SIE ddrag

Auction Rate Securities (ARS)

(ARS) are long-term variable rate bonds tied to short-term interest rates. With long-term maturities of 20 to 30 years, the interest rates are determined using a Dutch auction method at predetermined short-term intervals, typically 7, 28, or 35 days. This type of auction uses a competitive bid process where the lowest bid rate at which all of the bonds can be sold at par is used to establish the new or "reset" rate. This reset rate is referred to as the "clearing rate". Any customers that bid above the clearing rate receive no bonds and those that bid at or below the clearing rate receive the bonds at that rate. Interest paid in the current period is based on the interest rate reset in the prior auction.

total return

(change in price + dividends) / original price expressed in percent

Retail Investors

- "regular individuals" who have limited assets and income - can be an individual or joint account with friend or spouse - purpose of securities regulation is to protect retail

Eurodollar bonds

- Bonds Issued Outside US by Either Foreign or Domestic Corporations - Interest and Principal Paid ONLY in US Dollars (Eurodollars) - normally sold at Lower Rates (less regulation) - SEC has NO Jurisdiction

CBOE

- Chicago Board Options Exchange - Largest options exchange in the U.S. - SRO for options market

The Insider Trading Act of 1988

- Passed after several high profile insider traders were caught in the late 1980s. - Increased penalties for parties involved in insider trading. - SEC may seek penalties up to three times the profit and 20 years imprisonment. - Insider trading occurs when information not available to the public regarding a company that will cause a stock price fluctuation is used to gain an advantage in the buying or selling of stock. - *Anyone in possession of material inside information must either disclose to the investing public or must abstain from trading on the information.*

Pre-registration period

- Prepare registration statement and prospectus - No discussions with customers - registration doesnt get approved by SEC

Cooling off period

- SEC reviews registration statement - preliminary prospectus (red herring) - condensed form of registration statement to potential buyers, not final - 20 days long where no selling is allowed - prospectus can't be altered - comply with Blue Sky laws here - state must be notified and approve, coordination with federal, and qualification under state administrator

Anti-Intimidation/Coordination Interpretation

- can't coordinate prices, trades, reports with others - can't request member to alter quote - cant harass, coerce, threaten another member to change price for you - can't try to hurt another market participant

Four tiers of regulation

- federal laws - SRO rules & regulations - state regulation - firm-specific policies & procedures

FINCEN

- requires BDs to file certain transactions under Bank Secrecy Act and provides law enforcement need Bank Secrecy Act Currency Transaction Reports (BSACTRs) for all transactions summing over 10k$ executed by a customer in one business day need Suspicious Activity Report (SAR) for suspicious transactions over 5k$ can't tell customer when form is generated

Aftermarket Prospectus Delivery Requirements

-For IPOs: 90 days after issue for nonreporting companies with securities quoted on OTCBB or in the pink sheets. 25 days for companies to be listed or Nasdaq securities. -Additional offerings: 40 days for securities quoted on OTCBB or pink.

Settlement (Payout) Options

-Straight-Life Annuity - monthly payments until death, no death benefit -Life Annuity with Period Certain - pays forever but has death benefit for some fixed amount of time -Unit Refund Life Annuity - has death benefit for any remaining units left -Joint and Last Survivor Life Annuity - payments to multiple people, if one dies then others get same payments

exempt issuers

-US government + agencies -Municipalities - Nonprofits - short term debt instruments (<270 days) like commercial paper - domestic banks and trusts - VCs dont need to register and do prospectus as 1933 act requires, but still subject to Anti Fraud

Institutional Investor

-large entities that pool their money to buy securities -banks, insurance companies, pension plans, endowments, hedge funds some are considered QIBs

mutual funds

-open end management companies -provides means for investors to pool money and invest in portfolio - diversification

Payments to Unregistered Persons

-prohibited practice in which individuals who are not registered with broker-dealer are compensated in connection with securities business firm is allowed to pay commissions to retired RRs

Broker Dealer Department: IB

-work directly with issuers to arrange and structure securities offerings - underwriters of securities -assist in M&A and bankruptcy restructuring as well

Option exercise

1. buyer of option exercised contract by notifying broker-dealer 2. broker dealer tells OCC 3. OCC receives exercise info and randomly issues to short holder's broker dealer 4. broker dealer decides which of their clients has to be assigned. Can be random, First in First out (FIFO), or some other fair way

10-K and 10-Q

10-K is annual reports, 10-Q is quarterly reports. must be distributed to stockowners

customer payment

2 or 3 days after trade settlement

diversified management company

75% of assets invested in diversified manner with - no more than 5% in any one company - no more than 10% of voting stock in any one company must meet requirements at time of initial investment but market fluctuations or consolidations wont nullify diversified status

telemarketing rules

8 am to 9pm local time, must say name, firm, and purpose of call, Do not call list, no harassment or abuse, caller ID not blocked, no prerecorded messages allowed to call any time of day if established business relationship occurs: activity with broker firm in last 18 months, and person inquired about firm in last three months National do not call list

New Issue Rule

A FINRA member firm is required to make a bona fide offering of new issues (only IPOs) to the public and not withhold any shares for its own account, the accounts of any of its employees, or for any other industry insiders.

indenture

A bond indenture is the contract associated with a bond. The terms of a bond indenture include a description of the bond features, restrictions placed on the issuer, and the actions that will be triggered if the issuer fails to make timely payments.

Pass-Through Certificate

A certificate that represents a portion of ownership in a pool of federally insured mortgages investors collect mortgage interest that the pool pays

Treasury Stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use. Doesnt collect dividends or have voting rights. Informational item on balance sheet

Market Maker

A dealer who stands ready to buy or sell a specific security or securities at all times

Broker-Dealer

A financial intermediary (often a company) that may function as a principal (dealer) or as an agent (broker) depending on the type of trade.

limited liability

A form of business ownership in which the owners are liable only up to the amount of their individual investments. A corporation is treated like its own entity.

subordinated debenture

A lower-ranked bond that is not secured by collateral, which is in lower priority than regular debentures but still higher priority than stockholders

Banker's Acceptance (BA)

A money market instrument used to finance international trade. check drawn on a bank by an importer or exporter of goods and represents the bank's conditional promise to pay the face amount of the note at maturity (normally less than three months). can be redeemed early for discount or traded considered safe as they are backed by goods and bank

Repurchase Agreement (REPO or RP)

A negotiated transaction in which a securities dealer sells a security to another dealer (typically US Treasuries) with the agreement to repurchase them after a relatively short period at a predetermined price

Hedge Fund

A private investment organization that uses complex strategies to seek high returns. Include speculative investments, arbitrage, shorting, commodities trades, and margin

Options Disclosure Document

A publication of the Options Clearing Corporation that outlines the risks and rewards of investing in options. The document must be given to each customer at the time of opening an options account and must accompany any options sales literature sent to a customer

rule 144

A regulation that provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock. The number of shares that may be sold is limited

rule 144

A regulation that provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock. The number of shares that may be sold is limited must hold 6 months for reporting issuer restricted stock, 12 months for non reporting company, no holding period for control stock must notify SEC for large sell orders on restricted or control stock affiliated holder can sell max of 1% of total shares or the average weekly volume for NYSE and NASDAQ restricted stock has no volume restrictions for non-affiliates of issuer

529 College Savings Plan

A savings plan offering tax benefits that can be used for any qualified educational expenses. Prepaid Tuition Plan (PTP): covers tuition costs at public in-state colleges and universities - may require donor or beneficiary to be resident in state of plan, may limit scope of expenses - dont provide any investment options - can usually transfer to sibling College savings plan (529): similar to 401k - some move from stocks to bonds as child ages - after tax contributions but tax deferred gains - some expanded uses for private school, loan repayment - can switch between siblings - can be sold directly or through broker - five year front loading (max per year 16k)

Introducing Firm

A smaller broker dealer that has the direct relationship with the client and can accept customer orders but does not handle customer assets or the mechanics of the actual trade. They hand off trade processing and clearing to a larger clearing firm

growth stock

A stock from a company which has a consistent record of relatively rapid growth and earnings in all economic conditions. typically aggressive and growth minded, paying little dividends

Stop Limit Order

A stop order that becomes a limit order after the specified stop price has been reached or passed stock trading at 20, put stop-limit at 21, it has to cross 21 to trigger the limit order at 21, then hit 21 again so that the limit order lets you buy at 21 can have different strikes

Face Amount Certificate Company

A type of investment company where an investor makes periodic payments and at the end of a specified period, the company pays the investor the face amount of the security rare today

free-writing prospectus

A written, electronic, or graphic communication associated with the offer to sell a security published in waiting period and usually registered with SEC

NASDAQ Composite Index

All Nasdaq listed securities Nasdaq 100 is 100 biggest

Wrap Account

All the expenses associated with your account are "wrapped" into a single fee.

ADRs

American Depository Receipts: facilitate the trading of foreign stock in the U.S. markets held by US banks in foreign countries. pay dividends in USD. shareholders have dividend rights but not preemptive rights. sponsored ADR - company pays fee to trade in US stock exchanges unsponsored ADR - company doesnt pay fee and stock is listed in OTC market, usually quoted on OTC link

Omnibus Account

An account opened in the name of an investment adviser or a broker/dealer for the benefit of its customers. The firm carrying the account does not receive disclosure of the individual customers' names or holdings and does not maintain records for the individual customers.

