SIE Exam - Unit 1 Regulatory Entities, Agencies, and Market Participants

The Code of Arbitration (COA)

A FINRA-run dispute resolution process to settle monetary disputes. The goal is to provide a faster and cheaper resolution versus going through the traditional court system.

Registered Representative (RR)

An associated person engaged in the investment banking or securities business. This includes any individual who supervises, solicits, or conducts business in securities or who trains people to supervise, solicit, or conduct business in securities. Anyone employed by a brokerage firm who is not a principal and who is not engaged in clerical or broker- age administration is subject to registration and exam licensing as a registered representative. Syn. Account executive; stockbroker. Related item(s): associated per- son of a member.

Institutional Investor

An entity that pools money to purchase securities and other investment assets. These can include banks, insurance companies, pensions, hedge funds, and mutual funds. Some of these are also referred to as qualified institutional buyers (QIBs). This generally means the QIB owns and invests a minimum of $100 million in securities on a discretionary basis.

Issuers

An entity, such as a corporation or municipality, might offer or propose of raising capital.

U.S Treasury Department/IRS

An executive department and the Treasury of the US federal government. The department is administered by the Secretary of the Treasury, who is a member of the cabinet. One of the functions is to oversee the collection of taxes.

Federal Deposit Insurance Corporation (FDIC)

An independent agency of the US federal government that preserves public confidence in the banking system by insuring deposits. The funds for the agency are provided in the same way as the funds for a private insurance company; premiums are paid by all participating institutions.

Retail Investor

An individual who makes investments such as the purchase of securities for her own personal account rather than for an organization.

Trustee

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to do so.

Custodian

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another.

Clearing Agency

An intermediary between the buy and sell sides of a transaction. They receive and deliver payments and securities on behalf of both parties. Conceptually, this is similar to the way a bank clears checks between two parties.

Market Maker or Trader

Any entity, individual or institution willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security. They generally stand ready to buy or sell (make markets) in securities with the ultimate goal of being profitable.

Carrying Firm

Carries customer accounts and accepts funds and securities from customers. Carrying firms and clearing firms typically rank among the larger BDs. They have the capability to do trade executions, clear and settle transactions, take custody of customer funds and securities, and handle all back office tasks such as sending trade confirmations and statements.

The Federal Reserve Board

Consists of 12 regional Federal Reserve Banks and hundreds of national and state banks that belong to the system. They determine the monetary policy and take actions to implement it's policies, including: -acting as an agent of the US Treasury -regulating the US money supply -setting reserve requirements for members -supervising the printing of currency -clearing fund transfers throughout the system -examining members to ensure compliance with federal regulations -auditing the deposit-taking activities of member banks

The USA PATRIOT Act (Partially based on the Bank Secrecy Act of 1970)

Covers anti-money laundering (AML) policies and procedures that must be followed by financial firms

The Code of Procedure (COP)

Covers the enforcement of FINRA rules and details the punishment of members who incur rule violations. These decisions may be appealable to the SEC.

Securities Investor Protection Act of 1970 (SIPA)

Covers the protection thresholds for customers in the event of a BD's bankruptcy.

Insider Trading and Securities Fraud Enforcement Act of 1988

Defines penalties for the misuse of material, nonpublic information by both firms and individuals

Securities Act of 1933

Governs the new issuance (primary) market, which involves the money-raising activities of issuers & requires issuers to register their securities when selling to the public.

Investment Advisers Act of 1940

Governs the regulation of firms that earn fees for providing investment advice

Investment Company Act of 1940

Governs the regulation of packaged products such as mutual funds, closed-end funds, and unit investment trusts.

Securities Exchange Act of 1934

Governs trading markets for existing securities and registration requirements of BDs, BD employees, and exchanges.

Underwriters

Groups of BDs or investment bankers that work with an issuer to bring its securities to the market and sell them to the investing public. They help the issuer to structure capital raises, and at times, form syndicates with other underwriters to facilitate this money-raising process.

Full Service Broker Dealer

Offering all types of investment products such as stocks, bonds, mutual funds, options, and many others, while some limit the products they offer to only a few. They can also incorporate proprietary trading - that is, to trade the firm's own capital. These firms stand ready to buy and sell specific securities hoping to profit from price swings.

Municipal Advisors

Provides advice to or on behalf of a municipal entity with respect to municipal products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues OR undertakes a solicitation of municipal entity.

Financial Industry Regulatory Authority (FINRA)

Regulates all matters related to investment banking (securities underwriting), trading in the over-the-counter (OTC) market trading in NYSE-listed securities, and the conduct of _______ member firms and associated persons. They promote the investment banking and securities business, standardize principles and practices, promote high standards of commercial honor, and encourage the observance of federal and state securities laws.

