Securities Markets and Regulations

Primary Market

• Securities are sold by the issuer to the investing public.

Secondary Market

• Securities trade between investors.

Securities Act of 1933

• Also known as the Paper Act, Truth in Securities Act, Prospectus Act, and Full and Fair Disclosure Act.
• Requires full and fair disclosure in connection with the sale of securities to the public.

Prospectus

• A detailed disclosure document investors must receive before purchase.

Initial Public Offering (IPO)

• The first time an issuer distributes securities to the public.

Additional Public Offering (APO)

• Other names include subsequent public offerings and follow-on offerings (sometimes primary instead of public).

National Market System Securities (NMS)

• Promotes free market transparency by regulating how all major exchanges disclose and execute trades.

Underwriter

• A broker-dealer (investment banker) that works with an issuer to bring its securities to the market and sell them to the investing public.

Best Efforts Underwriting

• Underwriters act as agents, selling securities from the issuer to the investor.

All-Or-None Underwriting (AON)

• Requires the underwriter to sell all shares or cancel the underwriting.

Mini-Max Underwriting

• Sets a minimum amount the issuer needs to raise to move forward with the underwriting, and a maximum amount of securities the issuer is willing to sell.

Firm Commitment Underwriting

• Underwriters buy shares from the issuer and resell them to the public at a higher price, known as the Public Offering Price (POP), earning the price differential.

Syndicates

• Joint ventures where broker-dealers share the risk and the profits from an offering.

Institutional Investors

• Entities that pool money to purchase securities, including pensions, hedge funds, investment advisors, and mutual funds.

Qualified Institutional Buyers (QIBs)

• Owns and invests a minimum of $100 million in securities on a discretionary basis.

Retail Investors

• Invests their own assets.

Accredited Investors

• Insiders of the security's issuer (officers, board members, major stockholders).
• Have an income of at least $200,000 for the past two years or a net worth of $1,000,000 or more.
• Natural persons qualified based on certain professional certifications.
• Holders in good standing of the Series 7, Series 65, or Series 82 licenses.

Municipal Advisors

• Investment bankers that advise municipalities on the issuing of municipal debt and other types of municipal securities.

Securities and Exchange Commission (SEC)

• The primary federal regulator in the securities industry.

Registration Statement (S-1)

• The first step in the process of registering a security with the SEC.

Cooling-Off Period

• Lasts for a minimum of 20 calendar days.
• Resumes where it left off and does not begin anew if there is any revision or expansion.

Tombstone Advertisement

• The only form of advertising permitted during the cooling-off period.
• May include the name of issuer, type of security, number of shares to be sold, POP, and names of the underwriting members.

Shelf Offering Registration

• Allows a publicly traded company to register new securities without selling any shares until later.
• A supplemental prospectus must be filed with the SEC before each sale.

Prospectus Delivery Requirements in the Secondary Market

• IPOs of NMS securities: 25 days.
• IPOs of non-NMS securities: 90 days.
• APOs of NMS securities: 0 days.
• APOs of non-NMS securities: 40 days.
• Access equals delivery rule applies to the final prospectus and aftermarket delivery obligations.

Exempt Issuers

• US government, municipalities, national and state banks, building and loans and savings and loans, charitable, religious, educational, and nonprofit associations, and common carriers (railroad equipment trust certificates).

Exempt Issues

• Commercial paper, bankers' acceptances, insurance policies and fixed annuity contracts, and other securities that have maturities of 270 days or less.

Regulation A

• Provides two offering tiers for small and medium-sized companies to raise capital in amounts substantially more than the previously allowed $5 million.

Regulation A - Tier 1

• Securities offerings up to $20 million in a 12-month period are allowed but no more than $6 million can be sold on behalf of existing selling shareholders.

Regulation A - Tier 2

• Securities offerings up to $75 million in a 12-month period are allowed but no more than $22.5 million can be sold on behalf of existing shareholders.

Intrastate Offering Rule (Rule 147)

• Offerings that take place entirely in one state are exempt from registration when the issuer has its principal office (headquarters) in the state and all purchasers are residents of the state.
• Requirements for the intrastate offering rule include 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, and the majority of the company's employees work in the state.

Regulation D

• Provides exemptions from registration requirements, allowing some companies to offer and sell their securities without registering with the SEC.
• Maximum number of nonaccredited investors allowed in a Regulation D exempt transaction under Rule 506(b) is 35.
• De minimis exemption is 10%.

Private Placement Stock

• Also called restricted, unregistered, lettered stock, or legend stock.

Liquidity

• The ability to buy or sell a security easily.

Market Centers

• Locations, both physical and electronic, where buyers and sellers may gather and place trades.

Designated Market Maker (DMM) (Specialist)

• Member that acts as the dealer on the floor for a specific security.

Floor Broker

• A member of an exchange who executes transactions only on an agent-only basis for the member firm's customers and the customers of other member firms, earning a commission on each trade they execute.

Two-Dollar Broker

• Place trades for the floor brokers and receive a fee for performing the service.

Floor Traders (FTs or RFTs)

• Exchange members who execute transactions from the floor of the exchange only for their own account.

