Wilmington Capital Securities, LLC is a broker-dealer and investment adviser registered with the U.S. Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).
When our financial professionals recommend opening an IRA at WCS, or to roll over an existing account, such as a 401(k), to an IRA, we must act in your best interests at the time we make the recommendation without placing our financial or other interests ahead of yours. When making recommendations to you, we consider the following elements:
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry and provides protection for individuals in these plans.
ERISA applies to all Internal Revenue Service-qualified pension and profit-sharing plans and employee welfare benefit plans. Most IRA accounts, while not covered by ERISA, are subject to the prohibited transaction penalties. Limited exemptions apply to governmental (public employee) plans and certain offshore and church plans.
This section provides a general overview of ERISA. Because of the technical and legal nature of ERISA, questions should be referred to Compliance or legal counsel.
A "fiduciary" is generally anyone with discretionary authority or control over the management of a plan, the administration of the plan, or the disposition of plan assets. Fiduciaries must comply with certain statutory duties which include prudence and diversification of investments and the duty to act in accordance with the governing instruments of the plan.
A person or entity providing services to an ERISA plan is considered a "party-in-interest" to the plan. This status generally applies to WCSs providing traditional brokerage services to ERISA plans. WCS?s role in relation to ERISA plan accounts generally is as a party-in-interest unless WCS contracts to provide investment management services or other services where WCS would become a fiduciary to an ERISA plan.
Generally, trading in ERISA accounts is subject to the "Prudent Investor Rule" which is discussed in the next section. Allowable transactions are governed by ERISA (and related Department of Labor and IRS rulings), the investment policy of the ERISA plan, and trading guidelines in a managed account program or other trading program if such a program is used.
Some types of transactions (such as margin or certain option transactions) are associated with added risk, and it may be necessary for Compliance to review the plan to determine whether the type of transaction is permissible.
Prudent Investor Rule and Diversification
Trading in ERISA accounts is subject to the "prudent investor" rule (also known as the Prudent Man Rule) which is a standard that is generally understood to mean that individuals involved with investment decision-making act with the same care, skill, prudence and diligence as a prudent man in the same capacity. This measure is not judged on the risk of a single investment but by the investment's relationship to the overall portfolio.
ERISA also requires that investments in a covered plan be diversified to minimize the risk of large losses unless it is clearly prudent not to do so.
Federal laws prohibit plan assets from being used by a fiduciary for certain transactions (known as "prohibited transactions"). Fiduciaries are prohibited from dealing in plan assets for their own benefit or for the benefit of a third party with whom the fiduciary is affiliated. The Department of Labor (and other government agencies) have issued exemptions from the prohibited transaction rules which allow plans and WCSs to engage in some but not all types of securities transactions. The range of permissible transactions varies depending on whether the WCS is a fiduciary to the plan.
General Requirements When Dealing with ERISA Plans
Because of substantial legal liability, financial professionals are not permitted to become fiduciaries when dealing with ERISA accounts (unless WCS has a specific program designed to meet legal requirements in offering those services). The following summarizes requirements and limitations:
Plans differ depending on the law under which they are established. Differences include limits on contributions, tax deductibility, costs, types of plan sponsors (employer or otherwise), and who may participate. The following sections provide general explanations of various types of common retirement accounts. Some of the general guidelines that apply to retirement plan sales include the following. Specific plans should be consulted for limitations and requirements.
IRAs are established by individuals through a plan sponsor; following are key features:
Employers may offer different types of plans including traditional pension and profit-sharing plans that are funded entirely by the employer. All eligible employees participate and employer contributions are above and beyond the employee's salary. This section describes other types of employer-sponsored plans that give eligible employees the opportunity to put a portion of current income into a tax-deferred investment account. Participation may be voluntary or mandatory, and employers may make matching contributions.
The following sections provide a general explanation of these various plans.
Providing investment advice to 401(k) plan sponsors and participants is subject to strict limitations and requirements. Providing investment advice places the financial professional in the role of a fiduciary which creates the legal liabilities associated with fiduciaries.
Financial professionals are limited to offering Firm-approved educational material and third-party advisory plans offered through WCS.
A 403(b) plan is a salary reduction plan offered by non-profit, tax-exempt employers such as schools and colleges, hospitals, and foundations. Individual accounts in a 403(b) plan invest in two categories of investments:
These plans are offered by a state or local government or a non-profit organization. A 457 plan is a deferred compensation plan similar to 401(k) or 403(b) plans.
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We do not exercise discretionary investment authority in your brokerage account. This means that you make the ultimate decision to buy, sell or hold investments.
We do not monitor your brokerage account investments for you, unless written authorization has been granted by you to your financial professional. However, we may voluntarily, without any agreement with you, review the holdings in your account for the purposes of determining whether to provide a recommendation. This voluntary review is not considered to be ?account monitoring? and would not create an implied agreement with you to monitor the account.
You are responsible for reviewing your account and investments to ensure that they are in accordance with your investment objectives. We encourage you to carefully review the account statements and transaction confirmations you receive from your account custodian.
Accounts for residents of foreign countries may be subject to special requirements under securities laws of the foreign country. Before opening an account for a person or entity residing in a foreign country, your financial professional will contact Compliance for further information regarding any special restrictions or requirements and you may be required to remit additional information.
It is important for you to understand what discretion means. A discretionary account allows an authorized financial professional to buy and sell securities in your account without your consent for each trade. You must sign a discretionary disclosure with WCS as documentation of your consent. Our financial professionals who are granted discretion must act in your best interests at the time of transaction without placing our financial or other interests ahead of yours.
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We do not have a minimum account size; however, certain product sponsors do have minimum investment sizes. When this is applicable to you, you will receive disclosure at the time of the recommendation in a document such as a prospectus or offering memorandum.
Our clearing firm, RBC Correspondent Services, is the third largest clearing provider in the United States based on broker-dealer clients serviced. They specialize in providing comprehensive clearing, custody, and execution services to varying types of broker-dealers. They are a division of RBC Capital Markets, LLC, one of the largest full-service securities firms in the nation.
Below is a list of fees charged by RBC in relation to your account. Please be aware that WCS and RBC share in the revenue from some of these fees.
Account Pledge $100.00 per account
Customer Handling Fee $15.00 per transaction
Outgoing Account Transfer Fee $75.00
Returned Check $30.00
IRA, SEP IRA, SARSEP IRA, Simple IRA, Roth IRA Account Fee $35.00
403(b) Account Fee $45.00
Self-Trusted Retirement Account Fees:
- One Plan Setup Fee $200.00
- One Plan Annual Document Maintenance Fee $150.00
- Paired Plan Setup Fee $300.00
- Paired Plan Annual Document Maintenance Fee $250.00
- One Plan / Paired Plan Closing Fee Prorated annual fee
Custodial Qualified Plans: Profit Sharing & Money Purchase Pension Plans
- Employer Account Setup Fee $25.00 + $5.00 per participant
- Employer Annual Document Maintenance Fee $75.00 + $5.00 per participant
- Employer Account Closing Fee Prorated annual fee + $5.00 per participant
ACH Fees None
Alternative Investments Transaction Fee $150.00 per account
Annual Inactive Fee $35.00
Annual Safekeeping Position Fee $50.00 per year
Bank Wire Customer Funds ? Domestic $20.00
Bank Wire Customer Funds ? Foreign $45.00
Certificate Reject Fee $50.00 each
Duplicate Confirms $1.25
Duplicate Statements $1.25
Extensions ? Domestic / International Stocks $10.00
International Security Transfer $140.00
Legal Deposits & Transfers $25.00
Non-Mandatory Non-Physical Reorganization Item $40.00
Non-Mandatory Physical Reorganization Item $45.00
Overnight Check Fee $10.00 each
Registered Overnight Mail At Cost
Rule 144 Transfers $25.00
Security Transfer Fee $80.00
Transfer Agent Fees At Cost
Transfer on Death (TOD)
- Setup $50.00
- Change $30.00
- Distribution Fee $0.01%
For more information and disclosures about your account at WCS, please see your New Account and IRA Adoption Agreements. These forms are also available on www.wilmingtoncap.com/forms.
Recommending Securities Transactions
When our financial professionals recommend a transaction, we must act in your best interests at the time we make the recommendation without placing our financial or other interests ahead of yours. Our recommendations are based on the investment profile you established upon account opening, including, but not limited to:
Risks Associated with Investing
While your investment value may increase and you could realize capital appreciation, it is also possible for these investments to decrease, resulting in significant losses to your principal. It is important that you understand that all investment activities involve a degree of risks, including the possible risk of loss of the entire investment. Securities investments are not guaranteed and you may lose money on your investments. It is important that you understand the risks associated with investing and discuss with your financial professional the investment profile that best works for you.
