Study Course Workbook - thesecuritiesguys.guru · Company incorporates and has a certain number of shares . Authorized. They then choose to . Issue. some by going through . Underwriting

Version 2.0 Updated June 2019

Study Course Workbook

Created by Brian Kolins

www.TheSecuritiesGuys.guru

TSG: The Securities Industry Essential Exam (SIE)

www.TheSecuritiesGuys.guru ©2019

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Table of Contents TABLE OF CONTENTS ......................... 2

SOME IMPORTANT POINTS ............... 3

1. SECURITIES .................................... 4

Basics of Securities ........................................................... 4

Equity Securities................................................................ 6

Debt Instruments ..............Error! Bookmark not defined.

Derivatives ...................................................................... 18

Pooled Investment Products ........................................... 23

Annuities .......................................................................... 27

Misc. (REITs, DPPs, Hedge, ADR) .................................. 29

2. LAWS.......................................... 31

The Securities Act of 1933 ............................................ 31

The Securities Exchange Act of 1934 .......................... 35

Types of Markets ............................................................ 37

The Investment Company Act of 1940 ........................ 38

The Investment Adviser Act of 1940 ............................ 38

Random Laws ................................................................. 39

Books, Records, and Privacy Requirements ................. 44

Prohibited Activities ........................................................ 46

3. PEOPLE ....................................... 49

Account Types and Characteristics .............................. 49

Customer Account Registrations ................................... 50

Municipal Fund Securities ............................................. 56

Communications with the Public ................................... 58

Associated Persons ........................................................ 61

Roles of participants ...................................................... 66

Disclosures...................................................................... 70

4. ECONOMICS ............................... 72

Monetary and Fiscal Policy .......................................... 72

Business Economic Factors ............................................ 75

International Economic Factors .................................... 78

Investment Returns.......................................................... 79

Corporate Actions ......................................................... 81

Strategies for Mitigation of Risk .................................... 86

Orders and Strategies ................................................... 89

APPENDIX – ACRONYMS ................ 90

APPENDIX – DEFINITIONS .............. 94

IMPORTANT EQUATIONS .............. 103

LAST MINUTE STUDY SHEETS ......... 104

OTHER WAYS WE CAN HELP ......... 105

Any text in italic should be read, but will not be directly covered in the videos. There may be additional information on the site about them, and please feel free to contact Brian with questions, but these are topics that are “useful” to know, but don’t seem to be tested often.



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Some important points 1. The material presented here is created by The Securities Guys. It is based on the FINRA outline, but the organization is not the same; Think about taking the FINRA outline, cutting it up, and then gluing all of it back together, but in a different order. The order is how The Securities Guys believe students will learn better. It is not Kaplan, or FINRA’s direct outline.

2. Be very careful of the word GUARANTEE. There are very very few things on securities exams that are GUARANTEED. Very rarely will an answer choice with GUARANTEE in it be the correct one.

Be mindful of “big” words, as in words that are very powerful in questions. Words like ALL, EVERY, NONE, things are universal. There are not a lot of things that are universal in securities anymore than guaranteed. All you need is 1 thing to exist that is not that case, then the entire statement is wrong. Make sure if you select an ALL answer, you don’t actually mean to be selecting a MOST type answer.

3. Understanding the material in this class, or on flash cards, or in a book is only part of the solution. You need to know more than just the definitions and what they are, but how to use it. That is why you need access to a large question bank, and to take sample questions, study what you don’t know, review what you need to learn, and practice. Remember though, no question bank is going to show you questions from the test, but the concepts, material, the “WHY” they ask you, that will be tested.



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1. Securities Basics of Securities

What is a Security Investment of Money In a Pooled Investment/Interest With an Expectation of Profit With Third Party Management

Broker/Dealers

Story about the different types;



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Ownership

Limited Liability is the idea that your liability is limited to your investment. You can

only lose at most what you put in.



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Equity Securities Types of equities

Equity is ownership, and more risky than debt of the same issuer. Examples: Common Stock, Preferred Stock, REITS, Open/Closed End, ADRs, Rights,

Warrants, etc

Common stock Primarily capital appreciation Potential dividends (income) Lowest liquidation claims in bankruptcy Preemptive Rights Round Lots (100) Voting rights

Statutory Voting

Can allocate 1 vote per share per seat, benefits larger owners.

Cumulative Voting

Allocate all votes any way, including all for 1, benefits smaller owners.



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Company incorporates and has a certain number of shares Authorized. They then choose to Issue some by going through Underwriting. Those not Issued are

Unissued. The Issued shares then go through trading, and are Outstanding. Outstanding shares are

simply shares owned by the general trading public. The Issuer can purchase their own shares from the general trading public, and shares help by

the issuer are Treasury stock. There are many reasons company would purchase stock to become treasury stock. Employee stock options, stock benefits, stock increases, control of number of votes, control of

dividends.

American Depositary Receipts (ADRs) US trading of foreign companies in US dollars Issued by US banks to allow trading of foreign companies Purchased and paid in US dollars Company still issues the dividends in their foreign currency, the bank then converts it

and sends dollars to all US holders. There is still currency risk!



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Preferred stock Stated interest rate on certificate (percentage of par) Higher liquidation claims in bankruptcy than common stock No voting, No proportional ownership rights Purchased for Income Par Value $100 (% interest = $ interest) Attachments;

Straight Preferred: Nothing other than stated rate if BOD declares a dividend.

Convertible: Investor can convert the security into common shares. Lower stated return than

straight. (Par)/(Conversion Factor)=(Number of Shares).

Callable: Issuer can force the investor to sell the security to them. Higher stated return than

straight.

Cumulative: If dividends missed, all missed dividends must be paid to cumulative preferred

owners before anyone else gets the new dividend. Lower stated return than straight.

Participating: If BOD declares larger dividend, this preferred gets the larger dividend. Lower

stated return than straight



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Bonds/Debt Generate income

Purpose of all fixed-income securities (Bonds of all types, and Preferred Stock) is to generate income

Instead of owning the company, you are a debtor. You lent them money The more conservative the bond, the more likely the income, and the less that income will be. The

more risky the bond, the greater the income will be, but the more risk there is to principal and

interest payments in the future.

Direct Government Debt is most conservative, then Agency, then Muni, then Corporate. General

rule.

Par value Face amount, the amount paid on maturity, for bonds is $1,000. ($100 for preferred

stock)

Coupon The stated interest rate, or nominal yield printed on the Certificate. Interest paid every six months (semiannually). Annual income is the coupon times par, or coupon times $1,000. Take percentage and

move 1 decimal right (multiply by 10), and that is dollars. Ex. 7.9% = $79

Maturity The date when interest payments stop. Stated at issue of the bond. On the maturity

date, last interest payment and $1,000 (Par Value) is paid. Also known as Redemption.



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Current Yield Current Yield is (Annual Income) ÷ (Cost to Purchase). The annual income is the

coupon percentage times 1000. Current Yield is what you generally look for, and what people are looking for when

they want to “maximize income”.

Bond Quotations Given as percentage of Par. Be careful with decimals (colons), if it says .08, .16, or .24 (or :08, :16, :24) that is in

32nds. If .08 take percentage and add 2.50, if .16 add 5.00, and if .24 add 7.50.



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Ratings and rating agencies The higher the rating, the more likely the issuer can pay interest and principal when

due, but also generally the less they have to pay in interest. The lower the rating, the reverse; the less likely to pay interest and principal, potential

problems, and the more they will have to pay in interest to be able to borrow “Investment Grade” Moody’s (Baa3) and S&P and Fitch’s (BBB-) and above “Junk Bonds” or “High Yield Bonds” are those below Investment Grade Risk and Return, Junk isn’t necessarily bad, with the greater risk of default, comes

greater interest.

Relationship between price and interest rate When interest goes up, new bonds are paying more than older bonds, so older bonds price goes

down. When interest goes down, new bonds are paying less than older bonds, so older bonds price will

go up.



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Negotiated vs. competitive offerings Competitive, bonds are advertised for sale. Any BD may bid on the bonds, at specified

date and time. Winning bidder is offering lowest interest cost. Negotiated, underwriter selected to purchase bonds. Negotiated by issuer and

underwriter, and includes presale, where underwriter looks for indications of interest before establishing final bond pricing.

