Your FREE SIE Flashcards 2026 – 650+ Cards

-company issues stock to raise capital -Investors who buy the stock also buy a share of ownership in the company's net worth

Calculated by taking the business's assets less its liabilities (creditors' claim). Net worth belongs to the businessowners/stockholders

Rights Growth Income Limited Liability

-Right to vote for corporate directors -Right to limited access to the corporation's books (minutes and list of stockholders) -Right to receive audited set of financial statements (annual reports) -Preemptive right to maintain their proportionate share of ownership in the corporation

Increase in the market price of securities is capital appreciation - provide investors with returns in excess of the inflation rate

Dividends (usually quarterly)

Shareholders are only liable for the money they have invested - not for the overall debts and liabilities of their company

Market Risk Decreased or No Income Low Priority at Dissolution

A risk of stock ownership is the possibility of dividend income decreasing or ceasing entirely if the company loses money

If a company enters bankruptcy, the holders of its bonds and preferred stock have priority over common stockholders Common stockholders are the most junior class of investors in a company

A company's debt and preferred shares

-IRS(taxes and employees (unpaid wages) 2 -Secured debt (bonds and mortgages) 3 -Unsecured liabilities and general creditors (supplier and utilities 4 -Subordinate debt (debtholders who agreed to be paid back last of all debtholders in the event of liquidation ever needed to occur) 5 -Preferred stockholders 6 -Common stockholders 7 ​

an equity security that represents a class of ownership in the issuing corporationshares similar characteristics to debt securities -Rate of return is fixed -Annual dividend represents its fixed rate of return Dividend (percentage of its par value) -No voting rights -No preemptive Rights

Dividend Preference Priority at dissolution over common stock

When the BOD declares dividends, owners of preferred stock must be paid before any payment to common shareholders

If a corporation gets bankrupt, preferred stockholders have a priority claim over common stockholders

Purchasing power risk Interest rate sensitivity Decreased or no dividend income Priority at dissolution

When interest rates rise, the value of preferred shares decline

The potential that, because of inflation, a certain amount of money will not purchase as much in the future as it does today

Preferred stockholders are paid before common shareholders but paid behind all creditors

Straight (noncumulative) Cumulative

The straight preferred stock has no special features. The holder is entitled to the stated dividend rate and nothing else.

accrues payments due its shareholders in the event dividends are reduced to suspended

a company can buy back from investors at a stated price after a specified date

the owner can exchange the shares for a fixed number of shares of the issuing corporation's common stock -issued with a lower stated dividend rate than nonconvertible preferred of the same quality because the investor may have the opportunity to convert to common stock & enjoy greater capital gain potential

the owner can exchange the shares for a fixed number of shares of the issuing corporation's common stock -issued with a lower stated dividend rate than nonconvertible preferred of the same quality because the investor may have the opportunity to convert to common stock & enjoy greater capital gain potential

offers its owners a share of corporate profits that remain after all dividends and interest due other securities are paid

owned by directors, officers, or persons who own or control 10% or more of the issuer's voting stock

acquired through some means other than a registered public offering - ex. security purchased in a private placement

A regulation that provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock. The number of shares that may be sold is limited *selling shares under Rule effectively registers the shares - no restrictions

Restricted securities may not be sold until they have been held fully paid for 6 months - after , an affiliate may begin selling but is subject to the volume restriction rules

The stock may be sold completely unrestricted after the six-month holding period has been satisfied

an exemption under the Securities Act of 133 that is only available to certain large institutions, QIBs. -no volume restriction or holding period as long as the buyer is also a QIB

a type of equity security designed to simplify foreign investing for Americans -created when common shares are purchased in the foreign company's home market then deposited in a foreign branch of a US bank, and a receipt (the ADR) is created

listed on the NYSE or Nasdaq, but some may be traded over the counter (OTC) - trade and settle (T+2) -helps foreign companies attract a US investor base

dividends paid to a US investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer -any trading profits (capital gains) from the ADR would only be taxable in the US

When the exchange rate changes, so will the dividends (in US dollar terms) - the value of the ADR itself will rise and fall in conjunction with the value of the underlying foreign stock

unlisted security trading at less than $5 per share - highly speculative -monthly account statements regardless of the activity including issuer's name, market value and number of shares of each penny stock

-must determine suitability and sign and date the suitability statement before the penny stock trades can be affected - BD also must disclose: >the name of the penny stock >the number of shares to be purchased >a current quotation >the amount of commission that the firm and the rep received * exempt from paperwork if unsolicited transactions *

Someone who: -has held an account with the BD for at least one year (and had made a deposit of funds or securities) -has made at least three penny stock purchases of different issuers on different days. Exempt from the suitability statement requirement, but not from the disclosure requirement.

certificate representing the borrower's indebtedness to the investor - the borrower's obligation to pay back a specific amount of money on a specific date to the investor and specific interest for the use of the funds

creditor of the borrowing entity

Matures on a single date.

bond issue matures at intervals over a period of years until the entire balance had been repaid

Combo of serial and term - issuer repays part of the bond's principal before the final maturity date, but pays off the major portion of the bond at maturity (serial and balloon maturity)

when bonds trade between coupon payments - Interest earned to date at the time of settlement.

use 30 day month/ 360-day year calculation for accrued interest

-all issued in book-entry form -T+1 settlement cycle -employ the actual number of days elapsed when calculation the amount of accrued interest due

the cash interest payments in relation to the bond's value. Measured in basis points: one basis point equals 1/100 of 1%.

Coupon, nominal, or stated yield is set at the time of issue - coupon is a fixed percentage of the bond's par value

measures a bond's coupon payment (interest) relative to it's market price. Annual Coupon payment / market price = current yield

reflects the annualized return of the bond if held to maturity

measurement of the change in a bond's price, which equals 1% of face value, or $10 per bond

the rate of return earned on a bond when it is called before its maturity date

Issued at a discount, weekly Short term (1yr or less) Mature in 4, 13, 26, or 52 weeks Highly Liquid No Accrued Interest

Intermediate Maturities 2-10 Yr Semiannual Interest as a % of stated par value Mature at Par Priced at % of par

Long-term Maturities 10-30 Yr Semiannual Interest as a % of stated par value Mature at Par Priced at % of par

Zero coupon bond created by brokerages. B/D buy treasury securities and place them in trust at a bank and sell separate "receipts" against the principal. *Not backed by the U.S. Government

Treasury Departments own version of treasury receipts- Treasury Dept. designates certain issues as suitable for stripping into interest and principal components

Farm Credit Administration Government National Mortgage Association (Ginnie Mae) Federal Home Loan Mortgage Corporation (Freddie Mac) Federal National Mortgage Association (Fannie Mae) Student Loan Marketing Association (Sallie Mae)

Ties to the government - might be privately owned

Regular Waytwo business days (T+2)

A national network of lending institutions that provides agricultural financing and credit.

-A government-owned corporation that supports the Department of Housing and Urban Development. -typically sold based on an average life expectancy since the issues are backed by mortgages. The only agency securities backed by the full faith and credit of the federal government.

GNMA securities are purchased by BDs that use the underlying assets to create hybrid securities -CMO customers typically receive payments monthly and considered to be corporate securities and must be registered under the Securities Act of 1993.

public corporation created to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from financial institutions and packaging them into mortgage-backed securities for sale to investors

publicly held corporation that provides mortgage capital -purchases conventional and insured mortgages from agencies such as the FHA and the VA -securities created are backed by FNMA's general credit

settle T+3 and pay accrued interest based on a 30-day month/360-day year

Bonds that are secured by real property.

bonds secured with factory and equipment as collateral

bonds secured by the securities deposited

unsecured bonds

backed by a company other than the issuing corporation, such as a parent company - still unsecured

When a corporation goes bankrupt and reorganizes existing debt may be replaced by this kind of bond - unsecured

claims of these bonds are subordinate or junior to the claims of the debenture holders, still senior to stockholder

-Secured creditors' debt instruments (mortgage bonds, equipment trust certificates, collateral trust bonds, and mortgages) -Unsecured creditors' debt instruments (general creditors such as suppliers and utilities, debenture holders, guaranteed bonds, and income bonds) -Subordinated debt (debtholders who agree to be paid back last of all debtholders in the event a liquidation ever needs to occur) -Preferred stockholders -Common stockholders

settle T+3 and pay accrued interest based on a 30-day month/360-day year

General Obligations (GO) Bonds Revenue Bonds

municipal bonds issued for capital improvements that benefit the entire community -typically these projects do not produce revenues, so the principal and interest must be paid by taxes collected by the municipal issuer -The lower the statutory debt limit, the safer for bondholders

Used to finance any municipal facility that generates sufficient income -Principal and interest payments are made exclusively from revenues generated by the project or facility Not subject to statutory debt limits and do not require voter approval

sometimes issued by authorities, which are quasi-gov entities often tasked with building roads, tunnels, bridges, and other infrastructure

Municipal anticipation notes are short-term securities that generate funds for a municipality that expects other revenues soon -Usually have less than 12-month securities -Maturities range from 3 months - 3 years -Repaid when the municipality receives the anticipated funds

Build America Bonds (BABs): created to assist in reducing costs to issuing municipalities and stimulating the economy Two Types of BABs are issued: -tax credit BABs -direct payment BABs

provide no credit to the bondholder but instead provide the municipal issuer with payments from the US Treasury equal to 35% of the interest paid by the issuer

a specific type of education savings account available to investors - allows money saved to be used for qualified expenses fo K-12 and post-secondary education - qualified expenses up to $10,000 per year

-Overall contribution levels can vary from state to state -Assets in the account remain under the donor's control, even after the student becomes of legal age -There are no income limitations on making contribution to a 529 Plan -Plans allow for monthly payments if desired by the account owner -Account balances left unused may be transferred to a related beneficiary -Rollovers are permitted from one state's plan to another state's plan, but no more than once every 12 month

States establish these to provide other government entities, such as cities, counties, school districts, or other state agencies, with a short-term investment vehicle to invest funds. Formed as a trust in which municipalities can purchase shares or units in the LGIP's investment portfolios No SEC registration required, no prospectus, but do have disclosure documents

accounts that tax-advantaged saving accounts for individuals with disabilities and their families - the beneficiary of the account is the account owner, and the income earned by the accounts is not taxed -one ABLE account per person is allowed

serves as a source of intermediate-term to long-term financing, usually in the form of equity or debt securities with maturities of more than one year

fixed-income (debt) securities with short-term maturities, typically one year or less - considered highly liquid, very safe, a good place to invest money that will be needed soon (short term) -generally do not receive interest payments - instead issued at a discount and mature at face value

Banks issue and guarantee CDs with fixed interest rates and minimum face value of $100,000 -most mature in one year or less. Not considered a money market instrument.

bank's version of a unsecured promissory note in the same way commercial paper is for corporations - the bank's promise to pay principal and interest - secured by no physical asset and backed only by the bank's good faith and credit. Traded in the secondary market.

A short term time draft with a specified payment date drawn on a bank - essentially a postdated check or line of credit -Payment date is normally between1 and 270 days (nine months) -Corporations use BAs to finance international trade

short-term, unsecured commercial paper issued to raise cash to finance accounts receivable and seasonal inventory gluts -Maturities range from 1 to 270 days, although most mature within 90 days -Companies with excellent credit ratings issue commercial paper

direct short-term debt obligations of the US government -Issued weekly with maturities of 4 weeks, 13 weeks, 26 weeks, and at times, 52 weeks

a financial institution, such as a bank or BD, raises cash by temporarily selling some of the securities in holds with an agreement to buy back the securities at a later date at a slightly higher price -Agreement between a buyer and a seller to conduct a transaction (sale) and then reverse that transaction (repo) in the future

a dealer agrees to buy securities from an investor and sell them back later at a higher price

Any deposits in excess of the required amount -These excess reserves or fed funds can be loaned from one member bank to another for the purpose of meeting the reserve requirements (overnight)

provide the bondholder with a federal income tax credit equal to 35% of the interest paid on the bond in each tax year

securities providing payoffs that depend on the values of other assets

offer investors a means to hedge, or protect, an investment's value or speculate on the pice movement of individual securities, markets, foreign currencies, and other instruments

One party has the right to exercise the contact to buy or sell the underlying security, and the other is obligated to fulfill the terms of the contract

the amount paid for the contract when purchased, or received for the contract when it is sold

pays the premium for the contract is often referred to as the owner, holder, or party who is long the contract *has the right the exercise the contract

Entering the options market by buying calls or puts.

If buyers decide to sell the contract later, the second transaction is called this

Receives the premium for the contract is referred to as the writer or party who is short the contract -obligated to perform if the buyer chooses to exercise the contract -sellers can profit by the amount of premium received for the contract if the option expires worthless

Entering the options market by selling calls Or puts

An options transaction in which the seller buys back the contract later - second transaction

Buyer of a call option has the right to buy an underlying asset -Bullish Investor

Writer (seller) of a call option, has the obligation to sell the underlying asset -Bearish Investor

Buyer of a put option, has the right to sell the underlying asset -Bearish Investor

The writer (seller) of a put option, has the obligation to buy the underlying asset -Bullish Investor

Tracks the performance of a particular group of stocks such as S&P 500 Index or Dow Jones -If exercised, no delivery of the underlying shares is made and the writer pays the options owner the differential in cash

designed to measure expected volatility of the US stock market and is based on pricing from the S&P 500 Index - use these options to speculate on volatility of the equity market

Call: Price of stock is above the exercise price (strike price)

Call: Price of the Stock = Strike Price

Call: Price of the Stock is lower than the Strike Price

Call: When the Market Price is above the Strike Price -same as - In the Money-

at parity when the premium equals intrinsic value

Put: Price of the Stock is lower than the Strike Price

Put: Price of the Stock equals the Strike Price

Put: Price of the Stock is higher than the Strike Price

Put: Price of the Stock is lower than the Strike Price -same as Put - In the Money-

Call: Strike price + Premium

Call: Unlimited

Call: Premium

Put: Strike Price - Premium

Strike Price - Premium (Same as Put Breakeven)

Put: Premium

Clearing agent for listed options contracts - those listed for trading on US options exchanges Primary functions: to standardize, guarantee the performance of and issue option contracts

listed options traded from 9:30-4pm ET -traded without a certificate, the proof of ownership is the trade confirmation-

Listed options settle on the next business date after trade date (T+1)

Listed options expire on the third Friday of the expiration month at 11:59pm

Listed options can be exercised by the owner from the time of purchase until they expire. Exercise process is guaranteed by the OCC. If holder wants to exercise, his BD notifies the OCC

Any contract that is in the money by at least .01 will be exercised automatically at expiration for the holder unless the holder gives "do not exercise" instructions

When the OCC receives an exercise notice, it assigns the exercise notice to a shorter BD - one who has a customer who is short the contract. The short BD assigns a short customer who is now obligated to perform (buy or sell the stock at the strike price)

an option that can be exercised at any time until expiration

An option that can be exercised only on the expiration date

cash settled

must be provided at or before the account approval. This document explains options strategies, risks, and rewards and is designed to provide full and fair disclosure to customers before they begin options trading

Branch office manager (BOM) and by the Register Options Principal (ROP) at the firm

-states that the customer has read the disclosure document, understands the risk of options trading and will honor position limit rules -the customer must return the signed options agreement no later than 15 days after account approval -if the signed options agreement is not returned within 15 days of account approval, the investor cannot open new options positions

if the contract is covered the writer already owns the underlying security -Ensures the writer's ability to perform (deliver), should the owner exercise the contract

