1
Q
What is an issuer?
A
A legal entity that sells securities in order to finance its operations. Issuers include, the U.S. Treasury, foreign governments, local governments, corporations, and banks.
2
Q
Brokerage
A
A brokerage account allows an investor to deposit funds (stocks, bonds, options, cash, etc.) with a licensed brokerage firm and then buy, hold, and sell a wide variety of investment securities.
3
Q
Debt vs equity
A
Debt: bonds are essentially loans provided by issuers to creditors/bondholers. The issuer is required to repay the principal balance of the bond at a future date and will typically make interest payments over the life of the loan.
Equity: Stocks. This is where the stockholders are owners of the business.
- Advantages/disadvantages of equity: Firms must dilute their ownership in order to sell shares. The advantage is that they do not owe anything.
- Advantages/disadvantages of bonds: There was no dilution but money will need to be paid back.
4
Q
Broker
A
Any person that engages in the business of effecting agency transactions in securities for the account of others. Essentially, brokers match up buyers and sellers and earn a commission
5
Q
Dealer
A
Any person that engages in the business of buying and selling securities for its own account
6
Q
Investment Banking
A
The area that works directly with the issuers to arrange and structure their securities offerings. Investment bankers often underwrite securities.
7
Q
Equity research
A
A department of a brokerage that studies markets and issuers in order to make equity recommendations.
8
Q
Sales department
A
This department markets stocks or bonds or packaged products to retail investors and institutions
9
Q
Registered representatives (RRs)/Investment adviser representatives (IARs)
A
People who work in the sales department
10
Q
Trading department
A
A department that handles the execution of trades for both the firm’s clients and the firm’s own (proprietary) account.
11
Q
Operations department
A
Ensures that all of the paperwork, funds, and securities transfers that are associated with a trade (or processing) are handled efficiently and according to specific industry standards.
12
Q
Market maker
A
When a broker-dealer chooses to display quotes into a trading system to indicate its readiness to buy and/or sell securities at specific prices. Market makers sell securities from their own inventory. A market maker’s quote shows the bid price participants are willing to buy at and the ask/offer price that sellers are willing to sell at.
13
Q
True or false: Many financial firms act as investment advisers (IAs), rather than functioning as broker-dealers?
A
True
14
Q
Difference between investment adviser (IA) and broker dealer?
A
Broker dealers earn commissions, whereas investment advisors charge fees. The fees occur regardless of whether any trades occurred in thier clients’ accounts.
15
Q
How to determine which regulator with whom the IA must register with?
A
- If the IA has AUM of less than $100 million, it must register with the state(s) in which it conducts business.
- If the IA has AUM between $100 and $110 million, it may register with either the SEC or the state(s).
- If the IA has AUM in excess of $110 million, it must register with the SEC.
16
Q
Municipal advisor
A
A type of advisor that provides advice either to or on behalf of a municipal entity. The client is typically an issuer, not an investor.
17
Q
Types of investors
A
- Retail investors: Investors who buy stocks/bonds directly from broker dealers.
- Accredited investors: certain investors who, by the nature of their income or assets, are viewed as more sophisticated and/or able to assume greater risk.
- Institutional investors: large entities that pool their money to purchase securities (ex: banks, asset mgmt, etc.)
- To be defined as institutional investor TA must be at least $50MM.
- To be defined an accredited investor, an individual must be worth $1MM, excluding their primary residence.
18
Q
Qualified institutional buyer (QIB)
A
To be considered a QIB, an entity must satisfy 3 things:
1. Be one of these entities: insurance, registered investment company, small business development company, pension plans, bank trust funds, or Corporations, partnerships, business trusts, and certain non-profit organizations
2. The buyer must be purhcasing for its own account or of the account of another QIB
3. The buyer must own and invest at least $100MM of securities of issuers that are not affiliated with the buyer.
- QIBs are entities, NOT humans.
19
Q
Primary vs secondary market
A
Primary market: The market where the newly issued security is sold. The primary market is regulated by the SEC.
Secondary market: The market where securities are traded second hand.
20
Q
Listed security
A
Any equity securities that meet the standards for trading on a national exchange
21
Q
Third market
A
Where exchange-listed securities are traded over-the-counter or away from traditional exchanges. Usually these are between broker-dealers and large institutions.
- This market has grown significantly in recent years
22
Q
Fourth market
A
Direct institution-to-institution trading and doesn’t involve the public markets or exchanges. Most true fourth-market trades are internal crosses set up by broker-dealers that execute trades for institutional accounts.