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When WCS executes a transaction on your behalf, the security is either purchased or sold in the open market and placed into or removed from your account. In these instances, we have acted as an ?agent? in the transaction, for which compensation is generated by transaction-based fees, such as commissions and ticket charges. As such, we have an incentive to encourage you to trade more frequently and in greater volume.
WCS may buy or sell securities to you from our own inventory. In these instances, we have acted as ?principal? on a transaction, which typically results in the marking up or down of the price of the security, with WCS retaining the difference. As such, we have an incentive to trade with you on a principal basis and to recommend securities that we hold in inventory.
Recommendations of OTC Equity Securities
Recommendations to purchase or sell short OTC equity securities require completion of WCS's OTC Equity Securities Suitability Form prior to making the recommendation. An "OTC equity security" is defined as any non-exchange-listed security and certain exchange-listed securities that do not otherwise qualify for real-time trade reporting.
OTC equity securities as defined in this section often trade at low prices and may represent a higher risk to the purchaser depending on where and how the security trades. For example, a thinly-traded OTC stock may be subject to volatile price changes and may be difficult to liquidate. There is added risk when the security is purchased on margin, since some of these securities may be difficult to liquidate.
Financial professionals have a higher obligation to determine suitability when recommending the purchase or short sale of OTC equity securities. This includes obtaining current financial statements (balance sheet, P&L, etc.) and "current material business information" which includes information available that relates to material events that occurred in the 12 months prior to the recommendation. "Current material business information" is defined as information that is ascertainable through the reasonable exercise of professional diligence and that a reasonable person would take into account in reaching an investment decision. If the issuer is delinquent in its filings (SEC, foreign authority, bank, or insurance regulator), an inquiry must be made about the circumstances about the failure to make current filings.
Prior to recommending a security subject to this policy, the financial professional is required to complete a copy of the OTC Equity Securities Suitability Form and submit the form and the required financial statements and material business information (and information if the issuer is delinquent in its filings) for review and approval by the financial professional's designated supervisor. Upon approval, the financial professional may recommend the security to customers. Failure to complete the Form and obtain the required approval may result in cancellation of the transactions and assessment of resulting losses to the financial professional.
Orders in Volatile Stocks
Some securities are characterized by volatility of price and volume. This has, in particular, been a characteristic of some Internet stocks. The financial professional should know the potential effect of volatility on recommended stocks and discuss these risks when recommending such investments with customers unfamiliar with transactions in these types of securities. Following are some of the conditions potentially affecting volatile stocks:
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Customers may contact their financial professional, on an unsolicited basis, to sell an illiquid investment, and may have a prospective buyer. To place the transaction, the following is required:
If orders for illiquid securities are solicited, the financial professional is responsible for making a suitability determination in addition to obtaining the written acknowledgments.
Details regarding the commissions, mark-ups, markdowns and fees you pay for a transaction are found on the transaction confirmation you receive. It is important that you carefully review this document, and that you promptly contact us if you have any questions or concerns.
Margin is the money borrowed from a brokerage firm to purchase an investment. It is the difference between the total value of securities held in an investor's account and the loan amount from the broker. Buying on margin is the act of borrowing money to buy securities. The practice includes buying an asset where the buyer pays only a percentage of the asset's value and borrows the rest from the bank or broker. The broker acts as a lender and the securities in the investor's account act as collateral. Because we are compensated for transactions, we have an incentive to encourage you to open a margin account that would allow you to trade in greater volume. WCS also shares in margin revenue interest with RBC, giving us an incentive to encourage you to open a margin account.
Margin accounts may involve more risk than cash accounts, depending on a number of factors including leverage used and types of transactions. The financial professional is responsible for determining the suitability of margin trading in your account, including understanding your investment objectives and financial profile.
For more information and disclosures on margin accounts, please see your Margin Account Agreement provided by RBC. This form is also available on www.wilmingtoncap.com/forms.
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Exchange-Traded Funds (ETFs)
ETFs are open-end investment companies or unit investment trusts (UITs) listed on stock exchanges; they can be bought and sold throughout the trading day at the current market price. A typical ETF is based on specific domestic and foreign market indexes. An index-based ETF tracks the performance of an index by holding in its portfolio either securities replicating the index or a representative sample of the securities in the index. ETFs also track non-traditional investments such as commodities and currencies. Some ETFs track indexes inversely (i.e., the ETF rises when the index falls) and new ETFs are continually evolving.
Following are considerations when recommending ETFs:
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Mutual funds refer to open-end investment companies. When offering mutual funds, financial professionals use the following considerations:
The selection and offer of mutual funds will comply with anti-reciprocal prohibitions. Specifically, WCS will not:
For some mutual funds, front-end sales charges decrease as the dollar amount invested increases. These thresholds for reduced sales charges are called breakpoints. Different fund families establish different opportunities to link accounts, transactions, and share classes to qualify purchasers for reduced sales charges.
The financial professional has an obligation to disclose the existence of breakpoints to enable you to evaluate the desirability of making a qualifying purchase. The financial professional also must indicate on the mutual fund order if you qualify for a breakpoint because of linked accounts, transactions, or share classes or another basis for meeting a breakpoint by linking your transaction with another.
"Improper breakpoint sales" is a term that denotes selling mutual funds to maximize commissions earned, i.e., selling an amount close to, but below a breakpoint. you will, therefore, pay a higher sales charge. This practice is prohibited.
Recommending diversification among several funds with similar investment objectives, particularly if sales occur in amounts just below the breakpoints of one or more funds sold, may not be in the best interests of you. If multiple purchases of different mutual funds are appropriate, but will preclude you from qualifying for a breakpoint, you should sign a letter acknowledging his or her understanding that a breakpoint is being given up by purchasing multiple funds.
Purchases of mutual funds under a breakpoint are not subject to breakpoint violations if the purchases are made as part of a bona fide asset allocation program sponsored by WCS. Customers who participate in a Firm-sponsored program are notified, as part of the agreement to participate in the program, that they may not receive breakpoint reductions that otherwise would be available.
Letters of Intent
A letter of intent (LOI) is an investor's written statement of intent to purchase a specified dollar amount of a single mutual fund or funds within a single fund group over a specific period of time. The aggregate investment over time may qualify for a breakpoint and a lower percentage sales charge.
The mutual fund purchase should indicate if you will execute a letter of intent so the lower sales charge will apply. Some funds allow investors to use an LOI retroactively to include the value of past purchases in the LOI period. The financial professional should determine whether you made a prior purchase within the allowable period and whether the fund allows backdated LOIs.
Rights of Accumulation
Aggregating purchases of a particular fund or family of funds by one investor (and sometimes family-related purchases) may qualify for rights of accumulation. A lower sales charge may apply, based upon the total dollar amount invested. The financial professional should ask you whether you have other holdings in the fund or fund family, to determine whether rights of accumulation may be available to you.
Mutual funds follow different rules to determine the value of existing holdings and when a customer qualifies for a breakpoint discount. Most funds use current net asset value (NAV) of existing holdings, and a small number of funds use historical cost (cost of the initial purchase). If historical cost is used, it may be necessary for the investor to provide account records to qualify for the breakpoint discount.
The mutual fund purchase should indicate rights of accumulation, if available, and your desire to aggregate purchases to qualify for a lower sales charge.
Some funds offer shareholders a "reinstatement privilege" allowing the shareholder to reinvest some or all of the proceeds from a prior liquidation of the fund within a specified period of time (for example, 180 days) at a reduced sales load or no sales load. The financial professional should determine whether you qualify for a reinvestment privilege and, if he or she qualifies, note this on the order at time of entry.
Sales Charge Reductions/Waiver or NAV Transfer Program
A limited number of mutual funds offer a sales charge discount in the form of a waiver or NAV transfer. Investors may purchase Class A shares of a mutual fund without paying a front-end sales charge, if investing some or all of the proceeds from the sale of a mutual fund in a different mutual fund family for which the investor paid a front-end or back-end sales charge within a specified period of time. The period when the discount is available is generally 30 to 90 days from the date the investor purchased the other fund. This type of discount is explained in the fund prospectus and Statement of Additional Information.
Generally, customers will not make short-term sales of mutual funds. In those unusual circumstances, where you are making such a sale, the financial professional should investigate whether a waiver is available on the new purchase.
Deferred Sales Charges
If a customer purchases shares of a mutual fund that imposes a deferred sales charge on redemption, the confirmation will include the following legend: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus."
Direct Application and Wire Order Accounts
Mutual funds allow investors to purchase funds directly (sometimes called "application way" or "wire order" purchases or accounts). financial professionals are not permitted to recommend, or to direct, that a customer make a direct purchase of mutual funds. All such purchases must be made through WCS.
Sales Charge Discounts Must Be Marked on Mutual Fund Orders
Because automated mutual fund order processing systems do not generally provide the ability to monitor application of an available sales charge discount, it is important that all pertinent information be recorded on the order and entered to the system, including whether your purchase qualifies for a sales charge discount. Incomplete mutual fund orders will not be accepted and will be returned to the financial professional for completion of necessary information about available sales charge discounts.