Treasury Auctions Three steps to an auction

Announcement – Details; amount of securities offered, auction date, issuance date, maturity

date, terms and conditions of offering, noncompetitive or competitive bidding close times, and

other pertinent information

Bidding-

Competitive – Limited to 35% of offering amount for each bidder. Bidder specific rate, yield, or discount margin that is acceptable

Noncompetitive is limited to purchase of $5M per auction. Bidder agrees to accept rate, yield, or discount margin determine at auction

Bidding limits apply cumulatively to all methods that are used for bidding in single auction

Issuance of purchased securities –

On issue day, Treasury delivers securities to bidders who were awarded securities based on particular auction, and charges the accounts of those bidders for payment of securities



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Treasury Securities Treasury Bills

<1-year maturity

No interest, sold for less than par, matures at par

Treasury Notes 2-10 year maturity

Sold at par

Semiannual interest

Treasury Bonds 10+ years

Sold at par

Semiannual interest



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Treasury Inflation Protected Securities (TIPS) Inflation protection semiannually adjusts to principal based on CPI. Every 6 month par value

increases by CPI inflation level. Coupon is fixed, but as interest is based on par, interest does

increase as par value increases.

Treasury STRIPS/Receipts Separately Trading of Registered Interest and Principal Securities (zero coupon bond)

Breaks apart a Treasury (Note or Bond) into separate interest payments and then final Principal

STRIPS are backed by US Government, Receipts backed by bank or brokerages. Otherwise

same.

Agency Issues GNMA

Monthly Income

Backed by full faith and credit of US Government

Other agencies are not backed by full faith and credit and have semi-annual instead of monthly income

Zero Coupon Pay no interest. They have “Zero Coupons” or “0% Coupon rate”. Bought at steep discount, matures at par, difference is the income Taxable each year as phantom income Duration = Maturity Traditional US Gov’t EE Savings Bonds, buy for $25, matures at $50. STRIPS



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Municipal securities Issued by municipalities General Obligation

Backed by taxing authority

Schools, Police Stations, Fire Stations, Court Houses

Revenue Bonds Backed by specific revenue stream

Toll Booths, Stadiums, Sewage Treatment

Income is Federally tax exempt, and if from same state generally state and local exempt as well.

Generally, for high income (high tax bracket) individuals

Corporate bonds Issued by corporations Credit Ratings (Investment vs. Junk)

Investment Grade is Baa3/BBB- and ABOVE

Junk Bond is Ba1/BB+ and BELOW

Stated interest on the certificate, paid semi-annually

Attachments Callable

The issuer can force the investor to sell the bond back before maturity, thus ending the expected

interest payments.

Allows issuer to pay off debt early, and refinance to lower interest rate.

Can’t be called for at least 5 years

Higher than normal coupons.

Convertible Investor can convert the bonds into common stock. (Number of Shares)=($1000)/(Conversion

Price).

Lower than normal coupons.



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Secured Bonds Mortgage Bonds – Backed by Mortgages Equipment Trust Certificate – Backed by a specific piece of machinery; Bus, Plane,

Train, etc Collateral Trust Certificate – Issued by companies with subsidiaries, and they use

their subsidiary company’s stock as collateral for the loan Debenture is a loan that is NOT secured, and is NOT backed by collateral

Short-term vs. long-term characteristics Short Term: (generally) Lower coupon rates, Less reactive to changes in interest rates,

but change more frequently. Long Term: (generally) Higher coupons rates, More reactive to changes in interest

rates, but change less frequently.



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Others Taxable Municipal Bonds

A fixed-income security issued by a local government that is not exempt from taxes, usually

issued to finance a project or activity that doesn’t provide a major benefit for the public.

Short-Term obligation A short-term debt generally due within 12-month period. Debentures backed by faith and credit,

not specific property.

Money Market Instruments Cash Equivalents Short-term debt: Maturity less than 270 days. Treasury Bills, Commercial Paper, Banker’s Acceptances, Jumbo CDs (>$100k,

negotiable), repos/reverse repos



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Derivatives Rights

Short Term: Max 60 days. Issued with a purchase price below current market value. Preexisting shareholders given first right to buy a new issue, they can sell them.

Warrants Long-term: 3-5 years or perpetual Issued with purchase price above current market value. Issued and attached as a sweetener to bond/preferred stock or similar issue.

Options Puts and calls

Puts

The buyer bets stock will go down.

Seller believes buyer is wrong, and it will stay the same or go up.

Calls

The buyer bets stock will go up

Seller believes buyer is wrong, and it will stay the same or go down.

Bearish and bullish Bulls attack up, Buying Calls

Bears attack down, Buying Puts

Equity vs. index Equity option’s underlying asset is an equity security, typically common stock.

Index option’s underlying asset is the value of the underlying index.

Hedging or speculation Hedging is insurance. Buying puts as insurance against a long (buying) position in a stock.

(Buying calls as insurance when you are short)

Speculation is Gambling. Buying calls to simply bet the stock will go up, or buying puts to bet it

will go down.



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Expiration date The date the option expires and becomes worthless.

Option must be exercised, or used, by the expiration date.

Strike price The ‘bet’ price of the option. The price a Call Buyer thinks it will go above, and the price a Put

Buyer thinks it will go below.

Premium The cost to purchase the option, or the amount the writer receives initially. It is quoted ‘per share’

Each option is for 100 shares, so multiply the premium by 100 to find the true cost for the entire

contract.

Intrinsic Value – How much “in the money” contributes to the cost to purchase.

Time Value – How much time remaining until Expiration contributes to the cost to purchase.

Underlying or cash settlement Underlying Settlement is where the actual transfer of the underlying security occurs.

Cash Settlement is where seller/writer pays out the “in-the-money” value of the option at time

of exercise.

In-the-money, out-of-the money When the price of the underlying asset of a call is ABOVE the strike price, or when the price of

the underlying asset of a put is BELOW the strike price. The difference is how “in” or “out” of the

money the option is.

If the option is a ‘good bet’ at the time, it is in the money.

The “Intrinsic Value” is how much “In The Money” the option is. Intrinsic Value is $0 or above,

never negative.

Covered vs. uncovered Covered Calls are when someone writes a call, but also owns the same number of shares they

are writing. Worst case they only lose the shares they already owned when the call gets

exercised.

Uncovered, or Naked calls are when someone writes a call but doesn’t actually own the full

number of shares they wrote the call on. Worst case, if the stock price goes extremely high, they

would have to purchase at the extremely high price, and then sell at the strike price, losing a lot

of money. Very very dangerous.



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American vs. European American Options can be exercised anytime before the expiration

European Options can only be exercised on their expiration date, not before.

Exercise and assignment Exercise – The right of the owner of the option (put or call) to exercise the option, and force

the writer to assignment.

Assignment – When the writer is assigned the obligation to fulfil the contract; Either purchase

shares at the given strike price in a Put, or to sell the shares at the given strike price in a Call

Varying strategies Long – Purchasing. Wanting to “Buy low and later sell high”. “Buying” a security is being “long”

that security

Short – Borrowing. Wanting to “Sell high now, and then later buy it low”. “Borrowing” the

security, selling the security for cash, and then later when the price has gone down, purchase the

security with the cash, and then give it back to the person you borrowed it from, plus interest.

Brian thinks the investment will go down, so he borrows 100 shares of ABC from Jeff, each worth $100, and then Brian sells those shares for $10,000 now that is in his pocket. In a few months, ABC goes down to $80, so Brian takes his $10,000 and goes and buys 100 shares at $80, so he now has 100 shares of ABC and $2,000 in his pocket. He gives Jeff back his 100 shares, and some interest for the loan of shares, and keeps the difference as his profit; Thus selling high, to later buy it low.

Options Clearing Corporation (OCC) for listed options Provides clearing and settlement services to 15 exchanges in equity options and futures.

Options Disclosure Document (ODD) Publication of the OCC that must be read by first time option traders before making an option

trade. Explains risks of options.



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pg. 22/105



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Pooled Investment Products Net asset value (NAV)

The entire portfolio, all the money in the account, divided by the total shares of the account.

