SIE Exam Test Points

POP 1. What is the formula? 2. What the investor buys and sells shares at, at a mutual fund.

1. POP Formula: NAV (Net Asset Value) + SC (Sales charge) = POP (Public Offering Price) 2. Investors pay POP when they buy shares and sell shares at NAV.

1. G.O.

Types of Municipal Securities Backed by the full faith and credit of the issuing municipality (taxes) and need voter approval. Used to build non revenue producing facilities like schools, parks. At state level: State tax revenue = income tax and sales tax Local level: Political subdivision revenue = ad valorem tax/property tax Property tax is measured in "mills", 1 mill = .001 Mill rate x Assessed Value = Tax Ex. $200,000 assessed value taxed at a rate of 9 mills $200,000 x .009 = $1,800 property tax

If there is 4M stock outstanding and 2M repurchased what is the amount issued?

6M Issued Stock = Outstanding Stock + Treasury Stock Therefore: Treasury Stock = Issued stock - Outstanding Stock Outstanding Stock = Issued stock - Treasury stock

MAH (company name) has an 11% convertible preferred stock trading in the marketplace that is quoted at $117. What is its current yield?

9.4% Current Yield = annual cash inflows / market price Current Yield = 11 / 117 = .094 or 9.4%

How bond ratings are determined

use cash flow, total amount and type of debt outstanding, ability to meet interest and principal payments, collateral, industry and economic trends, and management to rate

An investor has purchased 10M of XYZ 9's due March 1, 2040 at 110 What does 10M mean?

$10,000 in principal

1. Bond Pricing 2. Par Value 3. Discount 4. Premium

1. All corporate bonds are priced as a percentage of par into fractions of a percent. 2. Par value is always $1000, and corporate bonds are priced as a percentage of par value. 3. Discount: Bonds purchased at a discount are less than the par value. CY > NY A 95 bond = 95% x $1,000 = $950 4. Premium: Bonds purchased at a premium are more than par value. CY < NY A 105 bond = 105% x $1,000 = $1,050

The Role of the Principal

1. The principal must review and approve: new accounts (name of the rep who opened the account and who serviced the account must be noted), retail communications, and transactions no later than TD + 1 2. A properly registered principal is required at each office of supervisory jurisdiction / OSJ 3. Registered rep principal is required to review all written customer complaint letter, email, or text and must be recorded at the OSJ

ADRs and ADS

American Depository Receipts (ADRs) and American Depository Securities (ADS): they facilitate the domestic trading of foreign securities Puts the ownership of a foreign stock in your domestic dollars through a bank, dividends are also converted to your domestic currency but international stock with different currencies have more risk by currency risk based on the trading value of the Dollar vs. Yen for example.

Risks of owning common stock:

Capital risk: stock declines in value Dividends can stop or reduce whenever Junior claim: very minor claim on assets if a company goes bankrupt

Combination Privileges:

Combination Privileges: most mutual funds have a wide variety of mutual funds. They allow investors to make investments into different mutual funds and the sales charge is based on the total investment between the funds. Test Point: If the mutual fund is purchased with two different BDs the sales charge is still assessed as the total investment sales charge

What must be done when a customer dies?

Death of a Customer: Mark account deceased, cancel all open orders, and await legal papers to distribute the assets in the account according to the will.

Diversified mutual fund rules

Diversified mutual funds rules: a large majority of mutual funds market themselves this way 1. 75% of the fund's assets must be invested in securities of other issuers. Cash and cash equivalents are counted as part of the 75%. A cash equivalent may be a t'bill or a money market instrument. 2. 5% - The investment company may not invest more than 5% of its assets in any one company. 3. 10% - The investment company may not own more than 10% of any company's outstanding voting stock.

Fiscal Policy Who controls it, what is it, how can it stimulate and slowdown the economy?

Fiscal Policy: Controlled by the President and Congress, tax and spend to control the economy Stimulate the economy: lower taxes or spend more money ex. enact infrastructure rebuilding program Slow down the economy: raise taxes and reduce spending

For both Calls & Puts:

For both Calls & puts: seller always gets the premium as MG meaning that the buyer's ML is the premium. The buyer's MG is the seller's ML and the BE is the same, who wins depends on the ending stock price.

When a Bond certificate is issued, it must include:

Name of issuer, Principal amount ($1000), issuing date, maturity date, interest payment dates, place where interest is payable (paying agent), type of bond, interest rate, call feature (can be recalled), reference to the trust indenture

Agency Issues not guaranteed by the Government

Not Guaranteed by the Government as they are public for profit companies (Prior to nationalization*). Produce Pass Through Certificates or CMOs for investors with an income investment Fannie Mae - Federal National Mortgage Association* Sallie Mae - Student Loan Marketing Association Fredie Mac - Federal Home Loan Mortgage Corporation*

Features of Preferred Stock vs common stock

Payment of dividends before common stock holder If bankrupt they get paid before common stocks Goes on forever until the company buys it back/the company goes out of business Doesn't have: no voting rights and is interest rate sensitive because of fixed income component of dividends

Which CMO provides the most protection?

Planned Amortization Class (PAC) or P = Protection

How is Market Value determined?

Supply and Demand

Becoming a stockholder (T + business days)/regular way settlement:

Test Point: Mr. Jones bought a stock for regular way settlement or basis

What can treasury stock not do compared to outstanding stock?

Test points: What treasury stock can't do: Cannot vote, is not calculated in EPS, does not receive dividend

TIPS Ex. 4% TIP, Par = $1,000, CPI = 2%, Par =

Treasury Inflation-Protected Securities (TIPS) Designed ot protect investor from inflation, Principal is adjusted every 6 months based on inflation for Income oriented investors who are concerned about inflation. The Principal adjusts, NOT the interest rate. Ex. 4% TIP, Par = $1,000, CPI = 2%, Par = $1,000 + $20 (1,000x.02) = $1,020 Par = Principal + (Principal x CPI)

What investment should you recommend for someone going to college if they need to be guaranteed $1,000 12 years from September?

Treasury STRIIP because of US Government backing and maturity date options

The price of bonds in the secondary market depends on:

rating, interest rates, term, coupon rate, type of bond, issuance, supply & demand, features like callable or convertible. The better rating the lower the interest rate.

1. When would an investor expect to realize the greatest gain on the purchase of a bond? 2. When would an investor expect to have the greatest loss?

1. By purchasing long term bonds when rates are high and are expected to fall. 2. By purchasing long term bonds when rates are low and are expected to rise.

Institutional Communication Rules 1. Does communication sent exclusively to institutional customers have to be filed with FINRA? 2. training rules 3. communication filing rules

1. Communication sent exclusively to institutional customers does not require principal approval and need not be filed with FINRA. If at anytime any part of that communication can be seen by just one retail investor it becomes a part of retail communication 2. The firm must train its employees on the use of institutional communication. 3. Institutions must retain communications for 3 years and have it readily accessible for 2 years.

What activities require someone to be a registered representative?

1. Employees who handle orders or supervise a member's business must be registered 2. To be paid commission or transaction based fees you must be registered No compensation (commission or transaction based) may be paid to unregistered people but they can pay a bonus on the profitability of the office not on the gross commissions

Violations and Complaints: 1. Minor Rule Violations 2. Censure, Suspend, Expel, Var, Fine, and other penalties definition 3. What if the BD doesn't want to accept the allegation?

1. Minor Rule Violation: $2,500 max fine and censure and the principal must accept it within 30 days always better to accept otherwise you are taken to a hearing where penalties are usually greater 2. Penalties defined i. Censure: letter of reprimand ii. Suspend: suspend firm, principal, or agent for up to 1 year iii. Expel: expel firm, principal or agent for up to 10 years iv. Bar: remove firm, principal, or agent for life v. Fine: can fine any amount vi. Other penalties: make restitutions to customers 3. If the Broker Dealer/Principal/agent doesn't want to accept the allegation? Without admitting wrongdoing they can pay for the fine and send an acceptance waiver of consent

You have 200 shares and there are 2 board members to be elected with 4 people running for the position. 1. How many votes do you have and how must you vote under each method? 2. Which voting method benefits the smaller shareholder? 3. What do Shareholders vote on?

1. Votes for both methods total 200 shares * 2 directors = 400 votes 2. Cumulative method as you can lump all your 400 votes together for candidate 1. Statutory method would mean 200 votes for candidate 1 and 200 votes for candidate 4 3. Board of Directors, don't vote on executive compensation or declaration of bankruptcy

1. Yield Definition 2. NY 3. CY If Par = $1000, NY = 6%, AI = $60, CMP = 98. CY 4. YTM

1. the investor's return for holding the bond 2. Nominal yield: the rate named on the bond printed in ink on the paper is an 8% bond. 3. Current yield: relationship between the annual interest generated by the bond relative to the marketplace. It tells the investor how much they will receive back. Current Yield (CY) = Annual Interest (AI) / Current Market Value (CMV) If Par = $1000, NY = 6%, AI = $60, CMP = 98. CY = 60/(.98x$1000) = .06122 4. Yield to Maturity: the investor's total annualized return for investing in the bond. It takes any appreciation or depreciation at maturity and assumes all coupon payments were reinvested at the same rate.

Conversion or Exchange Privileges: 1. What it is 2. What happens if gain on sale during conversion 3. Rep violations on mutual fund recommendations

1. Conversion or Exchange Privileges: the investor can move money between their portfolios (Growth & Income) at the NAV without a sales charge. 2. If there is a gain on the sale of the growth portfolio it is still a taxable event. 3. If an investor has money in a mutual fund company and wants to add money into a new portfolio or move portfolios you must recommend the current mutual fund company because of combination privileges. Ex. If an investor had $100k in mutual funds and the rep advises to put $25k in 4 different mutual funds that would be a violation as they are advising them poorly/advising to get more sales charges.

An investor owns 1000 shares of XYZ which is trading at $50 per share. XYZ Declares a 5:4 stock split the investor will now own:

1250 at $40 Explanation: For a 5:4 stock split multiply the number of shares by 5/4 = 5/4 x 1000 = 1250 and multiply the stock price by the reciprocal of the fraction 4/5 = 4/5 x $50 = $40

Selling Mutual Fund Shares

1. When an investor sells shares of a mutual fund they will always redeem the fund shares at the NAV that is next calculated after the company receives the investor's order. 2. Investors may sell fund shares based on: First in first out (FIFO, assumed by IRS): creates largest capital gains tax Share ID: good for investors trying to minimize tax liability by selling current shares at $10 NAV vs. shares at April 2 years ago at $12 a share that creates a capital loss Average Cost: investor can calculate average cost over time of investment

1. Investment Company Act of 1940 2. Investment Advisers Act of 1940

1. regulates businesses that are investing or reinvesting customer's pooled assets to meet a stated objective 2. regulates entities that are in the business of providing advice on the purchase and sale of securities for a fee ex. mutual fund portfolios

12B1 Fees

12B1 Fees: an annual fee that is charged quarterly to the shares that is a type of sales load that reduces the overall return to the investor that is charged quarterly (not a type of sales charge which is what an investor pays to invest) Annual fee charged to shares quarterly Promotional expenses, i.e. printing, advertising, commissions to sales reps No Load fund Max. 12B1 Fee = ¼ %

Look at diagram to answer these questions: Which one is the growth fund? Which one is the money market fund? What could the other two funds be?

Which one is the Growth fund? Fund D as the have to pay the investment adviser more Which is the money market fund? Fund A as they are super cheap Fund B could be an index fund and Fund C could be an income fund ex. corporate bond fund

The Business Cycle

1. Expansion: things are improving, wages are going up, savings are going up, unemployment is going down, GDP is increasing. 2. Peak: the economy is at its highest point for the expansionary phase, unemployment has bottomed out, employment has topped out, savings has topped out, and GDP has reached its highest point during this cycle 3. Contraction: recessionary phase, GDP down, unemployment rising, savings falling 4. Trough: unemployment tops out, employment bottoms out, GDP bottoms out, and savings account bottoms out and then a new expansionary phase occurs

Investment Company Registration Requirements:

1. Minimum net worth of $100,000 2. At least 100 shareholders 3. Clearly defined investment objectives 4. An investment company may be allowed to register without having 100 shareholders and without a net worth of $100,000 if it can meet these requirements within 90 days.

