Function # of Questions

1. Knowledge of Capital Markets (Covered in Chapters 1, 2, 11, and 19) 12

(16% of exam)
2. Understanding Products and their Risks (Covered in Chapters 3, 4, 5, 7,
8, 9, 10, and 20) 33 (44% of exam)
3. Understanding Trading, Customer Accounts and Prohibited Activities
(Covered in Chapters 6, 12, 13, 14, 15, and 16) 23 (31% of exam)
4. Overview of the Regulatory Framework (Covered in Chapters 17 and 18)
7 (9% of exam)
Sec 1934
Manipulation
Insider trading
Sec
Short sale
Proxy rules
Exchanges
Reports -bd’s have to - quarterly, annual and announcements
Margins
Stabilization - underwriters who are bringing the company public support
the stock

3 reasons to buy coming stock - growth (capital appreciation), income and

fight inflation
Buy preferred stock - income, inflation risk,
Call risk for preferred stock and bonds
Convertible preferred stock
Bonds have credit and interest risk
Treasury bonds and notes are out of 1/32 whenever you see decimals I.e
98.20X98.25
20/32 = .625
25/32 =.781
98.625 X98.781
986.25 X 987.81
Types of orders
Limit order -
buy at 100 shares at 50 want to pay 50 or lower
Sell at 100 shares at 50 or higher
Market orders take precedence over limit order
Total return = new price + any income / original cost basis or amount
Convertible bonds - 1. More volatile 2. Getting income and capital
appreciation 3. Converts= par/convertible price
What math do you need? Current yield, stock splits
Investment company act 1940 - fum - face certificate, unit investment trust,
manegment company
Open end - tax on everything but don’t double tax. The company doesn’t
pay.
Variable annuity - non qualified goes in after tax. Grows tax deferred until
you withdraw either lump some or annuitized. The money you put in is not
taxes only what you earned.
Annuities - pay you until you die
Variable annuities - Sub account and separate account - fights inflation
register sec
Fixed annuity -
Ira cap - 6k, no income limit. Taxed after rmd.
Ruth ira - cannot put in if you make 144k. 5 years and 59 ½ no rmd.
Erisa - employee retirement - protect employees from employers
Money goes in pre tax and tax deferred. Cannot discriminate . Anytime
company matches.
401k -
403b - teachers and non profit
457 - govt
Defined benefit - you don’t know what’s going on but you know what’s
coming out. Pensions
Aml
Placement - easiest to detect.
Layering - creating distance. Making it hard to track.
Integration -
Rr restrictions
No ipo - rr and the clubs you’re involved cannot participate in common
stock ipo.
Cannot have outside job but let your employer know
Outside a brokerage account - let your employer know
You cannot act as RR outside your firm. Selling away unless you get prior
permission from your firm.
If you do get permission it’s called private transactions
Cannot make guarantees or predictions.
You can only cold call 8-9 of the persons time zone.
Dnc list within 30 days
X CD

More prep -
Equities settle T+2
Treasury bills, bonds, and listed options settle T+1
FX transactions T+2
Unsecured Bonds T+3
Muni bonds - T+2
Government agency Securities T+2
Money Market securities - same day

All corporations issue common stock

Types of Corporate actions: issuers are required by SEC to give notice (no
later than 10 days before the record involved) of corporate actions to
shareholders but not on an ordinary interest payment on a corporate debt
(bond).
Dividends declaration, Stock splits, rights, warrants (sweeteners), -
unique corporate actions - m&a, takeover, spinoff, tender off, buyback
Every publicly traded company needs an annual shareholder meeting
where shareholder approval is required.
Short call is: An option contract where the investor has a contractual
obligation, for the duration of the contract, to deliver the underlying instrument
at the strike price upon exercise.
short call means writing a call, which puts the investor in an obligated position
to sell 100 shares of the stock at the exercise price if exercised
Allowable ways to qualify for a breakpoint when purchasing front-end

1.ROA (rights of accumulation) program = The investor is able to add up all of

the purchases made in the same fund complex. Once a breakpoint is reached,
all future purchases are entitled to the reduced sales charge.

2. 13 months LOI approach -Investors receive the benefit of a breakpoint

without immediately depositing all of the required funds.

Determining the Offering Price for a Reduced Load

POP = NAV(/100%-sales charge%)
For example, if the XYZ Fund has an NAV of $10 and a person invests
$100,000 into the fund, it will entitle him to a 3.25% breakpoint. What is the
adjusted offering price for the investor?
10/(100%-3.25%) = 10/96.75% = $10.34
At this price, the investor is able to purchase 9,671.18 shares ($100,000 ÷
$10.34).

A candidate who fails the SIE exam three times and has waited the six-
month moratorium period

Below business enterprises exhibit flow-through of tax and related

consequences: DPP, LLC, Sub S corporation.
Sub S Corp - An S corporation small business. Allows pass-through
● Requirements of an S corp give a corporation with 100 shareholders or
less the benefit of incorporation while being taxed as a partnership.
Both S corps and LLCs are pass-through entities, meaning that they don’t pay
corporate taxes, and both offer limited liability protection for their
owners/principals. However, LLCs are more flexible
Sec Rule 144 - control and restricted securities
Restricted securities are the unregistered securities that are typically
acquired by investors through private placements. Cannot be sold until
6 months and then is subject to volume restrictions for affiliates but not
non-affiliates after 6 months is up.
Control securities are registered securities that are acquired by control
(affiliated) persons in the secondary market. No holding period. Control
persons may include officers, directors, or other insiders (those with
more than 10% ownership) and their respective family members.
Notice of sale - Under 144, a person that intends to sell either restricted or
control securities must notify the SEC by filing Form 144 at the time the sell
order is placed with the broker-dealer.Once notification is made, the SEC
provides a 90-day period during which the securities may be
Sold.
Volume Limitation - Under Rule 144, the maximum amount of securities
that a control person of an exchange-listed company may sell over any
90-day period is the greater of 1% of the total shares outstanding or the
average weekly trading volume during the four weeks preceding the
filing.
An exemption from the notice of sale requirement is available if the
amount of the sale does not exceed 5,000 shares or securities with a
value that does not exceed $50,000
:
Rule 144A - Known as the Private Resales of Securities to Institutions. QIBs
no restrictions can purchase according to 144A. QIBs owns and invests a
minimum of $100 million.
The following table summarizes a dealer’s prospectus delivery
requirement in the after-market
● For an unlisted IPO 90 days
● For an unlisted follow-on offering 40 days
● For an IPO of a security to be listed on the NYSE or Nasdaq 25 days
● For an NYSE or Nasdaq-listed follow-on offering No requirement
Official Statement - prospectus for muni bonds.
Offering memorandum - private placements 3
Calls and Puts and Options
Types of stock: Cyclical, defensive, growth, utility
529 plans are considered to be municipal fund securities
Which of the following is a way the government can return an inflationary
gap to full employment output? - Increasing taxes
Penny/Pink stock - less than $5. Highly speculative. SEC rules requires
customers before their initial transaction be given a copy of risk disclosure
document. Must be given monthly statements.
IF cold calling - customer needs to sign a suitability statement. Must
disclose: (only applied to solicited customers)
Name of the penny stock
# of shares to be purchased
Current quotation
The amount of commission will receive.
Investment companies:
1 Face-Amount Certificates
2. UIT
3. Management (actively manages) Investment Company - primary
difference is closed-end company’s initial offering of shares is limited (it
closes after a specific authorized number of shares have been sold) open-
end is continually open to new investors.
A. Closed-End - publicly traded funds. Anyone can buy or sell shares in
the (only one that trades) secondary market after the initial offering.
May trade above or below NAV. Can issue common stock, preferred
and debt securities. Investors have voting rights and preemptive
rights. Price determined by supply and demand.
B. Open-End (mutual fund) - only issues common stock continuously at
public offering price POP. The funds themselves in the portfolio can
purchase preferred stock and bonds for their investment
portfolios.Registers an open offering with the SEC. Redeemed at
current NAV at the end of trading day (4pm) buyers and sellers next
calculated NAV not traded on secondary market. redeemed by fund
at NAV - selling price determined by formula in the prospectus. No
preemptive rights.
Mutual funds -
Offers guaranteed marketability = investors can redeem their previously
purchased shares in the mutual fund the mutual fund will buy them back.
Redeemable securities. Investors own an undivided interest in the portfolio
= mutual participants no one has a preferred status over another because
only issues common stock. All taxable events flow down to the
shareholders. Mutual fund shares may be purchased in full or fractional
shares. Allow investors to think in purchasing dollars and not
shares.Investment company portfolio is elastic = money is constantly being
invested or paid out when shares are purchased or redeemed.
IA - investment advisors is investment management company
IAR - Investment advisors representatives - individuals who work for the IA
Mutual Funds characteristics/benefits:
1.Professional investment advisor manages portfolio for investors
2.Provide diversification. - at least 75% of assets must be invested in a
diversified manner. No more than 5% in one company and no more than
10% of the voting stock of any one company may be owned.
3. Convenience- May allow investments at reduced sales charges based
on amount of investment i.e. breakpoints. 4.Have voting rights like a
common stockholders
5. Exchanges at NAV - Offers reinvestment of dividends and capital gains
at NAV without a sales charge but reimbursements are taxable. Allows
switches within funds within the same family of funds. Taxable event

6.Very liquid - may redeem and does not disrupt the portfolio’s balance of
diversification and has various withdrawal plans
7. Recordkeeping - sends semi-annual and annual reports. Provides 1099-
div year end tax summaries.

12b-1 Charges (distribution fees) -

Mutual Fund Share class: differences are how much and in what way the
investors will pay sales charges (loads) and related expenses. Max sales
charge is 8.5%
Class A - Usually have front-end loads (the sales charges are paid at the time
of purchase), but small or no 12b-1 fees. Are eligible for breakpoint discounts
or rights with large purchases. The disadvantage of Class A shares is that
not all of the investor’s money is directed into the portfolio. Most
common way to purchase.
Class B - Back-end loads. Contingent deferred sales charge (CDSC) is
charged when the investor withdraws. Allows the full investment amount to
purchase shares. The amount they pay at redemption will be based on the
current NAV and not the initial NAV. So with funds expected to appreciate
the cost can be higher. The sales load; a declining percentage charged
reduced annually. Usually drops to 0% by year 5 then converted to Class A
with no sales charge.
Class C - level-load shares. Assess an up-front sales charge, usually1%
CDSC plus 12b-1 fee or level load usually equal to 1% of the fund’s assets.
Pays an annual fee to the mutual fund. Good for short term investors who
won’t hold on long because the annual fees become expensive.
No load shares - Purchased at NAV (no sales charge). When shares are
directly marketed to the investor I.e. Funds - Investors. Without underwriter
and dealers. Still fees exist outside of sales charges: purchase fee, account
fees, exchange fees and redemption fees. Max 12b-1 fee is .25% to still be
considered no load shares.
Market Timing - short-term buying and selling of MFs to take advantage of
inefficiencies in pricing. Usually prohibited (not illegal) in the majority of MFs
due to diluting the value of the existing shares in the portfolio. MF’s should be
viewed as long-term and sales-charges structured that way.
NAV - Since MF’s don’t trade on the secondary market their price is not
determined by supply and demand like close-end but by Net asset value. NAV
= total assets - total liabilities. Then divides by number of outstanding shares.
NAV per share. NAV is calculated once per the end of business day.
Forward Pricing -The price the customer receives is the next NAV calculated
after receipt of his redemption request. Always have to wait until the next
available calculation to determine the value of shares redeemed for or number
of shares purchased. If a client places an order at 4:10 p.m. on Wednesday
(after the close); it will not be executed until the close of business on
Thursday
POP (public offering price) for Class A (front-end load) = NAV + SC
NAV = Total Net Assets/ Number of outstanding shares
LOI - mutual fund - 13 months to secure breakpoints. ROA (rights of
accumulation) - gives investors the ability to receive cumulative quantity
discounts when purchasing mutual fund shares.
No-load mutual funds = are not permitted to charge 12b-1 fee greater than
25 basis points .25%
No-load = no sales charge
SEC Registration The Investment Company Act of 1940 requires every
investment company that has more than 100 shareholders to register with the
Securities and Exchange Commissions (SEC). Also, a fund must have a
minimum net worth of $100,000 in order to offer

In MF Prospectus - must disclose fund’s objective, investment politics, sales

charges, management expenses, services offered and 1,5, and 10 year or life
of the fund performance histories .
Summary prospectus - MF can provide a summary prospectus to investors
but must provide a prospectus at the time of the sale can be done online.
Must include the fund’s name and the classes of shares, the exchange
ticker symbol and if the fund is an exchange-traded fund (ETF) , legend on
the cover page the summary nature of the prospectus and the availability of
the fund’s full prospectus and must provide a toll-free number to request
paper delivery or a website where one can be downloaded.
Statement of Additional Information - both MF and closed-end funds are
required to have an SAI and made available within three business days of
an investor’s request without charge. Investor can obtain by calling or
writing to the investment company or by contacting a BD that sells the
investment company shares or by contacting the SEC. SAI provides a
deeper look into the fund's history and policies and consolidated financial
statements: balance sheet, statement of operations, income statement and
portfolio list at the time SAI was compiled.
Investment Company Act of 1940 - require that shareholders receive
financial reports at least semi-annually with one of them being an audited
annual report. Investment company must send a copy of its balance sheet
to any shareholder who requests one in writing between semi annual
reports.
Funds costs and fees - sales loads, expenses, operating expenses and
fund portfolio management fee
12b-1 asset-based fee (distribution and marketing fees) - fees for
promoting, selling or undertaking activity in connection with distribution of
its shares. Annual flat dollar amount. A 12b-1 fee is an ongoing asset-
based charge that’s deducted from the customer’s account on a
quarterly basis. Typically, 12b-1 fees range between .25% and 1%, but
the maximum 12b-1 fee is an annualized 1% of the fund’s assets.
Typically, 12b-1 fees are associated with no-load fund companies and max
is .25% to still be called no-load.
Expense ratio - used by investors to determine one fund’s expense charges to
another. Compares the management fees and operating expenses, including
any 12b-1 fees with the fund’s net assets. I.e. Expense ratio of 1.72% means
that fund charges $1.72 per year for every $100 invested,
Stocks expense ratio usually 1%-1.5% But more aggressive funds employing
more sophisticated or risky investment strategies have a higher expense.
Bond expense ratio usually .5%-1%

DPP - exposure to non-correlated assets. Forms of business that raise

money to invest in real estate, oil and gas, equipment leasing and other
similar business ventures Most common is limited Partnership. Not taxed
directly as a corporation would be, instead, the income or losses are
passed directly through to the owners of the partnership. The
investors are individually responsible for any tax consequences. Highly
illiquid due to no secondary market not suitable for many investors.
Limited Partnership - 2 types of partners. General Partner and limited
partner. Must have one of each. Property held in LP is usually held in
tenants in common (TIC) which provides limited liability and no
management responsibilities to LPs.
LP have voting rights, right to receive cash distribution, capital gains, tax
deductions generated by business. Right to inspect books and records and
sue GP.
Advantages of LP: managed by GP, limited liability, flow-through income
and certain expenses.
Partnership Sales and Dissolution - LP’s may be sold through private
placement (involve small group of LPs each contributing large sums of
money and must be accredited investors) or public offerings (sold by
prospectus. Larger number of LPs making relatively smaller contributions
$1,000-5,000.)
LP’s are liquidated on a predetermined date specified in the partnership
agreement. When dissolved payouts in order:
1.secured lenders
2. Other creditors
3.LPs - first claims to their shares of profits and then claims to a return of
contributed capital
4.GPs

REITs - (Not a DPP do not pass through losses like LP) Organized as
trusts where investors buys shares or certificates of beneficial interest
either on stock exchange or in OTC market. pool capital in a manner similar
to investment company but are not investment companies. Shareholders
receive dividends from investment income or capital gains distributions.
REITs can avoid being taxed as a corporation by receiving 75% more of its
income from real estate and distributing 90% or more of its net investment
to its shareholders.
Public REITs (registered) vs Non Registered REITs. Public REITs must
register with SEC and non registered do not.
Listed REITs vs Nonlisted REITs - listed REITs are traded on a stock
exchange and nonlisted REITs trade instead in OTC markets and have
more unique risks and less liquidity.
REITs important points:
An owner of REITs holds an undivided interest in a pool of real estate
investments
REITs may or may not be registered (public or private) with the SEC
REITs may or may not be listed (trade) on exchanges
REITs are not investment companies
REITs offer dividends and gains to investors but do not pass through
losses like LPs, and therefore and not considered DPPs
Equity REITs - They acquire and manage commercial real estate properties,
such as hotels or apartment complexes, and generate revenue by collecting
rent from the tenants and businesses that lease the properties.
must pay out at least 90 percent of their income to shareholders via dividends,
typically on a monthly or quarterly basis. Also, make money on appreciation
from the properties.
Mortgage REITs: Also referred to as debt REITs, these make up less than 10
percent of the REIT market. They lend money to real estate buyers and then
generate revenue by collecting interest on the debt instruments (mortgage
loans, mezzanine loans, etc.). They are also required to pay out at least 90
percent of their annual taxable income to shareholders like equity REITs.