If there is $5,000,000 in the portfolio, and there are 50,000 shares of equal ownership,

$5,000,000/50,000 means each shares has a NAV of $100.

Buy and sell, bid-ask Bid Price (Wholesale)

The smaller number in a quote (NAV)

The highest price a buyer is willing to pay

Investors sell at Bid

Asked Price (Retail)

NAV + SC = POP or Asked

Larger number in a quote

You buy at Asked

“ASK POP before you buy!”

Investment companies



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Closed-end funds

Can issue common stock, preferred stock, and bonds.

Usually, think of it like stock; limited number issued.

Priced by supply and demand, not by actual value, and then commission for the sale.

Build a boat, sell off sections of the boat, then ship it to sea. If you want to sell, you have to find a buyer (on an exchange), not the fund company.

No Redemptions, only exchange trading.

Open-end funds

The issuer must always sell and redeem shares, number of shares outstanding changes daily.

Board of Directors

Structured so that at least 40% is unaffiliated, outside the company people.

The rest can be directors, owners, even investment adviser.

Diversified Company (75/5/10)

75% of the assets invested such that no more than 5% of the money is in a single issuer, and that the investment company doesn’t own 10% or more of the voting control shares.

Regulated Investment Company

Also referred to as the Pipeline/Conduit Theory/Sub Chapter-M.

If the Investment Company passes on at least 90% of investment income, it is only taxed on what it keeps, the investors pay taxes on what they receive.

If the Investment Company passes on less than 90% of investment income, it is taxed on 100% of all investment income, including the income sent to investors (double taxed).

Same rules apply to other investments under Sub Chapter-M.

Forward Pricing (Open-End/Mutual Funds)

NAV is calculated once each day at 4:00pm.

All shares are purchased and redeemed at the next calculated NAV price.

Example:

Client's funds post 2 pm Thursday, so the client will receive Thursday’s close of business NAV. If instead the Client's funds post 5 pm Friday, the client receives Monday close of business NAV

Mutual Fund Redemption

Mutual funds must redeem within 7-days unless suspended by NYSE closed on a non-normal day, and with SEC permission in case of emergency.



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Loads Sales Charge – Either up-front, back-end, or level-load. Could also be “No-Load Fund”

Share classes A-shares – Highest upfront charges. Lowest annual charges. Good for long-term investment.

Think “Front Load”

B-shares – No upfront charges. Lower than C Share annual charges, but higher than A shares.

Has a Contingent Deferred Sales Charge, a fee on selling that decreases over time. Once the

fee becomes 0%, the shares become A shares.

C-shares – No upfront or backend charges, but highest annual charges. Good for people with

shorter time horizon or who want to change strategy often.

Costs and fees Expense Ratio is the Total Annual Expenses divided by the Assets Under Management Surrender charges

Charges that are realized when the policy or investment is sold or redeemed.

Could be decreasing and eventually be eliminated (like B shares, and annuities), could be

constant, could be 0

Some C Shares have a small surrender charge during the first year only.

Sales charges Charges that are realized when the policy or investment is purchased.

Generally level, though usually stepped so that the more you invest, the lower the percentage of

fee.



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Breakpoints The dollar amount for the purchase of the fund's shares that qualifies an investor for a

reduced sales charge (load) Investment clubs and co-ops are excluded from breakpoints

Amount of Purchase at Offering Price ($)

Sales Charge as % of Offering Price

Less than $25,000 5.00% $25,000 to less than $50,000 4.25% $50,000 to less than $100,000 3.75% $100,000 to less than $250,000 3.50% $250,000 to less than $500,000 2.00% $500,000 to less than $1,000,000 0.50% $1,000,000 and above 0.00%

Letter of Intent (LOI) Investor promises to meet certain breakpoint within 13 months, and all contributions

are made with sales charge of that breakpoint. Can backdate up to 90 days. If not met in 13 months, extra fees charged at normal sales charge. Does not include appreciation. Sale Price savings on all contributions.

Rights of Accumulation (ROA) The investors have a right to receive cumulative quantity discounts when purchasing

shares of a mutual fund The investors are permitted to combine assets from their accounts and the accounts of

their immediate family (spouse, children under age 21, and financially dependent family members)

Appreciation of the shares are considered Sale Price savings on future contributions after breakpoint met. Net transactions



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Annuities How Invested

Fixed – General account of the insurance company with a guaranteed fixed return. Suffers from Inflation Risk.

Indexed – General account of the insurance company, where an index is used to calculate credited return. Caps and participation rates are used.

Variable – Separate account of the insurance company, where the investor has the investment risk as they choose where the separate account is invested. Requires Insurance and securities licenses.

How to Fund an Annuity Lump Sum – A single 1-time payment. Periodic Payment – Payments made over time. Can be made on a regular basis

(monthly/annually), or at random times (whenever client wants to add money) One side binding; no requirement for the client to actually deposit, but if a deposit is made company must credit units.

Timing of Annuities Immediate Annuity Income is started immediately, or at most 1 year from deposit.

Only Lump Sum

Deferred Annuity Income is deferred, will be taken some time in the future, at least 1 year from initial deposit.

Can be funded Lump Sum or Periodically



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Life of Annuities Accumulation Phase – When the money is simply sitting in the account. Each month if

the account is positive the money grows, if negative the money shrinks as the value of each unit changes.

Accumulation Units – Like shares, but in a Variable Annuity. Once purchased the number never changes (unless you surrender some or purchase more), but the value can and will change over time.

Annuitization – The point where the owner/annuitant chooses to turn the lump sum account value into a stream of income. A settlement option is chosen, and an AIR is assigned. These never change.

Annuity Phase – The part of the life of the plan where it has no account value, but it provides a stream of income on a regular basis that can not be out lived. It will be paid for the life of the annuitant.

Annuity Units – At annuitization, accumulation units become annuity units 1-1. Once set they never can change; you can’t sell or buy annuity units. The value paid each month to the annuitant is based on the number of annuity units.

Settlement Life-Only – Highest Payment. Highest Risk. Once they die, no more payments.

Life with Period Certain – Pays for the life of the annuitant of the period certain time, whichever

is longer. 5-year, 10-year, 15-year, 20-year are all common options.

Joint Life/Survivorship – Pays for the life of 2 annuitants. Payments only stop when the second

annuitant dies.

Assumed Interest Rate Set at annuitization and never changes.

Each month, the separate account return is compared to AIR;

If the Separate account earned more, next month the check increases

If the Separate account earned less, next month the check decreases

If the Separate account earned the same, next month check stays the same.

The calculation only cares about current month’s separate account return and the AIR set at

annuitization, nothing else.



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Misc. (REITs, DPPs, and Hedge Funds) Real Estate Investment Trusts (REITs)

Types of REITs Private

Exempt from SEC registration, and don’t trade on national stock exchanges.

Generally sold to institutional investors

Registered, non-listed

Do not trade on exchanges, but are registered and have more disclosure requirements than Private REITs

Listed

The REIT is listed on exchanges. Will not have the same liquidity risks of other, unlisted securities.

REIT Income Streams

Equity REIT: Acquire, Manage, Build, Renovate, and Sell real estate. Generate income usually from rent or similar income.

Mortgage REIT: Lend money to real estate buyers, or purchase mortgages. Generate income from mortgage loan interest.

Hybrid REIT: Combination of Equity and Mortgage REITs.

Sub-Chapter M rules hold if they pass on 90% of their income.

Direct Participation Programs (DPPs) Types of DPPs

Limited partnerships

Investment managed by others (General Partner)

Limited Liability (can only lose what you invest)

Flow through of income/losses

High liquidity risk (sale may require GP approval)

Can be organized as Limited Partnerships, Subchapter S Corporations, or General Partnerships

Pass-through tax treatment

Business doesn’t directly pay the tax. The tax ‘passes through’ the business to investors.

Unlisted

Don’t trade on stock exchanges. Serious liquidity issues.

Generally illiquid

Can be hard to sell, not actively traded, may need general partner permission



pg. 30/105

Hedge Funds Very high risk Invests in derivatives Tries to make profit in all market conditions Generally illiquid, lock in, limited trading opportunities

May need partners permission to sell sometimes, partners can lock the fund (no withdrawals)

Usually high fees and high minimum Investments Usually structured as a Partnership Not usually registered, but manager is usually an IA.