Rule 144A

An exemption to the holding period and volume restrictions of Rule 144 for qualified institutional buyers (QIBs)

CUSIP Number

An identification code for a security. Lost securities maybe re-issued by the transfer agent if the Committee on Uniform Securities Identification Procedures (CUSIP) numbers are available among other required proof of ownership. underwriters must apply for one

Separate Account

An investment pool funded by contributions to variable contracts, including variable annuities and variable life insurance. These assets are kept separate from the insurance company's general account can be different types of mutual funds, UITs, fluctuate based on market conditions

Current Yield (Dividend Yield)

Annual dividend/current market value of stock.

Variable Annuity

Annuity that has a varying rate of return based on the funds in which one has invested prospectus required contract owner has control over how contributions are invested while depositing

Know Your Customer (KYC)

Anti-money laundering policies and procedures used to determine the true identity of a customer and the type of activity that is "normal and expected," and to detect activity that is "unusual" for a particular customer

Balance Sheet

Assets = Liabilities + Stockholders' Equity

Annuity Units

At the time the variable annuity benefits are to be paid out to the annuitant, the accumulation units in the participant's individual account are converted into annuity units. payment calculated by annuitant's expected age, interest rates, and payout preference

designated market maker (DMM)

Auctioneer who controls trading in a given stock

trading ahead of customer orders

BD can't trade its own securities at same price as customer orders before executing those first

Special Tax bonds

Bonds that are secured by one specific local tax. Typically in the form of sin tax like gasoline or tobacco

convertible bonds

Bonds that can be converted into common stock at the bondholder's option conversion will turn debt into equity for firm

CMBs

Cash Management Bills: unscheduled very short term debt offerings Treasury uses to smooth cash flows offered at a discount and matures at face amount

Statutory Prospectus

Condensed form of the registration statement that provides detailed information on the offering

convertible preferred stock

Convertible preferred stocks are preferred shares that include an option for the holder to convert the shares into a fixed number of common shares after a predetermined date. Most convertible preferred stock is exchanged at the request of the shareholder, but sometimes there is a provision that allows the company, or issuer, to force the conversion. The value of a convertible preferred stock is ultimately based on the performance of the common stock. Combines debt instrument into option to transfer into security.

The Maloney Act of 1938

Created the former SRO for Over-the-Counter (OTC) Markets (the NASD)

Settlement Date

Date by which payment for the purchase of securities must be made; date by which delivery of securities sold must be made

DTCC

Depository Trust Clearing Corporation -National clearinghouse for settlement of trades in eligible securities -Nonprofit organization owned by members of security industry -Regulated by SEC, member of Federal Reserve System -Goal is to eliminate physical securities to provide greater efficiency of trade clearing and settlement

DPPs

Direct Participation Programs: general partner who must contribute at least 1% of capital, limited partner who provides capital and has no control over decisions

The Federal Telephone Consumer Protection Act of 1991

Do Not Call lists for solicitors can only call 8am to 9pm local time

Dow Jones Composite Averages

Dow Jones Industrial Average - 30 leading blue-chip stocks Dow Jones Transportation Average - 20 stocks Dow Jones Utility Average - 15 stocks

Treasury Auctions

Dutch Auction - auctioneer lowers price until someone buys competitive tender - firm who places limit orders through automated system noncompetitive tender - individuals who place market orders

Coverdell ESA

Education savings account where someone can put 2000$ a year (post tax) to beneficiary child fees for withdrawal or child turns 30 can be transferred to family member under 30 accounts are self-directed

EMMA

Electronic Municipal Market Access - MSRB's data port that accepts and lists documents from municipality issuers and provides info to public underwriters must submit to EMMA

Rule 147 and 147A

Establish the requirements for intrastate offerings - exempt from SEC requirements - 80% of gross revenues, consolidated assets, net proceeds related to state - most employees are in state issuer must verify residency of purchaser and resales to out of state restricted for six months

The Securities Exchange Act of 1934

Established rules for secondary market. (NYSE, NASDAQ) Created SEC Regulation T allowed Fed to regulate margin in securities industry

State (Blue-Sky) Regulation

Established under the Uniform Securities Act (USA) - Each state has the authority to impose additional requirements for both issuers and financial intermediaries

ETNs

Exchange-traded notes - unsecured debt security (don't actually own underlying) - mature 10-30 years - no interest payments just underlying performance returns - credit risk - backed only by issuer credit - fees: reoccurring and brokerage commissions indicative value - underlying index minus daily investor fee

margin requirements

Fed can determine credit needed to purchase securities by brokers and banks least effective way to impact economy as it only affects securities markets

monetary theory

Fed controlling rates and money supply to control inflation

Federal: FDIC

Federal Deposit Insurance Corporation: a federally sponsored corporation that insures accounts in national banks and other qualified institutions $250,000 is insured per depositor per FDIC insured bank

The Securities Acts Amendments of 1975

Federal legislation that established the Municipal Securities Rulemaking Board (MSRB), which regulates municipal securities. Has no enforcement authority but instead creates rules enforced by FINRA or SEC

FINRA

Financial Industry Regulatory Authority- primary SRO for securities, maker of exam has 4 categories: Conduct Rules - govern interactions between customers and firms Uniform Practice Code (UPC) - govern trading and settlements in order to standardize procedures Code of Procedure (COP) - process of discipline for violators (like a cop), can appeal Code of Arbitration - process for resolving disputes between members with arbitration, no appeals

FINRA Rule 2261 - Disclosure of Financial Condition

Firms must make available info on its balance sheet to customers

fidelity bond

Firms need to have it to protect against forgery, securities loss, etc due to malpractice. insurance

FICC

Fixed Income Clearing Corporation -Clearing and settlement for bond trades

Russel Index

Follows 2,000 small-cap company stocks and is considered the benchmark for the small-cap component of the market

General Obligation Bonds

GO bonds are municipal securities used to finance non-revenue facilities, such as public parks, public schools, and public libraries. The interest and principal is backed by the full taxing power of the issuing municipality. Issuers of GO bonds must obtain voter approval since it is funded with tax dollars, and must abide by debt ceiling limitations

Put Provision

Grants right to bondholder to sell (put) the bond to the issuer at a specified price prior to maturity. usually have lower yields and higher prices for extra optionality

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in the US

mutual fund service providers

IAs: give advice, do research, get a fee based on AUM but not performance custodians: bank that maintains assets, responsible for safeguarding cash and securities and collecting dividends and interest off securities transfer agent: recordkeepers who issue new shares and cancel redeemed shares. mostly electronically. distributes dividends and documents principal underwriter - sells shares to public directly or through broker. must use same pricing and can't use discounts for non-FINRA members

Taxable Municipal Bonds

In certain cases a municipality may not be able to issue bonds that are exempt from federal income tax. This may occur when the bonds are issued to finance projects that don't provide a significant benefit to the general public

Accredited Investor

In the context of securities offerings, "sophisticated" investors, such as banks, insurance companies, investment companies, the issuer's executive officers and directors, and persons whose net worth (besides house) is over $1,000,000 or has income of $200,000 or 300,000 if combined with a spouse for last two years

fully disclosed account

Information about each of the individual customers of the introducing firm will be transmitted to the clearing firm. Clearing firm has separate accounts for each client and is responsible for all paperwork associated with the accounts

London Interbank Offered Rate (LIBOR)

Interest rate that international banks charge one another for overnight Eurodollar loans.

IAs and IARs

Investment Adviser - management company Investment Adviser Representatives are individuals who work for IA

Mutual Fund Registration

Investment Company Act of 1940 requires that every company with 100+ shareholders and 100k$ in assets register with SEC firms with under 100k in assets can't offer public shares

Dormitory Bonds

Issued to build housing for students at public universities and are repaid from a portion of student tuition payments

LGIPs

Local Government Investment Pools: trusts established by state and local governments that offer municipalities a place to invest, like a mutual fund let government entities get good liquid investments

Money supply

M1 -> cash + checking accounts (published weekly) M2 -> M1 + savings accounts, overnight repurchases, money funds (published monthly)

Long-Term CDs (Brokered CDs)

Maturities range from two to 20 years, not considered money market securities. risks: Limited liquidity penalty for early redemption call features that may limit capital appreciation may not be FDIC insured

Firm (In-House) Rules

Member firms are required to establish and maintain a system to supervise the activities of their personnel. Firms must clearly outline their policies and procedures by creating internal Written Supervisory Procedures (WSP). A firm's WSP is essentially a manual that details the rules and identifies the person(s) responsible for their enforcement. Within a firm, there are three different categories of personnel—registered principals, registered representatives (RRs), and unregistered employees. The registered persons who manage and supervise RRs are referred to as principals. The unregistered employees are often administrative personnel, technology personnel, or other support staff.

