Securities Industry Essentials (SIE) Exam

Regulation D Offering

"PRIVATE Placement Rules" A provision under '33 Act for exempting private companies from filing requirements under certain conditions. Exemption from full registration. Offered to accredited investors (institutional investors, venture capital firms, individuals with high net worth/income, etc.)

Treasury Notes & Bonds

'33 Act exempt. Long-term (unlike t-bills) $100 minimum, subject to federal tax. Regular way in secondary: T+1 In primary auction market (gov't directly): T+3 Notes- 2 to 10 years, not callable. Bonds- 10 to 30 years, may be callable 40

Revenue Bonds

**municipal, based on revenue generated by a particular facility (i.e. toll road) doesn't require voter approval 42

Funded Debt

*CORPORATE Debt that is due more than 1 year out from the issue date (corporate bonds, notes, bank loans). NOT for preferred stock or gov't/municipal bonds. 25

The Trust Indenture Act 1939 *TRUST in who?

*CORPORATE Bonds & debt Issued under indenture or deed of trust A trustee is appointed who represents and PROTECTS the bondholders (NOT Gov't, private, or UITs) 31

SEC Rule 144-A

*Exception to Rule 144 Allows the sale of restricted (unregistered) securities to Qualified INSTITUTIONAL Buyers (QIBs) during the 6 month restriction. NOT individuals, but institutions (insurace companies, bank trust funds, etc.) 107

The Securities Exchange Act of 1934

*SECONDARY market only. Established the SEC & registration procedures. Regulates insider trading (Insider Provision) Affiliated/Control persons own 10% or more shares. Insiders can purchase through rights, options, and warrants. B-Ds must inform of free cash sitting in an account. And owner of 10% DEBT is NOT and insider (must be equity) 103

Unsecured Bonds (2)

*good faith and credit 1. Junk/High-Yield: BB or lower (speculative grade), fallen angels. 2. Income/Adjustment Bonds: to avoid bankruptcy; very risky. Promise to pay interest if they have sufficient funds. 33

Secured Corporate Bonds

*w/ collateral or guarantee Mortgage-closed/open-end or general (no specific property). Equipment Trust Certificates Collateral Trust Certificates Guaranteed- parent company Parity- equal to other bonds issued before (similar to open-end) 32

Build America Bonds (BABs)

- Taxable municipal bonds issued for infrastructure rebuilding (schools, hospitals, roads) - Cannot refinance outstanding debt - Interest payments are fully taxable to investors

Point on a Bond

1 point = $10 (regular point) 25

(3) Exceptions to 2-Year Time Out Period (Political Contributions)

1. $350 or less if able to vote 2. $150 or less if can't vote 3. New covered associate made contribution more than 6 months prior to becoming. 115

Covered Associate

1. Any general partner, managing member or executive officer of a covered member. i.e. a supervisor 2. Any associated person of a covereed member who engages in distribution/solicitation activities with government entity. 3. Any PAC controlled by a covered member/associate. 113

Joint Account Types (3)

1. JTWROS Joint Tenants With Rights of Survivorship 2. Tenants in Common 3. Transfer on Death

Discretionary Authority

1. Limited Trading Authorization/ Limited POA- can make trades, but can't withdraw funds. *When POA is granted, RR must know essential facts about them. 2. Full Trading Authorization/Full POA- allowed to withdraw money and make trades. Both (Limited & Full) 1. Terminated upon death of account owner. 2. Checks must be made out to account owner. 3. Owners may waive right to receive confirmations & statements. 4. Owner may still initiate orders. 5. Churning prohibited 6. All discretionary orders must be reviewed by principal at firm. *Must be written and prior* 134

Mortgage Bonds (3)

1. Open-end: property can be used for subsequent loans; more risk & higher yield. 2. Closed-end: property used to secure loan CANNOT be used to secure future loans (unless lesser in claim). 3. General: doesn't name one specific property. 32

Money Laundering Stages

1. Placement 2. Layering 3. Integration

Basis Point on Bond

1/100th of a point; .01% of $1000 par value. 1% change in yield = 100 basis points. Discount: Basis greater than coupon rate. Premium: Basis less than coupon rate. 29