The writer does not own the underlying security -If the contract is exercised by the owner, the writer will need to purchase the underlying security at the current market price to deliver it

An investor who is long stock (bullish) could buy a put option as a hedge against the stock falling in value -the put would ensure that the client could sell the stock at no less than the option's strike price if the share price declines

An investor who is short stock (bearish) could buy a call option as a hedge - the call would ensure that the client could sell buy the stock back at no more than the option's strike price if the shares rise in value

A corporation or trust that pools investors money and then invests that money in securities on their behalf. -purchasing power in the marketplace -must abide by the same registration and prospectus requirements imposed by the Securities Act of 1933 on other issuers

Classifies investment companies into three broad types: -Face Amount Certificate Companies (FACs) -Unit Investment Trusts (UITs) -Management Investment Companies

A contract between an investor and an issuer in which the issuer guarantees payment of a stated (face amount) sum to the investor at some set date in the future

An investment company organized under a trust indenture -do not have boards of directors (they have trustees) -create portfolio of debt or equity securities designed to meet the company's objectives & then resell redeemable interests in their portfolio of securities. Each share is an undivided interest in the entire underlying portfolio -can be fixed or nonfixed -no need for management and little or no portfolio turnover

units or shares of beneficial interest

typically purchases a portfolio of bonds and terminates when the bonds in the portfolio mature

purchase a portfolio of stocks and, because stocks don't have a matuirty date, terminates at a predetermined date

purchases shares of an underlying mutual fund

actively manages a securities portfolio to achieve a stated investment objective - either closed end or open end -all sell shares to the public in an initial public offering (IPO)

will raise capital for its portfolio by conducting a common stock offering, much like any other publicly traded company that raises capital to invest in its business (also called publicly traded funds) * only investment company security that trades in the secondary market *

the price at which an investor can sell

price at which an investor can buy

one issues one class of security, which is common stock (no preferred shares or bonds) - it does not specify the exact number of shares it intends to issue but registers an open offering with the SEC (mutual funds conduct a continuous primary offering of common stock)

priced at the end of each business day, with sellers receiving the next entered by 4pm - any request to buy or sell that are entered after 4pm will receive the next business day's NAV or POP

closed-end company's initial offering of shares is limited (it closes after a specific authorized number of shares have been sold) open-end company is perpetually offering new shares to the public (it is continually open to new investors)

an insurance contract designed to provide retirement income - stream of payments guaranteed for some period of time

An annuity guarantees payments for the life of the annuitant

if the investment manager of an insurance company is responsible for selecting the securities to be held in the separate account - must be registered under the Investment Company Act of 1940

insurance company product that guarantees a stream of income for life. Promises a stated rate of return: it is the insurance company that is at risk to provide the rate of return it promised; the investor assumes no investment risk with a fixed annuity.

if an investor wants to sell shares previously purchased in a mutual funds, it is the mutual fund that stands ready to buy them back

- A professional investment adviser manages the portfolio for investors - Mutual funds provide diversification by investing in different companies - Most funds allow investment , often $500 or less and additional of $25 - May allow investment at redue sales by offering breake pints through larger deposits - An investor retains voting rights similar to common stocks - new funds must offer re-investment of dividends and capital gains without sales charge - Investor may liquidate a portion of his holding without disturbing the portfolio

front-end sales load

back-end load

Level load - good for investors who have short time horizons Typically have a one-year, 1% CDSC, a .75% 12b-1 fee, and .25% shareholder service fees.

fund does not charge any type of sales charge and are purchased at NAV -are permitted to charge fees that are no considered sales charges

short-term buying and selling of mutual fund shares to take advantage of inefficiencies in mutual fund pricing

total assets - total liabilities *the amount the investor receives upon redemption

NAV of the fund/share outstanding

-Market value securities increases -Fund receives dividends -Fund received interest -Liabilities decline

-Market value securities declines -Fund distributes dividends -Fund distributes capital gains -Liabilities increase

-Manager buys or sells securities -Fund issues shares -Fund redeems shares

full and fair disclosure document that provides a prospective investor with the material information needed to make a fully informed investment decision. -if using to solicit a sale, must be distributed to an investor before or during the solicitation

Includes: -fund's objective -investment policies -sales charges -management expenses -services offered -1- 5- 10- yr performance history or perf over the life of the fund (whichever is shorter) * 8 yr existence - show 1,5,8 OR 4 yr existence - show 1,4

standardized summary of key information (in a specific sequence -investments, risks, performance, fee tables, objectives, strategies, holdings, management, shareholder, financials) in the fund's full or final prospectus - investor can either purchase funds using application or request a full prospectus *rule 489: short form that may be used to make the sale Cover page/Beginning: -Fund's name and the Class -Ticker symbol - and if the fund is an ETF, identification of the principal US market or markets on which the fund shares are traded -Legend (on cover page) w/ a toll free number to request paper delivery of prospectus or website of one to be downloaded

Additional details about the fund not necessary for the prospectus - presented within 3 business days of customer request Typicall contain the fund's consolidated financial statements: -the balance sheet (sent to any shareholder on request in writing between semi reports) -statement of operations -an income statement -a portfolio list at the time the SAI was compiled

-a discussion of factors and strategies that materially affected its performance during its most recently completed fiscal year -a line graph comparing its performance to that an appropriate broad-based securities market index -the name(s) and title(s) of the person(s) primarily responsible for the fund portfolio's day-to-day management

(shareholders must be sent these semiannually) One of these must be an audited annual report Must contain: -the investment company's balance sheet -a valuation of all securities in the investment company's portfolio as of the date of the balance sheet (a portfolio list) -the investment company's income statement -a completed statement of all compensation paid to the BOD and to the advisory board -a statement of the total dollar amount of securities purchased and sole during the period.

every fund's single greatest expense - charge annually percentage of the total assets under management

Sections 12b-1 of the Investment Company Act of 1940 permits a MF to collect a fee for promoting, selling, or undertaking activity in connection with the distribution of its shares - the fee is determined annually as a flat dollar amount or as a percentage of the fund's average total NAV during the year, and is charged quarterly - MUST BE DISCLOSED IN prospectus -associated with no-load fund companies - BUT if the fee os more than .25% of the average net assets, the fund may not use the term no load

a fund's expenses divided by/compared to average net assets. Represents operating efficiency of a mutual fund, where the lower the number the more efficient the fund. !! a expense ration of 1.72% means the fund charges $1.72 per year for every $100 invested . !!

unique forms of business that raise money to invest in real estate, oil and gas, equipment leasing, and other similar business ventures -Not taxed directly - the income or losses are passed directly through to the owners of the partnership (investors who are then responsible for tax consequences) -No secondary Market -Considered Highly illiquid

Real Estate Programs Oil and Gas Programs Leasing Programs Limited Partnerships

Includes: raw land, new construction, or existing properties. Provides investors with these benefit opportunities: -Capital growth potential: through appreciation of property -Cash Flow (income): collected from rents -Tax Deductions: from mortgage interest expense and depreciation allowances for "wearing out the building" and capital improvements -Tax Credits: for gov-assisted housing and historic rehabilitation -reduce tax liability dollar for dollar

Includes: speculative or exploratory (wildcatting) programs to locate new oil deposits (generally considered the riskiest development programs that drill near existing producing wells in hopes of location new deposits) and income programs that invest in producing wells (least risky) Unique tax advantages: -Intangible drilling cost (IDCs): costs associated with drilling (wages, supplies, fuel, and insurance that have no salvage value) can be written off (deducted) in full in the first year of operation -tangible are deducted over several years (depreciation) -Depletion Allowances: tax deductions that compensate the program for the decreasing supply of oil or gas after it is taken out of the ground and sold

Equipment leasing programs are created when DPPS purchase equipment leased to other businesses - investors receive income from lease payments as well as proportional share of write-offs from operating expenses, interest expenses, and depreciation of the actual equipment owned by the program. Primary objective: tax-sheltered income (the income being sheltered by the write-offs).

(Most common DPP) -investment opportunities that permit the economic consequences of a business to flow or pass through to investors -All pass through to the investors (partners) -partnerships with one or more general partners and one or more limited partners (report individually to IRA) Disadvantage: -lack of liquidity in the partnership interest -secondary market is extremely limited -interest In the business is not freely transferable

invest capital, manage the business, and are personally liable for partnership debts (unlimited liability)

partners in a limited partnership who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contributions (amount invested) - flow-through of income and certain expenses

Sold Through -Private Placement: investors receive a private placement memorandum for disclosure - involves small group each contributing a large sum of money (accredited investors) -Public Offering: sold by prospectus for disclosure - large number of investors making small contributions

liquidated on a predetermined date specified in the partnership agreement. Early shutdown may occur if the partnership sells or disposes of its assets if of a decision is made to dissolve the partnership by the limited partners holding a majority interest GP must settle accounts in this order: -Secured lenders -Other creditors -Limited Partners -GPs

Company that manages a portfolio of real estate (equity REITs), mortgages (mortgage REITs), or both to earn profits for shareholders Under the guidelines set by the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders -* NOT investment company (open end or closed end) * - organized as trusts and investors buy shares or certificates of beneficial interest on stock exchanges or in the OTC market (an owner of REITs holds an undivided interest in a pool of real estate investments) -offer dividends and gains to investors but do not pass through losses like LPs so they are NOT considered DPPs

Registered with the SEC and are subject to all disclosure requirements

not subject to the same disclosure requirements as public REITs and therefore are subject to greater risk

traded on a stick exchange, exchange-traded

not listed on an exchange and trade in the OTC market - unique risks exit -far less liquidity versus a listed product

(private investment companies) Unregulated companies that seek to exploit various market opportunities and thereby earn larger returns than are ordinarily available to investment companies - DO NOT HAVE TO BE REGISTERED WITH SEC -must be sophisticated investors only (accredited)

-highly leveraged portfolios -short positions -derivative postions (options/futures) -currency speculation -commodity speculation -investment in politically unstable international markets

minimum holding requirements (length of time)

securities that trade intraday on a national securities exchange, and are priced so the value of the product is derived from other investment instruments, such as commodity, a currency, a share price, or an interest rate

collections of stocks, bonds, and other investments that are traded on exchanges but are traded more like individual stocks than like mutual funds -registered as open-end funds -can be purchased on margin and sold short -commissionable transaction

Senior, unsecured debt securities issued by a bank or financial institution - backed only by the good faith and credit of the issuer -Notes track the performance of a particular market index, but do not represent ownership in a pool of securities

The potential for a major disruption in the function of an entire market or financial system (war, global security threats, or inflation) -Market Risk -Interest Rate Risk -Reinvestment Risk -Inflation Risk

the risk that when the overall market declines, so too will any portfolio made of securities the market comprises

the possible reduction in returns associated with changes in interest rates

The risk that a decline in interest rates will make it difficult to reinvest proceeds from redemption

The danger that money won't be worth as much in the future as it is today

risk that can be eliminated by diversification -Capital Risk: potential for an investor to lose some or all money -Business Risk: poor management decisions -Financial Risk: Credit Risk/Default Risk -Call Risk: called before maturity -Prepayment Risk: think paying off mortgages -Currency Risk -Liquidity Risk: Marketability Risk -Regulatory Risk: Rules ex. FDA -Legislative Risk: Law / Tax -Political Risk

Securities Exchange Commission - Sec ind. reg body - BD's must be approved by SEC

- Censure - Limits on activities, functions and ops - Registration suspension/revocation - Fines

- Function under SEC oversight 1. FINRA (Financial Industry Regulatory Authority) 2. CBOE (Chicago Board Options Exchange) 3. MSRB (Municipal Bond Rulemaking Board)

Financial Industry Regulatry Authority - Regulates investment banking (securities underwriting), trading, and conduct of firms/people

Chicago Board Options Exchange - Regs trading standardized options and related contracts listed on that exchange

Municipal Bond Rulemaking Board - Regulates underwriting and trading of state and municipal securities - No enforcement powers (FINRA can enforce) - No regulatory powers over the municipalities who issue municipal securities

- Oversees tax collection - IRS enforces laws and is a bureau of the Dept. of the Treasury

N. American Securities Administration Association - Voluntary association where members give insight to SEC to help make the rules

- Consists of 12 regional Fed. Res. Banks and hundreds of natl. and state banks - Determines monetary policy and implements policies like: Regs $ supply, prints $, clears fund transactons

- Nonprofit org. - Most members are BD's who pay assessments into general insurance fund used to meet cust. claims in event of BD bankruptcy

They become a general creditor of the BD for the uncovered amount

Commodities, Commodity futures, Currencies

Provides deposit insurance guaranteeing the safety of the depositor's accts in member banks up to $250K/deposit

An indiv. who buys personal securities

An entity that pools $ to buy securities (Banks, mutual funds, insurance companies, etc)

- Net worth of $1M or more, not including primary residence OR - Has annual income of $200K or more in each of 2 most recent years ($300K jointly with spouse)

- Operate under individual membership w/ FINRA or SRO - Some BD's are "full service," offering all investment types - They can also include proprietary trading - to trade in the acct of the BD known as market making into their business model

- Carries cust. accts and accepts funds and securities from customers - they are larger BD's - Very risky

Customer funds/securities from the firm's capital and securities

- aka "Introducing BD" - introduces its customers to a clearing firm - Clearing firm holds funds and secs of intro firm's customers, basically intro firm's back office - Risks are low for Intro BD's

Customer checks made out to a clearing firm

Allows a cust (usually an institution) to select 1 member firm (prime broker) to give custody and other services

Handle all trades placed by customer

1) Prime Broker must sign agreement with customer 2) PB enters into agreements with each executing broker named by customer

Customer can have 1 master acct and trade with mult brokerage houses (different products)

Anyone who gives investment advice for $

Gives advice on behalf of a municipal entity

- A company or municipality may offer securities for sale to public - Underwriters are groups of BD's/investment bankers that work with an issuer to bring its securities to market

Any entity who buys a security to sell to make $

The person/institution responsible for making all investment, management, and dist. decisions for a customer - A trustee is the same, but legally appointed to do so

- Securities issued in correct owner's name - Cancelling old and issuing new certs - Keeping ownership records

An intermediary b/n buy and sell transactions

BD's and commercial banks

Serves the custody needs of security independent participants in US worldwide

Broadly defined at stock and bond markets - Public and private securities sold

Where securities are sold to the public

Nasdaq - exchange listed securities traded on OTC market - All NYSE and most securities listed on regional exchanges are eligible for OTC trading

- A market for institutional investors with large blocks of stock both listed and unlisted trading w/o BD's involved - 24 hrs a day on Elec. Comm. Networks (ECM's)

1. Open market operations (buying and selling securities) 2. Changes in the discount rate (on loans to member banks) 3. Changes in reserve requirements

Monetary policy Fiscal policy

the actions the federal reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objects

Use of government spending and revenue collection measures to influence the economy. Government policy on spending and taxes. Interest rates influenced by both monetary and fiscal policy

To influence the $ supply

The President and Congress - tax laws and fed spending

M1, M2, M3

- The most readily availible kind of $ - Money in circulation and checking accts that can be easily converted into $ (demand deposits or checking accts)

Savings accts, money market mutual funds, time deposits less than $100,000

Time deposits of over $100,000 and repurchase agreements longer than 1 day

Buying and selling govt. securities

Where securities are traded between investors - 1 investor sells to another and the issuer isn't involved (stock exchanges)