Order entry procedures, including completeness of orders and proper application of available discounts, will be reviewed as part of the periodic review of sales practices in the office.
Switching is the selling or redemption of one mutual fund with a sales charge to buy another mutual fund with a sales charge. Recommended switches may not be based on the compensation to be received by the financial professional or WCS as a result of effecting the switch. As for all recommendations, the financial professional must have a reasonable basis for believing the switch is suitable for you.
you may incur multiple sales charges by changing from one fund to another or may be subject to an extended holding period, and there may also be tax consequences because of the switch. The concern is whether the switch is justified and whether you understand the consequences of the switch.
Switches between mutual funds that result in potential additional sales charges for you (whether front-end or back-end load) require that a letter be obtained from you acknowledging an understanding of the consequences of the switch. It is the designated supervisor's responsibility to ensure switch letters are obtained for switch transactions. The letter will be retained with the record of the order and/or in a file for you or for switch letters. FINRA prohibits the use of "negative consent letters," which are used to advise a customer that there will be a switch from one fund to another unless you respond before a specified date.
Market Timing Transactions
FINRA has stated that recommendations to fund investors to engage in market timing transactions should be made, if at all, within a single family of funds or where there are no transaction costs associated with the trades. Transactions that do not adhere to this standard may raise suitability questions.
Selling dividends is a practice of recommending the purchase of a mutual fund based on an imminent dividend distribution.
Since the price of a mutual fund is reduced by the amount of the dividend, there is no benefit to you unless there are specific tax or other advantages to you. In fact, there may be increased tax liability for the investor. A related concern is representing that distributions of long-term capital gains by the mutual fund are or could be viewed as part of the income yield from the mutual fund.
Misrepresenting "No-Load" Funds
Certain funds impose a sales charge when you redeem or liquidates an investment ("back-end load" or contingent deferred sales charge). These charges are generally on a decreasing basis the longer the mutual fund is held. For example, a mutual fund may charge 5% if the shares are sold prior to being held 5 years, 4% if after 5 but before 6 years, etc. Other funds have a combined asset-based sales charge and/or service fee exceeding .25 of 1% of average annual assets.
We do not sell mutual funds with back-end loads or asset-based sales or service fees exceeding .25 of 1% "no-load" funds.
Reinvestment of Maturing Certificates of Deposit in Mutual Funds
When funds from maturing certificates of deposit (CDs) are used for the purchase of mutual funds, including money market funds, customers must be advised of the material differences between the two products, particularly the greater risk to your capital and the absence of any federal insurance or guarantee for assets placed into mutual funds.
When recommending that a customer purchase, sell, or exchange a mutual fund, the following will be considered:
Mutual funds often offer three classes of shares that are based on the same mutual fund portfolio but differ regarding costs incurred by you.
Class A shares: Generally impose a front-end sales load and no (or a low) ongoing fee to pay for sales and marketing expenses (Rule 12b-1 fees). Usually the front-end sales load will decrease at certain breakpoints depending on the size of the purchase and whether the purchase qualifies for a letter of intent or rights of accumulation which also may result in a lower sales charge. A front-end sales charge means a portion of your funds are not invested and instead pay the front-end charge.
Class B shares: Generally do not impose a front-end sales charge but may impose a contingent deferred sales charge (CDSC) on share redemption and relatively high 12b-1 or other asset-based fees. The amount of the CDSC usually declines the longer the shares are held. Class B shares often automatically convert to Class A shares (with lower asset-based fees) after a period of time, usually after the CDSC declines to zero. All of your funds are invested at the time of purchase. These funds may not be referred to as no-load funds since they impose a back-end contingent charge.
Class C shares: Have different expense features than A and B shares; may include no front or back-end load or a small back-end load; and higher 12b-1 or other asset-based fees. Class C shares are often used for managed accounts and asset allocation purposes.
In addition, some mutual funds offer other classes that impose no front-end or back-end sales charges and relatively low asset-based fees. These may be offered to limited types of purchasers such as retirement plans or institutional investors.
The following are guidelines for determining which class of shares is best for you:
There are two mutual fund trading activities that may violate SRO rules whether initiated by the financial professional or the financial professional facilitates the prohibited activity by assisting a fund manager, an investment adviser, a fund sponsor, a customer, or someone else in engaging in these activities.
Late trading is the practice of effecting an after-close mutual fund purchase or redemption at the same day's net asset value (NAV). NAV is usually calculated at 4:00 p.m. E.T., the close of the trading day, and orders received after the close are effected at the next day's closing NAV. Late trading is a violation of fair practices because it potentially permits someone to take advantage of market movements known after the 4:00 deadline and gives the person an advantage in determining whether to buy or sell a fund based on an already established price. Engaging in late trading or enabling someone else to engage in late trading is prohibited.
Market timing is rapid and repetitive in-and-out trading to take advantage of market movements such as buying an international mutual fund one day and selling it the next day because of movements in foreign markets that impact the fund's value. While trading a mutual fund is not, in itself, illegal or violates a rule, it often violates restrictions established by the fund on short-term market timing trades. Our representatives are prohibited from engaging in market timing or knowingly aiding someone in activity that violates a mutual fund's internal trading guidelines.
There are valid reasons why an occasional mutual fund trade may be entered late and should be processed at the current day's NAV. There may also be funds that do not prohibit market timing. However, financial professionals must not engage in or assist someone else in engaging in prohibited late trading and market timing. Compliance should be contacted if someone proposes to engage in either activity.
Block Letter Restrictions
Mutual fund companies sometimes issue "block letters" that limit the trading activity of a particular customer. This may occur if the fund detects trading that violates trading restrictions imposed by the fund such as late trading or market timing.
When a block letter is received, the financial professional and the financial professional's supervisor will be notified, and the financial professional is responsible for complying with the restriction. Orders may not be entered for you in another account that is beneficially owned by you to circumvent any restrictions.
Money Market Funds
When RBC is the custodian of your account, RBC automatically moves (sweeps) the cash in your account into money market funds and/or FDIC insured bank deposit accounts. You and your financial professional may select the money market fund or bank deposit account. RBC retains some of the interest paid on the bank deposit account or shareholder servicing fees paid on the money market fund and pays a portion of that to us. These payments to are called ?distribution assistance? and they vary based on the bank deposit account or money market fund you select. We do not determine the interest rates paid on bank deposit accounts or shareholder servicing fees paid on money market funds, or the amount or percentage of distribution payments that it will receive. Because some funds pay more than others, we have an incentive to select a fund that pays us more, over a fund that pays us less. When interest rates are low, or in the event of a regulatory change RBC reserves the right to reduce or discontinue its distribution assistance payments to us.
Our receipt of distribution assistance payments creates a conflict of interest because we have an incentive to recommend or make available money market funds and FDIC insured bank deposit accounts with higher distribution assistance payments over those with lower payments. We do not share distribution assistance payments with our financial professionals.
Mutual Fund Prospectus
When a mutual fund is recommended, the client is provided with a prospectus. When the prospectus is amended, an updated copy is provided. The prospectus provides detailed and important information about the specific mutual fund. Therefore it is very important that you, the client, carefully read the prospectus.
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Alternative Funds Are Not Your Typical Mutual Funds
Treasury's Guarantee Program for Money Market Mutual Funds: What You Should Know
Class B Mutual Fund Shares: Do They Make the Grade?
Updated: Understanding Mutual Fund Classes
Net Asset Value Transfers: Look Before You Leap Into Another Mutual Fund
Principal-Protected Funds?Security Has a Price
Updated: Mutual Fund Breakpoints: A Break Worth Taking
Mutual Fund Breakpoints: Are You Owed a Refund?
Certificates of Deposit
WCS offers certificates of deposit (CDs) as one of the products available to customers. Because CDs offered by WCS may be different from traditional bank-issued CDs that carry a fixed interest rate over a fixed duration of time and are insured by FDIC, it is important that financial professionals understand the features of these CDs before offering them to customers.
General Sales Guidelines
The following guidelines apply to the sale of CDs:
Some CDs have unique characteristics which should be understood by the financial professional and communicated to the potential purchaser. Some of those special characteristics are explained below.
CDs may be securities. Some CDs may be considered securities and must be registered. Whether or not a CD is a security depends on a number of factors and requires individual analysis. CDs are reviewed by Compliance prior to offering to the public, to determine whether registration as a security is required.
"Brokered" CDs may be significantly different from traditional CDs.
Brokered CDs are CDs issued by banks via a "master CD" to deposit brokers (which include WCSs) which sell interests to individual investors. The master CD is an aggregation of individual CDs with the same denomination.
Please note the following important disclosures:
Secondary market: The secondary market for long-term CDs may be limited. WCS will make the appropriate disclosure to purchasers of CDs during an initial distribution.