Planned Amortization Class (PAC)

A CMO that receive payments over a predetermined period w/ sinking fund structure. Most resemble bonds. Stable cash flow for investors. Less likely to be called. 37

Collateralize Mortgage Obligations (CMOs)

A bond secured by a pool of mortgage loans. Provides income (monthly payments) Subject to federal & state tax Uses TRANCHES- short/med/long maturities Derivative security (principal payment fluctuates) Final Tranche: Z-Bond Risks: Credit, Interest/Market (refinancing), Maturity- Implied call (prepayment) and extension risk (delayed payments) 37

Prime Brokerage Account

A bundled package of services offered by B-Ds to hedge funds, other B-Ds, and institutional investors that use aggressive trading strategies. Services: securities lending, centralize trade processing (settlement), and calculating an "absolute return" (total return) on hedge funds. NOT investment advice. 136 *a prime brokerage agreement is needed to open*

Fiduciary

A person vested with legal rights and powers for the benefit of a person i.e. trustees, executors, administrators, q=guardians, custodians, FBO (advisers) Requires investments to be low-risk and can't have a share of the profits. 135

Suspicious Activity Report (SAR)

A report that must be filed within 30 days whenever a firm suspects that transactions of $5000 or more may be related to illegal activities. 111

Member Firm

A securities firm that's a part of FINRA. 160

FinCEN (Financial Crimes Enforcement Network)

A treasury department agency that focuses on money laundering and national security. Functions under "Bank Secrecy Act" (BSA). 110

Proxies

Absentee voting. If B-D receives a proxy: Equity: must forward Debt (bonds): "reasonable efforts" to forward ERISA: not required to forward. Reimbursement to firms for forwarding information (firms pay to send proxies) 138

Financial Exploitation of Specified Adults

Allows member firms to place temporary holds on accounts if they believe exploitation has/will occur. 15 business days w/ option for 10 additional. Must contact authorized individuals within 2 business days of starting hold. 148

Guardian Account

An account for a child or an adult with disabilities. Guardian Appointment Certificate issues by a court is required. Guardian handles the account, but has no ownership. 137

Investment Clubs

An organized group that studies stocks and invests their pooled money. *DON'T qualify for breakpoint discounts from mutual funds. 135

Current Yield on Bonds

Annual Interest / Current Market Price= % Current Yield. 29

Covered Member

Any member that solicits a government entity for investment advisory services. 113

Pattern Day Trader

Anyone who trades in the same security 4 or more times over a 5-day period. Must have a minimum equity of $25000. Most concerned with "timing risk". Least susceptible to inflationary risk. Buying power limit is 4 times the maintenance margin excess in the account. 133

SEC Rule 145

Applies to to situations in which securities are being offered as a result of business combinations, such as mergers, acquisitions, consolidations, reclassification of securities, or transfers of corporate assets "Offer to Sell/Sale" NOT required to register with SEC for changes in Par value/stock splits 107

Corporate Accounts

Authorizes specific person(s) to enter trades on behalf of the corporation. Must provide Certified Copy of Corporate Resolution and Articles of Incorporation, and may require Bylaws or Charter. Affidavit NOT required. 132

Most Conservative & Least Volatile Fund

Balanced Fund- diversified mix of bonds, preferred and common stocks. Other funds with low volatility: Growth, Diversified, & Blue Chip. 79

Non- Managed Fee Based Account Programs

Benefit customers who trade frequently. Firms must monitor accounts for possible "excessive" trading. All fees and cost must be disclosed prior to opening. 134

Corporate Bonds

Bond holders are "creditors" Fully taxed Traded OTC Quoted in points (regular) 30

Term Bonds

Bonds that are issued and mature at the same time. 25

Convertible Bonds

Bonds that can be converted into common stock at the bondholder's option. Not taxed until SOLD More volatile because it follows market value of common shares.