Exchange-traded Products (ETPs) Types of ETPs – A type of security that is derivatively priced (based on other

securities), and trades intra-day (not only once per day) on national securities exchanges.

Exchange-traded funds (ETFs)

Represent ownership in the underlying portfolio of stocks, bonds, or commodities.

Unmanaged

Exchange-traded notes (ETNs)

Issued as senior debt and are unsecured.

The issuer promises to pay ETN holders the return on some index over certain period of time and return the principal of investment at maturity

Active vs. passive Active Management:

Higher Fees, Trying to time the market, professional advice, commissions for professionals to advise. Could be very responsive to changes in the economy.

Passive Management:

Lower Fees, “Invest and forget”. Professionally chosen, but not actively changed. Won’t be responsive to changes in the economy.



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2. Laws The Securities Act of 1933

“The Paper Act” Regulates the Primary market Cooling off period of 20 days, no solicitation, only indications of interest. No SARS (Selling, Advertising, Recommending, or Soliciting) If Cooling Off Period is interrupted, it resumes on same day, doesn’t restart.

Issuers and underwriters Issuer – The organization that actually is issuing the securities. The one making most

of the money. Underwriters – Investment Banks that know how to bring securities to markets. They

work by Contract; Best Efforts (sort of like a Broker)

The underwriter tries to sell all the shares, whatever it doesn’t sell gets returned to the issuer.

All or Nothing

The underwriter either is able to sell all of the securities issued, or the issue is canceled.

Mini-Max

Like a best efforts, but only effective if a minimum is sold. If min not sold, issue canceled and returned. If min is sold than underwriter tries to sell the rest, up to the maximum.

Firm Commitment (Sort of like a Dealer)

Underwriters buy all securities, pay issuer, and then sell it themselves. If they can’t sell, it stays in their inventory.

Standby

The underwriting commitment used in rights offerings.



pg. 32/105

Offering Documents (Stocks) Tombstone

Advertises an upcoming IPO, or recent IPO

Not considered a prospectus

Disclosure must be included at the bottom of Tombstone

No SARS (Soliciting, Advertising, Recommending, or Selling) without a Final Prospectus

(Stocks) Red Herring (Preliminary Prospectus) Solicitation for interest in upcoming IPO

Cannot purchase stock yet

No SARS (Soliciting, Advertising, Recommending, or Selling)

(Stocks) Final Prospectus Anything a reasonable shareholder needs to know before they invest must be included in the

prospectus

A current prospectus must be delivered prior to or during the sale

Do not ever make any marks at all. Don’t do it, don’t do it, don’t do it. There are no exceptions.

For NYSE listed stocks, the Prospectus must be delivered for a period of 25 days after the IPO

for trading on secondary markets.

(Mutual Funds) Omitting Prospectus Rule 482 Omits key information and disclosures. General advertising for mutual funds. Sort of tombstone.

(Mutual Funds) Summary Prospectus Rule 498 Provides information from final prospectus investors need in plain English

Must explain where to get statutory prospectus if accepting applications.

Investment objectives/goals, Fee and expense tables, Principal investment strategies risks and

performance tables, Management information, Purchase and sale information, Tax information,

and Financial intermediary compensation information

Sort of Red Herring

(Mutual Funds) Statutory Prospectus Long form, traditional prospectus. The Mutual Fund’s “Final Prospectus”

Current prospectus must be updated at least annually

The fund's current portfolio is not included in the prospectus

Information can’t be more than 16 months old.



pg. 33/105

Statement of Additional Information SAI must be attached to the prospectus to keep it current

SAI does not extend the life of a prospectus

If requested by shareholder, it must be provided within 3 days

Types of offerings Public vs. private securities offering

Public offerings are offered to the public. Generally larger amount of capital from large number

of investors.

Private offerings are released for sale only to accredited investors such as investment banks,

pensions, and mutual funds, along with some high net worth individuals. Generally smaller

amount of capital from limited number of investors

Initial public offering (IPO), secondary offering and follow-on offering Initial Public Offering (IPO) – The first time a company sells its common stock to the public.

Follow-on Public Offer (FPO), Subsequent Public Offering, or Additional Public Offering – Any

time after the first time that a company sells its common stock, as a new issue, to the public. Rights

to Maintain Proportional ownership for existing common stock holders.

Secondary Offering – A large block sale of a previously issued security. The blocks are help

by large investors or institutions and proceeds go to them, not the issuing company.

Shelf registrations and distributions Public offering where certain issuers are allowed to offer and sell securities without separate

prospectus for each act of offering and without further prospectus for up to 3 years.

Basically, they could register 10M shares, $50M in bonds, $75M convertible bonds, 75M

Warrants all in one document, then as needed offer and sell any, all, or even none of them until

needed. Before each offering and sale the company must file a short statement “supplemental

prospectus” regarding any material changes since the shelf registration prospectus was filed.



pg. 34/105

Exempt Securities from Registration US Government

Municipals

Money Market Instruments

Bankers’ Acceptances

Jumbo CDs

Commercial Paper

Repurchase/Reverse Repurchase Agreements (Repos/Reverse Repos)

Issued by Insurance Company or Trust Company

Exempt Offerings Regulation D - Private Placement

Sold to no more than 35 non-accredited investors

Accredited investor - Any individual that has a net worth of at least 1 million dollars or has earned at least $200,000 for the past 2 years and expects it to continue.

“Letter stock”

Rule 147 (Intra-State)

Must satisfy at least 1;

At least 80% of revenues from the state, or

At least 80% of assets of issuer in the state, or

At least 80% of net proceeds from issue will be used in the state

100% of all purchasers must be from the state however.

Regulation A

Small offering exemption. Public offering not to exceed $50m.



pg. 35/105

The Securities Exchange Act of 1934 Trade Settlement

Settlement time frames for various products (e.g., T, T+1, T+2) Trade Date – The recorded date of the transaction, when the price is agreed and set, and both

parties become responsible to fulfil the transaction.

Corporate & municipal securities (T+2)

Government Securities (T+1)

Equity Options (T+1)

Cash Trades (Mutual Funds) same day

Physical vs. book entry (e.g., delivery and settlement) Physical Certificates – Hard copies of the certificates. Not done often. Required to be kept in in

safe, secure place, and kept in deliverable condition.

Book Entry – Digital record of ownership. Eliminates need to hard copy certificates.

Registered in the name of the Owner – Registered in the name of the person who purchased

them. Requires owner to take care of certificates, and sign documents when transfers are

required (purchase/sales)

Registered in Street Name – Registered in the name of the holding Broker/Dealer. Allows

easy transactions as owner simply calls and Broker/Dealer can sign and do all transfer work.

Potential risks in case of Broker/Dealer insolvency, covered by SIPC.

The Securities and Exchange Commission (SEC) The SEC is the chief regulator and enforcer of federal securities laws, for proposing

securities rules, and regulating the industry, exchanges, and other activities and organizations, including electronic securities markets.

The SEC has a three-part mission: To protect investors; To maintain a fair, orderly, and efficient markets; and To facilitate capital formation.

5-member board, with 5-year terms, so 1 comes up every year. No more than 3 can be of the same political party



pg. 36/105

Self-regulatory Organizations (SROs) All of these report to the SEC, are ‘under’ the SEC.

Self-Oversight. To protect investors.

Financial Industry Regulatory Authority (FINRA) – Regulator of securities firms doing business

in the US.

Created from National Association of Securities Dealers (NASD) combining with the

enforcement and arbitration operations of the NYSE.

Most important regulator for us. Sets licensing requirements, test requirements, renewal requirements, etc.

Continuing Education

Firm Element is taken every year

Regulatory Element is taken after 2 years, then every 3 years after that.

License expires every year, December 31st, unless renewed (fee)

No renewal for 2 years means retest.

Chicago Board of Options Exchange (CBOE) – Large exchange offering trading across

diverse range of products including; Options, Futures, US and European Equities, Exchange-

Traded Products (ETPs), Global foreign exchange (FX) and multi-asset volatility products.

Municipal Securities Rulemaking Board (MSRB) – Protects investors, state and local

governments, and other municipal entities, and the public interest by promoting a fair and

efficient municipal securities market.