Call features: Callable CDs give the issuer the right to redeem the CD. This typically happens when a long-term CD is trading at a premium to its call price in the secondary market. Purchasers should understand it is the issuer that has the right to call the CD, and it may be redeemed at a time when less favorable interest rates are available for reinvesting the funds. financial professionals must not predict the likelihood that the CDs will or will not be called.
Discount or zero CDs: Purchasers should understand the maturity date of the CD and that interest and principal are not payable until maturity. Early sales may result in a substantial loss of value.
"Step rate" CDs: A "step-down" CD generally pays an above-market interest rate for a period of time after which it will then "step down" to a lower, predetermined rate that will be paid until maturity. A "step-up" CD generally pays a below-market interest rate for a period of time after which it will then "step up" to a higher predetermined rate that will be paid until maturity. The "step rate" may be below or above then-prevailing market rates. The initial rate cannot be used to calculate yield to maturity.
Market Index/Linked CDs
Some CDs are linked to market indices. Market Indexed/Linked CDs ("MCDs") are hybrid investments that usually combine zero-coupon bonds with stock options on the underlying market index. When held to maturity, MCDs are intended to offer return of the initial investment with the potential of upside gain based on the performance of the underlying index. MCDs are insured by the FDIC for up to $100,000 per account held at each institution.
Risks and features should be disclosed to customers:
Real Estate Investment Trusts (REITs)
REITs invest in different types of real estate or real estate related assets such as shopping centers, apartment buildings, office buildings, hotels, and mortgages secured by real estate. The three types of REITs include:
General Sales Guidelines
Per FINRA rules, the following minimum material facts should be disclosed in the prospectus:
Expenses and Compensation
Prior to participating in a public offering of a REIT (unless the filing is made by another participant), WCS will make the required filing with the FINRA Corporate Financing Department. Prior to offering the REIT, WCS must receive a "no objections" opinion regarding the proposed terms and arrangements in the offering. The following sections explain key requirements that are considered by FINRA.
Organization and Offering Expenses
Organization and Offering Expenses (O&O expenses) are limited to 15% of the gross proceeds of the offering. O&O expenses are comprised of: (1) issuer expenses reimbursed or paid for with offering proceeds; (2) underwriting compensation; and (3) due diligence expenses. These elements are explained in the next three sections.
Issuer expenses include:
Underwriting compensation from whatever source paid to underwriters, WCSs or affiliates is limited to 10% of the gross proceeds of the offering. The 10% limit is included as part of the 15% limit on O&O expenses. Refer to Regulatory Notice 08-35 for a detailed explanation of the types of compensation considered underwriting compensation.
Due Diligence Expenses
All bona fide due diligence expenses included on a detailed and itemized invoice detailing such expenses are included as part of the O&O expenses. The amount of due diligence expenses may be treated in the calculation of underwriting compensation as a non-accountable expense provided that, when aggregated with all other non-accountable expenses, the amount does not exceed 3% of the offering proceeds.
Allocation of Compensation
Rule 2810 (and Regulatory Notice 08-35) outlines specific requirements for allocating employee compensation as underwriting compensation. The Rule and Notice should be consulted for specific guidance when considering what is included as underwriting compensation.
Private and Non-traded REITs
Private and non-traded REITs are companies whose shares do not trade on a national stock exchange. They generally operate like unit investment trusts by purchasing assets that are held for a fixed amount of time, often 7 to 10 years, and will either sell off the properties or do an IPO at the end to exit the fund and deliver returns to shareholders.
There are features and risks which financial professionals must be familiar with prior to recommending a private or non-traded REIT.
Prior to participating in a Non-Traded REIT:
Client Suitability for Non-traded REITs
Each Non-traded REIT will have specified suitability standards including information such as the purchaser's income and net worth. financial professionals will not discuss Non-traded REITs with a client unless the financial professional has previously obtained information from the client regarding such client?s income and net worth that would place the client within the suitability range(s) determined by the sponsor (or WCS) for each offering. Offerings that require a subscription agreement that is signed by the purchaser will include an affirmation that you meet the minimum suitability standards. For offerings where a subscription agreement is not required, the financial professional is responsible for ensuring the purchaser meets the standards outlined in the prospectus. The financial professional and Client will complete a Disclosure and Suitability Statement (and a Client Suitability Explanation if either: A. the client has a concentration of 30% or greater in illiquid assets, B. the transactions represent greater than 10% of the clients Adjusted Net Worth, C. the client has a Net Worth less than $150,000, or D. The client has Annual Income less than $45,000) for each purchaser of a Non-traded REIT whether or not a signed subscription agreement is required. The designated supervisor is responsible for ensuring required documents have been received prior to confirming and accepting purchases, and for retaining such documents in a file for the offering. The firm CCO shall retain the right to reject any client purchase of a Non-traded REIT product.
Subscription Agreements and Disclosure and Suitability Statements for Non-traded REITs
The designated supervisor is responsible for the following:
Public Non-Traded REITs?Perform a Careful Review Before Investing
Financial professionals are responsible for making a reasonable effort to obtain a price for you that is fair and reasonable in relation to prevailing market conditions.
Mark-Ups and Mark-Downs
Mark-ups or mark-downs are calculated from the prevailing market price of the security. The prevailing market price is commonly obtained from one of the following sources: (1) TRACE; (2) the dealer's contemporaneous cost; or (3) inter-dealer transactions.
When there is no contemporaneous transaction, the following pricing alternatives will be used:
Contemporaneous Cost (Or Sale Proceeds) and Overriding Events
The Mark-Up Policy states that the "prevailing price" is the price to be used when determining a fair mark-up or mark-down. For debt securities, the WCS's contemporaneous cost is considered the prevailing price. Contemporaneous cost is the price at which the BD buys or sells the security in close proximity to the transaction subject to the Mark-Up Policy.
FINRA recognizes that contemporaneous cost (proceeds) may not be indicative of the prevailing market price if one of the following three events occurs:
Hierarchy Pricing Factors
Three factors must be considered, in the order listed, to price the security on a hierarchy basis:
Pricing Information from Similar Securities
Pricing may be based on similar securities; the Interpretation includes the following possible considerations (which are in no particular order): credit quality of both securities, ratings, collateralization, spreads (over U.S. Treasury securities of similar duration) at which the securities usually traded, general structural similarities (calls, maturity, embedded options), size of the issue, float, recent turnover, estimate of market yield, and transferability or restrictions on the securities. A "similar" security should be sufficiently equivalent to the subject security that it would serve as a reasonably fungible alternative investment.
Pricing Information from Economic Models
Where none of the prior alternatives are available for determining the security's price, an economic model may be used. The model must take into account measures such as credit quality, interest rates, industry sector, time to maturity, call provisions and any other embedded option, coupon rate and face value, and all applicable pricing terms and conventions (e.g., coupon frequency and accrual methods).
Qualified Institutional Buyer (QIB) Exemption
Transactions with institutional customers that qualify as QIBs are not subject to the Mark-Up Policy. All three of the following elements must be satisfied to apply the exemption:
An individual we have designated to supervise this business line (the ?designated supervisor?) is responsible for reviewing the reasonableness of commissions on agency transactions. Relevant factors in determining the reasonableness of commissions may include:
Traders are prohibited from acting on, passing on, or discussing any inside information regarding any fixed income security issues, including any material non-public information regarding, for example, a credit-rating change, default or advance refunding. Any knowledge of such information must be brought to the attention of the designated supervisor and Compliance. No WCS proprietary account or employee account may enter a transaction in a security based on material non-public information about that security.
Traders are prohibited from entering into financial arrangements with customers or issuers (i.e., sharing in profits or losses, sharing in commissions, rebating commissions, etc.).
No purchase or sales order shall be entered or executed that is designed to raise or lower the price of a security or to give the appearance of trading for purposes of inducing others to buy and sell. No purchase or sale order shall be entered or executed with the intent to "corner" a market or create a "squeeze" in a security.
No WCS proprietary or employee account may trade a security while in possession of material information about an imminent block-sized transaction in that security or a derivative security.
No arrangement may be used to conceal the true ownership of securities through a fictitious sale or transfer to another party or nominee who agrees to later sell or transfer the securities to the true owner (or his agent) at the agreed upon time at essentially the same terms. Legitimate repurchase or "repo" transactions, usually entered into as financing transactions, are not included in this prohibition if they are not entered for a manipulative purpose.
A trader may not permit the charging of a mark-up or mark-down in addition to a commission on any transaction.
Adjusted trading or "overtrading" is a prohibited practice that involves the sale of a security by a customer for a price above the prevailing market price and the simultaneous purchase of a different security at a price lower than the prevailing market price. The purpose of an adjusted trade usually is to assist a customer in avoiding, disguising, or postponing losses.