Hedge Funds - Private investment company. Limit the amount of

participants. Similar to MF investments are pooled together and
professionally managed but differ in offering more flexibility in investment
strategies. Like mutual funds and DPPs, hedge funds offer pass-through tax
treatment which means that profits are taxed only once at the investor level.
High returns is the primary objective and conducts high risk and
aggressively managed. Suitable for accredited investors. Not regulated
exempt from SEC registered but lawmakers require investors meet
accredited and sophisticated investors. Require large minimum
investments and require minimum length of holding time known as a lock-
up provision. Hedge fund managers can also be investors in the fund. The
standard hedge fund compensation structure is known as two and twenty
and means that the fund charges an annual asset management fee of
roughly 2% of the amounts invested and a performance fee of roughly 20%
of the fund’s profits above the hurdle rate, a predetermined threshold of
return the fund must meet before the performance fee is earned.
ETF-s equity security invests in a specific group of stocks to mimic a
particular index. Trades like a stock on the floor of an exchange like a
closed-end fund but they are registered as either an open-end fund or as a
UIT. Unlike MFs they can be purchased on margins and sold short.
Expenses are lower than MF and the management fee is low. Little trading
activity required since it tracks the index. There is a commission charge
every time there's a purchase or a sale.
Advantages compared to MF - Tax efficiency - capital gain distributions are
rare with no further tax consequences with ETF shares until investors sell
their shares. Operating cost, ease of trading, and can be purchased on
margins.
Disadvantages compared to MF:
Commissions - each transaction is commissionable
Overtrading - ease and ability to trade which can introduce excessive
trading
Market Influences on price - Share prices can be influenced by market
forces of supply and demand.
ETN - senior unsecured debt securities issued by a bank or a financial
institutions. Backed only by the good faith of the issuer. The notes track the
performance of a particular market index but does not represent ownership.
ETNs - are bond-like instruments with a stated maturity date but do not pay
interest and offer no principal protection. Investors receive a cash payment
linked to the performance of the underlying index minus the management
fees when the note matures. Investors are exposed to market risk.
ETN has additional risk compared to ETF- if the credit of the underwriting
bank should falter the note lose value
UIT - do not trade on the secondary market. Creates portfolio of debt or equity
securities - Then sell redeemable interests known as units or shares of beneficial

interest.
Unit investment trusts are investment instruments that were established with the small investor in
mind. They have many advantages for investors who are uncomfortable with or uneducated about
securities markets. They can also be attractive to investors who just want to invest and not be
bothered with following their investments or making decisions (do not have an investment advisor)
. When a UIT does debt-fixed purchases portfolios of bonds and terminates when they
mature. UIT equity-fixed purchases stocks terminates at a pre-determined date.Some of the other
advantages are:

● The investment is more liquid because the units in the trust can be resold to the UIT at any
time.
● The fees could be lower because there is no day-to-day trading of the securities in the
portfolio.
● Investors can pick a UIT with a mix of securities that they are most comfortable with.
● UIT's provide a diversification of investment risk because of the mix of securities.
● The price of units in a UIT are cheaper and thus more affordable for average investors

Trade capacity (principal or agency)

Agent = Broker = Commission - if the firm acts as an agent they get a
commission acting on behalf of its customers to buy or sell in the market.
Principal = Dealer = Markup or Markdown - the is firm is buying or selling from
their account to its customers. Either markup or markdown.
Central Registration Depository (CRD)? - The Central Registration Depository
(CRD) is a database the Financial Industry Regulatory Authority (FINRA)
maintains of all entities in the U.S. securities industry. FINRA's BrokerCheck
program uses CRD information to provide background information on more
than 6,800 registered broker-dealers and more than 660,000 active registered
individuals. CRD data can be used like a background check on brokers and
financial advisers, showing any complaints, enforcement actions, education,
as well as licensing and professional certifications

Profit sharing plans - An employee benefit plan established and maintained

by an employer whereby the employees receive share of the business
profits. The money may be paid directly to the employees or deferred until
retirement. Can comprise just of common stocks.
Blue Chip stock - stocks that consistently produce income and modest
growth over long periods of time - When the term blue chip stocks is
used, think of the long-established most well-known companies that
consistently perform well and have done so for a very long time. Most if
not all of these are listed on the NYSE
For a call option, the strike price is:
The price at which the call holder can buy the securities from the call writer: The strike
price for a call option is the price at which the call seller is obligated to sell the
underlying security to the call holder if the option is exercised. When the call option hits
the strike price, it is said to be in the money; however, the call holder is not obligated to
buy the underlying securities when they reach the strike price. Additionally, the strike
price added to the option’s premium, and not simply the strike price, is the breakeven
point for both the holder and writer of a call option. Finally, the strike price for a put
option, and not a call option, is the price at which the call writer must buy the underlying
securities from the call holder when the put is exercised.
Public Communications Rules in Securities Industries
Investment Company Act of 1940
Securities Act 1933, 1934, 1940
Bonds -
Zero-Coupon Bonds Zero-coupon bonds don’t pay periodic interest.
Instead, an investor purchases a zero-coupon at a deep discount from its
par value, but redeems the bond for its full face value at maturity. The
difference between the purchase price and the amount that the investor
receives at maturity is considered the bond’s interest. Usually, the longer
the zero-coupon bond’s maturity, the deeper its discount will be from par
value. For investors who desire a lump sum at a future date.
Interest bearing Bonds - For investors who desire current income. Pay
interest at regular intervals (semi-annually).
Bond characteristics: maturities (5-30 years) - Ways the issuer may structure
its loan repayment
Term bond issue - if all the bonds in an offering are due to mature on the
same date. Entire principal is repaid at once - may establish a sinking fund
account to accumulate money to retire the bonds at maturity
Serial bond issue - Mature sequentially over several years.
Balloon - using elements of both serial and term. Issuer repays part of the
bond’s principal before the final maturity (like serial), but pays off the majority
portion of the bond at maturity (term).
Discounts and premiums are because of credit risk or interest rate risk.
Credit Risk - in bonds is that the issuer may default and may not be able to
meet its obligations to pay interest and principal to the bondholders. Low
credit rating would probably mean higher yield and discounts to attract
investors.
Investment Grade Moody’s S&P Fitch
Best Quality Aaa AAA AAA
High Quality Aa AA AA
Upper Medium A A A
Medium Baa BBB BBB

Speculative Ba BB BB
B B B
Caa CCC CCC

(Anything after triple B’s is speculative)

Bonds - muni bonds - accrued interest 30/360
Accrued interest - when bonds trade between coupon payments. The buyer
(new owner) must pay the seller (old owner) the amount of interest earned
at the date of settlement because the new owner would receive the full
payment at the next settlement.
Bonds trading on secondary market trade for par ($1,000), premium or
discount.
Price and Yield - inverse relationship pertaining to new interest rates affects
existing bond prices. As market interest rates change, new bonds will be
issued with either higher or lower coupon rates than what existing bonds
pay.

Current Bond Yield = interest rate(coupon rate) X $100 (par value)/ Current
Bond Price. I.e. Current bond price is $95.92 and semi-annual coupon rate
5%. (5%X$100 parvalue)/ $95.92 = 5.21%
CY = Annual Interest/Current Market Price.
If bond interest rates are falling, issuers will want to call the bond back
because if the original bond was paying 6% interest but now they’re 4% this
benefits the issuer to call it back and reset and give out a 4% instead of 6%
Opposite for the investors. They like it when interest rate goes down as
bond prices go up in the secondary market.
YTC - Yield to call. (call feature) may be redeemed prior to maturity at the
issuer’s option.
Call feature (benefits issuer - usually has a higher coupon rate)- allows
issuer to call the bond back before maturity. This is done when the rates
are falling.
Put Feature (benefits investor - usually has a lower coupon rate) - allows
investors to put the bond back to the issuer. Investors do this when the
rates are rising. Why keep my 6% interest rate when I can get 8%?
Convertible feature - Same as convertible preferred. Converting bond to
existing common stocks.
Call Protection - typically 5-10 years of date of issuance.
Call premium - when the bond is called the issuer pays a premium to retire
the bonds.
Bond see-saw - depends on price paid at purchase (yield to call is always
the worst. Known as yield to worst.
If purchased in par then all yields will be the same: NY, CY, YTM, YTC)
If purchased in discount then all yields will be - lowest to highest NY - CY,
YTM
If purchased in premium then all yields will be - lowest to highest - YTM,
CY, NY
Government National Mortgage Association (GNMA, Ginne Mae) Only
agency security backed by the Gov’t. Provide financing for residential
housing. Although have a stated 30-year life, typically sold based on an
average life expectancy since the issues are backed by the mortgages,
which are retired early. Prepayment risk. Most popular securities are
modified pass-through certificates. Pass-through certificate is backed by
mortgages as homeowners make their mortgage payments consisting of
principal and interest a portion of those payments is passed through to
investors who purchased the certificates through GNMA. Also CMOs -
collateralized mortgage
Pass-through certificate - are fixed-income securities that represent an
undivided interest in a pool of federally insured mortgages put together by a
government-sponsored agency. A pass-through certificate means that the
holder is entitled to any income earned from the securitized finance product
Federal Home Loan Mortgage Corporation (Freddie Mac, FHLMC) - Public
corporation created to promote 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 (FNMA, Fannie MAe) provides
mortgage capital. Purchases mortgages insured by agencies like VHA, FHA
Collateral trust bonds - when a corporation deposits securities it owns into
a trust account to act as collateral
Debentures - debt obligation of the corporation backed by only it’s good
faith. (unsecured)
Guaranteed Bonds - backed by a parent company. (still unsecured)
Income Bonds - (adjustment Bonds) - reorganizing or coming out of
bankruptcy - The issuer promises to repay the principal amount at
maturity, but does NOT promise to pay interest unless it has sufficient
earnings
Muni bonds - 2 types: GO and revenue
GO - for capital improvement that benefits the entire community. Do not
produce revenues so principal and interest are paid by taxes collected
by the municipal issuer. GO bonds known as - Full faith and credit
issues
GO bond Requirements: Debt ceiling limit, voter approval
Revenue Bond - Require - feasibility study
finance any municipality facility - self-supporting debt because principal
and interest payments are made exclusively from revenues generated
from the facility.
Municipal anticipation notes are short-term securities that generate
funds for a municipality that expects revenue soon. Muni notes have
less than 12 month maturities they are repaid when the municipality
receives the anticipated funds TANs, RANs, TRANs
BANs - bond anticipation notes are sold as interim financing that will be
converted to long-term funding through a sale of bonds.
Tax-exempt commercial paper is often used in place of BANs and TANs
for up to 270 days.
Taxable Municipals - Build America Bonds (BABs) - created to reduce
the cost of municipalities and stimulate the economy. - while bonds to
fund municipal projects usually tax exempt BABs were taxable
obligations.
Inflation - measurements. CPI, theories - keynesian and monetary, FRB
Economic cycles
U4 Statutory Disqualification
$250 max in muni bond gifting of cash per election
Redemption Value of an open-end investment company’s shares is based
on the NAV computers after the order is received.
US gov’t agency issues are exempt from registration under the Securities
Act of 1933
T-Notes paid interest semi-annually mature at par value. - 2-10 year
maturities. Priced at percentage of par. 365 days actual days elapsed
accrued interest
T-bonds - 10 -30 years. Priced at percentage of par. 365 days actual days
elapsed accrued interest
Treasury Receipts - type of bond created from t-bonds, t-notes. When BD’s
buy treasury securities and place them in a trust at bank, sell separately
receipts against the principal and coupon payments. - A treasury receipt is a
type of zero-coupon bond. That is, the investor is not paid in installments of
interest. Instead, the investor purchases the receipt at a discount and receives
its full value when the bond reaches maturity. not backed by the US gov’t
Treasury Strips - The Treasury Dept own version of receipts. The treasury
dept designates certain issues suitable for stripping into principal and
interest components. Treasury STRIPS are created when a bond's coupons
are separated from the bond The bond, minus its coupons, is then sold to an
investor at a discount price. The difference between that price and the bond's
face value at maturity is the investor's profit. Backed by the U.S. gov’t.
SEC Regulation S-P (Consumer Privacy) which information must a firm
include in its customer privacy and opt-out notices? The policies to protect
the security of nonpublic information
Accredited Investor
144A - Issuer of restricted stock is permitted to sell to - QIB
Rule 144A modifies restrictions for the purchase and sale of privately placed
securities among qualified institutional buyers without the need for SEC
registrations.
529 Savings plan - Potential deductibility of contributions from states taxes
but deductible from federal.
UTMA accounts opened under the Minor tax ID. Any taxes are the
responsibility of the minor.
Cash settlement is primarily used with index options because an index is
not deliverable.
For equity options, an in-the-money call option is typically converted to
long shares of stock, and in-the-money put options are converted into
short shares of stock at expiration.
Cannot use past performance for future holds of stocks
American Depository Receipts (ADRs)
Asset-backed securities - traded at their average life than their stated
maturity dates.
Call protection is most valuable to a bond owner when the princes are
generally rising. Call protection - is a provision of some bonds that
prohibits the issuer from buying it back for a specified period of time.
Call protection prevents the issuer from repurchasing it for a set period
of time.
Call protection can be extremely beneficial for bondholders when
interest rates are falling. It means that investors will have a minimum
number of years, regardless of how poor the debt market becomes, to
reap the benefits of the security. = when interest rate falls the bond
value rises = when bonds are rising the issuer wants to buy (call) it back
but call protection prevents this.