Municipal Securities Rulemaking Board (MSRB)

Regulates all matters related to the underwriting and trading of state and municipal securities. This regulates but does not have enforcement powers - it depends on other SROs (ex. FINRA) for the enforcement of its rules.

Chicago Board Options Exchange (CBOE)

Regulates all matters related to trading in standardized options and related contracts listed on that exchange.

Transfer Agents

Responsible for: -ensuring that its securities are issued in the correct owner's name -canceling old and issuing new certificates -maintaining records of ownership -handling problems relating to lost, stolen, or destroyed certificates

Accredited Investor

Someone with a net worth of over $1 million not including net equity in a primary residence or has had an annual income of over $200,000 in each of the two most recent years (or over $300,00 jointly with a spouse) and who has a reasonable expectation of reaching the same income level during the current year.

Securities and Exchange Commission

The securities industry's primary regulatory body. BDs that transact securities business with customers or with other BDs must apply and be approved for registration with the SEC.

Depository Trust & Clearing Corporation (DTCC)

The world's largest securities depository. It provides custody services for virtually all securities except those subject to transfer or ownership restrictions, which are known as restricted securities.

Self Regulatory Organizations (SROs)

These are accountable to the commission for enforcing federal securities laws, as well as supervising securities practices within an assigned jurisdiction.

Fully Disclosed Firm or Introducing BD

These introduce its customers to a clearing firm. The clearing firm holds funds and securities of the _____ firm's customers and performs related functions, such as sending confirmations and statements for its correspondent firms. Essentially, the clearing firm acts as the introducing firm's back office. Because the risk associated with holding customer funds and securities is not present, net capital requirements are lower for _____ BDs than they are for self-clearing or carrying BDs.

Uniform Practice Code (UPC)

These rules cover technical aspects of trading and payment for securities transactions.

Conduct Rules

These rules establish the relationship between firms and their customers. These rules cover areas such as fair dealing with customers, compensation-related issues, standards for communications, and various sales practice violations.

Prime Account & Prime Broker

This type of account allows a customer - generally, an institution - to select one member firm (the prime broker) to provide custody and other services, while other firms - called executing brokers - handle all trade placed by the customer. The role is that of facilitating large, active trading operations such as hedge funds. This can be thought of as a sort of central broker, facilitating and coordinating extensive, complex trading in a variety of financial instruments.

An individual or institution willing to hold securities positions in its own proprietary account for the purpose of providing liquidity to the marketplace is a. a market maker b. a broker c. a trustee d. a custodian

a. a market maker

Determining monetary policy and taking actions to implement those policies is the responsibility of a. the Federal Reserve Board (FRB) b. the Depository Trust & Clearing Corporation (DTCC) c. the Internal Revenue Service (IRS) d. the Securities Investors Protection Corporation (SIPC)

a. the Federal Reserve Board (FRB)

An entity such as a corporation wishing to offer securities for sale to the public for the purpose of raising capital is a. an underwriter b. an issuer c. a trustee d. a transfer agent

b. an issuer

For the Depository Trust & Clearing Corporation (DTCC), all of the following are true EXCEPT a. it is a member of the Federal Reserve System b. it acts as a retail bank servicing savings and checking accounts c. it serves for the purpose of providing custody of securities d. it is a worldwide clearing agent

b. it acts as a retail bank servicing savings and checking accounts

The federal regulatory body that governs the securities industry is a. the Financial Industry Regulatory Authority (FINRA) b. the Securities and Exchange Commission (SEC) c. the NYSE d. the Federal Reserve Board (FRB)

b. the Securities and Exchange Authority (SEC)

The FDIC provides insurance guaranteeing the safety of a depositor's accounts in FDIC member banks for each deposit up to a. $150,000 b. $200,000 c. $250,000 d. $500,000

c. $250,000

An intermediary between the buy and sell sides of a transaction is known as a. a custodian b. a transfer agent c. a clearing agent d. a depository

c. a clearing agent

Your BD acts as a prime broker for an institutional account. In this arrangement, your BD is likely to be providing which of the following services? a. execution of all transactions b. maintenance of a trading floor operation on an exchange c. ensuring that all exchange-trading rules are complied with d. clearing and transaction settlement services for executing brokers

d. clearing and transaction settlement services for executing brokers

A fully disclosed BD a. self-clears the transactions of its customers b. is known as a clearing agent c. is like the depository trust company in that it can take custody of funds and securities d. is an introducing firm clearing its transactions through a carrying firm

d. is an introducing firm clearing its transactions through a carrying firm

A nonprofit organization requiring members to pay assessments into a general insurance fund used to meet customer claims in the event of a BD bankruptcy is a. the Securities and Exchange Commission (SEC) b. the Depository Trust & Clearing Corporation (DTCC) c. the Federal Deposit Insurance Corporation (FDIC) d. the Securities Investors Protection Corporation (SIPC)

d. the Securities Investors Protection Corporation (SIPC)