is used to calculate the amount of each

annuity payment

The AIR remains fixed; it never changes

To calculate the next month’s payment, follow these rules:

If AIR is greater than the rate of return of the separate account, the payment

will be lower than the previous month

If AIR is lower than rate than the rate of return of the separate account, the

payment will be higher than the previous month

If AIR is the same as the rate of return of the separate account, the payment

will be the same as the previous month


50/66


46

Example:

AIR = 4%

March separate account return is 5% - payment is higher than previous month

April separate account is 3% - payment is lower

May separate account is 4% - payment is the same as separate account is

June separate account is 7% - payment is higher

July separate account is 5% - payment is higher

5-25 Similarities Between Whole Life And Variable life

Death Benefit

Both have a fixed minimum death benefit

Premium Payments

Generally paid in fixed amounts at fixed intervals

Loans

Both policies allow for loans, however:

With Whole life policyholder can borrow 100% of cash value

With VL policyholder can only borrow a percentage of the cash value

5-26 Features of Variable Life

Max sales charge is 9%

Proceeds past to beneficiary tax free

Value of policy is included for estate tax purposes

Policyholder has voting rights

Conversion Privilege

Allows Variable Life to convert to whole life or universal life without proof of insurability

Money is held in the separate account


51/66


52/66


48

6-3 Anti-Money Laundering Compliance Program

Every member firm must develop and implement a written AML program

Customer identification program

The part of a new account application where the RR must verify the identityof the customer by seeing and documenting a non-expired Government issued

picture ID (driver’s license, military ID, or passport)

Suspicious activity report (SAR) and describe suspicious activities

6-4 Privacy and Opt-Out Notices

B/D must make customer aware of the company’s privacy policy with respect to

customer’s non-public informationPrivacy policy flier must be given to customer at time of sale

Must be sent to customer annually

Customer has right to opt-out by sending form

Company website does not need to be on the notice or flier

6-5 Forms Of Ownership

Registration of accounts

6-6 Individual Accountants

Registered in the name of one individual

6-7 Joint Tenants With Rights Of Survivorship (JTWROS)

Each owner owns 100% of the accountEither party may transact business in the account

Sole ownership passes to the surviving tenant

Typically used by married couples


53/66


49

6-8 Tenants In Common (TIC)

Each tenant owns a percentage of the account

When a tenant dies their percentage is added to their estate

All tenant signatures are required for trading in the account

6-9 Custodial Accounts

Uniform Gift to Minors Act (UGMA)

One minor and one custodian per account

All securities are registered in the minor’s name

Contributions to the account are considered an irrevocable gift to the minor

UGMA account must include custodian’s name, the name and social security

number of the minor

As of 2011,

The Kiddie tax rule applies to children under age 19 (or 24 if full-time

student and claimed as dependent on parent’s tax return)

The first $950 of unearned income is tax free

The next $950 is taxed at the child’s rate

Unearned income over $1,900 is taxed at the parent’s top marginal bracket

Tax liabilities are the minor’s responsibility

Age of majority for UGMA is 18

Uniform Transfer to Minors Act (UTMA)

Age of majority for UTMA is between 18 and 25


54/66


50

6-10 Customers Securities or funds

RRs cannot, in any way, guarantee a profit to the customer

For a RR to share in a client’s account:

The agreement must be in writing The RR must share in direct proportion to the profits and/or the losses

6-11 Borrowing or Lending To A Customer

It is not permitted unless:

Existing written procedures are in place by B/D

The customer is a member of the RR’s immediate family

6-12 Immediate Family

Parents, grandparents, spouses, mother-or father-in-law, sibling, sister-or brother-in-

law, daughter or son-in-law, children, grand children, cousins, aunts, uncles, nieces

and nephews

6-13 Influencing Employees of Other Members

B/Ds may not pay compensation to employees of other members except:

The employing firm gives written permission

Gifts less than $100

6-14 Code of Arbitration

Simplified Arbitration

For claims under $25K

Eligible claims for submission

Between or among members

Between members and associated persons

Between members, associated persons and public customers


55/66


51

6-15 Federal Reserve Board/Regulation T

The FRB was granted authority, under Reg T to establish margin requirements for B/Ds

