Sie Exam Notes PDF

Chapter One: - Issuers - Legal entities that raise capital by issuing securities - Corporations - Us treasury and government agencies - State and local governments - Banks - Foreign governments - Types of securities - Equity...

Chapter One: - Issuers - Legal entities that raise capital by issuing securities - Corporations - Us treasury and government agencies - State and local governments - Banks - Foreign governments - Types of securities - Equity (**stocks**) - sold only by corps and banks - represents ownership - May receive dividends - Debt (notes and bonds) - **creditors** - Represent an issuer's promise to pay - Receive interest - All entities can sell debt - When companies raise money, can be public or private markets - Broker-Dealers - Broker - Firm acts as a conduit or agent - Finds another party willing to take the other side of the trade - Collects commission for the service - No risk to the firm - ABC- agency, broker, commission - Dealer - Firm acts as a principal - Firm takes the other side of the trade - Entitled to markup/markdown - inventory/risk - PDM- principal, dealer, markup/markdown - Front office- dealing with clients - Back office- operations - Market maker - Broker-dealer that chooses to display quotes to buy or sell a specific amount of securities at specific prices - Quotes are firm for at least 100 shares (100=round lot) - Odd lot- other number of shares - Spread- difference between bid and ask - Market makers- make spread - Agents- make commission - Investment Adviser (IA) - Firm that charges customers a fee for managing their securities portfolios - The fee is based on the assets under management (AUM) - An IA is considered a large or institutional customer of a broker-dealer - Municipal Advisor (MA) - Person or firm who advises municipalities on bond offerings and must be registered with the SEC - Typically advise issuers (state, country, or city) regarding the structure and timing of a new offering - Instituional investors - Defined based on the amount of assets they have invested - Customers with a large amount of assets are referred to as "institutional investors" such as: - Banks - Insurance and investment companies - Corporations, partnerships, individual investors with a certain amount of money invested - Registered investment advisers - Public and private pension plans - Hedge funds - Retail investors- people not defined as institutional investors - Accredited investors - Institutional investors as well as individuals who have met a financial test - Net worth of 1M excluding their primary residence - Or annual income of \$200,000 in each of last two years (\$300 for married couples) - Qualified institutional buyers (QIB) - Buyer must own and invest a minimum of \$100M of securities - Cannot be a natural person (human)- individual - Primary market - New issue - Regulated by 1933 act - Secondary market - Traded among investors - 1934 act- security exchange act - Issuer - Needs capital - Hires underwriter - Facilitates distribution - Assumes liability that varies with offering type - Signs underwriting agreement with issuer - IPO - Initial public offering - Follow-On - Selling securities later on - Raising money later on to fund something - Secondary Markets - Trading is monitored by a specialist or designated market maker (DMM) - Dealer-To-Dealer Markets - Nasdaq - Non-physical; phone and computer network - Negotiated market - Unlimited number of registered "market makers" - Classified as a securities exchange - Non-Exchange Issues (OTC) - Often low priced and thinly traded - A system that offers real time quotations - Otc pink markets- may be reporting or non-reporting companies - Market makers - Stand ready to buy or sell at least 100 shares at their quoted prices - Subject to SRO rules - Traders - Execute trades for their firm or their firm's clients - Do not maintain an inventory - Third market - Listed securities traded OTC - Trades included in NYSE volume totals - Fourth market - Transactions between institutions - Most true fourth market trades are internal crosses set up by money managers - Dark pools - **ANONYMOUS** - Provides liquidity for large institutional investors and high-frequency traders (buy and sell very quickly) - Quotes are not disseminated to the public (limits impact on market activity) - Limits impact on the market - Introducing firms process trades through clearing firms in one of two ways - Fully Disclosed - Specific info about each individual client is given to the clearing firm - Clearing firm is responsible for: - Maintaining a clients assets - Establishing a separate account for each client - Sending confirmations, statements, and checks - Contact info for introducing firm is included - Omnibus accounts - A single account is set up at the clearing firm - Specific client info is maintained by the introducing firm - Recordkeeping responsibilities rest with the introducing firm - DTCC - Depository Trust & Clearing Corp - Provides clearing, settlement, and info services for its members - Is a member of the NSCC (National Securities Clearing Corporation) - Guarantees settlement - Removes counterparty risk - Transactions among members are completed through computerized bookkeeping entries - OCC - Options clearing corp - Issues and guarantees option contracts - Regulates exchange-traded options (listed options) - Acts as the third party in all option transactions (the buyer for all sellers and the seller for all buyers) - Deals directly with broker-dealers, not customers - Trade settlement between broker-dealers and the OCC is next business day - Prime Brokerage - When a primary B/D provides a large client (ex. Hedge fund) with the ability to clear all trades through a centralized firm with executions occurring with multiplied B/Ds - Prevents a single firm from determining the client's strategy - The prime broker offers specialized services such as custody, securities lending, margin financing, clearing, processing, operational support, research, and customized reporting - equity , bond, derivative trades - All trades settle and clear through the prime broker Chapter 2 - SEC not an SRO (self regulated organizations) - Federal Reserve Board (FRB) - Fed- US Central Bank - Money supply - Interest rates - Create maximum employment and stable prices - Open market operations - Discount rate- only rate Fed sets - Reserve requirements - Regulation T - Amount of money one must deposit to buy securities on margin or credit (50%) - Other Regulators - FDIC (Federal Deposit Insurance Corporation) - Acts as a banking regulator - Insurers banking depositors for up to \$250,000 - State (Blue-Sky) Regulators - State administrator (sometimes called Commissioner) - Enforces the Uniform Securities Act (USA) - USA is a model law, not the actual law of any state - NASAA (North American Securities Administrators Association) - Responsible for creating the provisions and updating the USA - Focuses on protecting investors from fraud - Securities Act of 1933 - Scope of the Law - Provide for full and fair disclosure - Prospectus must precede or accompany any solicitation of a new issue (no marking or highlight) - SEC "no approval clause" - Requires SEC registration of new issues - Registration exemptions are provided to issuers of certain securities and specific types of transactions - Liability - Unconditional for issuers regarding information to investors - Conditional for the underwriters that are required to perform - Reasonable investigation - "Due diligence" - Securities Exchange Act of 1934 - Scope of the Law - To regulate the secondary market - Created the SEC to enforce federal securities laws - The SEC utilizes self-regulatory organizations (SROs) - Specific Provisions of the Act - Margin requirements (Regulation T) - Registration requirements for B/Ds and RRs - Trading regulations - Insider regulations - Investment Advisers Act of 1940 - IA is any person (firm) that meets the A-B-C test - Advice- provides advice about securities, including asset allocation - Business- as a regular business - Compensation- receives compensation for the advice - Includes firms that manage wrap accounts - Collect a single fee for providing advice and executing transactions - Following people are excluded from IA definition - Broker-dealers that receive commission only - Banks, savings institutions, and trust companies - Specific professionals who give incidental advice - Lawyers, accountants, teachers, engineers - Publishers of newspapers and periodicals - No timed or tailored advice is provided - SEC has power to regulate securities industry and take action against civil penalties (fine, suspension), can not imprison - DOJ would go to criminal court - Securities Investors Protection Act (SIPA) - Created securities protection corporation (SIPC) - Funded through assessments from broker/dealers - Pay a fee to be part of SIPC - Non-profit membership corporation (not a government agency) - Protects separate customers (not accounts) if B/D bankruptcy occurs - Separate customers include IRAs, as well as joint and custodial accounts - Separate coverage provided for accounts that are held at different games - Only protects you if you buy securities and the Broker declares bankruptcies - Does not protect "bad investments" - Coverage: - Cash and street name securities: \$500,000 - Will only cover cash up to: 250,000 - If limits are exceeded, customer becomes a- general creditor - Not covered: - Fraud (covered by fidelity bond), futures contracts, commodities, fixed annuities - Securties specifically identifiable to a customer are distributed back to customer without limit - Investment Company Act of 1940 - Identifies three types of investment companies - Management companies - Unit investment trusts - Face amount certificate companies - Insider Trading and Securities Fraud Enforcement Act of 1988 - Insiders include corporate officers and directors; owners of more than 10% of a company's common equity - Use of material, non-public info is prohibited - Both tippers and tippees may be in violation - Penny Stock Reform Act of 1990 - Regulates solicited sales of penny stocks (unlisted equities priced below \$5.00/share) - Firms must establish suitability, approval, and disclosure procedures - Telephone Consumer Act of 1991 - Call time frame- 8 am to 9 pm local time - Firms maintain "do not call" lists - USA patriot act of 2001 - Establishes the basis for a firm's anti-money laundering (AML) regulations - Require the filing of reports based on financial transactions - Financial Industry Regulatory Authority (FINRA) - Primary SRO for securities industry - Conduct rules: - Governs the interaction between customers and firms - Uniform Practice Code (UPC) - Standardizes the procedures for doing business in financial markets - Code of Procedure (COP) - Establishes the process used to discipline any person who violates FINRA rules, can not imprison- only through DOJ - Code of Arbitration - Provides the method for resolving disputes (typically monetary) between members, including those that involve public customers - Municipal Securities Rulemaking Board - MSRB formulates and interprets the rules that apply to: - Broker-dealers and salespersons engaged in municipal business and - Municipal advertising - Rules do not apply to municipal issuers - Since MSRB has no enforcement power, its rules are enforced by a separate regulatory agency - Who Regulates Rules: - For Broker-Dealers - Finra or SEC - For Bank Dealers - Controller of the currency - FRB - Or FDIC - Chicago Board Options Exchange (CBOE) - Self-regulatory organization mainly for the options market - A trading venue for: - Equity options - Index options - Yield-based options - ETFs - Regulated by the SEC - REMEMBER: COP determines discipline for violating rules Chapter 3:Equity Securities - Corporations - File articles of incorporation - AKA certificate of incorporation or corporate charter - Solicit individuals to serve as members of the Board of Directors - Responsibilities include: - Overseeing the management team - Corporate governance - Declaring dividends - How Corps raise money - Bonds (debt financing) - Bondholders- senior to equities - Stocks (equity financing) - Stockholders - Preferred (senior) - Common (junior) - Corporate charter determines the number of shares that are authorized and can be issued - If corp chooses to repurchase some of its outstanding shares, they become Treasury stock - Do not receive dividends and has no voting rights - Market Cap= outstanding shares \* price - Common Stock Ownership Rights - Inspection of books-info from company - Evidence of ownership - Transfer of ownership - Participate in corporate earnings - Entitled to dividends if declared (not guaranteed) - Voting power including the: - Election of board members - Authorization of additional shares and stock splits - NOT DIVIDENDS - Two Voting Methods - Statutory - Beneficial for large shareholders - One vote, per share, per issue - Cumulative - Beneficial for small shareholders - Allows shareholders to multiply the number of shares owned by the number of voting issues - Allocate any way you would like - Restricted Stock - When securities are purchased through a private placement - Stop-transfer instructions are issued and a legend