NASDAQ

National Association of Securities Dealers Automated Quotations dealer to dealer stock exchange network that provides quotes on select securities

NSCC

National Securities Clearing Corporation - a subset of the DTCC that clears equity trades

Municipal Notes

Notes issued by local or state governments; can be exempt from some taxes and are liquid but not risk-free. separate rating system for municipal notes

Municipal Bond Documents

Notice of Sale - essential information for competitive sales Legal Opinion - assures investors issuer has rights to issue bonds Official Statement - basically a prospectus but not subject to 1933 regulations - preliminary and final version if official statement altered by someone not municipal issuer, must be approved by municipal securities principal

OCC

Options Clearing Corporation: equivalent of DTCC but for options. regulated by SEC and owned proportionally by options exchanges When customers buy or sell options, they must deal directly with OCC to settle trade within one business day

No-Load funds

POP = NAV usually purchased directly from distributor no sales charge (technically under 0.25%)

Conversion Ratio for convertible bonds

Par Value of Bond (1000)/ Conversion Price if conversion price is 100 then ratio is 1000/100 = 10

Post-Effective Period

Period in a registration statement process where contracts can be finalized and securities can actually be sold price of purchase set must provide final prospectus to buyers

cumulative preferred stock

Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends of preferred stockholders are paid.

Participating Preferred Stock

Preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock. for example: investor owns 5% preferred stock with potential 3% additional payout. Investor is entitled to 5% dividend but could get 8% if common stock dividends reach a high level

callable preferred stock

Preferred stock that the issuing corporation, at its option, may retire by paying the predetermined call price plus any dividends in arrears. Priced higher than stock's par value.

non-cumulative preferred stock

Preferred stock where missed dividends do not accumulate. Only the current year dividend is owed to preferred stockholders before common dividends can be paid.

PIPE

Private Investment in Public Equity - can do special deals with hedge funds to directly sell shares at discount while its publicly trading

sales charge (load)

Public offering price - Net Asset Value

QIB

Qualified Institutional Buyer: 1. only some certain types of investors are eligible, like insurance companies, registered investment companies, registered investment advisers, small business development companies, pension plans, bank trust funds, corporations, partnerships, non profit 2. buyer must be purchasing for its own account or for another QIB 3. Buyer must own and invest $100 million of securities not affiliated with buyer Individuals are never QIBs

principals vs RRs

RR - sales personnel in securities business principals - officers and management involved in management of firm's securities business

misrepresentation of SEC approval

RR can's say SEC approves firm. SEC only registers firms and does not approve them

misdirection to class B shares

RRs can't direct large investors to Class B if they are better off in Class A

Borrowing and Lending Practices with Customers

RRs can't lend or borrow from customer. exceptions: they are family members, customer is a loan business, they are both in same firm , there is a personal relationship, or there is independent business relationship need approvals and must keep them for three years for exceptions

Sharing in Accounts and Guarantees

RRs can't share in profits or losses in accounts unless they have contributed, have consent, or employing broker gives written consent exception for investment advisors who charge fee and have consent employees can't guarantee or reimburse against losses in accounts

recommending LPs

RRs must certify that customers are accredited (can afford to investment risks) and understand fully the risks of LPs RRs cant act discretionary with LPs, must be approved by customer

outside business activities

RRs must give written notice about outside employment activities to protect against conflicts of interest

REITs

Real Estate Investment Trusts - also not regulated by 1940 act, but are regulated by 1933 act and must send prospectus to public investors - income received by rent money on real estate mortgage REITs - profit off mortgage interest Equity REITs - profit off real estate Hybrid REITs - mix of both favorable tax treatment: needs 75% of income from real property rentals and income 90% to go back to investors less than 30% from sale of short term securities

Rule 145

Reclassification, mergers, consolidations, transfer of assets are considered sales and are subject to registration and prospectus stock splits don't count

margin accounts

Reg T says must put up 50% by yourself, and customers must pay their portion within two days of settling long - client borrows money to buy shares short - client borrows shares to short them no loan provided unless customer has at least 2000$ of equity minimum starting requirements - 2000$ (or 100% of equity if long)

The Penny Stock Reform Act of 1990

Regulates OTC securities under 5$ per share that are highly volatile. Must give disclosure to buyers informing them of risk involved.

RMDs

Required Minimum Distributions must withdraw before age 72

FTC Red Flags Rule

Requires creditors and financial institutions to establish an Identity Theft Prevention Program

Statutory Disqualification

SD person - prohibited from employment - expelled/suspended by SRO - registration denied by SEC or others - violating MSRB - failing to supervise subordinate - convicted of crimes in finance (even if pardoned) - submission of false info when attempting to hire SD person, discretion is used and must be monitored closely with specific supervisory plan

ETFs

SPDRs - track sp500, QQQ tracks Nasdaq, DIA tracks Dow passive, not active - trying to match, not beat market low fees because no active management (small commission on transaction) continuous pricing on exchange (once a day for mutual funds), can be shorted, inverse and leveraged ETFs - only applies short term

Nominal Yield

Same as the coupon rate, fixed interest payments every year. Depends only on par, not traded price at all

Federal: Federal Reserve Board (The Fed)

Semi-private government agency and central bank of the USA; regulates banks and controls monetary policy through money supply and interest rates goal is maximum employment and stable prices

STRIPS program

Separate Trading of Registered Interest and Principal Securities program: Treasury created this to directly back Treasury Receipts dealers can purchase T-Notes or T-Bonds and resell the coupon and principal payments as ZCBs

Right to Evidence of Ownership

Shareholders have the right to receive one or more stock certificates as proof of ownership certificate includes name of corporation, name of owner, shares owned by stockholder, names of transfer agent and registrar, signature of corporate officer, endorsement of owner when sold

Class A Shares

Shares of a mutual fund that charges a front-end load and a small or no 12b-1 fee ideal for long term investment breakpoint - deposit amount that qualifies for benefits like reduced costs

Combined (Split) Offering

Some of the shares are offered by the issuer while the remainder are offered by selling shareholders must tell purchaser that portion of proceeds goes to shareholders

Municipal advisor

Specialized advisor that advises a municipal entity. Municipal entities are usually issuers and the Municipal Advisors give advice on the structure, timing, and terms of the offering.

SAI

Statement of Additional Disclosure: gives more detail than prospectus not necessary to distribute but must be available if asked

right of transfer

Stockholders have the right to freely transfer their shares by selling them, giving them away, or bequeathing them to heirs.

Regular Way Settlement

T + 2 for stocks, bonds, municipal securities. T + 1 for options and treasury

T-Notes and T-Bonds

T-Notes: maturities of 2-10 years T-Bonds: maturities of 10+ years issued electronically pays interest twice a year interest taxed federally only

Enforcing agencies

The SEC or FINRA for broker-dealers The comptroller of the currency for federal banks The FRB for state banks that are members of the FRB The FDIC for member banks of the FDIC

Regulation M

The SEC restricts distribution participants (underwriters and issuers) from bidding for or making secondary market purchases of the stock that is being offered in a distribution. No pumping up stock

The Securities Act of 1933

The first major federal law regulating the securities industry. It requires firms issuing new stock in a public offering (first market) to file a registration statement with government. Underwriters and issuers both regulated

authorized shares

The maximum number of shares a corporation may issue as indicated in the corporate charter can only be changed by majority vote of shareholders and revision of corporate charter

Volume limitations of Rule 144:

The maximum of: - 1% of outstanding shares or - the average weekly trading volume over the last 4 weeks example: 7mil shares outstanding, avg weekly volume traded last 4 weeks was 60k 1% of outstanding shares is 70k. 70k>60k so max holder can sell is 70k shares

Interpositioning

The placing of a third party between a broker-dealer and its customer when filling a trade. This practice is prohibited unless it results in a better execution for the customer

Conversion Price

The price at which the bond can be converted

Breakpoint Sale

The sale of mutual fund shares in an Amount just below the level at which the purchaser would qualify for reduced sales charges. This violates the Conduct Rules.

State registration (blue sky)

The securities, the underwriters, and the bankers themselves must all be appropriately registered in all states where the securities are sold. pass series 63, 65, or 66. firms must submit application and fees to state administors securities must also be registered in each state

Proceeds Transaction

The use of sales proceeds to effect a purchase of new securities can only charge 5% markup once, not twice

USA Patriot Act (2001)

To combat terrorism and money laundering, must submit Currency Transaction Reports (CTRs) for transactions over $10,000, Suspicious Activity reports (SARs) for transactions over $5000, and the Customer Identification Program (CIP)

Risk Free Return

Total Return minus US T Bill return

Inflation-Adjusted Return

Total return minus rate of inflation

Trading Ahead of Research Reports

Trading ahead is a violation where a broker-dealer or registered representative trades a security based on nonpublic information contained in a research report prior to that report being released to the public.