Meets to direct the govts. market operations

$ supply increases

The money supply decreases

It buys securities from the banks - Takes securities out of the econ and $ goes into the econ - This increases # of reserves and lets banks give more loans, lowering interest rates! (Basically buying securities pumps $ into banks)

It sells securities to the banks and interest rates rise

Expands the econ - Securities out and $ in - Money supply increases and interest rates drop

Contracts the econ - Securities go into the econ and $ goes out - $ supply drops and interest rates rise

The cost of $ - The supply and demand of $ determines the rate of interest payed to borrow it (Less $, higher int rates. More $ supply, lower int rates)

The rate commercial banks charge each other for overnight loans of $1M or more

The rate the Fed Reserve charges for short term loans to member banks

The interest rate US commercial banks charge their largest corporate borrowers for unsecured loans

Yes. The large banks set the standards for the smaller banks rates

Lower - When FRB eases $ supply Raise - When FRB contracts $ supply

The interest rate banks charge BD's on $ they borrow to lend to margin acct. customers

They let customers buy securities w/o paying in full - AKA "Call Loan Rate" or "Call Money Rate"

Other member banks or Fed Reserve

Businesses prospering or failing

Give analysts fundamental raw material needed to assess a company - Quarterly and annual financial reports

- Gives a snapshot of company finances - ID's assets and liabilities - The company's equity and net worth is the difference b/n assets and liailities

Assets - Liabilities = NW Assets = Liabilities + NW

- Summarizes a corp's revenues and expenses for a fiscal period - Compares revenue with costs and expenses

Expansion, Peak, Contraction, Trough

Increased business activity

Economic decline from its peak (recession is a mild, short contraction) - 6 months

When business activity stops declining

Econ. downturn lasting for over 6 quarters (18 months) or more

Precious metals

- $ supply - Building permits - New orders of consumer goods - Stock prices

- Very direct and simultaneous with business cycles - # of hours worked - Employment levels - Ind. production - GDP (Gross Domestic Product)

Factors that change after the econ. has started a new trend - determines long term trends - Corp. profits - Average duration of unemployment - Commercial and Ind. loans outstanding

General rise in prices

General price drop

Slow/little growth and high unemployment

Inflation + unemployment

1. Defensive Industries 2. Cyclical Industries 3. Growth Industries 4. Special Situation Stocks

Food, pharma, tobacco - Stays steady - Less risk, so lower ROI

Highly sensitive - Durable goods like machinery, raw materials - Demand for these drops during recessions

- Industries growing faster than the econ. as a whole - Computers and bio-engineering - Most growth companies keep all/most earnings, so these stocks pay low dividends

- Comps with unusual profit potential coming from non-recurring circumstances Ex. New management, discovery of a new natural resource, new product intro

The theory that a government policy of increasing spending and cutting taxes could stimulate the economy in a recession.

The idea that the amount of money in circulation (the money supply) is the primary influence on economic activity and inflation

A decrease in the highest income tax rates should stimulate economic growth and ultimately result in an increase in government revenues.

Factors outside the US that impact our securities and trade markets

The flow of $ b/n the US and other countries

They may be in a surplus (more $ in than out) or a deficit.

The export and import of goods and services

When debits are greater than credits

When credits are greater than debits

A nation's annual economic output of all goods and services

The value of one currency compared to another - If the dollar is weak, foreign currency buys more US goods so exports increase

Offer the securities

Help issuers bring the securities to market - BD's or investment banks - Called Syndicates

- $ raised goes to the issuing company - Done via primaries market (new issues)

Offered and sold to the public - BD's and investment banks used (underwriters)

To give full and fair disclosure to the investors. New issues have to be registered with the SEC

Sold to private investors rather than the general public - Generally institutional investors or small groups of wealthy people - Accredited investors

Private offerings - exempt

The 1st time an issuer distributes securities to the public - They are primary issuer transactions b/c comps get all the proceeds

Subsequent Public Offering - subsequent issues of new shares after an IPO

When 1 or more stockholder in the comp. sells all or a large portion of their holdings - Proceeds are paid to the stockholder, not the issuer/comp

A combo of a primary and secondary offering - Some shares offered to the public and the existing stockholders offer the balance

- Calls for UW's to buy secs from the issuer - The UW doesn't have to buy the shares, therefore the issuer is liable for them

The UW has to sell all shares or cancel the underwriting

Sets a minimum the issuer needs to raise to move forward with the UW and a maximum amount of securities the issuer needs to sell

- Widely used UW contract - UW's contract with issuer (firm) to buy the securities - UW acts as the Principal and they have to buy any unsold shares

- Disclosing material info about the issuer - A prospectus is given to the purchasers - All responsibility is on the issuer

After the issuer files a registration statement, a 20 day period occurs when no one can solicit sales of the securities

- Bare bones ads about the security, minimal info during the Cooling-Off period - These do not have to e registered with the SEC - Issuer name - Offering type - # of shares to be sold - Names of UW's

Securities registered with the SEC for sale at a later date; the securities are held "on the shelf" until the sale.

Legal framework for the state registration of securities - Registrations renewed every year

1. Isolated non-issuer transactions 2. Unsolicited transactions

Occurs on the secondary market and aren't frequent

Transactions initiated by the client not the agent or rep

Coordination, Qualification, and Notice Filing

The issuer files a NEW security with the state and SEC at the same time

- Most difficult way to register - Issuer has to respond to any state requirement - If registration can't be done by coordination or filing

Federally covered - states don't have jurisdiction or registration requirements

These give full disclosure to investors about the securities

- Made available during the cooling-off period - First registration statement filed w/ SEC by issuer to ring the securities to market with more detailed info

- Make offers to sell securities - Take orders to deliver ad material

- Take indications of interest - Distribute a Preliminary Prospectus - Tombstone ads

- Amendments made to preliminary prospectus after the effective date, like final offering price - Orders can now be taken

Nope

Delivered to all buyers after the effective date

On the SEC website

Securities that need to be registered and sold

- Some are exempt from registration and prospectus either b/c of issuer's creditworthiness or b/c a govt agency has jurisdiction over the issuer

Securities offered by industrial, financial, or other companies can apply

Additional Public Offering - done on Primary Market

B) shelf registration sales Through a shelf offering, an issuer who is already a publically traded company can register new securities without selling any of the shares until later or waiting to sell a portion of the shares. For securities offered via a shelf registration, a supplemental prospectus must be filed with the SEC before each sale.

buy or sell, executed immediately at the best available market price market orders are always executed immediately at the current market price

buy or sell, limits the acceptable purchase or selling price paid or received for the securities limit orders can only be executed at the limit price designated by the customer or better

at the limit price or lower

at the limit price or higher.

inherent risk. The risk is that the market may never go as low as the buy limit designated on the order, or as high as the sell limit designated on the order. As a consequence, it is possible their order will never be executed. In this light, customers who enter limit orders risk missing the market—that is, the opportunity to buy or sell because of the limit they've imposed on the buy or sell order instruction.

time priority. There may be multiple orders to buy stock at a particular price. Once the stock begins trading at that price, those limit orders that were entered first will be filled first.

Buy or sell, a stop order does not become a "live" working order in the market place until the stock trades at or through a specified price (the stop price). Once the order is "triggered" by the stock reaching the specified stop price, the order becomes a market order, and like any other market order, it should be executed immediately at the best available market price.

Buy or sell, this order type also has a stop price and does not become a "live" working order until the stock trades at or through the stop price. However, it also has a limit price, so once the order is "triggered" by the sock reaching the specified stop price, the order becomes a limit order to buy or sell at the specified limit. Like any other limit order, it may or may not be executed depending on where the price of the stock is.

Unless marked to the contrary, an order is assumed to be a day order, valid only until the close of trading on the day it is entered. If the order has not been filled (executed in full), it is canceled at the close of the day's trading. Keep in mind that while market orders should be filled immediately, this is of more importance with limit orders.

GTC orders are valid until executed or cancelled. However, all GTC orders are automatically cancelled if unexecuted on the last business day of April and the last business day of October. If the customer wishes to have the order remain working beyond those specific days, the customer must reenter the order.

These are market orders designated to be executed at the opening of the day or at the close of the day. Depending on the market (exchange or OTC) the order is being sent to, the customer is not guaranteed the exact opening or closing price but instead a price at, or close to the first or last price of the day.

Applicable to limit orders, this is an instruction to fill (execute in its entirety) the order immediately or kill (cancel) the order completely. In this light, there can't ever be a partial execution.

IOC orders are like FOK orders except that a partial execution is acceptable. In other words, if only a portion of the order can be filled, it is, and the remaining unexecuted portion is canceled.

AON orders must be executed in their entirety or not at all. AON orders can be day or GTC orders. They differ from the FOKs in that they do not have to be filled immediately. In other words, they can be held until the end of the day (for day orders) or beyond (for GTC orders) until they can be filled in their entirety.

the highest price anyone is willing to pay for the securities at that moment in time.

the lowest price anyone is willing to accept to sell the securities at that moment in time.

If the firm acts as an agent, it is a broker acting on behalf of its customer to buy or sell securities in the market. The firm is paid a commission when acting as an agent. AGENT = BROKER = COMMISSION

If the firm is acting as a principal, the firm is buying into, or selling out of its own inventory to accommodate its customer. In this capacity the firm is a dealer and will markup the securities it is selling out of its inventory or mark down the securities it is buying into its inventory, rather than charge the customer a commission. PRINCIPAL = DEALER = MARKUP or MARKDOWN

hen an investor buys a security, they are known to have taken a position in that security. Owning a security is also known as being long or having a long position in the security. When someone is long a security they have taken an ownership position in the hopes that the security will rise in value and they will be able to sell it later for a profit. This is known as being bullish (anticipating the security will rise in value). The risk associated with a long position is that the price of the security falls. Maximum loss for the investor occurs if the security becomes worthless. Investors can open a position by buying a security and then later close the position by selling the security, hopefully at a higher price for a profit, Buy to open a position = Long = Bullish

An investor can also sell a security to open a position. To do this, an investor is actually selling a security they do not own. This is done by borrowing stock from a stock lender and selling (shorting) the borrowed shares. Selling a security one does not own is known as being short or having a short position in the security. Just the opposite of being long, a short customer is taking the view that the stock will decline in price, enabling them to buy the shares back later at a lower price. Buying back the shares enables the investor to return them to the party they were initially borrowed from. In this scenario, the customer profits by the difference between the short sale price and the price at which the shares are bought back. This is known as being bearish (anticipating the security will fall in value). The risk to a short seller is that the price of the borrowed shares increases, forcing the seller to buy back at a higher price instead of a lower price as anticipated. Because there is no limit on how high a security's price may rise, a short seller has unlimited loss potential. Sell to open a position = Short = Bearish

Selling a stock short without first borrowing the shares or confirming a location where the shares can be borrowed from Naked short selling is a violation.

■ what security; ■ the number of shares or units; or ■ whether to buy or sell. Discretion does not apply to decisions regarding the timing of an investment or the price at which it is acquired only.

trading authorization or a limited power of attorney with the broker-dealer. No transactions of a discretionary nature can take place without this document on file. Once authorization has been given, the customer is legally bound to accept the decision made by the person holding discretionary authority, although the customer may continue to enter orders on his own.

■ Each discretionary order must be identified as such at the time it is entered for execution. ■ An officer or a partner of the brokerage house must approve each order promptly and in writing, but not necessarily before order entry. ■ A record must be kept of all transactions. ■ No excessive trading, or churning (trading for the sole purpose of generating commissions), may occur in the account relative to the size of the account and the customer's investment objectives. ■ To safeguard against the possibility of churning, a designated supervisor or manager must review all trading activity frequently and systematically.

A transaction initiated by an agent or registered representative

Unsolicited transactions are those initiated by the customer.

salary bonuses and income that is derived from active participation in a trade or business.

that which is earned from one's investments. Sometimes referred to as portfolio income, it would include dividends, interest, and capital gains derived from the sale of securities.

Ordinary income can be defined as the income earned from interest, wages, rents, royalties, and similar income streams. Ordinary income is taxed at different rates depending on the amount of income received by a taxpayer in a given tax year. The IRS divides ordinary income into tax brackets.

Capital gains are usually associated with the sale or exchange of property, including securities. The category of capital gain taxation is further broken down into long and short-term capital gains. If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be a short-term gain and it will be taxed at the same rate as the taxpayer's other ordinary income. Therefore, for short term capital gains, the tax rates are the same as the taxpayer's ordinary income. However, if the asset is held for more than one year, the gain is considered to be a long-term capital gain and is taxed at a favorable long-term rate.

Dividends are distributions of a company's profits to its shareholders. Investors who buy stock or mutual funds for example are entitled to dividends if and when the board of directors votes to make such distributions. Shareholders are automatically sent any dividends to which their shares entitle them.

Cash dividends are normally distributed by check if an investor holds the stock certificate, or they are automatically deposited to a brokerage account if the shares are held in street name (held in a brokerage account in the firm's name to facilitate payments and delivery). When declared, cash dividends are typically paid quarterly and are taxed in the year they are distributed.

If a company wishes to reinvest its profits for business purposes rather than to pay cash dividends, its board of directors may declare a stock dividend. This is typical of many growth companies that invest their cash resources in research and development. Under these circumstances, the company issues additional shares of its common stock as a dividend to its current stockholders instead of cash. The net result is that the shareholder now owns more shares after the distribution but the cost per share is adjusted downward. The stock dividend itself is not taxable, but the adjusted cost per share (new cost basis) will impact the tax consequences when the shares are sold.

either nonqualified (ordinary-taxed at the investor's ordinary income tax rate) or as qualified. The maximum tax rate on qualified dividends is specified by current IRS tax code and will depend on the investor's income tax bracket. The higher the investor's income tax bracket, the higher the tax on qualified dividends will be, up to the specified maximum. However, it will always be lower than the investor's ordinary income tax rate.

When a company's board of directors (BOD) approves a dividend payment it is recognized as the date the dividend was declared. At this time the BOD would also designates the payment date and the dividend record date discussed following.

On the basis of the dividend record date, FINRA or the exchange (if the stock is listed) posts an ex-date. The ex-date is one business day before the record date. Because most trades settle the regular way—two business days after the trade date—a customer must purchase the stock two business days before the record date to qualify for the dividend. Or said another way, to receive the dividend, the stock must be purchased before the ex-dividend date. ■ Conversely, if the stock is purchased on or after the ex-date, the new owner has purchased the stock "ex" without the dividend and is therefore not entitled to receive it.

The stockholders of record (those who own the stock) on the record date receive the dividend distribution.

On the payable date the dividend disbursing agent sends dividend checks to all stockholders whose names appear on the books as owners as of the record date.

Interest is the income paid to those who purchase debt securities—bond holders. It is generally stated as a percentage of face (also known as PAR) value on an annual basis. Interest is taxed as ordinary income.

when a security is sold for a price higher than the cost basis.

a capital loss occurs.

return of capital. The cost basis is not taxed as a gain but any sales proceeds above cost basis would be

The most widely cited measure of the market, the DJIA tracks the performance of 30 stocks of large, well-known companies.

Standard and Poor's index tracks 500 stocks of large-company U.S. companies and is the basis for several index mutual funds and exchange-traded funds.

This index tracks 2,000 small-company stocks and serves as the benchmark for that component of the overall market.

Tracking over 5,000 stocks, the Wilshire covers all the companies listed on the major stock markets, including companies of all sizes across all industries.

Lipper calculates several indexes tracking different categories of mutual funds, such as Growth, Core, or Value funds.