on the certificates indicates that the securities are unregistered - Investment Letter or Lock-Up Agreement - Purchasers must sign the letter to acknowledge that the shares cannot be resold within a defined period - Rule 144- permits the sale of restricted and control stock - Resticted stock - Unregistered stock that is acquired through a private placement or as compensation for senior executives of an issue - Mandatory 6 month holding period - Control (Affiliated) Stock - Registered stock that is part of an issuer's public float and purchased in the open market by officers, directors, or greater than 10% shareholders of the issuer - No minimum required holding period - When Intending to sell, the SEC must be notified - Form 144 filed at the time the sell order is placed - Securities may be sold over 90 days through unsolicited broker's trades or to a dealer that is acting as principal - If any shares from this filing remain unsold and the investor wants to sell them, an updated form 144 must be filed - Maximum sale allowed is the **greater of 1% of the outstanding shares** or the average weekly trading volume over the **last four weeks** - Filing Form 144 is not required if selling no more than 5,000 shares **and** \$50,000 of securities - American Depositary Receipts (ADRs) - Represent shares of foreign company stock sold in the U.S - Priced in US dollars - Pay dividends in US dollars - Sponsored or Unsponsored - Sponsored - Issued in cooperation with the foreign company - May trade on Nasdaq or NYSE - Unsponsored - Issued without involvement of the foreign company - Generally trade in OTC market (OTCBB or OTC Pink Markets) - Blue chip stocks - Stock of strong, well-established, dividend paying companies - Growth Stocks - Companies with sales and earnings that are expanding faster than the economy; pay little (if any) dividends - Income stocks - Companies that pay higher than average dividends in relation to market price - Defensive Stocks - Stock of companies that are resistant to recession (utilities, pharmaceutical, tobacco, cosmetic) - Cyclical - Fluctuates with the business cycle (household, appliances, automobile) - Preferred Stock (does not have voting rights) - Designed to provide returns that are comparable to bonds - Pays a stated dividend (not guaranteed) - Stated as a percentage of par- paid over 4 quarters - Par value is typically \$100 - Dividends are paid to preferred shareholders before common shareholders - Multiple types of preferred stock - Non-Cumulative - Investor is only entitled to the current dividend; the investor is not entitled to unpaid dividends (dividends in arrears) - Cumulative - Investor is entitled to unpaid dividends before common stock dividends may be paid - Callable - Issuer has the ability to repurchase the stock - Typically repurchased at a premium over par value - Participating - Investor may receive additional dividends based on company's profit - Convertible - Investor may convert into a predetermined amount of commont stock - Preemptive Rights - Only if you own shares of common stock, will you receive any rights - A shareholders right to maintain percentage ownership; no dilution - Distributed through a rights offering - One right for each share owned - Discounted - Shareholders exercise rights at a price that's below the current market value prior to a public offering - Immediate intrinsic value - Short-Term - Typically must be exercised within four to six weeks - Tradable - Warrants - Attached to bonds or stocks; act as "sweeteners" - Allow holders to purchase a specific number of the company's common shares - Exercise price is above the current market value (premium) - Long-term - May be exercised years after the original issuance - May be "detached" or traded separately - Miscellaneous Equity Rules - FINRA Rule 2261- Disclosure of Financial Condition - Upon request, a member firm must make its balance sheet available to customers in either a physical or electronic form - FINRA Rule 2262- Disclosure of Control Relationship with Issuer - Before executing a trade in the issuer's securities, a broker-dealer must disclose to its customers if it has a control relationship with the issuer - SEC Rule 10b-18- Issuer Purchasing its Own Stock - For the issuer's purchases to not be considered manipulative, the following conditions must be met: - Only one broker-dealer used - Purchases made late in the day are prohibited - Purchase price is restricted - Single-day purchase amount is limited Chapter 4- Intro to Debt Instruments - Bonds - Borrower - Responsible for interest payments and repayment of the principal at maturity - Investor - Creditor (not owner), receive interest payments - Loan or debt obligation of an issuer (borrower) - Creditors have priority over owners (stockholders) - Must make payments or be in default - Investors are attracted to bonds because they offer - Greater safety than stocks (bonds are a form of senior security) - Typically, consistent income in the form of interest and a known maturity - Par Value (face value or principal) - Amount that the issuer agrees to pay its investors when the bond matures - Due Date - Maturity of the bond - Date on which principal is returned and the last interest payment is made - Interest rate- fixed percentage of par - It is set when the bond is issued - Stated annually, but paid semi-annually - Debenture- unsecured corporate debt - Not pledging any specific asset, backed by earnings ability of a corp - Coupon rate or nominal yield - Rate of interest is generally fixed at the time the bond is issued and, with some exceptions, remains the same for the life of the bond. Exceptions include bonds that are issued with variable (or floating) rates or as zero-coupons - Term and Serial Maturities - Bonds are issued on same date and interest is paid each year - Term maturity- the entire bond offering matures on the same date - Serial- bond offering matures over several years - Level debt service- some serial maturities are structured so that principal and interest payments represent approximately equal annual payments over the life of the offering - Zero-Coupon Bond - Issued at deep discount - Matures at face value - Interest- Considered the difference between purchase price and par value - Carrying value- investor's carrying value (cost basis) must be accreted yearly - Trades flat (without accrued interest) - Not subject to reinvestment risk- locked in return - Suitable for an investor planning for a specific future investment goal - Why Bond Prices Fluctuate from Par - Par value of a bond can differ greatly from the price that investors pay to purchase the bond - Although