TIPS

Treasury Inflation Protected Securities interest is fixed but principal varies with CPI for example, interest is always 4% but principal can be adjusted to 1050$ if inflation rises when inflation is high, TIPS will pay out more 5, 10, 30 year terms

Yankee bonds

U.S. dollar-denominated debt securities that let foreign issuers borrow money in US market. registered by SEC

Transportation Bonds

Used to finance projects such as bridges, tunnels, toll roads, airports, and transit systems, paid by tolls

return of capital

When the investor receives some of the original investment back not taxable, lowers cost basis

Fourth Market

Where big institutional investors (pension funds, insurance companies, mutual funds, etc.) trade directly through electronic communications networks (ECNs)

current yield

a bond's annual coupon divided by its current traded price. Doesnt depend on par

par value

a bond's stated value, to be paid to the bondholder at maturity

cash account

a brokerage account in which all transactions are made on a strictly cash basis (no margin)

Prime Brokerage Account

a customer (an institution) selects one brokerage firm to provide custody and financing of securities. Customer can still execute trades with other firms known as executing brokers. The idea is to consolidate all trade date and reports for easier accounting

rights offering

a derivative where existing common shareholders are given the right to buy new shares at a discount before they go public, about 30-45 days. Dilutes ownership unless right is exercised; Sometimes the right can be sold

prospectus

a disclosure document for potential investors includes objectives, policies, risks, managers, etc must be delivered before an investor purchases shares, can't be altered by RRs

information barriers

a firm's research department can't disclose nonpublic info to trading department

registration statement

a long, complex document that firms must file with the SEC when they sell securities through a public offering

Lease Rental Bonds

a municipality issues bonds to finance office construction for itself or its state or community bond will be repaid by lease of facility to another organization

Investment Adviser

a person who, for compensation usually proportional to Assets Under Management, engages in the business of advising others in the purchase or sale of securities

cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors 1000 shares lets you vote a total of 3000 times across three candidates

call provision

a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date tells investor price and time that issuer can call bond usually have higher yields to compensate

stock power

a separate assignment that's used to transfer delivery of a security from a seller to a buyer. The stock power is used when a seller wants to safeguard a security in the mail. The stock is sent in one envelope, while the signed stock power is sent in another.

defensive stock

a stock that remains stable during declines in the economy

custodial account

accounts for minors which have a managing custodian UGMA/UTMA gifts or transfers to minor acts - only one custodian and minor per account, gifts unlimited but taxed beyond 16000/year registered in name of custodian, who may receive fee if not a donor custodian can authorized discretion to third party no margin trading

firm commitment underwriting

act as principal the type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares

Best Efforts Underwriting

acts as agent the type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility minimum contigency of shares sold - will cancel offering if not met

alpha

actual minus expected (index) earnings

clearing

affirming the trade. both sides agree on terms

Roth IRAs

after-tax contributions, earnings untaxed contributions can always be withdrawn tax free earnings withdrawn if over 59.5, or exceptions (same as tIRA) no RMDs everyone eligible unless income too high

mutual fund categories

aggressive growth - small companies, IPOs, volatile but high returns growth - stock goes up specialized/sector funds - particular industry or location international funds - securities outside USA global funds - securities inside or outside USA equity income - high dividend, safe stocks growth and income - mix of both bond funds - bonds aiming for preservation of capital index funds - sp500, low fees, mimic index value funds - out of favor undervalued companies balanced funds - stocks, bonds, money market asset allocation - same as balanced but more actively managed money market funds - safety and liquidity

annuity

agreement between contract owner and insurance company where owner provides money and then company later provides income to annuitant

clearing firm

aka carrying firm, or full-service firm, they perform execution, settlement, and clearing. They interface directly with the DTCC

basis

aka yield to maturity. or just "yield". expressed like 7.43

fingerprinting requirements

all RRs who come in contact with funds must be fingerprinted for criminal background check

NYSE Composite Index

all of the common stocks listed on NYSE

follow on offerings

already public company (post IPO) sells more stock still considered primary distributions as they are straight from issuer broker firm must disclose if they are involved in follow on offerings to their secondary market participants

Restricted Security Lock up Agreement

amount of time pre-IPO investors must wait before selling their shares after IPO. No statutory time limit, generally six months. Prevents management and VCs from quickly liquidating for a profit

tombstone

an advertisement announcing a public offering, provides info to potential buyers

street name

an arrangement under which a broker is the registered owner of a security

UIT (Unit Investment Trust)

an investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income. units are shares of beneficial interest (SBIs) sold in increments of 1000$, can be traded in secondary market each unit is an undivided interest proportionate to money invested

12b-1 fees

annual fees charged by a mutual fund to pay for marketing and distribution costs deducted on quarterly basis range 0.25 - 1 % service fees - commissions for RRs for service administrative charges - pays transfer agents and custodians must disclose fees on prospectus

cash surrender

annuitants may cancel their variable annuities during accumulation period and get annuity current value, or partially surrender. May have to pay surrender charges and any gains will be taxable

listed securities

any equity securities that meet the standards for trading on a national exchange like the NYSE or NASDAQ

form U4

applicant personal data, SRO law violations, customer complaints, terminations 30 days to file amendments

antifraud provision of the securities act of 1933

applies to all securities, registered or not

Class C Shares

assess level load - ongoing fee (usually 1%) for as long as investor holds no front end load backend load if sales redeemed very early good for short time holders (1-3 years)

Securities Trustees

assigned to hold security interests that are created on trust for the benefit of various creditors. - for some bond trustees, they ensure issuers abide by covenants formalized in agreements called trust indentures. -may represent investors in case of default

Client Notifications

at least quarterly account statements with positions, balances, and activity confirmation statements of each purchase or sale with details holding of client mail - customer can instruct firm to hold mail securely electronic delivery of records, paper not needed

disclosing conflicts

authorized investor needs client's approval to buy their own firm's securities

Double-Barreled Bonds

backed by revenue source and faith and credit of an issuer with taxing authority. paid out with combination of tax dollars and project revenue

reserve requirements

banks must keep portion of deposits on reserve with Fed. Fed can change this which impacts money supply and rates multiplier effect - rate which banks create new money by lending

custodians

banks or financial institutions that issuers use to hold customers' securities for safekeeping. Usually held in book entry (electronic) form than actual physical asset.

SIE exam

beginning 2018, open to people 18+ regardless of firm membership SIE exam itself not enough to be a RR valid for four years

Mini-Maxi Offering

best efforts sale with minimum contingency

Eurobond

bond denominated in a currency other than that of the country in which it is sold for example, russian firm can sell bonds denominated in Swiss Francs in London

yield to call (YTC)

bond's yield if it is called prior to maturity yield to worst - bond issuers must advertise worse of YTC and YTM as the conservative return estimate if a bond is trading at a discount, YTC > YTM as being called would pay the higher par value faster

guaranteed bonds

bonds additionally secured by a guarantee of another company, usually a parent

municipal bonds

bonds are not backed by federal government but are usually exempt from federal tax, and often states dont tax their own bonds which incentivizes buyers two types: General Obligation and Revenue

T-bills

bonds that pay no coupons with maturities under 1 year they pay a lump sum at maturity and are discounted by interest rate (discount security) higher yield means lower price

401k plans

both employer and employee can contribute, has predetermined options by employer employees eligible if they worked 1000 hours for one year or 500 hours for three years contribution limits set by IRS, 50+ can contribute extra Roth 401k - post tax contributions and no tax on gains

SP500 Index

broader than Dow Jones 400 industrial stocks 20 transportation stocks 40 financial stocks 40 utility stocks

Wilshire Associates Equity Index

broadest index, dollar value of all stocks trading on NYSE and NASDAQ

municipal syndicate

broker dealers who combine to form an underwriting syndicate with one firm as syndicate manager (lead underwriter)

Held Order

broker has no discretion over order non-held - broker can try to get better deal with price and time discretion

Best Execution

broker needs to reasonably be diligent in server the customer more broad for municipal securities as they are OTC

FINRA Rule 2262 - Disclosure of Control Relationship with Issuer

brokerage firms that have a relationship with security issuers must notify customers at or before transaction execution. For example, buying robinhood shares on robinhood

clearing

buyer and seller agreeing on trade terms

free riding

buying securities in a cash account and then selling them before actually paying

call protection/ premium

call protection - restriction on how soon bonds can be called, usually 5 to 10 years after issue call premium - premium that issuer must pay to compensate holders for early redemption of the bonds

Redeeming Mutual Fund Shares

can be done any business day, bust be refunded within a week can include redemption fees 0.5 -2 % for redeeming early

marketable (negotiable) securities

can be traded in second market treasury securities are marketable us savings bonds are not marketable

Recordkeeping Formats

can keep records electronically but must notify regulator before use, and 90 days prior to changes. must be non erasable, accurate, serial form with date, time, easily downloadable

DPP Offering Practices

can offer privately or publicly public - must register with SEC, underwriter gets no more than 10% of gross securities in fees private - conducted under regulation D on 1933 Act and exempt from registration

preliminary prospectus (red herring)

can omit price, underwriting commissions, amount of proceeds issuer gets

annuity loans

can take a loan against your annuity during accumulation compared to withdrawal, can avoid surrender charges, some taxes, penalties. loans not repaid are considered distributions of the annuity and will be subject to tax and penalty

MSRB Political Contribution Rule (G-37)

can't do municipal securities with political officials for two years after gift unless: under 250$ and person is allowed to vote for official

Gift Limit

can't give more than 100$ to any member of another firm in relation to business value of gift is max of cost or market value when given small, personal, promotional, or commemorative gifts excluded entertainment is allowed if its not recurring and hosted by member firm (they must attend) can't pay commission through securities can pay for training

arbitration clause

can't sue, only arbitrate and results are final

forgery

cant forge documents, including accidentally signing off for customer without permission