Discretionary orders - pre approved authority for an RR to make transactions

without having to ask for specific approval by the customer filling out a trading
authorization to the BD
Discretion is defined as authority to:
What security, the number of shares and whether to sell or buy
Does not apply to: timing of an investment or the price at which it is acquired.
Bond interest payments are taxed at ordinary income. Paid out semi-
annually
Cash account - Needs to be paid in full for any securities purchased. SEC
Reg T must occur no later than two business days after the standard
settlement period. T+4 Full payment would be required two business days
after T+2.
Margin Account - Long or Short account.
Long Margin Account - customers purchase securities and pay interest on the
money borrowed until the loan is repaid (borrows money)
Short Margin Account - stock is borrowed and then sold short; enabling
customers to profit if its value declines. All short sales must be executed
through, and accounted for in a margin account. (borrows security)
Hypothecation - pledge agreement customers securities as collateral for
margin loans. Customers giving permission in the margin agreement.
Rehypothecation - BD may rehypothecate the securities I.e. use the
customer’s securities to obtain a loan from a bank.
Margin Agreement: Must sign margin agreement first. Margin agreement
consists of disclosures: credit agreement (mandatory), hypothecation
(mandatory), and loan consent form (optional) - gives consent to the firm to
loan the customers margin securities to other customers.
Federal and FINRA Margin Requirements:
Reg T states deposit of 50% of the market value of the purchase is required.
FINRA requires minimum deposit cannot be less than $2,000 so the greater of
50% or $2,000.
Reg T requires margin account customers to meet initial margin deposit
requirements no more than four business days after trade date. T+4 deposits
can be fully cash or fully paid marginable securities. If made using fully paid
marginable securities they are only marginable to the extent of 50% of their
value. Therefore, securities must be valued at twice the amount of Reg T
margin calls.
If payment is late BD may apply to its designated examining authority for
(DEA) an extension. If extension is not granted or requested on the morning of
the 6th business day the account is frozen for 90 days and the firm must sell
the securities.
Accounts eligible for margin:
Individual and joint
Corporate and partnership accounts- only if it’s not restricted in the
bylaws/partnership resolution
Fiduciary (trust and custodial) accounts - only if it is specifically permitted
within the trust or custodial agreement.
IRA and other qualified plans prohibit margin accounts.
Margin account approvals - approved by principal of the firm before first trade
Securities Eligible to be purchased on margin and used as collateral:
Exchange listed stocks and bonds, NASDAQ stocks, OTC issues approved by
FRB and warrants
Cannot be purchased on margin and cannot be used as collateral for margin
loan:
Options, rights, non-national market securities, OTC not approved by FRB,
insurance contracts
Cannot be bought on margin but used as collateral after being held for 30
days:
Mutual funds, new issues
Exempt from Reg T:
Treasury Bills, Notes, Bonds
Government Agency Issues
Municipal Securities
Qualified plans -give employers a tax break for any contributions they make
(401K, 403(b), profit sharing plans)
Non qualified plans - own rules for contribution but it offers no employer tax
break.
Wrap accounts - firms provide a group of services, such as asset allocation,
portfolio management, executions, and administration for a single fee.
Generally investment advisory accounts.
Tenants in Common - ownership provides that the deceased tenant's
fractional interest in the account is retained by that tenant’s estate and is not
passed to the surviving tenant. Each party must specify a percentage interest
in the account.
Joint tenants with rights of survivorship - stipulates that a deceased tenant’s
interest in the account passes to the surviving tenant. Undivided interest in the
account
Primary purpose of a syndicate desk in the context of an equity offering is to -
build an order book and allocate stock
Exchange-traded notes (ETNs) - is an unsecured debt security that tracks
an underlying index of securities. ETNs are similar to bonds but do not pay
periodic interest payments
The investors must trust that the issuer will make good on the return based on
the underlying index.
The ETN's ability to pay back the principal—plus gains from the index it tracks
—depends on the financial viability of the issuer. As a result, an ETN's value
is impacted by the credit rating of the issuer. The value of the ETN could
decline due to a downgrade in the issuer's credit rating, even though there
was no change in the underlying index.

(OTC). Trades need to be reported to the Consolidated Tape within 10

seconds of execution.

BSA- establishes the US treasury dept as the lead agency to developing

regulations in connection with anti- money laundering .
FinCEN - Enforced by Bank Secrecy Act =to prevent financial institutions
from being used as tools by criminals to hide or launder their ill-gotten gains.
Firms must file a Suspicious Activity Report within 30 days of becoming aware
and retain copies of record for 5 years and must remain confidential
OFAC - Office of Foreign Assets control - maintains a list of individuals and
companies owned or controlled by or acting for terrorist or narcotics.
Specifically, the Designated Nationals (SDN) list is maintained by OFAC when
someone is found on that list their assets are blocked and prohibited from
doing business with them.
New customers must be advised before account opening that the firm is
requesting information to verify their identities. Notification may be placed on
their website, delivered verbally or placed in the new account form.
Books and Records Retention Requirements: Records/retention are generally
kept either lifetime, 6 years or 3 years. (4 years for customer complaints)
Lifetime: partnership/corporation articles, minute books (director or
partnership meetings), stock certificate books, and organizational documents
such as Form BD and amendments
6 years: blotters (original record of entry) purchases and sales of securities,
the receipt and delivery of securities and receipt of disbursement of cash
reflect transactions as a trade date and must be prepared no later than the
following business day. General ledger, customer ledger (customer
statements), customer account records and stock records
3 years: advertising, u4/5, trial balances, customer confirmations, order
tickets, subsidiary ledgers and list of every office where each associated
person regularly conducts business, associated persons compensation
records, compliance and procedures manual.
Regulation SP - Nonpublic Personal Information - Firms must give customers
a description of their privacy notice. Firms must provide a customer with the
privacy notice at the time the relationship is established and must provide
updated versions annually. Also, giving customers the ability to opt-out of
unaffiliated third parties nonpublic personal information.
Communications with the public and general suitability requirements:
Statements must be clear and not misleading. No omission of material facts,
exaggerations and ever imply past performances will be repeated.
Classification of three categories of communication:
Retail communications any written (even electronic) made to more than 25
retail investors within 30 calendar-day period.
Correspondence - made to 25 or fewer retail investors
Institutional communication - communications only made to institutional
investors but does not include member’s internal communication (internal
memo)
Social Media communications -no requirement to pre approved individual
posts but firms required to monitor. Static content - websites or blog must be
approved a by firm’s principal
BD’s do-not-call list 5 year record retention.
Options:
Call Up (bullish) Put Down (bearish)
Buyer/Long/Owner
Seller/Writer/Short
Buyers of Calls -Right to buy - Maximum loss is premium - Maximum gain
unlimited
Buyers of Puts Right to sell - Maximum loss is premium - Maximum gain strike
price minus premium
Sellers of Calls - obligated to sell - Maximum loss unlimited - Maximum gain
premium
Sellers of Puts - Obligated to buy - Maximum loss Strike price minus premium
- Maximum Gain premium
Hedging with Options
Long stock - (protective) put option
Short stock -(protective) call option
When options are settled in Index and foreign currency they settle in cash!
Options before purchase need to get an options disclosure document, need to
be approved by registered options principals or branch office managers.
However, 15 days later the customer needs to return a signed options
agreement or the option will end (although a customer could trade and utilize
their option before 15 days).

Buy a put 35 for 3 = paid 3 believing it will go down. Will be able to exercise
once it crosses 32
Buys 100 shares at 35. So I need it to raise 3 more to offset the premium to
break even. 38

Initial purchase of 3,000 of common stock in a margin account requires

cash deposit of
They must deposit the greater of 50% or $2,000.

What Is Regulation SHO - that regulates short selling. The regulation introduced the
"locate" and "close-out" requirements aimed at curtailing naked short selling

Prohibited activities:
Backing away
Free riding
Pump and dump
Churning
Front running
Capping - involves when someone is short option call contracts. Entering sell orders in a
stock for the purpose of keeping it from rising above the strike price
Supporting - associated with who are short a put option. Entering purchases in a stock
for the purpose of keeping the price from falling below the strike price
Pegging -intended to keep the price of a stock from moving
Wash sales - investor uses a capital loss to offset a capital gain. Creating loss on
purpose for tax reasons when one’s intent is to still maintain ownership of the security.
Any repurchase of the same within 30 days before or after the loss then it would be
disallowed. The rule prohibits taking the loss on one’s tax return if the positions as
recreated within 30 days.
Matched orders (painting the tape) - manipulation involves one party selling stock to
another with the understanding that the stock will be repurchased later (usually the
same day) at the same price. To appear the stock has more activity.
Breakpoint sales - sales just below the breakpoint can be viewed as RR’s trying to get
higher sales charges
Insider trading penalties - SEC can enforce three times the loss/profit a controlling
person such as BD or RR could be fined $1 million or three times the loss. Also, criminal
penalties $5 million and up to 20 years in jail. The BD firm may be fined up to 3 times the
damages or $25 million whichever is greater.
Contemporaneous traders (victims of the inside trader)- traders who enter trades at or
near the same time in the same security as the insider trader can sue the persons
involved up to 5 years after the violation occurred.
SEC Regulation FD (fair disclosure) - Protecting the issuers from insider trading. If
disclosure of nonpublic information gets sent out unintentionally they must make it
available to the public. If it was intentional they will also issue a press release.
Borrowing or lending from a customer's account is prohibited without a loan consent
agreement signed by the customer. However, it can be permissible that firms must
Conduct Rules that have written procedures in place to monitor such activity. RR’s must
provide written notice of the proposed arrangement to the firm and the firm must
approve in writing. Conduct Rules permit:
Immediate family member (no approval needed)
The customer is in the business of lending money (bank - no approval needed)
Customer and RR are both in the same firm
Personal or business relationship
Sharing profits and losses - prohibited
Exception: joint account and can share that is proportionate (excluding family
members) financial contributions (only in dollars) and the firm has given written
approval.
Financial Exploitations of seniors
Makes a reasonable effort to have a trusted contact person
If suspicion of financial exploitations - firms can place a temporary hold (no longer than
15 days) on disbursements and initiate an internal review and provide notice to the
trusted contact person (but not required to as the trusted contact person can be the
exploiter) no later than 2 business days from the hold.

SRO and Regulatory Requirements

National Adjudicatory Council (NAC) establishes rules, regulations and membership
eligibility standards.
Fingerprinting - submit to the U.S. Attorney general
Receptionist who handle incoming mail will also need to be fingerprinted
Only selling MF, DPP, variable annuities are exempt.
FIrms must employ 2 registered principals.
Central Registration Depository (CRD) - maintain information on the disciplinary history
of all persons currently registered. Can access BrokerCheck through all FINRA member
websites.]
Continuing Education Requirements - Firm and regulatory element.
Firm - annual training plan
Regulatory element - completed within 120 days on the second anniversary and every 3
years after the material is determined by FINRA
Employee conduct and reportable events:
FINRA 4 sets of rules and codes:
Conduct Rules - faith and ethical trade practices member firms must follow when
dealing with the public
Uniform Practice Code - uniform trade practices: settlement, good delivery, ex-dates,
confirmations don’t know (DK) procedures
Code of Procedure - how member violations will be heard and handled
Code of Arbitration - governs the resolution of disagreements and claims between
members. RRs and the public. Address monetary claims.
Fails securities exam 30 days must pass before a 2nd attempt fails 3 times then 6
months.
U5 - when someone leaves or is terminated, the firm must file U5 within 30 days of
termination date.
If someone were to leave and join a new firm they submit a U4 and the former employer
must provide a copy of the U5 to the new firm within 60 days.
License is good for 2 years after leaving and FINRA is still able to retain jurisdiction if
complaints arise.
Parking is not allowed. (parking registration with a firm)
Complaint is defined as written statement by a customer
If a complaint involves allegations of theft, misappropriation of funds, the member must
immediately report to FINRA within 10 business days.
Copies of all customer complaints must be kept in the Office of Supervisory Jurisdiction
(OSJ). Member firms must electronically file information of all customer complaints to
FINRA within 15 days of the end of each calendar year.
Outside Activities - Without employer’s knowledge. Must have written
notice to the employer if they will be compensated by another member
firm. Permission is not required. The firm does have the right to reject.
Passive investment (LP) - not considered an outside business activity does
not need to provide written notice.
Private securities transactions - known as selling away. They must first:
Provide written notice to their employer, describe in detail the proposed
transaction, describe in detail their proposed role in the transaction and
disclose whether or not they will be receiving compensation.
Political contributions - If political contributions to certain elected officials
is made, advisers may not provide advisory services to any government
they represent for a fee for 2 years.
Rule G-37 rules to prevent pay to play when dealing with municipal
securities. Prohibits municipal firms from engaging in the municipal
securities business negotiated underwriting/financial advisory work with an
issuer for 2 years after a contribution is made. MSRB has no enforcement
authority so FINRA will enforce.
Contributions limit is $250 per election.$250 de minimis exemption does
not apply to contributions made by municipal firms.
Two types of risk: Systematic (non-diversifiable) and non systematic
(diversifiable)
Systematic Risks:
Market Risk
Interest Rate Risk
Reinvestment Risk
Inflation Risk (purchasing power)

Knowledge of Capital Markets (regulatory entities, agencies, and market participants) Quiz 1 A 9/10
1. B
2. D
3. C
4. B
5. A - prime broker provides clearing service
6. A
7. B
8. D
9. C
10. a

Quiz 1b(market structure) 5/5

1. B
2. A
3. D
4. C
5. d
Quiz 1 C (economic factor) 7/10
1. B - importing - buying from other countries = trade deficit would
create a negative outflow of money which adversely affect the GDP
2. C - b Expansion - increasing sales, higher wages, higher interest
rates
3. D - C Stagflation (hybrid between inflation and stagnation) - when the
economy isn’t growing there is a lack of consumer demand and
business activity yet prices are still rising.
4. B
5. A
6. B
 7. D
8. C
9. B? - A - S&P 500 Index is a leading economic indicator - moving
ahead of the overall economy.
10. C

Quiz 1.D Offerings

1.d
2. D?
3. A
4. A - C Tombstones advertisement is bare-bones and does not identify
risks associated with the investment
5.
A.)F - T
B.) F - 3 years
C.)T
D.)T
E.)T - F Cooling off period
6.D - C Uniform Securities Act
7.C? A - Coordination when an issue is sold in more than one state must
be registered in each state
8.D

SIE Practice Exam on mometrix.com

Time of day restriction when telemarketing 8 am - 9 pm called party’s time.
Breakpoint sale takes place when an investor in investment company
shares at a level below where the sales charge would be reduced (the
breakpoint). Equities, municipal bonds, and corporate bonds are not
investment company shares.
General consideration regarding communications with the public about
variable life insurance and variable annuities. Product identification,
liquidity, and claims about guarantees are general considerations.
When must political contributions be disclosed to the MSRB? Quarterly.
A member may not public a research report regarding a subject company
for which the member acted as a manager or co-manager of a secondary
offering for 10 calendar days following the date of the offering.
Basic exclusion limit on tax-free transfers during the life or at death (the
unification of gift and estate taxes) is $12,060.

Bonds pay semi-annually and use a 30/360 calculation for accrued interest
(is when the bond gets sold between coupon rates)
Treasury Bonds and Notes - 365 days for accrued interest
Bond pricing is measured in points 1% is $10 considering par value of a
bond is $1,000. Inverse relationship with bond price and interest rates
T-Bills (less than 1 year) shortest treasury security and pay no interest
rather issued at discount (only treasury security issued at discount with no
interest) - Issued in 4 weeks. 13 (90 days) weeks, 26 (6 months) weeks
and 52 (1 year) weeks.
Quiz 2.b Options
1. B
2. A
3. D
4. A? B - writers of options incur an obligation if the option is exercised
by the other party to the contract owner or buyer. If the owner of the
put exercises his right to sell the stock, the writer will be obligated to
purchase the stock.
5. 32, unlimited, 200
6. 11,1100, 400
7. C
8. b
9. B
10. C
11. D - b The BE for a covered call writer (seller) long stock;short
call is the purchase price of the stock minus the premium paid for the
call option. The investor

2.C Quiz - Investment Companies 10/10

1. D
 2. A
3. C
4. B
5. D
6. B
7. C LGIP (local government investment pool)
8. A
9. D
10. c
2.D Quiz Investment Risk 6/6
1. B
2. B
3. D
4. C
5. A
6. b

Leading Economic Indicators Leading economic indicators precede

the upward and downward movements of the business cycle and may
also be used to predict the near-term activity of the economy. The
government index of 10 leading economic indicators is released monthly.
The components of the index include:
● Average weekly hours, manufacturing
● Average weekly initial claims for unemployment insurance
● Manufacturing new orders, consumer goods and materials
● ISM Index of New Orders (this reflects the level of new orders from
customers)
● Manufacturers’ new orders, non-defense capital goods excluding
aircraft orders
● Building permits, private housing units
● The prices for the S&P 500 Index common stocks
● Leading Credit Index (This index consist of six financial indicators
based on various yields) Interest-rate spreads, 10-year Treasury
bonds less federal funds
● Average consumer expectations for business conditions
 ● The prices for the S&P 500 Index common stocks
● Leading Credit Index (This index consist of six financial indicators
based on various yields)
● Interest-rate spreads, 10-year Treasury bonds less federal funds
● Average consumer expectations for business conditions
Coincident Economic Indicators Coincident indicators usually mirror
the movements of the business cycle. The composition of the
coincident economic indicators includes the following four
components:
● Employees on non-agricultural payrolls
● Personal income less transfer payments (Transfer payments
represent aid for individuals in the
● form of Medicare, Social Security, and veterans’ benefits, etc.)
● The Index of Industrial Production
● Manufacturing and trade sales
Lagging Economic Indicators The index of lagging indicators
represents items that change after
the economy has moved through a given stage of the business cycle. The
index of lagging indicators
should confirm the economic condition portrayed by previous leading and
coincident indexes.
Lagging indicators include the following components:
● Average duration of unemployment
● Ratio of manufacturing and trade inventories to sales
● Change in labor cost per unit of output for manufactured goods
● The average prime rate charged by banks
● Commercial and industrial loans outstanding
● Ratio of consumer installment credit to personal income
● Change in the Consumer Price Index for services