This is a composite index that combines several bond indexes to give a picture of the entire bond market.

known as the trade date

is the date on which ownership actually changes between the buyer and seller. It is the date on which broker-dealers are required to exchange the securities and funds involved in a transaction and customers are requested to pay for securities bought and to deliver securities sold.

T+2

corporate securities, municipal bonds and government agency securities (Ginnie Mae, Fannie Mae and Freddie Mac debt securities)

federal government securities (T-bills, notes and bonds) and options

money market securities

Cash settlement, or same-day settlement, requires delivery of securities from the seller and payment from the buyer on the same day a trade is executed. Stocks or bonds sold for cash settlement must be available on the spot for delivery to the buyer. Both parties to the transaction would have to agree for cash settlement to occur.

This form of settlement is available to customers who want to sell securities but cannot deliver the physical securities in time for regular way settlement. A seller's option contract lets a customer lock in a selling price for securities without having to make delivery on the second business day. Instead, the seller can settle the trade as specified in the contract. Or, if the seller elects to settle earlier than originally specified, the trade can be settled on any date from the fourth business day through the contract date, provided the buyer is given a one-day written notice. A buyer's option contract works the same way, with the buyer specifying when settlement will take place.

the trade date plus three business days (T + 3). Consider that regular way settlement would be T + 2 and that a seller's or buyer's option settlement is allowing settlement to occur after regular way. Therefore, it couldn't occur any sooner than the day after regular way.

book-entry form, meaning that no physical securities (paper certificates) exist. Transfer of ownership is recorded by entering the change on the books or electronic files.

A forward stock split increases the number of shares and reduces the price without affecting the total market value of shares outstanding; an investor will receive more shares, but the value of each share is reduced. The total market value of the ownership interest is the same before and after the split. More shares, reduced value per share = same total ownership before and after the adjustment.

After a reverse split, investors own fewer shares worth more per share. Fewer shares, increased value per share = same total ownership before and after the adjustment.

Rights, sometimes known as preemptive rights, entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. A rights offering allows stockholders to purchase common stock below the current market price. The rights are valued separately from the stock and trade in the secondary market during the subscription period which is typically 30 to 45 days. Rights - short term, given to existing shareholders, allows one to purchase shares below current market value.

■ exercise the rights to buy stock by sending the rights certificates and a check for the required amount to the rights agent; ■ sell the rights and profit from their market value (rights certificates are negotiable securities); or ■ let the rights expire and lose their value (not a likely scenario).

A warrant is a certificate granting its owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price at the time the warrants are issued, and at some time in the future. warrant is usually a long-term instrument that gives the investor the option of buying shares at a later date at the specified (exercise) price. Note that while the exercise price is higher than the current market value when the warrants are issued, it is hopeful that the exercise price will be below current market value when the warrants are eventually exercised. Warrants are usually offered to the public as sweeteners in connection with other securities, such as debt instruments (bonds) or preferred stock, to make those securities more attractive. Such offerings are often bundled as units. Warrants—long term, bundled with other securities, allows someone to purchase shares at a price that is above the current market value at the time the warrants were issued.

These are transactions in which the ownership of companies or their operating units are transferred as in the case of an acquisition, or combined as in the case of a merger. M&A can allow enterprises to grow, shrink, or change the nature of their business.

A takeover is the purchase of one company, known as the target company, by another company known as the bidder or buyer. A hostile takeover is accomplished when the buyer goes directly to the target company's shareholders bypassing the board of directors or management.

A type of divestiture where a parent company sells all of the shares of a subsidiary or distributes new shares of a company or division it owns to create a new company.

An offer to buy securities for cash or for cash plus securities.

A buyback, sometimes referred to as a repurchase, is when a company buys its own outstanding shares in the open market from existing shareholders. Companies might buy back shares for a number of reasons. For example, doing so reduces the number of shares available (supply) and therefore can increase the value of shares still available (demand). Sometimes by removing available shares from the market a company might be trying to eliminate any threats of takeover.

cash dividends, stock dividends, a forward or reverse split, or a rights or warrants offering.

Issuers are required by the Securities Exchange Commission (SEC) to give notice of corporate actions to shareholders for such actions as cash dividends, stock dividends, a forward or reverse split, or a rights or warrants offering. A notice is not required for an ordinary interest payment on a corporate debt (bond) security

■ Title of the security ■ Date of declaration ■ Date of record for determining holders entitled to receive the distribution or to participate in the split ■ Date of payment or distribution ■ For a cash dividend—the amount to be paid ■ For a stock dividend—the rate of the dividend; example 10% ■ For a split (forward or reverse) the rate of the distribution; example

no later than 10 days prior to the record involved or, in case of a rights subscription or other offering if giving 10 days advance notice is not practical, on or before the record date and in no event later than the effective date.

a limited power of attorney that a stockholder gives to another person, transferring the right to vote on the stockholder's behalf. A proxy is automatically revoked if the stockholder attends the shareholder meeting or, if the proxy is replaced by another proxy, the stockholder executes at a later date.

Stockholders can receive multiple proxy solicitations for controversial company proposals. If proxies are solicited, the SEC requires a company to give stockholders information about the items to be voted on and allow the SEC to review this information before it sends the proxies to stockholders. In a proxy contest, everyone who participates must register with the SEC. Also, anyone who is not a direct participant but who provides stockholders with unsolicited advice must register as a participant.

alerted to all financial matters concerning issuers (e.g., quarterly reports and proxy statements). To do so, members act as forwarding agents for all proxies and other corporate materials received from an issuer for street name stock.

vote street name stock in accordance with the wishes of the beneficial owners (the brokerdealers' customers who purchased the shares). If a customer signs and returns a proxy statement and fails to indicate how the shares are to be voted, the member must vote the shares as recommended by management.

the 10th day before the annual shareholders' meeting, the member may vote the shares as it sees fit as long as the matters to be voted on are of minor importance. If the matters to be voted on are of major importance (e.g., merger or issuance of additional securities), the member may never vote the shares as it sees fit. In this case, if the proxy is not returned, the shares are not voted.

all costs relating to the forwarding of proxy materials. Such costs include postage and related clerical expenses.

A cash account is the basic type of investment account. Anyone eligible to open an investment account can open a cash account. In a cash account, a customer pays in full for any securities purchased. Payment in full as defined by the Securities Exchange Commission (SEC) under Regulation T must occur not later than two business days after the standard settlement period. Certain accounts must be opened as cash accounts, such as individual retirement accounts (IRAs), corporate retirement accounts, and custodial accounts. Corporate stock is purchased in a cash account and it will settle regular way T + 2. In a cash account full payment would be required no later than two business days after T + 2—in other words, T + 4.

Trading on margin is a common practice in the securities industry. It allows customers to increase their trading capital by borrowing either cash or securities via their broker-dealers.

long and short. In a long margin account, customers purchase securities and pay interest on the money borrowed until the loan is repaid. In a short margin account, stock is borrowed and then sold short, enabling the customer to profit if its value declines. All short sales must be executed through, and accounted for in a margin account.

he member firm executing a short sale on behalf of the customer, margin customers of that member firm, other member firms, specialized companies known as stock lending firms, and institutional investors. The most common source is another customer's margin account, but permission must be given by signing a loan consent agreement

customers borrow money

Customers borrow securities

■ purchase more securities with a lower initial cash outlay; and ■ leverage the investment by borrowing a portion of the purchase price. Leveraging magnifies the customer's rate of return or rate of loss in adverse market conditions. The table following demonstrates this but does not account for trading costs (commissions) or for interest costs applied for the funds borrowed.

■ margin account loans generate interest income for the firm; and ■ margin customers typically trade larger positions because of increased trading capital, generating higher commissions for the firm.

is the pledging of customer securities as collateral for margin loans. A hypothecation agreement must be signed by a customer who wants to open a margin account. This agreement is generally contained within the margin agreement, and thus, customers are giving permission for this process to occur when they sign the margin agreement.

In this light, you can see that a broker-dealer is not lending its own funds to customers purchasing securities on margin but instead is borrowing money from a bank for that purpose. Regulation U oversees the process of a bank lending money to broker-dealers based on customer securities having been pledged as collateral for the loan.

hypothecation if customers have given specific permission by signing the hypothecation agreement.

■ Individual and joint accounts (those with more than one party to the account) can utilize margin. ■ Corporate accounts may utilize margin only if it is not restricted in the corporation's charter or by-laws. In other words, trading on margin may be listed as being prohibited, and if so, would not be allowed. ■ Partnership accounts may utilize margin only if it is not restricted in the partnership resolution. Like a corporate account, a partnership agreement might list trading on margin as being prohibited, and if so would not be allowed. ■ Fiduciary (trust and custodial) accounts could only utilize margin if it is specifically permitted within the trust or custodial agreement. Note the difference here. In this instance, margin must be specifically listed as being permitted. ■ Individual retirement accounts (IRAs) and other qualified plans prohibit the use of margin.

principal of the firm prior to the first trade. The approval would need to be in accordance with whether or not margin is permissible for the type of account being set up as outlined in the previous section.

amount of equity that must be deposited to buy securities in a margin account

securities that can be used as collateral in a margin account

■ Exchange-listed stocks, bonds ■ Nasdaq stocks ■ Non-National Market Securities (NMS) OTC issues approved by the FRB ■ Warrants

■ Options (both calls and puts) ■ Rights ■ Non-National Market Securities (NMS) OTC issues not approved by the FRB ■ Insurance contracts

■ Mutual funds ■ New issues

■ U.S. Treasury bills, notes, and bonds; ■ government agency issues; and ■ municipal securities.

The credit agreement discloses the terms of the credit extended by the broker-dealer, including the method of interest computation and situations under which interest rates may change.

he hypothecation agreement allows the securities to be pledged for the loan and gives permission to the broker-dealer to repledge customer margin securities as collateral. The firm re-hypothecates customer securities to the bank, and the bank loans money to the broker-dealer on the basis of the loan value of these securities. All customer securities must be held in street name (registered in the name of the broker-dealer) to facilitate this process. When customer securities are held in street name, the broker-dealer is known as the nominal, or named, owner. The customer is the beneficial owner because he retains all rights of ownership.

If signed, the loan consent form gives permission to the firm to loan the customers margin securities to other customers or broker-dealers, usually to facilitate short sales where securities need to be borrowed.

a risk disclosure document. This information must also be provided to margin customers on an annual basis.

■ Customers are not entitled to choose which securities can be sold if a maintenance call is not met. ■ Customers can lose more money than initially deposited. ■ Customers are not entitled to an extension of time to meet a margin call. ■ Firms can increase their in-house margin requirements without advance notice.

■ greater than $4,000, deposit 50%. ■ between $2,000 and $4,000, deposit $2,000. less than $2,000, deposit 100% of the purchase price.

The deposit may be made in cash or in fully paid for marginable securities. If made using fully paid for marginable securities remember that they are only marginable to the extent of 50% of their value. Therefore, the securities must be valued at twice the amount of the Regulation T margin call. If payment is late, the broker-dealer may apply to its designated examining authority (DEA) for an extension.

clearing firm. For an amount less than $1,000, the broker-dealer can choose to take no action.

on the morning of the sixth business day, the firm must sell out the securities purchased and freeze the account for 90 days.

must have the funds available in the account to pay for the securities in full.

no order can be entered without the customer's prior approval.

a commission is billed for each transaction,

charge a single fee (either fixed or a percentage of assets in the account) instead of commission-based charges for brokerage services. Fee-based accounts are appropriate only for investors who engage in at least a moderate level of trading activity. Accounts with a low level of trading activity may be better off with commission-based charges. Rules require that, before opening a fee-based account, investors be given a disclosure document describing the services to be provided and the cost.

Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap accounts are generally investment advisory accounts.

Coverdell Education IRAs allow after-tax contributions of up to $2,000 per student per year for children younger than age 18. Contribution limits may be reduced or eliminated for higher-income tax payers. Distributions are tax free as long as the funds are used for qualified education expenses. These expenses include those for college, secondary, or elementary school. If a student's account is not depleted by age 30, the funds must be distributed to the individual subject to income tax and 10% penalty or rolled into an education IRA for another family member beneficiary.

A single account has one beneficial owner. The account holder is the only person who can control the investments within the account and request distributions of cash or securities from the account.

A full power of attorney allows someone who is not the owner of an account to deposit or withdraw cash or securities and make investment decisions for the account owner. Custodians, trustees, guardians, and other people filling similar legal duties are often given full powers of attorney.

A limited power of attorney allows an individual to have some, but not total, control over an account. The document specifies the level of access the person may exercise. Limited power of attorney, also called limited trading authorization, allows the entering of buy and sell orders but no withdrawal of assets. Entry of orders and withdrawal of assets is allowed if full power of attorney is granted.

Transfer on death (TOD) is a type of individual account that allows the registered owner of the account to pass all or a portion of it, upon death, to a named beneficiary or beneficiaries. This account avoids probate (i.e., having the decedent's will declared genuine by a court of law) because the estate is bypassed. However, the assets in the account do not avoid estate tax, if applicable.

In a joint account, two or more adults are named on the account as co-owners, with each allowed some form of control over the account. The account forms for joint accounts require the signatures of all owners. Joint account agreements provide that any or all tenants may transact business in the account. Checks must be made payable to the names in which the account is registered and endorsed for deposit by all tenants, although mail only needs to be sent to a single address.

Tenants in common (TIC) ownership provides that a deceased tenant's fractional interest in the account is retained by that tenant's estate and is not passed to the surviving tenant(s). each part must specify a percentage interest in the account

Joint tenants with right of survivorship (JTWROS) ownership stipulates that a deceased tenant's interest in the account passes to the surviving tenant(s). all parties have an undivided interest in the account

Corporations, like individuals, will invest in securities. When opening an account for a corporation, a firm must obtain a copy of the corporate charter as well as a corporate resolution. The charter is proof that the corporation does exist and the resolution authorizes both the opening of the account and the officers designated to enter orders.

■ the business's legal right to open an investment account; ■ an indication of any limitations that the owners, stockholders, a court, or any other entity has placed on the securities in which the business can invest; and ■ the individual who will represent the business in transactions involving the account.

A partnership is an unincorporated association of two or more individuals. Partnerships frequently open accounts necessary for business purposes. The partnership must complete a partnership agreement stating which of the partners can make transactions for the account. If the partnership opens a margin account, the partnership must disclose any investment limitations. An amended partnership agreement (similar to a corporate resolution) must be obtained each year if any changes have been made.

When securities are placed in a fiduciary account, a person other than the owner initiates trades. The most familiar example of a fiduciary account is a trust account. Money or securities are placed in trust for one person, often a minor, but someone else manages the account. The manager or trustee is a fiduciary. In a fiduciary account, the investments exist for the owner's beneficial interest, yet the owner has little or no legal control over them. The fiduciary makes all of the investment, management, and distribution decisions and must manage the account in the owner's best interests. The fiduciary may not use the account for his own benefit, although he may be reimbursed for reasonable expenses incurred in managing the account. The beneficial owner's Social Security number is used on the account.

is any person legally appointed and authorized to represent another person, act on his behalf, and make whatever decisions are necessary to the prudent management of his account.

■ trustee designated to administer a trust; ■ executor designated in a decedent's will to manage the affairs of the estate; ■ administrator appointed by the courts to liquidate the estate of a person who died intestate (without a will); ■ guardian designated by the courts to handle a minor's affairs until the minor reaches the age of majority or to handle an incompetent person's affairs; ■ custodian for a minor; ■ receiver in a bankruptcy; and ■ conservator for an incompetent person.