Types of Investment Risk

Capital, Interest Rate, Inflationary/Purchase Power (long term), Liquidity, Systematic ( in same general class- diversification CAN'T eliminate), Non-Systematic ( company specific- CAN be eliminated with diversification), Credit, Economic/Social, Risk/Reward, Reinvestment (long term), Call, Regulatory/Legislative, Market timing, Business. 140

Taxable Equivalent Yields (Corporate to Municipal)

Corporate Yield x (100%-tax rate) = Municipal Yield

2 Year Prohibition (Political Contributions)

Covered members/associates & advisers undergo a 2 year prohibition from date of contribution. Includes third-party solicitors & "bundling" ( solicit others to contribute). 114

SEC Rule 144

Covers resale of restricted unregistered stock (already held for 6 month restriction period- now unrestricted) May make a public sale w/o filing registration statement w/SEC. Sales in a 90-day period are limited to either: 1. 1% of the outstanding stock or 2. average trading volume for the previous 4 weeks (whichever is greater) Form 144 effective for 90 days. Transactions must be reported to the SEC at the time of sale. 106

MSRB Rule G-37

Establishes political contribution limits. $250 max per municipal election (able to vote) violation- 2 year probation G-37 filed quarterly 45

Rule 504 (Reg D)

Exemption from full registration for PRIVATE companies; cannot exceed $5 million. 105

Trusted Contact Person

FINRA Rule 4512 Registered rep can: 1. disclose information about account to address possible exploitation 2. confirm client's current contact information 3. Discuss client's health status 4. Identify legal guardian, executor, trustee, or holder of a Power Of Attorney on the account. 130

Shelf Registration

Form S-3, single registration statement. Covers 3 year period. Intent to sell more shares later w/o having to file with the SEC again. 103

Officers of Financial Institutions

I.e. President of a bank. Not required to obtain authorization for a new account from bank's board of directors. 135

Tenants in Common

If one tenant dies, his interest will pass to his ESTATE, not the other owner. Either party may place orders. 132

Anti-Fraud Provision

In the '33 Act. Applies to ALL (no one is exempt from fraud). 103

Series Bonds

Issued at different times, same maturity date.

JTWROS

Joint Tenants with Rights of Survivorship (death cert or affidavit of domicile required) surviving member becomes sole owner. Orders can be placed by either party. Both names on checks. 132

Confirmations (trades) for Corporate & Agency Debt Securities (Retail Only) FINRA 2232

Member firm must disclose markup/down if executing an offsetting principal trade in same security on same day. Shown as a $ amount AND a % of the market price. Must contain a hyperlink to TRACE (confirmations on FINRA's site) and time of execution to the second. 140

Sinking Fund

Money set aside to redeem the company's bonds. Frequently used for term bonds. Adds to the safety of a bond issue. 25

Taxable Equivalent Yields (Municipal to Corporate)

Municipal Yield / (100%-tax rate) = Corporate Equivalent Yield

Competitive Bidding

Municipality awards bonds to group with lowest net interest cost; typically for General Obligation bonds. 44

Advertising CMO Rules

Must NOT have comparisons between other investments (including CDs) Must display final maturity date and description of initial issue tranche. 39

Customer Account Statements

Must be sent to the client QUARTERLY. Discloses current positions, money & debit balances, and interest & dividend payments. NOT required to show the original price paid. 140

Currency Transaction Report (CTR)

Must file when a transaction from ONE person in ONE day is over $10,000. Laundering prevention. 111

Class "B" Shares

Mutual Funds (open-end) Back-end loaded; Contingent Deferred Sales Load Sales charge declines every year- based on % of NAV at the time of purchase OR redemption (whichever is less) Medium expenses & 12b-1 84

Class "A" Shares

Mutual Funds (open-end) LOWEST expense charges & 12b-1 Upfront sales charge- 8.5% max (FINRA) Best for long-term & large amounts (breakpoint discounts) 84

Securities Act of 1933

NEW Issues only (primary market) Prospectus required (no opinions) Provides monetary damages from fraud. SEC NOT responsible, but :No Approval" clause required on front cover or page of prospectus. Exempt from Act '33: Insurance, Annuity (not variable), government & municipal securities, Reg A offerings (short form), Commercial Paper (270 days max), Banker's Acceptances (180 days max), Banks, Reg D (Private). 103

Unsecured Corporate Bonds

NO Collateral - Debenture/Subordinate, Income/Junk/Adjustment, Fallen Angel, Zero-coupon.