Stock dividend paid quarterly

Bond interest paid semi annually
Quiz 3.A Trading, Settlement and Corporate Actions (⅞)

1. D - Buy Limit order

 2. C
3. D
4. C
5. B
6. A
7. D
8. C

Quiz 3.b Customer Accounts and Compliance Considerations 9/13

Need to review Trust accounts, trade confirmation
1. A - C Transfer of Death account
2. A
3. D
4. C
5. B
6. B - A Commissions
7. D
8. B
9. C
10. D
11. D - A The number of bonds in the transaction
12. B - C Nontrade confirmation would have to be generated
13. B

Quiz 3.C Prohibited Activities 6/8

1.
A. Capping
B.Pegging
C. Front Running
D. Pump and Dump
E. Marking the close
F. Matched Orders
2. A
3. C
4.D - c = Continuing commissions may never be paid on business referred
or introduced by an employee after that person ceases to be registered
with the member.
5. A - D = Firms cannot have joint accounts with customers.
Representatives may have joint account with customers only if the
arrangement has been approved by the principal and account proceeds are
shared in proportion to each party’s contribution. Exceptions are sharing in
a joint account with immediate family member.
4.A SRO and Regulatory Requirements for Associated Persons 6/7
1. B
2. D
3. C - a - Registered BDs must have fingerprinting records and submit
to the US attorney general office for processing and identification.
4. D
5. B
6. C
7. A
4.2 Employee conduct and reportable events 6/7
1. D
2. B - A = If an associate person of a FINRA member firm wants to be
employed by or accept compensation from an entity other than the
member firm, that person must provide written notice to the member.
The employing member’s permission is not required.
3. C
4. B
5. C
6. B?
7. C

Sie Exam Prep Book

Practice Page 29
Review - Auction Markets
Yield Curve
Currency Revaluation
Shelf Registration
 1. A - B Keynesian Theory
2. C
3. A? - Underwriting commitment - assures all shares will be purchased
or with best efforts to sell all of the securities.
4. B
5. D
6. A
7. A?
8. B? - yield curve is measured as a predictor of recession
9. D
10. A - D - shelf registration
11. B? - currency revaluation - when the government artificially
increases the value of its currency. Devaluation is intentionally lower
of a currency’s value.
12. D

Ch. 2 Understanding Products and their Risks 24/33 = 73%

1. A.
2. C - b Money market funds cannot be more than 13 months and not
insured by the FDIC. They must be mainly invested in short-term
securities with an average maturity of no greater than 90 days.
3. A
4. D
5. A
6. D
7. B
8. D - c
9. C
10. C
11. C
12. A
13. B
14. D
15. D? - closed-end funds 90% of income and 98% of capital gains
must distribute to investor maintain tax-free status
16. A - C. Deferred sales charges on unit investment trusts paid
monthly
17. A? - riders
18. C? - D DRIP = dividend reinvestment program - existing
shareholders can purchase more shares when a dividend is paid at a
discount to the current share price.
19. C
20. A? - B Hedge funds would violate the tax-exemption status by
Having more than one hundred beneficial shareholders
21. D
22. A? - C Political Risks - introduction of new laws and regulations
23. B? - The coupon rate of 7% annual payment of $70. $70/1150
= 6.081 = 6.1%
24. A - C = A puttable bond grants the investor the right - not the
obligation - to ‘put’ the bond back to the issuer.
25. A-C
26. D
27. A
28. B
29. D
30. C
31. D
32. C
33. B
Ch. 3 Trading, Customers Accounts, and Prohibited Activities 20/23
1. B
2. A - D
3. A - B
4. C
5. C
6. C
7. D
8. B
9. A
10. C
 11. D
12. B
13. C
14. A
15. A
16. B
17. C
18. B
19. B
20. A-D
21. B
22. D?
23. D
Ch. 4 Overview of Regulatory Framework 6/7
1. C
2. A
3. C
4. A
5. B -A
6. D
7. B

Withdrawals from a 401(k) after separating from service are penalty free if the
separation occurs at age 55 or older. The other options would result in
an early withdrawal penalty.
Combined Offering -
In a fixed exchange rate system, a country ties its currency to a basket of other
currencies or to another measure of value, such as gold.
rule 144 is 1 percent of the outstanding shares or the average trading volume for
the previous 4 weeks, whichever is greater.
For IPOs (Initial Public Offerings), a final prospectus must be available to all
purchasers of the IPO for 90 days after the effective date (the first day the
security starts trading
Aftermarket Prospectus Delivery Requirement
Nonlisted IPO - 90 days after market
IPO exchange listed - 25 days
Nonlisted APO - 40
Exchange-listed APO No requirement
Preliminary prospectus include: SEC Disclaimer, names of the officers of
the issuing corporation, an explanation of what the funds raised by the
offering would be used for
A sell stop order is an order to sell a stock at a price below the current market
price
The cooling-off period is when an issuer files a registration statement with the
SEC. During this time, the SEC reviews the registration statement to see if it
needs to be amended or if additional information is needed. It typically takes 20
days for the SEC to review the registration statement. As a matter of fact, it is
sometimes referred to as the 20-day coolingoff period.

the client pays the price at which the trade was executed - Occasionally, a
client will be told that a trade was done at a transaction price which turns out
to be incorrect. This can happen for a number of reasons, usually clerical, not
intentional. Federal law and FINRA rules state clearly that the client will be
told about the erroneous report, and the transaction will be done at the actual
price at which it took place, not at the erroneous price. Since every transaction
is a legal contract, the actual price at which the trade was executed is the
legally binding price

IRA required minimum distributions must begin upon reaching 72 years - You
generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE
IRA, or retirement plan account when you reach age 72. Roth IRAs do not
require withdrawals until after the death of the owner.

TIC, tenants in common, holds that each co-tenant in the account will have
their % share of the account go to their estate upon death. In joint tenancy
with rights of survivorship (JTWROS), the survivor receives the share of the
other co-tenant upon death

Regulation S-P principally deals with protection of privacy and identity

information of clients. Thinks of letters S-P as Security and privacy.
All State securities Administrators are part of the North American Securities
Administrators Association (NASAA) - All states have a securities
Administrator whose job it is to enforce the securities laws of their state

Trades in the 3rd market are trades in stocks which are executed off the floor
of the stock exchange on which those stocks are listed

Business sectors in the US economy generally fall into three distinct

categories: cyclical, defensive, growth - Cyclical companies tend to follow
the business cycle: defensive companies tend to perform in a consistent
stable way regardless of the cycle; growth companies are expected to grow
faster than the economy in general

In the business of underwriting, when a firm adopts a firm commitment, it

is acting as a:

Firm commitment implies the syndicate is purchasing the new issue from the
issuer with a view to retailing it to the investing public….this is acting in a
principal/dealer capacity. Best efforts underwritings are being done on an
agency/brokerage basis..

A ‘weak’ US dollar makes US goods ‘cheaper’ for foreign buyers to buy, since
their currency becomes ‘stronger.’ This leads to an increase in the export of
US manufactured goods

STRIPS are long term (up to 30 years) zero coupon debt securities issued by the US
government. Investors purchase STRIPS at deep discounts, hold them for potentially
decades, then receive par at maturity. For example, an investor purchases 30 year
STRIPS at $400. At maturity 30 years later, the investor receives $1,000, essentially
making $600 in interest. Although the interest is not received until maturity, the investor
is subject to annual taxation on the "accreted" interest. Accreted interest is the amount
earned on an annual basis. $600 earned over a 30 year period results in $20 per year in
interest. The investor pays interest on this amount annually, which is known as
"phantom tax" because taxes are assessed on funds not received potentially for
decades. This is why the answer is false (therefore the correct answer).
All zero coupon debt securities, including Treasury bills and STRIPS, trade flat (without
accrued interest). Treasury notes, bonds, and TIPS pay interest semi-annually. TIPS
(Treasury Inflation Protected Securities) are essentially Treasury bonds that pay more
when inflation rises. In particular, their par values adjust over time in relation to inflation,
although their coupons (nominal interest rates) stay fixed.

Bond ratings - The lowest investment grade bond rating is BBB. The highest
speculative bond rating is BB.

Preferred stock is a fixed income equity security that typically comes with a fixed
coupon (dividend rate). Although adjustable-rate preferred stock exists, the majority of
preferred shares have fixed coupons. Additionally, each has a par value that the coupon
rate is based on, which is usually $100 (unless otherwise stated). Bonds typically have
a par value of $1,000.

The primary benefit of preferred stock is dividend income. Capital appreciation is

possible, but is usually dependent on interest rates declining.

While preferred stock has priority over common stock during corporate liquidations, it
does not have priority over any debt security.

A customer wants their firm to manage their assets and wants a simplified fee structure.
What should the registered representative recommend? - Wrap accounts are a type of
discretionary account, where the firm takes care of every aspect of the account for a
single fee. The firm will manage the assets and generally maintain the account on
behalf of the client, typically in exchange for an assets under management fee (e.g.,
charging 1.5% of assets managed).

Buy stops and sell limits are both placed above the current market price. Buy limits and
sell stops are both placed below the current market price.

Warrants are long-term options to buy stock at a fixed price. At issuance, they don't
have intrinsic value, which means their fixed exercise price is higher than the stock's
market price. However, they are issued with a significant amount of time value (typically
expiring after 5 years).

Warrants are typically issued as "sweeteners" with other securities like bonds in order to
entice purchases from investors. If a bond sale is not going well, adding free warrants to
the bond sale usually make the offering more competitive. Because warrants provide
more shares to a small portion of investors (and not all current stockholders), offerings
of warrants are considered dilutive events. Companies must obtain shareholder
approval prior to offering warrants, but they are typically approved as they make it
easier for the issuer to raise capital.

The order of yields for a discount bond, from highest to lowest is yield to call (YTC),
yield to maturity (YTM), current yield, and nominal yield. Bonds bought at discounts
reflect higher yields than the coupon (nominal yield) of the bond because the bond is
being bought at a price lower than what it matures at. The bond see-saw is a great
resource for this question.
Measuring return:
Total return = (ending value - beginning value) + investment income/
beginning value
Example: An investor purchases 1,000 shares of VPN at $25 per share.
VPN pays an $0.80 annual dividend. After one year, the stock’s market
value has declined to $23 per share.
What is the investor’s total return?
In this example, the investor’s total purchase was $25,000; however, after
one year, the value of the stock had declined to $23,000. During the year,
the company paid a dividend of $0.80 per share; therefore, the investor
received $800 (1,000 x $0.80). The investor’s total return calculation is
shown below:
(23,000 -25,00) + 800/25,000 = 1,200/25,000 = -4.8%
The investor has a loss of 4.8%.
Inflated-Adjusted Rate of Return = Actual Return - Rate of Inflation
ABC Corporation’s bond has a nominal yield of 8%. If the rate of inflation is
3%, what is the bond’s inflation-adjusted rate of return? Based on the
formula shown above, the inflation-adjusted rate of return is 5% (8% – 3%).

Breakevens for a call option is strike price + premium

Breakeven for a put option is strike price - premium.
Put Summary
Put buyer:
BE Strike price - premium
MG Strike Price - premium
ML Premium
Put Seller:
BE Strike Price- Premium
MG Premium
ML Strike Price - Premium

Options
The market price (premium) is not a fixed component of an option contract.
Instead, it’s constantly
changing and is determined in the secondary market between buyers and
sellers.
Option Premium = Intrinsic Value + Time Value
Intrinsic Value - how much it is in the money

Buyer’s Exercise / Writer’s Assignment

Step 1 - The process begins when an investor decides to exercise her
contract and notifies her broker-dealer.
Step 2 - The broker-dealer will then notify the Options Clearing Corporation
(OCC).
Step 3 - Once the OCC (discussed later) receives exercise
instructions from the purchaser’s broker-dealer, it will randomly issue the
exercise notice to a broker-dealer whose account shows a short option
position that’s identical to the long option position being exercised.
Step 4 - The broker-dealer that receives the exercise notice, must select a
client to whom the notice will be assigned. There are three methods by
which this assignment may be accomplished — (1) using random selection,
(2) using first-in, first-out (FIFO), or (3) using any other method that’s
deemed to be fair and equitable. Every member firm must notify its clients
as to which method is used and how it will be implemented.
Note - For equity options, since exercise involves the purchase and sale of
the underlying stock, settlement of an exercised option occurs in two
business days (T + 2).
Deadlines for expiration - third friday of the expiration month expire at 11:59
pm est. Buyer must notify brokerage firm of their intent to exercise the
option by 5:30 pm est on that friday.
OCC - In an effort to eliminate the possibility of option sellers being unable
to fulfill their obligation and to protect options investors from counterparty
risk, the OCC guarantees all listed options. Essentially, the OCC acts as a
seller for every buyer and a buyer for every seller.
It’s the responsibility of a firm’s margin department to verify that a client
who writes an option is in a position to deliver securities (if short a call) or
cash (if short a put) if exercised against.
Covered Put The seller of a put is obligated to buy the underlying stock if
the buyer of the put exercised the contract. Therefore, for the put to be
covered, the seller must either be short the underlying stock or deposit
cash equal to the strike price. If an investor sells an XYZ put and does not
deposit sufficient cash, the position is considered an uncovered put.

Question:
A customer buyers puts at 56 at $ premium. Same time, customer buyers
200 shares of the same stock at $56 per share. At expiration, the customer
break even when the stock is selling at what share price?
$60
Two-part question. To determine break even, you need to understand when
you make or lose money on the option and separately when you make or
lose money on the underlying stock. A put option owner makes money
when the stock is worth less. When you add in the premium cost, the
investor cannot break even when the stock price drops. When the stock
price increases to $60, the investor makes $4 on the underlying stock
appreciation, and the put option expires worthless. The cost $4 though,
wiping out the $ stock gain.

Broker’s broker = municipal bond dealer

Stabilization bids - only be entered at or below the public offering prie of a
newly issued security
A 457(b) account can only have distributions withdrawn upon separation of
service but there is no age requirement
AML - learn more about PLI

Where would institutions wish to trade stocks for the cheapest transaction
costs and most privacy? 4th Market.
The Primary Market is the first issuance of shares to public buyers, the
Secondary Market is the trading after the IPO in the primary. The Third Market
is shares listed in exchange in the OTC market and the Fourth Market is
virtually the same as the Third Market but without an intermediary and
therefore more discretion.

Which of these are structured to have a portion of the principal to mature

before the entire balance has been repaid?
A term bond has a set time for the bond to mature at once. A serial bond as
intervals where portions of the principal are paid throughout. A balloon bond
also can have part of the principal paid before the maturity date, but the
majority is paid at maturity

The Federal Reserve Board (FRB) has functions including

They perform these as well as act as an agent of the U.S. Treasury, supervise
currency printing, handle compliance with federal regulations, and clearing
fund transfers.
It consists of 12 Federal Reserve Banks and hundreds of national and state
banks.
If an investor pays an issuer a set amount of money in a lump sum with a
guaranteed set sum at a later date, which type of investment are they
exercising? Fully Paid FAC
When a Face-Amount Certificate is paid for in a lump sum, it is known as a
fully paid FAC. They can also be paid in installments. The Unit Investment
Trusts (UITs) create a portfolio to meet the company’s objectives filled with
debt or equity securities.
A firm whose employee has been convicted of insider trading can be fined up
to three times the damages or $25 million (whichever is greater

When a complaint is received, the member firm often attempts to resolve the
dispute as efficiently as possible. Whenever disputes cannot be resolved, it
can be sent to FINRA’s director of arbitration which makes up the above listed
rulings.
When between a client and member, it would only go with agreement signed.
When between a member and an associated person, it must go to arbitration.
If the dispute is between members, the panel can be made up however both
parties can agree to.