most bonds are initially sold at par value, as time goes by, these same bonds will trade in the market at prices that are either more than or less than their par value - A bond selling for less than its par value- discount - More than- premium - Interest rate risk - Credit risk - Bond prices and market interest rates have inverse relationship - Credit Risk - Issuer may default and may not be able to meet its obligations to pay interest and principal to the bondholders - Issuers that are considered high credit risks must pay a higher rate of interest in order to induce investors to purchase their bonds - Securities issued by the U.S government have lowest possible credit risk - More difficult to evaluate when the bonds are issued by a corp or municipality - +-----------------------+-----------------------+-----------------------+ | | S&P/Fitch | Moody's | +-----------------------+-----------------------+-----------------------+ | Investment Grade | AAA\ | Aaa | | (high) | AA | | | | | Aa | +-----------------------+-----------------------+-----------------------+ | IG (medium) | A | A | | | | | | | BBB | Baa | +-----------------------+-----------------------+-----------------------+ | Speculative | BB | Ba | | Grade/Junk | | | | | B | B | +-----------------------+-----------------------+-----------------------+ | | - Or - | 1,2,3 | +-----------------------+-----------------------+-----------------------+ - Issuer pays for rating - Concern is risk of default - Coupon Rates and Bond Pricing- usually stated as a percentage of its par value - A bond with a price of: - 100 is selling at 100% of its par value, or \$1000 - For corporate and municipal bonds, a bond's price may also be expressed in terms of points - Each point is equal to 1% of the bond's par value or \$10 - Corporate and muni bonds trade in increments of ⅛ of a point, or \$1.25 - Pricing of Government Securities (T-notes, T-bonds and agency securities) trade in increments of 1/32 of a point - 87.24= 87 24/32, = 87.75%, = 877.5 - Bond yields - Return you get on a bond - NY - Nominal yield - Same as coupon - Fixed - CY - Current yield - Annual interest divided by the current market price - YTM- yield to maturity - Same as basis and yield - Includes the reinvestment of annual interest and the gain or loss over the life of the bond - Measured to the bond's maturity - 1.00%= 100 basis points - If bond trading at par- all yields equal - If rates go up, prices drop, CY and YTM increase - If rates fall, price goes up, CY and YTM decrease - Retiring Debt Prior to Maturity - When a bond reaches its maturity date, the bondholder will redeem it to the issuer and receive the bond's par value plus the last interest payment - The issuer's obligation to the bondholder has ended and the debt is considered retired - Some bonds are redeemed before they mature - Call Provisions - Allows issuer to redeem bonds prior to maturity- either in- whole or partial (lottery call, random lot) - If called, the investor receives the full return of principal plus any accrued interest - Used when interest rates are falling - Why Purchase: - Higher yield - Call protection - Call premium - Put Provisions - Gives bondholder right to redeem (put back) the bond on a date prior to maturity (opposite of a call provision) - Redeemed when interest rates are rising - Why purchase - Allows bondholders to redeem their bonds at values greater than market value as interest rates rise - Normally have a lower yield- reason these are beneficial to seller - Tender offer- issuer offers to buy back bonds in secondary market - Convertible debentures (unsecured) and conversion parity - Gives investor the ability to convert the par value of his bond into a predetermined number of shares of the company's common stock - Convertible bonds provide investors with safety of principal and potential stock growth - Allow issuer to pay a lower coupon rate - Conversion price is set at a premium at issuance and the bond's price is influenced by the underlying stock's price - The price at which a bond can be converted is referred to as the conversion price and is set at the time that the bond is issued - Conversion Ratio= Par value of bond/conversion price - Number of shares investor will receive at conversion - Conversion parity= equivalent market value - Price of convertible bond= aggregate market value of common stock - Corporate and muni bonds- 30-day month and a 360-day year - Treasury notes and bonds- actual days in month and a 365-day year Chapter 5- Debt Instruments - Treasury Debt (T-notes, T-bonds) - Issued directly by U.S government - Highly liquid; no credit risk - Interest taxable at federal level - Exempt from state and local levels - T-Bills, T-Notes, T-Bonds - Marketable securities since they are traded in the secondary market after issuance - T-bonds and T-notes are interest-bearing securities that have all of the attributes of traditional fixed-income investments - Each pays a fixed rate of interest semi-annually and the investors receive the face value at maturity - T-bills do not pay periodic interest, are issued at a discount and mature at face value - +-----------------+-----------------+-----------------+-----------------+ | | T-Bills | T-Notes | T-Bonds | +-----------------+-----------------+-----------------+-----------------+ | Maturities | Up to 1 year | 2-10 years | \>10 years | +-----------------+-----------------+-----------------+-----------------+ | Denominations | \$100 | = | = | | | multiples--- | | | +-----------------+-----------------+-----------------+-----------------+ | Forms of | Book Entry (no | = | = | | Issuance | physical | | | | | certificate)\-\ | | | | | -\-\-\-- | | | +-----------------+-----------------+-----------------+-----------------+ | Interest | Discount | - Stated | = | | | Securities | Annually, | | | | | paid | | | | | semi-annual | | | | | ly | | | | | | | | | | - Accrued | | | | | Interest: | | | | | Actual/365 | | +-----------------+-----------------+-----------------+-----------------+ | How They're | Weekly Auction | Periodic | = | | Initially Sold | | Auctions | | +-----------------+-----------------+-----------------+-----------------+ - T-notes and T-bonds, and agency securities trade in increments of 1/32 of point - T-bills are quoted on a discount yield basis, not dollar - Bid of 2.94%, means looking to buy at a discount of 2.94% from face value - Ask of 2.9%, means looking to sell at a discount of 2.9% from face value - TIPS - Treasury Inflated Protected Securities - Offer a stated coupon rate with interest paid semi-annually - Adjusted principal for inflation and deflation, based on CPI - T-STRIPS - Non-interest bearing - Issued at a discount and mature at face value - Considers each payment as its own security, and sells them separately - Forms of zero-coupon debt created from T-notes and T-bonds - Issued with a variety of maturities - Bidding at the Auction (T-Bills) - Government sells Treasuries through auctions conducted by U.S Treasury - Competitive Bids - Placed by large financial institutions - Indicate both quantity and price - Non-competitive bids - Placed by the public - Indicate quantity only - Are filled first - Bidder agrees to pay the lowest price (highest yield) of the accepted competitive bids - Usually auctioned on Monday, settled on Thursday - When traded in secondary market, would settle next business day - Clearing rate- highest yield applied to all bidders - Agency Securities - Debt instruments issued and/or guaranteed by federal agencies and GSEs - Exempt from state and federal registration - Quoted in 32nds - Accrued interest based on 30 days in month/360 days in year - Issued in book entry form - Farming Loans- Government sponsored entity - Federal Farm Credit Bank - Provides agricultural loans to farmers - Subject to federal tax, but exempt from state and local taxes - Mortgage-Backed Securities - Represent an interest in a pool of mortgages - Monthly payments consist of interest and principal - Interest portion is fully taxable - Subject to prepayment risk- paying off mortgage quicker if rates fall and people refinance - Agencies that issue mortgage-backed securities include: - GNMA or Ginnie Mae - FNMA or Fannie Mae - FHLMC or Freddie Mac - Most common security issued by government agencies is a mortgage-backed pass-through certificate. Pass-through provide excellent credit quality and a slightly higher yield than Treasuries; often used to supplement retirement income - Municipal Bonds and Their Issuers - States and Political Subdivisions - Cities - Counties, towns - School districts - Public Agencies and Authorities - Transit systems - Housing authorities - Water, sewer, and electric systems - Territories - Puerto rico - Guam - US Virgin islands - Triple tax free, federal, state, and local - Municipal Bonds - General Obligation (GOs) - Issued for general purposes to meet any need of the issue - Sources for payment of debt service: - Taxes - Issuer's full faith, credit and taxing power - State level - Sales taxes, income taxes - Local level - Ad valorem(based on/according to value) (property taxes) - Assed value \* millage rate= tax bill (1 mill=.001) - Parking/licensing fees - Revenue Bonds - Issued to fund a specific project - Sources for payment of debt service: - Revenue (user fees) from a specific project - Toll roads, bridges, stadiums, and airports - Considered: self-supporting debt - NOT backed by taxes, Do not require voter approval Progress Exam 1 - For a Treasury note, interest accrues based on: - **Actual number of days per month, 365 days per year, plus settlement of T+1** Study Chapter 7 Chapter 10 -------------------- ----------------------------------------- *Opening Purchase* *Establishes a long position* *Opening Sale* *Establishes a short position* *Closing Purchase* *Liquidates an existing short position* *Closing Sale* *Liquidates an existing long position* -------------------- ----------------------------------------- Chapter 11 - *Rule 144A allows for the immediate sale of restricted securities to qualified institutional buyers (QIBs). A QIB is an institution that owns and invests at least \$100 million in securities. Rule 144A applies to both equity and debt securities and can be used by both domestic and foreign issuers. The purpose of Rule 144A is to create a more liquid market for restricted securities. (23542)* - *In order to issue a general obligation bond, voter approval must be received, and the debt ceiling limitations must be observed. Municipal securities are exempt from SEC registration. Although the interest on municipal bonds is generally tax-free, thus us bit guaranteed by the IRS. Feasibility studies are a part of revenue bond offerings. (14248)* - *When a syndicate member receives credit for a sale of a new issue, the member receives the additional takedown plus the concession. The additional takedown plus the concession is referred to as the total takedown. The additional takedown is the portion received for assuming risk, while the concession is the portion received for selling. (14230)* - *For unlisted IPOs, prospectuses must be delivered for **90 days** in the aftermarket. (14239)* - *The earliest that an underwriter can discuss a new issue with potential customers is during the cooling-off period. Although discussions regarding new issues can be and sales are permitted during the post-registration period, that period occurs after the cooling-off period. (14234)* - *For unlisted follow-on offerings, prospectuses must be delivered for 40 days in the aftermarket. (14241)* - *An individual who owns more than 10% of a company\'s voting shares is considered a control person. If such a person acquired the stock in the secondary market, he\'s permitted to sell at any time, but Rule 144 limits the amount that he\'s able to sell. (23508)* - *Chapter 12* - *Without any qualifier on an order, it\'s assumed to be a day order. Good-til-cancelled (GTC) orders and open orders are synonymous. A not held order is one which allows a broker to assume unwritten discretion over the price and/or time of execution. (23617)* - ***The high bid and low ask on a security are referred to as the inside market. (14256)*** - *Since the securities are being held in the client\'s account, the order ticket will be marked \"long.\" The fact that the securities are in street name (in the broker-dealer\'s name) is irrelevant. The client is still the beneficial owner. (23607)* - *When selling stock short, an investor is borrowing stock and will benefit if the stock drops in value (i.e., the short seller is bearish). Selling short is typically a short-term strategy. It\'s important to note that the potential losses for short sellers are unlimited because a stock\'s rise is potentially unlimited. (14260)* - *Bearing=selling securities short* *Chapter 13* - *Security- cash settlement on same day* - *Bonds&Options- T+1* - *Option payment- T+3* *Chapter 14* - *When the initial transaction in a margin account is the short sale of securities, the minimum required deposit is \$2,000 or 50% of the market value, whichever is greater. Since \$2,000 is greater than \$750 (\$1,500 x 50%), \$2,000 is the required deposit* *Chapter 15* - *A Suspicious Activity Report (SAR) must be filed for any transaction of \$5,000 or more for which the firm is suspicious (e.g., suspects any evasive or criminal activity). The Bank Currency Transaction Report (BCTR) must be filed for each currency transaction effected by a customer that exceeds \$10,000 on one business day. Currency and Monetary Instrument Report (CMIR) filings are required when money is being deposited from overseas in amounts exceeding \$10,000. The Bank Secrecy Act is the law which requires the filing of these reports.