The margin requirement now is 50%; this means you can borrow up to 50% of

the value of your account with your B/D

Must pay B/D within 7 business days or your account will be frozen for 90 days

Once your account is frozen you can only do cash trades

The B/D may apply to FINRA in writing and they may grant an extension

of time; if not, account is frozen

6-16 Holding Mail

The broker may hold customer’s mail, if request is made in writing

Mail may be held for 2 months for domestic travel

Mail may be held for 3 months for foreign travel


56/66


52

Notes


57/66


53

Practice Questions

For Series 6 Review


58/66


54

Chapter 1

1. A 6% bond is selling to yield 4.5%. The next time interest is paid, an investor who

owns $1,000 face amount of the bonds will receive:

A. $45

B. $22.50

C. $60

D. $30

Answer D, $30, is correct. The bond is a 6% bond. The total amount paid each

year on the bond is $60 but the amount for an individual, semi-annual interest

payment, is $30. The phrase “the next time interest is paid” in the question is

important in getting this one right.

2. A bond offered at face value has a nominal yield:

A. less than its yield to maturity

B. more than its current yield

C. more than its yield to maturity

D. equal to the nominal yield

Answer D, equal to the nominal yield, is correct. When a bond is selling at par,

its coupon or nominal rate, current yield and yield to maturity are all the same.


59/66


55

Chapter 2

1. A customer has a cash account that has securities with a market value of

$200,000 and $300,000 in cash. The customer also has a joint account with her

husband that has securities with a market value of $300,000 and $200,000 incash. If the B/D were to become insolvent, the customer would be covered under

SIPC for cash and securities of:

A. $500,000 cash and securities for both accounts

B. $1,000,000 total for both accounts

C. $250,000 cash for her account and $250,000 cash for the joint account

D. $450,000 cash and securities for her account and $500,000 cash and

securities for the joint account

Answer D is correct. There are two separate customers, each entitled to the

$500,000 SIPC protection but since SIPC only covers up to $250,000 in cash,

the customer will not get full coverage for the $300,000 cash in her account.

2. In June, a customer invested $10,000 in the XYZ Mutual Fund. In December of the

same year, XYZ distributed a capital gain on securities it had held for three years.

In May of the next year, the customer decided to redeem her shares for a capitalgain. How are both of the capital gains treated for taxation purposes?

I. The capital gain distribution is treated as long term

II. The capital gain from redemption is treated as long term

III. The capital gain from redemption is treated as short term

IV. The capital gain distribution is treated as short term

A. I and III

B. II and IV

C. I and II

D. III and IV


60/66


56

Answer A, I and III, is correct. The tax payable on capital gains depends on the

holding period of the security sold or redeemed. The mutual fund had held the

securities for three years prior to the sale, making the capital gain long term.

The capital gain from the redemption took place after the mutual fund shares had

been held for less than a year, making the capital gain short term.

3. Jack is the annuitant in a variable plan, and Donna is the beneficiary. Upon Jack’s

death, during the accumulation period, Donna takes a lump-sum payment. What is

her total tax liability?

A. The entire amount is taxed as ordinary income, because it is not like life

insurance

B. The proceeds, minus Jack’s cost basis, taxed as ordinary income, at

Donna’s tax rate

C. None, because it is the proceeds from a life insurance company

D. The ordinary income on the proceeds over the coast basis, plus 10% of the

net gain (if any), if Donna is younger than 59 1/2 years old

Answer B is correct. Annuity death benefits are generally paid in a lump sum.

The beneficiary is taxed at ordinary income rates during the year the lump sum

is received. The amount taxed is the amount of the lump-sum payment, minus

the deceased’s cost basis in the investment.