Realized gain - is when you execute

Unrealized gain - is when you you don’t execute on the position

Coverdell ESA - 30th birthday

Money laundering

Customer confirmation - trade capacity either broker (agent) or dealer

(principal)

Hybrid Reit

If a public utility wants to raise capital so they can bury the power lines in a
new residential subdivision they will most likely issue which of the
following? Debenture
Answer Assume that a public utility is a corporate entity instead of a
municipal entity. General obligation bonds, revenue bonds, and special
purpose bonds are all types of municipal bonds. Debentures are unsecured
corporate bonds

An issuer has had its share unlisted from an exchange. Which of the
following is true? The shares may trade OTC. Shares that are unlisted from
an exchange may trade OTC.
The main purpose of a variable annuity is to provide tax-deferred earnings.
The earnings will be taxable as ordinary income upon withdrawal (or
annuitization). The early withdrawal penalty applies to withdrawals made
under age 59 ½

A broker-dealer shall preserve for a period of not less than ______ years
after the closing of any customer’s account any account cards or records
which relate to the terms and conditions with respect to the opening and
maintenance of the account.
Answer: A broker-dealer shall preserve for a period of not less than six
years after the closing of any customer’s account any account cards or
records which relate to the terms and conditions with respect to the
opening and maintenance of the account.

Lifecycle funds are also known as target date funds and become slightly
more conservative in their investment makeup the closer the fund gets to
its target year in the future.
50 Questions youtube video

Which type of securities offering allows new public shareholders to

purchase shares in a company? Secondary Offering
In a secondary offering, new public shareholders are given an opportunity
to purchase an ownership stake in the company.
● A secondary offering occurs when an investor sells their shares to the
public on the secondary market after an initial public offering (IPO).

Knowledge of capital Markets Ch. 1 Mometrix book

State regulators - NASAA - all 50 states have membership. Purpose is the
protection of investors from fraud. Enforces state laws concerning finance
and securities. Blue sky laws - state laws designed to protect investors
from fraud in securities transactions. BSL mandates that individuals or firms
selling new issuances register such offerings at the state level and also
supply key financial information related to the security and the issuer.
Fed reserve- overseeing nations money supply. Sebring as the ‘lender of
last resort’. Primary tool for influencing the economy is monetary policy to
maintain economic stability. The Fed's goal is to ensure inflation remains
relatively low.
Sipc - protect investors in case their brokerage firm goes out of business.
Each customer (not account) is protected up to $500k although no more
than 250k can be in cash. Joint and group accounts only count as one
customer. Does not cover investments not registered with the SEC.
Investors
1. Retail - regular people
2. Accredited - sophisticated. 1 mil net worth and income exceeding
$200 k or $300 k jointly. SEC considers general partner, director
executive officer for the company issuing the unregistered securities
3. Institutional - entities never an individual
Participants
Broker-dealers facilitate trading securities for customers.
Dealers (principals)- trade on their own behalf (own accounts)
Brokers (agents) - commission. Operate as go-betweens for other clients.

Introducing (firm) broker dealer - does not resin a client’s securities or cash,
but instead “introduces” the client to a clearing broker-dealer. Introducing
broker-dealers are usually small companies and also direct transactions
that they might not be able to execute to a clearing broker-dealers. Main
role is to attract new assets, not necessarily manage them.
Clearing BD - can operate independently of introducing BDs
Executing BD is a BD that accepts (if deemed ‘in good order’) and enters
orders for clients. Usually works with retail investors.
Prime Broker - specialized services that some BD offer to select groups of
clients (high net worth individuals). Specialized services include cash
management, securities lending, leveraged trade execution. The executing
BD and Prime broker work together to service clients. Since the PB
provides specialized services, they may facilitate the EB by clearing trades.

The Investments Advisers Act of 1940 provides additional regulation for

investment advisers.
IA - any person who, for compensation, engages in the business of
advising others, either directly or through publications or writings, as to the
value of securities or as to the advisability of investing in, purchasing, or
selling securities, or who, for compensation and as part of a regular
business, issues or promulgates analyses or reports concerning securities.
Keynesian economic theory - (fiscal policy) - job of the federal government
to keep the economy stable by spending tax money on gov’t projects
designed to stimulate sectors of the economy
Monetarist theory - (monetary policy) - gov’t should stay out of the market.
Monetarists believe in controlling the supply of money that flows into the
economy while allowing the rest of the market to fix itself.
International Economic Factor.
Balance of Payment (BOP) - more comprehensive than balance of trade.
BOP includes intangible exchanges such as financial transactions in the
calculation. Keeps track of all the inflows and outflows made for that
country in a given period of time.
GDP: Measure of the finished goods and services (both public and private)
that are produced inside of a country in one year. Includes company’s net
exports, business spending, and gov’t spending. Provides an overall picture
of a country’s financial health as well as it’s productivity. Comparing yearly
GDP allows us to see if we expanded or contracted from one year to
another. Measures the production of everyone inside of one country’s
borders regardless of their nationality.
GNP - Measure of what nation’s citizens produced regardless of the
physical location.

How prevailing market interest rates affect exchange rates:

Exchange rates - high interest rate in one country will attract lenders to lend
money there, thus increasing foreign investment and increasing the
exchange rate.
2 ways exchange rates affect securities markets.
1. Changes in exchange rates directly affect the value of securities for
foreign companies
2. Changes in exchange rate affect the cost for domestic businesses to
do business abroad.
Offerings: Role of participants
Investment banker (underwriter) - any institutions which help issuers of
securities to raise money for themselves. Corporations can do this through
Primary Market (new market) or private placement.
Primary market (public) - companies hire an investment bank to serve as
the underwriter for the transaction to provide expertise in the distribution of
securities and to ensure they have the most competitive price available.
Underwriters set the initial price and generate interest transactions to
appropriately size the new issue.
In a private placement all investors are qualified investors such as banks,
insurance companies, or large, sophisticated financial institutions. Can
avoid many of the regulatory filings.
Municipality - seeks a municipal advisor who provides guidance regarding
the types of securities, structures, terms which may be ideal for the entity.
The next step is to find an underwriter, someone willing to bring the
securities to the public on the issuer’s behalf. Because of the large sums of
money and financial risk involved, an underwriter syndicate (group or firm
put together in order to lower their individual risk and investment) is formed.
Members of the syndicate must sign a syndicate agreement as part of the
syndicate contract containing official terms: how much each firm is
obligated to underwrite, how long it lasts, etc. An underwriter generally
purchases a new issue from the corporation and then attempts to resell
issues to investors.
Types of offerings: Public vs Private Offerings
Private offering - are sold to a very specific group, and the issuers may not
solicit the investing public with their offering. Greater risk due to less
regulation.
Public Offerings - must submit the registration requirements outlined by
Securities Act of 1933
IPO - securities offerings that have undergone the underwriting process
and obtained registration. The proceeds of the IPO go to the issuing
company used to expand operations through the raising of capital.
Secondary Offering - all of the proceeds go to the stockholders.
Shelf Offering - characteristics of initial offerings but occurs after the IPO
but chose not to sell all of the shares in the IPO. SEC registration valid for 2
years and may sell unsold shares for up to three years. Proceeds go to the
issuing company.
Advantages of shelf offering:
1. A shelf offering provides an issuing company with tight control over the
process of offering new shares. It allows the company to control the
shares' price by allowing the investment to manage the supply of its
security in the market.
2. A shelf offering also enables a company to save on the cost of
registration with the SEC by not having to re-register each time it wants
to release new shares.
Follow-on public offering (FPO) (secondary offering) - can be dilutive which
increases the total number of shares outstanding for that company. Thus
the value per share is diluted. Or it can be non dilutive which does not
increase the shares outstanding.
Methods of distribution:
Firm commitment - requires the underwriter to purchase all of the issuer’s
securities.
Best efforts commitment - underwriters purchase only enough shares to
meet demand
Mini-Maxi commitment - minimum number of shares to be sold or the
underwriter has the option to cancel the entire offer.
All or none commitment
Standby commitment - underwriter agrees to purchase securities remaining
after existing shareholders have bought as many shares as they want.

Shelf Registration - company fulfills the registration requirements for

securities substantially ahead of the securities issuance, up to three years.
If market conditions are not favorable to the issuer for securities at a given
time, they can invoke shelf registration and can issue when conditions
improve. SEC Rule 415.

Types of Purpose of Offering Documents and Delivery requirements

Prospectus - ensure investors have access and are provided with, prior to
the purchase of a security, a minimal level of information that is necessary
for the investment decision-making process.
Two types of prospectuses:
Preliminary - Red Herrings - Declaring they are preliminary and may be
subject to change.
Final - investment objectives for MF, strategy risks, fees and expenses and
past performance. Format is the same to enable investors to easily
compare different investments.
Statement of additional information (optional) - history of the company or a
detailed financial profile must be provided if investors request.
Official Statement - Similar to a prospectus but for municipal bonds must be
signed by an officer of the issuer, and they must contain all the information
prospective investors will need to evaluate the bond.

Regulatory filing requirements and exemptions - due to either strong credit

standing of the issuer or to authority belonging to a gov’t regulatory agency.
Exempt securities:
Securities issued by federal gov’t or its agencies
Municipal bonds
Securities from banks, savings institutions and credit unions
Public utility securities
Securities issued by nonprofit, educational or religious institutions
Fixed annuities and insurance policies
Notes, bills of exchanges, bankers’ acceptances and commercial paper
with an initial maturity of at most 270 days.

Understanding Products and their Risks Ch. 2 Mometrix

Equity Securities - common and preferred stock
Common stock - the role of common shareholder differs substantially
based on the size of the company. For smaller companies - may participate
in the management of the business. For large companies - i.e. publicly
traded corporations. Shareholders elect BOD to act on their behalf through
a voting process. Common shares for publicly traded corporations are
available for sale and purchase on stock exchanges as the NYSE and
NASDAQ.
Types of common stock:
Authorized stock - maximum number of shares that a company has been
approved to sell on the market. May hold shares back for sale at a later
date or for other purposes such as employee stock options.
Issued Stock - is the number of shares that have been sold and held even if
they have been repurchased and held
Outstanding stock - the number of shares that are currently held by
investors and tradable in the market.
Treasury stock - stock that has been bought back from the market and held
by the company. Because treasury stock represents the number of shares
repurchased from the open market, it reduces shareholders' equity by the
amount paid for the stock Dont’ have voting rights and dividend rights.
Stock buybacks - usually seen as an indicator of a company’s belief in the
strength of its value and are often followed by an increase in share value,
the earnings per share should go up, since the number of shares
outstanding that will share in company earnings has been reduced.
Preferred stock - some corporations issue a limited number of preferred
stock. Do not have voting rights. Usually comes with a fixed dividend paid
on a regular basis, so that even if common stock owners don’t receive
dividends preferred stock holders will. Owners can depend on regular
income. Because of these differences, the prices of preferred stocks tend
to rise and fall with relation to interest rates (like bonds), and not with other
factors that affect the price of the common stock.
Types of Preferred stock:
Adjust-rate preferred stock - dividend payment change periodically.
Payments are altered according to a benchmark, usually the risk-free rate
on U.S. treasury securities. Still more stable than preferred stock with a
fixed rate.
Cumulative preferred stock - (areared) gives the stockholder the right to
missed dividend payments from the company. If the company misses a
dividend payment to owners of cumulative preferred stock they must make
up the payment at a later date, as it stays on the books until the debt is
paid.
Straight or noncumulative preferred stock - do not need to make up for
missed payments.
Participating preferred stock - entitles the stockholders to a portion of the
profits that remain after dividends and interest have been paid by the
corporation. Allows the stockholder to participate in the profits. Also have
special rights if the company liquidates,
Convertible preferred stock - consists of shares that can be converted into
common stock if the owner chooses. The conversion price is preset.
Callable preferred stock - company reserves the right to buy back in the
future date at a specified price. Will pay a premium over the stated price to
make up for loss of future dividends. Ordinarily covered by a sinking fund
provision. In the same way corporations can repurchase bonds with a
sinking fund the same can be done for their purchasing of preferred stock.
Rights -
Preemptive right - to maintain their current percentage of share ownership
in case the corporation decides to issue more stock. Gives the existing
shareholders first crack at buying the shares before the company offers the
shares to the general market usually below market price.
Common stockholders - varying level of voting powers.
Statutory voting requires the stockholder to split up his votes evenly
among the issuers being voted on.
Cumulative voting - does not require stockholders to split up their votes
evenly.
Proxies - agents legally enabled to vote on the stockholders behalf.
Warrants (sweeteners)- Longer term than rights. are the rights to buy a
stock at a specified price, which is almost always higher than the current
price when the warrant was issued. If the stock goes higher than the
warrant price it becomes very valuable. The owner can exercise the
warrant or may sell the warrant. Usually good for 5 years.
ADRs - financial instruments created so that stocks of foreign companies
can be bought and sold on stock markets in the US. Each ADR represents
a certain number of shares of a foreign company. Bought and sold just like
common stock, ADR owners have the rights as other stockholders,
including voting and receiving dividends, which are paid in dollars. An ADR
is technically owned by a bank which handles the ADR. Can fluctuate due
to currency rates.
Rule 144 - SEC rule governing the sale of restricted, unregistered and
control securities. (control securities refer to securities that effectively give
the owner control over the entity more than 10% ownership officers,
directors or other insiders). 5 requirements which must be met to be
permissible sold.
1. Specific holding period (restricted securities) must pass 6-12 months
once fully paid. For a company that does not have to make filings with
the SEC, the holding period is one year. No margins. No holding period
for control securities.
2. ‘Adequate’ amount of information concerning the securities past
performance has been publicly disclosed
3. If a selling party is an affiliate of a company, the amount of securities to
be sold is no more than 1% either of the outstanding shares or the
average weekly trading volume over the previous four weeks.
4. A seller desiring to sell over 5,000 shares or $50,000 must file a
Notice of Sale form with the SEC prior to making the sale. Provides a
90 days period during which the securities may be sold.
5. Other requirements for ordinary trades have been fulfilled. In
particular, brokers cannot solicit buy orders, and they are not allowed to
receive commissions in excess of their normal rates.
Debt Instruments (bonds) - interest rates and the yield curve
Normal Yield Curve - one that slopes from left to right. Interest rate at which
a bond is available increases along with the duration. I.e. 30 year bond
yield > 1 year bond
Flat Yield Curve - One that does not have a distinct slope. The interest rate
for bonds of all durations are about the same. I.e. 30 year bond 5% and 1
year bond 5%
Inverted Yield Curve - one that slopes downward from left to right. Interest
rate at which a bond is available decreases as bond duration increases. I.e.
30 year bond 4% and 1 year bond 5%
Humped Yield Curve - slopes upward and then downward again. Interest
rates for short-and long-term are lower than those of medium-term bonds.
30 year and 1 year bond 4% and 2-4 year bond 5%
The yield curve provides insights into the state of the debt market in the
US. When investors expect economic growth and rising interest rates they
have less incentive to buy long-term debt securities - results in a normal
yield curve. Contrary, if investors expect interest rates to fall in the future,
the demand for long-term bonds is higher since investors will want to lock
in their interest rates before it drops. - results in an inverted yield curve.

Treasury Securities:
T-bill - short-term obligations issued by US Treasury dept. Like zero-
coupon bonds they don’t pay interest, but are sold at discount and the
buyer collects face value at maturity. Proceeds are T-bills are one of the
main ways of funding operations of the fed gov’t. Matures 4,13,26, and 52
weeks. Taxed only at the federal level.
T-Notes - medium-term obligations. Pay interest semi-annual. Proceeds
from T-notes are used to fund the intermediate operations of the fed gov’t.
Mature 1-10 years. May also be refunded at maturity, with a new note
instead of a payment. T-notes are quoted as a percentage of pay in
increments of 1/32. Gains are taxed only at federal level
T-Bonds - long-term obligation. Proceeds help fund long-term operations of
the fed gov’t. Pay interest every 6 months. 10-30 years maturities.
Treasury Receipts - Broker firms and other financial institutions may
purchase t-notes and t-bonds and put them in trust. They then sell the
receipts, or rights to individual interest or principal payments to investors.
Not backed by the US gov’t.
STRIPS - separate trading of registered interest and principal securities.
Like t-receipts except that since the govt has authorized the securities into
separate components, STRIPS are backed by the U.S. Gov’t.
TIPS - Treasury Inflation Protected Securities - created to attract investors
to offer protection against rising inflation. Interest paid out every 6 months
is adjusted to reflect the CPI. When inflation is rising TIPS rises, if the CPI
were to lower TIPS interest payments lower. Because of this built-in
protection TIPS are sold at lower interest rates than other gov’t securities.
Any increase in interest paid due to the adjustment is taxable in the year
the adjustment is received.
Municipal Securities:
General Obligation (GO) bond - Issued to pay for improvement that benefits
the whole community but doesn't produce income. Known as ‘full faith and
credit issues’ because they are repaid from tax revenues raised by the
issuing government entity.
Revenue Bonds - to finance a project and facilities that are expected to
generate enough revenue to pay bondholders back without resorting to tax
money.
Double-barreled bonds - revenue bonds that also have the backing of the
taxing authority. They are considered GO bonds, even though they depend
primarily on revenue generated from the project for repayment. Essentially,
debt service on the bonds will be paid by a combination of tax dollars and
revenue dolls from the project being constructed.

