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All four FINRA functions: knowledge of capital markets; understanding products and their risks; understanding trading, customer accounts and prohibited activities; and the overview of the regulatory framework.

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-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

Benefits of Owning Common Stock

Rights Growth Income Limited Liability

Rights of Common Stockholders

-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

Growth (capital gains)

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

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

Risks of Owning Common Stock

Market Risk Decreased or No Income Low Priority at Dissolution

Decreased or No Dividend Income

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

Low Priority at Dissolution

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

Liquidation: Priority of claims will be sold

-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

Benefits of Owning Preferred Stock

Dividend Preference Priority at dissolution over common stock

Benefit: Dividend Preference

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

Benefit: Priority at dissolution over common stock

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

Risks of Owning Preferred Stock

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

Interest rate sensitivity

When interest rates rise, the value of preferred shares decline

Purchasing power risk (inflation risk)

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

Priority at dissolution

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

Types of Preferred Stock

Straight (noncumulative) Cumulative

Straight/Noncumulative Preferred Stock

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

Callable (or redeemable) preferred

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

Convertible preferred

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

Adjustable-rate preferred

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

Participating Preferred Stock

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

Restricted Securities

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

Rule 144 for Affiliate

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

Rule 144 for Unaffiliated Investors

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

Rule 144A Transactions Under the Act '33

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

American Depository Receipts (ADRs)

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

ADR Currency and Political Risk

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

Penny Stock Cold Calling Rules

-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 *

Established Customers - Penny Stocks

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 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

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.