1. ETNs 2. Eurobonds 3. Eurodollar bonds 4. Yankee bonds 5. VRDOs

Other types of Debt Securities: 1. Exchange traded notes (ETNs): similar to ETF (stocks) you hold stake in their bond holdings to get investor gain but it is a debt security without interest and converts to a principal payment based on an index. Has default risk. 2. Eurobonds: pays investors in foreign currency, has currency risk 3. Eurodollar bonds: bond issued outside of the country that pays in US dollars 4. Yankee bonds: bonds issued by overseas corporation but in US dollars 5. Variable rate demand obligations (VRDOs): principal is constant but interest rate changes based on the market

Able Accounts 1. What it is 2. Tax benefits and how it can be used 3. The person who is disabled is 4. Supplemental insurance rules 5. Reimbursement rules

1. Able Account (Achieve a Better Living Experience): for people who are incapacitated by the age of 26 years old and a person may only have one Able account at a time 2. Money grows taxed deferred to meet qualified living expenses such as: Housing Expenses including mortgage, tax, rent , insurance, and utility payments Transportation, assistive technology, education and job training The person who is disabled is considered to be the owner and the beneficiary 3. The assets in the Able account will not impact first $100k of supplemental insurance / benefits such as Medical Care or Wellness Care When the person passes away any assets remaining in the account go to the state to repay any supplemental benefits they received during their lifetime. 4. The person may take money in anticipation of an expense or to reimburse themselves for something they paid out of pocket

Keoghs 1. What it is 2. Max contribution rules 3. Employer contribution rules for employees

1. Keoghs: for self-employed unincorporated people who are sole proprietors can establish these plans to plan for their retirement.: 2. Max contribution is 20% of their pre-tax income or 25% of their after tax income up to the annual contribution limit. 3. A self-employed attorney who has a full time paralegal, if he makes a contribution to his Keogh, he has to make an equal % of the paralegals income to their Keogh. He doesn't have to pay that out of pocket, he just needs to contribute that for them.

1. Why Purchase Preferred Stock 2. If you par value $100 (assumed usual value), 6% preferred stock how much is your dividend?

1. Purchased for dividend income 2. $3 semi-annually

1. What the Put Buyer picture says 2. MG 3. ML 4. BE and what it means and what they want

1. The buyer of this put contract has the right to sell XYZ at $50/share until June and they paid a $7/share premium or $700 total 2. MG how far can the stock fall = BE = $43/share or $4,300 total 3. ML = premium you paid = $7/share or $700 total 4. BE = (strike price - premium) = 50 - 7 = $43. Any less than BE from $43/share to $0/share we make money any more we lose up to $7/share Want the stock price to fall

1. What the Put Seller picture says 2. MG 3. ML 4. BE and what it means and what they want

1. The seller of this put contract sells 100 shares of XYZ at $7 at the strike price of $50 2. MG = premium = $7/share or $700 total 3. ML = BE = $43/share or $4300 total 4. BE = SP - Prem = 50 - 7 = $43/share. Any less than BE per share from $43/share to $0/share we lose money and any more than BE we lose up to $7/share Want the stock price to rise

What are CMOs?

A Collateralized Mortgage Obligation is a mortgage-backed security issued by private finance companies, as well as by FHLMC (Fredie Mac) and FNMA (Fannie May). The securities are structured much like a pass-through certificate and their term is set into different maturity schedules, known as tranches. Ex. A small bank has made tons of loans to people in the town and can't lend more due to federal regulations on the amount of money they must have to be able to lend. They would sell other mortgages in CMOs and get cash so they can lend more money in mortgages. These mortgages sold are divided into tranches (slice) with different time horizons 30, 15, 10 and 5 year mortgages or different risks within these.

1. Leading Indicator 2. Coincident Indicators 3. Lagging Indicator 4. Defensive Industries 5. Cyclical Industries 6. Growth Industries

Economic Indicators: 1. Leading Indicator: an indicator that precedes a change in the economy Ex. the stock market or Standard & Poors (S&P) 500 these look forward to what will happen over the next 6, 9, 12 months if it is increasing it indicates the economy is increasing. Ex. Increase of Building permits signals economic growths as buildings take a long time to build and give jobs through workers and materials as well as it needs to be valuable when it is sold 2. Coincident Indicators: moves lock step with the economy as a whole like Ex. GDP as it moves as the economy is moving 3. Lagging Indicator: changes after the economy has changed Ex. Corporate profits as they are recorded for the preceding quarter/year! 4. Defensive Industries: business prospects are resistant to changes in the economy (not a military / defense contract thing!) Ex. food, drugs, tobacco, alcohol are bought regardless of the economic condition 5. Cyclical Industries: earnings profile is tied closely to the business cycle Ex. steel (making buildings), automobiles (no one buys a new car if they aren't sure they will have a job) 6. Growth Industries: profits/earnings are growing faster than the economy as a whole ex. Tech, tend not to pay dividends and reinvest their profits to make more money

Inheriting an IRA Spouse and Non Spouse Options

Inheriting an IRA: What happens when an individual passses away and leaves their IRA to a beneficiary? 1. Spouse: May roll over into own IRA or continue to own as a beneficiary 2. Non Spouse: Have a few options on what to do with the money i. They can receive a Lump sum, a 5-year payout, take RMDs over the Beneficiaries life expectancy, or if multiple beneficiaries they can take RMDs based on the life expectancy of the oldest beneficiary

Issued Stock

Stock that has been authorized for sale and that has been sold to the investing public to raise cash.

Treasury Stock

Stock that has been sold to the investing public and repurchased (maybe to avoid a takeover/increase ownership and control of the company

Why would a company repurchase shares?

To maintain control of the company Increase EPS Fund employee stock purchase plans Use shares to pay for a merger or acquisition

1. FOMC 2. Change Reserve Requirement 3. Moral Suasion / jawboning

Tools of the Federal Reserve Board 1. The Federal Open Market Committee (FOMC): handles open market operations by buying and selling securities 2. Change Reserve Requirement: must have a certain amount of assets to be able to lend, least likely policy response 3. Moral Suasion / jawboning: The chairman of FRB or voting members give a speech that includes certain language that influences market participants to raise/lower interest rates and buy or sell bonds.

What types of products are securities?

VABMS Variable Annuities, Bonds, Mutual Funds, Stocks

Bonds definition, investor objective, what are bondholders

represents a loan to the issuer in exchange for its promise to repay the face amount of the bond known as the principal amount at maturity. Investor's objective is semi-annual income Bondholders are creditors.

What is economics?

the dismal science, the study of shortages, how prices and supply interact with each other in the economy of any given country

Book Value

the theoretical liquidation value of the company

What are the requirements for a security to trade in the money market?

to trade in the money market the security must be a debt security or a promissory note (FIXED INCOME!!!) with 1 year or less until maturity regardless of original maturity (no rights - right to purchase a certain number of shares, warrants, common stock, options, equity, etc)

FINRA Bylaws parts 1-3: 1. The rules of fair practice 2. The uniform practice code: 3. The Code of Procedure

1. The rules of fair practice: deal fairly with the public, ethical treatment is owed to your customer (don't lie, cheat, steal, or charge excessive commissions). 2. The uniform practice code: guidelines and regulations regarding how broker dealers do business with other broker dealers, ex. Merrill Lynch with Morgan Stanley ex. Rules for good delivery, ex-dividend dates, settlement dates, etc 3. The Code Of Procedure (call the COPs): sets forth a standard/method for FINRA to investigate violations and complaints

Why buy common stock?

Growth/capital appreciation

Bond Purchased at a Discount Relationships

If callable YTC is on the right passed YTM

Bond Purchased at a Premium Relationships

If callable YTC is on the right passed YTM

1. Commercial Paper 2. Banker's Acceptances 3. What both have

Money Market Securities 1-2: 1. Commercial Paper: unsecured promissory notes/IOUs issued at a discount sold by the most creditworthy companies in the US like Apple with a 270 day (9 month) max duration. INTEREST RATE IS CALCULATED AS A 360 DAY RATE! 2. Banker's Acceptances: a letter of credit from the bank promising that a company will pay a certain sum to another company Ex. BestBuy wants 1,000 TVs but doesn't want to send the money unless they know the TVs are coming and Sony doesn't want to send the TVs without the money so a banker's acceptance is sent as a promise of payment. 3. Both Commercial Paper and Banker's Acceptance have a small discount which represents the buyer's interest and if the owner wants the money now they can sell it on the money market.

Who can issue municipal bonds/securities?

Municipal Bonds/securities are issued by cities, counties, and states, as well as agencies, commissions, or authorities (Turnpike Authorities).

Who issues Municipal Notes, why is it issued, types, ratings (MIG) Types of ANs: TANs, RANs, BANs, CLNs, and TRANs

Municipal Notes Municipal Notes: issued by state/local governments for short term financing with low areas of revenue. Provide short term financing Used to even out a municipality's cash flow Anticipation Notes (AN): TANs (Tax AN), RANs (Revenue), BANs (Bond AN), CLNs (Construction Loan Notes to build a facility notes), TRANs (Tax & Revenue AN) Rated by Moody's Investment Grade (MIG) with MIG 1 = highest and MIG 4 = lowest

1. Equity funds 2. Bond funds 3. Sector funds 4. Index funds 5. Money market funds 6. Alternative funds

Mutual Fund Portfolio Types: 1. Equity funds: common stock fund with a growth objective or a preferred stock fund with an income objective 2. Bond funds: corporate bond fund, treasury bond fund, municipal bond fund. The investor owns a share of the mutual fund and owns a share of a portfolio of debt. Municipal bonds pay interest payments that are free from federal taxes but the income generated by a mutual fund share is classified as a dividend. If you own a share of a municipal bond fund, you receive a dividend from the fund that is free from federal taxation. 3. Sector funds: invest 25% or more of its assets in any one business sector like technology or any geography like a NE Utility fund 4. Index funds: tracks or mirrors the performance of an index like the S&P 500 as the fee is lower than other growth funds since there isn't a lot of asset picking. Can also be about rules based investing that keeps fees low but that isn't on SIE. 5. Money market funds: not a checking account, you own a share of $1 not a deposit with interest slightly higher than a bank savings account 6. Alternative funds (Alt funds or liquid alt): designed to provide retail investors with access to hedge funds. It should NOT be recommended for an overall asset class but should be recommended based on the performance, characteristics, and style of that portfolio. If the registered representative doesn't understand how the portfolio will act in certain market conditions they should not recommend it.

FOMC

The Federal Open Market Committee (FOMC): basically the right arm of the FRB who does what they say, enacts federal reserve policy and they buy & sell US government and mortgage backed obligations in the secondary market. To stimulate the economy they buy bonds which gives money to the banks which decreases the price of money (interest rates). To slow down the economy they sell treasuries and mortgage backed securities. This brings money to the Fed, since there is less supply of money the price of money goes up (interest rates).

1. Term Bonds 2. Serial Bonds 3. Balloon Maturity 4. What happens at maturity?

Types of Bond Maturities 1. Term bonds: entire amount due at maturity, most bonds. $1000 due on 12/31 2. Serial Bonds: different amounts due over a series of years. $250 due for 4 years 3. Balloon Maturity: a large payment due at a set date. $100 due for 4 years, $600 due 12/31 4. At maturity the investor receives the principal payment and their last semi-annual interest payment!

2. Revenue Bonds

Types of Municipal Securities Backed by a specific source of revenue, no voter approval. Used to build revenue producing facilities like airports and toll roads. Revenue bonds are therefore "self supporting" so a feasibility study must be performed as they are designed to be paid off within the useful life of the facility. Have a Bond Indentures / Covenants

Agency Issues Guaranteed By the Government What is a Pass-through certificate?

Ginnie Mae - Government National Mortgage Association: provides mortgage insurance Issues Pass Through Certificates backed by pools of mortgages with minimum denominations of $1,000 with monthly interest and then a principal. Pass-through certificates are fixed-income securities that represent an undivided interest (land ownership by two or more owners) in a pool of federally insured mortgages put together by a government-sponsored agency, such as Ginnie Mae.