Regulates securities firms, banks, and advisers in the municipal securities and advisory markets.

Generally, Rule Making, enforcement is left to FINRA for BDs, or FRB for Banks, etc.



pg. 37/105

Types of Markets The Primary Market (Regulated by SA33)

The marketplace where the money goes to the issuer of the security. All Primary Market sales require a Prospectus. Initial Public Offering (IPO) – The first time a company issues securities. Subsequent/Additional Public Offering (SPO/APO) – Any issuance of security

outside an IPO. Requires a physical location, an exchange.

NYSE, Chicago Mercantile Exchange, etc

The Secondary Market (Regulated by SEA34) Trading of Issued Securities Exchange Market Auction style Physical Location (NYSE) Highest Bidder (Best Price)

The Third Market (Regulated by SEA34) Over the counter market. Internet sales, trading without centralized location.

The Fourth Market (Special) Instinet or Electronic Communication Networks (ECNs). Large institutional company trades. They arrange between themselves who wants to buy and sell. Hard to move 100,000 shares on the lower markets.



pg. 38/105

The Investment Company Act of 1940 Regulates the rules around Investment Companies; Open-End Management

Companies, Closed-End Management Companies, Unit Investment Trusts, and Face Amount Certificate Companies

Unit investment trusts (UITs)

Exchange Traded offering a fixed (unmanaged) portfolio of securities having a definite life.

No board of Directors, but has a board of managers/trustees.

Created for fixed length of time and is a fixed portfolio; securities in its portfolio will not be sold or increased except in very limited situations.

The Investment Adviser Act of 1940 Regulates rules around Investment Advising. Tested on Series 63 and 65. Advisor is someone 1) in the Business of 2) giving Investment Advice and 3) gets Paid

for that advice.



pg. 39/105

Random Laws Other Regulators and Agencies

Department of the Treasury/IRS Regulates and supervises all national banks and federal savings associations in the US.

Goal to ensure these operate in a safe and sound manner and follow all consumer protection

and AML laws and regulations.

State regulators (e.g., NASAA) Seeks to help protect investors from fraud, in investment advice or securities industry, at the state

and provincial level.

NSMIA created Federal and State covered Securities and Advisers, and they are separate.

Regulatory filing requirements and exemptions (e.g., SEC, blue-sky laws) Form 8-k – Event driven.

Sale of large asset, Mgmt change, Change in name, Bankruptcy, Disgruntled BOD resignation

Relocation of subsidiary not trigger

Filed wi/14 days of event

Form 10-k – Annual audited financial report. Must use independent accountant

Form 10-Q – Quarterly financial report

Annual Report – Sent to stockholders, may use 10-k

State Registration:

Notice Filing – Large nationally traded issues. (not technically registering)

Coordination – Midsize, multi-state issues.

Qualification – Small, All others, single state issues.



pg. 40/105

Anti-money Laundering (AML) Definition of money laundering

The act of trying to conceal transactions to make “dirty” money into “clean” money. It can be

hard to buy cars and houses with drug money for example.

Stages of money laundering Placement

The part of putting money into the market

Structuring – Method of placement breaking down cash into smaller deposits

Layering

Moving money around to try and hide it

Integration

The money is cleaned and can be used to purchased legitimate things

AML compliance program Every member firm must develop and implement a written AML program

Training continuous (web links)

Financial crime enforcement network (FinCEN) enforces AML



pg. 41/105

Customer identification program – the part of a new account application where the RR must verify the identity of the customer by seeing and documenting a non-expired Government issued picture ID (driver license, military ID, or passport)

Suspicious Activity Report (SAR) Must file a Suspicious Activity Report (SAR) involving transactions >$5k when financial behavior

appears illogical.

Currency Transaction Report (CTR) For transactions exceeding $10,000, B/D must file a currency transaction report (CTR)

This could be a single transaction or multiple transactions that exceed $10,000 during a single

business day

FinCEN Financial Crimes Enforcement Network

Bureau of the Dept of the Treasury, collects and analyses information about financial

transactions to combat domestic and international money laundering, terrorist financing, and

other financial crimes.

Office of Foreign Asset Control (OFAC) Financial intelligence and enforcement agency of US Treasury



pg. 42/105

Publishes the list of people and organizations that US people can’t do business with due to

potential international issues.

Specially Designated Nationals and Blocked Persons (SDNs) A list of persons, organizations, and vessels with whom US citizens and permanent residents are

prohibited from doing business with. Published by OFAC.



pg. 43/105

Insider Trading Definition of material and nonpublic information

Material information – Information that would be considered necessary or important to make

an investment decision about the issuer

Nonpublic Information – Information that is not available in the public arena

Definition of insider trading Insider Trading is using Material Nonpublic information in effecting securities transactions. Illegal in ALL cases.

Both the person giving and receiving inside information can be guilty (Tipper and Tippee).

Penalties Penalties

Civil Penalties – Not to exceed the greater of $1M (now indexed) or 3 times the profit gained or loss avoided (“treble damages”)

Criminal Penalties – Up to 20 years in prison

Cotemporaneous Trader – The ‘contra party’ to the inside trader. The party on the other side of the trade. They can sue for 100% of losses, but no more.



pg. 44/105

Books, Records, and Privacy Requirements Books and records retention requirements

3-years Trade confirmations

U-4, U-5, and fingerprint cards, including

terminated personnel

Communications with Public

Order Tickets

Firm’s compliance and procedure manual

4-years Customer complaints

5-years Suspicious Activity Reports

Information to verify customer’s identity

6-years Blotters

General Ledger

Stock Record

Customer Ledger

Customer Account Records

Holding of customer mail When instructions are provided in writing, mail can be held for up to 3 months.



pg. 45/105

Business continuity plans (BCP) Must be created, maintained, monitored and checked by each member. Updated in event of any material change to member, not just personnel 2 APs designated to FINRA as emergency contacts. At least one must be senior

management and a principal, if second is not principal, must be senior management.

Minimum requirements: Data back-up and recovery (hard copy and electronic);

All mission critical systems;

Financial and operational assessments;

Alternate communications between customers and the member;

Alternate communications between the member and its employees;

Alternate physical location of employees;

Critical business constituent, bank, and counter-party impact;

Regulatory reporting;

Communications with regulators; and

How the member will assure customers' prompt access to their funds and securities in the event

that the member determines that it is unable to continue its business.

Can’t leave above blank, if not applicable must explain

Customer protection and custody of assets Those in custody must take great care of books, and may have other requirements

such as surety bond, and filing requirements Can’t use the funds for company business, must be segregated



pg. 46/105

Prohibited Activities Market Manipulation

Definition of market manipulation Deliberate attempt to interfere with the free and fair operation of any market. Somehow,

someway, purposefully increasing or decreasing the value of a security.

Types of market manipulation Front Running

“Running in front” of a large block order. When a large block order is placed, it will change the prices. Placing a personal order in front of a large block is “front running”

Trading ahead of research reports – Knowing that a research report is coming out, and buying/selling based on that unpublished report.

Rumors

Spreading false gossip about a security for personal benefit. Generally linked to Pump and Dump.

Pump and Dump

Buying a large amount of a cheap stock, artificially increasing the price of the stock, and when it is higher sell all you have at a profit.

Marking the Close

Buying a security at very end of trading day at higher price than current market price to artificially raise the closing price to make it appear higher valued.

Marking the Open

Placing orders at a slightly higher price, or sale orders at a lower price to drive up or suppress the price of securities when the market just opened.

Backing Away

Failure of a Market Maker to honor the quoted bid and ask prices.

Withholding/Freeriding

A practice where an underwriter does not make a legitimate public offering of a hot issue, but instead holds back shares, hoping to sell them for more than the Initial Public Offering Price.

The underwriter is “withholding” shares.



pg. 47/105

Churning

Agent doing transactions purely for commissions

Depends on client’s objectives and goals, if it is churning

Switching

Churning in Mutual Funds

“Switching” clients between fund families to generate additional sales charges and commissions.

Remember, moving within the same fund family does not have sales charges.

Selling Dividends

Trying to convince a client to buy a security just to receive an upcoming dividend.