Series EE Savings Bonds

NOT tradeable in secondary market; only redeemable w/ government. NOT marketable (not collateral) Sold at face value, earn interest. Redeemable prior to maturity after 1 year. $10000 max per year limit. 41

Negotiated Deals (Underwriting Agreement)

New issue of REVENUE bonds Negotiated directly with municipality & managing underwriter 44

Zero-Coupon Bonds

No interest paid. High discount. Earns accretion- imputed interest. Phantom Income- taxed Accumulation of capital (investor's goal) *MOST volatile fixed income security. Example: ABCzr27 (matures in 2027). 34

Rights Calculation

Outstanding Shares/New Shares= # of rights needed to purchase each new share of stock. 13

Convertible Bonds Conversion Equation

Par Value/Conversion Price=Common Shares Received (1000/50[given]=20 shares) 36

Trust Account

Property is managed by one person for the benefit of another. Margin account establishment must be authorized in trust agreement. Types: revocable (changeable) irrevocable (not changeable) living (revocable or irrevocable, set up while the grantor is "living") testamentary trusts (created from a will) 133

Securities Investor Protection Corporation (SIPC)

Protects customers against risk of loss due to the failure of a B-D. NOT a US Government agency/covers commodities. SIPC is a non-profit organization. Protection is limited to specific amounts- up to $500k ($250k in cash) and becomes a general creditor for any excess. Joint account is considered separate customer. 146

Time & Price Discretion

RR only determines time and price of order. Doesn't require written authorization. NOT deciding on what security, # shares, or whether to buy/sell. Good for the day only (Written authorization required for more than one day) 135

Callable Bonds

Refunding option with issuer. Call premium. Riskier (not for grandma) "Notice of Call" Investor can: 1. Convert (if convertible) 2. Sell 3. Wait (whatever earns most) "Partial Call": called at random 35

FTC Red Flag Rule

Requires businesses to implement a written Identity Theft Prevention Program to identify theft in day-to-day operations; see warning signs/red flags. 112

The PATRIOT Act (Providing Appropriate Tools Required to Interpret & Obstruct Terrorism

Requires firms to obtain new customer's basic info- SSN, DOB, and street address. 112

Limited Partnership Accounts

Requires signature of all GENERAL partners (not each limited partner) 133

Customer Protection Rule

Rule ensures customer's funds held by a broker dealer are deployed in safe areas; deposited in a RESERVE BANK ACCOUNT. 109

Local Government Investment Pools (LGIP)

SEC Exempt; lower level of protection smaller government entities pool assets for diversification, lower costs, and provide liquidity. 45

Serial Bonds

Same issue date, staggered maturity dates. 25

DK (Don't Know!) Notice

Sent to confirming B-D when trade comparisons between B-Ds don't match (i.e. price discrepancy) 140

Confirmations (Trades)

Sent to customers at/before transaction completion. Applies to individuals & institutions (NOT Direct Participation Programs) Shows B-D's role (agent, principal, market maker, etc.) Must disclose markup charged (if not a market maker). 139

STRIPS

Separate Trading of Registered Interest and Principal of Securities Most similar to zero-coupon bonds (all interest paid at maturity) Deep discounts; very volatile. High quality Phantom Income aspect for IRAs or Keough Plans T+1 in federal funds Treasury receipts are stripped coupon T-Bonds 41

Regulation A Offerings

Short form registration. No more than $50,000,000 in 12 consecutive months. Offering statement filed with SEC (not full registration). Prospectus NOT required. Shares NOT restricted. NO holding period. '33 Act exempt. 102

Treasury Bills (T-Bills)