23
Q
Electronic communication networks (ECNs)
A
Exchanges that allow for both the quoting and trading of exchange-listed securities. Retail and institutional investors can use ECNs. The objective of an ECN is to provide an electronic system for bringing buyers and sellers together. These systems allow subscribers to disseminate information about orders, execute transactions both during the trading day and after-hours, and buy and sell anonymously.
24
Q
Dark pools
A
A system that provides liquidity for large institutional investors and high-frequency traders, but it doesn’t disseminate quotes. The name is derived from the fact that the details of the quotes are concealed from the public. Allows for institutions to buy/sell stocks anonymously. Some dark pools provide order matching systems and may also allow participants to negotiate prices.
25
What does clearing a trade mean?
When the buyer and seller must agree on the terms of the transaction
26
Settlement
When the seller delivers the security to the buyer
27
Depository Trust & Clearing Corporation (DTCC)
A securities depository and a national clearinghouse for the settlement of transactions in equities, corporate, municipal, and U.S. government bonds, mortgage-backed securities, money-market instruments, and over-the-counter derivatives. The primary goal of the system is to eliminate physical securities in order to increase the speed and reduce the cost of clearing and settling trades.
## Footnote
* The DTCC is a non-profit, industry-owned corporation. Its owners include broker-dealers, investment banks, commercial banks, and mutual fund companies. The DTCC and its subsidiaries are regulated by the SEC and the depository is also a member of the U.S. Federal Reserve System.
28
National Securities Clearing Corporation (NSCC)
A subsidiary of the DSCC. This entity clears equity trades
29
Fixed income clearing corporation (FICC)
A subsidiary of the DSCC. This entity clears bond trades
30
Clearing firms vs introducing firms
Clearing firms: A step below DTCC on the hierarchy. Broker-dealers perform order execution, clearing, and settlement functions. Clearing firms interface with the DTCC directly for both their own transactions as well as those of any other broker-dealers that choose to clear through them.
Introducing firms: These firms contract with clearing firms to perform clearing services.
31
True or false: A clearing broker may provide introducing firms with back office and related recordkeeping functions on either a fully disclosed or omnibus basis?
True, the difference is the level of detail the clearing firm will have regarding the customer as well as which entity will be responsible for providing trade details to the customer.
32
Fully disclosed accounts vs omnibus accounts
Fully disclosed accounts: This means that information about each of the individual customers of the introducing firm will be transmitted to the clearing firm and the clients’ assets are held at the clearing firm. The clearing firm establishes separate accounts for each client and is responsible for all of the paperwork associated with the accounts, such as the delivery of confirmations and statements.
Omnibus accounts: In this case, since the clearing firm doesn’t have information on each individual customer, the recordkeeping responsibilities belong primarily to the introducing firm.
33
Hedge fund
An investment fund that uses sophisticated strategies in an attempt to generate returns that are higher than traditional stock or bond investments.
34
Prime brokerage
The prime brokerage relationship consist of a bundled package of services that’s offered to hedge funds, institutions, and high net worth individual clients. The clearing firm acts as a centralized location for holding all of the positions that were created by the various executing firms through which the client trades. In a prime-brokerage arrangement, the client chooses one firm as its prime broker to consolidate the bookkeeping process. Although the client may still use several broker-dealers for execution purposes, all of the trades are ultimately handled through its account at its prime broker.
35
Options
A type of derivative that tracks the value of an individual stock, an index, or foreign currency. Options contracts can be purchased either on one of the options exchanges or in the over-the-counter market.
## Footnote
* Listed are options that are traded on exchanges.
36
Standardization
When the terms of the option contracts are set and uniform.
37
True or false: The DTCC clears option trades?
False, the OCC does.
| Not the Office of the Comptroller of the Currency
38
Options clearing corporation (OCC)
Listed options are issued and guaranteed by the Options Clearing Corporation much in the same way that the DTCC guarantees locked-in trades for its members. The OCC is regulated by the SEC. When customers buy or sell option contracts, their broker-dealers must settle the transactions with the OCC within one business day.
## Footnote
* The OCC issues, gaurentees, and clears options.
* The OCC only settles contracts with broker dealers, NOT with customers directly.
39
Custodian
Banks or other institutions that hold customers' securities for safekeeping to prevent them from being lost or stolen
40
Registrar
An institution responsible for keeping records of bondholders and shareholders after an issuer offers securities to the public. The registrar also ensures the corporation doesn’t issue more shares than the number of authorized shares.