ABC common stock has declined dramatically in value over the last quarter but the dividend it has declared for payment this quarter has remained the same. The dividend yield on the stock has:

Gone up as the price of ABC has fallen The (dividend) yield on the stock will have gone up as the price has fallen because the dividend has remained constant. Dividend yield = Annual Dividends per share / Current Share Price NOT been fixed at the time of issuance, it says common stock not preferred

1. Transfer and Ship 2. Safe Keeping 3. Street Name 4. DRP / RVP / COD 5. DRS

Holding Customer Securities: 1. Transfer and Ship: register the security in the customer's name and mail the securities to the customer address on record 2. Safe Keeping: BD to register the security in the customer's name and hold them at the BD in safekeeping and the BD can charge a fee for this 3. Street Name: Hold stock in the name of the BD as it ensures ease of transfer. If it is in their own name they have to endorse/sign it to make it transferable or a power of substitution. Also allows for SIPC insurance up to $500k with $250k in cash 4. DVP / RVP / COD (Delivery / Receipt Versus Payment & Cash on Delivery): a very conservative account, like a trust or foundation, they can't send out checks without receiving the securities so securities are paid for once they are presented to the bank or paying agent. There are 35 calendar days to settle a buying transaction. The process goes: 2 days to make the customer an owner of record, this is given from the B/D to the transfer agent who creates the certificate of ownership for the customer, who then presents the certificate/securities to the bank to be paid for. The customer who places the order only needs to verify to the BD that the bank or paying agent will pay for the securities upon presentation and this doesn't need to be verified. When they sell securities it is done in the regular way trade date + 2 but the BD has to go to the customer's bank and present the check for the bank to give them the stock. The balance on these accounts is usually $0 as all of their assets are held at the bank. 4. Direct Registration System (DRS): allows customers to hold securities electronically in their name

Mutual Fund Selling Rules Sponsor Underwriter to Selling Group Member

The sponsor may sell the shares of the mutual fund at a discount to a selling group member who has signed a Selling Agreement and they must be a FINRA member. If a customer sells mutual fund shares immediately like they changed their mind within 7 days the selling group member must return the concession to the fund distributor.

What is the Money Market?

a place where short term debt instruments (1 year or less to maturity, regardless of original maturity) trade between large institutions.

The regulatory structure of the marketplace as a whole

1. "There is the SEC and then there is god" the SEC is the ultimate securities regulator which is a direct government body 2. Self Regulatory Organizations (SROs): FINRA & NYSE, regulate the actions of their member broker dealers 3. Broker Dealers: have principals in place that ensure that all the activities of the registered agents are in line with industry regulations and firm policy

XYZ has a 7% subordinated debenture trading in the marketplace at 120. The bonds are convertible into XYZ common stock @ $25 per share. 1. How many shares can the investor receive upon conversion? 2. What is the parity price?

1. # conversion of shares = Par Value / Conversion Price ; 1000/25 = 40! Par value not CMV!! 2. Parity Price = CMV / # of common shares received upon conversion ; Parity Price = 1200 / 40 = 30. This value of the stock that makes the conversion even.

Breakpoint Schedule 1. What it is 2. Who it is available to 3. Rules attached to it

1. A breakpoint schedule provides an investor with a reduced sales charge for larger investments 2. Breakpoint sales charge reduction are available to any person, including: individuals, Corporations, and Trusts just not Investment Clubs 3. Breakpoint sale violation is if the Rep doesn't tell the investor about a sales charge reduction if they invest a little bit more. A Letter of Intent allows the client to contribute the $75k or additional $5k over the next 13 months while receiving the 5% sales charge that can be backdated to investments up to 90 days ago. Test Point: If the investor back dates a Letter of Intent, the 13 month window to meet the new investment bracket starts from the back date. If they don't come up with the $5k in the 13 months the investor may send in a check for the additional sales charge expense or the rep can liquidate the customers assets to recoup this sales expense.

1. Annual Compliance Review 2. Business Continuity Plan

1. Annual Compliance Review: must inspect each employee annually by going out to OSJ and inspect books & records there 2. Business Continuity plan: required for broker dealers designed to ensure that customers can transact business with the firm should the firms office become damaged or inaccessible. Must have backup communication between the firm and its ages, customer and the firm, and the customer must have ready access to its cash and securities. i. A specific business continuity plan must be available for each type of business it conducts (stocks, bonds, mutual funds, etc) ii. Must have a recorded backup physical facility and going out of business clause in the event of a catastrophe.

Arbitration rules: 1. After arbitration findings are: 2. Payments should be paid in what timeframe and what if they can't be paid in the timeframe? 3. Types and amounts of arbitrators required based on case money value

1. Arbitration: Final, binding, and there is no appeal 2. Awards to firm, customer, rep must be paid within 30 days or the members of the financial services industries can lose their license. If they lose a significant amount they can enter into a payment plan if the customer agrees to it. 3. Types and amounts of arbitrators required based on case money value i. Simplified Arbitration up to $50,000: Simplified arbitration the person claiming the loss writes a letter and the person being accused writes a letter and the arbitrator decides what happens. When you have a public customer involved they can request a hearing otherwise no hearing and just submission of papers. ii. $50,001 - $100,000 you have a hearing with 1 arbitrator if there is a member of the public involved it must be a public arbitrator iii. Over $100,000 may have up to 3 (1 or 3 arbitrators because there can't be a tie). If 1 arbitrator he must be public arbitrator and if 3 arbitrators 2 must be public arbitrators and 1 must be industry (majority of arbitrators must be public)

Dividend Process Questions: 1. XYZ Declares a 10 cent dividend to shareholders of record on Friday August 13th. When is the Ex Dividend Date? 2. What is the last day you can buy the stock to receive the dividend?

1. August 12th, 1 business day prior to Record Date 2. August 11th. It takes 2 business days to become an owner of record and be entitled to receive dividend on the Record Date of August 13th.

Dollar Cost Averaging Formulas: 1. Average Cost 2. Average Price 3. General rule

1. Average Cost = Total dollars invested / Total shares purchased = 400/27 = $14.81 2. Average Price = Total of purchase prices / Number of purchases = $67.5/4 = $16.875 3. You always want your average price to be higher than your average cost

Even more additional communication rules: 1. Blind Recruiting Ads Rules 2. What qualifies as generic advertising? 3. What are tombstone ads and its rules? 4. What are testimonials? 5. Free Services rules

1. Blind Recruiting Ads: All ads run by broker dealers must include the name of the broker dealer publishing ad except for blind recruiting ad "broker trainee wanted please call this #" 2. Generic Advertising: doesn't provide anything other than a list of services provided through the broker dealer 3. Tombstone Ads: imagine tombstone/security rising out of the ground into the market, it is an announcement of a security coming to market like an IPO or bond offering that has a list of syndicate and selling members where they can obtain a prospectus and it must have a no commitment statement (responding to the ad doesn't obligate investor to buy or syndicate to sell the securities) 4. Testimonials: any testimonial by compensated endorses must have credentials and must state that they are paid and if citing past results they must include "this result is not typical and may not be achieved in all cases". 5. Free services: If they advertise free services everyone must get it free with no strings attached "Everyone at this conference gets a free portfolio analysis and market report" must not include a $99 shipping and handling charge and be truly free

Hart Scott Rodino act:

1. Hart Scott Rodino (Rodino Roosevelt who was a trust buster and anti monopoly) Act: designed to ensure that companies do not create monopolies 2. Prior to completing a large merger or acquisition notice must be filed with FTC & DOJ and they can block it or require the company to divest or spin-off certain assets. 3. There is a minimum waiting period given to the FTC & DOJ of 30-days before a merger is completed. Ex. Google would never be able to take over Yahoo or Bing because they have too much of the market share already.

Mutual Fund Sales Charges 1. Max allowable sales charge 2. What must be offered at this max

1. The maximum allowable sales charge for an open end mutual funds is 8.5% of the POP. 2. If they hit 8.5% they must offer: Breakpoint schedule: more money invested the lower the sales charges Rights of accumulation: allow the investor to have both contributions and account growth to reduce sales charge in Breakpoint schedule. In the diagram all money is charged at 7% once the threshold is reached, NOT 8.5% for the first $50k Reinvestment of dividends and capital gains at NAV: they can't charge a sales charge on reinvestment of dividends and capital gains at NAV

Mutual Fund share distribution: 1. Can a mutual fund distribute its own shares directly to investors? 2. How loaded funds sell shares to investors, go through the chart 3. Can registered reps purchase shares for their own investment account at NAV? 4. Can the selling group member/broker dealer buy shares of a mutual fund for their own account at a discount? 5. Selling group member discount rules

1. Can a mutual fund distribute its own shares directly to investors? Yes but only if it is a no load fund but most are loaded funds. 2. If a loaded fund, the Mutual fund sells the Net Asset Value (NAV) to the sponsor underwriter distributor who sells shares to the investor at the Public Offering Price (POP). The Sponsor Underwriter Distributor could sell the shares at a discount to the Selling Group Member who sells the shares to investors at the POP. Investor's must ALWAYS buy shares at the POP. In order for a selling group member to be able to buy shares at a discount they must be a member of FINRA. 3. As a courtesy, registered reps may be allowed to purchase shares for their own investment account at or close to the NAV because they are a part of the business. 4. Yes, but when they want to redeem them back to the fund company they cannot just sell them directly to an investor. 5. A selling group member may only purchase shares at a discount from the POP for offers that it already has NOT in anticipation.

Compensation to foreign agents 1. What is a foreign agent? 2. The customer and foreign agent must not have: 3. What must the BD ensure? 4. What happens when an employee of a foreign affiliated B/D comes to the US and wants to speak to an institutional client doing business with them?

1. Compensation to foreign agents: when an overseas professional wants to refer business to a US B/D and wants compensation on those referrals 2. Neither the person referring the business or the customer can have any US presence 3. The BD must ensure: i. The person is not required to register with FINRA ii. The foreign agent would not be barred from registration from a different financial institution iii. They provide customers with written disclosure of compensation. iv. The Finder's agreement is available to FINRA and this agreement is maintained on its books. 4. What happens when an employee of a foreign affiliated B/D comes to the US and wants to speak to an institutional client doing business with them? That person should have a Series 7 chaperone with them.

Additional Communication Rules 1. What is classified as correspondence? 2. Website changes 3. Can the firm use the FINRA logo on their website? 4. Does the BD have to have the FINRA logo on their website? 5. A broker dealer is regional and only used in a few states but it is accessible in only a few states, what must they state?

1. Correspondence: personal style of emails 2. Websites: the rep may never post to the website without prior approval and any changes must be maintained by the member for ⅓ year accessibility rules. 3. Can the member firm use the FINRA logo on its website? Only if they have a hyperlink on the FINRA logo or in close proximity, the type/size of the logo to imply membership not being FINRA or being approved by FINRA. 4. Is the broker dealer required to use the FINRA logo on its website? No! 6. They must state which states these are and that they can only respond to inquiries in states that they are properly registered.

1. Customer Account Protection 2. Regulation S & P 3. Privacy notices what they are & mean for the customer 4. Identity Theft

1. Customer Account Protection: BD has tons of customer information that must be safeguarded with policies & procedures in place to ensure this 2. Regulation S & P: the BD must have policies and procedures in place to lock down the firm's Wi-Fi and computer system to stop hacking attacks. 3. Initial and annual privacy notice: tell the customer how and when the BD may share their information with 3rd parties The customer must be notified that as a result of sharing this information may receive solicitation or marketing offers from these 3rd parties. The customer must be given the opportunity to opt out of this information sharing by clicking a link or calling an 800 number, they cannot require the customer to write a letter because that is too cumbersome. What if the 3rd party is affiliated with the BD? Ex. Merrill Lynch is owned by Bank of America The customer can't opt out of information sharing with affiliated 3rd parties such as Bank of America. They will be able to have all of their information though i am unsure if this means they can request stopping solicitation from Bank of America. 4. Identity Theft: must have an entire policy in place to protect & identity theft known methods of stealing identity such as a phishing and plans to mitigate losses in case a customer's identity is stolen.

Mediation 1. Example situation 2. Mediation rules

1. Customer calls the rep and says "you really did you wrong putting me in that stock" and the rep admits that he should have researched that better. Customer lost $50k and wants it back but the rep doesn't think he owes the whole amount. That would go to mediation if both parties agree to meet in the middle 2. Mediation rules i. Non-Binding dispute resolution ii. May terminate at any time iii. Test Point: Mediator may not serve as the arbitrator

1. Disciplinary actions against a rep FINRA reporting 2. Actions by another regulator disciplines a rep 3. Employer disciplines their own rep 4. Clearing firm disciplines a rep

1. Disciplinary actions against a rep: FINRA must be updated immediately (within 10 business days and in no circumstances more than 30 days) 2. Actions by another regulator disciplines a rep: they must update their form U4 to disclose the action to FINRA 3. Employer disciplines their own rep: if they withhold commission greater than $2.5k or suspend them for violating firm policy for a period of time and must update their form U4 and FINRA must be notified. 4. Clearing firm disciplines a rep: must update their form U4 and FINRA must be notified.