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Common Stock: -company issues stock to raise capital -Investors who buy the stock also buy a share of ownership in the company's net worth
Net Worth: Calculated by taking the business's assets less its liabilities (creditors' claim). Net worth belongs to the businessowners/stockholders
Benefits of Owning Common Stock: Rights Growth Income Limited Liability
Rights of Common Stockholders: -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
Growth (capital gains): Increase in the market price of securities is capital appreciation - provide investors with returns in excess of the inflation rate
Income: Dividends (usually quarterly)
Limited Liability: Shareholders are only liable for the money they have invested - not for the overall debts and liabilities of their company
Risks of Owning Common Stock: Market Risk Decreased or No Income Low Priority at Dissolution
Decreased or No Dividend Income: A risk of stock ownership is the possibility of dividend income decreasing or ceasing entirely if the company loses money
Low Priority at Dissolution: 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
Senior Securities: A company's debt and preferred shares
Liquidation: Priority of claims will be sold: -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
Preferred Stock: 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
Benefits of Owning Preferred Stock: Dividend Preference Priority at dissolution over common stock
Benefit: Dividend Preference: When the BOD declares dividends, owners of preferred stock must be paid before any payment to common shareholders
Benefit: Priority at dissolution over common stock: If a corporation gets bankrupt, preferred stockholders have a priority claim over common stockholders
Risks of Owning Preferred Stock: Purchasing power risk Interest rate sensitivity Decreased or no dividend income Priority at dissolution
Interest rate sensitivity: When interest rates rise, the value of preferred shares decline
Purchasing power risk (inflation risk): The potential that, because of inflation, a certain amount of money will not purchase as much in the future as it does today
Priority at dissolution: Preferred stockholders are paid before common shareholders but paid behind all creditors
Types of Preferred Stock: Straight (noncumulative) Cumulative
Straight/Noncumulative Preferred Stock: The straight preferred stock has no special features. The holder is entitled to the stated dividend rate and nothing else.
Cumulative: accrues payments due its shareholders in the event dividends are reduced to suspended
Callable (or redeemable) preferred: a company can buy back from investors at a stated price after a specified date
Convertible preferred: 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
Adjustable-rate preferred: 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
Participating Preferred Stock: offers its owners a share of corporate profits that remain after all dividends and interest due other securities are paid
Control Securites: owned by directors, officers, or persons who own or control 10% or more of the issuer's voting stock
Restricted Securities: acquired through some means other than a registered public offering - ex. security purchased in a private placement
Rule 144: 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
Rule 144 for Affiliate: 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
Rule 144 for Unaffiliated Investors: The stock may be sold completely unrestricted after the six-month holding period has been satisfied
Rule 144A Transactions Under the Act '33: 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
American Depository Receipts (ADRs): 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
ADR Ease of Use: 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
ADR Taxation: 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
ADR Currency and Political Risk: 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
Penny Stocks: 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
Penny Stock Cold Calling Rules: -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 *
Established Customers - Penny Stocks: 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 suitability statement requirement, but not from the disclosure requirement
Bonds: 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
Bond Investor: creditor of the borrowing entity
Term Bond: Matures on a single date.
Serial Bond: bond issue matures at intervals over a period of years until the entire balance had been repaid
Balloon Bond: 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)
accrued interest: when bonds trade between coupon payments - Interest earned to date at the time of settlement.
Corporate and Municipal Trades: use 30 day month/ 360-day year calculation for accrued interest
Treasury Bonds and Notes Transactions: -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
Bond's Yield: the cash interest payments in relation to the bond's value ** measured in basis points - yield equal to 1/100 of 1%
Nominal Yield: Coupon, nominal, or stated yield is set at the time of issue - coupon is a fixed percentage of the bond's par value
Current Yield (CY): measures a bond's coupon payment (interest) relative to it's market price. Annual Coupon payment / market price = current yield
Yield to maturity (YTM): reflects the annualized return of the bond if held to maturity
Point: measurement of the change in a bond's price, which equals 1% of face value, or $10 per bond
Yield to Call (YTC): the rate of return earned on a bond when it is called before its maturity date
Treasury Bills: Issued at a discount, weekly Short term (1yr or less) Mature in 4, 13, 26, or 52 weeks Highly Liquid No Accrued Interest
Treasury Notes: Intermediate Maturities 2-10 Yr Semiannual Interest as a % of stated par value Mature at Par Priced at % of par
Treasury Bonds: Long-term Maturities 10-30 Yr Semiannual Interest as a % of stated par value Mature at Par Priced at % of par
Treasury Receipts: 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 STRIPS: Treasury Departments own version of treasury receipts- Treasury Dept. designates certain issues as suitable for stripping into interest and principal components`
US Government Agencies: 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)
Agency: Ties to the government - might be privately owned
Agency-Issued Securities Transactions: Regular Waytwo business days (T+2)
Farm Credit System (FCS): A national network of lending institutions that provides agricultural financing and credit.
Government National Mortgage Association (Ginnie Mae): -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 **Only agency securities backed by the full faith and credit of the federal government
Collateralized Mortgage Obligations (CMOs): 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.
Federal Home Loan Mortgage Corporation (Freddie Mac): 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
Federal National Mortgage Association (Fannie Mae): 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
Corporate Bonds Transactions: settle T+3 and pay accrued interest based on a 30-day month/360-day year
Mortgage Bonds: Bonds that are secured by real property.
Equipment Trust Certificates: bonds secured with factory and equipment as collateral
Collateral Trust Bonds: bonds secured by the securities deposited
Debentures: unsecured bonds
Guaranteed Bonds: backed by a company other than the issuing corporation, such as a parent company - still unsecured
Income Bonds (Adjustment Bonds): When a corporation goes bankrupt and reorganizes existing debt may be replaced by this kind of bond - unsecured
Subordinate Debenture: claims of these bonds are subordinate or junior to the claims of the debenture holders, still senior to stockholder
Liquidation of Corporation's securities due to bankrupcy: -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
Municipal Securities Transaction: settle T+3 and pay accrued interest based on a 30-day month/360-day year
Municipal Securities: General Obligations (GO) Bonds Revenue Bonds
General Obligations (GO) 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
Revenue Bonds: 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
Authorities - Revenue Bonds: sometimes issued by authorities, which are quasi-gov entities often tasked with building roads, tunnels, bridges, and other infrastructure
Short Term Municipal Obligations (Anticipation Notes): 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
Taxable Municipal Bonds: 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
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
Section 529 Plans: 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
Sections 529 Plans Points: -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
Local Government Investment Pools (LGIPs): 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
Achieving a Better Life Experience (ABLE): 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
Capital Market: 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
Money Market Instruments: 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
Certificate of Deposit (CD): 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 money market instrument
Negotiable CD: 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 secondary market
Banker's Acceptance (BA): 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
Commercial Paper (Prime Paper, Promissory Notes): 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
US Treasury Bills: 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
Repurchase Agreements (REPOs): 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
Reverse Repurchase Agreement: a dealer agrees to buy securities from an investor and sell them back later at a higher price
Federal Funds: 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)
Tax Credit BABs: provide the bondholder with a federal income tax credit equal to 35% of the interest paid on the bond in each tax year
Derivatives Securities: securities providing payoffs that depend on the values of other assets
Options Contracts: 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
Options Parites: 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
Contract Premium: the amount paid for the contract when purchased, or received for the contract when it is sold
Buyer (owner of the contract): 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
Opening Purchase: Entering the options market by buying calls or puts.
Closing Sale: If buyers decide to sell the contract later, the second transaction is called this
Seller (writer of the contract): 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
Opening Sale: Entering the options market by selling calls Or puts
Closing Purchase: An options transaction in which the seller buys back the contract later - second transaction
Long Call (Purchase): Buyer of a call option has the right to buy an underlying asset -Bullish Investor
Short Call (Sale): Writer (seller) of a call option, has the obligation to sell the underlying asset -Bearish Investor
Long Put (Purchase): Buyer of a put option, has the right to sell the underlying asset -Bearish Investor
Short Put (Sale): The writer (seller) of a put option, has the obligation to buy the underlying asset -Bullish Investor
Index Option: 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
VIX Options: 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 - In the Money: Call: Price of stock is above the exercise price (strike price)
Call - At the Money: Call: Price of the Stock = Strike Price
Call - Out of the Money: Call: Price of the Stock is lower than the Strike Price
Call - Intrinsic Value: Call: When the Market Price is above the Strike Price -same as - In the Money-
Parity (For Call and Put): at parity when the premium equals intrinsic value
Put - In the Money: Put: Price of the Stock is lower than the Strike Price
Put - At the Money: Put: Price of the Stock equals the Strike Price
Put - Out of the Money: Put: Price of the Stock is higher than the Strike Price
Put - Intrinsic Value: Put: Price of the Stock is lower than the Strike Price -same as Put - In the Money-
Call Breakeven (Long & Short): Call: Strike price + Premium
Long Call - Max Gain Short Call - Max Loss: Call: Unlimited
Long Call - Max Loss Short Call - Max Gain: Call: Premium
Put Breakeven (Long & Short): Put: Strike Price - Premium
Long Put - Max Gain Short Put - Max Loss: Strike Price - Premium (Same as Put Breakeven)
Long Put - Max Loss Short Put - Max Gain: Put: Premium
Options Clearing Corporation (OCC): 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
Options Trading Times: listed options traded from 9:30-4pm ET -traded without a certificate, the proof of ownership is the trade confirmation-
Options Settlement: Listed options settle on the next business date after trade date (T+1)
Options Expiration: Listed options expire on the third Friday of the expiration month at 11:59pm
Excercise: 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
Automation Exercise: 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
Assignment: 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)
American-style Option: an option that can be exercised at any time until expiration
European-style option: An option that can be exercised only on the expiration date