41
Transfer Agent
An entity who keeps records of who owns a publicly traded company's stocks and bonds. They also ensure investors receive dividends/interest payments on time. These entities are also responsbile for handling lost or destroyed security certificates of ownership.
42
Securities trustees
For some types of investments, such as select bonds, loans, or trusts, a trustee is assigned to hold security interests that are created on trust for the benefit of various creditors. Some bond trustees also ensure that issuers abide by promises (covenants) that are found in a formalized agreement which is referred to as a trust indenture.
43
True or false: An entity that sells securities from its own inventory is a broker?
False, market maker
44
True or false: All shares that are held in street name are actually registered under the registrar's name?
False, the broker-dealer's name.
45
Full-service firm
A broker-deal that executes orders, but also settles and clears trades.
46
What are the 4 tiers to regulation?
1. Federal laws
2. State laws
3. SRO rules/regulations
4. firm-specific policies
47
The securities exchange commission (SEC)
An independent, federal government agency that’s responsible for protecting investors, maintaining fair and orderly securities trading markets, and facilitating capital formation in the primary market. The SEC is also charged with ensuring that Congress’ demands are implemented. If criminal activity is found, the SEC must report to the DOJ.
48
The Federal Reserve Board
Tasked with creating monetary policy. Main goal is stable prices. Maximum employment is secondary goal.
49
FDIC
An independent agency that was created by the Congress. The FDIC’s role is to maintain stability and public confidence in the nation's financial system.
50
Self Regulatory Organization (SRO)
The creation and enforcement of day-to-day rules that brokerage firms must follow are often handled by SROs (ex: FINRA). SRO rules require firms to use reasonable due diligence when dealing with customers. However, since SROs are not a part of the U.S. government, they lack the power to arrest or imprison any person who violates their rules.
## Footnote
* Financial service firms are required to join SROs as member firms.
* Employees of these firms are referred to as associated persons.
51
True or false: Typically, states require broker dealers, their agents, and their securities to be registered in the state to do commerce there?
True
52
Blue-sky laws
State security regulations
53
North American Securities Administrators Association (NASAA)
The provisions of the Uniform Securities Act are established by the North American Securities Administrators Association (an organization) and enforced by the individual states. NASAA is the oldest international investor protection organization and its focus is protecting investors from fraud.
54
What is the person in charge of each state's securities department?
The administrator or Commissioner
55
Written Supervisory Policy (WSP)
A manual that each firm has their own of that details the rules and identifies the person(s) responsible for their enforcement.
56
Supervising principal
A member of each firm that is responsible for employees' (registered representatives) actions w/ regards to security regulations.
57
The Securities Act of 1933
The Securities Act of 1933 was the first federal legislation to cover the securities industry and its main focus is the primary market. This Act states that investors must be provided with full and fair disclosure so that they’re able to make informed investment decisions. The Act also provides specific rules for the conduct of both issuers and the investment bankers (underwriting firms).
58
The Securities Exchange Act of 1934
This Act establishes the rules for activities which are conducted in the secondary market. The two most recognized secondary markets are the NYSE and Nasdaq. This Act created the SEC and gave the Fed th e ability to extend credit (use margin) in the securities industry.
59
The Investment Advisors Act of 1940
This Act established regulation of IAs. The Act said that for a firm to be considered a IA it must provide investment advice, operate as a business, and receive compensation.
## Footnote
* The result of the Investment Company Act and the Investment Advisers Act is that a mutual fund must register with the SEC as an investment company and the firm that manages the assets of the mutual fund must register as an investment adviser.
60
The Maloney Act of 1938
This Act allowed for the creation of non-exchange trading venues that are considerd OTC markets.
61
The National Association of Securities Dealers (NASD)
Created in 1939 to oversee OTC markets
62
The Securities Investor Protection Act (SIPA) of 1970
SIPA enabled the creation of the Securities Investor Protection Corporation (SIPC
63
Securities Investor Protection Corporation (SIPC)
An industry-funded, non-profit (not apart of the government) insurance entity that provides insurance coverage for the customers of brokerage firms in the event that the firms become insolvent; however, it doesn’t protect the customers against market losses or employee misconduct. SIPC covers securities that are registered in street name. Maximum insurance for customers (retail and institutional) is $500k, which no more than $250k may be for cash holdings.