Characteristics/Benefits of Open End Mutual Funds

1. Diversification of assets (one investment allows you to invest in hundreds of companies) 2. Professional management by the best in the business with low minimum investment and easy tax reporting with form 1099 3. Reduction of sales charges through breakpoint schedule, letter of intent, and rights accumulation. 4. Automatic reinvestment of dividends and capital gains distributions. 5. Structured withdrawal plans 6. 30-day emergency withdrawal: can withdraw for up to 30 days and reinvest at the current NAV if within 30 days

Regulation M-A:

1. Regulation M-A: requires summary term sheet be provided to investors MASMS 2. Term sheet must have a bulleted disclosure of all the main points in plain English on the 1st or 2nd page of the disclosure document. It includes: 3. Description of transaction, price received by holders, reason for transaction, and accounting and tax considerations for the entity and the holder of the security.

1. Educational / Coverdell IRA 2. 529 Plans 3. What is a Qualified Educational Expense 4. Educational / Coverdell IRA vs. 529 Plans for financial aid

1. Educational / Coverdell IRA: max contribution is $2k/year after taxes and can grow tax deferred. It is owned by the student and they must be used for qualified educational expenses. 2. 529 plans: state based plan that allows a family member to contribute a significantly larger amount of money than an IRA. Money goes in after taxes, grows tax deferred, and may be used for qualified education expenses. It can be established in two ways: i. Prepaid tuition plan: I went to NYU and my kid is going to NYU so the parent pre pays the current tuition rate and guarantees the kid goes to this school at a cheaper tuition rate. If the kid's grades don't qualify / can't get into the school then you can use the tuition for another university or college. ii. College savings account: I don't know where my kid is going to college but he is GOING to college. I am going to start saving now so that whenever he goes we have money to pay for those expenses. 3. Qualified educational expenses: room, board, housing, books, computers, etc. Not beer money! That would be a taxable withdrawal. 4. When a student has a Coverdell or Educational IRA that account is deemed to be an asset of the student and is calculated at the student contribution rate for qualifying for financial aid which is about 20%. The 529 plan is deemed to be an asset of the person who put the money in the plan. The child/student is the beneficiary, because the donor is the owner the financial aid calculation for the family contribution rate is much lower. Which plan is better in the event that a student needs financial aid? 529 plan

ERISA Part 2 1. What it is 2. ERISA 404C Safe Harbor what it is and eligibility rules 3. HSA i. what it is, what it is used for (qualified expenses and over the counter rules) ii. who contributes and tax rules iii. How and when HSA can be established iv. Rules upon HSA owner death for spouse and children

1. Employee Retirement Income Security Act of 1974 (ERISA): regulates how all private sector pension plans are administered for the benefit of employees 2. ERISA 404C Safe Harbor: the employee selects how they are invested and the plan administrator manages their accounts. The safe harbor protects the plan administrator from being sued if the employee retirement account doesn't perform as well as expected. For the Safe Harbor to be in effect certain requirements must be met: i. Must have a minimum of three portfolios: Safety, Income, and growth ii. Must be reasonable to switch between different plans 2. Health Savings Account (HSA): i. Often used to offset high deductibles in health insurance plans Can be used for qualified health expenses: doctor's visits, prescriptions, reimburse the employee for out of pocket health expenses Test Point: If the individual wants to use the money in a health savings account to buy an over the counter medication (Advil) they must get a prescription from a doctor. ii. Employee and / or employer may contribute, but money goes in after taxes. Growth may be used tax free for qualified expenses iii. How & When HSA can be established: If person is eligible on December 1st they make make a full contribution of that year called the: First Day of the Last Month rule iv. If the owner passes away and it is given to the spouse it becomes the spouse's HSA IF given to someone more distant like a child it ceases to be an HSA and the money is put into a different account type

ERISA Part 1 1. What it is 2. Who is eligible / allowed to participate 3. Funding 4. Beneficiary 5. Vesting Guidelines 5. Fiduciary responsibility of what the employee must receive for that account

1. Employee Retirement Income Security Act of 1974 (ERISA): regulates how all private sector pension plans are administered for the benefit of employees 2. Who must be allowed to participate, who is eligible, which is every full time employee. Full time employee: More than 1,000 hours per year, has been working at the employer for more than one year, and are older than 21 than they must be allowed to participate in the plan sponsored by their employer 3. Funding: how money gets into the plan about if the employee or employer contributes or both 4. Beneficiary: normally selected for these accounts which is who gets the account if the account owner passes away 5. Vesting Guidelines: the process by which the contributions made by the owner become the property of the employee Ex. I'm 70% vested, meaning that 70% of the money in their plan is their money and they can take it at any time. The employee is immediately 100% vested in their own contributions; that money is always the employees. The Vesting schedule only talks about how the money put there by the employee becomes property of the employee. 6. Fiduciary responsibility: When an employee initially joins the plan they must get the plan in writing and must get at least annual reports on the account.

Fairness Opinions and Required Disclosures on them

1. Fairness Opinions: a B/D or adviser issues an opinion on M&A Deal. "Is the price fair?" 2. Required disclosures: i. Are they being paid or being paid based on success ii. Material relationship to show any conflicts of interest such as being clients iii. If opinion was approved by a fairness committee iv. If the information was independently verified.

Financial Exploitation of Seniors 1. What it is and what is needed to create it 2. What the adviser should inquire about 3. You have a 79 year-old customer who takes out $2k a month from her brokerage account and twice a year she moves $5k-8k to travel to see family. One day the client calls you to send $35k to a bank in another sent. What must the rep ask and do? 4. The rep has an 80 year old client who is the father of a 42 year old daughter who is also a client. The 80 year old client and the rep speak about twice a month and the 80 year old keeps forgetting what they were talking about. Each time they speak the client keeps asking to invest money in a particular mutual fund. The daughter now says she thinks her father may be losing mental capacity. What should the registered rep do?

1. Financial Exploitation of Seniors: Special attention has to be given for accounts of anyone over 65 should obtain the information of a trusted contact that the rep can call in limited circumstances. 2. The rep can inquire about suspicious transactions and about the welfare of the customer. Traditionally you can never share information to a third party but you can to a trusted contact. 3. The registered rep is required to ask what it is for and if the client seems evasive or unsure to this question they should suspect this could be elder abuse. They can withhold sending this money for 15 days while they investigate the recipient and should contact the trusted contact. If at the end of the 15 days they have significant suspicions about the transaction they can withhold for another 10 days to contact the authorities about potential elder abuse. 4. Never have a meeting with a client and invite the daughter as she has no right to know anything about that account as she is not a client. You could tell the daughter to get power of attorney but this is beyond the scope of a registered representative. Best answer: consult the principal or execute the father's order and mark it unsolicited.

1. Normal Yield Curve 2. Inverted Yield Curve

1. The interest rate on a 1 year loan should be lower than a 30 year loan and this is present during prosperity. It also prices in the market's belief on future inflation. 2. An inverted yield curve is indicative that a recessionary environment is about to take place and tends to reverse itself fairly quickly.

1. What made the Investment Adviser rules? 2. What is an Investment Adviser? 3. Who is an Investment Adviser? 4. Who is not an Investment Adviser?

1. Investment Advisers Act of 1940: sets forth guidelines for business requirements and activities of investment advisers 2. What is an Investment Adviser? An entity that is business to provide advice for a fee 3. Who is an investment adviser: A person may be considered an adviser if they hold themselves out to be in the business of providing advice for a fee As defined an investment advisor is anyone who: i. Gives Advice ii. Engaged in the business of advising on investment matters iii. Receives compensation for advice regardless on if the individual acts on that advice 4. Who is not an investment adviser: lawyers (how to set up a trust), accountant (put money in municipal bonds for taxes), teacher (teacher tells a teacher about benefits of participating in 403b plan), or engineer (is a bridge or tunnel feasible) use acronym LATE (Lawyer Accountant Teacher Engineer). If any fees are received on advice or commission is received by sending you to an investment adviser than the person receiving said fees must register as an investment adviser.

1. Monetary Policy: who is controlled by and what is it? 2. How to stimulate the economy, what happens? 3. How to slowdown the economy, what happens?

1. Monetary Policy: controlled by the Federal Reserve Board (FRB) and controls the amount of money that is in circulation and the cost of money (interest rates) 2. Stimulating the economy: the FRB reduces interest rates which makes people more likely to borrow and they increase the money supply to decrease interest rates and make more money available for borrowing What happens? Stimulate: When money supply increases (fed buys treasuries/bonds), interest rates reduce, CPI decreases, and bond prices go up 3. Slowing down the economy: the FRB increases interest rates and decreases money supply to make it more costly to borrow. Ex. of how higher interest rates slow down demand: buy $7k of TVs now because of 0% interest or buy one TV at a time due to 9.9% interest to avoid paying more What happens? Slow down: When money supply decreases (fed sells treasuries/bonds), interest rates increase, CPI increases, and bond prices go down

SIPC coverage rules on defining separate customers and Mr. & Mrs. Jones examples

1. Mr. Jones, Mrs. Jones, Mr. & Mrs. Jones, and Mr. Smith are all separate customers! This would also include IRAs or FBOs for their kids; they are all separate customers. 2. Only thing that is not a separate customer is if Mr. Jones had a cash or margin account and it would only be covered to the amount of equity or securities actually owned by Mr. Jones in the account not the market value (as margin accounts have borrow a portion of the purchases 3. Mr. Smith is not fully covered on his cash as cash is only covered up to $250k of cash not the full $300k. He would become a general creditor to the broker dealer and would need to file a claim to get the excess $50k.

Retiring and refunding bonds: 1. Normal way 2. Tender offers 3. Refunding 4. Sinking Fund 5. Pre refunding

1. Normal way: Bonds are retired or redeemed upon maturity 2. Tender offers: when a company retires all or a portion of its outstanding bonds at a by making and offer to debt holders at a specified price and period of time. 3. Refunding: when companies lend new bonds to pay for old ones Sinking fund: a place where monies are placed to retire bond principal, cannot be used for other purposes 4. Pre refunding: issuing new bonds prior to a call date or maturity of an outstanding bond issue. You put bond money in an escrow account and are now AAA since they will be paid off for sure.

1. Numbered Accounts 2. Option Accounts 3. Margin Accounts

1. Numbered Accounts: if a person wants an account only documented by a number or a symbol this is possible but there must be documentation within a BD stating who the owner is (ex. celebrity). 2. Option Accounts: customer needs to sign option risk disclosure document and must sign an options agreement within 15 days after establishing an initial position in an option. If they don't return the option agreement within 15 days they may not open any new options but can still liquidate existing positions. 3. Margin Accounts: customer must sign Margin Agreement that contains: Credit agreement: tells the customer how & when interest will be charged Hypothecation agreement: the customer pledges their securities as collateral for the loan Loan consent agreement: the customer allows the BD to loan out their stock certificates to customers that want to short their position. They are not required to sign but if they don't sign it the BD is not required to lend them money.

Opening Customer Accounts: 1. New account required information for all new accounts 2. Types of Investment Objectives 3. Verification of this information 4. Can you make a recommendation to a customer, if they didn't provide all the information provided under the new account form? 5. When do they not have to sign any forms when making a new account?

1. Opening Customer Accounts: New account information for all new accounts i. Full name and address (not a P.O. box) ii. Home and work phone numbers, no email address is required iii. Social security or tax ID number (done through tax form W 9) iv. Employer, occupation, and employer's address (need to know if the customer is employed by a bank, B/D, or if employed by a publicly traded company to be tracked for insider trading) v. Investment objective, income, net worth (what are there assets & liabilities), risk profile All new accounts must be signed / approved by the principal Rep name will be noted (both who opened and is managing the account), but they don't have to sign anything 2. Types of Investment Objectives: i. Growth: want their money to grow over time equity/stock growth ii. Income: they want current income bonds/preferred stock 3. Customer profile information must be sent this within 30 days and to be signed and returned by customer within 30 days i. If they don't sign and return the information it is deemed to have been approved Customer information must be verified every 36 months The account profile must be updated within 30 days if the financial picture changes like an inheritance, raise, new job, divorce, or winning the lottery 4. Can you make a recommendation to a customer, if they didn't provide all the information provided under the new account form? Only if the information is given is enough to determine suitability for example: net worth, investment objective, and their risk tolerance is enough If there is not enough information you can only make unsolicited orders or invest them in the money market if you have to 5. Rules don't require the customer to sign anything when they open up a cash account

1. What is an Option? 2. What is an option buyer and various names? 3. What is an option seller and various names? 4. Car example

1. Options: a 2 party contract between a buyer an a seller that results in a "Zero Sum Game" 2. Names of Buyer and their role: buyer, holder, owner, long, pays premium, has rights, wants to exercise 3. Names of Seller and their role: seller, writer, short, receives premium, has obligations, wants expiration 4. Ex. Most of us have cars and we are concerned that cars may be involved in an accident. We buy insurance and we pay a premium for this insurance. The insurance takes this premium from you and if the car is involved in the accident they will fix your car. Buyer is the car holder, they pay a premium and have rights to exercise in the event of a crash and want to exercise to get full value Seller is the insurance company, they receive the premium, have an obligation to the fix the car in an event of a crash, and want the insurance to expire so they don't have to pay to fix your car and just make money

Regulation S-K: 1. What it is 2. Various rules it created

1. Regulation S-K: regulates disclosures for mergers and acquisition SKM&A 2. Various rules it created i. Tender Offer statement: lays out the terms of the offer in plain English ii. Proxy statements: must be forwarded soliciting votes from stockholders to vote in support of or reject the merger iii. Registration statements: issued as a result of merger & acquisition must be filed at the SEC and must be disclosed to the interested parties iv. Earnings projections: can give earnings projections and management projections for the future of the company as long as they are reasonable. v. Companies will sometimes pay an outside reviewer to insure an understandable tender offer statement and projections.