Muni bonds often are sold by an issuer to an underwriter, who then sells
them to the public. Two primary ways in which the underwriter might do this
1. Competitive Sale - issuer presents bonds for sale at a particular price
(along with terms of its issuance) and multiple underwriters may
competitively submit bids to acquire the bonds
2. Negotiated Sale - issuer first selecting an underwriter and then
negotiating a sale price for the underwriter based on his purposes of
selling
Special Tax bonds - are muni bonds where bondholders are repaid through
a particular tax levied specifically for their repayment. I.e. For example, a
special tax may be levied on the sale of alcohol or tobacco to help fund a new cancer
research facility. A municipal bond backed by revenue generated by increasing
a particular tax is referred to as a special tax bond
Special Assessment Bonds - muni bonds where bondholders are repaid
through the taxation of the community which received the benefits. T hose
who will benefit directly from the property improvement are levied an
additional tax to help with the interest payments on the bond issue.
An example of a project for which a special assessment bond may be issued
is the building of a new freeway. People who live in nearby areas of the
proposed freeway would be subject to an increased property tax based on
their likelihood of using the new road.
Moral Obligation Bond - the municipality adds a moral pledge to repay the
bondholders, with this pledge backed by a reserve fund established in case of
a default. Not legally binding.

Numerous ways municipalities fund immediate projects with short-term (one

year or less) debt securities. : Anticipation Notes. RAN, TAN, BAN, TRAN,
GAN, Tax-exempt commercial paper

Asset Backed Securities - securities that are backed with some sort of asset
as collateral. alternative to corporate bonds.

Collateralized mortgage obligation - mortgage backed securities, issued by

private financial institutions and represents bundles of private mortgages.
CMOs are usually secured with financial instruments from Ginnie Mae,
Freddie Mac, and Fannie Mae so are rated AAA.
-Tranches - Mortgages are bundled by maturity dates into groups. In
a standard CMO, all tranches receive interest payments every month, but
only one tranche at a time receives principal payments.
- Very safe because they’re tied to mortgages guaranteed by the fed
gov’t, although they are not backed themselves by the gov’t. Yield is higher
than gov’t securities, payments received monthly.
- Very liquid and easy to sell.
- Prepayment is a risk. All investors must sign a suitability statement,
Collateralized Debt obligations - CDO - similar to CMOs, also being
subdivided into tranches bearing different risks and maturities. Main
difference: they are backed by debts other than mortgages, such as loans
and bonds.

Corporate Bonds - debt instrument, no ownership. Issued by:

Private companies, Fed Gov’t, by state and local gov’t (municipalities) to
raise money for various projects or operating expenses. The value
fluctuates with interest rates, and not with the success of the company or
the stock market. Senior securities due to them having priority over equity
securities. Classified based on maturities:
Short-term - 3 years or less
Medium-term - 4-10 years
Long-term - 10+ years
Long term bonds are riskier but are often accompanied by higher interest
rates.
Corporate bonds are issued by corporations. Do not have guarantees, and
thus generally have higher interest rates than gov’t bonds. Maturity value of
a bond represents it’s par value, normally $1,000.
Coupon value - amount of interest the bondholder is entitled to receive for
each interest payment period.
Yield - often of a bond is different from the coupon interest rate depending
on whether the bond sold at a discount or a premium. Yield represents the
actual rate of interest that the bondholder earns based on what they paid
for the bond which is not equal to its par value.

High Yield Bonds - (junk bonds) - higher interest rate. Since the riskiness of
the bond is universally related to the interest rates. Lower credit rating than
usual corporate bonds (below ‘BBB’ S&P rating and below ‘Baa’ Moody’s.
Speculative rating.
Secured Bonds - bonds that are backed by collateral. Such as:
Mortgage bonds - secured by a mortgage on property owned by the issuer
Equipment Trusts - issued by transportation companies.
Collateral trusts - backed by financial assets
Guaranteed Bonds - backed by the promise of a firm besides the issuer
usually a parent company.
Convertible Bonds - bonds that can be converted into common stock.
Makes them attractive to investors due to the combined feature of financial
instruments. If the stock goes up the holder of a convertible bond can
choose to convert or sell the bond on the market. Some convertible bonds
give the issuer the right to force conversions.
Parity - occurs when a convertible bond is trading on the market for the
same price as the stocks to which it can be converted.
Conversion Ratio - gives the number of shares a convertible bond may be
converted into. CR = par value of the bond/conversion price of the stock.
Parity Price = (market price of stock) X (conversion ratio)
Bond Indentures - A contract that discloses the interest rate, frequency of
interest payments, maturity date, characteristics of the bond (convertible,
callability) and the principal amount need to be disclosed
Flat Trade (breaking even) for Bonds - when a bond is traded to another
investor without accrued interest being included in the price. Happens
because no interest actually generated or the bond is in default.
Term Bonds and Serial Bonds
Term bonds - same issuance which have the same maturity date
Serial Bonds - mature at different intervals
Bond Ratings - Credit rating for bonds S&P, Moody’s, and Fitch. Assign
ratings based on their evaluation of creditworthiness of the bond issuer.
Investment grade - Are those rated equal or above BBB or Baa and
represent a low risk of defaulting. I.e. AAA,AA,A, BBB
speculative grade - Anything lower is considered junk bonds because they
have low credit quality.
Call provisions on bonds - (will call if interest rates are lower than the bond
rate) arrangements on bonds stating the issuer has the right to purchase
back and retire the bond. Provisions usually have a timeframe when the
call can occur, including the details on the price and accrued interest paid
to the bondholders.
Bond refunding - when an issuer sells a new bond issue in order to raise
money to redeem a previous bond issue. Done to take advantage of lower
interest rates. Refunding becomes more likely as bonds get closer to the
maturity date. Accomplished through the use of a sinking fund.
Pre-refunding - is when issuers sell a new set of bonds at a lower interest
rate but don't call the previous issue of bonds. The proceeds from the sales
are placed in escrow and used to buy gov’t securities, and the interest
received is used to call the previous issue at the first call date. Highest
credit rating.
Bond Liquidity - Following conditions affect bond liquidity:
How well known or widely-owned they are
Bond rating
How mature the bond is
How high the interest rate is
Whether it is trading at or above or below par
Whether it has a call feature

Other debt instruments:

Commercial paper - short-term unsecured promissory notes issued by
corporations to cover cash shortages such as accounts receivables or
seasonal business fluctuations. Mature within 90 days but can range from
1-270 days.
CDs - financial instruments offered by banks and usually have fixed interest
rates.
Brokered CDs - not purchased from the bank but by a brokerage firm.
Generally higher price
Jumbo CDs - CDs with minimum face value of $100,000.
Banker’s acceptance (BA) - commonly used in international transactions.
Corporate equivalent to a post-dated check and can have limits of 1-270
days. Sell at a discount and mature at face value. Sold in the money
market.
Auction-rate securities (ARSs) - form of debt security where the interest
rate is determined by Dutch auction. (reverse auction where the auctioneer
begins with a high price and keeps lowering it to some minimum price). The
first bidder wins. These debt securities have long-term maturity, but in
practice are treated as short-term, since the interest rate is periodically
(monthly) reset through another Dutch auction.
Options
Right to buy - Call option Right to sell - Put option
Spread - for a stock option is the difference between the strike price (the
price at which one can exercise the right to engage in the transaction) and
the current market value of the stock.
In the money
Out of the money - exercising the option would be a loss for the investor
Types of options: Puts and Calls
Puts- The person or entity holding the option has the right to sell a specific
security at some point in the future
Calls - The person or entity holding the option has the right to buy a
specific security at some point in the future
Buyer of a Put option is in a short position to the underlying asset but in a
long position with respect to the option contract itself. The value of a put
option increases as the price of the underlying asset decreases.
Position limits and Exercise Limits
Can have an investor hold a long position on one option contract and then
hold a short position on a different option contract of the same asset. To
limit the ways these can be exploited, a position limit exists.
Exercise limits - restrictions placed upon the number of option contracts an
investor can exercise for a given security in a given period of time. I.e. an
investor (probably an institutional one) can be forbidden from exercising
6,000 option contracts on a particular share of stock in the span of 5 days.
However, the investor is not limited to the total options that they can
exercise - only on the total number that they can exercise for a particular
security.
Option assignments - notices received by the writers (sellers) of options,
informing the writer that the buyer has not exercised their option.
Settlement date for options is one business day after the date when the
option is exercised. T+1
Option Disclosure Document (ODD) - investors required to receive the
ODD prior to first transaction.
Packaged Products: Investment Companies -
Types of investment companies - 1. Face-Amount Certificate 2. UIT 3.
Management investment company A. Closed-end B. Open-end (MF)
Closed-end Funds - Called closed-end because they have a fixed number
of shares. Commonly known as publicly traded funds and have a fixed
number of shares that are available to the public issued at the IPO price.
Then the shares trade on the secondary market. May also issue preferred
stock and sell bonds. Only whole shares can be bought not at fractional.
Market determines the price.
Open-end funds (MF) - POP = NAV/outstanding shares + sales charge..
Do not issue a fixed number of shares. Register with the SEC as an open
offering, which gives them the right to raise more investment capital by
issuing and selling shares continuously. Do not trade on the secondary
market and can be bought (redeemed) from the investment company.
Shareholders sell back to the investment company and not on the
secondary market.
UIT - issue shares entitling the owner to a portion of the investment
portfolio owned by the trust. Cannot be sold on the market, but only bought
back or redeemed. The trust is obligated to purchase them when an
investor wants to sell.
UIT’s don’t have a BOD and do not have investment managers or advisers
(thus no fees for them) Usually invest in gov’t bonds or in MFs.
UITs were created to be long-term investments, similar to MFs. Key
difference is UITs have termination or maturity date. On the maturity date
all securities owned by the trust are liquidated and the NAV is paid out to
the shareholders.

Variable Contracts/Annuities
Life insurance companies sell annuities. Purchasers of annuities are buying
a regular payment from the company, guaranteed for life. This guarantee
makes an annuity different from all other investments. Purchasers make a
one-time lump sum payment or a series of regular payments, and later they
are entitled to a regular withdrawal of income payments.
Riders - provisions built into the policy but purchased as a separate entity,
entitling the annuitant to additional benefits other than the usual coverage.
I.e. Accelerated death benefit premits the policyholder to receive some of
the coverage before death, such as in the case of severe illness.
Fixed annuity - guarantees a specific rate of return. Investors premiums are
deposited into the insurance company’s general accounts. Fixed annuities
are not considered securities, because all of the risk is on the insurance
company, not the buyer
Variable annuities - Considered securities because the purchaser is taking
the risk. Investors' monies are deposited into an account separate from the
insurance company’s general account and the company invests these
funds. Variable annuities guarantee payment for life, but don’t guarantee
the amount of the payments or the rate of return on the investment.
MF:
No-load funds - is when Investors purchase the MF from the investment
company directly. This will prevent fees that would go to reimburse
underwriters and dealers who market the fund to the investors. 12b-1 fee of
.25% or less is classified as a no-load fund.
12b-1 fees - fees paid annually on MF, ordinarily between .25-1% of the
funds net assets, to cover marketing and distribution costs for the fund.
Marketing Load Funds
Load funds - may market and distribute their shares through one of two
ways:
Utilizing an underwriter only, who sells the shares to the investing public
Utilizing an underwriter who sells shares to the brokers and dealers, with
the brokers and dealers then selling the shares to the investing public.

Front-end Loads - Class A Shares most popular. Cannot exceed 8.5%. Pay
for the charges upfront. Not all of the payment goes to the fund.
Back-end Loads - Class B. Charged at the back end known as CDSC.
Every year you hold onto it the charges get lower. At the end around 4-5
years it becomes 0% and converts to Class A.
Calculating the Load - If the investors knows the POP and the NAV per
share, then they can subtract the NAV from the POP to find the load in
dollars. Then divide that figure by the POP to arrive at the load expressed
as a percentage.
POP = NAV + Sales charge
Sales Charge = POP - NAV
Sales charge/POP = Sales charge %
Class C Shares - most 12b-1 fees. Asses an up-front sales charge,
usually1% plus 12b-1 fee or level load usually equal to 1% of the fund’s
assets. Good for the short term.
NAV - is the value of one share of a MF. NAV is always changing and must
be calculated once every day at the end of trading. The fund’s total
liabilities are subtracted from the fund’s total assets, which leaves the NAV
of the fund. The divided by the total number of shares outstanding, which
gives the NAV per share.

Fee-based accounts differ from other accounts - such as commission

based accounts. Since fee-based accounts compensate the advisor based
on a percentage of the client’s assets, rather than as a commission for
transactions facilitated.
Annuity fees and expenses
Surrender charges - are fees based upon an undue cancellation of some
account or policy, occurring most often with life insurance policies. The fee
is meant to cover the cost for keeping the account on the books, and
therefore is usually waived for individuals who notify the insurance
company of the cancellation sufficiently in advance. In the case of mutual
funds, short-term surrender charges can apply if a buyer sells the investment
within 30, 60 or 90 day
Mortality and expense charges - fees included in variable annuities. When
a life insurance company provides an annuity to some customers, the
company calculates risks such as the life expectancy of the annuitant and
charges a fee based upon those risks.
Sales charges and expenses for MF:
Front-end sales charge - Class A
Contingent Sales Deferred Sales Charge (CDS) - Class B - declining
schedule as a percentage of assets redeemed.
Asset Based Charges - MF also charges an amount against invested
assets each year that includes charges related to management fees,
marketing, and distribution fees (12b-1 fees) fees to fund’s investment
adviser, transfer agent, and custodian, and any other operating expenses.
Sales Charge structure within a variable life insurance contract - life
insurance companies typically deduct both sales charge and a premium
expense charge from contributions to a variable life insurance policy. Sales
charge is typically 3-5%. Additionally, the life insurance company deducts a
portion of the premium deposits in order to cover certain
Coverdell Education Savings Account - Created by congress to enable
parents to help fund their children’s future college education. Maximum
contribution is $2,000 per year and anyone is allowed to contribute.
Contributions must cease once the child is 18. Earnings are not taxed if
directly applied to beneficiary’s educational expenses. Income limitations
are $95,000 per year $190K for couples can’t give the full $2,000 and
anyone making over $110K per year or $220K for couples is now allowed
to participate.The money accumulates on a tax-deferred basis and
withdrawals are tax-free if they’re used to pay for the beneficiary’s
expenses at an eligible educational institution. Unlike state sponsored
529 plans, investment options in Coverdell accounts are self-directed. If
the money is not used by the beneficiary’s 30th birthday and is withdrawn, it is
subject to ordinary income taxes as well as a 10% penalty.

529 College Savings Plan Accounts - The parent or other person opening and
contributing to the account is considered the account owner, while the person
whom the plan will benefit is called the beneficiary. Taxes are deferred on
money invested in 529 plans, generally not taxed in most states, and not
taxed by the Fed gov’t when withdrawn if applied to qualified educational
expenses.
Two kinds of 529 accounts
Prepaid tuition plan - allows parents to purchase a certain number of units of
tuition, ‘locking in’ the units, which will be used in the future, at today’s rates.
Thereby protecting against rises in tuition over years. In-state requirements.
529 College Savings plan - Plans vary greatly state by state, but one thing
they have in common is that, because contributions to 529 plans are gifts,
there are certain restrictions on contributions. 529 plans generally have
lifetime contribution limits rather than annual limits. Tax deferred. No gov’t tax.
Contributions are made after tax-dollars, but any earnings grow on a tax
deferred basis. Earnings on 529 not subject to federal income tax when used
on higher education expenses. Contribution limits - may front-load with an
initial gift of $75,000 and tax free of $15,000 a year
Local Government Investment Pool (LGIPs) - allowing local gov’t entities pool
their public funds to invest and follow specific guidelines and allow for fund
liquidity. LGIPs have very conservative investments.