Selling the stock BECAUSE of upcoming dividends

Breakpoint Sale

Selling an investment just below a breakpoint.

Must always notify clients of breakpoints.

Unethical

Can’t recommend borrowing beyond their means, but letters of intent should be suggested

Other Prohibited Activities Restrictions preventing associated persons from purchasing initial public offerings

(IPOs) Certain reps of certain members will be prohibited from purchasing IPO issues, as they could be

deemed to have an unfair advantage.

They may not own stock, in any personal account, or any account in which they have beneficial

interest, unless those permitted by exception.

Fraud No member shall effect any transaction in, or induce the purchase or sale of, any security by

means of any manipulative, deceptive or other fraudulent device or contrivance.

Improper use of customers’ securities or funds Borrowing from customers

You cannot borrow from clients who are not in the lending/borrowing business, except;

Immediate Family, Outside long term friends (best friend since childhood who become a client a couple years ago), Outside business partners requiring lending between you, and Other reps registered with the same member firm

Guarantees No guaranteeing of customer’s money

Guaranteed Bonds: Backed by a parent company of the issuer



pg. 48/105

Sharing in customer accounts Registered Reps can’t share in clients accounts, unless there is a written procedure in place and

they share in direct proportion to the amounts contributed by all parties.

Except in the case of accounts being shared with immediate family.

Influencing Employees of other Members BDs may not pay compensation to employees of other members except when employing firm

gives written permission and gifts are less than $100.

Be careful about the difference between a “gift” and a “marketing expense”

Financial exploitation of specific adults Permit members to place temporary holds on disbursements of funds or securities from the

accounts of specified customers where there is a reasonable belief of financial exploitation of

these customers

Require members to make reasonable efforts to obtain the name of and contact information for a

trusted contact person for a customer’s account.

Activities of unregistered persons Prohibition against paying commissions to unregistered persons

Must be natural person, can’t receive commission income through separate entity.

Prohibition against solicitation of customers and taking orders

Unregistered people can’t solicit or take orders

Falsifying or withholding documents Signatures of convenience

Blank forms/dates with signatures to allow easy filling and filing.

Very unethical and not allowed.

Responding to regulatory requests

Promptly



pg. 49/105

3. People Account Types and Characteristics

Documentation It is important for a RR to obtain essential facts about a customer opening an account

Customer name and residence

Whether or not they are of legal age

Signature of Principal

Cash Easiest simplest to set up, 100% owned securities, as if “bought in cash”.

Margin Client borrows money from the broker Regulation T (set by FRB) determines how much equity client must deposit. Currently

50%

Options Many disclosures required.

Discretionary vs. non-discretionary The rep can make purchase and sales without needing to talk to the client. Discretionary if advisor makes any of the 3 A’s

Action: Buy or Sell

Asset: The specific asset

Amount: The number of shares or dollar value to buy or sell

Price and Time are NOT discretionary

Fee-based vs. commission Fee-Based – Advisory. Usually either on an hourly basis or percentage of assets under

management annually. Commission – On a sale. Generally, a fixed amount or a percentage of the sale price.



pg. 50/105

Customer Account Registrations Individual Account

1 owner, no one else can make decisions without POA

Joint Account Tenants in Common (TIC)

If one tenant dies, their share is frozen and given to estate.

All tenants can deposit, make investment decisions, withdrawal.

With the approval of all tenants, only 1 tenant can be designated to receive mail.

Joint Tenants with Rights of Survivorship (JTWROS) Very much like TIC, except when one tenant dies, others gain their share.

Generally, only done in marriage.

Corporate/Institutional Account Requires corporate documents, and list of authorized traders When any changes occur, new documents must be provided before trading can

continue.

Partnerships Account Partnership agreements, list of all partners, all partners can conduct business.



pg. 51/105

Trust Revocable Trusts – Can be changed while the person is alive. Generally, does not have

tax benefits. Irrevocable Trusts – Can’t be changed while the person is alive. Once set up they are

unchanging. They may have some tax benefits depending on the structure. Living Trusts – Created while the person is alive Testamentary Trusts – Created when a person dies Simple Trusts – Distributes all income each year to beneficiaries. Complex Trusts – Doesn’t need to distribute all income each year to beneficiaries. Charitable and Non-Charitable provide tax benefits depending if the goal is to leave a

charitable gift. Charitable Remainder Trusts are where while they live they benefit, but when they

die charity does.

Custodial Uniform Gift to Minors Act (UGMA)/Uniform Transfer to Minors Act (UTMA)

Basically identical except UGMA age is assigned by state UTMA age can be set up to age 25.

Everything else about UGMA/UTMA are identical.

One minor and one custodian per account

All securities are registered in the minor's name

Contributions to the account are considered an irrevocable gift to the minor.

UGMA/UTMA accounts must include custodian's name, the name and social security number of

the minor

Taxes

UGMA/UTMA is not a place to hide from taxes.

Specific Tax Brackets are not important

Tax Liabilities are responsibility of the minor.

Tax liabilities are the minor's responsibility



pg. 52/105

Retirement Individual

Traditional IRA

100% of earned income up to annual max, plus $1,000 catchup if over 50 years’ old

Spousal option for nonworking or low-earning spouse

Allows non-wage earning spouse to contribute up to annual limit to their IRA.

Tax deferred growth

Premature withdrawal (prior to age 59½)subject to 10% penalty plus tax, with exceptions like a Roth

Has Required Minimum Distributions (RMDs)

Withdrawals must begin by age 70½ or penalties for failing to withdrawal and pay taxes. Always better to withdrawal and pay taxes.

Roth IRA

Contribution limits are same as Traditional IRA Contributions are subject to income limits

Traditional if over not deductible anymore

Roth if over can’t contribute

After tax nondeductible contributions only

Tax free distribution if:

Account is open for at least 5 years (Roth Only)

Withdrawals begin after 59½ (Roth Only)

Penalty free withdrawals for 1st time homebuyer ($10,000 lifetime cap)

Qualified higher education expenses

Disabled owner

RMD does not apply (70½ rule)



pg. 53/105

Qualified Plans ERISA

Minimum requirements private sector plans must meet to be “Qualified” plans.

All employees 21 years or older, who have worked for 1-year full time, and for 1000 hour or more.

Money must eventually vest, even if the employee is no longer employed.

No discrimination

Qualified Plans contain Qualified Money. Qualified Money is tax deductible, that is Pre-Tax

Contributions. All Qualified Money if fully taxable at withdrawal. Qualified Money and all

accounts with them have RMDs at 70½. 50% penalty on what should have been withdrawn.



pg. 54/105

Defined Benefit vs Defined Contribution Defined Benefit

Think pension.

Company defines a benefit and it has responsibility to meet.

Defined Contribution

Think 401(k).

Company offers employees ability to withhold income and invest in options company selects.

401(k)

Pre-tax contributions, grows tax-deferred

No mandatory matching

Employee picks where money goes

Employees are always 100% vested on their contributions

Distributions prior to 59½ will receive a 10% penalty, RMDs at 70½.

All withdrawals will be taxable

403(b)

Tax Sheltered Annuities (TSA)

Pretax contributions

Public school employees, non-profit hospitals, and churches

Contributions are made by salary deduction



SEP IRA

For self-employed individuals and their eligible employees

Eligibility rules:

21 years’ old

Worked for same employer 3 out of the last 5 years

Has received IRS Small Amount, in compensation from the employer

Employer contributions only

Max contribution is the lesser of 25% of gross earnings or IRS Maximum





pg. 55/105

SIMPLE IRA

Small business plan

No more than 100 eligible employees

Any employee that make $5,000 during the previous year

Employees may contribute to their account up to the annual limit

The employer must contribute either by:

2% method or

3% $for$ match

Employees are immediately 100% vested on employer's contributions



Keogh

Only a self-employed person or an employee of a self-employed person is eligible

Eligibility rules (“1-1-1”)

Must be 21 years’ old

Must have worked with the company for at least 1 year

Must have worked at least 1,000 hours in that year

Voluntary employee contributions are allowed up to the lesser of 10% of earned income or $2,500

Max contributions are 25% of gross income up to IRS Maximum





pg. 56/105

Municipal Fund Securities 529 Plans/Educational accounts

529 Prepaid tuition Able to purchase prepaid tuition for participating state universities. Not very flexible, and can be

a problem is child wants to go to outside university. (Rarely dealt with)

Section 529 Savings plans State-sponsored municipal fund for post-secondary education.