■ Proper authorization must be given—the necessary court documents must be filed with and verified by the broker-dealer. ■ Speculative transactions are generally not permitted. ■ Margin accounts are only permitted if authorized by the legal documents establishing the fiduciary accounts. ■ The prudent investor rule requires fiduciaries to make wise and safe investments. ■ Many states publish a legal list of securities approved for fiduciary accounts. ■ A fiduciary may not share in an account's profits but may charge a reasonable fee for services.

Accounts set up for minors can be established under either the Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts require an adult to act as custodian for a minor (the beneficial owner). Any kind of security or cash may be given to the account without limitation. Any securities given to a minor through an UGMA or UTMA account are managed by a custodian until the minor reaches the age of majority.

the property in the account is transferred into the name of the new adult.

the new adult reaches age 25 (or 21 in some states).

■ buy or sell securities; ■ exercise rights or warrants; or ■ liquidate, trade, or hold securities.

■ An account may have only one custodian and one minor or beneficial owner. ■ Only an individual can be a custodian for a minor's account. ■ A minor can be the beneficiary of more than one account, and a person may serve as custodian for more than one account as long as each account benefits only one minor. ■ The donor of securities can act as custodian or can appoint someone else to do so. ■ Unless they are acting as custodians, parents have no legal control over a custodial account or the securities in it.

When opening a custodial account, a representative must ensure that the account application contains the custodian's name, the minor's name and Social Security number, and the state in which the account is registered. no documentation of custodial rights or court certification is required for an individual acting as the custodian for a minor. Any securities in a custodial account are registered in the custodian's name for the benefit of the minor. For UGMAs, the securities cannot be registered in street name (the name of the broker-dealer), but for UTMAs they can. Securities bought in a custodial account must be registered in such a way that the custodial relationship is evident.

that of the minor. Though the minor is responsible for any and all taxes on the account, it is the parent's or legal guardian's responsibility to see that the taxes are paid.

■ Custodial accounts may be opened and managed as cash accounts only. ■ A custodian may not purchase securities in an account on margin or pledge them as collateral for a loan. ■ A custodian must reinvest all cash proceeds, dividends, and interest within a reasonable time. Cash proceeds from sales or dividends may be held in a non-interest-bearing custodial account for a reasonable period but should not remain idle for long. ■ Investment decisions must take into account a minor's age and the custodial relationship. Commodities futures, naked options, and other high-risk securities are examples of inappropriate investments. Options may not be bought in a custodial account because no evidence of ownership is issued to an options buyer. Covered call writing is normally allowed. ■ Stock subscription rights or warrants must be either exercised or sold. ■ A custodian cannot delegate away fiduciary responsibility but can grant trading authority and investment decisions to a qualified third party. ■ A custodian may loan money to an account but cannot borrow from it. A custodian may be reimbursed for any reasonable expenses incurred in managing the account as well as compensation for doing so. However, if the custodian is also the donor, only reimbursement of expenses is permitted and not compensation.

If the beneficiary of a custodial account (minor) dies, the securities in the account pass to the minor's estate, not to the parents' or custodian's estate. In the event of the custodian's death or resignation, either a court of law or the donor of the securities in the account must appoint a new custodian.

All employed individuals, regardless of whether they are covered by a qualified corporate retirement plan, may open and contribute to an IRA. IRAs are considered qualified plans by the IRS. Qualified plans allow the earnings in the account to grow tax deferred. Additionally, individuals making a contribution to an IRA can take a tax deduction for the amount of the contribution if certain criteria are met. If an individual is not actively participating in other qualified plans like an employer's 401(k) plan for instance, the full amount of the contribution to the IRA is deductible. For an individual covered by another qualified plan, the portion deductible is determined by that person's income level. The tax deduction gradually phases out as the taxpayer's adjusted gross income climbs. The exact income levels above which tax deductible contributions are prohibited is not critical for testing purposes because these levels are, by law, raised each year. However, contributions may still be made because the earnings on these amounts are still tax deferred.

An eligible individual may make contributions up to a maximum dollar amount that can change from year to year (as determined by the IRS tax code), provided that the contribution does not exceed earned income (normally compensation and income from self-employment) for the year. The dollar cap is increased by a catch-up amount for individuals age 50 and older.

Within an IRA, investments can be made in stocks, bonds, investment company securities, U.S.-minted gold and silver coins, and many other securities. There are however, certain investments that are considered ineligible for use in an IRA. Collectibles (e.g., antiques, gems, rare coins, works of art, stamps) are not acceptable IRA investments. Life insurance contracts may not be purchased in an IRA. Although life insurance is not allowed within IRAs, other life insurance company products (like annuities) are. Annuities are frequently used as funding vehicles for IRAs.

■ Stocks ■ Bonds ■ Mutual funds ■ UITs ■ Government securities ■ U.S. government-issued gold and silver coins ■ Annuities Certain investment practices are also considered inappropriate. No short sales of stock, speculative option strategies, tax-exempt municipal securities, or margin account trading are permitted within IRAs or any other retirement plan. However, covered call writing is permissible because it does not increase risk.

Individuals may take possession of the funds and investments in a qualified plan to move them to another qualified plan but may do so no more than once every 12 months. This is known as a rollover and it must be completed within 60 calendar days of withdrawal.

Distributions may begin without penalty after age 591⁄2 and must begin by April 1 of the year after the individual turns 701⁄2. Distributions before age 591⁄2 are subject to a 10% penalty as well as regular income tax, except in the event of: ■ death; ■ disability; ■ first-time homebuyer for purchase of a principal residence; ■ education expenses for the taxpayer, spouse, child, or grandchild; ■ medical premiums for unemployed individuals; and ■ medical expenses in excess of defined adjusted gross income (AGI) limits.

April 1 of the year after the individual turns 701⁄2, a 50% insufficient distribution penalty applies. It is applicable to the amount that should have been withdrawn on the basis of IRS life expectancy tables. These are known as the IRA holder's annual required minimum distribution (RMD) and required beginning date (RBD). Ordinary income taxes also apply to the full amount.

Up until this point we have been discussing "traditional" IRA accounts. Let's take a brief look at another type of qualified IRA known as a Roth IRA. Roth IRAs allow after-tax contributions up to a maximum annual allowable limit per individual per year. Contributions to other (traditional) IRAs when combined with contributions to a Roth may not exceed the maximum annual allowable limit.

are not deductible on one's tax return. Note the difference here between a traditional IRA and a Roth. Therefore, there is no phase-out schedule regarding a contribution being deductible as there is with a traditional IRA. However, there is a phase-out schedule regarding the contribution that can be made to a Roth IRA, and again the schedule is tied to an individual's AGI. The contribution limit is phased out from the low end of the phase-out scale until the high end, above which no contribution to a Roth IRA would be allowed.

not taxed as they accrue or when they are distributed from an account as long as the money has been in an account for five taxable years and the IRA owner has reached age 591⁄2.

401(k) plans are a type of retirement contribution plan that allows an employee to elect to contribute a percentage of salary up to a maximum dollar limit to a retirement account each year (a defined contribution). Just like with IRAs, catch-up contributions for those age 50 and older are also allowed. Contributions are excluded from the employee's gross income and accumulate tax deferred as do any earnings in the account. Employers are permitted to make matching contributions up to a specified percentage of the employee's contributions. In addition, 401(k) plans permit hardship withdrawals for situations such as unemployment or first time home buyers and can also allow loans against any vested balance.

A 403(b) plan is type of qualified retirement plan available to employees of public educational institutions. In general, employees of colleges, universities, elementary and secondary schools are eligible to participate if they are at least 21 years old and have completed one year of service. Generally set up as tax-sheltered annuities these plans are funded by elective employee salary deferrals. The deferred amount is excluded from the employee's gross income, and earnings accumulate tax deferred until distribution. For these plans, a written salary reduction agreement must be executed between the employer and the employee. As with other qualified plans, distributions are 100% taxable, and a 10% penalty is applied to distributions before age 591⁄2.

tax sheltered annuities are also available for employees of tax-exempt organizations (501(c)(3)) and religious organization

establishes the U.S. Treasury Department as the lead agency for developing regulations in connection with anti-money laundering (AML) programs. Before September 11, 2001, money laundering rules were concerned mostly with the origin of the cash. Money laundering was defined as the process of creating the appearance that money originally obtained from criminal activity, such as drug trafficking or terrorist activity, came from a legitimate source. Under the act, regulators became much more focused and concerned with where the funds are going. The idea is to prevent "clean" money (money that has been laundered) from being used for "dirty" purposes (such as funding terrorist activities).

1. Placement—This first stage of laundering is when funds or assets are moved into the laundering system. This stage is recognized as the time when illegal funds are the most susceptible to detection. 2. Layering—The goal of money launderers during this stage is to conceal the source of the funds or assets. This is done through a series of layers of transactions that are generally numerous and can vary in form and complexity. 3. Integration—In the final stage, illegal funds are commingled with legitimate funds in what appear to be viable legitimate business concerns. This can be accomplished using front companies operating on a cash basis, import and export companies, and many other types of businesses.

Broker-dealers are required to establish internal compliance procedures to detect abuses. There are signs or red flags that might suggest the possibility of money laundering. If a red flag is detected, it should be reported to the principal designated to receive such reports immediately.

■ a customer exhibiting a lack of concern regarding risks, commissions, or other transaction costs; ■ a customer attempting to make frequent or large deposits of currency or cashier's checks; ■ a customer making a large number of wire transfers to unrelated third parties; ■ a customer engaging in excessive journal entries between unrelated accounts; and ■ a customer who designs currency deposits or withdrawals to fall under the $10,000 cash transaction report (CTR) filing threshold, a practice known as structuring.

The USA PATRIOT Act requires firms to report to Financial Crimes Enforcement Network (FinCEN) when there is an event, transaction, or series of events or transactions that appear to be questionable.

a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat money laundering, domestic and international terrorist financing, and other financial crimes.

■ The transaction involves funds derived from illegal activity. ■ The transaction is designed to evade the requirements of the Bank Secrecy Act. ■ The transaction appears to serve no business or lawful purpose. ■ The transaction involves the use of the firm to facilitate criminal activity.

30 days of becoming aware of the suspicious transaction(s). Copies of each SAR filing and the related documentation must be retained for five years from the date of the filing. The act also requires that the filing of a SAR must remain confidential. The person involved in the transaction that is the subject of the report must not be notified. If subpoenaed, the firm must refuse to provide the information and must notify FinCEN of the request unless the disclosure is required by FinCEN, the SEC, an industry self-regulatory organization (SRO), or other law enforcement authority.

to make and retain records relating to wire transfers of $3,000 or more. Information to be collected includes the name and address of both sender and recipient, the amount of the transfer, the name of the recipient's financial institution, and the account number of the recipient.

The Bank Secrecy Act requires broker-dealers to report, any currency received in the amount of more than $10,000 on a single day. Though paying for purchased securities with currency is not prohibited—many firms do not permit this. Failure to report can result in fines of up to $500,000, 10 years in prison, or both. Records relating to filed reports must be retained for five years. The report must be filed within 15 days of receipt of the currency. This rule is part of the regulatory effort to deal with money laundering. The two federal agencies empowered to deal with this abuse are the Federal Reserve and the Department of the Treasury. If anyone designs deposits to fall under the $10,000 radar, this is a prohibited activity known as structuring. Financial institutions should have systems in place to monitor for and recognize such attempts.

Customer Identification Programs (CIPs) to prevent financing of terrorist operations and money laundering. Financial institutions, such as banks and broker-dealers, must keep records of identification information and check customer names against the Specially Designated Nationals (SDN) list maintained by the Office of Foreign Asset Control (OFAC).

The Office of Foreign Assets Control (OFAC) publishes and maintains a list of individuals and companies owned or controlled by, or who are acting for, or on behalf of, targeted countries and individuals, groups, or entities that are designated under programs that are not country specific, such as terrorists and those trafficking in narcotics. When individuals or groups appear on the Specially Designated Nationals (SDN) list, their assets are blocked, and U.S. persons and businesses, which include registered representatives and broker-dealers, are generally prohibited from dealing with or conducting business with them. New customers must be advised, before the account is opened, that the firm is requesting information to verify their identities. This notification may be placed on the firm's website, delivered verbally, or placed on the new account form.

Records that must be kept for the life of the firm are partnership articles if a partnership, articles of incorporation if a corporation, minute books (records of directors' or partners' meetings), stock certificate books, and organizational documents such as Form BD and amendments.

■ Blotters—A blotter is a record of original entry. A member generally maintains blotters relating to the purchase and sale of securities, the receipt and delivery of securities, and the receipt and disbursement of cash. Blotters must reflect transactions as of trade date (or event date) and must be prepared no later than the following business day. ■ General ledger—The general ledger contains accounting records of the firm's assets, liabilities, and net worth accounts. From the general ledger, a firm prepares its financial statements. The general ledger must be prepared as frequently as necessary to determine compliance with the net capital rule, but in no event less frequently than monthly. ■ Stock record—The stock record shows all securities held by the firm, the ownership of those securities, and where the securities are held. The stock record must be posted no later than the business day after settlement date. ■ Customer ledgers—Customer ledgers are customer statements. Cash accounts and margin accounts are shown on separate ledgers. These ledgers must be posted no later than settlement date. ■ Customer account records—Customer account records might include the new account form and margin agreement, if appropriate. In addition, a record of when someone attained a principal designation must be retained for six years.

■ Advertising ■ Trial balances ■ Form U-4, U-5, and fingerprint cards for terminated personnel ■ Customer confirmations ■ Order tickets ■ Subsidiary ledgers such as securities borrowed and securities loaned, monies borrowed and monies loaned, and dividends and interest received ■ A list of every office where each associated person regularly conducts business ■ Associated persons' compensation records ■ The firm's Compliance and Procedures Manual Whether a record retention requirement is six years or three years, the most recent two years must be in a readily accessible location.

must be retained for 4 years

FINRA allows members to electronically send documents, such as confirmations and account statements, to customers as long as certain conditions are met. To do so, the firm must have procedures in place to show that the information sent has been delivered as intended and that the confidentiality and security of personal information are protected. Furthermore, customers must provide written consent to electronic delivery. In addition, a customer who consents to receive information and documents electronically must be provided with the information in paper form, upon request.

To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer, within 30 days of opening the account, a copy of the account record. The firm must include a statement that the customer should mark any corrections on the record and return it along with a statement that the customer should notify the firm of any future changes to information in the account record so that accurate and current records can be maintained. If the customer should ever contact the firm with any changes, the firm must furnish the customer with an updated account record within 30 days of receipt of the notice of change. Furthermore, this account updating must occur at least every 36 months thereafter.

■ all activity in the account since the previous statement; ■ securities positions, long or short; and ■ account balances, debit or credit. If a customer's account has a cash balance (known as a free credit balance) the firm may hold it in the account. However, the statement must advise the customer that these funds are available on request. Under FINRA rules, members are required to send statements to customers at least quarterly. If there is activity in the account in any given month, or penny stocks are held in the account, a statement must be sent that month. Finally, account statements must include a statement advising customers to promptly report any discrepancy or inaccuracy to their brokerage firms and clearing firms.

is a printed document that confirms a trade, its settlement date, and the amount of money due from or owed to the customer. For each transaction, a customer must be sent or given a written confirmation of the trade at or before the completion of the transaction—the settlement date.