Short-term debt (1,3,6,12 months) Considered risk free investment (government) Sold at a discount. Extremely liquid, highest quality. Subject to federal tax only (interest income) Not callable No fixed interest rate 40

Municipal Notes (5)

Short-term temporary financing (interim) 1. TAN Tax Anticipation Notes- paid off with tax receipts 2. RAN Revenue "" - paid off with specified revenues 3. TRAN Tax and Revenue "" - Combo 4. BAN Bond "" - paid off w/ sale of long-term bonds 5. GAN Grant "" - from federal transit authority; depends on congressional appropriation. 44

New Account Report Form

Signed by branch manager/principal Member firm holds responsibility for final approval of a new account (signature as evidence) PATRIOT Act requires: full name, DOB, street address, SSN (or passport/alien ID) Customer account info must: 1. be sent to customer in 30 days of opening 2. updated withing 30 days of receiving change 3. given to each customer every 36 months 4. maintained for 6 years after account closure 131

Customer Identification Program (CIP)

The processes used by a financial institution to verify and validate the stated identity of a customer within 5 business days of opening account. For UGMA (minors)- the custodian's (adult) information must be verified. Information is kept for 5 years after closing account. 115

Refunding Bonds

The sale of a new issue of bonds (lower rate)used to retire outstanding issue (has a higher rate). Done when there's a sharp decline in interest rates. Often w/ call feature. 36

TIPS

Treasury INFLATION Protected Securities Subject to federal tax only. Notes & bonds- interest payments are indexed to current inflation rate (CPI) Can't pay less than original price. *Best preserves capital among all treasury securities. 41

UGMA/UTMA

Uniform Gifts/Transfer to Minors Act. Transfer upon legal age (usually 18) w/o an attorney. NO joint account b/c minor can't place trades. Donor- must be an adult, only fully-paid securities allowed (not at margin or margin accounts/short sales) No limit, but minor is responsible for any taxes (gift tax)- taxed at parent's top marginal rate. Donor appoints a custodian. Completely irrevocable. Only 1 custodian and 1 beneficiary allowed. Custodian may use funds for the benefit of the minor at their discretion. 136

Benchmark & Indices

Used as a point of reference to measure the performance (return level)- interest rate, value of a group of stocks or bonds, S&P 500 (most common indices) 143

Money Laundering Abatement Act

Verify identity of customer seeking to open account withing 5 business days; confirm not on any terrorist list. 111

Rule 506 (c) Offering

WITH general solicitation (internet, TV, etc.) Accredited ONLY 106

Rule 506 (b) Offering

WITHOUT general solicitation (quiet). For accredited investors and 35 "sophisticated" investors may be provided with PPM (Private Placement Memorandum) Restricted for 6 months (not for those with liquidity concerns) 105

Holding Mail

Written instructions from customer with time period. No longer than 3 consecutive months and an acceptable reason (not convenience). Can be more than 3 months in a year (just not consecutively) 138

Principal Stockholder

a person that owns more that 10% of the outstanding shares of a company. Equity only, NOT Debt. AKA Affiliated persons/Control persons (insider) May NOT short their shares or sell stock within 6 months of purchase. May purchase more through rights, options, and warrants. 104

Churning

excessive buying and selling of securities to generate commissions 134

Municipal Variable Rate Securities (3)

floating/fluctuating interest rates final maturity at 10 years long-term 1. Variable Rate Demand Obligations- put feat. 2. Floating Rate Notes- put feat. Put Feature- sell security back to issuer 3. Auction Rate Securities 46

General Obligation Bonds

full faith and credit, **municipal secured by taxes collected requires voter approval for issuance 42

Transfer on Death (TOD)

individual account with a named beneficiary-assets transferred directly to the named beneficiary upon death of account holder. Ex: brother is the beneficiary but cannot place trades with I'm alive. Transfers stocks/bonds/mutual funds (basic securities only) NOT eligible: limited partnership interests, precious metals, variable/fixed annuities, and commodities. 132

Industrial Development Bonds

revenue bonds issued by a municipality to obtain funds to purchase land and build facilities for private businesses "on behalf of corporation" 43