Sarbanes Oxley: 1. What is it? 2. What rules did it create?

1. Sarbanes Oxley: regulations that came into play because executives of large companies used to claim they didn't know what was in the 10K's and 10Q's to hold executives accountable 2. Rules it created i. CEOs and CFOs must certify accuracy of 10Qs and 10Ks. ii. Must have internal controls for their accounting procedures. iii. Companies using non GAAP must include GAAP calculations. iv. If they are non GAAP or pro forma reporters they must still include a GAAP comparison v. Must disclose all material off balance sheet assets & liabilities Companies used to move liabilities off their balance sheet to make it look better to investors vi. Public companies may not make loans to officers as they would make great loans to officers and in some cases the officers wouldn't pay it back. vii. All publicly traded companies must have a code of ethics for senior executives and any breach of this code is a reason for termination.

SIPC 1. What SIPC is 2. When/how it was started 3. Amount of money insured per customer 4. Who must be SIPC members 5. Excess insurance rules

1. Securities Investors Protection Corporation (SIPC): provides customer insurance/coverage to customer in case a broker dealer fails like FDIC insurance 2. Organized/started under the securities investment protection act of 1970 3. $500,000 per SEPARATE customer with up to $250,000 may be in cash not money market fund or cash equivalents 4. All broker dealers must be members of SIPC 5. If broker dealer carries excess insurance must notify customers 30 days prior to any change on this insurance

TSAs & TDAs 1. Who are they established for? 2. What type of accounts are these?

1. Tax Sheltered Annuities / Accounts (TSAs) & Tax Deferred Accounts (TDAs): Established for employees of non-profit organizations and public sector employees. Retirement plans for teachers and city employees like 403b plans 2. If you see Tax Sheltered Annuities / Accounts & Tax Deferred Accounts are all Qualified accounts. Tax Deferred Annuities are NON QUALIFIED Accounts . Tax Deferred Annuities are an annuity contract sold by a rep to an investor seeking future income.

Telemarketing Rules: 1. Which customers does this apply to? 2. When can telemarketing occur? 3. What must the firm maintain? 4. The firm must not have 5. Do not call list rules 6. What if a customer is on the firm do not call list but they have an account with the firm? 7. What if the person is a college buddy of yours but is on the firms do not call list? 8. What if your customer tells you to call them at 11pm?

1. Telemarketing Rules: regulates how POTENTIAL customers (not current customers) are contacted at HOME not at their place of business 2. Must be done in the person's time zone between 8am to 9pm 3. Firm must maintain a do not call list that is no more than 30 days old 4. The firm must not have a Caller ID block: it must display the name of the firm and the number as well as the caller must give their name, the firm name, office address & location if requested 5. If the customer requests to be put on the do not call list no one from the firm (ex. Fidelity do not call list includes all Fidelity offices) can call them for 5 years. 6. What if a customer is on the firm do not call list but they have an account with the firm? The only reason you can call them is to verify their mailing address 7. What if the person is a college buddy of yours but is on the firms do not call list? Only if to catch up with them not call them about opening a new account 8. You can contact people anytime at work and if your customer tells you to call them at 11pm at night that is when you call them. The 8am to 9pm is about POTENTIAL customers

Tender Offers 1. What is it? 2. How it can be bought and what happens if terms change 3. Can you short tender? 4. Covered calls and the amount of shares you can tender 5. To tender, what does the customer have to exercise?

1. Tender offers: A tender offer is a bid to purchase some or all of the shareholders' stock in a corporation. Tender offers are typically made publicly and invite shareholders to sell their shares for a specified price and within a particular window of time. This is offered when a corporation wants to buy back its securities for various treasury security reasons. 2. This tender offer must be open for at least 20 days, they must be willing to buy the security at the stated price for 20 days from the day of announcement or 10 days from the term change whichever is greater. It must be bought through the tender, not the open market. If terms change must remain open for at least 10 days from the date of change 3. You cannot short tender, you can't borrow stock and sell it in the tender, you can only short tender stock that you have actually longed. 4. If you have written calls, covered calls, against your stock the number of calls you have written reduces the number of shares you can tender. How many shares can you tender once you have written covered calls? Ex. Investor long 1000 shares, it short 3 April 50 calls, and put 2 April 50 puts The 3 call short reduces the amount they can tender by 300 shares and can tender 700 shares. 5. If the person has call options or convertible / convertible preferred bonds and they want to tender they have to exercise that option or convert the bond to preferred to exercise that tender.

What are the different parts of an Investment Company? Including what is a mutual fund expense ratio and what does it say?

1. The Board of Directors: define investment objectives, determine which portfolios are offered, actually run the fund company, and a minimum of the 51% of the board must be not interested, meaning they are not employed by the investment company. The Board of Directors is there to protect the investor. 2. The Investment Adviser: Manage the investment portfolio and pick the assets that are best able to meet the investment objective this is a company not just one person! They receive a fee for this service which is a percentage of the net asset value of the fund, which is the biggest expense of the fund! The more aggressive the fund's growth objective the more expensive the fund is. 3. The Custodian Bank: Holds the fund's cash and securities, the broker dealer handles the customers cash and securities 4. The Transfer Agent: Issues, cancels, redeems shares, and handles name changes 5. The mutual funds expense ratio is how much it costs the investor for them to manage your money and shows how well the mutual fund manages its expenses from the previous four components.

The Insider Trading & Securities Fraud Enforcement Act of 1988 1. What it is 2. Tipper 3. Tippee 4. Law suits from contemporaneous traders 5. What is non-public information 6. What can get you in trouble as a tipper 7. What is considered public information 8. Whistleblower payment

1. The Insider Trading & Securities Fraud Enforcement Act of 1988: sets forth penalties for the tipper and the tippee 2. Tipper: provides information and can be penalized up to $1M 3. Tippee: receives and acts on information with penalties for the greatest of $1M, 300% of the money they made, or 300% of the money they avoided losing called treble damages. If they don't do something about the information then they didn't violate anything. Ex. If an adviser is talking with the company president while playing golf and comments "the stock has been doing well and I'm consider selling it" and the president says "I wouldn't do that if I were you I think things will get better" and the adviser now holds the stock they didn't violate anything since they didn't act on anything. 4. Contemporaneous traders can sue insider traders for recovery Ex. someone buys the stock from selling it on insider information and the stock then falls heavily they can then sue the insider trader for recovery 5. Non-public information is information that is not known by people outside of the company 6. You can get in trouble as a tipper if the information will materially affect the company in the present or in the future 7. Information becomes public when released to the public through a nationally recognized new sours: 8k, press release, Facebook, Twitter 8. 10% of the amount recovered may be paid to informants or whistleblowers Ex. a person is fined $100M the whistleblower gets $10M

The Mutual Fund Prospectus 1. What it is 2. What it contains 3. When it should be updated and is able to be used 4. What is a mutual fund offering/term sheet and its rules? 5. What if a customer wants more information?

1. The Mutual Fund Prospectus: the offering document for the mutual fund that should be given at or before the sales presentation 2. It contains the fund's investment objectives, sales charges, management expenses, fund services (check writing or exchange privileges), and performance data for the past 1, 5, & 10 years or for the life of the fund (ex. Only been open for 7 years so shows 7 years of data instead of 10) this should also be compared to the overall market in a relevant graph. 3. Should be updated by the fund every 12 months, update is required every 13 months, may be used by a representative for up to 16 months and should be discarded after 16 months have passed. These dates are from the date of the financial information of the prospectus not when it was released. 4. A mutual fund offering/term sheet could be used to solicit purchases so long as a link to the prospectus was provided to the investor shortly thereafter. 5. Statement of Additional Information: if a customer wants more information about a fund this provides more information on: fund's securities holdings, balance sheet, income statement, portfolio turnover date, compensation paid to the board of directors and investment advisory board.

Treasury Bill Pricing 1. Bid vs Ask 2. How are they Priced

1. The T Bill is quoted as a discount to its face value so 2.91% less for bid and 2.75% less for ask which is more expensive than the current bid due to less discount. Ex. Store t-shirt 20% discount vs. 10% discount you want the 20% which represents the bid discount. 2. Priced as a percentage of par in 1/32 of 1% or in 32nds of a percent A quote of 92.02 translates into: 92 2/32% x $1,000 = $920.625 A quote of 98.04 translates into: 98.125% x $1,000 = $981.25 In the percentage, the right of the decimal is always in 32nds

The US Patriot Act / the Bank Secrecy Act 1. What it is? 2. What policies must BD have? 3. What must be filed at various transaction types and amounts? 4. Red Flags 5. Who maintains the OFAC list? 6. Penalties for money laundering or turning a blind eye to it 7. AML policies

1. The US Patriot Act / the Bank Secrecy Act: anti money laundering (AML) 2. What policies must BD have? i. Broker dealers must have written policies to detect suspicious activity such as terrorists/criminals in money laundering ii. The firm must designate a principal to ensure compliance 3. What must be filed at various transaction types and amounts? i. Suspicious Activity Report must be filed for any transaction of more than $5,000 that appears questionable Keep records of international wires of $3,000 or more Currency Transaction Reports required to filed for $10,000 in cash or more in one deposit or a series of deposit that add up to $10k 4. Red flags: If a customer doesn't seem to care about profits, losses, or expenses this is a red flag for money laundering. Customer puts money into an account quickly and then removes it quickly. Requests to journal money to another account at a broker dealer that seems unrelated. 5. Financial Crimes Enforcement Network (FINCEN) maintains the OFAC list of known and suspected terrorists and money launderers 6. Up to 20 years in prison and $500,000 fine if convicted of money laundering or turning a blind eye to it. 7. When a broker dealer writes its AML policies it identifies an AML officer who receives communications from OFAC about known & suspected money launderers. If they have a match they must replay within 14 days and the broker dealer may not inform the individual of being on the OFAC list. AML Program must be certified by senior firm management and AML officers must be identified to FINRA and they have to be knowledgeable about the Bank Secrecy Act. The AML program must be tested every year which is tested by non-AML program employees. When the AML officer leaves the new AML officer should get the program recertified.

1. What the Call Buyer picture says 2. MG 3. ML 4. BE and what it means and what they want

1. The buyer of this call contract has the right to buy 100 shares of XYZ at $50 until June and paid $7 per share for this right or $700 total. Every option contract covers 100 shares of stock! 2. Maximum Gain (MG) = unlimited 3. Maximum Loss (ML) = $7 per share or $700 total which is the premium you paid Break even (BE) = strike price + premium = 50 + 7 = BE is at $57/share. Any more than BE per share we make unlimited money and any less per share up to $7 we lose money Want the stock price to go up for unlimited gain

FINRA Bylaws part 4 The code of arbitration 1. What the code of arbitration is 2. What needs to be disclosed to the customer 3. The only situation(s) where a FINRA member doesn't have to go through arbitration 4. What is Arbitration

1. The code of arbitration: all about money, somebody has lost money and is upset about it. All industry participants are required to settle all disputes through arbitration (BD vs. BD, company vs. employee, company vs. company). The only person that doesn't have to agree to arbitration is a member of the public but they usually sign a document about this called the pre-dispute arbitration clause. 2. Three disclosures of the predispute arbitration clause: these must appear prominently above the signature line i. All results of arbitration are final, defining, and no appeal ii. Limited access to discovery iii. Results are not based on any particular rule or law 3. Don't have to go through arbitration for harassment or discrimination and the offended party can sue 4. Arbitration: a private process where disputing parties agree that one or several individuals can make a decision about the dispute after receiving evidence and hearing arguments. Arbitration is different from mediation (meet in the middle please) because the neutral arbitrator has the authority to make a decision about the dispute.