Funds Secondary and certain K-12 Expenses ($10k/year)

After-tax contributions

Gift tax limits ($15k/person/year 2018), 5-year lump sum possible

Tax-deferred growth

Distributions tax-free for qualified education

No income limits

Can be moved to other family members

Coverdell Education Savings Account (ESAs) After-tax contribution

$2,000/child/year up until child turns 18

Tax-free for qualified education, any education including high school and below.

Income limits on donor

Must be used by 30, or penalized and taxed on the remainder.

Can be moved to other family members

Owner vs. beneficiary In most cases the owner and beneficiary are the same

529 cases the owner and the beneficiary are generally not (but could be). The beneficiary is

(generally) the child, and the owner is (generally) the parent(s) or grandparent(s) of the

beneficiary



pg. 57/105

Local government investment pools (LGIPs) Not regulated by SEC, but similar to other funds. Designed to provide state or local government public entities to invest public funds.

Designed to offer safety with competitive yields, and have a history of prudent management, but some isolated instances of losses. Required to provide regular reporting and disclosure

Sort of like a Money Market, but run by municipalities (sort of)

ABLE accounts Tax advantaged savings accounts for individuals with disabilities and their families.



pg. 58/105

Communications with the Public Retail Communications

Defined as materials used in the media; Newspapers, magazines, radio, and television No guarantees. No promises. Almost always requires a principal to at least review, except; Institutional communications are communications distributed and made available

only to institutional investors (no principal needed)

Sales Literature Defined as any written or electronic communication made generally available to the

public Reprints, telemarketing scripts, performance reports, and circulars are all sales

literature Retail Communications are distributed to more than 25 retail investors within any 30

calendar-day period.

Communications vs Correspondence Communications is more than 25 (26 or more) Correspondence is 25 or less (less than 26) Communications must always be checked by a principal BEFORE clients see it,

Correspondence just needs spot checks.



pg. 59/105

Advertising Recordkeeping Advertisements, Sales Literature, and any other retail communications must be kept

on file for 3 years starting from date of first use and last use. Advertisements and Sales Literature must be filed with FINRA within 10 days after

use For newly established firms, that is 10 days prior filing

Telemarketing Calling people you don’t know to try to get them to buy something

No private residence can be called before 8 am their time or after 9:00 pm in their local time

zone

Check the DNC

Do-not-call list (DNC) If not expected to call, must check DNC list.

If client request to never be called again, must add them to company DNC list.

Established business relationship exemption Telemarketer has made a financial transaction within 18 months of call

The telemarketer is the B/D of record on the client's account

The person contacted the telemarketer within 3 months of the call

Personal Relationship Family, friends, and acquaintances are exempt

Telephone Consumer Protection Act of 1991 When making cold calls, rep must record names and put on DNC if uninterested (within 30

days). Must tell prospect firm’s name.



pg. 60/105

Suitability requirements Know-your-customer (KYC)

Bank and Anti Money Laundering regulations.

Requires proof of identity, make sure the client is who they say they are.

What constitutes a recommendation General requirements

Your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your income and net worth, investment objectives, risk tolerance, and other security holdings.

Based on; age, other investments, situation and needs, tax status, objectives, experience, time horizon, liquidity needs, risk tolerance, and any other information disclosed



pg. 61/105

Associated Persons Registration and Continuing Education

SRO qualification and registration requirements Definition of registered vs. non-registered person

Registered Person: Anyone involved in a firm’s investment banking or securities business must be a registered representative with FINRA. Anyone dealing with cash or original books of entry as well. Duties include; supervision, solicitation, or training of persons associated with member

Non-registered persons: Limited to clerical, ministerial, or janitorial type positions. May not recommend or solicit business.

Permitted activities of registered and non-registered persons

Registered reps can handle customer accounts, make recommendations. Commissions can be split with others registered reps of the same member.

Non-registered persons are limited to clerical, ministerial, or janitorial type positions.

Ineligibility for membership or association

Firms that do not meet certain financial requirements or do not have natural persons with the experience necessary.

Individuals are only ineligible with statutory disqualification, or inability to prove citizenship

Background checks

Firms are responsible for investigating the good character, business reputation, qualifications, and experience of applicants for registration

Required to make reasonable effort to review most recent Form U5

Full 10-year employment history

Fingerprinting

Everyone in the business gets fingerprinted.

Anyone who is a registered representative, who touches money, or who deals with any original books of entry must all be finger printed.

Exemption for those not involved in securities sales, do not handle or have access to cash/securities, and do not supervise employees engages in these activities.



pg. 62/105

Statutory disqualification

If a person has been expelled or suspended and is denied trading privileges, or is subject to an order of the commission for such actions

For Firms

Having been expelled/suspended by another SRO

Subject to SEC order denying/suspending/revoking registration

Willfully filed false or misleading membership application

For Individuals

Made willful misrepresentations on registration application

Felony conviction within past 10 years

Misdemeanor conviction involving securities or money in past 10 years

Failing to register an associated person

The failure of any member to register an employee, who should be so registered, as a Registered Representative may be deemed to be conduct inconsistent with just and equitable principles of trade and when discovered may be sufficient cause for appropriate disciplinary action.

Continuing Education (CE) requirement Firm Element – Taken at office each year

Regulatory Element – Completed within 120 days of second registration anniversary and

every 3 years after.

State registration requirements All Broker dealers and their reps must be registered in each state, or exempt from registration in

that state (no place of business, only transacts with institutions, only exempted

securities/transactions, etc)



pg. 63/105

Reportable Events Private Securities Transactions

Securities transactions that are not done by the Broker Dealer. Must get permission, or can’t be

done. If permission is given the trade is run on the BD’s books.

Generally requires getting paid.

Outside Business Activities Any money from an outside source. Non-Securities Related. Not permission, just notification.

Certain charitable, non-payment, but still potential conflict of interest positions also require

notifications (unpaid Board of Director, helping charity issue securities, etc)

Reporting of political contributions and consequences for exceeding dollar contribution thresholds

FINRA 2030

Max $350 to a candidate you can vote for, $150 for a candidate you can’t vote for

Can’t solicit or coordinate contributions

No contributions or government entities the member is or trying to engage in distribution or solicitation

You can’t contribute to a mayor’s campaign if you are trying to underwrite a municipal bond from the city.

New associates, no problems for more than 6 months before being covered

Dollar and value limits for gifts and gratuities and non-cash compensation $100 limit for gifts.

Business entertainment Must keep track to verify no gifts above $100

Felony, financial-related misdemeanors, liens, bankruptcy Must be reported PROMPTLY



pg. 64/105

Employee Conduct Form U-4 and Form U-5 (e.g., purpose, when to update forms)

U-4 – Initial Registration Form

U-5 – Withdrawal Form

Changes within 30 days

Consequences of filing misleading information or omitting information Termination, and potentially other consequences

Customer complaints Filed in writing

4 year held by OSJ, with what was done

Potential red flags: Indicators of irregularities or misconduct Unreasonably large number of trades in accounts in regards to clients stated goals (churning)

Blanket recommendations

Many other brokerage accounts

Not wanting to take mandatory vacation

Identical explanations on many replacement forms



pg. 65/105

Control and restrictions (SEC Rule 144) Can’t normally be sold in public marketplace. Control Securities – held by an affiliate of the issuing company

Officer, director, large shareholder, or in control relationship

Restricted Securities – are acquired in unregistered private sales, typically Private Placements, Reg D offerings, or similar.

5 general conditions under Rule 144 Holding Period – only applies to restricted stock. Must be held at least 6 months if reporting to

SEA34, if not subject to reporting requirements must be held at least 1 year. No hold period

restrictions for affiliate who purchases securities of issuer in marketplace, but resale of affiliates

shares as control securities is subject to conditions.

Current Public Information – Must be adequate current information about issuing company

publicly available before sale can be made.