Other scenarios of adjusted trading include:
High Yield Debt Securities
Since high yield debt securities generally involve a higher degree of risk, it is important that the financial professional recommend such securities only to customers willing to risk loss of principal. Supervisors reviewing daily transactions should consider the suitability of recommended purchases of high yield debt securities in relation to your investment objectives and other investments.
It is WCS?s policy to deal fairly with all persons. Deceptive, dishonest, or unfair practices are prohibited.
WCS must have a reasonable basis to believe that a recommended transaction or investment strategy involving a municipal security is suitable for you, based on the information obtained through the reasonable diligence of WCS to ascertain your investment profile. A customer?s investment profile includes but is not limited to, your age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information you may disclose to WCS in connection with such recommendation.
As detailed in Supplemental Material section 0.4 of Rule G-19, the factors delineated in Rule G-19 regarding a customer?s investment profile generally are relevant to a determination regarding whether a recommendation is suitable for a particular customer, although the level of importance of each factor may vary depending on the specific facts and circumstances. WCS shall use reasonable diligence to obtain and analyze all of the factors delineated in Rule G-19 unless WCS has a reasonable basis to believe, documented with specificity, that one or more factors are not relevant components of a customer?s investment profile in light of the specific facts and circumstances.
If you refuse to provide the requested information, the new account form should be so marked. Changes to customer suitability information should be made by amending existing new account information or submitting a new form.
To satisfy their suitability obligations under amended Rule G-19 (which closely aligns with FINRA Rule 2111?s structure) there are separate determinations relating to Reasonable Basis Suitability, Customer Specific Suitability and Quantitative Suitability.
These three components of the Suitability Obligations of Rule G-19 are explained in Supplemental Material Section .05 of the Rule G-19. Subsection (a) explains that for WCS to satisfy Reasonable Basis Suitability, the recommendation must be suitable for at least some investors. In general, what constitutes reasonable basis diligence will vary depending on, among other things, the complexity of and risks associated with the particular municipal security. Reasonable diligence must provide the firm with an understanding of the potential risks and rewards of the recommended municipal security, including the information about the security described in new MSRB Rule G-47 (Time of Trade Disclosure), to the extent such information is material. The lack of such an understanding when recommending a municipal security violates the suitability rule.
Additional subsections of Supplemental Material Section .05 of the Rule G-19 cover both Customer Specific Suitability and Quantitative Suitability. Customer Specific Suitability requires that WCS believe a particular security is suitable for a particular customer based on that customer?s investment profile as delineated in Rule G-19. With respect to Quantitative Suitability, transactions that in isolation are suitable for a particular customer may violate quantitative suitability if they are part of a series of recommended transactions that, when analyzed together and in context with the particular customer?s investment profile, are excessive. No single test defines excessive but turnover ratio, cost-equity ratio and the use of in-and-out trading should be used for consideration.
Non-Rated Municipal Securities
Non-rated municipal securities may represent a higher level of risk to the investor. financial professionals should discuss the risks of purchasing non-rated bonds when such bonds are recommended for purchase. Risks may include less liquidity; more price volatility; and higher risk of default. As required by MSRB Rule G-15, customer confirmations include a disclosure when a municipal security is not rated.
Sophisticated Municipal Market Professionals (SMMPs)
Suitability obligations differ for institutional customers that are "sophisticated" and capable of making their own suitability determinations.
The MSRB has adopted new Rule D-15 to define the term Sophisticated Municipal Market Professional or SMMP to mean a customer of a broker-dealer that is either:
1. a bank, savings and loan association, insurance company, or registered investment company, or
2. an investment adviser registered with the SEC under section 203 of the 1940 Act or with a state securities commission, or
3. any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million;
AND, the broker-dealer has a reasonable basis to believe you is capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions and investment strategies in municipal securities;
AND that customer has affirmatively indicated that it is exercising independent judgment in evaluating the recommendations of the broker-dealer.
The MSRB has also adopted an associated new Rule G-48 which provides that when dealing with a customer that WCS reasonably concludes is a SMMP, the firm?s obligations are modified in important ways:
(1) There is NO time of trade disclosure obligation under Rule G-47,
(2) There is NO obligation to perform a customer specific suitability analysis under Rule G-19,
(3) If the transactions are either non-recommended secondary market transactions; or WCS?s services in the transactions are limited to providing anonymity, communication, order matching and/or clearance functions; or WCS does not exercise discretion as to how or when the transactions are executed; then WCS will NOT have an obligation under Rule G-30 (b)(i) to ensure that the transactions are effected at fair and reasonable prices,
(4) WCS shall apply the same standards to your quotations as it would if the quotation were provided by another broker-dealer.
WCS may not sell municipal securities to customers below the minimum denomination for securities issued after June 1, 2002, with limited exceptions explained below. In addition, for securities issued on or before June 1, 2002, sales to customers in amounts below the minimum denomination must include a disclosure that the amount is below the minimum denomination and that this may adversely affect the liquidity of the position.
Exceptions for Securities Issued After June 1, 2002
There are two limited exceptions to this rule:
Written disclosure about the potential effect on liquidity will be included on confirmations where a customer buys an amount below the minimum denomination.
If WCS determines to provide a separate written disclosure, records of providing the disclosure will be retained by Operations for a minimum of three years.
Time of Trade Disclosures, Disclosure Obligations in a Municipal Underwriting
New MSRB Rule G-47 became effective on 7/5/2014 and is included below:
(a) No broker, dealer or municipal securities dealer shall sell a municipal security to a customer, or purchase a municipal security from a customer, whether unsolicited or recommended, and whether in a primary offering or a secondary market transaction, without disclosing to you, orally or in writing at or prior to the time of the trade, all material information known about the transaction, as well as material information about that security that is reasonable accessible to the market.
(i) ?Established Industry Sources? shall include the MSRB?s EMMA system, rating agency reports, and other sources of information relating to municipal securities transactions generally used by brokers, dealers, and municipal securities dealers that effect transactions in the type of municipal securities at issue.
(ii) ?Material information?: Information is considered to be material if there is a substantial likelihood that the information would be considered important or significant by a reasonable investor in making an investment decision.
(iii) ?Reasonably accessible to the market? shall mean that the information is made available publicly through established industry sources.
Supplemental Material .01 to Rule G-47 and is also included below:
Manner and Scope of Disclosure: a. The disclosure obligation includes a duty to give a customer a complete description of the security, including a description of the features that likely would be considered significant by a reasonable investor, and facts that are material to assessing the potential risks of the investment, b. The public availability of material information through EMMA, or other established industry, does not relieve brokers dealers of their obligation to make the required time of trade disclosures to a customer, c. a broker-dealer may not satisfy its disclosure obligations by directing a customer to an established industry source or through disclosure in general advertising materials, d. Whether you are purchasing or selling the municipal securities may be a consideration in determining what information is material.
Subsection .03 of the Supplemental Material to Rule G-47 lists some areas of possible material information relating to municipal securities and includes sections specifically relating to: Variable Rate Demand Obligations, Auction Rate Securities, Credit Risks and Ratings, Credit or Liquidity Enhanced Securities, Insured Securities, Original Issue Discount bonds, Securities Sold below the Minimum Denomination, Securities with Non-Standard Features, Bonds that Pre-Pay Principal, Callable Securities Put Option and Tender Option Bonds, Stripped Coupon Securities, the Investment of Bond Proceeds, Issuer?s Intent to Pre-Refund, and finally Failure of the Issuer to make Continuing Disclosure Filings.
Subsection .04 of the Supplemental Material to Rule G-47 makes clear that firms are required to implement processes and procedures reasonably designed to ensure material information about municipal securities is disseminated to financial professionals who possess the above described time of trade disclosure obligations.
When making recommendations in secondary market municipal bond transactions, the municipal trading desk will do the following for each order received for a municipal security:
Rule 15c2-12 of the Securities Exchange Act of 1934 imposes certain requirements on municipal underwriters and dealers to disclose "material events" regarding municipal securities sold to customers. When WCS participates in an underwriting, required information is included in the official statement provided to purchasers, when an official statement is available.
529 College Savings Plans (Municipal Fund Securities)
529 College Savings Plans are higher education savings plans named for Section 529(b) of the Internal Revenue Service Code. Through a 529 Plan, an individual may contribute cash to be invested for the purpose of accumulating savings for qualifying education costs of beneficiaries. Plan investments include pooled investment funds and have features similar to mutual funds or variable annuities.
529 plans established by states or local governmental entities are deemed municipal fund securities subject to MSRB rules. This section addresses requirements for 529 plans that are considered municipal securities.
Features of 529 Plans
General features include the following; specific programs must be reviewed to determine actual features.
There are two primary forms of written disclosure that must be provided to customers when marketing 529 college savings plans. Providing disclosures does not relieve the obligation to make suitable recommendations to you.