Market-Out Clause

clause that lets underwriting syndicate cancel agreement if market conditions shift suddenly

Equity Indexed Contracts (EICs)

combination of fixed and variable annuities not required to be registered with SEC offers a floor return with upside potential participation rate: multiplier on equity index returns that lowers upside fees from early withdrawal may cause investors to lose money only for long term investors (15 year surrender period)

right to vote

common shareholders get a vote for every share owned. can vote on board of director elections, stock split, company mergers and acquisitions. CANT vote on dividend decisions. Only board of directors can vote on that.

common stock vs preferred stock

common stock: the most basic form of ownership, including voting rights on major issues, in a company last to receive funds from corporation preferred stock: A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do. considered a senior security but still below bondholders

reverse stock split

companies dont want their shares to be cheap (<5$)

cyclical stocks

companies whose earnings fluctuate with the business cycle

profit sharing plans

company profits are shared with employees; can be directly distributed to employees or can be deferred

Performance Tracking

comparing an investor's returns to some benchmark

cash settlement

completed same day

ECNs

computer networks that allow direct trading without the need for market makers - allow subscribers to disseminate order info, execute transactions after hours, and transact anonymously - ECNs charge a fee and act only as a broker

Death Benefit

contract has a beneficiary, someone who receives greater of sum of all payments into annuity or value of annuity on day of death benefit of annuities that mutual funds dont have, despite annuities having lower returns

spot rates

conversion between currencies as US interest rates increase, dollar becomes stronger strong dollar means more likely to import, weak dollar more likely to export from US

tax on conversions

conversions into stock are not taxable until investor sells the acquired shares for a profit

Unsecured Corporate Bonds (Debentures)

corporate debt not secured by collateral, just faith in issuer in case of default, have claim on assets after secured bondholders, but before stockholders

corporate account

corporate resolution - person opening account is authorized by BOD copy of corporate charter needed for margin or options account

Regulation of Communication

correspondence - written or electronic messages sent by a firm to 25 or fewer retail investors in a 30-day period institutional - only to institutional investors, not retail retail - messages sent to more than 25 retail investors in a 30-day period, includes public ads only retail requires approval from principal of firm, some must be reported to FINRA (options)

Firm Element

covered person - has direct contact with customers in conduct of security sales firms must show they have training plan of covered persons once a year must record completion of program by RRs not reviewed by regulator

The Securities Investor Protection Act of 1970 (SIPA)

created the SIPC

assets

current - cash and items that can be converted to cash in one year fixed assets - items used by company in day to day operations (land, equipment, furniture) intangible assets - intellectual property, goodwill

liabilities

current liabilities - payable, due in one year long term liabilities - debt payable in over one year like bonds or loans

Safekeeping of Funds and Secuirty

customer protection rule - ensures safety of funds and securities must maintain margin securities, advise on free credit balances (sitting cash) need to send balance sheets of firm every six months to ensure firm stability

effective date

date ending cooling off period and begins post effective period 20 days after filing is done (or filing is amended) can be accelerated under request

Agency Securities

debt instruments issued by federal agencies and GSEs (government sponsored agencies) considered very low risk since assumption is federal government will not let agencies default slightly higher yields like Treasury securities, issued in book-entry form and quoted in 32nds

Money Market Securities

debt instruments or securities with maturities of one year or less considered cash equivalents, as they are almost the same as cash

Mortgage Backed Securities

debt instruments secured by bundles of mortgages include Government National Mortgage Association (GNMA, Ginnie Mae) and Federal National Mortgage Association (FNMA, Fannie Mae) and Federal Home Loan Corporation (FHLMC, Freddie Mac)

Treasury Securities

debt securities issued by the U.S. Treasury doesnt need to be registered considered safest possible security benchmark of credit ratings

Annuity Expenses

deducted from investment income in separate account management fees: each subaccount has investment management fee for subadvisers expense risk charges: fee they charge in case expenses become too high beyond expense guarantee administrative expenses: cost of issuing and servicing variable annuity contracts including recordkeeping, providing info, processing mortality risk charges: mortality guarantee means they may have to pay out longer than expected if person lives too long, also death benefits hurt them

warrant

derivative where you can buy stock some point in the future for a fixed price set above current price. Often used as an added incentive for initial IPO. Warrants can sometimes be sold separately. Don't expire for many years

underwriting spread

difference between what the investment bank gets from selling securities to public investors and what they pay to the issuing firm consists of managers fee, underwriters fee, and concession (selling fee)

discount vs. premium bonds

discount - bond sells for under par value premium bond sells for over par value

SEC Rule 10b-18 - Purchases of Certain Equity Securities by the Issuer

discourages issuers from buying their own stock to drive up price safe harbors: only one broker dealer is used to buy during trading session purchases cant be made near market open or close can't buy above current bid or last traded price cant buy more than 25% of average daily traded volume on single day

Waivers

disqualified person can apply for waiver from SRO. SEC can overturn. If approved, person is under close watch

stock dividends

dividends paid in shares. will be a percentage of shares owned. not taxable until shares are sold. must report change in cost basis to IRS though

Statutory Voting

each share held is assigned one vote in the election of each member of the board of directors 1000 shares lets you vote 1000 times on three candidate

NASAA (North American Securities Administrators Association)

each state has an administer creates rules, laws, exam requirements for states protects investors from fraud oldest organization

Right of Inspection

each stockholder can access the corporation's books and records, facilities, and premises

Dark Pools

electronic trading networks where participants can anonymously buy or sell large blocks of securities to avoid market impact

Broker Dealer Department: Operations

ensures that all paperwork, funds, and securities transfers involved in trading are handled efficiently and meet regulations. they also generate customers statements, confirmations and tax records, and assist in organizing firm and client assets

Regulation SP

establishes privacy policies, notifies them of privacy policies, and lets them opt out of sharing nonpublic info need to protect records, non public info consumer - in process of providing info - need privacy notice before sharing info to third party

ex-dividend rule

ex-dividend date is first date on which stock trades without its dividend usually two days before first day of dividend ineligibility stock price will subtract dividend paid, rounded up to nearest tick for cash settlements, ex-div day is after the record date since transactions don't have delay

limit order

executes at specified price or better

business cycle

expansion - growing activity, employment high, lots of borrowing and higher rates peak - inflation kicks in contraction - recession, economic activity declines, people laid off, disinflation as demand slows trough - prices low enough that demand is back

Oil and Gas LPs

exploratory program - drilling looking for oil (risky) developmental program - developing proven areas. low risk, low returns as nearby areas also will drill Balanced program - combo of both Income program - acquires interests in developed wells. low risk

Backing Away

failing to honor a quote from market maker

private placements

faster and less costly than public offering

fee vs commission based accounts

fee based - annual fee based on AUM commission based - make a commission off each trade wrap fee - one fee that wraps all expenses together

institutional stability

firm and RR must believe that account has reasonable basis that customer can evaluate risks independently and that customer is using independent judgement in evaluating recommendations

Form U5

firm must notify FINRA if employee resigns or is fired. Within 30 days. someone who leaves job but wants to join another FINRA firm has two years for registration to requalify

CRD updates

firms must file report to FINRA within 30 days of complaints and incidents includes theft, law violations, suspensions, felonies must provide updates on reports quarterly

AML Compliance Program

firms must have policies, compliance officers, training, and audit function to ensure AML compliance customer identification program SDN list - suspected terrorists and criminals need specialized due diligence when dealing with foreign banks customer verification - info including tax id need records of verification for five years after account closed penalties - up to 20 years prison and max of 500k per transaction or twice the amount of funds. can be liable for being ignorant

review of new hires

firms must have procedures verifying accuracy of U4s. review must take place 30 days after filing with FINRA must look at form U5 if they were employed by another member firm, completed within 60 days

insider trading rules

firms must have their own rules for preventing insider trading. procedures should include: monitoring employee personal accounts, monitoring securities that firm has private access to, restricting access to confidential info, information barriers, educating employees

background check

firms must investigate applicants, including public records to verify form U4 details form U5 - reason for termination at member firm and any claims of misconduct

Accounts at Other Broker-Dealers and Financial Institutions

firms must monitor employee accounts at other firms. need written consent of their firm to open and provide it to new firm. applies also to accounts of family members who employee has beneficial interest if employee already has account, needs to tell employer within 30 days executing firm must send employee firm records upon request doesn't apply to mutual funds, UITs, variable contracts or 529s

withdrawal plans

fixed dollar - withdraw fixed dollar amount every month fixed percentage - withdraw fixed percentage every month fixed time - provide exact end date and fund will distribute back shares until then

coupon rate

fixed rate of interest on the bond usually payed twice a year longer maturing bonds generally have higher interest

529A plan

for disabled people can save up to 100k without losing any social security contributions taxed but withdrawals aren't if used for life expenses max contribution 16k per year tax penalties if used for non expenses goes back to medicaid if beneficiary dies or is no longer disabled

Units of Delivery

for stocks, must be in multiples of 100 for bonds, must be in multiples of 1000 or 100

registration of RRs and principals

form U4 required - background, any violations

Expense Ratio

fund's total expenses / average net assets range 0.2 - 2% does not include sales charges

zero cost basis

funds not yet subject to tax

FINRA Markup Policy

generally 5% but lots of considerations like liquidity, size, market, etc primary issuances like mutual fund shares, municipal bonds, IPOs, are exempt from 5% rule

mutual fund liquidity

generally very liquid but arent traded, only issued and redeemed by fund

gtc/open order

good till cancelled

Keynesian Theory

government intervention through tax and spending necessary to control inflation and deflation (congress)

OCC

guarantees all listed options to avoid counterparty risk

Broker Dealer Department: Trading

handle execution of trades for firm clients and firm proprietary account.