1. What the Call Seller picture says 2. MG 3. ML 4. BE and what it means and what they want

1. The seller of the call sells 100 shares of XYZ at $7 at the strike price of $50 2. MG = $7 per share or $700 total which is the premium 3. ML = unlimited, if XYZ goes from $50 to a share to $800 a share we would have to buy it at this ridiculously high price and deliver to the buyer at $50 a share losing $750/share 4. BE = SP + Prem = 50 + 7 = $57/share. Any more than BE per share we lose unlimited money, any less per share up to $7 we make money Want the stock price to fall

Things not covered by SIPC

1. Things not covered by SIPC: commodities, the broker dealers private trading account, officers & directors of broker dealers if they are in a position to make policy or cause failure of a broker dealer, and a subordinate lender (someone who has lent money to a broker dealer). 2. If a customer has stock registered in their own name and held in safekeeping it is not provided with SIPC coverage because it doesn't require it since it is readily identifiable as belonging to the customer like stock held in street name. 3. Only covers stock held in street name Ex. Charles Schwab has 100ks of people who own Apple and it is registered in the name of Charles Schwab and they don't know who owns the stock. 4. Ex. If Mr. Jones had 1000 shares of google registered in his name held at the broker dealer that is worth more than $1m it doesn't need SIPC coverage as it is identifiable to belonging to Mr. Jones

1. Traditional and Roth IRA rules about having both 2. Traditional to Roth conversion

1. Traditional and Roth IRA rules: Any amount you contribute to a traditional IRA reduces the amount you can contribute to a Roth IRA and vice versa. 2. What if someone wants to convert their Traditional IRA to a Roth IRA The amount that they convert is subject to ordinary income taxes but not penalty taxes if they were younger than 59 ½

1. Calls & Puts Buyer vs Seller chart 2. Bull & Bear origin 3. Which two are bullish? 4. Which two are bearish?

1. look at picture 2. Bull & Bear origin: Bull lowers its head and then strikes upward, Bear swipes down with paw. 3. Which two people are Bullish? Call buyer and Put seller 4. Which two people are Bearish? Call seller and Put buyer

All of the following are corporate money market instruments except: A. Negotiable CDs B. T'Bills C. Federal funds D. Commercial Paper

B. T'Bills Explanation: Gov. money market instruments not corporate Federal Funds are loans between banks that I guess could be loaned to corporations? Shitty question.

1. What is the maximum duration of a right? 2. Is the subscription price high or lower than the stock price? 3. What does the preemptive right always allow

Rights of Stockholders Questions: 1. 45 days 2. lower 3. the investor to maintain their percentage of ownership

Broker Dealer hosted by other Financial institutions: 1. Financial Networking Arrangements 2. Employee Identification 3. What must the host allow? 4. What must be stated about BD products? 5. Could the BD advertise their products on the screen at the bank?

Broker Dealer hosted by other financial institutions: 1. Financial networking arrangements: this happens when a B/D is given an on site location to network with clients (ex. bank) 2. BD Employees must be clearly identified to help people know they are not bank employees 3. Bank/host institution must allow FINRA & SEC onsite access 4. All products must clearly state NOT FDIC insured and products are subject to the loss of principal 5. Could the B/D advertise their products on the screen of the ATM at the bank? Yes, so long as it is made clear that these products are not FDIC insured

All of the following trade with accrued interest except: A. Treasury Bonds B. Negotiable CDs C. Income Bonds D. Revenue Bonds

C. Income bonds - only pay interest if they have enough income to do so! T'bond: issued at $1,000; pay interest semi-annually 10 - 30 years Negotiable CDs: is a Certificate of Deposit that can be traded between two parties with a $100,000 minimum with accrued interest. FDIC insurance will only insure the first $250,000. Revenue Bonds: type of muni bond that is backed by a specific source of revenue and doesn't need voter approver that should be "self supporting"

All of the following are reasons a corporation would attach a warrant to their bond except: A. To save money B. To make the bond more attractive C. To increase the number of shares outstanding when the bonds are converted D. To lower the Coupon

C. To increase the number of shares outstanding when the bonds are converted. Reasoning: The corporation wouldn't want to increase the number of shares outstanding, this isn't a good thing

1. Mortgage Bonds 2. Equipment Trust Certificates 3. Collateral Trust Certificates

Collateralized Bonds: 1. Bonds: backed by a pledge of large real estate, like UF's campus 2. Equipment Trust Certificates: backed by a pledge of large equipment, planes & industrial equipment just not cars since they depreciate too quickly 3. Collateral Trust Certificates: backed by a pledge of securities by the issuer. Cannot pledge their own companies securities.

1. Deferred compensation 2. Defined benefit plan 3. Defined contribution plan 4. Profit sharing 5. 401ks 6. Payroll deduction vs. Salary reduction

Corporate Plans: 1. Deferred Compensation: established by a high income earning employee and is entitled to earn a some of money but they would rather earn that money later during retirement as they will be in a lower tax bracket then Ex. $200k bonus for construction manager who is 4-5 years away from retirement for finishing earlier than projected. A deferred compensation plan defers making payments on this $200k owed to the employee until later. Deferred Compensation plans are non-funded so the company doesn't put the money to the side for the employee so if they go out of business he likely won't receive that sum. 2. Defined benefit plan / Pension Plan: the ultimate benefit is known ex. a police officer getting a 60% pension of their yearly salary upon retirement. They are very expensive for employees to provide and the people who get the most out of it are the highest earners closest to retirement. The entire investment risk is borne by the employer. If the money they put away into the plan doesn't provide enough income/growth to provide the benefit the employer has to make up the difference. 3. Defined contribution plan: what is known is the contribution not the ultimate benefit/value. Ex. Employer will match up to 6% of your salary into your retirement plan 4. Profit sharing: company must have continuing and significant profits to be eligible Allows the employer to share profits during good times to employees but not during bad times of losses 5. 401ks: can be any type of corporate plan but more likely to be a defined contribution plan 6. Payroll deduction vs. Salary reduction: i. Payroll deduction: Non Qualified plan, an employee may contact the payroll person to put $500 from each check into a mutual fund account ii. Salary reduction: Qualified plan, established by the employer to contribute into 401k or pension plan before taxes. You receive a salary before taxes and get your check from payroll after taxes.

1. What is a customer agreement 2. What clauses does it include? 3. Where do these clauses have to be located?

Customer agreements (arbitration): 1. Most B/Ds have customers sign a customer agreement to sign a pre-dispute arbitration clause making the client waves their right to sue / jury trial 2. Clauses it includes about arbitration: i. Arbitration is Final, binding no appeal ii. Discovery process is limited iii. Findings are not based on any legal reasoning or law (just business conduct standards within the financial services industry) 3. These 3 points should be included right above the signature line If the customer asks for a copy of this agreement it must be provided within 10 days

The price of which of the following would be most affected by a change in interest rates? A. Treasury Bills B. Preferred stock C. Commercial paper D. Treasury Bonds

D. Treasury Bonds Explanation: The prices of long term bonds will be more sensitive to changes in interest rates than the prices of a short-term debt. As rates change in the market place the price of long term bonds will change the most.

Who controls the dividend process dates?

Declaration Date - The date the board decides to pay a dividend Who controls this date? Company Ex Date - The first day buyers are not entitled to receive the dividend - 1 business day prior to Record Date. FINRA sets this date! Who controls this date? FINRA Record Date - The date when an investor must be an owner of record to be entitled to receive the dividend. It takes 2 business days to become an owner of record. Issuer must notify FINRA of a pending dividend at least 10 calendar days prior to the record date. Who controls this date? Company Payment Date - The date the company pays dividend to shareholders Who controls this date? Company

What does the Registrar do?

Ensures through audit that the corporation doesn't issue more shares than they our authorized. Shareholders must approve an increase in share number.

Price and Yield relationship

If interest rates of the market go down, the price of bonds goes up. If interest rates on the market go up, the price goes up. Reasoning: Since interest rates are now at 6%, your 8% bond looks really good so it is worth more than the 6% or relative to the rest of the market.

1. CPI 2. Constant Dollar Risk 3. Inflation 4. Deflation

Inflation Types, Measures, and Phenomenon 1. Consumer Price Index (CPI): a basket of goods and services that people use in their daily lives that is used to measure inflation. If the CPI is rising inflation is present 2. Constant Dollar Risk: the risk that fixed payments will not be able to buy the same amount of goods & services as time goes buy, ex. $3k pension over 20 years 3. Inflation: the persistent increase in prices over time, the Federal Reserve Board sets a certain goal percentage 4. Deflation: a persistent decrease in prices that drives prices down and manufacturers continually lose money when trying to sell goods and can wipe out an economy. Only ok with old technology becoming less valuable like TVs

1. Discount Rate 2. Federal Funds Rate 3. Broker Call Loan Rate 4. Prime Rate 5. LIBOR

Interest Rates: Discount Rate: the rate set by the federal reserve board that it charges its member banks for loans directly from the fed Federal Funds Rate: the rate banks charge each other on overnight or slightly longer loans, the Fed sets a target for this rate and then the marketplace ultimately decides what the rate is. A federal funds loan can be sold in the money market Broker Call Loan Rate: the rate that banks charge broker dealers on loans to finance their customers margin purchases What is a margin purchase? Basically buying securities on credit and the margin is the initial payment made to the BD for the asset. Ex. 10% down 90% financed Prime Rate: the rate that banks charge their best corporate customers, basically their best rate LIBOR (London InterBank Offered Rate): most widely quoted and used measure of interest rates in the world, similar to the fed funds rate as it is between banks

What bonds are most responsive to interest rate changes?

Interest rates on short term bonds change more in amount and more quickly than the interest rates of long term bonds since they must match the market to be competitive. BUT, the price of long term bonds are more sensitive to interest rate change than short -term debt!!!!!!!!!!!!!!!!!!

1. IV 2. TV 3. A certain combination of these two makes what 4. XYZ April 50 call @ 3.20, XYZ @ 51 . What is IV and TV? 5. XYZ April 50 call @ 1.20, XYZ @ 49. What is IV and TV? 6. XYZ April 50 put @ 1.40, XYZ @ 49. What is IV and TV? 7. XYZ April 50 put @ .70, XYZ @ 50.75

Intrinsic Value and Time Value: 1. Intrinsic value (IV): the in the money amount 2. Time value (TV): the amount by which the premium exceeds the intrinsic value or TV = Premium - IV The more time to expiration the greater the time value 3. An options premium = intrinsic value + time value 4. The amount in the money for IV = $1. TV = 3.2 -1 = $2.2. 5. No amount in the money so IV = 0 NOT -1. TV = 1.2 - 0 = $1.2 6. Amount in the money IV = 1. TV = 1.4 - 1 = $.40 7. Amount in the money IV = 0 NOT -.75, TV = .7 - 0 = $.70

Taxation of Municipal Bonds Interest based on type of bond/location

Investment objective is income, interest earned by investors in municipal bonds is free from federal taxation. Territory bonds like Puerto Rico or Guam are free of all taxes.

Overlapping Debt: What is it and who is it issued by?

Issued by another municipal entity such as a county, neighboring town, and municipal authority. Ex. when counties tell towns to pay back a percentage of a bond since their road project helps all towns within the county. States do not issue overlapping debt!!

3. Negotiable CDs, What is a CD? 4. Repurchase Agreement 5. T'bills 6. Treasury and Agency Issues

Money Market Securities 3-6: 3. Negotiable CDs: a Certificate of Deposit that can be traded between two parties with a $100,000 minimum with accrued interest. FDIC insurance will only insure the first $250,000. What is a CD? a Certificate of Deposit issued by a bank to a person depositing money for a specified length of time. 4. Repurchase Agreement: a fully collateralized loan Ex. BD needs money now but doesn't want loan paperwork/hassle. They sell securities to a lender at a certain price for the next 60 days and promise to buy them from the lender at a later date at a 8/32nds% higher price. Loan with less paperwork. 5. T'bills with 1 year or less remaining (all T'bills) 6. Treasury and Agency issues with 1 year or less remaining: like BANs, TANs, RANs, etc

Mutual Fund Expenses:

Mutual Fund Expenses: the investment adviser is the largest expense of a mutual fund. Their expenses are from the Board of Directors, Investment Adviser, Custodian bank, and Transfer agent.