Settlement of Index and Foreign Currency Options: cash settled
OCC Options Disclosure Document (ODD): 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
Approval of Options: Branch office manager (BOM) and by the Register Options Principal (ROP) at the firm
Options Agreement: -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
Covered: 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
Uncovered (naked): 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
Protective Puts: 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
Protective Call: 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
Investment Company: 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
Investment Company Act of 1940: Classifies investment companies into three broad types: -Face Amount Certificate Companies (FACs) -Unit Investment Trusts (UITs) -Management Investment Companies
Face-amount certificate: 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
Unit Investment Trust (UIT): 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
Redeemable interests: units or shares of beneficial interest
debt-fixed UIT: typically purchases a portfolio of bonds and terminates when the bonds in the portfolio mature
equity-fixed UIT: purchase a portfolio of stocks and, because stocks don't have a matuirty date, terminates at a predetermined date
nonfixed UIT: purchases shares of an underlying mutual fund
Management Investment Company: 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)
Closed-End Investment Company: 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 *
Bid Price: the price at which an investor can sell
Ask Price: price at which an investor can buy
Open-End Investment Companies (Mutual Funds): 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)
Mutual Funds: 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 vs Open-end Difference: 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)
Annuity: an insurance contract designed to provide retirement income - stream of payments guaranteed for some period of time
Mortality Guarantee: An annuity guarantees payments for the life of the annuitant
Directly managed Annutities: 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
fixed annuity: insurance company product, guarantee a stream of income for life **promises a stated rate of return -it is the insurance company who is at risk to provide the rate of return it promisedthe investor assumes no investment risk with a fixed annuity
Guaranteed Marketability: 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
Mutual Fund Characteristics: - 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
Class A Shares: front-end sales load
Class B Shares: back-end load
Class C Shares: 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.
No-load Shares: 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
Market Timing: short-term buying and selling of mutual fund shares to take advantage of inefficiencies in mutual fund pricing
Total NAV of the fund: total assets - total liabilities *the amount the investor receives upon redemption
NAV per share: NAV of the fund/share outstanding
Increase in NAV: -Market value securities increases -Fund receives dividends -Fund received interest -Liabilities decline
Decrease in NAV: -Market value securities declines -Fund distributes dividends -Fund distributes capital gains -Liabilities increase
NAV does not change: -Manager buys or sells securities -Fund issues shares -Fund redeems shares
Prospectus: 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
Mutual Fund Prospectus: 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
Summary Prospectus/Statutory Prospectus: 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
Statement of Additional Information (SAI): 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
More Disclosures: -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
Disclosures: Financial Reports: (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.
Management Fee: every fund's single greatest expense - charge annually percentage of the total assets under management
12b-1 asset-based fee: 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
Expense Ratio: 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 . !!
Direct Participation Programs (DPPs): 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
Types of DPPs: Real Estate Programs Oil and Gas Programs Leasing Programs Limited Partnerships
Real Estate Programs: 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
Oil and Gas Programs: 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
Leasing Programs: 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)
Limited Partnerships: (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
General Partners: invest capital, manage the business, and are personally liable for partnership debts (unlimited liability)
Limited Partners: 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
Partnership Sales and Disclosures: 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
LP Liquidation: 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
Real Estate Investment Trust (REIT): 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
Public REITs (Registered REITs): Registered with the SEC and are subject to all disclosure requirements
Private REITs (Unregistered REITs): not subject to the same disclosure requirements as public REITs and therefore are subject to greater risk
Listed REITs: traded on a stick exchange, exchange-traded
Nonlisted REITs: not listed on an exchange and trade in the OTC market - unique risks exit -far less liquidity versus a listed product
Hedge Funds: (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)
Hedge Fund Strategies: -highly leveraged portfolios -short positions -derivative postions (options/futures) -currency speculation -commodity speculation -investment in politically unstable international markets
Lock-up Provisions: minimum holding requirements (length of time)
Exchange-traded products (ETPs): 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
Exchange-Traded Funds (ETFs): 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
Exchange-Traded Notes (ETNs): 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
Systemic Risk: 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
Market Risk: the risk that when the overall market declines, so too will any portfolio made of securities the market comprises
Interest Rate Risk: the possible reduction in returns associated with changes in interest rates
Reinvestment Risk (Call Risk): The risk that a decline in interest rates will make it difficult to reinvest proceeds from redemption
Inflation Risk (Purchasing Power Risk): The danger that money won't be worth as much in the future as it is today
Nonsystematic Risk: 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
SEC: Securities Exchange Commission - Sec ind. reg body - BD's must be approved by SEC
If BD's don't comply with SEC, they are subj. to?: - Censure - Limits on activities, functions and ops - Registration suspension/revocation - Fines
Self Regulatory Organizations (SRO's): - Function under SEC oversight 1. FINRA (Financial Industry Regulatory Authority) 2. CBOE (Chicago Board Options Exchange) 3. MSRB (Municipal Bond Rulemaking Board)
FINRA: Financial Industry Regulatry Authority - Regulates investment banking (securities underwriting), trading, and conduct of firms/people
CBOE: Chicago Board Options Exchange - Regs trading standardized options and related contracts listed on that exchange
MSRB: 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
US Dept. of the Treasury & IRS: - Oversees tax collection - IRS enforces laws and is a bureau of the Dept. of the Treasury
NASAA: N. American Securities Administration Association - Voluntary association where members give insight to SEC to help make the rules
The Fed. Reserve: - 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
SPIC - Securities Investor Protection Act and Corporation: - Nonprofit org. - Most members are BD's who pay assessments into general insurance fund used to meet cust. claims in event of BD bankruptcy
What happens to claims in excess of SPIC coverage limits?: They become a general creditor of the BD for the uncovered amount
What 3 things are NOT covered by the SPIC?: Commodities, Commodity futures, Currencies
FDIC - Fed. Deposit Insurance Corp.: Provides deposit insurance guaranteeing the safety of the depositor's accts in member banks up to $250K/deposit
Retail Investor: An indiv. who buys personal securities
Institutional Investor: An entity that pools $ to buy securities (Banks, mutual funds, insurance companies, etc)
Accredited Investor: - 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)
Broker-Dealers: - 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
Carrying Firms: - Carries cust. accts and accepts funds and securities from customers - they are larger BD's - Very risky
What do Carrying Firms have to separate?: Customer funds/securities from the firm's capital and securities
Introducing Firms (Fully Disclosed Firms): - 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
What else can an intor firm receive?: Customer checks made out to a clearing firm
Prime Account: Allows a cust (usually an institution) to select 1 member firm (prime broker) to give custody and other services
Executing Brokers: Handle all trades placed by customer
2 things needed to open a Prime Broker Acct:: 1) Prime Broker must sign agreement with customer 2) PB enters into agreements with each executing broker named by customer
Advantage of PB account:: Customer can have 1 master acct and trade with mult brokerage houses (different products)
Investment Advisor: Anyone who gives investment advice for $
Municipal Advisors: Gives advice on behalf of a municipal entity
Issuers and Underwriters: - 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
Traders and Market Traders: Any entity who buys a security to sell to make $
Custodians and trustees: 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
Transfer Agents are responsible for:: - Securities issued in correct owner's name - Cancelling old and issuing new certs - Keeping ownership records
Clearing Agency: An intermediary b/n buy and sell transactions
What 2 entities can act as clearing agencies?: BD's and commercial banks
What does the Depository trust & clearing Co do?: Serves the custody needs of security independent participants in US worldwide
Capital Markets: Broadly defined at stock and bond markets - Public and private securities sold
Primary Markets: Where securities are sold to the public
Third Market: Nasdaq - exchange listed securities traded on OTC market - All NYSE and most securities listed on regional exchanges are eligible for OTC trading
Fourth Market: - 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)
3 ways the Federal Reserve Board (FRB) impacts business activity and market stability: 1. Open market operations (buying and selling securities) 2. Changes in the discount rate (on loans to member banks) 3. Changes in reserve requirements
2 policy types that impact the economy: Monetary policy Fiscal policy
monetary policy: the actions the federal reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objects
Fiscal policy: 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
Why are monetary policies enacted by the FRB?: To influence the $ supply
Who enacts Fiscal policies?: The President and Congress - tax laws and fed spending
3 different categories of "money": M1, M2, M3
M1: - The most readily availible kind of $ - Money in circulation and checking accts that can be easily converted into $ (demand deposits or checking accts)
M2: Savings accts, money market mutual funds, time deposits less than $100,000
M3: Time deposits of over $100,000 and repurchase agreements longer than 1 day
How does the FRB effect the $ supply?: Buying and selling govt. securities
Secondary Markets: Where securities are traded between investors - 1 investor sells to another and the issuer isn't involved (stock exchanges)
Federal Open Market Committee does what?: Meets to direct the govts. market operations
When the FOMC buys securities, wat happens?: $ supply increases
When the FOMC sells securities, what happens?: The money supply decreases
If the Fed Govt wants to expand (loosen) the econ, what happens?: 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)
If the Fed Govt wants to contract (tighten) the $ supply?: It sells securities to the banks and interest rates rise
Govt buying securities does what?: Expands the econ - Securities out and $ in - Money supply increases and interest rates drop
Govt selling securities does what?: Contracts the econ - Securities go into the econ and $ goes out - $ supply drops and interest rates rise
Interest rate: 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)
Federal Funds Rate: The rate commercial banks charge each other for overnight loans of $1M or more
Discount Rate: The rate the Fed Reserve charges for short term loans to member banks
Prime Rate: The interest rate US commercial banks charge their largest corporate borrowers for unsecured loans
Do banks set their own interest rates?: Yes. The large banks set the standards for the smaller banks rates
When do banks lower and raise interest rates?: Lower - When FRB eases $ supply Raise - When FRB contracts $ supply
Broker Loan Rate (call loan rate): The interest rate banks charge BD's on $ they borrow to lend to margin acct. customers