* - *Records that relate to customer accounts must be maintained for a total of six years after the account is closed. For the first two years, the records must be kept in an easily accessible location* *Chapter 16* - *Financial Exploitation= 15 days* - *The SEC prohibits any statements implying that it approves of the broker-dealer, the registered representatives, or the activities of the firm. (14329)* - *Chapter 17* - *Form U4 is the registration application that must be completed before sitting for a qualification exam. Form U5 describes the reason that an individual\'s previous registration had been terminated by another firm. (14359)* - *A person whose registration has been inactive may re-register with another member firm without having to requalify be exam if he does so within two years of becoming inactive. However, if a person enrolls in the Maintaining Qualifications Program (MQP), he may re-register without examination within five years. (14364)* - *A person whose registration has been inactive may re-register with another member firm without having to requalify be exam if he does so within two years of becoming inactive.* - *Termination= form U5* *Chapter 18* - *Complaints filed with FINRA quarterly* - *Form U4= new registration* - *And disciplinary action against RR* *Chapter 19* - *Defensive stocks, such as stocks of brewery, tobacco, and utility companies, are not as directly influenced by changes in the economy* - *Congress enacts fiscal policy* - *Unlike most interest rates, the discount rate is directly set by the Federal Reserve Board rather than in the lending markets. The discount rate only changes when the Fed\'s Governors vote to change it.* - *Member banks can borrow money from the Fed at the discount rate* - *The federal funds rate, which is the rate of interest one bank charges another bank for the use of excess reserves on overnight loans, fluctuates the most since it has the shortest maturity* - *Keynesian economic theory states that government intervention (e.g., decreasing taxes, creating stimulus programs) is necessary for bringing an economy out of a recession.* - *Supply-side economics states that the government should reduce marginal tax rates and the size of government in order to promote economic growth* - *Monetary theory argues that the money supply is the best way to influence the economy.* - *The Dow Theory, which is followed by some technical analysts, states that a major reversal in the market has occurred when both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) break their trends* - *The effective federal funds rate is the daily average rate that commercial banks charge throughout the country for overnight loans. The fed funds rate is influenced, but not set by, the Federal Reserve Board. An increase in the federal funds rate typically signifies that the Fed has taken money out of the banking system in an attempt to increase interest rates* - *During periods of easy money when interest rates are declining, yields on shorter maturities fall faster than those of longer maturities. As a result, short-term yields will be lower than long-term yields. This is referred to as a positive yield curve since it slopes upward from the shorter to longer maturities.* *Chapter 20:* - *Dollar cost averaging is a method of investing that requires a periodic investment of a fixed amount, but is not a measure of risk.* - *Duration measures interest-rate risk on bonds.* - *Beta measures the amount of systematic risk of a stock or portfolio, while alpha measures the non-systematic risk of a stock or portfolio.* - *ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees.* - *Both ETFs and ETNs have market risk, are traded on an exchange (e.g., the NYSE), and may be purchased on margin or sold short.* - *Only ETNs carry credit risk that\'s tied to the creditworthiness of the financial institution backing the note.* - *If the issuer\'s financial condition deteriorates, it can impact the value of the ETN negatively regardless of how its underlying index performs.* *Chapter 20* - *CMO= mortgage=prepayment risk in times of falling interest rates* *Review:* ***Chapters 1-5*** - *Study days for things and T+1, T+2, T+3* - *Margin requirements- Securities Exchange Act 1934* - *T-notes and T-bonds- quoted in 32nds* - *94-18=( 94 + (18/32)) \* 10* - *A double-barreled bond is a municipal security that can be paid from the revenues of a project and is also a general obligation of a municipal government.* - ***A Bid of 1.25 and Asked of 1.10*** - ***=T-Bill*** - ***quoted on a discounted yield basis, which means that the larger discounted yield reflects a lower price. As a result, from a price perspective, the higher bid reflects a lower price, while the lower ask reflects a higher price.*** - *Securities Act of 1933- **establishes the disclosure requirements for new issues*** - *Securities Exchange Act of 1934- **established margin requirements*** - *OTC \ - *For a public offering of a new issue, the customer must be provided with the statutory prospectus. The offering memorandum is the disclosure document that\'s used for private placements* - *Interest rates falling= call risk* - *Trading on the knowledge of a large impending order that has yet to be executed is a violation that\'s referred to as front-running* - *Reverse repurchase agreement= matched sale* - *Most volatile rate= federal funds rate* - *M1= demand deposits (checking accounts, currency in circulation)* - *Regulation M- deals with new issues* - *The transfer agent is the final judge as to whether the security meets the requirements of good delivery.* - *S+2=T+3* - *S= settlement date, settles next day after trade date* - *For unlisted follow-on offerings, prospectuses must be delivered for 40 days in the aftermarket* - *Hedge against rising costs of goods from Europe= buy Euro call options* - *Hold mail for 3 months* - *High Bid-Low Ask= inside market?* - *Listed Options= T+3* - *For Margin Accounts:* - *Required deposits when Valued at \$4000 or less* - *Lesser of market value and \$2000* - *If purchase exceeds \$4000* - *50% of market value* *Progress Exam 2-A* - *When writing (or selling) the call, the investor is said to be short the call. A covered call writer will currently own the underlying securities, and hence be long the stock.