How should you think about this? Calls: 1. In the money 2. At the money 3. Out of the money 4. What this doesn't refer to Puts 1. In the money 2. At the money 3. Out of the money For both when does it make sense to enact an option?

Option Values and Premiums: think from the buyer's perspective since they are who enacts the option Calls: 1. In the money - stock price is higher than strike price 2. At the money - Stock price is equal to the strike price 3. Out of the money - Stock price less than strike price. 4. These terms do not refer to profitability in any form, just a relationship between stock price and strike price. Puts: 1. In the money - stock price is lower than strike price 2. At the money stock price is equal to the strike price 3. Out of the money - stock price higher than strike price It only makes sense to enact an in the money option

Penny Stock Cold Call Rules 1. What makes a stock qualify as a penny stock 2. What must the customer sign? 3. What must the firm supply and disclose? 4. Who are exempt from these rules?

Penny Stock Cold Call Rule: 1. Penny stocks are Unlisted Stock < $5 2. Non-established customers: required to follow the below procedures for the first 3 purchases (3 different penny stocks on 3 different days) after this they are considered an established penny stock customer. 2. Customer must sign suitability statement 3. Firm must supply a current quote, must disclose compensation to the firm and agent, and supply monthly statements to the customer 4. Established customers are exempt from this procedure (they have ahd cash and securities on deposit for at least a year) Firms receiving less than 5% of its revenue from penny stocks are exempt which is basically all broker dealers Firms do not have to follow this procedure for unsolicited order (customer tells you to buy it for them, not the other way around)

Least suspicious to most suspicious types of deposits:

Personal Check, Business check, Wire, Bank Check, Money order (you don't know what the origin of the cash was), Cash What about a personal check with a person's business address on it? Not suspicious at all!

Rights of Stockholders:

Preemptive right: right to maintain their proportional ownership of the company Ensured through a rights offering and for a certain duration of 45 days max and they are a given a discount on purchasing new shares. Current shareholder's get the subscription price which is below the current market price. If the market price dips below the current market price these rights will expire. This right may be sold to other investors if the current investor doesn't want to purchase new shares. Right to vote Statutory method: votes will be distributed evenly among the candidates that the investor wishes to vote for. Cumulative method: can put all votes behind one candidate. Right to freely buy and sell their shares (transfer agent - transfer shares for corporation like schwab) Right to inspect books and records Done through 10ks (annual report) and 10Qs (quarterly report)

Revenue Bonds Covenants within Bond Indenture

Rate covenant: they promise to keep fees high enough to support and maintain the facility as well as repay the bond holders. Maintenance covenant: the place will be maintained to keep its usefulness Catastrophe/insurance: promise to maintain insurance in case a hurricane wipes out the facility so insurance will pay back the bond. Outside Audit: makes sure money is used correctly Additional Bonds Test: can the facility generate enough revenue to issue additional bonds Callable: can the facility call in and receive their bonds after a period of time Put-able: can the investor put the bond to the issuer for redemption if interest rates rise to a certain level or their rate decreases to a certain level.

1. Discount Rate 2. Federal Funds Rate 3. Broker Call Loan Rate 4. Prime Rate

Rates Controlled by the FRB: 1. Discount Rate: the rate set by the federal reserve board charges member banks for loans directly from the fed 2. Federal Funds Rate: the rate banks charge each other on overnight or slightly longer loans, the Fed sets a target and then the marketplace ultimately decides the rate. A federal funds loan can be sold in the money market 3. Broker Call Loan Rate: the rate that banks charge broker dealers on loans to finance their customers margin purchases What is a margin purchase? Basically buying securities on credit and the margin is the initial payment made to the BD for the asset. Ex. 10% down 90% financed 4. Prime Rate: the rate that banks charge their best corporate customers, their best rate

Bond ratings examples and rule of thumb to determine junk/high yield bonds vs investment grade

Rating rule of thumb that if there is b followed by less than 3 letters it is junk or high yield bonds

REITS Taxation, features, and risks/types

Real Estate Investment Trust (REITS) Organized to own or to finance large real estate. Taxation: To avoid double taxation it must distribute 90% of Net investment income. 75% of income must be from Real Estate. Features: Do not pass through losses or expenses only pass investors net investment income Risks/types: Non-Traded REITs also exist but have more investment risk as they have less liquidity. If REITs start borrowing money to pay out investment income registered investment advisors should stop recommending the product and seek to have their clients liquidate their position.

Regulation T of The Securities Exchange Act of 1934

Regulation T: Granted the authority of the Federal Reserve Board under to regulate the extension of credit for securities purchases Public companies must file 10Ks (1 annual reports with final quarter), 10Qs (3 quarterly reports), and 8ks (material events) If an investor wants to borrow money to buy stock they must deposit 50% of the securities purchase price The investor that buys stock must pay for those shares two business days after the settlement date

Retail Communications: general rule 1. Do you have to file with multiple regulators? 2. Rules for BDs less than a year old who haven't advertised in the past 3. Film testimonial rules 4. Special requirements for filing dates for Option and CMO ads 5. Non-standard ranking rules date filing 6. Portfolio analysis or calculation tools 7. When can mutual funds file ads 8. Do you have to file mutual fund sales literature? 9. How long must retail communications be kept and what must they include

Retail Communication Filing: all communications must be within rules of fair practices (no excessive claims or head clauses, and cannot be misleading to the reader) 1. If a member firm files the communication with one regulator it does not need to file the same material with another. 2. Broker dealers less than one year old who have not advertised in the past are required to file their ads 10 days prior to use. After the first year business, they may file most retail communications 10 days after there use Only have to file communication with one of FINRA or NYSE not both 3. Firms using testimonials must disclose credentials (ex. PHD in Finance) and compensation relating to the testimonial. 4. Special requirements for Option and CMO ads - all must filed 10 days prior to use 5. Any non standard ranking of mutual funds or bonds must be filed 10 days prior to use 6. If a firm is giving access to a portfolio analysis or calculation tool to clients FINRA must be given access to this tool 10 days before first use 7. Mutual funds may file ads 10 days after first use 8. If a mutual fund gives you retail communication to use as sales literature you don't have to submit again as the investment company submits this 9. All retail communication must be kept for 3 years and must be readily accessible (produced on demand) for 2 years in a central file at the Office of Supervisory Jurisdiction (OSJ)] These files must have the name of the principal who approved it and the date it was approved

1. 13D 2. 13G 3. 13F 4. Form 3 5. Form 4

SEC Filings: 1. 13D: required to be filed by individual or entity once they acquire 5% of an issuers outstanding stock and why they are doing this (to gain control or just investment purposes) 2. 13G: filed by investment companies (mutual funds, Fidelity Funds, Vanguard) when they reach 5% or more of any one company 3. 13F: Investment adviser that manages more than $100 million Shows all of the securities owned by this individual which is announced quarterly 4. Form 3: filed by officer/director when they initially receive/purchase stock in the employer 5. Form 4: filed by the offer/director anytime there is a change in their holdings of employer stock

1. Classical Economics 2. Keynesian Economics 3. Monetarists

Schools of Economic Thought 1. Classical Economics: supply side economics, lower taxes & government regulation produce the strongest economies. This makes sure workers have the largest portion of their paychecks and reduces barriers to entry for new businesses both stimulating the economy and creating new jobs. 2. Keynesian Economics: a combination of the private sector and public sector will produce the best economic result. The private sector is non-government like mom & pop stores and big companies. The public sector is government regulations and spending programs. Appropriate public policy responses can steer the economy through tough times. 3. Monetarists: they believe that the money supply and interest rates are the driving forces of the economy. They believe in the things that the FRB does to control the economy.

1. Double Barreled Bonds 2. IDR/IDB 3. Special Tax Bonds

Special Types of Revenue Bonds Types 1-3: 1. Double Barreled Bonds: Revenue Stream: debt is first paid by user fees and tolls FF&C (Full Faith & Credit) of municipality (state gov or lower!!): they will pick up any shortfall of revenue stream with taxes 2. IDR/IDB (Industrial Development Revenue/Bond): private purpose municipal bond that benefits a private corporation to incentivize companies to move to the town. The private purpose municipal bonds (IDR/IDB) may subject high income earners to the Alternative Minimum Tax (AMTs)!! Ex. The city would build the headquarters and then rent the facility to the corporation that pays back the bondholders. The credit rating on the bond is the credit rating of the corporation!! 3. Special Tax Bonds: Bond is paid off using only money raised by levying special taxes

4. Special Assessment Bonds 5. Moral Obligation Bonds 6. PHA/NHA

Special Types of Revenue Bonds Types 4-6: 4. Special Assessment Bonds: Bond is paid off with money raised through an assessments Ex. assessment bond issued to apartment owners when complex repaves sidewalks in front of apartment 5. Moral Obligation Bonds: Municipality can pay off bond if issuer defaults Bridge is built by someone in the town and its revenue isn't enough to pay off the bond and the municipality will vote to cover the missing money. They do this because if a bond in their jurisdiction defaults the cost of borrowing would go up in the future. 6. PHA/NHA (Public/New Housing Authority): Bond is backed by FF&C of the US Government, the safest municipal bonds on the planet! Bonds for low income housing, rental income pays down debt and shortfalls the federal income will pick up the check. These are not double barreled bonds because the US government is the backer not a state or municipality!!

Tax Equivalent Yield Questions. Type 1: If given Muni Bond rate Type 2: If given Corporate Bond Rate You are always given the investor's tax bracket

TEY 1 = Muni Rate / (100% - investor's Tax Bracket) If percentage is higher than TEY 1 take corporate bond if lower take muni TEY 2 = Corp rate x (100% - TB) If percentage is higher than TEY 2 take muni bond if lower take corporate

Types of Dividends

Stock Dividend: are not taxed until the stock is sold, can be paid both in its own shares and shares of another subsidiary company (like the google maps division of google i guess) Cash Dividend: Taxed at 15% to 20% Property/Product Dividend

Outstanding Stock

Stocks that have been sold (issued) to the investing public and remain in public hands. Can be different if the company buys back stock but issued stock stays the same.

Types of preferred stock

Straight - Pays stated dividend only Ex. if the company couldn't afford to pay its preferred dividend we would miss out on it Cumulative - If company misses dividend it is owed to the investor Ex. If the company couldn't afford to pay its dividend for a year or two the company still owes it Participating - Receives common dividends paid to common stockholders. Ex. receives regular $6 dividend as well as $1 dividend paid to common stock that year Convertible - May be converted or exchanged for common stock at a pre-set price. Allows holders to have a growth company if they think the company is doing well. Callable - The company may call in (retire) the preferred stock memorization pneumonic: SCPCC - a family company or SCP CC - Secure Contain Protect Catholic Convicts

Types of Treasury Securities:

T' bills: issued at a discount 4, 13, 26, 52 weeks no 9 month!; maximum term is 1 year T' note: issued at $1,000; pay interest semi-annually 1-10 years T'bond: issued at $1,000; pay interest semi-annually 11 - 30 years

Taxation of Mutual Funds

Taxation of Mutual Funds: 1. Mutual funds are classified under the Internal Revenue Code subchapter M as a conduit for investment income. This classification allows the mutual fund to avoid paying taxes on the income it distributes to investors, as long as the mutual fund distributes at least 90% of its net investment income (income to the portfolio - funds expenses, capital gains & NAV don't matter). 2. If the mutual fund distributes 89% or less it will pay taxes at the fund level on 100% of its net investment income. 3. Dividend distributions must be sent out at least once per calendar year but it is usually done monthly or quarterly and can be done as many times as the fund wants. 4. Capital Gains distributions can only happen once per year. 5. Mutual Fund Current Yield (CY) = Annual income generated by the Mutual fund / public offering price. If an investor wants to invest in the mutual fund the CY used by the rep must be based on dividends only NOT on capital gains. The POP must contain the highest sales charge by the fund NOT the breakpoint schedule.

1. The Federal Land Bank 2. The Bank of the Cooperatives 3. The Federal Intermediate Credit Bank

The Federal Farm Credit System: 1. The Federal Land Bank: provides mortgage money to buy land 2. The Bank of the Cooperatives: provides money for feed and grain 3. The Federal Intermediate Credit Bank: provides money for equipment like huge tractors

The Securities Exchange Act of 1934

The Securities Exchange Act of 1934: requires broker dealers to have a certain amount of net capital to ensure their financial solvency Regulates the secondary market All broker dealers and industry participants Created the Securities Exchange Commission (SEC): the ultimate securities industry regulator Requires all agents to be fingerprinted on a hard copy or electronically If the individuals card is not readable after 3 good faith submissions they won't be asked to do a 4th set of fingerprints and the FBI will do a manual background check

1. Bearer Bonds 2. Principal Only registration 3. Fully Registered 4. Book/Journal Entry

Types of Bond Issuance: 1. Owner is not known, must clip paper coupons to receive interest payments and surrender physical paper to bank to receive principal. Not issued anymore 2. Owner known, must clip paper coupons, principal received automatically 3. Owner receives interest and principal payments automatically and their is a piece of paper, this is most US bonds 4. Fully registered, no certificate/piece of paper. Owner receives interest and principal payments automatically.