What are Margin Accounts?: They let customers buy securities w/o paying in full - AKA "Call Loan Rate" or "Call Money Rate"
What/who can a bank borrow $ from?: Other member banks or Fed Reserve
How do economists consider business activity?: Businesses prospering or failing
Financial Statements: Give analysts fundamental raw material needed to assess a company - Quarterly and annual financial reports
Balance Sheet: - 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
Net Worth Formula:: Assets - Liabilities = NW Assets = Liabilities + NW
Income Statement: - Summarizes a corp's revenues and expenses for a fiscal period - Compares revenue with costs and expenses
3 parts of the business cycle: Expansion, Peak, Contraction, Trough
Business Expansion: Increased business activity
Business Contraction: Economic decline from its peak (recession is a mild, short contraction) - 6 months
Business Trough: When business activity stops declining
Depression: Econ. downturn lasting for over 6 quarters (18 months) or more
What things are counter cyclical?: Precious metals
4 Leading Econ. Indicators: - $ supply - Building permits - New orders of consumer goods - Stock prices
Coincident Econ. Indicators: - Very direct and simultaneous with business cycles - # of hours worked - Employment levels - Ind. production - GDP (Gross Domestic Product)
Econ. Lagging Indicators: 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
Inflation: General rise in prices
Deflation: General price drop
Stagnation: Slow/little growth and high unemployment
Stagflation: Inflation + unemployment
4 types of industries and investments: 1. Defensive Industries 2. Cyclical Industries 3. Growth Industries 4. Special Situation Stocks
Defensive Industries: Food, pharma, tobacco - Stays steady - Less risk, so lower ROI
Cyclical Industries: Highly sensitive - Durable goods like machinery, raw materials - Demand for these drops during recessions
Growth Industries: - 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
Special Situation Stocks: - Comps with unusual profit potential coming from non-recurring circumstances Ex. New management, discovery of a new natural resource, new product intro
Keynesian Economic Theory: The theory that a government policy of increasing spending and cutting taxes could stimulate the economy in a recession.
Monetarist Theory: The idea that the amount of money in circulation (the money supply) is the primary influence on economic activity and inflation
Supply-Side Economic Theory: A decrease in the highest income tax rates should stimulate economic growth and ultimately result in an increase in government revenues.
International Economic Factors: Factors outside the US that impact our securities and trade markets
Balance of Payments: The flow of $ b/n the US and other countries
US Balance of Payments: They may be in a surplus (more $ in than out) or a deficit.
Balance of Trade: The export and import of goods and services
When does a deficit happen?: When debits are greater than credits
When does a surplus happen?: When credits are greater than debits
Gross Domestic Product (GDP): A nation's annual economic output of all goods and services
Exchange Rates: The value of one currency compared to another - If the dollar is weak, foreign currency buys more US goods so exports increase
Issuers: Offer the securities
Underwriters: Help issuers bring the securities to market - BD's or investment banks - Called Syndicates
Primary Offering: - $ raised goes to the issuing company - Done via primaries market (new issues)
Public Securities Offerings: Offered and sold to the public - BD's and investment banks used (underwriters)
Purpose of the Securities Act of 1933: To give full and fair disclosure to the investors. New issues have to be registered with the SEC
Private Securities Offering: Sold to private investors rather than the general public - Generally institutional investors or small groups of wealthy people - Accredited investors
What are not subject to the Securities Act of 1933?: Private offerings - exempt
Initial Public Offering (IPO): The 1st time an issuer distributes securities to the public - They are primary issuer transactions b/c comps get all the proceeds
SPO: Subsequent Public Offering - subsequent issues of new shares after an IPO
Secondary Offering: 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
Split Offering: A combo of a primary and secondary offering - Some shares offered to the public and the existing stockholders offer the balance
Best Efforts Underwriting: - 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
All - or - None Underwriting (AON): The UW has to sell all shares or cancel the underwriting
Mini-Max: 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
Firm Commitment Underwriting: - 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
The Registration Statement: - Disclosing material info about the issuer - A prospectus is given to the purchasers - All responsibility is on the issuer
The Cooling-Off Period: After the issuer files a registration statement, a 20 day period occurs when no one can solicit sales of the securities
Tombstone Ads: - 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
Shelf Offering Registration: Securities registered with the SEC for sale at a later date; the securities are held "on the shelf" until the sale.
Uniform Securities Act (USA): Legal framework for the state registration of securities - Registrations renewed every year
2 Exemptions to State Registration (USA): 1. Isolated non-issuer transactions 2. Unsolicited transactions
Isolated non-issuer transactions: Occurs on the secondary market and aren't frequent
Unsolicited transactions: Transactions initiated by the client not the agent or rep
3 ways for states to register securities: Coordination, Qualification, and Notice Filing
Coordination: The issuer files a NEW security with the state and SEC at the same time
Qualification: - Most difficult way to register - Issuer has to respond to any state requirement - If registration can't be done by coordination or filing
Notice Filing: Federally covered - states don't have jurisdiction or registration requirements
Offering Docs and Delivery Requirements: These give full disclosure to investors about the securities
Preliminary Prospectus: - 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
During the Cooling-off period, UW's my NOT:: - Make offers to sell securities - Take orders to deliver ad material
During the Cooling-off period, UW's CAN:: - Take indications of interest - Distribute a Preliminary Prospectus - Tombstone ads
Final Prospectus: - Amendments made to preliminary prospectus after the effective date, like final offering price - Orders can now be taken
Does the SEC approve/endorse offerings?: Nope
When is the final prospectus delivered?: Delivered to all buyers after the effective date
Where are prospectus finals posted?: On the SEC website
Non-exempt securities: Securities that need to be registered and sold
Exempt Securities: - 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
Exempt Transactions: Securities offered by industrial, financial, or other companies can apply
APO: Additional Public Offering - done on Primary Market
The requirement for a supplemental prospectus to be filed before each sale is applicable to A) additional issues B) shelf registration sales C) initial public offering sales D) sales of shares in the secondary 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.
Market order: buy or sell, executed immediately at the best available market price market orders are always executed immediately at the current market price
Limit order: 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
For a buy limit order, or better means: at the limit price or lower
For a sell limit order, or better means: at the limit price or higher.
Limit orders to either buy or sell come with an: 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.
Limit orders stand in: 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.
Stop order: 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.
Stop limit order: 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.
Day order: 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.
Good-til-cancelled (GTC) order: 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.
Market-at-open or market-on-close 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.
Fill-or-kill (FOK) order: 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.
Immediate-or-cancel (IOC) order: 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.
All-or-none (AON) order: 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 current bid price for a security is: the highest price anyone is willing to pay for the securities at that moment in time.
The current ask (offer) price is: the lowest price anyone is willing to accept to sell the securities at that moment in time.
Agent: 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
Principal: 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
Long: 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
Short: 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
naked short selling: 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.
Discretion is defined as the authority to decide:: ■ 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.
A customer can give discretionary power over his account(s) only by filing a: 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.
In addition to requiring the proper documentation, discretionary accounts are subject to the following rules.: ■ 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.
solicited transaction: A transaction initiated by an agent or registered representative
unsolicited transaction: Unsolicited transactions are those initiated by the customer.
Earned income includes: salary bonuses and income that is derived from active participation in a trade or business.
Investment income is: 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: 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: 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: 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: 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.
Stock dividends: 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.
cash dividends may be taxed as: 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.
Declaration date: 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.
Ex-dividend date: 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.
Record date: The stockholders of record (those who own the stock) on the record date receive the dividend distribution.
Payable date: 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: 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.
A capital gain occurs: when a security is sold for a price higher than the cost basis.
If the selling price is lower than the cost basis: a capital loss occurs.
Upon liquidation, cost basis represents a: return of capital. The cost basis is not taxed as a gain but any sales proceeds above cost basis would be
Dow Jones Industrial Average: The most widely cited measure of the market, the DJIA tracks the performance of 30 stocks of large, well-known companies.
S&P 500 Index: 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.
Russell 2000: This index tracks 2,000 small-company stocks and serves as the benchmark for that component of the overall market.
Dow Jones Wilshire 5000: 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 Fund Indexes: Lipper calculates several indexes tracking different categories of mutual funds, such as Growth, Core, or Value funds.
Barclays Capital Aggregate Bond Index: This is a composite index that combines several bond indexes to give a picture of the entire bond market.
The date a transaction occurs is: known as the trade date
Settlement 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.
Regular Way Settlement: T+2
T + 2: corporate securities, municipal bonds and government agency securities (Ginnie Mae, Fannie Mae and Freddie Mac debt securities)
T + 1: federal government securities (T-bills, notes and bonds) and options
same day as trade date: money market securities
Cash Settlement: 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.
Seller's Option: 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.
Seller's or buyer's settlement option cannot take place any sooner than: 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.
government securities issued by the U.S. Treasury are all issued in: 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.
Forward Split: 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.
Reverse Split: 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: 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.
A stockholder who receives rights may:: ■ 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).
Stock Warrants: 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.
Mergers and Acquisitions (M&A): 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.
Takeover: 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.
Spin-Off: 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.
Tender Offer: An offer to buy securities for cash or for cash plus securities.
Buyback: 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.
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: 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