Rule 144 Holding Period

holding period applies only to restricted securities. Holder can't dispose of security for six months after fully paying for them.

Risk Adjusted return

how much an investment returns in relation to risk assumed to attain it

Bondholders vs. Stockholders

if a corporation goes bankrupt, bondholders have a stronger claim to assets than stockholders

all or none contingency

if all shares arent sold, the ones bought are refunded

Time/Price exception (three As)

if client indicates asset, action (buy or sell), and amount, then order is not considered discretionary

confirmation disclosure

if customers purchase shares of investment company with CDSCs, must notify investors

secured corporate bonds

if issuer goes bankrupt, trustee will liquidate assets and distribute proceeds to bondholders include mortgage bonds, equipment trust certificates, collateral trust bonds (with another security as collateral), and asset-backed securities

interest rate risk

if market interest rate changes then the bond will become more or less attractive and price will reflect that

mutual fund exchanges

if two funds owned by same company, can transfer between funds for little to no cost

BEY (bond equivalent yield)

implied annual return on bond

in-whole, partial (lottery), and catastrophe calls

in-whole - entire issue called all at once partial(lottery) - some bonds retired early, others remain outstanding catastrophe - issuer can call bond if underlying collateral is destroyed (bridge swept out by storm) partial and in-whole calls must be disclosed prior to purchase, but catastrophe calls do not

cash settlement

index options are cash settled instead of settling into stock

bounties

information leading to payment of insider trading penalties are rewarded with 10-30% of collected money

SIPC (Securities Investor Protection Corporation)

insures investors in case of firms becoming bankrupt does not protect against market losses or employee misconduct covers up to $500k, of which up to $250k can be cash holdings not backed by government but by industry doesn't apply to securities not in street name, commodities, broker-dealers, senior officers of the firm

bond prices and interest rates

inversely related: higher interest rates make existing bonds less appealing so price falls

Revenue Bonds

investments secured by the revenue generated by a state or municipal project, like airports, sports stadiums, and bridges riskier than GO bonds because generated revenues may be unreliable may be issued when GO bonds are unavailable due to low voter approval or statutory debt limitations

Sales Charges (Front-end Loads)

investors pay Public Offering Price (POP) which is NAV plus sales charge

Housing Revenue Bonds

issued by state or local housing finance agencies in an effort to help fund single family or multi-family housing and are normally for low or moderate income families.

outstanding stock

issued stock minus treasury stock used to calculate market capitalization

Utility Revenue Bonds

issued to finance gas, water and sewer, and electric power systems owned by government and repaid by user fees

Shelf Registration

issuer can sell more securities on a delayed or continuous basis, so they can do registration beforehand and time their offering allowed for amount sold within three years of registration

Transfer Agent

issues and redeems certificates. Handles name changes, validates mutilated certificates. Distributes dividends, gains, and and shareholder reports to mutual fund investors.

RR supervision

keep records of procedures, review and endorse transactions of RRs, review customer accounts, inspect locations annually, RR has designated supervisor who is responsible for them

preferred stock

lack voting rights, behave kind of like bonds usually have par of 100$. A 5% preferred stock expected to pay 5$ annually. AKA a 5$ preferred stock. If company not doing well, board of directors may choose to pay out part of none of the 5$.

Negotiable CDs (jumbo Cds)

large-denominated certificates of deposit that have short maturities. there is a penalty for redeeming early FDIC insures CDs up to 250k$

statutory power

law passed by state or local government allowing issuance of securities, derived from state constitution may limit debt issuer can incur, the debt ceiling

indicators

leading - unemployment claims, sp500, interest rates coincident - payrolls, income, sales lagging - duration of unemployment, prime rates, CPI

LOI (Letter of Intent)

letter saying investor intends to contribute required funds over next 13 months to get better discount may be backdated 90 days to include prior purchases not binding to protect against the client's failure to fulfill the letter of intent, a certain amount of the initially purchased shares may be placed in an escrow account by the customer's broker-dealer.

Record Maintenance

lifetime - corporate and partnership documents some six years and some three years trade tickets are three years

dealer

like a car dealership, they buy and sell securities for their own account. They profit by charging a markup or markdown on price

broker

like a real estate agent, a broker facilitates transactions on behalf of clients. They match buyers and sellers and charge a commission.

Non-Registered Persons

limited direct contact with customers. can extend invitations to events, discussions, or info but may not discuss specific products, prequalify customers, or solicit orders RR can not pay non registered person to give referrals to their firm can't accept customer orders

Limited vs Full POA

limited trading authorization - RR can make orders but not withdrawals full trading authorization - RR can buy and sell AND withdraw money and securities

Variable Rate Demand Obligations (VRDOs)

lower quality variable rate bonds, can be put back by bondholders upon interest rate changes

registrar

maintain ownership registrar of the issuers of each issue of securities. Holds the name, address, and tax info of each individual owner.

Primary Market

market for selling financial assets that can only be redeemed by the original holder

Broker Dealer Department: Sales (RR)

market stocks, bonds, or mutual funds to insititutional and retail investors. also known as Registered Representatives (RRs) or Investment Adviser Representatives (IARs)

Traditional IRAs

max contribution of min of 6000 or 100% or earned income, if over 50 then catch up contribution has max 7000 spousal account - if one spouse works but not the other they both can have accounts and contribute up to 6000 deductible based on taxable income and access to employer sponsored plans transfers - can transfer funds between IRAs without incurring taxes can also roll over 401k to IRA, can be done within 60 days and once a year early withdrawal - 10% penalty for withdrawing before 59.5 exceptions - owner becomes disabled, dies, medical expenses, 10,000$ to first home, 5000$ to birth or adoption of child, education expenses

bond duration

measured in years for example, a duration of 10 years means a 1% increase in rates causes a 10% decrease in price longer bonds have larger durations

internal compliance

member firm has supervising principal that monitors own firm for misconduct may have different or stronger compliance than regulations require

charging issuers and customers

member firm may charge issuers for forwarding material and may charge customers for services (safeguarding securities, dividend and interest collection, transfer fees) charges must be reasonable and non discriminatory can't charge for forwarding proxy or other reports from corporation since reimbursement is collected from issuer directly

Federal Funds

money borrowed overnight between banks needed to meet reserve requirement set by Fed fed funds rate is leading indicator of interest rate trends

Private Activity Bonds

more than 10% of bond proceeds going to private entity project and more than 10% of proceeds are secured in property

Bond Markets

most bonds are traded OTC

proxy

most stockholders vote on corporate issues by proxy, giving another person authority to vote for them

sector rotation

moving between sectors to try and beat market

joint account

multiple owners, any owner can trade but when securities are transferred, need all signatures can have right of survivorship where if one owner dies the others get the account, or tenancy in common where that owner's portion is passed to their estate although all owner's background info is needed, only one tax ID on account

Time of Trade Disclosures (MSRB Rule G-47)

municipal securities dealer must disclose all info known by market at or prior to time of trade

municipal underwriting

municipal underwriter assists issuer by structuring financing and preparing disclosure document underwriters can be selected through negotiated sale - where issuer selects one underwriter and negotiates price with them or competitive sale - where issuer lets underwriters compete for lowest bid on project

complaints

must be forwarded to supervisor who reviews it must be stored by firms for four years, with responses and correspondence empty files must be kept

margin agreements

must be signed by client, includes: credit agreement - terms of how purchase is financed, how interest is calculated and charged hyopthecation (pledge) agreement - securities will collateralize the debt to broker dealer loan consent agreement - right for broker to lend securities to other customers or brokers. customer loses right to vote. this is optional to open margin acct need to sign margin disclosure statement which discloses risks and broker's power

annuity sales charges

must disclose sales charges most use a form of CDSCs like Class B mutual funds, but there is no maximum 8.5% fee

feasibility study

must hire consultants to see if revenue bond is feasible for the project

private securities transactions

must provide written notice to employer, and must be on books selling away - transacting without notice of employer personal transactions involving investment company and variable annuity securities not covered by rule

quoting across multiple markets

must use same price in different markets for same security

mutual fund trading rules

mutual funds are sometimes allowed to trade with each other without being subject to rules, if transaction is small or they are controlled by same company

Required Information

name, residence, age, RR in charge of account, signature of officer who approves account if business account, need names of everyone authorized to access it need reasonable effort to get SSN, customer employer info, and if customer is associated with another member firm customer signatures required for margin accounts