A cash account is established if a customer doesn’t borrow funds from a brokerage firm, while a margin account involves a customer borrowing funds to purchase securities.
## Footnote
* For the most part, broker dealers have to be a member of SIPC.
64
True or false: SIPC covers securities not in street name, commodities accounts, and personal accounts of senior officers of the brokerage firm?
False, SIPC specifically DOES NOT cover securities not in street name, commodities accounts, and personal accounts of senior officers of the brokerage firm.
65
The Employee Retirement Income Security Act (ERISA) of 1974
This Act deals with the administration of private, qualified retirement accounts, such as the popular 401(k) plans. ERISA provides standards for the funding, vesting, and eligibility of these plans, as well as the fiduciary responsibilities of pension fund trustees.
The Securities Acts Amendments in 1975 creates the MSRB to act as the SRO for firms that transact business in municipal securities.
## Footnote
* Although the MSRB has no enforcement authority, it’s responsible for formulating and interpreting the rules and regulations that are then enforced by other regulatory entities, such as FINRA or the SEC.
66
The Insider Trading and Securities Fraud Enforcement Act of 1988
This Act deals w/ insider trading: trading on non-public, illegal info. Although insider trading was prohibited under The Securities Acts of 1933 & 1934, this Act in 1988 created penalties as high as $5 million and/or up to 20 years imprisonment. At the civil level, the SEC may sue for up to three times the profit made or loss avoided (referred to as treble damages).
67
The Penny Stock Reform Act of 1990
This Act regulates the solicited sales of certain low-priced securities to potential new customers. Penny stocks are defined as non-exchange-traded securities (OTC equities) that trade for less than $5 per share.
## Footnote
* Since penny stocks are often risky investments, the rules require firms to obtain a signed disclosure document from potential buyers which states that they understand the risks involved.
* Penny stocks have high volatility and low liquidity
68
The Federal Telephone Consumer Protection Act of 1991
This Act enforced that any person with a profit motive who calls prospects must maintain a Do Not Call List and refrain from continuing to solicit business from any persons who request that their name be placed on that list.
69
The USA PATRIOT Act of 2001
This Act requires the financial services industry to report potential money laundering.
70
SIPC procedures
If a broker-dealer declares bankruptcy, a trustee is appointed by a federal court. The trustee is required to notify the broker-dealer’s customers of the firm’s insolvency and handle the liquidation. Securities that are in the possession of the failed broker-dealer will be distributed to customers. If there are insufficient securities in the possession of the failed broker-dealer, the securities on hand will be distributed to the claimants on a proportionate basis. Customers who have claims that exceed the maximum dollar limits of SIPC coverage will rank with other general creditors for the balance of their claims.
## Footnote
* If a customer has a claim for securities that cannot be specifically identified as being in the possession of the broker-dealer, the dollar amount of the customer’s claim will be based on the market value of the securities on the day that the court appoints a trustee.
71
True or false: SIPC covers each separate account of each customer?
False, SIPC covers each individual customer up to $500k.
72
SIPC coverage examlpe:
Customer 2 has a cash account with $50,000 of securities and $320,000 of cash. What does SIPC cover?
SIPC will cover the $250k in cash and the $50k in securities.
73
FINRA
The primary SRO for the securities industry. FINRA members include broker-dealers who are part of a national securities exchange.
74
4 main FINRA rules
1. Conduct Rules: Rules for interactions between customers and firms.
2. Uniform Practice Code (UPC): Rules for trading & the proper settlement of transactions. Idea is to standardized the procedures of transactions.
3. Code of Procedure (COP): The process used to discipline any person that violates FINRA rules.
4. Code of Arbitration (COA): A process for resolving disputes between members, as well as those that involve public customers
75
Municipal Securities Rulemaking Board (MSRB)
An SRO charged with primary rulemaking authority for the municipal securities industry. **MSRB rules don’t apply to the issuers of municipal securities. **MSRB is controlled by the SEC and MSRB rules are enforced by either the SEC or another regulatory agency.
76
Chicago Board of Exchange (CBOE)
The CBOE functions as a trading venue for options contracts in individual stocks, stock indexes, interest rates, as well as exchange-traded funds (ETF) and is also the SRO for the options market. The CBOE is regulated by the SEC.
77
For a Treasury Notes, what is interest accrued based on?
For Treasury note and Treasury bonds, interest accrues based on actual number of days per month and a year consisting of 365 days. The settlement date for these Treasury securities is T+1 (i.e., the next business day following the trade date).