The following should be included in the notice:: ■ 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
Notice should be given: 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 proxy is: 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.
Proxy Solicitation: 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.
Member broker-dealer firms must cooperate with issuers by ensuring that customers whose stock is held in the broker-dealer's name (street name) are: 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.
Member firms that are nominal owners of record (the stock is held in street name) must: 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.
If a customer does not return the proxy by: 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.
Member broker-dealer firms are reimbursed by issuers for: all costs relating to the forwarding of proxy materials. Such costs include postage and related clerical expenses.
Cash Account: 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.
Margin Account: 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.
There are two types of margin accounts:: 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.
Stock can be borrowed from several sources for short sales 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
In long margin accounts: customers borrow money
in short margin accounts: Customers borrow securities
Consider that in a margin account a customer can:: ■ 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.
The advantages of margin accounts for broker-dealers are:: ■ 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.
Hypothecation: 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.
After customers pledge their securities to the broker-dealer by signing the margin agreement, the broker-dealer re-hypothecates (repledges) them as collateral for a loan from a bank.: 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.
Firms cannot commingle customer securities with securities owned by the firm. However firms can commingle one customer's securities with another customer's securities for: hypothecation if customers have given specific permission by signing the hypothecation agreement.
Types of Accounts Permitted or Not Permitted to Trade on Margin: ■ 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.
Like all accounts, margin accounts would need to be approved by a: 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.
Margin is the: amount of equity that must be deposited to buy securities in a margin account
Marginable refers to: securities that can be used as collateral in a margin account
The following may be purchased on margin and used as collateral:: ■ Exchange-listed stocks, bonds ■ Nasdaq stocks ■ Non-National Market Securities (NMS) OTC issues approved by the FRB ■ Warrants
The following cannot be purchased on margin and cannot be used as collateral for a margin loan:: ■ Options (both calls and puts) ■ Rights ■ Non-National Market Securities (NMS) OTC issues not approved by the FRB ■ Insurance contracts
The following cannot be bought on margin but can be used as collateral after being held for 30 days:: ■ Mutual funds ■ New issues
Securities exempt from Regulation T include:: ■ U.S. Treasury bills, notes, and bonds; ■ government agency issues; and ■ municipal securities.
Credit agreement: 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.
Hypothecation agreement: 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.
Loan consent form: 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.
Additionally, before opening a margin account, you must provide customers with: a risk disclosure document. This information must also be provided to margin customers on an annual basis.
The document discusses the risks associated with margin trading, some of which are shown in the following.: ■ 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.
There is another way to look at this: if the customer's first purchase in a margin account is;: ■ 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.
Margins calls: 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.
For introducing broker-dealers who do not clear their own trades, the extension request is made by the: clearing firm. For an amount less than $1,000, the broker-dealer can choose to take no action.
If no extension is requested, or one is requested but not granted,: on the morning of the sixth business day, the firm must sell out the securities purchased and freeze the account for 90 days.
If the customer wants to purchase securities in a frozen account, the customer must have adequate funds in the account before order entry. In other words, the customer: must have the funds available in the account to pay for the securities in full.
In a nondiscretionary account,: no order can be entered without the customer's prior approval.
Accounts can be set up as commission-based, where: a commission is billed for each transaction,
Firms can offer investors fee-based accounts that: 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: 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 IRA): 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.
Individual/Single Accounts: 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.
Full power of attorney: 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.
Limited power 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): 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.
Joint Accounts: 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): 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): 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
Corporate Accounts: 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.
A broker-dealer who opens an account for a corporate must establish:: ■ 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.
Partnership Accounts: 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.
Fiduciary Accounts: 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.
A fiduciary: 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.
Fiduciaries include a(n):: ■ 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.
The registered representative for a fiduciary account must be aware of the following rules.: ■ 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.
Custodial Accounts for Minors: 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.
Under UGMA, when the minor reaches the age of majority,: the property in the account is transferred into the name of the new adult.
Under UTMA, the custodian can withhold transfer of property in the account until: the new adult reaches age 25 (or 21 in some states).
The custodian has full control over the minor's account and can:: ■ buy or sell securities; ■ exercise rights or warrants; or ■ liquidate, trade, or hold securities.
Registered representatives must know the following rules of custodial accounts.: ■ 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.
Opening and Managing Custodial Accounts: 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.
Because the minor is the beneficial owner (the account contains the minor's Social Security number), any tax liability is: 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.
Certain restrictions have been placed on what is deemed to be proper handling of the investments in these accounts. The most important limitations follow.: ■ 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.
Death of the Minor or Custodian: 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.
Individual Retirement Accounts (IRAs): 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.
TRAD IRA Contributions: 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.
TRAD IRA Funding: 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.
Following is a partial list of investments appropriate 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.
TRAD IRA Rollovers and transfers: 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.
TRAD IRA Distributions/withdrawals: 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.
If distributions do not begin by: 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.
Roth IRAs: 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.
Contributions to Roth IRAs: 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.
ROTH IRA Earnings are: 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: 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.
403(b) Plans: 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.
Besides 403(b) plans for employees of educational institutions,: tax sheltered annuities are also available for employees of tax-exempt organizations (501(c)(3)) and religious organization
Bank Secrecy Act: 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).
Three Stages of Money Laundering: 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.
AML Compliance Program: 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.
Examples of red flags include:: ■ 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.
Suspicious Activity Report (SAR): 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.
Financial Crimes Enforcement Network (FinCEN) is: 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 act requires firms to report to FinCEN any transaction that alone or in the aggregate involves at least $5,000 in funds or other assets if the firm suspects that it falls within one of the following four classes.: ■ 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.
Firms must file a SAR within: 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.
In addition, the USA PATRIOT Act requires firms: 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.
Currency Transaction Report (CTR): 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.
The USA PATRIOT Act requires financial institutions to maintain: 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).
Office of Foreign Asset Control (OFAC) and the Specially Designated Nationals and Blocked Persons (SDNs) List: 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.
Lifetime records: 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.
Six-year records: ■ 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.
Three-year records: ■ 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.
Written customer complaints records: must be retained for 4 years
Electronic Delivery: 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.
Updating Customer Account Records: 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.
Account statements provided to customers give a general accounting of securities and cash held in the account. A statement shows:: ■ 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.
trade confirmation: 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.
The trade confirmation includes the following information:: ■ 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.
Non-Trade Confirmations/Third Party Activity Notices: Firms are required to send confirmations of activity in accounts even when the activity is not trade related or initiated by a third party.
Your firm is permitted to hold mail for a customer (e.g., statements and confirmations) who will not be receiving mail, provided that:: ■ 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.
Additionally, during the time that a member firm is holding mail for a customer, the firm must: 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.
Business Continuity Plans (BCP) FINRA requires member firms to create and maintain a business continuity plan to deal with the possibility of a significant business disruption. The plan must address certain points having to do with the consequences of the event, including but not limited to the following:: ■ 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
Firms must designate: 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.
Privacy Requirements—Regulation S-P: This regulation was enacted by the SEC to protect the privacy of customer information. In particular, the regulation deals with nonpublic personal information.
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.
Confidentiality of Information: 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.
Privacy Notifications: Your firm must provide a privacy notice describing its privacy policies to customers whenever a new account is opened and annually thereafter.
Safeguard Requirements: 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.
FINRA holds broker-dealers to certain general standards regarding all member firm communications. All member communications must be: 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.
Retail communication: 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.
Correspondence: means any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period.
Institutional communication: 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).
Examples of institutional investors are:: ■ 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.
The Telephone Consumer Protection Act of 1991 (TCPA): 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.
The Telephone Consumer Protection Act of 1991 (TCPA) requires an organization that does telemarketing (cold calling in particular) to:: ■ 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.
The act exempts calls:: ■ 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.
Know-Your-Customer (KYC): 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.