Forward Pricing within Mutual Funds: Why it happens and what it means?

The fund company creates new shares for every investor once the investors purchase order is received. An investor who is buying mutual fund shares does not know what they will pay when the order is entered. Investor's buy at 12pm but pay the POP calculated at 5pm and don't know the NAV when they receive the shares. Investor's buy their shares at the POP and sell their shares at the NAV. Since every investor receives new shares there is no time required to transfer shares between investors. If you buy a share at 12pm Tuesday you will be an owner of record at 5pm on Tuesday. If we sent money to a mutual fund on the record date of dividend payment we would receive that dividend payment. The Ex Dividend date for a mutual fund is a day after the record date, which is different than stocks, ETFs, and closed end funds.

Authorized Stock

The maximum number of shares that a company may sell in an effort to raise cash at the time of incorporation which is arbitrarily determined and can be changed!

Yield Curve Analysis What is the difference in interest rates between bonds? What does it mean when this difference changes?

The spread between high quality and high risk bonds is (8% - 5%) = 3% which is the risk premium. If this spread narrows to BB 6% and AAA at 5% the risk premium is only 1% which is a strong economic sign as it is believed that the market will be strong enough to keep risky businesses able to pay off their debt. If this spread widens to BB 10% and AAA at 5% this is a bad economic sign. It is believed that the market won't be strong enough to allow risky businesses to be able to pay off their debt.

What happens if the customer can't pay for the security by the Payment Date?

Their account will be frozen for 90 days or they can ask the broker dealer to request time on their behalf before the 4th BD or Payment Date. Ultimately it is the broker dealers decision to ask for more time, not the customers!

1. PO 2. IO 3. PAC 4. TAC 5. Private Labeled

Types of CMOs: 1. Principal Only (PO): Only would receive the component paying down principal of mortgages within portfolios 2. Interest only (IO): Only receives interest component paying down interest 3. Planned Amortization Class (PAC): if money comes in to quickly (prepayment risk - refinancing) or too slowly (extension risk - interest rates rose). PACS protect the investor from both risks by sending money to another support class/CMO if too quickly or pulling money from another support class/CMO if too slowly. 4. Targeted Amortization Class (TAC): only provides protection from prepayment risk NOT extension risk. 5. Private Labeled: Created by a bank or broker dealer even if every mortgage was insured the credit risk is still associated with the issuing bank/broker dealer. Ginnie Mae only insures principal/interest payment but cannot guarantee that the bank/broker dealer will send the money where it needs to go. They carry the credit risk of the bank/Broker dealer!

1. Zero coupon bonds 2. Convertible bonds

Types of Corporate Bonds: 1. no coupons only just principal/maturity payment 2. Convertible bonds can be exchanged into common stock

1. Individual 2. JTIC 3. JTWROS 4. TOD / POD

Types of Customer Accounts 1-4: 1. Individual: Mr. Jones' account, he enters the order, if he passes away the money becomes property of his estate 2. Joint Tenants in Common (JTIC): allows 2+ parties on the account and each party must sign a joint account agreement that agrees to be bound by the decision of others Ex. Two brothers sign an account together and are bound by each others account Can have more than two parties with unequal interest (Bob owns 60%, Bill 40%) If Bob passes away his 60% will be property of his estate and will not pass to Bill or his wife until paperwork from the Will names the executor or account administrator of this account 3. Joint Tenants with Rights of Survivorship (JTWROS): The account is community property and owned equally to only two people Mr. & Mrs. Jones account, if Mr. Jones dies all of his assets will pass to Mrs. Jones and they will not go through probate and will be retitles Mrs. Jones account 4. Transfer on Death / Pay on Death (TOD / POD): account owner names a beneficiary and assets on this account will pass automatically to the beneficiary in the event of the account holder's death. It avoids probate, meaning that assets don't go through court when the owner passes away. The beneficiary is not entitled to have any information regarding that account (don't know what's in it and can't talk to the rep about it). If they want information the account owner would have to provide them with power of attorney / 3rd party trading authorization. TOD is preferred to JTWROS: don't have to show the assets, can be given to one person instead of having to split it between your kids if you like Bobby the most, and Bobby's wife can't take the assets if she divorces him

1. Corporate Accounts & trading securities on margin 2. Trust Accounts & what the BD must see 3. Partnership Accounts i. what the BD must see ii. Who can enter orders for a limited partnership? 4. Discretionary Accounts i. what is required to create one ii. What happens if the discretionary rep leaves the firm? iii. When is a discretionary account required?

Types of Customer Accounts 5-8: 1. Corporate Accounts: When a corporation (IBM/Intel) wants to open up an account with a BD the BD must receive a corporate resolution which tells who is empowered to enter orders for the benefit of the company. i. If the corporation wants to trade securities on margin, the BD must receive a copy of the company's by-laws to make sure this is allowed. 2. Trust Accounts: established for the benefit of named beneficiaries, the trustee can make orders on the account i. The BD an rep are required to receive a copy of the trust agreement which informs the trustee as well as their powers and limitations to buy/sell securities and which types. 3. Partnership Accounts: general partnership, law partnership, limited partnership i. When opening the account the rep/BD needs a copy of the partnership agreement which sets forth the partners authority to act on the account and investment limitations ii. Who can enter orders for a limited partnership? Only the general partner is empowered to act on the account and the limited partners provide the money for the account but can't enter orders 4. Discretionary Accounts: gives the rep permission to buy/sell securities without consulting them first i. Must be evidenced in writing and give the rep limited power of attorney. This does not include the rep withdrawing money or writing checks which is full power of attorney. The discretionary papers must be received by the BD and approved by a principal before exercising this authority. They are now bound to accept advisor decisions and cannot say they didn't like that trade and dispute it later. ii. If the rep leaves the firm the limited power of attorney is terminated iii. When is a discretionary account required? If a customer calls up the rep and says "buy 500 shares of XYZ whenever you think the price is right" The answer is no because they gave the Action + Asset + Amount Action: buy, Asset: XYZ Shares, Amount: 500 shares Should be executed in that day unless authorized otherwise

1. Third Party Accounts 2. Fiduciary Accounts 3. UGMA & UTMA i. UGMA ii. UTMA 4. Accounts for employees of a different BD

Types of Customer Accounts 9-12: 1. Third Party Accounts: an investment advisor created for the benefit of the customer. i. The rep has discretionary authority and enters orders for the benefit of that account. The BD must receive paperwork of discretionary authority. 2. Fiduciary Accounts: established for customers who need certain care provided for them to their benefit. The fiduciary has an obligation to a third party to act as they would on their behalf. This could be a Trust account where the Trustee acts for the benefit of the beneficiaries. i. Guardian Account: someone has been declared mentally incompetent and needs someone to manage their affairs because. The rep is required to receive a certificate of incumbency issued by a court saying this person is the Guardian of the incapacitated person within 60 days of opening the account. 3. Uniform Gift/Transfer to Minors Act (UGMA / UTMA) Accounts: minors can't open accounts in their own name as they can't enter into legally binding contracts. UTMA & UGMA: There is no evidence required to document the custodial relationship i. UGMA there are four pieces of information that must appear in the account title: Custodian's name, minor's name, the state, and UGMA Ex. Mr. Jones as custodian for Billy Jones under Illinois UGMA The social security number on the account is the minors and the minor is required to pay taxes but the SSN doesn't appear in the account title. The assets must be transferred to the minor at the age of majority What would happen in a custodial account if the minor passes away? It becomes property of the minor's estate ii. UTMA: the custodian can select the age when the assets become the property of the minor (with the maximum age of 25 years old) 4. Accounts for employees of BD: when an employee of a BD opens an account at a different BD Conflicts with incentives of employee of one BD to take information from account at other BD and trade on this information The BD can say they don't want any outside accounts What is required when you open an account for an employee of another BD? The employee must inform their BD that they want to open an account at another BD, the employer must give a notice that they have been informed of this which is presented to the new BD when opening the account, the new BD will inform the employed BD of account opening and will send confirmation and statements of the account if requested by the employer.

1. GDP 2. Real GDP 3. Recession 4. Depression

Types of GDP and Economic Cycles: 1. Gross Domestic product: the value of all goods or services produced and consumed domestically, it is a top line number 2. Real GDP: takes out the impact of inflation for a given period which gives a more "real" GDP estimate 3. Recession: six months or two quarters of GDP decline 4. Depression: 18 months or six consecutive quarters of GDP decline

1. UIT 2. Face Amount Company 3. Management Company Open End or Closed End

Types of Investment Companies: 1. Unit Investment Trust (UIT): an entity that creates a fixed or non-fixed portfolio of securities. A fixed UIT buys a large block of bonds and they sell units of beneficial interest within this portfolio and they will hold the bonds until they have matured and send off the principal payments to investors. A non-fixed portfolio will purchase shares of mutual funds and sell units of beneficial interest to investors that represent the ownership of mutual fund shares in that portfolio. They would decide to purchase a mutual fund through a UIT if they don't have the minimum amount to participate in the mutual fund such as a $1M barrier to entry. 2. Face Amount Company: don't really exist anymore, an investor determines they need a set amount of money in the future and they would contribute to the company at a regular interval so at retirement age they would have the sum of money. Test Point: Face amount certificate/company IS an investment company 3. Management company (Mutual Fund) Open End or Closed End: manages a portfolio of securities to meet a stated investment objective

1. Treasury STRIIPS 2. Treasury Receipts 3. Phantom Income

Types of Zeros & Receipts 1. Treasury STRIIPS (Separate Trading of Registered Interest In Principal Security): a zero coupon bond issued directly by the US Government with no semi-annual interest, issued at a discount, and the investor receives the par value at maturity. 2. Treasury Receipts: created by a bank or broker dealer with no semi-annual interest. Ex. Goldman buys a 30 year treasury bond and split up the 61 coupons and 1 principal component to different investors. 3. Phantom Income: Each year the value of STRIIPS or Receipt goes up in value in the market place which is a taxable event to the investor!

1. Debentures 2. Subordinate debentures 3. Adjustment/Income bonds

Unsecured Bonds: 1. Debentures: backed by good faith or company only 2. Subordinated debentures: backed by good faith only, lower claim than regular debentures 3. Adjustment/Income bonds: very risky no interest unless the company has income to pay. Test Point: never recommend for income objective or generally as they are very risky

Valuing Mutual Fund Shares 1. Rules for what should be calculated most often and when it should be done 2. How it is calculated 3. What increases, decreases, and has no impact on what should be calculated most often by the fund?

Valuing Mutual Fund shares: 1. Mutual funds must determine the net asset value of the fund's shares at least once per business day. When should a mutual fund calculate its net asset value? Whatever it says in the mutual fund prospective or if not available the answer is daily. 2. This calculation is required to determine both the redemption price (NAV) and the purchase price (POP) of the fund's shares. Net Asset Value (NAV) = Assets - Liabilities If XYZ mutual fund has $10 million in assets and $500k in liabilities what is the fund's NAV? What is the NAV per share? $10M - $500k = $9.5M = Total NAV NAV per share = Total NAV / Total # of shares outstanding = $9.5M/1M = $9.50 3. Increases the NAV: The value of the securities in the portfolio increase The portfolio receives investment income, such as interest payments from bonds Decreases the NAV: securities value goes down or the mutual fund sends out assets like a dividend payment, or makes a capital gain distribution No impact on NAV: Investor purchases and redemptions of shares. Purchases & sales of mutual funds shares don't impact the mutual funds as shares are created and destroyed not sold. Purchases & Sales in the portfolio, $10M stock for $10M cash is worth the same Sales charges, which is the cost of distribution that the investor pays to invest. Mutual fund price = NAV + sales charge = POP

Examples of products that are not securities:

Whole & Term life - insurance products Fixed Annuities - guarantees monthly income with no risk/insurance product IRAs/401ks/retirement plans - holds securities is not a security itself Prospectuses - offering document/pamphlet to sell a security for new securities with details/risks Confirmations - tells how many the person bought/sold a security, ex. trade confirms