78
Pink Open Market
A quotation system for securities that are not listed on either the NYSE or Nasdaq. The Pink Open Market has less stringent listing requirements and it's not regulated as an exchange.
79
True or false: Regarding dispute arbitration, FINRA determines the outcome of the process?
False, it helps adminster the process
80
True or false: When warrants are issued, the exercise price equals the current market price?
False, when issued, the exercise price > current market price.
81
True or false: The FRB issues securities?
False
82
For a muni bond, what is interest accrued based on?
A 30-day month and a 360-day year is used.
83
True or false: T-bills always trade at a discount?
True
84
True or false: An advantage a corporation receives when it issues a convertible bond is that it's able to offer bonds with a higher rate of interest to investors?
False,
it's able to borrow money at a lower rate of interest.
85
Special tax bond
A type of revenue bond that's typically financed by a tax on certain items such as cigarettes, liquor, or gasoline (excise taxes).
86
What is a corporate bond that's not backed by any specific asset?
Debenture
87
True or false: There is a required holding period for restricted stock?
true, there is a required holding period of six months for all restricted stock.
88
True or false: There is a required holding period for control stock?
False
89
True or false: A 30 year premium bonds has more IRR than a 30 year zero coupon?
False, bonds with lower interest rates are more sensitive to interest-rate risk than bonds with similar maturities and higher coupon rates.
90
True or false: There are joint IRAs?
False, all IRA accounts are individual. Remember, individual retirement account
91
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be?
105 + 24/32 = 105.75
105.751000 = $1,057.5
92
True or false: open-end funds, close-end funds, UITs, and a face-amount certificate company all make provisions for future purchases or redemptions?
False, close-end funds do not
93
Who creates the Options Disclosure Document?
The OCC
94
A previously registered person was convicted of a felony 14 years ago and has served out his sentence in federal prison. Can he be a RR?
Yes
95
True or false: The investments in a Coverdell Education Savings Account (CESA) are determined by the investor?
True
96
Obtaining best execution includes which factors?
* Price & volatility of the security
* The general character of the market
* Size & type of the transaction
* Location of member firms to primary markets
97
True or false: Fidelity bonds protects customers in the event their broker-dealer goes bankrupt.
False
98
Accredited investors
Accredited investors have a net worth of $1 million (excluding their primary residence) or annual income of $200,000 in each of the last two years. For married couples to be considered an accredited investor, they need to have income of at least $300,000.
99
If a company is utilizing statutory voting, how many votes will a common shareholder receive per vacant seat on the board?
One vote for each share that the stockholder owns
100
True or false: Registered representatives can borrow money from or loan money to a customer that regularly provides loans (e.g., a bank) without permission. However, for an RR to borrow from other employees, friends, and business partners, she's required to obtain permission from her employer?
True
101
A corporation will be paying a cash dividend to its shareholders. On what date will the market price of the stock be reduced?
The ex-dividend date. The ex-date is the first day that a stock trades without its dividend included in its price. On the ex-date, the stock's price is reduced by the amount of (or enough to cover) the dividend.
102
What is the main disadvantage of 529 Prepaid Tuition Plans compared to 529 Savings Plans?
The account owner may lose financially if the student does not attend a public school in that state
103
A 5% $1,000 par value bond sells at $900 and matures in 10 years. What is the amount of each interest payment?
Since each payment is every 6 months, its (.05 * 1,000) / 2 = $25
104
Leveraged ETF
Designed to deliver a multiple of the performance of an index or other benchmark.
Ex: 3X leveraged ETF seeks to deliver three times the performance of an index.
105
What tax advantage is available with a REIT?
If 90% of the income is distributed, only the shareholders pay taxes, thereby avoiding corporate taxes.
106
True or false: During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account?
True, thus the annuity units never change
107
An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is:
The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond's yield will be the same as the coupon rate, which is 5.30%.
108
Who is responsible for creating the official statement for a municipal bond offering?
The issuer
109
True or false: The SEC rules regarding record retention generally require that records be kept in an easily accessible location for the first three years?
False, The SEC rules regarding record retention generally require that records be kept in an easily accessible location for the first two years. Records must generally be kept in total for either three years, six years, or the life of the firm depending on the specific record.
110
True or false: In judging the fairness of a firm's markup, industry rules would consider whether the investor was retail or institutional?
False
111
True or false: When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income?
True
SIE
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Decks in class (8)
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