Recordkeeping Requirements

name, tax ID, address, phone number, dob, employment status, annual income and net worth, investment goals person can refuse some info, RR writes "refused" on form trusted contact person to verify customer info and ensure financial exploitation not happening documentation of verification needed within 30 days of opening account and verification needed every 3 years

retail suitability

need basis to recommend trading strategies. investment profile: age, other investments, financial situation, tax status, risk tolerance, 3 main obligations: reasonable basis - reasonable to believe investment is suitable for some investors customer-specific - reasonable to believe its suitable for this customer quantitative - series of transactions not excessive

partnership account

need info for each partner partnership agreement - states authorized partners

options accounts

need options agreement - RR must gather customer background to determine ability to understand and take on the risk need written agreement that customer abides by rules of option trading

NAV

net asset value - net assets / number of shares must be calculated once a day, usually on close of NYSE

zero coupon bonds

no coupons, instead buyer pays a big discount from the par value which is delivered all at once at expiry. difference is calculated as interest

mutual fund dividend reinvesting

no sales charge for reinvesting

Class B Shares

no up front sales charge but higher back 12b1 fees must pay CDSCs if redeemed early for investors who want to redeem shares in 5-7 years will turn into class A shares, but no breakpoint discounts

beta

non diversifiable risk, sp500 has beta 1

Payments to Influence the Market Price

not allowed

hedge funds

not required to register with sec for sophisticated accredited investors >1 million$ since unregistered, allowed to short, use derivatives, leverage, fees not required to publish NAV daily 2 and 20

issues with variable annuities

not suited for short term investors (seniors) early surrender very expensive

forced conversion

occurs when an issuer calls its convertible bonds and it is clearly in the best interest of bondholders to convert their bonds to stock rather than let them be called away

Third Market

off-exchange market for securities listed on an organized exchange

associated persons

officers of member firms, employees (unless clerical), person engaged in IB or securities business controlled by member firm

trust accounts

one person (trustee) in charge of managing assets for another need evidence of trustee authority to transact business and trust agreement

Individual Account

opened for and by one person only one who can trade unless someone else is authorized clients can use numbers instead of their name though firms must keep up with personal info

deadlines for option expiration

option settles in two business days options expire third friday of month but buyer must notify broker of exercise intent by 5:30 ET on that friday. options stop trading 4pm ET on that Friday

stop order

order placed such that if position moves against you you can hack out (selling if price falls too low)

solicited trade

order ticket that says it was recommended by customers RR

end of day pricing

orders to buy and sell shares are based on next computed price at next market close "forward pricing"

principal

owns the underlying

Federal: SEC

part of Federal Government that enforces Acts of Congress jurisdiction over interstate transactions criminal activity referred to DOJ

general LP risks

partner management abilities, illiquidity, possible losses, ability to recontribute if called, rising costs, availability of goods needed, regulatory risk, economic and environmental disasters

income bonds

pay no interest unless the issuing company is profitable. usually by companies in bankruptcy. highly speculative

Accumulation Period

pay-in period: value of annuitant's investment in separate account is calculated with accumulation unit: purchased at NAV (Net assets / Units Issued) priced at end of each trading day like mutual funds

Special Assessment Bonds

payable only from specific charge of benefactors of facilities like sewer, sidewalk, etc

settlement

payment and delivery of security between buyer and seller

income stock

pays higher-than-average dividends compared to other stock issues

Traders

people who actively execute quotes for their own firm or clients benefit

creditors

people who lend out money and expect a future return

beneficial owners

people with security positions held by trustee or broker NOBO (non objecting beneficial owner) - gives permission to broker to release info to issuer and gets communications directly OBO - (objecting beneficial owner) - info goes to broker dealer who then distributes it

money laundering

placement - places illegal cash flow into business through buying securities layering - putting money in slowly through different accounts integration - money earns proceeds which are clean

points

point is a percentage of the par value. A bond selling at 95 points is selling at 950 if par is 1000. corporate and municipal bonds trade in eighths of a point while treasury notes and bonds trade in 32nds of a point

educational accounts

post tax in, earnings untaxed if applied to education

ERISA (Employee Retirement Income Security Act)

prevent misuse of pension funds by fund managers plan must cover all employees 21+ who have worked there one year, vested based on years worked there, adheres to strict guidelines pretax contributions, tax deferred growth, don't discriminate among employees defined benefit - fixed payout, risk on employer defined contribution - fixed contribution, risk on employee

market capitalization

price of share times number of outstanding shares (doesn't include treasury shares)

process of getting variable annuity

principal approval - RR collects info on customer, sends application package to Office of Supervisory Jurisdiction (OSJ) for approval, who reviews and approves in seven business days review of 1035 exchanges: permits exchange of annuity contracts without tax. managers must be careful in examining proposed transfer, document if transfer has been done in last three years to prevent churning FINRA concerns - people should use annuities as last resort, sometimes salespeople sell to wrong people

Industrial Development Bonds

private activity bonds issued by municipality and secured by lease with a corporation. purpose is to sponsor private facility

Regulation D: Exempt Offerings

private placement of securities is exempt if: buyer is sophisticated investor buyer has access to all info that would be on prospectus issuer assured buyer won't quick sell (may use lock up agreement) no more than 35 non-accredited investors

Business Continuity Plan

procedures to be followed in case of emergency. -data backup/recovery - financial and operative assessments - alternative communications -alternate physical location -regulatory reporting must provide SRO with plan and info, two senior RRs with knowledge of firm must discloses BCP to customers

income statement

profit and loss

public offering

pros - unlimited potential investors cons - regulated by Act of 1933, extra effort for legal and accounting

limited partnerships

pros: taxed once, not twice like corporation investors assets diversified usually can only lose investment (limited) unlike general partners cons: no control, illiquid, regulation risk, capital calls (force you to contribute more)

Federal Home Loan Corporation (FHLMC, Freddie Mac)

provides funds to federally insured savings institutions to finance new housing raises money by issuing mortgage-backed bonds, pass-through certificates backed by other agencies and mortgages purchased by Freddie Mac interest fully taxable on state local and federal level

BrokerCheck

public record of disciplinary history of BDs and firms - current firm, last ten years of employment -charges - accusations can change BrokerCheck info with amended U4 firms must supply customers BrokerCheck info annually (also municipal firms)

GSEs

publicly chartered but privately owned organizations provide low cost loans for portions of population not backed by USD directly include Federal Farm Credit Banks (FFCBs) and Federal Home Loan Banks (FHLBs)

Federal National Mortgage Association (FNMA, Fannie Mae)

raises money to buy Federal Housing Administration (FHA), Veterans Administration (VA), and conventional residential mortgages from lenders like banks backed not by government but by ability to borrow from US Treasury Interest is fully taxable

prime rate

rate a bank charges when providing loans to highest credit rated customer corporations. other rates based on prime rate

junk bonds

rated below BBB or Baa, pay high yields due to high credit risk

real estate LPs

raw land - LPs just buy a bunch of land, no income just capital appreciation in value new construction - capital appreciation through construction investing existing properties - more predictable returns, immediate cash flow and depreciation allowances government assisted housing - Section 8 of Dep. of Housing and Urban Development(HUD) for low income people, lots of tax credits

Rights of Accumulation (ROA)

reduced sales charge applied to total investment within family of funds if shares are in same class can go far back in time once breakpoint is hit, applies to all future purchases instead of original purchase price, current market value plus any additional investments are used to determine sales charge funds must check if investors are eligible with existing contributions to family funds

The Investment Advisers Act of 1940

regulates IAs ABC Test (Advice, Business, Compensation) Incidental advisers (lawyers, accountants, teachers, engineers) are excluded from the adviser definition

The Investment Company Act of 1940

regulates mutual funds which meet following: have 100 shareholders have $100,000 in assets they must report annually to SEC and semiannually to shareholders

The Employee Retirement Income Securities Act of 1974 (ERISA)

regulates private retirement plans like 401ks

continuing education

regulatory element - need computer training two years after initial registration and three years thereafter FINRA notifies 30 days before anniversary date (or anniversary of disciplinary action), and person has 120 days after anniversary date to do training

Form U6

reports disciplinary actions against RRs and other firms

repo agreement

repurchase, where Fed will lend out money through the treasury market repo eases money supply, reverse repo tightens

special settlement

requesting early settlement, must request before transaction

Revocable and Irrevocable Trusts

revocable trust (living trust) - can change or revoke trust but assets are considered belonging to beneficiary irrevocable trust - can't be changed revocable becomes irrevocable when trust creator dies irrevocable trusts used to pass down property without tax

transaction settlements of mutual funds

same day as purchase/ redemption ex div date selected by fund, typically day after record date

Moral Obligation Bonds

secured by revenues of project, but if revenues aren't enough then state has moral, but not legal, obligation to repay

control securities (affiliated securities)

securities acquired by control (affiliated) persons in secondary market. Includes: officers, directors, shareholders with >10% ownership, and their families.

