Series 7 Kaplan Class Notes - Day 3 / Post Unit 11 Notes

Firm Quote

Dealer agrees to buy or sell at that price Minimum of one trading unit or stated number of shares: assume 100 shares if not told otherwise

Rule 80B - Circuit Breakers

Level 1 halt = 7% decline in S&P 500 15 minute break Level 2 halt = 13% decline in S&P 500 15 minute break Level 3 halt = 20% decline Trading stops for remainder of day

Municipal Bond Documentation

Preliminary Official Statement (POS) -- Analogous Red Herring Official Statement (OS) --Analogous Prospectus Official Notice of Sale

Dollar Cost Averaging: Average Price

Price Paid / # of Purchases

Backing Away

Prohibited practice of not honoring a firm quote

Good-Till-Cancelled (GTC) Order

Remain until order is filled, cancelled or expires

Trade Reporting Facilities (TRFs)

Reports transactions in NYSE and Nasdaq securities made OTC Includes 144A transactions The "Normal market hours" are from 9:30AM-4:00PM ET

Regulation SHO

Requires BDs to locate shares to sell short

Exempt from SEC Transactions: Private Placement (Reg D)

Rule 506b allows unlimited accredited investors and up to 35 nonaccredited investors, but NO general solicitation Rule 506c allows only general solicitation but only to accredited investors

Hedge against long stock

Sell Stop Buy Put

Unlimited Loss

Short Sale Uncovered (Naked) Call

Cooling-Off Period

- Gather indications of interest - No solicitations/sales - Potential investors receive red herring - Blue sky paperwork - Syndicate manager hea

CMO Suitability

- Highly complex products - Offers educational material (Risks, interest rates, glossary of terms) - Cannot compare to other investments - Effect of prepayment rate on yield - Must be filed within 10 business days of first use

Collaterized Mortgage Obligations (CMOs)

- Issued by financial organizations - Pass through certificates - Monthly check (Interest only) - Taxed at all levels - If you see the term "Tranch" on the exam, this is the financial product

Stop (Loss) Orders

- Limit losses, protect profits, create long/short positions if resistance/support is broken - Become market orders when triggered/elected

Strategic Asset Allocation

- Long-term approach, more passive in nature - Standard mix is to subtract age from 100 to determine percentage of portfolio in stock

Order Ticket

- Marked long or short

Short Sales

- Must be done in margin account - Bearish strategy - Deliver stock borrowed from the BD - Return borrowed stock to close out (cover) position

Customer Complaints

- Must be in writing - Must be kept for 4 years

Exempt from SEC Transactions: Regulation A+

- Offering exemption for small and medium sized companies - Tier 1 up to $20M in 12 month period - Tier 2 up to $50M in 12 month period

Hedge Fund Structure

- Organized as limited partnership - Not registered with SEC - Does not fall under Investment Company Act of 1940 - Offered through private placement

Types of Tranches

- PACs have reduced prepayment and extension risk, most predictable maturity dates, and lower yields - TACs have elevated risk, least predictable maturity dates, and higher yields

Primary (New Issues) Market

- Proceeds go to issuer - Exists to facilitate capital formation

Code of Arbitration (COA)

- Registered representative can be forced to arbitration unless dispute is statutory (discrimination) - Customer cannot be forced to arbitrate unless they sign pre-dispute agreement

Tactical Asset Allocation

- Short-term approach, active in nature - Can be heavily weighted in various asset classifications depending upon market conditions

Trade Confirmations

- Trade date - Account & rep numbers - Buy or sell - Security description - Capacity of broker-dealer (agent/principal) - Price per share (or bond price/yield) - Commission (some cases also markup) - Total amount

Exemptions from SEC Registration

-US Government (tbills, tnotes, tbonds) -US Government agencies (GNMA,FNMA,etc) -Municipal issuers -Non-profit or religious organizations - Commercial Paper - Banker's acceptance

Example of SMA problem

$40,000 (purchase) x 50% (Reg T) $20,000 (Deposit) $40,000 (CMV) - $20,000 (DR) $20,000 (Equity) $42,000 (Long Market Value) -$20,000 (DR) $22,000 (Equity) -$21,000 (Reg T: 50% LMV) = $1,000 Excess Equity

Quick Ratio / Acid Test

(Current Assets - Inventory) / Current Liabilities

Modern Portfolio Theory (MPT)

- A method of choosing investments that focuses on the importance of the relationships among all of the investments in a portfolio rather than the individual merits of each investment. - The method allows investors to quantify and control the amount of risk they accept and return they achieve. - Focuses on diversification as a means of controlling volatility and risk - Perfect Negative Correlation: -1 to +1

The Order Ticket (Memorandum)

- Account number - Solicited or unsolicited - Long or short - Member firm/ RR identifier No client name, address, current market price, bond rating

Suitability

- Aggressive - High net worth - Illiquid

Hedge Fund Characteristics

- Aggressive strategies - Lock-up period - Management and performance-based fees - Not suitable for typical investor

Account Statements

- All activity since previous statement - Positions - Value - Delivered quarterly (No penny stocks) - Delivered monthly (If they have penny stocks)

Market not Held Order

- Any order for which the customer gives you authority over price or time. - The RR is not held to secure a specific price for the order. - Must be executed on the day received (day orders) unless the customer has given written instructions to the contrary.