Official Statement/Program Disclosure Document
Issuers of 529 plans provide a document to be used in connection with sales of municipal fund securities. This may be an official statement, program disclosure document, information statement, prospectus, or other document provided by the issuer.
When marketing out-of-state 529 college savings plans, disclosure will be provided to you prior to or at the time of the trade as follows:
1. Depending on the laws of the home state of you or designated beneficiary, favorable state tax treatment or other benefits offered by such home state may be available only if you invest in the home state's 529 college savings plan.
2. State-based benefits should be one of many appropriately weighted factors to be considered in making an investment decision.
3. you should consult with his or her financial tax or other adviser about how such state-based benefits would apply to your specific circumstances and may wish to contact his or her home state or any other 529 college savings plan to learn more about their features.
When recommending 529 plans, the financial professional has the obligation to determine the suitability of the recommendation, with particular consideration of the plan's underlying investments. financial professionals should consider the following when discussing 529 plans with prospective purchasers:
The financial professional's designated supervisor must approve transactions where an out-of-state plan or replacement of an existing plan is being recommended. financial professionals are required to complete the 529 College Savings Plan Checklist and submit it to the designated supervisor prior to effecting the transaction.
Sales Material for Municipal Fund Securities
Special requirements apply to sales material for municipal fund securities. In addition to MSRB rule requirements, any municipal fund securities sales material that includes the following information about underlying investment company investments must comply with SEC advertising rules and FINRA Rule 2210:
Updated: 529 Plans- School Yourself Before You Invest
Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell?depending on the type of contract they hold?the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.
Options trades typically incur higher trading fees and commissions. As such, we have an incentive to recommend that you invest in options contracts.
When considering investing in options, please be aware of the following:
Financial professionals are responsible for obtaining the required information on WCS's customer option agreement. you must sign the option agreement confirming the information included on the form and agreeing to abide by the requirements included on WCS's agreement.
Your signed option agreement must be submitted to WCS within 15 days of approval. Failure to receive your signed option agreement within 15 days will result in restricting your account to closing option transactions until the agreement is received.
Levels of Option Trading
The following guidelines apply to accounts requesting approval to trade at various levels:
Requalifying an Account's Approved Option Levels
When a previously-approved option account is to be approved for a higher level of option, a new option agreement is required. The new agreement is to be approved by a ROP or qualified sales supervisor and sent to you for verification of account information on the form.
Uncovered Short Options
All accounts that are approved for uncovered short options will be provided with the Special Statement for Uncovered Option Writers ("Statement") before or with the confirmation of the first uncovered short option transaction. If the Statement is revised, the revised version will be provided before or with the confirmation of the next uncovered short option transaction.
Option Disclosure Document (ODD)
All customers will be provided the required disclosure document either before or with the confirmation of the first option transaction.
In addition, whenever the disclosure document is revised, a new copy will be sent to all option accounts in existence at the time of the revision.
ODD documents are also available on www.wilmingtoncap.com/forms.
Compliance will review trusts, pension plans, and other fiduciary accounts to determine whether options transactions are permitted in the document (trust agreement, etc.) governing the account.
Suitability of Option Transactions
When recommending opening option transactions, financial professionals should have a reasonable basis for believing you have the knowledge and experience in financial matters that he/she may be reasonably expected to be capable of evaluating the risks of the recommended transaction, and financially able to bear the risks of the recommended position. Suitability determinations are based on the information provided by you including the financial professional's understanding of your ability to evaluate the risk and financial ability to bear the risk.
Orders Requiring Prior Approval
The following option transactions require the approval of the designated supervisor prior to entry:
The designated supervisor is responsible for review of option orders to identify transactions inconsistent with policy requirements including incomplete orders and transactions that appear to be unsuitable for you.
Accounts Trading Outside Approved Levels
WCS has established procedures to identify accounts that trade outside approved option levels. financial professionals may be required to complete a new option agreement to re-qualify you or orders may be canceled if deemed inappropriate for you.
The following transaction(s) is/are not permitted:
Customers are subject to limits on how many contracts may be accumulated in a particular option at any one time. Total positions include all accounts under "common control" by one party. An example of common control would be a registered investment adviser who manages multiple accounts and establishes option positions in accounts under the adviser's management. Position limits also include accounts "acting in concert" to accumulate a position.
The designated operations supervisor is responsible for identifying positions that exceed allowable limits under SRO rules. When a position limit violation is identified, the SRO will be notified as required by rule and you will be notified and asked to reduce the position to within the permitted levels.
Exercise of Options
The method used for exercising options is disclosed on WCS?s option agreement.
The following records will be retained by the designated supervisor regarding exercise of options:
The following apply to the exercise of options:
The number of shares underlying an option contract and/or the exercise price are subject to adjustments by the Options Clearing Corporation when the underlying shares are subject to dividends (other than cash dividends), distributions, stock splits, recapitalization, or reorganization. Branches are notified and financial professionals should advise customers who hold option positions in the affected security.
Option Communications with The Public
Requirements for options communications include the following, which are explained in more detail below:
Options [FINRA Rule 2360(a)(20)]: Any put, call, straddle or other option or privilege, which is a "security" as defined in Section 2(1) of the Securities Act of 1933 but not including any tender offer, registered warrant, right, convertible security or any other option in respect to which the writer is the issuer of the security which may be purchased or sold upon the exercise of the option.
Options Disclosure Document (ODD) [FINRA Rule 2360(a)(12)]: The options-market document containing explanatory information relating to the mechanics of buying, writing and exercising options; the risks involved; and other required information about options. The ODD must be provided to all options customers and provided with certain options communications.
Public appearance: Any participation in a seminar, forum (including an interactive electronic forum), radio, television or print media interview, or other public speaking activity, or the writing of a print media article, concerning options.
Standardized Option: Any options contract issued, or subject to issuance, by The Options Clearing Corporation, that has standardized terms for the strike price, expiration date, and amount of the underlying security, and is traded on a national securities exchange registered pursuant to section 6(a) of the Securities Act.
All advertising, sales literature, or educational materials regarding options must conform to rule requirements and be approved by Compliance prior to use or publication.
Institutional Sales Material
Sales material prepared for institutional investors is not subject to the same requirements as material prepared for non-institutional investors. This does not include material that the Firm has reason to believe will be distributed to anyone who is not an institutional investor. For example, if sales material is provided to an institution for distribution to employees participating in a 401K plan, the sales material would be treated as distributed to retail investors.
Options institutional sales material must be approved by a ROP but does not require pre-use approval and filing with FINRA.
Correspondence includes any written letter or electronic communication. Pre- or post-approval by the designated supervisor or a ROP depends on the scope of distribution, as outlined below.
Written communications regarding options should include the following:
Independently Prepared Reprints
Articles and other reprints are subject to outgoing correspondence reviews and copies should accompany correspondence submitted for review and approval. If the article or reprint was provided by WCS to financial professionals, the letter or other correspondence may reference what was enclosed without including a copy of the reprint.
Articles and reprints that are issued by an independent publisher and not materially altered are not subject to FINRA filing requirements and most content standards. This exception does not apply to reprints published by an affiliate of WCS.
Distribution of copyrighted material is subject to the copyright holder's approval. WCS will obtain approval for independent reprints it distributes to financial professionals for sending to customers.
Communications Regarding Standardized Options Prior to Delivery of the ODD
Prior to providing the ODD, we will limit communications with you to a brief description of options including a statement that identifies the registered clearing agency for options and a brief description of the general attributes and method of operation of the option exchanges including a discussion of how an option is priced. Such pre-ODD communications must include contact information for obtaining a copy of the ODD and must not contain recommendations or past or projected performance figures including annualized rates of return or the names of specific securities. They may include statements required by state law and administrative authority and may include advertising designs and devices, providing such material is not misleading.
Seminars and Public Presentations
Prior to conducting a seminar or other public presentation regarding options, the presenter is required to submit an outline of the presentation to the designated supervisor for review. Seminar scripts, handouts, slides, or other visual presentations must be pre-approved and are deemed to be sales literature. The presenter shall provide all who attend the public presentation the current options disclosure document. A list of those who attended and received the disclosure document should be prepared and include the date of the meeting.
Appearances in public media (radio, TV, newspapers, other) require the prior approval of Compliance and copies of written material or tapes of the presentation must be provided to Compliance including where published/presented and the type of media (name of newspaper, radio/TV station, other) and date of the appearance or publication.
Communications that are likely to be widely disseminated such as advertisements, sales literature, and independently prepared reprints are subject to filing with FINRA at least ten calendar days prior to use. If changed or disapproved by FINRA, the originator of the communication will be notified, and the communication will be withheld from distribution until resubmitted to FINRA and approved by them.
Filing with FINRA is not required:
A private placement is a sale of securities that is not subject to registration under the Securities Act of 1933. While private placements are exempt from registration requirements, they are subject to the anti-fraud and civil liability provisions of various federal securities laws. Private placements and offerings are subject to strict requirements that are imposed on the issuer and those who sell the issue. The requirements for offering a specific private placement will be announced at the time the private placement becomes available for sale. A general understanding of private placements is helpful when considering whether to participate in an offering.