ABLE accounts - similar to 529 contributions and tax rules. Contributions are
subject to gift tax constraints. Contributions are not tax deductible but
earnings are tax-deferred and can be withdrawn tax-free for qualified disability
related expenses. ABLE accounts are intended to fund expenses pertaining
to disability rather than only education.
DPPs - flow-through investments. The profits, losses, and income flow
through the DPP and to the investors directly. The DPP pays no taxes
themselves, the investors do. DPP’s are organized as limited partnerships.
LP’s are generally involved in real estate, oil and gas, or equipment leasing.
LP’s put up the money, but don’t manage the business. Illiquid - very difficult
to sell.
Types of DPPs
LP - must have one GP and one LP.
Real-estate partnerships - 1.Public housing partnerships - invest in
construction of low-income and retirement housing. 2. Existing properties
partnerships - gain rental income 3. New construction partnerships - invest in
properties to be built aiming to make profit in selling the building. 4. Raw land
partnerships - invest in mere land. Aim is to make money through capital
gains as the value of land increases.
Equipment leasing partnerships - seek to make profit by purchasing and
leasing various assets.
Oil and gas partnership:
Exploratory oil and gas DPP - search new areas to find new oil and drill.
‘Wildcatting’ is the riskiest.
Developmental oil and gas DPP - search for new reserves in areas near wells
that are already extracting oil and gas.
Income oil and gas DPP - purchase wells that already exist
Combination oil and gas DPP - any assortment of the previous 3.

Tenants in Common (TIC) - arrangement where multiple people share

ownership of a given property. Ownership does not need to be equal
percentages. Not easily liquidated.

REITs - specialized tax investment in real estate that trade on the stock
market, and which have special tax advantages for investors. By being treated
as a trust rather than a corporation for tax purposes, investors avoid the
double-taxation that generally occurs when investors receive dividends from
corporations. I.e. Corporations paid income tax and the investor then pays
income tax on the dividend distribution. To qualify for a REIT and thus to avoid
being taxed as a corp:
Derive 75% of its income from real estate-related activity
Hold at least 75% of its assets in real-estate, gov’t securities or cash
Distribute 90% of its profits to shareholders.
REIT is organized as a trust, but it is bought and sold like common stock on
an exchange. Shares are sold to raise capital for large real estate projects,
usually commercial.
REITs are not MFs but they pool investor’s money and distribute shares.
Unlike MF in that they have a finite number of shares. REITs are issued at
their IPO price, they can also be traded on the secondary market; investors
can purchase directly from the issuer too. REITs traded on the secondary
market share will not be priced at their NAV but according to market dynamics
and sentiments.
Types of REITs
Private REITs- not registered with the SEC. Limited audience and usually
institutional investors
Registered REIT, non-listed - Registered with the SEC however, not publicly
traded on an exchange
Listed REITs - Registered with the SEC and listed on a national stock
exchange.
REITs classifications
Equity REITs - purchase real-estate equity, owning real estate and making
profits off of rent revenue or capital gains when sold
Mortgage REITs - purchase various debt securities related to real estate, such
as construction loans and mortgages. The income from mortgage REITs is
therefore based on interest
Hybrid REITs - combination of the two. Investing in both equity and debt
securities related to real estate.
Tax Treatments of REITs - Dividends from REITs are taxed at ordinary
income. Certain dividends are qualified dividends and are eligible to be taxed
at capital gains rates.
Hedge Funds - private investment funds that are legally restricted to very
wealthy individuals, $1 mil net worth. Hedge Funds are like MFs for the super
wealthy. Unregulated because private. Very risky and speculative, using
purchases on margin, short sales, and other higher-risk investment strategies
to make profit. Not liquid - often keeping investors money for at least one year.
They are arranged as LPs for tax purposes, so they qualify for flow-through
entities. The manager of the fund is the GP and investors are LPs.
Private Equity - any equity which isn’t quoted on any public exchanges.
Private investments usually involve funding a private company to develop new
technologies, or simply to be more successful.
Exchange Traded Products: (ETPS)
ETFs - shares of portfolios that are issued by investment companies, and then
traded on exchanges like an individual stock. They are similar to MF in that
the value of the security is based upon the underlying holdings, but unlike MF,
once the shares are offered no more shares are created like a closed end
fund. The underlying portfolios can be varied and far-reaching. An index fund
is a portfolio that is based on a specific index and whose performance is
designed to track the performance of the index. The index fund allows
investors to invest in a specific index without having to purchase all of the
securities that make up the index. Benefits the investor who are not interested
in the day-to-day fluctuations of the market, but who are interested in the long-
term performance of the index.
Differences between ETFs and Hedge Funds: ETFs are valued throughout the
day just as any other security would be and typically have very low fees as
there is no active management. HF is the opposite. HF seeks unconventional
sources of outperformance by picking individual stocks or market movements
to exploit. HF are valued less frequently unlike ETFs that are valued
throughout the day. HF’s offer less liquidity as investments may be subject to
long restricted periods where the investor cannot access funds.
ETNs - hybrid securities mixture of bonds and ETFs. They are traded on an
exchange but have maturity dates like bonds. With ETNs the repayment of
principal at the maturity date is modified according to the day’s market index
factor. Repayment is reduced by investing fees. The value of an ETN is not
simply based on the market index but depends on the creditworthiness of the
debtor company. ETNs are unsecured debt instruments and do not have
coupon payments.
Strategies for mitigation of risks:
Diversification for portfolios or accounts is the possession of several varied
types of securities
Asset Allocation - a part of diversification - one takes an investors portfolio
and divides it up into several categories such as stock, cash, and bonds.
Strategic Asset Allocation - seeks to structure a portfolio for long-term
investment (having fewer stocks for older investors)
Tactical Asset Allocation - seeks to structure portfolios in response to
particular market conditions
Portfolio rebalancing - maintains the balance of allocation based on the
investors goal. I.e. sell gains from the highly performing securities and buy
more of the underperforming securities to maintain allocation.
Understanding Trading, Customer Accounts, and Prohibited Activities
SLoBS (Sell Limit, Buy Stop) over BLiSS (Buy Limit, Sell Stop)
SLoBS - placed above market price - expecting the price to go up (remember
it like the Ask is always higher than the bid)
BLiSS - placed below market price - expecting the price to go up (remember
it like the Bid is always lower than the Ask)

Market Order - requires an investor's order will be carried out as soon as the
investor makes the order. Guarantees the order will be executed
Stop Order - the order is not executed until either a lower or upper trigger
price is reached. At that point, the order is executed at the next market price.
Limit order - sets a minimum or maximum price at which an investor wants an
order executed.
Buy Limit Order -will only be executed if the price is at or below the maximum
limit. If the price exceeds the limit it will not be executed. (BL = place below
the market price - expecting the price to go down).
Sell Limit Order - when they want to sell a minimum price that they will accept
for a security. It will only be executed at or above the specified minimum price
(SL = place above the market price).

Stop Orders and Stop Loss - used by customers who wish to avoid an
excessive loss. Requires an investor to set a stop price. The stop order only
becomes executable once the stock price has gone through the stop price.
The stop price acts as a trigger - once a stock reaches the stop price, the stop
order is executed. Once triggered it becomes a market order. Guaranteed
after it hits the trigger.

Trade Capacity -
When a BD works in an agent capacity for a customer they are acting as a
broker - they get commission
When a BD works in a principal capacity for a customer they are buying and
selling from their own account - they charge a markup/down.

Selling short - When an investor sells short - they do not own it, and must
borrow the security. They’re hoping the value goes down so they can buy the
security at a lower price than at the borrowing price and return the borrowed
security to the lending broker.
Holding long - traditional investing (buying and holding an asset in hopes of
capital appreciation)
Time horizon - amount of time remaining before an investor expects to need
to begin liquidating securities.

Long and short, naked and covered

Uncovered/naked and covered usually refer to options positions.
Naked position - when an investor does not own the security and borrows.
Much riskier than covered positions. The value of the underlying security
theoretically may increase infinitely, and since the investor doesn’t own the
security, they must buy it to meet the call, and they’re at the mercy of the
market as to the price.
Covered call - the safest option to sell since you already own the underlying
security. If the value of the underlying security increases and the position is
called, the customer only has to sell a security they already own.

Bearish investors - may take steps to prepare for a bear market, such as
selling positions short and selling their long positions to hold cash. May also
buy assets that are negatively correlated to the market they believe will
decline or if they wish not to sell their long positions, they may also use
options to hedge their long positions to protect against loss. Bearish investors
on equities will move funds to bonds since the two share a negative
correlation.
Bullish investors - tend to hold current investments, hoping they will increase.
Bullish investors write options, but with the intent on magnifying gains instead
of hedging losses. Tend not to hold cash as they believe it can be best put to
work in the market.
Investment returns -
Dividend - a portion of the company’s profit that is returned to shareholders.
Can be a form of cash or stock. When dividends are paid in cash they are
considered income and taxes must be paid on them during the tax year
received. Stock dividends are not considered income and not taxable until
they’re sold.
Interest - is the fee charged for the use of another’s money.
Tax-exempt interest - not subject to federal income tax. Muni bonds provide
tax-exempt interest.
Holding period - length of time someone holds the security owned.
Capital gain/ realized gain - when someone sells a security more than what
they paid for it.
Return of capital - when an investor has an investment returned to him in part
or whole such that he is not gaining anything beyond original investment. Not
taxed or considered income.
Stock dividend - results in shareholders receiving additional shares of the
company’s common stock and thus requiring the company to issue additional
shares to cover the dividend. The stock dividend does not affect the value of
the company as it simply dilutes the value of each outstanding share.
Small stock dividend - less than 25% pre-dividend outstanding shares are
considered small
Large stock dividend - more than 25% of pre-dividend outstanding shares.
Dividend Payment Dates
D - declaration date
E - ex dividend date (FINRA) (stocks must be purchased one day prior to be
able to receive dividend since stock T+2 unless paid in cash)
R - record date
P - payment date

Bonds concepts of measurement: 4 types of yield rates: Always depend on if

the bond was purchased at par, discount or premium of which yield would be
high or low. See-sasw
Nominal Yield (coupon rate - would only be accurate if bond was purchased at
par value)
CY -
YTM - how much return the bondholder will earn annually by holding the bond
until its maturity date.
YTC/YTW
Bond credit spread: the difference in value between two bonds with different
credit ratings that are otherwise identical, comparison often made with the
U.S. T-Bond which is most secure.
Credit spreads are measured in terms of basis points, each point is equal to
one hundredth of one percent, and all with reference to the bond’s yield. I.e. 5
year corporate bond has a yield of 3.89% and the corresponding 5 year T-
bond is 2.36% then the credit spread is 389-236 =153 basis points.
Total return - includes dividends, interest and capital gain, in addition to
capital appreciation, evaluated annually. This way losses may be offset by
dividends or interest. Current rate of return may not be accurate because of
the discounting of these factors .
Total return = (ending value - beginning value) + investment income/
beginning value
Example: An investor purchases 1,000 shares of VPN at $25 per share.
VPN pays an $0.80 annual dividend. After one year, the stock’s market
value has declined to $23 per share.
What is the investor’s total return?
In this example, the investor’s total purchase was $25,000; however, after
one year, the value of the stock had declined to $23,000. During the year,
the company paid a dividend of $0.80 per share; therefore, the investor
received $800 (1,000 x $0.80). The investor’s total return calculation is
shown below:
(23,000 -25,00) + 800/25,000 = 1,200/25,000 = -4.8%
The investor has a loss of 4.8%

Cost Basis - (tax basis) for stocks is the reference point to be used when
determining one’s capital gains or losses. If a stock’s cost basis is $5,000
and the investor sells it for $5,500, then they have a capital gain of $500.
Cost basis will often be listed as cost basis per share.
The cost basis for stock is not ordinarily the purchase price of the stock.
When buying stock, the basis will be increased by fees and commissions
paid to the BD.
If dividends are gained on stock and then reinvested in the stock, the
dividends are still treated as income, in which case their reinvestment
increases the cost basis of the stock by the amount reinvested.
All reinvested dividends are still taxable. (the price paid for an asset,
including any commission or fees, used to calculate capital gains, or losses
when sold)
Cost Basis of Stocks given as a gift or an inheritance - stocks acquired as
gifts will have a basis equal to the donor’s basis unless they have
decreased in value since the donor acquired them. In that case, their new
basis is their value at the time of donation.
Inheritance - will have basis equal to the value per share at the point of
decedent's death. All securities acquired by inheritance are automatically
taxed as long-term.

Benchmarks and indices -

Benchmark portfolios - designed to mimic the volatility of the benchmark
they purport to track. Often viewed as a product of the efficient market
theory I.e. S&P 500, Dow Jones. Benchmark portfolios are often less
expensive to manage and less expensive for investors to participate
because they just track the index.
Efficient market theory - It is impossible to outperform the market. share
prices reflect all information
Market Indices -The securities which compose the market indices are
selected so that the indices can report the market’s performance as a
whole I.e. S&P 500, Dow Jones
Trade Settlement Time frames for various Products:
Settlement date in securities trading is the day that the trades actually
settle, or securities change hands, as opposed to the execution date, which
is the day the trade goes through. If a trade’s settlement date is one
business after execution day, then T+1
T+0 money market securities
T+1 (options, U.S. Treasury products)
T+2 (regular way) - stocks, corporate + muni bond, GSE, MFs and
securities issued
T+3
The transfer of ownership of a stock or bond certificate is made via a book
entry or a physical entry. Book entries—the method of tracking securities
ownership electronically—cover the majority of cases and are processed by
the Depository Trust Company. Physical entries, on the other hand, mean
that certificates are physically delivered to the buyer and ownership is kept on
the books of the securities issuer.

Good Delivery - involves the requirements that must be met for a security in a
transaction to be transferred to a buyer. A security certificate meeting these
requirements is ready to be transferred on ‘good delivery’. Some of the
requirements for good delivery. The certificate must be in good physical
condition, must have an endorsement, exact number of securities and correct
currency denomination for the certificates must be delivered.

Bearer Bonds (coupon bonds) - not registered to particular individuals, but

are tradeable and liquid as dollar bills, must be delivered with all the related
unpaid coupons - interest payments attached.
Registered Bonds - registered to particular individuals, must have par values
in multiples of $1,000 not to exceed $100k
Stocks - stock certificates are required to be denominated in ways relating to
round lot= 100 shares. Must be denominated in multiples of 100 shares.
Trades less than 100 shares are odd lot trades and discrete components of
trades which are fewer than 100 shares can be termed odd lot portions. These
are not required to meet this particular good delivery requirement.
Corporate Actions
Types of corporations - splits, reverse splits, spin-offs and tender offers
Tender offer - is an offer to purchase a portion or all of the shares of a
company from its shareholders.
Rights offering (issue) - company will issue rights to purchase additional
shares, known as subscription warrants, to current shareholders in the
company. Giving shareholders the right to purchase discounted shares in the
future, sometime within a set time period, usually 16-30 days. Rights can be
transferable and can be sold on the open market.
Impact of Stock Splits on market price and cost basis: cost basis changes for
the customer but not the value.
Stock splits (forward splits) - making the share price less per share. Usually a
sign of confidence on the part of the company, usually price goes up after.
Reverse split - making the share press more per share. Usually a negative
sign

Delivery of Notices and corporate action deadlines

Issuers are required by the SEC to give notice of corporate actions to
shareholders. No later than 10 days before the record involved or in
Customer Accounts and Compliance Consideration

Joint Tenancy with Rights of Survivorship (JTWROS) - individuals have equal

authority over the account’s assets, retaining control even if other joint tenants
die.
Joint Tenants in Common (JTIC) - different individuals do not retain any rights
of survivorship over the account. JTIC survivors do not necessarily acquire the
control over assets which were previously held by a tenant who died. Instead,
each tenant gets to distribute the assets as they desire through their will.