Options Communications

- Approved by ROP - Prior to ODD delivery, retail communications submitted to FINRA 10 calendar days in advance for approval - Projected and historical performance permitted w/ disclosures

Exempt from SEC Transactions: Rule 147 Intrastate

-offerings that take place in entirely one state are exempt from registration when: >the issuer has its principal office and receives at least 80% of its income in the state >at least 80% of the issuer's assets are located within the state >at least 80% of the offering proceeds are used within the state >the B/D acting as underwriter is a resident of the state and has an office in the state >all purchasers are residents of the state

4 FINRA Rules

1. UPC 2. Conduct 3. COP 4. COA

Special Memorandum Account (SMA)

A line of credit established when a margin account has excess equity (above FRB initial requirement). SMA may be withdrawn by the client or used to purchase additional securities

Stop Limit Order

A stop order that becomes a limit order after the specified stop price has been reached or passed

Odd Lot Theory

A technical analysis theory based on the assumption that the small investor is always wrong. Therefore, if odd-lot sales are up—that is, small investors are selling stock—it is probably a good time to buy.

Shelf Offering

An SEC provision allowing an issuer to register a new issue security without selling the entire issue at once. The issuer may sell limited portions of the issuer over a 2-year period without reregistering the security or incurring penalties. Three years

Order Audit Trail System (OATS)

An automated computer system created to record information relating to orders, quotes, and other trade information from all equities that are traded on Nasdaq

Correspondence

Any written communication distributed or made available to 25 or more retail investors in a 30 day period.

Ask (Offer)

BD's selling price MM sells, customer buys

Regulation U

Bank loan to public or BD

Hedge against short stock

Buy Stop Buy Call

Day Orders

Cancel any unexecuted portion at end of day

Dividend Payout Ratio

Common dividends / EPS - Growth stocks will have lower DPR, Income stocks will have higher DPR

Nominal Quote

Common term used for an informational quote on Munis

Required forms for Margin

Credit agreement Hypothecation agreement (Pledges securities as collateral) Consent to loan agreement (Optional form, consenting the loaning of your stock to other BDs)

Current Ratio Formula

Current Ratio = Current Assets / Current Liabilities

Earnings Per Share (EPS)

Earnings available to common / Number of common shares outstanding

Marginable Securities

Exchange listed OTC Nasdaq issues

Limit Orders

Executed at specified price or better - Buy limit - Sell limit

Market Order

Executed immediately at best available price

Trade Reporting and Compliance Engine (TRACE)

FINRA-approved trade reporting system for corporate Bonds trading in the OTC secondary market. Excludes foreign government debt, money market instruments, munis, and treasuries.

Who regulates extension of credit in securities industry?

Federal Reserve Board (FRB)

Types of Communication with Public

Institutional Retail Correspondence

FINRA's Maintenance Requirements

Long account = 25% Short account = 30%

Market Value @ Maintenance

Long position: DR / (1 - 0.25) = DR / 0.75 Short position: DR / (1 - 0.30) = DR / 0.70

COD/POD Trades

Member firm must have appropriate documentations Up to 35 calendar days to make payment

Form U4 Reporting: DRPs

Must disclose changes to DRPs within 30 days

Fill or Kill (FoK) Order

No partial executions

All or None (AoN) Order

No partial executions May remain GTC

Subject Quote

Not a firm quote - subject to change

Noneligible securities for margin

OTC non-Nasdaq issues (OTCDB & OTC Pinks) New issues for first 30 days Open-end funds first for 30 days Option contracts

Price-to-Earnings Ratio (P/E)

PE = CMV / EPS - Growth stocks will have higher PE, Income stocks will have lower PE

Immediate or Cancel (IoC) Order

Partial executions allowed Remainder is cancelled

Form U5

Termination - indicate if voluntary or involuntary

Reg. T Requirement

The amount a customer must deposit when buying securities in a margin account is 50% (Unless stated otherwise) Ex. $10k purchase on margin, $5k must be deposited.

Spread

The difference between the bid and ask prices

Code of Procedure (COP)

The formal procedure for handling trade practice complaints involving violations of the Conduct Rules. The Department of Enforcement (DOE) is the first body to hear and judge complaints. The National Adjudicatory Council handles appeals and review of DOE decisions. Penalties include censure, fine, suspension (not longer than 2 years), expulsion (member), revocation (associated person), permanent bar from the industry

Secondary Market

The market in which previously issued securities are traded among investors

Bid

The price the BD is willing to pay MM buys, customer sells

Best Efforts Underwriting

The underwriter acts as an agent/broker and sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

Firm Commitment Underwriting

The underwriter acts as dealer buys the entire issue, assuming full financial responsibility for any unsold shares Usually form syndicates to reduce liability/risk. Selling group may sell on behalf as agent/broker

Dollar Cost Averaging: Average Cost

Total Investment / # of Shares Bought

Working Capital Formula

Working Capital = Current Assets - Current Liabilities

Institutional Communication

Written and/or electronic communication directed exclusively to institutional investors, including natural persons with $50M or more of total assets

Dollar Cost Averaging

investing a fixed amount on a regular basis to average out the highs and the lows within the market