■ Trade date—day on which the transaction is executed (the settlement date is usually the second business day after the trade date) ■ Account number—branch office number followed by an account number ■ Registered representative internal ID number (or AE number)— account executive's identification number ■ BOT (bought) or SLD (sold)—indicates a customer's role in a trade ■ Number (or quantity)—number of shares of stock or the par value of bonds bought or sold for the customer ■ Description—specific security bought or sold for the customer ■ Yield—indicates that the yield for callable bonds may be affected by the exercise of a call provision ■ CUSIP number—applicable Committee on Uniform Securities Identification Procedures (CUSIP) number, if any ■ Price—price per share for stock or bonds before a charge or deduction ■ Amount—price paid or received before commissions and other charges; also referred to as extended principal for municipal securities transactions ■ Commission—added to buy transactions; subtracted from sell transactions completed on an agency basis; a commission will not appear on the confirmation if a markup (or markdown) has been charged in a principal transaction ■ Net amount—obtained on purchases by adding expenses (commissions and postage) to the principal amount (whether the transaction is a purchase or sale, interest is always added whenever bonds are traded with accrued interest—interest that hasn't been paid yet but will be owed to the seller up the settlement date). Finally, the confirmation must also show the capacity in which the broker-dealer acts (agency or principal) and the commission in cases where the broker-dealer acts as an agent.

Firms are required to send confirmations of activity in accounts even when the activity is not trade related or initiated by a third party.

■ the member firm receives written instructions that include the time period the request is being made for up to three months (requests may be granted for periods longer than three months for an acceptable reason such as safety or security concerns but not merely for the sake of convenience); ■ the member firm informs the customer of any alternate methods that the customer may use to receive or monitor account activity such as email or through the member firm's website (the member must obtain customer confirmation that this information regarding alternate methods was received); and ■ the member verifies at reasonable intervals that the customer's instructions still apply.

be able to communicate with the customer in a timely manner to provide important account information. The firm must take actions reasonably designed to ensure that a customer's mail is not tampered with or used in a manner that would violate FINRA rules or federal securities laws. While holding mail is a courtesy that firms are permitted to extend to customers, the rule does not require them to. If extending the courtesy is consistent with the broker-dealer's in-house rules, the written request by the customer to do so implies that the customer is also giving the broker-dealer permission to do so.

■ Data backup and recovery (hardcopy and electronic) ■ Alternate communications between the firm and its customers ■ Alternate communications between the firm and its employees ■ Alternate physical location of employees ■ Communications with regulators ■ Prompt customer access to funds and securities in the event the firm is unable to continue its business

a member of senior management who is also a principal to approve, update, and conduct an annual review of the plan. Additionally, FINRA requires firms to provide them with the names of two emergency contact persons who may be contacted by FINRA in the event of a significant business disruption. Each contact person must be a principal and a member of senior management, and firms must update this contact information promptly, in no case later than 30 days following any change. Regarding communicating this information to customers, a firm must disclose to its customers how it will respond to significant events of varying scope. This disclosure must be made, in writing, to customers at the time of account opening, posted on the firm's website, and mailed to customers on request.

This regulation was enacted by the SEC to protect the privacy of customer information. In particular, the regulation deals with nonpublic personal information.

The SEC, in Regulation S-P notes examples of nonpublic personal information. This type of information would include a customer's Social Security number, account balances, transaction history, and any information collected through an internet cookie.

If your firm reserves the right to disclose to unaffiliated third parties nonpublic personal information, the notice must provide customers a reasonable means to opt out of this disclosure. Reasonable opt-out means include providing customers with a form with check-off boxes along with a prepaid return envelope, providing an electronic means to opt out for customers who have agreed to the electronic delivery of information, and providing a toll-free telephone number. Asking customers to write a letter to express their disclosure preferences or to opt-out would not be considered reasonable under Regulation S-P.

Your firm must provide a privacy notice describing its privacy policies to customers whenever a new account is opened and annually thereafter.

In addition, the regulation embodies the obligation of financial institutions to safeguard customer information as related to all forms of existing and developing technology. For example, this would include, but not be limited to, securing desktop and laptop computers and encrypting email.

based on principles of fair dealing and good faith. Statements must be clear and not misleading within the context that they are made and must be fair and balanced regarding potential risks and benefits. Omission of material facts is not permitted, nor is making false, exaggerated, or misleading statements or claims. No communication should ever imply that past performance will be repeated. Finally, FINRA mandates that members must consider the nature of the audience to which the communication will be directed and should provide details and explanations appropriate to the audience.

means any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. A retail investor is any person other than an institutional investor, regardless of whether the person has an account with the member.

means any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period.

means any written (including electronic) communication that is distributed or made available only to institutional investors, but does not include a member's internal communications (e.g., internal memos).

■ another member firm or registered representative; ■ a bank; ■ a savings and loan (S&L); ■ an insurance company; ■ a registered investment company (mutual fund); ■ an employee benefit plan; ■ a governmental entity or subdivision; ■ a person acting solely on behalf of an institutional investor; and ■ any entity with $50 million or more of total assets. FINRA mandates that no member may treat a communication as having been distributed to an institutional investor if the member firm has reason to believe that the communication or any part of it will be forwarded or made available to any retail investor.

administered by the Federal Communications Commission (FCC), was enacted to protect consumers from unwanted telephone solicitations (telemarketing). A telephone solicitation is defined as a telephone call initiated for the purpose of encouraging the purchase of or investment in property, goods, or services. The act governs commercial calls, recorded solicitations from autodialers, and solicitations and advertisements to fax machines and modems.

■ maintain a do-not-call list of prospects who do not want to be called, and keep a prospect's ■ name on the list until they request it be removed; ■ institute a written policy on maintenance procedures for the do-not-call list; ■ train representatives on using the list; ■ ensure that representatives acknowledge and immediately record the names and telephone ■ numbers of prospects who ask not to be called again; ■ ensure that anyone making cold calls for the firm informs prospects of their name, the ■ firm's name, and the firm's telephone number or address; ■ ensure that telemarketers do not call a prospect from the time of their do-not-call ■ request; and ■ ensure that solicitation occurs only between the hours of 8:00 am and 9:00 pm of the time ■ zone where the prospect lives.

■ made to parties with whom the caller has an established business relationship or ■ from whom the caller has prior express permission or invitation; ■ made on behalf of a tax-exempt nonprofit organization; ■ not made for a commercial purpose; and ■ made for legitimate debt collection purposes.

FINRA and other SROs require brokers to know their customers. This implies understanding a customer's financial status (net worth and net income), investment objectives, and all facts essential in making suitable recommendations. It is a registered representative's responsibility to perform due diligence to determine the validity of a customer's information. Based on that information, registered representatives must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer.

ther brokers and certain potential investors (someone who is not your client at the time the advice is given). Therefore, the rule would not apply if the recipient of the advice is not currently a client and neither the representative nor the firm receives direct or indirect compensation as a result of giving the advice.

■ customer's age; ■ customer's marital status; ■ number and ages of customer's dependents; ■ customer's employment status; ■ employment of customer's immediate family members; and ■ customer's current and future financial needs.

What kind of risks can you afford to take? How liquid must your investments be? How important are tax considerations? Are you seeking long-term or short-term investments (investment time horizon)? What is your investment experience? What types of investments do you currently hold?

No security is exempt from the industry's anti-fraud provisions. This means that fraud or market manipulation cannot be involved in the trading of any security.

Misleading information or rumors can be employed for the sole purpose of manipulating the price of a stock up or down. The spreading of false information and market rumors by industry personnel is expressly prohibited. Social media platforms that might be used in this way would include online bulletin boards, email blasts, and Internet chat rooms.

A form of securities fraud commonly known as pump and dump is the act of inflating (pump) the price of an owned stock by perpetrating false and misleading positive rumors, in order to sell the stock at a higher price later. Generally the shares owned are first accumulated at lower prices before the misleading information is doled out to the investing public. After the stock price rises due to the frenzied buying caused by the rumors, the operators of the scheme then sell (dump) their overvalued shares in the open market. The fraudsters profit while the selling pressure associated with dumping drives the price downward, causing investors who purchased based on the rumors to lose their money. Perpetrating rumors to push up the price of stock owned so as to profit later when selling

Front running is the act of placing orders for one's own account ahead of other orders that are known to be entering the market in an attempt to gain from the price movement that is likely to occur Placing orders to buy or sell stock ahead of orders that could move the market

Excessive trading in a customer's account to generate commissions rather than to help achieve the customer's stated investment objectives is an abuse of fiduciary responsibility known as churning. Excessive frequency or excessive size of transactions not in keeping with the client's trading history or financial ability are often signs that churning might be occurring. To prevent such abuses, self-regulatory organizations require that a principal of the member firm review all accounts, especially those for which a registered representative or an investment adviser has discretionary authority.

Entering orders before the opening for a stock or falsely reporting trades that never occurred to influence the opening price of a stock is called marking the open. prohibited

Effecting trades at or near the close of the trading day or falsely reporting trades that never occurred to influence the closing price of a stock is called marking the close. For example, putting in buy orders at the close for the purpose of pushing up the price of a stock so that it is valued higher in one's portfolio or account at the end of the day is marking the close. prohibited Falsely reporting trades that never occurred or entering orders to influence the closing price of a stock

A market maker can revise a firm quote in response to market conditions and trading activity, but a market maker that refuses to do business at the price(s) quoted is backing away from the quote. Backing away is a violation of trading rules.

Freeriding is a term used when securities are purchased and then sold before making payment for the purchase. Freeriding is generally prohibited in both cash and margin accounts. As a penalty, the account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before the purchase is made.

Capping is usually associated with those who are short option call contracts. This is the act of entering sell orders in a stock for the purpose of keeping it from rising above the strike price of calls someone is short; this is done so the calls won't be in-the-money and thus likely to be exercised. Entering orders designed to keep a stock from rising

Supporting is usually associated with those who are short put option contracts. This is the act of entering purchase orders in a stock for the purpose of keeping the price from falling below the strike price of puts someone is short; this is done so the puts won't be in-the-money and thus likely to be exercised.

Pegging is a generic term that applies to any activity intended to keep the price of a stock from moving. This can involve entering either buy or sell orders or both. Any activity intended to keep a stock price stable

Consider that an investor can use capital loses to offset capital gains. A wash sale violation is an attempt to create a loss for tax purposes (sell at a loss) when one's intent is to still maintain ownership of the securities. Any repurchase of the same within 30 days before or after the date establishing the loss, would be recognized as one's intent to maintain ownership. If this occurs, the loss established at the time of the sale is disallowed.

First, the rule applies to recreating long positions, as in the previous example, and also to recreating short positions. Second, the rule applies for attempts to recreate the same position using not only the exact same security but also substantially identical securities. For instance, a long stock position in XYZ stock is closed with a sale for a loss. Not only do the wash sale rules prohibit reestablishing the positon by repurchasing XYZ stock, but it would also recognize the purchase of XYZ call options or rights that can be exercised to purchase shares of XYZ stock as a way of reestablishing the position if the options or rights are exercised. In this light, the XYZ call options or rights would be considered substantially identical to the XYZ stock.

Matching orders is a manipulation that involves one party selling stock to another with the understanding that the stock will be repurchased later (usually the same day) at virtually the same price. The intent of such transactions is to make it appear that far more activity in a stock (share volume) exists than actually does. This is sometimes referred to as painting the tape. Transactions designed to give the illusion of increased activity or volume in a stock

Breakpoints are quantity discounts on open end management company shares (mutual funds)—the greater the dollar amount of a purchase, the lower the sales charge. There is no industry standardized breakpoint schedule so they can vary across mutual fund families.

is a term used in the securities industry that means sales just below the breakpoint. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges. This is inconsistent with just and equitable principles of trade. FINRA does not define near or just below a breakpoint or how close a purchase can be to a breakpoint triggering a violation. Therefore, members must make certain that customers are advised of a fund's breakpoint schedule. The rule is in place because members, and indirectly, registered representatives, could earn more concession dollars on a smaller customer investment (with a higher sales charge) than on a larger customer investment (with a smaller sales charge).

the Insider Trading and Securities Fraud Enforcement Act of 1988 amended its provisions and specified penalties for insider trading and securities fraud. All broker-dealers must establish written supervisory procedures specifically prohibiting the misuse of inside information. Additionally, they must establish policies that restrict the passing of potentially material nonpublic information between a firm's departments. This barrier against the free flow of sensitive information is known as a firewall or an information barrier.

This barrier against the free flow of sensitive information

any person who has access to nonpublic information about a company that would most likely influence the price of the company's stock. Utilizing that information for the purpose of gain, or to avoid a loss constitutes insider trading

Inside information by definition is any material nonpublic information. That is, any information that has not been disseminated to, or is not readily available to, the general public.

The act prohibits insiders from trading on or communicating nonpublic information. Both the tipper (the person who relays the information) and the tippee (the person who receives the information) are liable, as is anyone who trades on information that they know or should know is not public or who has control over the misuse of this information.

■ Is the information material and nonpublic? ■ Does the tipper owe a fiduciary duty to a company or its stockholders? Has he breached it? ■ Does the tipper meet the personal benefits test (even something as simple as enhancing a friendship or reputation)? ■ Does the tippee know or should the tippee have known that the information was inside or confidential?

The SEC can investigate any person suspected of violating any of the provisions of the Insider Trading Act. If the SEC determines that a violation has occurred, civil penalties of up to three times profits made or losses avoided may be levied. A controlling person such as a registered representative or broker-dealer could be fined $1 million or three times the profit made or loss avoided, whichever is greater. Violators may also face criminal penalties of up to $5 million and up to 20 years in jail. If the violator is an employee of a broker-dealer, a firm (which is supposed to have procedures in place to prevent this) could be fined up to three times damages or $25 million, whichever is greater.

Persons who enter trades at or near the same time in the same security as a person who has inside information are known as contemporaneous traders. Contemporaneous traders may sue persons that have violated insider trading regulations, and suits may be initiated up to five years after the violation has occurred.

The Insider Trading Act specifically allowed for payment to informers. However, amended under the Dodd-Frank legislation, awards may now be paid in connection with original information concerning any violation of securities law, including insider trading. The information bounty or award can range from 10% to 30% of amounts recovered based on the information received.

FINRA member firms are strictly prohibited from using manipulative, deceptive, or other fraudulent tactics or methods to induce a security's sale or purchase. The statute of limitations under the Securities Act of 1934 is three years from the alleged manipulation and within one year of discovering it. No dollar limit is placed on damages in lawsuits based on allegations of manipulation.

Any time funds or securities of a customer are used in any way other than was intended by the customer, improper use has occurred. All such uses are prohibited. FINRA expects member firms to detect or investigate "red flags" that alert the firm to improper use of customer funds. Exception reports may be generated to indicate red flags, such as conflicting information in new account applications and suspicious transfers of funds between unrelated accounts. The broker-dealer is expected to implement reasonable systems and controls regarding the supervisory review of customer accounts to thwart, among other things, the falsification of new account applications and other records to take advantage of vulnerable customers.

■ suspicious activity involving transfers and disbursements in customer accounts; ■ activity in the account of a deceased person; ■ excessive customer complaints; and ■ exception reports showing discrepancies regarding more than one address or a street address not matching a city or zip code provided or a telephone area code not matching an address provided.

The most common examples of misuse might be in the form of borrowing r lending without consent. Taking (borrowing) a customer's funds for either the firm's or representative's own use is prohibited. Lending a customer's securities for the purpose of short sales when no loan consent agreement has been signed by the customer is another way in which improper use might occur. However, borrowing and lending arrangements can be permitted under certain circumstances. Firms that permit lending arrangements between representatives and customers must have written procedures in place to monitor such activity. Registered persons who wish to borrow from or lend money to customers are, in most cases, required to provide prior written notice of the proposed arrangement to the firm, and the firm must approve the arrangement in writing.