Custodial Accounts - accounts managed by an adult for the sake of minors

and therefore a type of trust account. These accounts can either be a Uniform
Gift to Minor Account (UGMA) or Uniform Transfer to Minor Account (UTMA).
UGMA accounts are extensions of UTMA accounts, since they allow the
transferral of gifts as well as securities of cash.
UGMA is limited to purely financial products like cash, stock, MF, bonds, other
securitized instruments and insurance policies. Automatically transfers to your
child when they reach 18. Anyone may donate either cash or securities to a
UGMA. The gifts cannot be revoked after.
UTMA - More options. Can hold any form of property, including real property
and real estate. Many states you can choose between 18-25 to give your
child.
UGMA+UTMA - Contributions are after-tax, no tax benefits or deductions.
Only can make withdrawals to cover the expense that benefits the beneficiary.
Numbered accounts - where the account holder’s name is kept confidential,
identified by a number or some code words. Margin activity is prohibited on
UGMA and UTMA. Must be cash accounts only. The custodian is not allowed
to use assets of the account as collateral on a loan. Except for covered calls,
options trading and commodities trading is off limits to UGMA accounts.
Transfer on death account - provides the account holder with a means of
easily passing on their assets to others without various hassles and delays of
probate (process of a will being proved)
Estate accounts - held in the number of the estate of some deceased person,
handled by his representative.

IRA’s - made to encourage people to save for retirement. Nearly all people
who earned income in a year can participate. Considered qualified accounts -
they meet IRS stipulations regarding tax-deductible contributions and tax-
deferred growth. 3 types of IRAs:
1. IRA - $6K max ($7K if over 50 years) contribution limit per year and
contributions must be earned income. Unearned income is capital gains,
interest, dividends income etc. Cannot withdraw or will incur a 10%
penalty in addition to ordinary income tax. Age of 72 RMD.
2. Roth IRA - $6K max ($7K if over 50 years) contribution post tax so not
tax deductible but allows for tax free distribution including the growth in
the account. Limitations: Individuals who made over $144K or married
filing jointly $214K may not contribute. Since contributions have already
been taxed they can keep contributing and No RMD. Held on for more
than 5 years.
3. SEP IRA - Simplified employee-sponsored retirement plan - Offered by
small businesses with less than 100 employees. Contributions pre tax
and earnings tax-deferred. Employers are required to make minimum
contributions. Participants are given a menu of investment choices.
Conversions, Rollovers, and Early Withdrawal
Conversion - When an investor converts a traditional IRA to a Roth IRA
investors will pay income tax on the amount converted, including both tax-
deductible contributions and tax-deferred earnings that accrued. The benefit
of a conversion is that the investor will not be required to pay income tax on
any funds when they are withdrawn from the Roth IRA.
Rollover - when the assets of one retirement plan are transferred to another
retirement plan. Direct rollover occurs when the assets are transferred directly
from one plan to another. Indirect rollover occurs when the assets are paid to
the investor and then the investor transfers the assets to another plan. Do not
incur a tax liability as long as the funds are transferred into the destination
within 60 days of leaving the original plan. Funds can be rolled over into a
retirement account of the same tax status. I.e. funds cannot be rolled over
from a tax deferred 401k to a Roth; they would have to be first rolled over to
an IRA and then converted to Roth. Before 59 ½ years of age will be subject
to a withdrawal penalty of 10%. However, can be waived if the funds are used
to pay for unreimbursed medical expenses, health insurance premiums while
unemployed, or to pay for higher education expenses.

401k Plans - qualified retirement plan employees contribute a percentage of

their salary through payroll deductions (pre tax). Tax deductible. Maximum
annual contributions is $20,500 and max annual additions (employer match) is
the lesser of 100% of the participants compensation or $56K. May not make
withdrawals until 59 ½ of age or 10% withdrawal penalty. However, hardship
withdrawals to avoid the 10% penalty. RMD
Roth 401K - mixes features of Roth IRA and 401k. Contributions are made
post tax which allows the account to grow tax free and distributions to be
made tax free. Employers cannot make contributions to Roth 401k. Therefore,
two 401 K must be maintained simultaneously. Advantage of Roth 401 k over
Roth IRA is no income limit to be able to contribute to a Roth 401k and may
contribute the same amount to their 401k $20,500. They are not taxable. RMD
70 1⁄2.
403 (b) Plans - similar to 401k (same contribution limit, pre-tax, 59
½,)retirement account that is tax-deferred. Reserved for tax-exempt
organizations such churches, schools, and hospitals.
Non qualified Retirement plans - contributions are not tax deductible to the
employer. The employer may discriminate as to the employee who benefits
from this type of plan. I.e. Rewarding a key employee but not sharing the
benefits with other less-essential personnel.
AML - BSA requires all BD develop anti-money laundering programs to help
combat the crime.
1.Placement - into the monetary system. Easiest to catch. Structuring or
smurfing financial institutions must file a CTRs, so the launderer makes
multiple smaller deposits to avoid showing up on the transaction reports.
2.Layering - attempts obscure the source of the funds by transacting multiple
times. Once the crime proceeds have entered the financial system,
and their origins are separated from the criminal source, then the
funds are moved, dispersed, and disguised to lessen the suspicion or
prevent detection from the law enforcement. layering is where most of
the action happens to conceal the original source of the illegal
proceeds. The different layers denote the sequence of complex
financial transactions which mix up the funds through the international
financial transfers and camouflage the illegal profits
3.Integration - illegal funds are intermingled with legitimate money often by
associating the illegal funds of an actual business. Buying a business etc.
Entered back into the economy. The process of integration can happen
through different means such as the purchase/resale of real estate,
expensive goods, luxurious assets such as jewelry, diamonds, or any
item that amounts to huge sums of moneyMost difficult to detect.

BSA - established responsibilities for financial institutions to fed agencies,

requiring institutions to maintain records for cash purchases of negotiable
instruments, to file any such purchases over $10,000 and to report any
suspicious activity.
FinCEN - their goal is to protect the banking systems from illegal activities,
promote secure financial transactions. Part of the US Dept of Treasury.
Books and Records Retention Requirement
Lifetime: partnership/corporation articles, minute books (director or
partnership meetings), stock certificate books, and organizational documents
such as Form BD and amendments
6 years: blotters (original record of entry) purchases and sales of securities,
the receipt and delivery of securities and receipt of disbursement of cash
reflect transactions as a trade date and must be prepared no later than the
following business day. General ledger, customer ledger (customer
statements), customer account records and stock records
3 years: advertising, u4/5, trial balances, customer confirmations, order
tickets, subsidiary ledgers and list of every office where each associated
person regularly conducts business, associated persons compensation
records, compliance and procedures manual.
Confirmations and Account Statements - FINRA states that firms should send
customers an account statement at least every quarter, including relevant
balances, activity and positions. If the account has activity then it should
receive a statement that month. Firms should retain statement for 6 years
Holding Customer Mail - only if provided written instructions requesting for a
specified amount of time.
Business Continuity Plan - (disaster recovery plan) - a firm takes actions to
resume the firm’s ordinary operations in the case of a significant disrupting
event. Preventive measures - backup data, alternative communication with its
regulators, customers and employees. Backup location and a means to give
customers access to their securities in case of a disaster. Must conduct an
annual review of their BCP.
Customer Protection and Custody of Assets
Segregation - the process of separating the firm’s securities and the
customers. Customers can request their security to be registered in street
name meaning the security is registered to the broker-dealer name but
belongs to the customer.
Fund’s/securities over which a BD has transaction authority but does not hold
them are considered controlled funds. BD’s exerts control but does not own
them on behalf of the customer.
Privacy Requirements
Regulation S-P (security and policy) - privacy of consumer financial
information. Customers are provided additional protection from the distribution
of their personal information. Financial institutions are provided a ‘road map’
to follow to ensure compliance.Three purposes:
1. Regulations requires financial institutions to notify its customers of its
privacy practices
2. Prohibits financial institutions from disclosing nonpublic personal
customer information to third parties.
3. Provides certain industry standards for financial institutions regarding
privacy practices and disclosure of customer information.
Disclosure Limitations in Regulation S-P
Provides a number of improvements to the required disclosure by financial
institutions to their customers regarding the institutions privacy practices and
providing personal customer information to third parties. For example -
financial institutions regulated by Reg S-P must provide disclosures to
customers including the nonpublic personal data that is collected, how that
data is used, and with whom it can be shared. Must provide customers with
the ability to ‘opt out’
Exceptions to Regulation S-P
Requires the privacy disclosure be given at the beginning of the customer
relationship however may be delayed if:
1.Providing the notice prior to the customer relationship would delay the
customer’s transaction and the customer agrees to receive the notice at a
later date
2. Nonaffiliated BD creates the customer relationship with the fund without the
fund’s prior knowledge.

Suitability Requirements -
CIP - was established to aid financial institutions in gathering required
information. Must obtain the customer’s name, dob, address, and ssn.
KYC - know your customer rule
Prohibited Activities:
Market manipulation - manipulations of financial markets by creating false or
inflated prices.
Types of Market Manipulation
Pumping and dumping - bloating the market price of a security that one owns,
often through confident recommendations grounded in deceptive assertions
and then selling it before the bubble pops and the price decreases back.
Marking the close - purchasing a security at a high price before trading ends
for the day. Making the security appear high on exchanges which then
deceptively influence traders at the beginning of the day.
Marking the open -
Backing away -
Capping (put a cap on something so it doesn’t keep going up) - associated
with those who are short a option call contract - act of entering sell orders in a
stock for the purpose of keeping it from rising above the strike price keeping
the option from getting in the money
Supporting (support something to help get up) - associated with those who are
short put options - act of entering in buy orders to keep the price from falling
below the strike price. This artificial support is done to prevent the puts from
moving in the money.
Pegging (when you’re on a bike peg you’re not doing anything you’re not
pedaling)- any activity to keep the price of a stock from moving. Can be both
buying or selling.
Freeriding - purchasing securities without having the funds to do so.
BD’s not allowed to pay for referrals by compensating others for finding,
introducing or referring a client.

Insider is anyone who acts as an officer or director of a company or a

shareholder with over 10% and anyone who is holding nonpublic information
and their direct family members.

Penalties of Insider Trading - fined, sued, and criminally prosecuted

Civil: controlling person - SEC can impose damages for up to three times the
amount of profit gained or loss avoided and up to a max of $1 mil whatever is
greater.
Criminal penalties $5mil and up to 20 years in jail.
BD firm can 3 times the damages or $25 mil whichever is greater.
Restrictions Preventing Associated persons from Purchasing IPO
FINRA expressly forbids BDs from selling shares of IPO to restricted persons.
Restricted persons are member firms, financial consultants, employees of
FINRA member firm, representatives of the firm and portfolio managers. Rule
is in place to protect customers that may wish to participate in the IPO but
unable to do so because of the restricted persons had unfair access to the
IPO shares. Restricted people also include immediate family members and
anyone in the same household.
Improper Use of Customer Securities or Funds
Uniform Securities Act - place provisions on security professional’s ability to
borrow from clients. As a general rule, they are prohibited from borrowing
securities or funds from clients. Limited circumstances in which it is
permissible:
If the client is a lending institution or bank
If the client is a securities firm or other business that offers securities loans as
a standard business offering.
As a general rule, agents cannot share a client’s profits or losses. Certain
circumstances is permissible:
Joint account with a customer Shared based on the percentage of account
owned by each party. I.e. if the agent owns fifteen percent of the account and
the client owns 85% the account’s profits and loss will be split according to the
percentages (BD’s are not allowed to have join accounts - only agents)

Activities of unregistered persons:

Overview of the Regulatory Framework

SRO for Associated Persons
A firm needs to sponsor candidates from taking the Series Exam.
Then the sponsoring firm needs to file an application form and pay processing
fees to the CRD. Then submit fingerprints through an approval facility and
schedule the exam.
The Central Registration Depository (CRD) is a database the Financial
Industry Regulatory Authority (FINRA) maintains of all entities in the U.S.
securities industry. CRD data can be used like a background check on
brokers and financial advisers, showing any complaints, enforcement actions,
education, as well as licensing and professional certifications
Non-registered can:
Invite customers to events, sponsored by a registered firm, at which a
registered individuals will make solicitations
To ask whether the custom will like to speak to a RR
To determine whether the customer would like to receive literature from a
registered firm,
Not receive any commissions.
Investment Advisors who manage over $100 mil in customer assets must
register with the SEC, while those handling less must register with their state
securities agency.
Written customer complaints retention for 4 years. A member is to report
information regarding written customer complaints by the 15th day of the
month after it was received.
Customers can submit a complaint form to SEC’s Office of Investor Education
and Advocacy
FINRA handles customer complaints, formal and informal. The customer
decides whether to pursue formal or informal proceedings. Formal
proceedings then the complaint must be resolved according to FINRA’s code
of procedure. District Business Conduct Committee (DBCC) maintains first
jurisdiction over complaints then can appeal all the way up to the Supreme
Court.
Informal proceedings then the complaint can be resolved according to
FINRA’s code of arbitration and at least two arbiters will participate in the
informal hearing. The decision will be binding and final.
Reportable Events
Outside Business Activity (OBAs) - RR’s are required to disclose OBAs. RR’s
are permitted to execute trades for people employed at other firms, but they
must exercise “reasonable diligence” to ensure that such trades do not unduly
harm their own employers. The other firm is obligated to notify the RR’s
employer in writing, deliver duplicate documents for the account, and notify
the RR of the completion of these tasks. This must be done before any
transactions are conducted for the account.

Private securities transactions - where the broker sells a security not

recognized or ordinarily sold by their own BD and receives compensation for
the transaction. This will be known as selling away.

PE Ratio = market price/earnings per share

Net profit margin = net profit/ total revenue

An inflationary gap measures the difference between the current level of real
GDP and the GDP that would exist if an economy was operating at full
employment
Policies that can reduce an inflationary gap include reductions in government
spending, tax increases, bond and securities issues, interest rate increases,
and transfer payment reductions.
Business Cycle -indicators: output, consumer spending, employment, inflation
interest rates, wage rates
1.Expansion
-Economic growth
-confidence - purchase now vs later because they know they’ll have future
income
-low unemployment
-price rises
-investment increased - property and stock market rises

2. Peak
- Economy is producing at its maximum
- Demand exceeds supply (inflation)
- Economy begins to overheat (unsustainable growth)
3. Recession (contraction)
- Fear and panic - GDP slows down
- Demand and spending fall
- Business profit decline
- Unemployment rises
- Investment and prices fall
4. Trough
- Lowest point in GDP
- Decline in growth curbs
- Requires fiscal and monetary intervention

A particular issuer of bonds chooses to engage a managing underwriter under a

negotiated, firm-commitment underwriting contract. The underwriter chooses to sell the
bonds using a selling group rather than a syndicate. Who bears the financial risk of
unsold bonds? Instead of forming a syndicate, an underwriter may choose to form a
selling group. A selling group member has no obligation to buy the bonds. The
financial risk of unsold bonds is borne entirely by the managing underwriter when a
selling group is used in lieu of a syndicate

Open market operations is when the Fed buys and sells U.S. treasury bonds on the
secondary market. Open market operations (OMOs)--the purchase and sale of
securities in the open market by a central bank--are a key tool used by the Federal
Reserve in the implementation of monetary policy. The short-term objective for open
market operations is specified by the Federal Open Market Committee (FOMC).
Historically, the Federal Reserve used OMOs to adjust the supply of reserve balances
so as to keep the federal funds rate--the interest rate at which depository institutions
lend reserve balances to other depository institutions overnight--around the target
established by the FOMC.

67/75
Questions I should have gotten right: II
Questions I did not know: III
SIE Practice Test FINRA
Call protection is most valuable to a bond owner when the bond prices are generally:
Rising.
When bond prices are rising that means interest is lowering which is when bond issuers
will want to call the bonds. Call protection offsets that.

Company ABC announces a 20% stock dividend for its common shareholders. If a
customer holding 1,000 shares at $50 what is the new price and number of shares
following the payment of stock dividend?
1,000 X.2 = 1200 shares at $41.66

The call provision of a bond stipulates which of the following factors?:

Call dat and call price

Variable rate demand note - provides investors with a stated maturity date, a floating
interest rate, and an option to put the security back to a financial intermediary on a daily
or weekly basis.

ADRs required to register with SEC

The primary purpose of a syndicate desk in the context of an equity offering is to: Build
an order book and allocate the stock.

Asset-backed securities are generally traded according to their average life rather than
their stated maturity.

The redemption value of an open end investment company's shares is based on the:
NAV computed after the order is received.