Restricted Securities

securities with legends. need transfer agent to remove to be good delivery must get an opinion letter from original issuer to remove legend

SROs

self-regulatory organizations: FINRA, MSRB, CBOE not part of government, can't arrest violators financial firms must join SROs and are called member firms, their employees are called associated persons

Accrued Interest

seller of a bond receives partial interest from the next period, proportional to the time he owned the bond, from the buyer. municipal and corporate bonds calculate 30 day months and 360 day years, government bonds use actual days

uncovered call

selling a call without hedging by owning underlying

due bills

sent when the wrong party receives a dividend from the issuer, buyer buys stock before ex-div but isnt transacted until after record so dividend goes to seller

Restricted Shares

shares bought before IPO or as part of work compensation. they are ineligible for transfer

Short selling and margin

short sales must be executed in margin account firms use stock borrowed from other customers but they must provide permission through loan consent form upon account opening short seller must pay dividend to lender

Commercial Paper

short-term (<270 days) unsecured debt issued by large corporations considered safe since only good companies issue it. not regulated. standard minimum denomination is $100k

Private Equity Funds and VC funds

similar to Hedge Funds, sell limited partnership units under Regulation D exemption. illiquid raise capital for startups

board of directors

similar to corporation job is to protect shareholder interests, make investment policy, determine dividends and distributions, appoint fund principal, custodian, transfer agent, underwriter

municipal fund securities

similar to investment company securities or variable contract products investment returns of pool of assets, not bonds

long / short coupons

since bonds usually pay interest on the 1st or 15th of the month, the first period starts on the day the bond is issued and may fall on a different day causing the first period to be longer or shorter than the rest

Forwarding Official Communications

since broker securities are often in street name, must forward official communications from issuers to their clients

Back-End Loads & Contingent Deferred Sales Charges (CDSC)

some funds charge sales charge upon redemption instead of purchase longer shares are held - lower the sales charge

Rule 144 Notice of Sale

someone who wants to sell restricted or control securities must notify SEC by filing form 144 when sell order is placed with broker-dealer. SEC then gives them 90 day period to sell. Only applies for big sales (5000 shares or 50,000$)

financial exploitation

specified adults - 65+ or has mental/physical impairment that renders them unable to protect their interests trusted contact person - helps firm manage account, their info is requested but not necessary temporary holds - can hold disbursement of funds but not securities. when they suspect financial exploitation. must notify parties/trusted contact in two days hold expires in 15 days, may be extended another 10 days if they suspect exploitation

stock splits

splits stock into smaller pieces ex div date is business day after payable date due bill attached with trades to ensure proper shareholder gets shares

P/E Ratio

stock's market price / profits per share

Right to Receive Dividends

stockholders share in profits when the company declares dividends. the percentage of shares a stockholder owns determines his or her share of the dividends distributed

Broker Dealer Department: Research

study markets and issuers to recommend buy, sell, or hold

Mutual Fund Summary Prospectus

summary of key info in the fund's full or final prospectus

Red Flags

supervisor should investigate situation (assembling details and records), document investigation, pursue investigation to conclusion

syndicate vs selling group

syndicate - shared liability across syndicate who does background check on issuer. they back the offering selling group - sales agent, no sales liability together they are distribution participants

Municipal Syndicate

syndicate manager must keep track of sales and unsold bonds, keep records like settlement dates and names of syndicate members syndicate letter - competitive sale has manager inviting other firms to help

mutual fund record keeping

takes care of recordkeeping for investors and ensures they receive reports of purchases, redemptions, and tax summaries also must provide semiannual and annual reports

Qualified Annuity

tax deferred annuities some NPOs or public school employees can use taxed entirely at withdrawal

Serial vs. Term Issues

term bond issue - all issued bonds expire at once serial bond issue - all issued bonds expire at different times level debt service - principal and interest payments represent approximately equal annual payments over life of offering balloon maturity - issuer structures offering so some matures serially with large portion paid off at final maturity

auction market

the NYSE, for example, where buyers and sellers simultaneously enter competitive prices, Sometimes called a "double auction" market because buying and selling occur at the same time

YTM (yield to maturity)

the annual rate of return earned on a bond if it is held to maturity example: say an investor currently holds a bond whose par value is $100. The bond is currently priced at a discount of $95.92, matures in 30 months, and pays a semi-annual coupon of 5%. Therefore, the current yield of the bond is (5% coupon x $100 par value) / $95.92 market price = 5.21%

payment date

the date cash dividend payments are made to stockholders dividends usually paid quarterly and taxable in year paid

declaration date

the date on which the board of directors officially approves a dividend

record date

the date you must own the stock to get a dividend

issuer

the individual or business organization offering a security for sale to the public (US treasury, gov entities, corporations and banks) can issue either bonds (debt) or equity securities (stock)

secondary market

the market in which previously issued securities are traded among investors

issued shares

the number of shares sold or otherwise distributed to shareholders. Cant be more than authorized shares

Cost Basis

the original value of a purchased asset, usually the purchase price plus any fees on inheritance, market value on time of death is used for new "stepped up" cost basis

Annuity Period

the payout period of an annuity: chosen by investor can no longer surrender annuity for current value

Credit Risk

the probability that the borrower will fail to pay some of the interest or principal

prepayment risk

the risk that mortgages underlying a mortgage-backed security/pass-through will be paid off sooner than expected due to a drop in interest rates. Investors reinvest the principal at a lower rate going forward.

Blue Chip Stock

the stock of a large, well-established and financially sound company that has operated for many years

Standby Underwriting

the type of underwriting in which the underwriter agrees to purchase the unsubscribed portion of the issue happens after preemptive rights offering in case not enough buy more discounted shares

Debt or Bond Indices

there are benchmarks for debt securities Barclays Capital creates indices for debt securities The Bond Buyer has municipal bond indices

PPM (Private Placement Memorandum)

though private issuers dont need to file with SEC, they provide detailed disclosure to purchasers

GNP (Gross National Product)

total dollar value of goods & services produced by a nation at home or overseas

when Issued

trade will settle when security is actually issued

churning

trading a client's shares of stock very frequently in order to generate large commissions

seller's option

transaction where seller gets more time, usually to clear legal issues like legends

Marking the Close/Open

transactions or quotes that cause uptick or downtick at start or end of trading day

Payments for Market Making

underwriters may not accept payment for market making the issued stock (conflict of interest)

public offering price

underwriters take in earnings, other companies trading, dividends into account

Capital Losses

used as reductions against capital gains. Also have short term capital losses for under one year and long term capital losses for over one year

Health Care Revenue Bonds

used for the construction of non-profit hospitals and health care facilities

DTCC Settlement

uses book entry settlement, just updates inventory of both parties. takes on all counterparty risk

reducing sales charges

usually for class A shares fund families - funds related to each other that give associated benefits and discounts breakpoints - reductions in sales charges with higher contributions

discount rate

what banks are charged when they borrow from Federal Reserve

call rate

what banks charge BD for margin loans

switching shares

when RR directs client to sell shares in order to switch causing higher sales charges exchanging shares is also a taxable event

Stripped Securities

when a broker-dealer strips the interest and principal payments to turn a bond into a ZCB called treasury receipts, they are backed by Treasury securities owned by broker dealer, not directly by the Treasury

leveraged issuer

when a corporation has more debt than equity outstanding

Capital Gains

when an investment is sold for more than its cost basis. If held under one year, short term capital gains tax is taxed as income tax if held more than one year, gain is considered long-term and taxed at up to 20%

paper settlement

when client personally holds certificates or security is not DTCC eligible good delivery - paperwork is in order for delivery CUSIPs help make sure right delivery is transferred

discretion not exercised

when customer consents to trade specifics before execution (no broker discretion used)

tender offers

when entity publicly offers intent to buy a bunch of stock (at premium) people can choose to offer tendering of their stock: stock owners, people who bought the stock but haven't had delivery yet, and exercised option call owners

passive activities

when owner of business doesnt participate in business (DPPs, rentals) - losses only deductible up to gains

Special Inactive Status

when person is called into military, they may not function as RRs but may still receive commissions not subject to inactive status from retraining

depository-eligible securities

when registered security deposit like DTCC or NSCC has stores of securities and are distributed through book entry instead of physical delivery cash settlements are also book entry

Restrictive Legend

when shares are acquired through private placement, a legend is on certificate that prevents resale since there has not been SEC registration can be removed with rule 144

Dealer-to-Dealer Market

when stocks don't qualify for the listing on a physical or electronic exchange, they are considered over the counter securities which are traded over the phone/ computer in a dealer-dealer network (OTC bulletin board or Pink Market)

Laddering

when underwriter promises to buy shares of IPO at sale price later, this inflates aftermarket price

front running

when you know a huge trade is coming in that will move markets block trade - 10000 shares or more

general creditor

when your securities value exceeds the insured amount of the SIPC

closed-end investment company

while mutual funds are open as they can be issued continuously, closed end companies only issue once (although may re-issue later) and shares trade on second market like NYSE can trade at discount to NAV in second market, investors pay commissions instead of sales charges, no delivery can issue stocks and bonds in addition to common shares not easily redeemable to issuer

Government National Mortgage Association (GNMA, Ginnie Mae)

wholly owned under US Departments of Housing and Urban Development provides financing to regular housing fully backed by government but also fully taxable offers pass through securities from FHA and VA mortgages but backs them regardless of collection pool usually has life 25-30 years but can be shorter due to declining interest rates, foreclosures, and refinancing