■ There is an immediate family relationship between the representative and the customer (no notice or approval is needed). ■ The customer is in the business of lending money (e.g., a bank; no approval is needed). ■ The customer and the representatives are both registered persons with the same firm. ■ The customer and the representative have a personal relationship outside the brokercustomer relationship. ■ The customer and the representative have a business relationship outside the broker-customer relationship.

advise his firm in writing and receive written permission. However, notice and approval are not needed if the loan is between immediate family members, and approval is not needed if the customer is a lending institution and the loan is on standard commercial terms.

Broker-dealers, investment advisers, and registered representatives may not guarantee any customer against a loss or guarantee a gain. All such guarantees or anything intended to convey a guarantee is prohibited.

Member firms and representatives are also prohibited from sharing in profits or losses in a customer's account. An exception is made if a joint account has received the member firm's prior written approval and the registered representative shares in the profits and losses only to the extent of his proportionate financial contribution to the joint account. Contribution to the account cannot be measured in knowledge or expertise but only in dollars. The firm, however, may share in a loss if the loss was due to an error made by the firm.

sharing in a joint account with immediate family members. In these instances, directly proportionate sharing of profits and losses is not mandatory. Immediate family members include parents, mother-in-law or father-in-law, spouses, children, and any relative to whom the officer or employee in question contributes financial support. Financial support is broadly defined to include anyone who is living in the same residence. Firms cannot have joint accounts with customers. Representatives may have joint accounts with customers only if the arrangement has been approved by the principal and account proceeds are shared in proportion to each party's contribution.

■ age 65 and older, or ■ age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.

■ The wrongful or unauthorized taking, withholding, appropriation, or use of funds or securities; or ■ any act or omission of an act taken by a person to obtain control, through deception, intimidation or undue influence, over the specified adult's money, assets or property; or convert the specified adult's money, assets, or property. This includes any act aligning with the previous, done through the use of a power of attorney, guardianship, or any other authority.

1. Member firms and associated persons must make "reasonable efforts" to obtain the name and contact information for a trusted contact person. 2. Member firms will be permitted to, but not required to place temporary holds on customer accounts when there is a reasonable belief of financial exploitation.

Importantly, it should be noted that the member firm is not prohibited from opening an account when the customer fails or refuses to provide the information, so long as the member firm took "reasonable efforts" to obtain such information. Asking the customer to provide the name and contact information for a trusted contact person constitutes a "reasonable effort." When the customer has provided the name and contact information for a trusted contact person, the member firm must disclose in writing to the customer that the member or an associated person is authorized to contact the trusted contact person and disclose certain information about the customer's account. FINRA notes that the trusted contact person is intended to be a resource for the member firm in administering the customer's account, protecting assets, and responding to possible financial exploitation.

■ opening a customer's account, or ■ updating the account information for an existing account.

place a temporary hold on disbursements of funds or securities. Note that the rule does not require the member firm to take this action, but allows it to do so at its discretion. The hold can be no longer than 15 business days under the rule. A state regulator or agency of jurisdiction however, can terminate the hold sooner, or extend the hold longer.

immediately initiate an internal review of the facts and circumstances that caused the member to initiate the temporary hold on the disbursements. In addition, the rule requires the member to provide notification of the hold and the reason for the hold to the trusted contact person and all parties authorized to transact business in the account, no later than two business days after the date the hold was initiated. However, a member firm is not required to provide notification to the trusted contact person or a party authorized to transact business in the account, if the trusted contact person or party is unavailable or the member reasonably believes that the trusted contact person or party is the perpetrator of the financial exploitation.

Unregistered persons are prohibited against soliciting customers and taking orders to buy or sell securities.

Only registered persons can be paid commissions. Similarly, member firms can only grant commissions or other allowances such as discounts or concessions (when selling new issues) to other members. In general, nonmembers are treated as the general public would be treated. In that light, nonmember firms, including suspended members, always buy at the public offering price and sell at the public bid price, never at a discount.

These firms, ineligible for FINRA membership, may be granted commissions, or other allowances provided they agree to abide by FINRA rules, regulations and standards.

A registered person who leaves a member firm (e.g., upon retirement) may continue to receive commissions on business placed while employed. While there is no requirement for members to pay continuing commissions, there must be a contract to this effect before the representative leaves the firm in order to do so. Heirs of a deceased representative may receive continuing commissions if this is part of the written contract. Continuing commissions may never be paid on business referred or introduced by an employee after than person ceases to be registered with the member

FINRA requires that "A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." It is well established that forgery and falsification of documents, including all books and records, is not consistent with the high standards of commercial honor and just, and equitable principles of trade required of registered representatives. Someone found in violation of the rule may be sanctioned.

Sanctions against a member or associated person, if found guilty of falsifying or withholding documents, are included with the written decision. Under FINRA's Code of Procedure, sanctions could include: ■ censure (generally meant to mean public disclosure); ■ fine; ■ suspension of the membership of a member or suspension of the registration of an associated person for a definite period; ■ expulsion of the member, canceling the membership of the member; ■ the barring of an associated person from association with all members; and ■ imposition of any other fitting sanction.

Altering documents previously signed by the customer or reusing or forging a customer's signature even if for the convenience of a customer is prohibited.

FINRA grants its staff and adjudicators the authority to inspect and copy the books, records and accounts of member firms, associated persons and other persons over whom FINRA has jurisdiction. These records include documents relating to compliance with just and equitable principles of trade, other FINRA rules, SEC rules, MSRB rules and the federal securities laws. All requests for books and records should be met promptly and as noted earlier the most two recent years should be in a readily accessible location. This would apply to hard copy (physically maintained) records or those maintained electronically.

limited partnership unit -- A passive investment, such as the purchase of a limited partnership unit, is not considered an outside business activity. An associated person may make a passive investment for his own account without providing written notice to the employing broker-dealer.

it is prepared by FINRA for the member firm to administer --- The firm element of a broker-dealer firm's continuing education (CE) requirement is prepared by the member firm. It comprises training for those personnel who have direct contact with the public, and it must be completed by all registered persons. Among other things, it must take into account the scope of the firm's business.

register with them -- All SROs, such as FINRA, require member firms and associated persons to be registered with them. Some firms may transact business with other members, or the public, or both. There is no requirement that a member firm be organized as a corporation.

the chairman of the board --- All associated persons engaged in the investment banking and securities business are considered registered representatives, including any assistant officer who does not function as a principal; any individual who supervises, solicits, or conducts business in securities; and any individual who trains people to perform functions in those capacities.

the filing of a fingerprint card with the U.S. Attorney General --- A fingerprint card is required to be filed with the U.S. Attorney General to ensure that any criminal past that might result in statutory disqualification from association with a member firm is discovered.

expect the office to be treated like any branch office --- If a registered representative works from home, the office must be subject to site review and visits to the premises by principals of the firm and FINRA examiners, may be specified in advertising of various kinds as a business office, and function in all ways like any other branch office of the firm.

Spouses are included in the invitation with travel expenses paid for. --- FINRA deems payment or reimbursement by sponsors in connection with meetings held to train or educate representatives acceptable as long as certain requirements are met. These would include, but are not limited to, the following: the representative obtains the member firm's prior permission to attend, the location of the meeting is appropriate to the purpose of the meeting, there is no payment or reimbursement for a guest (e.g., a spouse) of the representative attending the meeting, and there is no payment or reimbursement for certain expenses incurred in connection with meetings, such as golf outings.

have the opportunity to approve or disapprove of the associated person's participation --- If the private securities transaction involves compensation, the employing member may approve or disapprove the associated person's participation. While the employing member firm is responsible for all supervision regarding the transaction, it is not obligated and normally is not in a position to provide any services related to accommodating the transaction.

promptly but no later than 30 calendar days -- Normally, customer complaints will be handled within the firm to the satisfaction of both the customer and the firm, going to arbitration or the courts only if this proves impossible. Complaints alleging theft, misappropriation of funds, or forgery, however, must be reported to FINRA promptly but no later than 30 calendar days from receipt of the complaint.

Within 120 days of the person's second registration anniversary and then every 3 years thereafter --- The regulatory element of training requires that all registered persons complete a computer-based training session within 120 days of the person's second registration anniversary and every 3 years thereafter (i.e., within 120 days of the person's 2nd, 5th, 8th, 11th registration anniversary, and so on).

The Financial Industry Regulatory Authority --- Whenever a customer complaint is received, it is essential that the proper personnel are notified. Persons who should be notified may include the account's representative, the account's principal, the branch manager, or a member of the compliance department. A notice to FINRA is required only in regards to certain scenarios, such as allegations of theft, forgery, misappropriation of funds, or securities.

2 years --- FINRA retains jurisdiction over a registered person for 2 years after the person leaves the industry.

misstatements are willfully made in an application for membership --- Misstatements willfully made in an application for membership or registration as an associated person will automatically disqualify an applicant from membership. A felony conviction (not charge), either domestic or foreign, or a misdemeanor conviction involving securities or money within the past 10 years will also automatically disqualify an applicant from membership. Note that FINRA will examine the circumstances around a disqualifying event before a final decision is made, but they take willful misstatements on the U-4 very seriously.

Annually --- Firm element requires member firms to prepare an annual training plan, taking into account such factors as recent regulatory developments, the scope of the member's business activities, employee performance in the regulatory element, and its supervisory needs.

A $125 designer edition fountain pen and desk holder --- FINRA member firms may not give business-related compensation to associated persons of other firms - compensation directly tied to sales or promises of sales - but may give an individual gifts whose value does not exceed $100 in a 12-month period. Tickets to a sporting event or dinner at an expensive restaurant may exceed the $100 limit if it is occasional, someone from the rewarding firm is present, and the employing firm has given its permission. Reminder advertising, items with the BD's name and /or logo, may also exceed the $100 limit, within reason, because it has a business purpose.

have direct contact with the public -- A broker-dealer's continuing education program has a regulatory element and a firm element. The contents of the firm element are determined by the broker-dealer and must be met annually by all registered persons who have direct contact with the public.

$100 per individual per year -- No member or associated person (AP) may give anything of value in excess of $100 per individual per year to any person, principal, employee, or representative of another person where such payment is in relation to the business of the employer of the recipient of the payment or gratuity.

Comply with the association's rules and regulations -- Application for FINRA membership carries the applying firm's specific agreement to comply with the association's rules and regulations, comply with federal securities law, and pay dues and assessments to FINRA.

180 days -- Applicable to the first 2 attempts, if an individual fails to pass a FINRA qualification exam, a 30-day waiting period before the next attempt can be made is imposed. An unsuccessful 3rd attempt requires a 180-day waiting period.

deactivated by FINRA until the requirements of the program are met --- If a person fails to complete the regulatory element within the prescribed time period, FINRA will deactivate that person's registration until the requirements of the program have been met.

knowledge of the activity --- An associated person cannot work for any business (independent activity) other than his member firm without his employing broker-dealer's knowledge.

Sales Practice Code -- FINRA publishes the Conduct Rules, the Uniform Practice Code, the Code of Procedure, and the Code of Arbitration Procedure to regulate employee conduct and reportable events. There is no Sales Practice Code.

the Form U-5 -- FINRA requires that registered representatives complete both the regulatory and the firm elements of a continuing education program. In addition to satisfying FINRA requirements for registration, each state has its own requirements that must be satisfied before a representative can act in that state. A representative is not required to file a Form U-5. That form is filed by the member firm upon the termination of a registered representative for any reason. A copy will be provided to the departed representative.

home offices are restricted to servicing existing customers only --- Broker-dealers often allow registered representatives to operate a home office. Approval of the member firm and registration of the location with its self-regulatory organization (SRO) is required as it would be for any office associated with the broker-dealer. All normal business activities including opening new accounts and taking customer orders for the purchase and sale of securities would be permitted. Additionally, the home office address and telephone number may be advertised in any normal manner such as on business cards or through various media venues like newspapers and websites.

1.Use of a designation such as Chartered Senior Advisor, a largely unknown designation 2.The representative is introduced as someone approved by FINRA to answer questions from senior investors -- Use of degrees or designations may never be used in a misleading fashion nor can any reference to nonexistent or largely unknown designations be made. The use of designations is permissible so long as the compliance department of the firm has performed due diligence and is satisfied the credentials are bona fide and would be reasonably recognized as true tokens of expertise. Using educational degrees or securities registration licenses is permissible. To say that the representative is approved by FINRA to offer advice to seniors would likely bring heavy sanctions. The promotion of any stock is permissible so long as it is a balanced presentation with disclosure of the potential risks.

to the FINRA district office where the applying firm has its home office -- An application to become a FINRA member firm must be made to the FINRA district office in the district where the applying firm has its home office.

1.There is an incidental tour the representatives may attend at their own expense. 2.The representatives must obtain their employing firms' permission to attend. --- The trip itself is acceptable in principle, because it has a business purpose. Having it in the Canary Islands would be inappropriate. Side tours, outings, and so on are acceptable, provided the guests pay their own expenses for them. Paying the expenses of guests would be inappropriate as well. Permission of the employing firm to attend is always required.

continuing education (CE) requirement --- Registered persons must undergo regular training in the securities industry. What is known as the regulatory element of this training is determined by FINRA and takes place every 3 years. What is known as the firm element is determined by the broker-dealer firm and takes place annually. Together, the 2 elements are said to meet the firm's continuing education (CE) requirement.

disclosure of convictions of a spouse employed by a financial institution --- To register an associated person of a member firm with FINRA, the member fills out and submits Form U-4. Information required on Form U-4 is extensive and includes name, address, any aliases, 5-year residency history, 10-year employment history, and information on any charges, arrests, or convictions relating to the investment business for that individual (not spouses). Finally, registration cannot be effective until the person passes the appropriate qualification exam(s).

political parties, candidates for office, and elected officials -- All business should be awarded on the basis of merit only and not political favor gotten via contributions to political parties, elected individuals or candidates, or third parties with connections to those with political affiliations.

1.if the member approves the RR participating in a transaction for compensation, it must treat the transaction as if it is being done on its own behalf by entering the transaction on its own books and supervising the associated person during the transaction 2.if the member disapproves of the RR's participation in a transaction for compensation, the associated person may not participate in it --- FINRA divides private securities transactions into two categories. If the associated person will receive compensation, the rules are more comprehensive requiring approval or disapproval. If approved, the firm must record the transaction on its books and records and supervise as if it were executed on behalf of the member firm. Trades with immediate family members are not included if there is no compensation. In other transactions where there is no compensation, written notice to the employer member is still required.

2 years --- Rules within the Investment Advisers Act of 1940 are designed to deter what is commonly called the practice of "pay to play" or "play for pay." In other words, gaining political favor via contributions made to political parties, elected officials, or candidates. If a political contribution to certain elected officials or candidates is made, an adviser may not provide advisory services to any government the adviser represents for a fee, for a period of 2 years.