Over-The-Counter Market (OTC)

• Trades unlisted stocks and bonds, including municipal bonds and Treasury debts, in the secondary market.
• Corporate bonds are most likely to trade in the over-the-counter market.

Third Market (Nasdaq Intermarket)

• A trading market in which exchange-listed securities are traded in the OTC market.

Fourth Market (The ECNs)

• A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers and is open 24 hours a day.

Dark Pools

• Trading that is not openly available to the public.

Carrying Firm (Clearing Firm/Agency)

• An intermediary between the buy and sell sides in a securities transaction that receives and delivers payments and securities.

Clearing Broker-Dealer (Carrying Broker)

• A broker-dealer that clears its own trades as well as those of introducing (correspondent) brokers.

Fully Disclosed (Introducing) Firms

• Acts as the introducing firm's back office and they do not have the ability to execute trades for its customers.

Prime Account

• Allows a customer to select one member firm to provide custody and other services.

Transfer Agent Responsibilities

• Ensuring securities are issued in the correct owner's name.
• Canceling old and issuing new certificates.
• Maintaining records of ownership.
• Handling problems relating to lost, stolen, or destroyed certificates.

Registrars

• Licensed by the states and provide audit and oversight services for the transfer agents.

Depository Trust and Clearing Corporation (DTCC)

• The world's largest securities depository.

Market Maker

• A dealer in the OTC market that maintains an inventory in a stock and provides liquidity for customers seeking to buy and sell the security.
• If the broker-dealer maintains an inventory, the firm is transacting as a market maker (principal).

Bull

• When a person believes that a given market or stock is likely to go up in value.

Bear

• When a person believes that a given market or stock is going to go down in value.

Bid

• The highest amount someone is willing to pay for the security.

Size

• The number of shares that someone is willing to buy at the bid in round lots (100 shares).

Ask (or Offer)

• The lowest amount someone is currently willing to sell the security for.
• The price an investor can sell a security.

Inside Market (Inside Quote)

• The highest bid and lowest ask.

Market Order

• Executed immediately at the best available market price.

Stop Order

• Does not become a "live" working order in the marketplace until the stock trades at or through a specified price.

Good-Til-Canceled (GTC) Order

• Valid until executed or canceled.

Market-At-Open or Market-At-Close Order

• Designated to be executed at the opening of the day or at the close of the day.

Fill-Or-Kill (FOK) Order

• Fill (execute in its entirety) the order immediately or kill (cancel) the order completely.

Immediate-Or-Cancel (IOC) Order

• Similar to FOK order except that a partial execution is acceptable.

All-Or-None Order (AON)

• Must be executed in their entirety or not at all and do not have to be filled immediately.

Long Position

• When an investor buys a security and now owns the security, hoping the security will rise in value, also known as buy to open, sell to close.

Sales Proceeds

• The money they receive after they close the position.

Short Position

• Selling a security one does not own, also known as sell to open, buy to close.

Regular Way Settlement

• Occurs by the end of the business day either one or two business days following the trade date.

Settlement Times

• Settles in one business day (T+1): all Treasury securities (T-bills, T-notes, T-bonds).
• Settles in two business days (T+2): corporate issues (stocks and bonds), municipal debt, agency securities (GNMA), and GSE securities (FNMA and FHLMC).

Cash Settlement (Same-Day Settlement)

• Requires delivery of securities from the seller and payment from the buyer on the same day a trade is executed.

Good Delivery Rules

• Govern the delivery of physical stock and bond certificates in a trade.
• Must be endorsed by all owners whose name appears on the face of the certificate and signed exactly as the name appears.
• A document that substitutes for the owners' signatures on the back of a stock or bond certificate is called a stock or bond power.

Agent

• If a BD charges a commission for service provided, the firm is acting as an agent.

Restrictions on Sales of New Equity Issues

• Violation of rules regarding sales of new equity issues to restricted persons occurs when member firms sell blocks of the new issue to accounts of partners or officers of the member firm or sell to accountants or attorneys acting on behalf of the underwriters.
• Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their immediate or supported family members (aunts, uncles, and grandparents are not considered immediate family).
• An officer of a broker-dealer firm would be categorized as a restricted person if that individual attempted to purchase a new issue initial public offering (IPO) at the public offering price.

Street Name

• A customer's securities are held in the name of the brokerage firm to facilitate payment and delivery, while the customer remains the beneficial owner.

Red Herring (Preliminary Prospectus)

• Distributed while the SEC is reviewing an issuer's registration statement and contains all of the essential facts, but not pricing or effective date.
• The final prospectus has the public offer price and release date that is not found in the preliminary prospectus.

NYSE Trading Hours

• 9:30 AM - 4:00 PM Eastern Time on business days.

SEC Mandate in Final Prospectus

• The statement "these securities have not been approved or disapproved, nor have any representations been made about the accuracy or the adequacy of the information" is mandated to be in the final prospectus.

Official Statement

• Serves as a disclosure document and contains any material information an investor might need about a municipal bond issue.

Actual Underwriting Contract

• Not required in a final prospectus.

Exempt from Registration

• Fixed annuities.

Overview of the primary and secondary securities markets, the Securities Act of 1933, and the role of underwriters. It covers IPOs, APOs and the regulations around the National Market System Securities.