These products typically generate higher commissions than other transactions. As such, we have an incentive to encourage you to invest in a private placement.
There are several general areas of requirements and limitations that affect most private placements.
Accredited investor An investor who meets certain criteria that are indicative of sophistication Letter of Non-Distributive Intent A letter or form signed by the purchaser of a private placement, affirming that the investor is purchasing the securities for their own account and are not to be resold unless registered or subject to an available exemption.
Non-Disclosure Agreement An agreement signed by the offeree stating that proprietary information learned about the issuer will not be divulged to third parties.
Offer An attempt to sell a security to a potential purchaser
Offeree A prospective purchaser to whom an offer is made
Purchaser questionnaire A questionnaire completed by an offeree to establish the offeree's suitability to purchase the investment
Purchaser representative A person (not affiliated with the issuer or the WCS selling the issue) who acts on the purchaser's behalf to evaluate the investment for the purchaser
Subscription agreement The document signed by the purchaser and evaluated by the issuer prior to the purchase
Section 4(2) of The Securities Act Of 1933
Some private placements are offered under Section 4(2) which provides an exemption for "transactions by an issuer not involving any public offering." While the section does not specifically outline the requirements for establishing an exemption, the following is a summary of requirements gleaned from SEC interpretations and court decisions.
Regulation D is a series of six rules, Rules 501-506, that include exemptions from the registration requirements of the 1933 Act. The specific exemptions are included in Rules 504-506 and differ as to the size of the offering and conditions imposed to qualify for the exemption. The following chart summarizes the three exemptions available under Regulation D. This is only a very general summary of requirements and does not include legal definitions and technicalities that may apply to certain types of private placements.
Rule 504 Rule 505 Rule 506
Who may invest Anyone suitable for the investment Qualified investors Qualified investors Number of investors
Unlimited 35 non-accredited, unlimited accredited investors 35 non-accredited, unlimited accredited investors
Size of offering sold in any consecutive 12 months $1,000,000 $5,000,000 Unlimited
Restricted securities? No Yes Yes
Public solicitation/advertising allowed? Yes No No
Disclosure document required? No Yes* Yes*
Opportunity to ask questions of issuer? No Yes Yes
*Under the rule, disclosure documents are not required to be given to accredited investors though a note to Rule 502(b) states that an issuer should consider providing such information to accredited investors in view of anti-fraud statutes.
The reference to "unlimited accredited investors" in the section "Number of investors" above does not imply that a private placement will, in fact, have an unlimited number of accredited investors. The issuer and WCS will consider limitations on accredited investors, as appropriate, to preserve the exemption as a private placement and avoid the appearance of a broad solicitation of the issue.
Blue Sky Requirements
State securities laws ("blue sky" laws) that apply to private placements vary from state to state. Some states have differing definitions for accredited investors; some states require registration of a securities issue that is otherwise exempt under Federal securities laws.
WCS and its sales personnel are required to comply with any blue sky requirements that apply to a specific private placement issue. Requirements may differ depending on where the issue originates and where it is sold.
Due diligence will be conducted for each private placement issue to be offered by WCS and is documented in the file for the private placement. Outside counsel may be engaged to assist in due diligence and other aspects of the private placement offering.
Agreement with The Issuer
WCS will execute an agreement with the issuer to define the terms of WCS?s role in the offering and the issuer's obligations as well as other covenants of the offering.
Dollar Amount of The Offering and Integration Issues
The designated supervisor is responsible for ensuring the issue is not oversold relative to the dollar amount disclosed in the offering document compared to the limitations provided in the rules. The supervisor should consider any "integration" of similar offerings by the same issuer for substantially identical purposes for determining whether the issuer meets the dollar limitation under the exemption within a 12-month period of time. The supervisor's review for integration may include one of the following or another procedure determined adequate by the supervisor:
For issues sold under Regulation D, the issuer is required to make a Form D filing electronically on EDGAR within fifteen days after the first sale of securities in the offering. For ongoing offerings lasting longer than one year, the issuer is required to electronically file an amendment annually.
Some states also require filing of Form D. The issuer (or issuer's counsel) is responsible for Form D filings.
Sales of Private Placements
A primary objective when selling a private placement is that all securities will be suitable for investors. The financial professional recommending a private placement is responsible for determining that the recommendation is suitable for the offeree based on information known about the potential offeree. The financial professional must consider minimum investor requirements and other suitability standards for each private placement offering. WCS has policies and procedures in place designed to comply with relevant regulatory requirements.
An accredited investor meets certain financial criteria which may include minimum net worth, minimum income levels and other standards set by federal or state laws and regulations. Typically, accredited investors are not counted toward the limitation on the number of purchasers of a private placement.
Information about each private placement (and where it is sold) must be consulted to determine who qualifies as an "accredited investor" for a particular issue.
Private placements sometimes may be offered to purchasers who do not meet the criteria of accredited investors. The number of allowable non-accredited purchasers will be limited, to preserve the registration exemption and meet requirements specified under federal and state law.
Restricted Nature of Private Placement Securities
Private placement securities are considered "restricted securities," other than those purchased in Rule 504 offerings. Certificates will typically include a legend and securities cannot be resold unless registered or the securities qualify for sale under an exemption.
Purchases must be for investment purposes and not for the purpose of resale. Subscription documents typically include an affirmation that the purchaser is buying the private placement for investment purposes and understands they may not be resold (Letter of Non-Distributive Intent).
financial professionals must consider the illiquidity of most private placements when making suitability determinations. For example, a private placement would not be a suitable investment for a purchaser who expects to invest his funds on a short-term basis.
Where necessary, the potential investor will be requested to complete a Purchaser Questionnaire which confirms that the investor meets certain minimum requirements to participate in the private offering.
When Purchaser Questionnaires are required, the financial professional is responsible for obtaining the completed Questionnaire from the potential purchaser and submitting it for review and approval within the timeframe established for the offering.
If a purchaser is not sufficiently sophisticated to effectively evaluate the investment opportunity, he or she may have a "purchaser representative" (chosen by the investor and not an affiliate of the issuer or WCS) who assists in evaluating the investment. The purchaser representative will be required to sign the offering documents attesting to his or her role acting as purchaser representative.
An offering memorandum is prepared for each private placement, depending on the specific issue. The offering memorandum includes disclosures of information obtained from the issuer including the nature, character, and risk factors relating to the offering. Purchasers will be required to acknowledge, in writing, that they have received the offering memorandum.
An offering memorandum must be provided to all offerees. Offering memorandums are numbered, to enable WCS to maintain a record of offerees who received them.
Offering memorandums are available from [include name or department]. financial professionals must provide information regarding the offeree at the time the memorandum is provided to the prospective purchaser.
If it is necessary to update or correct information in the private placement memorandum prior to closing of the issue, the revised information will be provided to offerees, in writing.
financial professionals must not deviate from written private placement memorandum information or other pre-approved information when discussing private placements with potential investors. Written notes of conversations with offerees (and their purchaser representatives) should be made, dated and placed in your file.
Offeree Access to Information
Most private placement memoranda state that it was prepared by counsel from information provided by the issuer. Offerees are invited to meet with representatives of the issuer to make an independent investigation and verification of information in the memorandum.
Limits on Solicitation
A key element of private placement exemptions (other than offerings under Rule 504) is that there may be no general solicitation of the issue. This includes the following restrictions or requirements:
Because general solicitation is not permitted for private placements, meetings or seminars for potential investors must meet the following requirements:
Each potential purchaser will be required to complete the necessary subscription agreement to purchase a private placement. The agreement must be accompanied by a check for the purchase.
Subscription agreements are processed as follows:
Some private placement issues are offered on a "best efforts" or "all-or-none" basis. Completion of the offering may depend on the sale of a certain minimum amount of the issuer's securities and, where the minimum is not sold within the specified deadline, all customer funds must be refunded.
Two rules that address contingency offerings are SEC Rules 15c2-4 and 10b-9. 15c2-4 deals with the protection of customer funds and requires prompt transmission of customer funds to the issuer or an escrow account, depending on the type of offering. 10b-9 requires that WCS sell only to bona-fide purchasers to meet any minimum amount of the securities to be sold.
Section 1031 Tax-Deferred Exchanges
Section 1031 of the Internal Revenue Code allows an investor in income-producing or rental real estate to exchange the investment for another like investment of equal or greater value and defer payment of capital gains tax on the original investment. To qualify for the deferral, the investor must acquire an interest in real estate in exchange, and not an interest in a partnership.
TIC exchanges receive favorable tax treatment. A 1031 exchange by TIC would qualify for deferral only if the TIC and the transaction meet 15 IRS conditions outlined in Revenue Procedure 2002-22.