* - *An advantage of buying shares of an index mutual fund is that:* - *Passively managed, has lower management fees as a result* - *10M= \$10,000* - *In a direct participation program, which of the following parties is subject to the MOST risk in a limited partnership?* - *General Partner* - *The main difference between open-end and closed-end investment companies is that open-end investment companies:* - *Determine share prices once per day* - *High dividends- equity income fund* - *Best hedge for a long stock position- buying a put* - *Sellers of call options are bearish (i.e., they want the value of the underlying stock to fall).* - *ETN based on credit rating of issuer* *Progress Exam 2-B* - *Hedge funds not liquid* - *A 12b-1 fee is a yearly charge that mutual funds impose on investors to cover the costs of marketing, distribution, and other services* - *Unit investment trust- investment company* - *Mutual Fund- long term trading* - *A mutual fund investor who redeems her fund shares will receive the next computed **bid** price on the day that the shares are redeemed.* - *If a bond is currently selling at a premium, then:* - ***Current yield is lower than nominal yield*** - ***Bond yields and prices have an inverse (opposite) relationship*** - *Hedge fund- uses leverage to increase returns* - *Broad exposure to US equity market* - *S&P 500 index mutual fund* - *The general partner is the member of the limited partnership who assumes liability for the debts of the entity and is usually concerned with its overall management.* - *What is the breakeven point for the buyer of a call option?* - *Strike price+ premium* - *Since the bond has a yield-to-maturity (basis) of 4.35%, which is lower than the 4.95% nominal yield (coupon rate), the bond is selling at a price that is above the par value of \$1,000* - *\^\^Inverse Relationship* *Progress Exam 3-A* - *A primary offering of securities is being made for a company listed on the NYSE. Prospectuses must be delivered:* - ***Only on purchases made at the public offering price*** - *Which of the following items is NOT found on a sell order ticket?* - *Customer's original purchase price for the stock* - *An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA without tax consequences if it is done within:* - *60 days* - *Premature withdrawals from an IRA are subject to 10% tax* - *Not-held order can be accepted with a client's verbal authorization* - *In an equity offering, what\'s the function of a syndicate desk?* - *Create an order book and allocate stock to investors* - *Preemptive rights- common stockholders* - *If an investor\'s initial margin purchase is less than \$4,000 of stock, his initial deposit requirement is \$2,000, rather than 50%.* *Progress Exam 3-B* - *Broker-Dealer DNC List- indefinitely* - *Wrap account- "wrap" all fees together* - *Blue-Skying- state registration of securities* - *When cold-calling, RRs must disclose their name, as well as the phone number or address of the firm* - *A corporation intends to raise additional funds from its existing shareholders to avoid diluting their interest in the company. The corporation will be engaging in a:* - *Rights offering* - *Equity Security= T+1* - *The most detailed financial information regarding a municipal securities issuer is found in the:* - *Official statement* - *Exempt securities from registration and prospectus requirements of the Securities Act of 1933* - *U.S. government and U.S. government agency securities* - *Municipal securities* - *Securities issued by nonprofit organizations* - *Short-term corporate debt instruments (such as commercial paper) that have a maturity not exceeding 270 days* - *Securities issued by domestic banks and trust companies (but not bank holding companies)* - *Securities issued by small business investment companies (exempted by federal legislation regarding small businesses)* - *A limit order to buy can only be executed at a specific price or lower* - *According to Regulation S-P, when is a broker-dealer required to provide disclosures regarding their policies for protecting customer information?* - *At the time an account is opened and annually thereafter* *Progress Exam 4-A* - *BrokerCheck- annually* - *Compliance meetings by RRs- annually* - *Lagging economic indicator- average duration of unemployment* - *Max civil penalty for insider trading- 3x amount gained or loss avoided* - *Form U4- bankruptcy made within the last 10 years and any felony conviction* - *No fingerprints needed for preparing marketing materials* - *Industrial production- not a leading economic indicator* - *Selling stock short- buy calls to offset risk* - *buy-and -hold strategy- primary concern is allocation of assets* - *DUI results in statutory disqualification* - *Investor brochure availability- annually* - *When opening a brokerage account for a customer who is considered a specified adult, the name of a trusted person should be requested. A specified adult is defined as a senior investor (age 65 or older) or a person who is age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders him unable to protect his own interests.* *Progress Exam 4-B* - *Lowest interest rate risk= shortest time to maturity* - *Coincident economic indicators-move directly with the business cycle (personal income)* - *If a registered person fails to participate in the Regulatory Element Continuing Education (CE) program, the person\'s status is:* - ***Inactive** until they complete the program* - *Non-RR's can not be compensated for referrals* - *Regulatory Element of CE- done **annually*** - *The income statement of a company includes its sales (revenues), less its operating expenses (selling and administrative expenses is an example), less interest paid on its debt, which equals earnings before taxes.