Regarding the term "customer," FINRA defines it to exclude: 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.
A customer's nonfinancial considerations are often as important as his financial concerns. Therefore, a registered representative or an investment adviser should know the:: ■ 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.
Risk Tolerance and Investment Goals A customer's risk tolerance and investment goals are other important considerations that will shape his portfolio. To understand a customer's attitude about investment alternatives, the representative or adviser should ask the customer the following questions in order to complete the customer profile and know the customer.: 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?
market manipulation: 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.
Market Rumors: 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.
Pump and Dump: 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: 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 (Churning): 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.
Marking the open: 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
Marking the close: 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
Backing Away: 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: 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: 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: 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: 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
Wash Sales: 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.
Two additional points on wash sale rules should be noted.: 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.
Matched Orders: 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: 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.
Breakpoint sales: 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).
INSIDER TRADING AND THE SECURITIES FRAUD ENFORCEMENT ACT OF 1988: 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.
firewall or information barrier: This barrier against the free flow of sensitive information
Insider: 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
Material Nonpublic Information: 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.
Identifying Involved Parties: 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.
The key elements of tipper and tippee liability under insider trading rules are as follows.: ■ 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?
Insider Trading Penalties: 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.
contemporaneous traders: 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.
Informer Bounties: 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.
Use of Manipulative, Deceptive, or Fraudulent Devices: 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.
Improper Use of Customers' Securities or Funds: 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.
There is no end to the number of red flags and combinations of red flags, but just a very small sampling might include:: ■ 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.
Borrowing and Lending: 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.
The Conduct rules permit the following five types of lending arrangements:: ■ 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.
Generally, before borrowing from or lending to a customer, a representative must: 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.
Guarantees in Customer Accounts: 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.
Sharing in Customer Accounts: 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.
Exceptions to the proportion rule are made when: 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.
FINRA, along with other regulators specifically addresses the financial exploitation of seniors and other specified adult customers. FINRA defines the impacted accounts as those for individuals: ■ 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.
FINRA notes financial exploitation to be as follows:: ■ 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.
Essentially, to prevent potential exploitation the rules regarding the accounts of seniors and other specified adult customers do two things:: 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.
Trusted Contact Person: 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.
A reasonable effort to obtain the name and contact information for a trusted contact person must be made when: ■ opening a customer's account, or ■ updating the account information for an existing account.
If the member firm reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted, it can: 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.
If a member firm places a temporary hold on disbursements, it must: 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.
Solicitation and Taking Orders: Unregistered persons are prohibited against soliciting customers and taking orders to buy or sell securities.
Paying Commissions to Unregistered Persons: 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.
Exceptions: Foreign nonmember firms: These firms, ineligible for FINRA membership, may be granted commissions, or other allowances provided they agree to abide by FINRA rules, regulations and standards.
Exceptions: Continuing commissions: 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
Falsifying or Withholding Documents: 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: 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.
Signatures of Convenience: 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.
Responding to Regulatory Requests: 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.
Passive investments do not fall under the definition of an outside business activity. Which of the following investments would be considered a passive investment?: 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.
All of the following regarding the firm element of a broker-dealer's continuing education requirement are true EXCEPT: 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.
A commonality of all self-regulatory organizations (SROs) is that they all require their members and associated persons to: 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.
All of the following associated persons engaged in the investment banking and securities business are considered registered representatives, EXCEPT: 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.
Upon application for registration as a registered representative to ensure that any criminal past might be discovered by the employing firm, the Securities and Exchange Commission (SEC) requires: 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.
A broker-dealer may allow a registered representative to work from home - that is, to have a "home office." If this is the case, the registered representative must: 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.
FINRA is concerned about potential conflicts of interest in providing incentives or rewards for selling a sponsor's product. Which of the following situations regarding a product sponsors product training or education for outside RRs would FINRA disallow?: 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.
Should a registered representative enter into a private securities transaction that would entail earning compensation, the employing member will: 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.
A written customer complaint has been received by a broker-dealer, alleging that the customer's signature was forged on a document. The broker-dealer must report this to FINRA: 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.
The regulatory element of training requires that all registered persons complete a computer-based training session how frequently?: 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).
In the event that a customer complaint is received it is essential that the appropriate personnel are notified immediately. Which of the following need not be notified or only notified regarding specific scenarios?: 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.
A registered representative was guilty of an undetected minor rule violation during the last year of employment at a broker-dealer firm. The representative has now decided to leave the industry. For how long might the representative still be subject to fines or other sanctions by FINRA if the violation is belatedly detected?: 2 years --- FINRA retains jurisdiction over a registered person for 2 years after the person leaves the industry.
Automatic disqualification for registration from FINRA may occur if: 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.
Firm element training requires member firms to prepare training how frequently?: 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 broker-dealer firm managing an IPO wishes to give a gift to an associated person of one of the selling group members. Which of the following would be an unacceptable gift under the rules?: 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.
The firm element of a broker-dealer's continuing education requirement must be undergone by all registered persons who: 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.
Gifts and gratuities directed to those who work at another firm may not be made by a member or associated person for amounts greater than: $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.
An application for FINRA membership carries the applying firm's specific agreement to do which of the following?: 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.
An applicant who was unable to pass a FINRA qualifications exam 3 times would need to wait how long before another attempt would be permitted?: 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.
Registered representatives who have not completed their regulatory element training in the prescribed time frame will have their registrations: 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.
An associated person is unable to work for any business other than his member firm without having the employing broker-dealer's: 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.
All of the following are part of FINRA's manual regarding employee conduct and reportable events EXCEPT: 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.
Registered representatives must complete or satisfy each of the following EXCEPT: 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.
All of the following statements about a home office are true EXCEPT: 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.
A "free lunch" seminar is advertised among senior citizens who may be looking to improve the results of their investment portfolio. Which of the following activities by the registered hosts of the seminar would be deemed a potential violation?: 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.
If a broker-dealer firm wishes to become a FINRA member firm, it must make its application: 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.
An investment company wishes to provide incentives for registered representatives of several broker-dealer firms to sell their investment products. The company proposes to send some selected representatives to a sales training seminar. Which of the following would be acceptable features of the trip?: 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.
To keep up with recent developments in the industry regarding regulatory changes and other requirements imposed by FINRA, as well as needs identified by the broker-dealer firm, registered persons must fulfill the firm's: 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.
Reporting requirements for representatives and principals who are to be registered with FINRA include filling out a Form U-4 when the individual is hired. All of the following are required to make the registration effective EXCEPT: 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).
Industry rules regarding political contributions intended to preserve investor confidence and market integrity apply to contributions made to: 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.
One of the FINRA Conduct Rules is concerned with private securities transactions. Under that rule, it would be CORRECT to state that: 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.
The Advisers Act of 1940 specifically deters gaining political favor via contributions made to candidates, officials, or political parties. As such, if a political contribution is made to any of these entities then under the Act, the firm may NOT provide advisory services to any government these individuals or parties represent for how long?: 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.
Which of the following violates the FINRA Conduct Rules?: 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.
Each of the following activities would require prior written notification by an associated person to the employing broker-dealer EXCEPT: 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.
Regarding registered representatives working from their residence, commonly known as their "home office," all of the following would be true EXCEPT: 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.