61/66


57

Chapter 3

1. Which of the following statements regarding Cold-Calling are TRUE?

I. Faxes may be sent at any time of the day on an unsolicited basis

II. Upon request, contact names must be placed on a Do-Not-Call list and the

request must be honored

III. Cold calls may not be made before 8:00 am or after 9:00 pm in the

contact’s time zone

IV. The rule imposes a time limit on the length of a call to a customer

A. III and IV

B. I and IV

C. I and II

D. II and III

Answer D, II and III, is correct. The Cold-Calling Rule restricts the time during

which cold callers may telephone prospects but does not restrict conversations

with customers. Faxes may not be sent to the homes or offices of non-customers

unless requested. B/Ds must maintain Do-Not-Call lists and train their

representatives in their use.


62/66


58

Chapter 4

1. Which of the following statements regarding the suitability of investment

recommendations are TRUE?

I. A client’s investment objectives, prior investment experience, financial

profile, and risk tolerance aid in determining suitability

II. Suitability will vary with each investor

III. Only the client is responsible for learning about the investments that

are purchased

IV. Growth and income mutual funds are suitable for all investors

A. III and IV

B. II and III

C. I and III

D. I and II

Your answer D, I and II, is correct. Knowledge of the client’s investment

objectives, investment experience, financial and tax status, and risk tolerance

all contribute to an understanding of a client’s suitability. No two investors have

precisely the same investment needs and characteristics.


63/66


59

Chapter 5

1. Which of the following are among the objectives of a balanced fund?

I. Tax advantages

II. Exploitation of special circumstances

III. Capital appreciation

IV. Income

A. II and III

B. III and IV

C. I and IV

D. I and II

Answer B is correct. Balanced funds, also known as hybrid funds, invest in stocks

for appreciation and bonds for income. The relative proportion of each is adjusted

by the fund manager.

2. A shareholder invested in a mutual fund and has signed a letter of intent to invest

$50,000. Her original investment was $15,000 and her account value is $20,000.

For her to complete the LOI, she must deposit:

A. $15,000

B. $30,000

C. $37,000

D. $35,000

The correct answer is D, $35,000. Under an LOI, the full contribution is requested

for the letter to be completed. Appreciation is not considered.


64/66


60

3. If your customer invests in a variable annuity and chooses to annuitize at age 60,

which of the following statements are TRUE?

I. He will receive the annuity’s entire value in a lump-sum payment

II. He may choose to receive monthly payments for the rest of his life

III. The accumulation unit’s value is used to calculate the total value of theaccount

IV. The annuity unit’s value represents a guaranteed return

A. II and III

B. I and IV

C. II and IV

D. I and III

The correct answer is A. When a variable contract is annuitized (distributed

in regular payments, not as a lump sum), the number of accumulation units

is multiplied by the unit value to arrive at the account’s current value. An

annuity factor is taken from the annuity table, which considers, for example,

the investor’s sex and age. This factor is used to establish the dollar amount of

the first annuity payment. Future annuity payments will vary according to the

separate account’s performance.

4. Your client owns a variable annuity contract with an AIR of 5%. In April, the actual

net return to the separate account was 7%. If this client is in the payout phase, how

would her May payment compare to her April payment.

A. It cannot be determined until the May return is calculated

B. It will be lower

C. It will stay the same

D. It will be higher

Answer D is correct. If the separate account of a variable annuity with an AIR of

5% had actual net earnings of 7% in April, the May payment will be higher than

the April payment.


65/66


61

Chapter 6

1. To comply with the regulations regarding customer identification programs, the

minimum identifying information that must be obtained from each customer

before opening an account includes:

I. Name

II. Verbal assurance that the customer is of legal age

III. A street address, unless the primary mailing address is a post office box

located in the state of residence

IV. A taxpayer identification number

A. III and IV

B. II and III

C. I and IV

D. I and II

Your answer C, I and IV, is correct. Mere verbal assurance that the customer is of

legal age is not sufficient; the actual date of birth must be obtained. A post office

box is never acceptable without a physical address. In addition, the identity of the

person opening the account must be verified through documentation such as an

unexpired driver’s license or passport.


66/66

Documents

Primerica - Series 6