TIC interests offered and sold together with other arrangements generally constitute securities under federal securities laws. FINRA considers TIC interests to be a type of non-conventional investment (NCI) subject to due diligence, suitability, training, and internal control requirements. The section Non-Conventional Investments in the chapter ORDERS explains those requirements.
FINRA Notice to Members 05-18 should be referenced for a detailed discussion of "Private Placements of Tenants-in-Common Interests."
Rule 144A Transactions
Rule 144A permits private placement of securities with certain institutional purchasers. The designated supervisor is responsible for establishing procedures regarding 144A sales including the following:
Private Investment in Public Equity (PIPE)
PIPE transactions are privately issued equity or equity-linked securities sold by public companies to accredited investors under Regulation D. PIPE transactions include registered common stock, unregistered common stock, convertible preferred stock, convertible debt and equity credit lines. They may fund growth capital, acquisition funding, de-leveraging, working capital, and secondary sales. It is a way for public companies to raise cash quickly.
Following are requirements and considerations when offering PIPEs:
Private Placements?Evaluate the Risks before Placing Them in Your Portfolio
Brokerage Firm Private Securities Offerings: Buying Your Brokerage
Insurance Products & Annuities
Certain Financial Professionals are licensed to sell insurance products, such as life and health insurance or variable annuities. These products typically generate higher commissions than other transactions. As such, we have an incentive to encourage you to purchase these insurance products.
Our financial professionals must follow specific guidelines in order to solicit these products, such as:
Insurance companies (and sometimes others) offer equity-indexed annuities (EIAs) which are financial instruments that:
The following requirements apply to the sale of EIAs before recommending a purchase to you:
Interest rate computation
Floor on interest The floor is the minimum index-linked interest rate earned. The most common floor is 0% which assures that even if the index decreases in value, the index-linked interest earned will be zero and not negative.
The following requirements apply when offering life insurance products (including annuities) to military personnel and their dependents on military installations:
The following are steps for purchasing annuities:
The term "replacement" generally refers to the activity of a customer surrendering or altering existing insurance coverage in order to purchase a new insurance policy. Recommendation of a replacement should be suitable for you and justified based on the reasons for the replacement. Considerations include the age of you, the cost involved, and what benefit is derived from the replacement.
If the financial professional is aware of a replacement, certain procedures must be followed.
Replacement occurs when an existing life insurance or annuity has been or is to be:
Suitability of Replacements
The financial professional must have a reasonable basis for determining the suitability of recommending a replacement. A replacement may not be in your best interest. For example, you may incur new fees, extended surrender charge periods, a possible higher insurance risk rating due to ill health, and new suicide and incontestability periods. There may also be unfavorable tax consequences. financial professionals should carefully consider whether a replacement is suitable for you and take into consideration the following:
If a replacement is to be effected, the financial professional must:
A 1035 Exchange refers to a section of the IRS Code that allows for the non-taxable exchange of non-qualified funds from one insurance carrier to another. The tax code states that the old insurance contract must be exchanged for a new contract; the policyholder cannot receive a check and apply the proceeds to the purchase of a new insurance or annuity contract. The tax code also states that the policyholder may make a tax-free exchange from: 1) a life insurance contract to another life insurance contract or an annuity contract, or 2) from one annuity contract to another annuity contract. 1035 exchanges are not allowed for liquidations from annuity contracts to purchase life insurance contracts.
When a customer exchanges an annuity or life insurance contract to purchase an annuity contract, in addition to the requirements listed in the prior section, a specific 1035 exchange form may be required. The Insurance Department should be contacted regarding questions on 1035 exchanges.
Prohibited Replacement Activities
Variable products are insurance contracts with underlying investments generally in investment company (mutual fund) securities. They are a hybrid of insurance and securities products. There are different types of variable products with differing requirements.
Variable products are included in financial professional training on an ongoing basis and particularly when new products are introduced.
General Sales Guidelines and Suitability Requirements
There are a number of considerations that should be made when recommending a variable product:
A variable annuity is a contract between the purchaser and the insurance company whereby the insurer agrees to make periodic payments to the purchaser, beginning either immediately or at some future date. A variable annuity may be purchased by a single payment or through a series of purchase payments. The underlying investment options typically include mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.
When offering deferred variable annuities, there are specific requirements that apply to the purchase or exchange (not sale or surrender) and the initial subaccount allocations. They also apply to the use of these products to fund IRAs but not sales to certain tax-qualified employer-sponsored retirement or benefit plans unless recommendations are made to individual participants. The Deferred Variable Annuity Worksheet form must be submitted to the designated supervisor with your contract and a copy of your new account information.
The following lists the requirements that apply when recommending these products.
Group variable annuity contracts are designed for employer retirement plans. Insurance companies directly or through WCSs contract with an employer to provide variable annuity investments for 401(k), 403(b), 408(k), or other types of retirement plans. The plan is sold to the employer typically with no contact with the employees who participate in the retirement plan.
When offering group plans to employers, financial professionals must consider the underlying investments, terms of the contract, and the needs and investment goals of the retirement plan.
Variable Life Insurance
Variable life insurance is a life insurance contract with an underlying investment component in securities investments. Variable life contracts include two types of policies: variable whole-life and variable universal life. Both allow the policyholder to invest part of the premium in mutual fund-like investment pools called sub-accounts which often include a broad selection of funds from major mutual fund companies. Variable whole-life policies require fixed premiums; variable universal life policies allow the policyholder to vary payments. Variable life insurance offers a death benefit, similar to traditional life insurance. The cash value generated by the investment element is not guaranteed by the insurance company and can fluctuate depending on the performance of the investments.
"Life settlements" are the sale of existing life insurance policies to third parties. This secondary market for life insurance policies provides a policyholder the opportunity to sell a policy to a third party for less than the net death benefit but more than the cash surrender value. This market provides available cash to individuals who can no longer make premium payments or who need immediate cash. The value of a life settlement depends on different factors including life expectancy and the nature and terms of the policy. Usually the insured sells the policy to a life settlement provider which holds it until the death of the original policy owner and collects the benefits or sells the policy or bundled policies to other investors. Variable life insurance policies are securities subject to the rules and standards that apply to the sale of securities.
There is also a market for "related products" which are derivatives of life settlements that provide an opportunity to investors to purchase derivative securities that invest in life settlements.
Obligations Involving the Offer of Life Settlements
The following are obligations when recommending or facilitating the sale of an existing variable life insurance policy to a third party.
Investment products offer investors the opportunity to purchase securities based on life settlements. financial professionals are obligated to understand and communicate the risks to prospective purchasers who may be attracted by a relatively higher yield.
Some insurance contracts offer a bonus credit feature where the insurance company promises to add a bonus to a variable annuity policyholder's contract value based on a specified percentage (typically 1% to 5%) of purchase payments. Financial professionals must be aware there may be disadvantages and added costs may more than offset the benefit to you. For example, as compared to a variable annuity that does not have a bonus feature, there may be higher surrender charges; longer surrender periods; and higher mortality and expense risk charges or other charges. The financial professional is responsible for understanding the benefits and disadvantages of a bonus product before making a recommendation to you.
Communications with The Public Regarding Variable Products
Some public communications require the prior approval of Compliance. Communications that include dollar cost averaging, effective yield, and performance illustrations must meet regulatory guidelines for presenting such information.
Advertising and Sales Literature
Only Firm-approved vendor material may be provided to you. The Insurance Department is responsible for reviewing vendor materials and confirming FINRA approval has been obtained, where necessary, by the vendor. Copies are retained by the Insurance Department including the date of approval and initials of the reviewer.
Depending on the content, some material may require providing a prospectus prior to or with the advertising or sales literature.
Financial professionals should use letters pre-approved by WCS and include a prospectus or limit correspondence to stating that a prospectus is enclosed and the financial professional will be in contact with you.
Sales Seminars and Public Presentations
Seminars and presentations including variable products require the prior approval of Compliance. An outline of subjects to be covered and any handouts or copies of slides or other presentation materials must be provided for review. Compliance will retain records of materials reviewed including date of review and initials of the reviewer and any changes to be made.
It is inappropriate to recommend replacing an existing annuity with a new annuity when there is no reasonable basis or economic justification for making that recommendation (churning) or make misrepresentations to encourage someone to replace an existing contract ("twisting"). financial professionals are obligated to obtain signed replacement letters or other required disclosure forms when replacing one variable annuity contract with another.
When a customer redeems a variable annuity, the following procedures must be followed:
Pension or Settlement Income Streams?What You Need to Know Before Buying or Selling Them
Equity-Indexed Annuities: A Complex Choice
Variable Annuities: Beyond the Hard Sell
Seniors Beware: What You Should Know About Life Settlements
Should You Exchange Your Variable Annuity?
Should You Exchange Your Life Insurance Policy?