While an associated person may work for an entity other than the member firm, the employing member firm's permission is: 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.
A representative of a dealer who solicits municipal securities business from an official of an issuer contributes $275 to the official's city council re-election campaign during the general election. Under what circumstance would the contribution invoke a ban on the dealer's municipal securities business with that issuer?: 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.
In which of the following circumstances would a firm be denied FINRA membership?: 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.
All associated persons must be fingerprinted if they handle: cash and securities --- Any associated person put in a position that would have them handle cash or securities would be required to be fingerprinted.
Someone responsible only for training associated persons at a FINRA member firm: 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.
An individual has been a registered representative with a national firm for the past three years. Another member firm makes an attractive offer in an attempt to lure this individual to join them. In order to do so, the paperwork necessary would be: 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.
Which of the following constitute a private securities transaction, or "selling away"?: 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.
A registered representative has left one firm to join another. Sometime later, the former employer discovers that some information on Form U-5 filed at the time of termination was inaccurate. The firm need not file an amended U-5 if at least how much time has gone by?: 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.
Accusations of FINRA Conduct Rule violations will heard and handled under the: Code of Procedure --- The Code of Procedure (COP) describes how member violations of the Conduct Rules will be heard and handled.
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: 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.
Those persons employed by a FINRA-registered broker-dealer to do nothing other than provide training for its associated persons: 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.
FINRA's Conduct Rules regarding gifts and gratuities would permit a branch manager to: 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.
A broker-dealer wants to give an employee of another firm a gift. This is permitted provided all of the following conditions are met EXCEPT: 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.
Fingerprint records are required for each of the following employees of a registered broker-dealer EXCEPT: 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.
Mary Alice McVey, a registered representative with a FINRA member broker-dealer, has recently remodeled her home and now has an area with a private entrance that she would like to use instead of commuting each day to her office 20 miles away. Under FINRA rules: 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.
To register an associated person with FINRA, a member firm will fill out and submit which of the following forms?: 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).
When a new associated person is hired at a broker-dealer firm, which of the following is responsible for seeing that Form U-4 is completed and filed?: 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.
A municipal finance professional (MFP) is: 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.
FINRA's Conduct Rules are designed to promote: 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.
FINRA has a continuing education requirement with the goal of making sure that all registered personnel are aware of industry changes. If a registered representative has just observed her second anniversary in the industry and did the required regulatory element CE, the next time she will be required to sit for the regulatory element is: 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.
If an associated person is disciplined for violating SEC rules and regulations, and is ultimately suspended by the SEC, the member firm where the person is affiliated must report the suspension to: 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.
A registered representative has left a firm and joined another. The new firm must obtain a copy of the Form U-5 filled out by the old firm. Where might the new firm obtain a copy of the form?: 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.
Which of the following is TRUE regarding a registered person who wishes to move her registration from one broker-dealer to another?: 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.
If an associated person is barred by the SEC, no broker-dealer firm may allow that person to associate with it, unless: the SEC expressly permits it -- If the SEC bars an individual, only the SEC may grant an exception to that action.
If an arbitration agreement has not been signed, under which 2 of the following circumstances would a dispute between a FINRA member firm and a retail customer go to arbitration?: 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.
Fingerprint cards are required by the SEC to be filed with: 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.
All of the following are eligible to apply for FINRA membership EXCEPT: a real estate broker --- Any person who effects transactions in securities may apply for FINRA membership. Real estate is not a security.
If a registered representative is involved in a securities transaction outside the scope of employment with the firm, a practice known as "selling away," and will receive compensation for it, which of the following must see that the representative is properly supervised for the transaction?: 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.
Regarding political contributions, the Investment Advisers Act of 1940: 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.
The securities industry is highly regulated, and as such, it is important for broker-dealers to keep detailed records. If a customer complaint has been received regarding the actions of a registered representative, it will be maintained at the office of supervisory jurisdiction for a period of: 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.
Failure to complete the regulatory element continuing education requirement within the allotted time period will result in: 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.
An associated person of a FINRA member firm would not be considered a municipal finance professional (MFP) if involved solely in which of the following?: 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.
A municipal securities dealer has just made a contribution to the mayor's reelection campaign. How long must the firm wait before it can enter competitive bids on proposed bond issues by the city?: 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.
Which of the following scenarios would NOT violate general standards regarding member firm communications?: 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.
All of the following people working for a registered broker-dealer would be required to be fingerprinted EXCEPT: 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.
Noncash compensation exceeding the $100 annual limit to another member firm's employee is: 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.
The rules to prevent "pay to play" regarding contributions made to political parties, candidates, and elected officials by firms involved in the underwriting or sales of municipal securities are enforced by: 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.
Firms applying for FINRA membership are required to agree to: 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
All of the following are required when completing Form U-4 EXCEPT: 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.
Associated persons or registered representatives who want to work outside of their existing employment with their current broker-dealer may do so if they provide prior written notice to the member. In which of the following would notice not be required?: 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.
An applicant for registration was convicted of a misdemeanor within the past 5 years having to do with a motor vehicle driving infraction. For purposes of filing Form U-4 for registration with a member firm, the applicant: 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).
Which of the following would be unacceptable reasons for an officer of a member firm to make a contribution to the election campaign of a political candidate?: 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.
The Uniform Practice Code (UPC) establishes uniform trade practices pertaining to all of the following EXCEPT: 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.
In general, the first industry form that a new applicant for registration sees is the Form U-4. This lengthy form requests information about the applicant's: 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.
Information on the Form U-4 is extensive and includes names (aliases) and addresses in addition to which of the following?: 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.
During a discussion with a customer about a potential investment opportunity involving securities, standing alone, all of the following would likely be permissible EXCEPT: 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.
Registered broker-dealers must have fingerprint records for most of their employees and for which of the following?: 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.
When a registered person leaves the securities business, FINRA retains jurisdiction over that person for how long?: 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.
FINRA rules regarding outside business activity (OBA) require that: 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.
An individual would most likely be statutorily disqualified from working in the securities industry for which of the following reasons?: 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.
Which of the following entities establishes the rules, regulations, and membership eligibility standards to be registered with the SEC?: The National Adjudicatory Council (NAC) --- The National Adjudicatory Council (NAC) establishes the rules, regulations, and membership eligibility standards for registration with the SEC.
A registered representative has a customer who is interested in utilizing options strategies such as spreads and straddles. The RR's firm does not offer options transactions as part of their existing business model. As such, the RR directs the customer to open an account through another broker-dealer. This would be known in the securities industry as: 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.
The minimum number of principals that a member firm of FINRA may have is: 1 -- If the member firm is a sole proprietorship, only 1 principal is required; otherwise, the firm must employ at least 2 registered principals.
When is the electronic filing of all information on customer complaints by broker-dealers with FINRA due?: 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.
An amended Form U-5 must be filed and a copy sent to the former employee within how many days of discovery of the inaccuracy?: 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.
Before submitting an application to enroll, part of the process for an associated person to engage in the investment banking or securities business, is to have the member firm that sponsors them ascertain the individuals: 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.
Updates to the Form U-4 such as a change in address, and that do not point to disciplinary action must be made promptly but no later than: 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.
Continuing education (CE) requirements are a part of the securities industry's ongoing commitment to furthering the knowledge base for registered representatives. Which of the following CE requirements are needed by a registered rep?: 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.
Associated persons who wish to enter into a private securities transaction for which they will receive no compensation must: 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.
A person may not act as a registered representative or principal unless FINRA's eligibility standards regarding training, experience, and competence are met. In all of the following instances, a person may be statutorily disqualified from FINRA membership EXCEPT: 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.
All of the following information is required to be provided on the Form U-4 EXCEPT: 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.
A minimum 4-year record retention is required for: customer complaints --- Copies of customer complaints require a minimum retention of 4 years.
When an employee is either terminated from, or willfully leaves, a member firm, Form U-5 must be filed. Under these circumstances, which of the following is TRUE?: 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.
Members and non-members alike can look into a broker's service and qualifications record by accessing which of the following services?: 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.