* - *Not found- amount of goodwill- found on balance sheet* - *Lagging economic indicator- **average prime rate*** - *Leading economic indicator- **money supply and stock prices*** - *Index of Industrial Production- coincidental indicator* - *Unregistered Employee **Can-** send a prospective client an account opening form* - *Halt suspicious withdrawals from an account* *Greenlight 1* - *Ex date for stock, one day before record date* - *If less than 25%- same day* - *Class A- front-end sales charge, Class B- deferred sales charge* - *Institutional investor- bank, regardless of assets* - *Municipal bonds that are backed by the taxing power and the full faith and credit of the issuer are referred to as:* - ***General Obligation bonds*** - *Systematic risk= market risk* - *Unsystematic risk= political, business, credit risks* - *US Department of treasury- collecting taxes* - *Blue Sky Laws- Uniform Securities Act of 1956* - *Preferred stock- no voting rights* - *SEC regulates the process by which issuers raise capital* - *Cost basis for inherited mutual fund shares- Net Asset Value of the shares on the date of the owner's death* - *Common stockholders- can vote* - *If an investor purchases a call option and the stock declines, the maximum potential loss is limited to the premium paid for the call* - *Temporary Hold- only on account of a senior investor* - *A principal must approve retail communication prior to use* - *General obligation Bonds (GOB)- **Municipal bonds that are backed by the taxing power and the full faith and credit of the issuer*** - *Sell order ticket- do not need customer's social security number* - *Hedge Funds not subject to investment company act of 1940* - *A limited partner would be in jeopardy of losing her limited liability if the partner:* - ***Assisted in the decision of which properties to acquire*** - *Which of the following activities is NOT performed by a transfer agent?* - ***Maintaining the issuer's ownership register for each issuance of securities*** - *European style options- exercised day of expiration only* - *Convertible bond-**safety of principal as well as capital appreciation*** - *Direct participation programs (DPPs) can be businesses that invest directly in real estate programs* - *Consultant not required to be fingerprinted* - *For IPOs which will be listed, the requirement is 25 days (there is no after-market delivery requirement for listed follow-on offerings).* - *For unlisted follow-on offerings, the requirement is 40 days, and for unlisted IPOs it is 90 days.* - *No-load funds cannot assess a 12b-1 fee that exceeds 25 basis points* - *Public Offering Price = NAV \* (1-Sales charge)* - *Moral obligation bonds- **through legislative approval, the state pays interest and principal in a timely manner*** - *The federal securities regulation that requires disclosure by issuers offering securities to the public is:* - ***Securities Act of 1933*** - *Corporate Action- **issuance of a stock dividend*** - ***Liquidity Risk-** A client has been watching a thinly traded stock and has noticed that it has not had any trading activity today* - *A change in **net worth** does not require the broker-dealer to send a notice to the customer* - *An investment in preferred stock represents:* - *Ownership position in the company* - *T-notes and T-bonds- receive payments semiannually and at maturity* - *commercial banks charge on loans to broker-dealers for **margin** **purposes**- call rate* - *A Form 10-K is an annual filing that provides details of a company\'s **financial information**. Forms 10-K are often sent to broker-dealers rather than investors; therefore, broker-dealers must **promptly forward them to their customers**. The form that allows shareholders to vote without attending the annual meeting is referred to as a **proxy*** - ***If an associated person of a member firm provides a gift that exceeds \$100 from another FINRA member firm, it\'s unacceptable and a violation of FINRA rules.*** - *Sales charge breakpoints are available for quantity mutual fund share purchases of the same family of funds at the same broker-dealer. Additionally, purchases of shares of the same family of funds at the same broker-dealer by a spouse can be added together to reach a breakpoint* - *Spouse- same family fund- same broker-dealer* - *According to FINRA\'s rules regarding communication with the public, which communication is subject to principal approval and filing with FINRA?* - *An independently prepared reprint of an article regarding mutual funds that a member firm is distributing to 30 existing retail investors* - *12b-1 fees cannot be used to pay commissions for executing trades in the fund's portfolios* - *A type of offering in which the issuing corporation is assured of receiving the full amount of the offering and anything unsold is retained by the underwriter is a:* - *Firm commitment* - *May a brokerage firm place a temporary hold on a securities transaction?* - ***Yes, for the account of a specified adult*** - *ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer\'s buy order. ABC has acted as a(n):* - ***Agent*** - ***Federal funds rate fluctuates the most*** - *In what type of offering are all of the proceeds directed to the issuer?* - ***Primary*** - ***Cooling-off period-** soliciting indications of interest* - *In a 529 plan, can an individual be both the donor and the beneficiary?* - *Yes, if the person is of legal age* - *Under Regulation S-P, when must a firm make the required disclosures?* - *Annually, and when changes are made* - ***When interest rates decline, the bonds with the longest maturities will have the greatest price increase.*** - *Any person who has been convicted of a misdemeanor related to securities, or any felony during the last 10 years, is subject to statutory disqualification. A guilty plea is the equivalent of a conviction.* - *T-notes are exempt from state taxes* - *U.S. government obligations are subject to federal taxes, but exempt from state taxes* - *For the buyer of an option, the premium paid represents the maximum loss (risk). On the other hand, for the seller of an option, the premium received represents the maximum gain.* - *Greenlight Exam 2* - *\$300,000 for married couple to be "accredited investors"* - *Debenture- **A corporate bond that has no specific collateral backing and is guaranteed by the \"full faith and credit\" of the issuing corporation*** - *NASAA-updates state securities laws* - *Repurchase agreements (repos) and reverse repos would MOST likely be used by:* - *Institutions that have a need to borrow on a short-term basis, or have money to lend on a short-term basis* - *Convertible Bonds- bond to stock* - *A sales breakpoint of a mutual fund is:* - ***Minimum dollar amount...*** - *Federal funds rate- loans between banks* - *When money is laundered, the first phase is structuring. During this phase money is deposited in the banking system in small amounts to avoid detection. It is then layered. Layering is the process of moving the funds around so that their origin is difficult to detect. The final stage is integration. This occurs when the funds finally appear to be from a legitimate source.* - *Straight-life payout option- provides max cash flow of all payout options* - *State security regulators in charge of regulating blue-sky laws* - *Warrants are long-term, rights are short-term*