Allowing a former RR to keep a securities license with your firm, even though no business is expected to transpire --- Allowing a former RR to keep a securities license with a firm even though no business is expected to transpire is known as "parking" a license and is a prohibited practice. A member has up to 30 days to file a copy of Form U-5 after the termination of an employee. Receiving a complimentary dinner at a seminar presented by a mutual fund sponsor can be permitted but must be in a location that is considered appropriate to the purpose of the meeting. A private securities transaction with an immediate family member is permissible as long as there is no compensation.

becoming a limited partner in an oil and gas drilling program --- Passive investments, such as the purchase of a limited partnership interest, are not considered outside business activity. An associated person may make a passive investment for his own account without providing written notice to the employing broker-dealer.

prospects would not be allowed to visit and be on the premises at this location -- Registered representatives are allowed to operate out of a home or residence, advertising the address and contact numbers. All normal business activities, including taking customer orders for the purchase and sale of securities, would be permitted. Additionally, it would be subject to a premise visit and review by principals of the firm and FINRA examiners as often as needed.

not required -- If a registered person wants to be employed by or accept compensation from an entity other than the member firm, that person must provide prior written notice to the member. Note that notice must be made, but the employing member's permission is not being requested nor is it required.

The dealer seeks to engage in a negotiated underwriting with the issuer. -- A representative of a dealer firm who gave any amount to the election campaign and then solicits a negotiated underwriting would likely cause a two-year ban on performing any work for that municipality. There are some exceptions. For example, if the representative lives in the municipality and is eligible to vote there, he may give up to $250 per election without triggering a ban.

The firm has been expelled or suspended by the foreign equivalent of an SRO. --- Firms will be denied membership if the applicant has been expelled or suspended by another self-regulatory organization (SRO) or from the foreign equivalent of an SRO.

cash and securities --- Any associated person put in a position that would have them handle cash or securities would be required to be fingerprinted.

must be registered as a principal of the firm --- Anyone who manages or supervises any part of a member firm's investment banking or securities business must be registered as a principal with FINRA, including people involved solely in training associated persons.

both a Form U-5 from the previous employer and a Form U-4 from the new one. --- Termination, for whatever reason, requires that the "old" firm file a Form U-5. Registration, whether for the initial or any subsequent one, requires filing of a Form U-4.

1.A registered representative helps an old school friend issue securities for a small business under formation. 2.A registered representative helps an acquaintance sell some inherited stock certificates without the acquaintance becoming a customer of the firm. -- A private securities transaction is any sale of securities outside the scope of the regular business of the associated person involved and of the broker-dealer firm. Such a transaction done for an immediate family member, however, does not fall under the definition.

No stated time limit --- An amended U-5 form must be filed and a copy sent to the affected former employee within 30 days of discovery of the inaccuracy. It does not matter how long it has been since the employee's termination.

Code of Procedure --- The Code of Procedure (COP) describes how member violations of the Conduct Rules will be heard and handled.

turn the complaint over to the appropriate supervisor or principal --- Any representative receiving a written customer complaint is required to turn the complaint over to a supervisor or principal without delay.

After receiving a written complaint letter from a client, an RR should turn the complaint over to the appropriate supervisor or principal --- Any representative receiving a written customer complaint is required to turn the complaint over to a supervisor or principal without delay. A mutual fund company may offer noncash compensation to associates of broker-dealer firms in the form of attendance at a meeting or convention, provided that a record of compensation and meeting details is kept by the attendee member's firm --- The firms whose associates attend the meeting must keep records of all noncash compensation and details of what went on at the meeting. Noncash compensation of this type will inevitably be at least indirectly business-related, but must not be conditional upon agreeing to meet some sales goal. Side trips and expenses of guests must be met by those in attendance, not the host of the meeting.

must be registered as a principal -- Those who manage any part of a member's securities activities must be registered as a principal with FINRA, including those involved solely in training associated persons.

invite a portfolio manager to see a popular Broadway show together --- A gift of tickets to a single event would be permitted under the Conduct Rules. A scenario where a representative of the firm accompanies the guest would fall under the heading of normal business dealings and the requirement that gifts be of no more than $100 in value is waived.

the gift or compensation is preapproved by the firm's SRO --- Firms may not distribute gifts, gratuities, or compensation to the employees of other member firms unless the compensation is not conditional on sales or promises of sales, it has the employing member's prior approval, and the compensation's total value does not exceed the annual limit of $100 per person. Approval of the self-regulatory body the firm reports to is not a requirement or condition.

a receptionist greeting customers and directing them to the appropriate registered representative within the office --- Certain broker-dealer employees (typically clerical) are exempt from the fingerprinting requirement, if they are not involved in securities sales, do not handle or have access to cash or securities or to the books and records of original entry relating to money and securities, or do not supervise other employees engaged in these activities.

this would be permitted with FINRA's approval --- FINRA rules provide for the ability of registered representatives to operate out of their residence in what is known as a home office. Approval from FINRA is required and the same rules that apply to any branch office would apply here.

Form U-4 --- To register an associated person of a member firm with FINRA, the member will fill out and submit a Form U-4. Registration can only be made effective after the person passes the appropriate qualification exam(s).

The employing broker-dealer firm --- Though the new employee furnishes most of the information contained in Form U-4, it is the responsibility of the employing firm to arrange for the information to be placed on the form and filed.

an employee of a FINRA member engaged in municipal security representative activities such as underwriting and trading --- As per the Municipal Securities Rulemaking Board (MSRB), a municipal finance professional (MFP) is an associated person of a member firm who is primarily engaged in municipal securities representative activities, including underwriting, sales and trading, or any other activity that involves communications with the public regarding municipals.

fair and ethical trade practices when dealing with the public. -- The Conduct Rules specify trade practices that are fair and ethical when dealing with the public. Events that must be reported are also described.

three years from now --- New registered representatives are required to sit for the regulatory element as of their second anniversary. Thereafter, they are scheduled each three years. Having just completed her second anniversary regulatory element CE, she will be next scheduled in three years.

the exchanges where the firm is a member --- An associated person may be disciplined for violating SEC rules and regulations. If a member firm suspends an associated person, the firm must report the suspension to the exchanges where the firm is a member.

1.From the new employee 2.From FINRA's Central Registration Depository -- Copies of a new employee's Form U-5 may be obtained from the employee, or from FINRA's Central Registration Depository (CRD). Whichever the source, the firm must obtain the copy within 60 days of filing the new Form U-4 for the new employee.

In no circumstances can a registration be transferred from one firm to another. -- Transferring a registration from one member firm to another is not permitted. Should a person resign or be terminated, the member firm must file a Form U-5 with the Central Registration Depository (CRD) within 30 days of the termination date. A Form U-4 must then be filed by the new employer with all of the form's information requirements met.

the SEC expressly permits it -- If the SEC bars an individual, only the SEC may grant an exception to that action.

1.The dispute cannot otherwise be resolved to the satisfaction of both parties. 2.The customer requests that the dispute go to arbitration. --- Generally speaking, a broker-dealer firm has the customer sign a binding arbitration agreement before opening the account. In the absence of such an agreement, if a dispute cannot otherwise be resolved, the dispute can go to arbitration if the customer wishes it so.

the U.S. Attorney General --- The Securities and Exchange Commission upon application for registration requires that fingerprint cards be filed with the U.S. Attorney General.

a real estate broker --- Any person who effects transactions in securities may apply for FINRA membership. Real estate is not a security.

The employing firm -- If a registered representative is to be compensated for a trade done through another firm, the employing firm must run the trade on its own books and see to it that the representative is properly supervised. The firm where the outside trade will take place is, of course, responsible only for the actions of its own registered representatives.

is designed to deter gaining political favor by employing what is commonly known as "pay to play" -- The rule is designed to deter what is commonly called pay to play. It makes it unlawful for an adviser to receive compensation (fee) for providing advisory services to a government entity for a 2-year period after the adviser makes a political contribution to a public official of a government entity.

4 years --- Copies of all customer complaints must be maintained in a file at the office of supervisory jurisdiction (OSJ) for a period of 4 years.

the registration being deactivated until the requirements are met --- Failure to complete the regulatory element within the allowable time frame will lead to FINRA's deactivating that person's registration until the CE regulatory element is met.

Municipal securities sales to customers --- Associated persons whose activities are limited solely to sales or have only clerical or ministerial functions are not MFPs. All the other activities would be associated with an MFP.

No waiting period --- If a potential bond issue is up for competitive bids, any firm may participate in the bidding process, because the city will select the best arrangement available. If it is a negotiated bid (not competitive), there is a 2-year waiting period because a firm that has made a political contribution might have an unfair negotiating advantage over firms that have not.

A recruitment advertisement promises substantial training to be delivered to incoming employees. --- FINRA holds broker-dealers to certain general standards regarding all member firm communications, including recruitment advertising. Promises of training in recruitment pieces would not be considered exaggerated or misleading. None of the other scenarios would be acceptable and all would be deemed misleading, unbalanced regarding risk, or simply untrue.

a driver assigned to high-net-worth clients --- Registered broker-dealers must have fingerprint records made for most of their employees, including all directors, officers, and partners, those involved in sales and those who handle cash or customer securities. While a clerk handling all incoming mail is likely to be to in a position to handle cash or securities coming to the BD, a driver is not.

permitted if occasional --- The rules regarding gifts, gratuities, and compensation to another firm's employees permit occasional noncash expenditures that exceed the $100 limit. These might include dinners, seminars, tickets to entertainment events, or reminder advertising items. However, vacations or season tickets to cultural or sporting events are always violations.

FINRA -- Having no authority to enforce the rules it enacts, the MSRB relies on FINRA to enforce its municipal securities rules. This would include the enforcement of the "pay to play" or "play for pay" rules regarding political contributions.

1.be in compliance with all federal securities laws 2.pay dues, assessments, and other charges the association levies --- Firms must agree in their membership application that they will comply with all federal securities laws and make payment of dues and assessments when requested. Although qualification exams must be passed by individuals representing the firm, there is nothing requiring the firm itself to do so, nor is attendance at FINRA conferences

educational degrees --- Among the extensive information required on Form U-4, residence history for the past 5 years, employment history for the past 10 years, legal name and any aliases and date of birth would all be listed. Educational degrees and marital status are not required, but full-time education is included in the 10-year employment history.

They will be involved in extensive fundraising activities for a charitable institution. --- If a registered person wants to be employed by or accept compensation from an entity other than the member firm, that person must provide prior written notice to the member. These affiliations would include serving as an officer or director of a company or owning any interest in another financial services company.

1.need not list the conviction 2.would not be subject to statutory disqualification --- Non-securities-related misdemeanor convictions (such as a driving infraction) do not have to be reported on an applicant's Form U-4 when applying for registration. Securitiesor money-related misdemeanors and felony convictions within the past 10 years must be reported. These will automatically disqualify an applicant from registering (statutory disqualification).

1.The candidate has promised to steer business to the officer's firm. 2.The candidate is a close relative of a potential customer of the firm. --- Political contributions may never be used to procure or enhance business.

communications with the public --- The Uniform Practice Code (UPC) established uniform trade practices and other guidelines for broker-dealers to follow when they do business with other member firms, including transaction settlement, good delivery, ex-dates, trade confirmations, and don't know (DK) procedures.

1.name including any aliases 2.residency history back through the previous two years --- The Form U-4 contains the applicant's name as well as any aliases used. Residence history is shown for the past 5 years and employment history for the past 10 years. Charges, arrests, and convictions for securities related violations must be disclosed.

5 years of residency and 10 years of employment history --- Information required on Form U-4 includes name, address, any aliases, 5-year residency history, and 10-year employment history.

the RR points out only that a tech firm has a brilliant product idea and the CEO has advanced degrees in science -- The CEO may have advanced degrees, and the product idea may be brilliant, but the registered representative has failed to mention that these 2 things do not guarantee success nor the relevancy of the degree to the product or idea being discussed.

Partners -- Registered broker-dealers must have fingerprint records made for most of their employees, and all directors, officers, and partners. Those who are ancillary to the securities business and do not speak about securities with the investing public or who do not handle funds or securities are generally not required to be fingerprinted.

2 years -- If a terminated person becomes subject to a customer complaint or charges are brought against that person by FINRA, that person remains subject to FINRA jurisdiction for two years following termination.

prior written notice to the employing firm be provided --- Under FINRA's rules regarding outside business activity (OBA), prior written notice to the employing member is required.

Willful failure to disclose personal bankruptcy or unsatisfied liens --- A willful misstatement or omission made on an application for membership or registration as an associated person is deemed a serious infraction of securities law that would likely lead to a statutory disqualification from the securities industry. The Form U-4 does not ask about motor vehicle fines per se. Felonies convictions have to be disclosed, as do misdemeanor convictions involving money or securities.

The National Adjudicatory Council (NAC) --- The National Adjudicatory Council (NAC) establishes the rules, regulations, and membership eligibility standards for registration with the SEC.

selling away -- A private securities transaction is any sale of securities outside an associated person's regular business and his employing member. Private securities transactions are also known as selling away. If an associated person wishes to enter into a private securities transaction, that person must provide prior written notice to his employer, describe in detail the proposed transaction, describe in detail the RR's proposed role in the transaction, and disclose whether they have or may receive compensation for the transaction.

1 -- If the member firm is a sole proprietorship, only 1 principal is required; otherwise, the firm must employ at least 2 registered principals.

Within 15 days of the end of each calendar quarter --- Broker-dealer firms must electronically report information on all customer complaints to FINRA within 15 days of the end of each calendar quarter. Both these filings and the complaints must be retained by the firm for 4 years.

30 --- If a broker-dealer discovers that a filed Form U-5 was inaccurate, an amended form must be filed and sent to the former employee within 30 days of the discovery of the inaccuracy.

business reputation, character, education, and experience --- Before submitting an application to enroll any person with FINRA as a registered representative, a member firm must ascertain the person's business reputation, character, education, qualifications, and experience. As part of the application process, the member firm must certify that it has made an investigation and that the candidate's credentials are in order.

30 days --- Any changes such as a change in address require filing an amended Form U-4 with the Central Registration Depository (CRD) no later than 30 days after the member becomes aware of the changes. If the amendment to the form involved a likely statutory disqualification, an amended form must be filed within 10 business days.

1.Firm element training 2.Regulatory element training -- Registered persons are required to participate in continuing education (CE) programs. The CE requirement has 2 components: a regulatory element and a firm element. Regulatory element requires that all registered persons complete a computer-based training session within 120 days of the person's second registration anniversary and every 3 years thereafter. Firm element requires member firms to prepare an annual training plan that takes into account such factors as recent regulatory developments, the scope of the member's business activities, the performance of its personnel in the regulatory element, and its supervisory needs.

provide prior written notice to their employer -- Associated persons who wish to enter into a private securities transaction must provide prior written notice to their employer. Approval is only required when compensation will be paid. All supervision for the transaction is the responsibility of the employing member and not the firm accommodating the transaction.

conviction of a DUI resulting in a fine and probation --- Disciplinary sanctions by the SEC, an SRO, a foreign financial regulator, or the foreign equivalent of an SRO may be cause for statutory disqualification of FINRA membership. This would also be the case for willful misstatements made in an application for membership or a felony conviction, either domestic or foreign, or a misdemeanor conviction involving securities or money (not a DUI) within the past 10 years.

education (degrees or designations) --- Although there is a place to disclose certain earned professional designations such as CPA and CFA, there is no requirement to disclose education (degrees or designations). Time spent as a full-time student however would be included in the 10-year employment history.

customer complaints --- Copies of customer complaints require a minimum retention of 4 years.

Under either circumstance, the employing firm is responsible for filing Form U-5. -- Whenever a registered employee leaves a member firm under any circumstance, it is the employing member firm that is responsible for filing Form U-5.

BrokerCheck -- FINRA makes available some key information about firms and representatives through its BrokerCheck service. This is available to anyone by calling the BrokerCheck hotline or online.