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By Career EmployerUpdated Jun 7, 2026

650+ free SIE flashcards — 4 ways to study

SIE Flashcard of the DayNew daily

The classic card. Do you know this one?

Click Study Flashcards above to open the flashcard hub — over 650 SIE cards you can flip, match, type, or quiz yourself on. Every card is drawn from the four FINRA job functions, so you study exactly what the exam tests.^[2] Pair them with our free practice exam and study guide.

SIE Flashcard Study Modes

Most flashcard sites give you one thing: a card to flip. Ours has four modes so you can both learn the material and prove you actually know it — the difference between recognizing an answer and recalling it under pressure.^[3]

Flip (Study) — the classic card. Flip term ↔ definition, shuffle the deck, and mark each card “Got it” or “Still learning” to track what’s sticking.
Match (Game) — a timed game: pair each term to its definition as fast as you can. Beat your best time. Great for cementing vocabulary.
Type (Recall) — read the definition and type the term. Typing forces true active recall instead of passive recognition.
Quiz (Test) — multiple-choice questions generated from the cards, so you can self-test exactly like exam day.

Free SIE flashcards from Career Employer — active recall for the FINRA Securities Industry Essentials exam

Why Flashcards Work for the SIE

Flashcards aren’t busywork — they’re built on active recall: the act of pulling an answer out of memory strengthens it far more than re-reading notes. Pair that with spacing — short sessions across several days rather than one cram — and you retain more in less time.^[3] Used alongside our practice exams and study guide, flashcards turn review time into measurable progress.^[4]

SIE Flashcards by Topic

The cards are organized by the four FINRA functions. Weight your study toward the heaviest one — products and their risks is nearly half the exam:^[2]

SIE flashcards by FINRA function
FINRA function	Flashcards	% of exam
Understanding products & their risks	214	44%
Trading, accounts & prohibited activities	241	31%
Knowledge of capital markets	140	16%
Overview of the regulatory framework	100	9%

How to Get the Most Out of These Flashcards

Start early, review daily. Begin flashcards as you cover each topic, not the week before — a few minutes a day beats one marathon session.^[3]
Use Type and Quiz, not just Flip. Recognizing the right answer is easy; recalling and choosing it is the real test. Typing and quizzing expose the gaps.
Drill your weakest function. Pick a single domain deck and grind it until the Match time drops and the Quiz score climbs.
Mirror the exam weighting. Spend the most time on “products & their risks” — it’s 44% of the test.
Then prove it. When the cards feel easy, confirm with a full practice exam — aim for 80%+ before exam day.

SIE Flashcards FAQ

650+ free SIE flashcards, organized across the four FINRA job functions tested on the exam. They're free to use with no account required.

References

1.FINRA. “Securities Industry Essentials (SIE) Exam.” FINRA.org. ↑
2.FINRA. “SIE Content Outline (2025, PDF).” FINRA.org. ↑
3.Dunlosky, J., Rawson, K. A., Marsh, E. J., Nathan, M. J., & Willingham, D. T.. “Improving Students' Learning With Effective Learning Techniques (practice testing & distributed practice rated highest utility).” Psychological Science in the Public Interest (Association for Psychological Science). ↑
4.Roediger, H. L., & Karpicke, J. D.. “Test-Enhanced Learning: Taking Memory Tests Improves Long-Term Retention.” Psychological Science (Association for Psychological Science). ↑
5.FINRA. “Qualification Exams Overview.” FINRA.org. ↑

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