Trading Volume Formula – If affiliate, the number of equity securities that can be sold during any

3-month period can’t exceed greater of 1% of outstanding shares of same class, or greater of

1% or average reported weekly trading volume during 4 weeks preceding filing of sale on form

144 (WORK)

Ordinary Brokerage Transaction – If affiliate, sales must be handled in all respects as routine

trading transactions, brokers can’t receive more than normal commissions. Neither seller nor

broker can solicit orders to buy the securities

Filing a Notice of Proposed Sale with the SEC – If affiliate, must file notice with SEC form 144 if

sale involves 5,000+ shares or aggregates dollars is greater than $50,000 in any 3-month

period.

Restricted stock, held by non-affiliates, can always be sold after 1 year normally.



pg. 66/105

Roles of participants Investment Bankers

A single underwriter of securities. They know what type of financial instrument should be issued, the pricing, and the

regulatory requirements to try and raise maximum capital. Too much risk for a single bank, so they join into a syndicate.

Underwriting Syndicate A group of underwriters working together to underwrite a new issue, thus spreading

the risk amongst more participants.

Municipal Advisors Stated below, seems like Underwriter for Municipal Securities.

Market Participants and their Roles

Investors Retail

Normal regular investors.

Accredited Net Worth of at least $1M (excluding primary residence), or have income of $200k ($300k

married) for past 2 years and expect it to continue.

Institutional Large organization, like bank, pension fund, labor union, or insurance company that makes

substantial market investments. Not natural persons.



pg. 67/105

Broker-Dealers Introducing

Doesn’t actually handle the transactions.

They can make recommendations, but someone else is actually handling the trade.

Forwards the money it receives to the actual clearing firm

Clearing Acts as middle man, makes sure trades are settled properly and transaction is successful. They

work between the investor and a clearing corporation and actually does the trade.

Prime Brokers Brokerage firm that offers special services to only certain clients. These clients could be hedge

funds, specialists, or even other money managers.

Investment advisers Discussed earlier, In the business, of giving investment advice, and getting paid for

that advice

Municipal advisors A person that provides advise to or on behalf of a municipal entity or similar with

respect to municipal financial products or issuance of municipal securities, including with respect to structure, timing, terms, and other similar matters OR undertakes solicitation of a municipal entity

Including; Financial advisers, Guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors engaging in municipal advisor activity.

Basically Underwriters for municipalities?



pg. 68/105

Traders and market makers Traders

Individual who engages in buying/selling of financial assets in any market either for themselves

or someone else. Difference between Trader and Investor, is Investor is long term, Trader is

short term

Can work for a company, using company money, or could be for themselves, personal money.

Day Trader – Someone who buys and sells during a single day, doesn’t hold positions over

night.

Either making 4+ trades in any 5-day period, or the firm believes they are a day trader

$25,000 min equity at start of day

Market Makers Big Firms.

They promise to always be willing to sell at a given price (their Ask), and buy at a given price

(their Bid). The combination of the Ask and Bid is their current Quote. Some securities have only

a few MMs, others have hundreds. The more MMs the more liquid the investment.

Example: 50-50.50 (10x20). They are quoting the bid, what retail investors would get for

selling to them at $50, and they are willing to purchase 10 lots, or 1,000 shares at $50. They

are quoting the ask, what retail investors pay as $50.50, and they are willing to sell 20 lots, or

2,000 shares at $50.50.

Depositories and clearing corporations Depository Trust and Clearing Corporation

American post-trade financial services company provided clearing and settlement services.

Clearing – all activities from the time a commitment is made for a transaction until it is settled.

Settlement – Process whereby securities or interests in securities are delivered, usually against payment of money to fulfil contractual obligations.

Options Clearing Corporation Clearing house based in Chicago specializing in equity derivatives clearing and settlement.



pg. 69/105

Positions in a Mutual Fund Investment Adviser

The IA is elected by the BOD to manage the fund's portfolio

The IA is paid a fee based on the percentage of AUM over a specific period of time

This fee is classified as an operating expense of the fund

The IA must conform to the objectives of the fund stated in the prospectus

Custodian Mutual funds are required to have national bank or any qualifying institution to act as its

custodian

Duties of the custodian include:

Safeguard the physical assets

Perform payable and receivable functions

Register the receipt of interest and dividends for the fund

Custodian does not perform any management, supervisory or investment functions

Custodian is not involved in the selling of any MF shares

Transfer Agent Shareholder services

The transfer agent is contracted by the fund to perform basic clerical functions:

Issue the shares

Redeem the shares

Distribute the dividends and capital gains



pg. 70/105

Disclosures Disclosures of Financial Condition

Must make available to any customer, upon request, information relevant to member’s financial condition, by disclosing most recent balance sheet.

Disclosures of Investment Policies (Objectives) Investment companies must publish their investment objectives. Can only be changed by a vote including shareholders.

Disclosures of fees Investment Companies must disclose standardized performance information, the

maximum sales charge, and the total annual fund operating expense. Investment Advisers must disclose their fees, amounts, prepayment requirement, and

it must be in writing.

Disclosure of fiduciary responsibility The fiduciary duty is an obligation of loyalty and good faith to someone or some entity

that is the highest duty known to the law Full disclosure of conflict of interests

Proxies and proxy voting Voting in absence, by giving their voting power to a representative, the one they gave

their “proxy” to, or who is standing in “proxy” of them. Mutual Fund shareholders have voting rights on the assets in the portfolio, and

usually would vote by proxy if needed Basically an absentee ballot



pg. 71/105

Privacy requirements (e.g., Regulation S-P) Nonpublic personal information

Personally identifiable financial information, any list/description/grouping of consumers that is

derived using any personally identifiable financial information not publicly available

Doesn’t include; publicly available information or any list derived from publicly available

information

Confidentiality of information Describe in general terms who is authorized to have access to the information and state whether

you have security practices and procedures in place to ensure confidentiality of the information

in accordance with the privacy policy.

Privacy notifications Notified at time of account opening and annually.

Can opt out of annual updates

Trustees and Custodians The fiduciary, the one with responsibility to act in the best interests as stated in the

documents, of a trust or similar entity They are a fiduciary and must act in the best interest of the stated purpose of the trust,

not necessarily any given beneficiary or owner. Custodians are generally trustees of an account for a minor. Trustees are more legally assigned, Custodians are more chosen, but not necessarily

always.



pg. 72/105

4. Economics Monetary and Fiscal Policy

Monetary Policy Controlled by the Federal Reserve Board

FOMC

Discount Rate (Prime is based on discount)

Reserve Requirement

Regulation T

Margin Requirements

Currently 50% must be down payment ($2,000 minimum)

Must pay BD within 4 business days or account frozen for 90 days

Only cash trades, no borrowing

No mutual funds on margin

Primary focus to control inflation

Supervises and regulates banks

Maintains stable financial system

Tighten/Loosen money policy



pg. 73/105



pg. 74/105

Fiscal Policy Controlled by Federal Government

Primary focus is stable economic growth and high levels of employment

The Government's use of taxes and expenditures

Interest Rates Discount Rate – The rate members banks borrow from the Fed at. The only rate

directly set by the Federal Reserve Board. Federal Funds Rate – The rate commercial banks borrow from the member banks at.

Target is set by the Fed, but the rate itself is set by the individual banks. Broker Call Loan Rate – The rate for margin accounts. Prime Rate – Rate lenders charge to their best, highest credit borrowers. Normal

people pay points above Prime depending on their credit scores.



pg. 75/105

Business Economic Factors Financial Statements

Balance Sheet – Assets and Liabilities A stock we own is an Asset

A mortgage balance is a Liability

Income Statement – Cash Flows The interest we get on a bond is income

Networth/Shareholder Equity Assets-Liabilities

Business cycle

Expansion – GDP Increasing, Unemployment around target, inflation near target,

Stock market Bullish, Lower inventories due to higher sales, higher consumer demand

Peak – Economy overheating, GDP growing above target, inflation greater than target Contraction – Growth weaken, GDP falls below target, Higher inventories due to

lower sales, lower consumer demand Trough – The bottom; opposite of peak. Economy at bottom, GDP below target,

inflation less than target



pg. 76/105

Indicators Leading – Indicators that tell us “where we are going”, they “lead” the economy

Money supply, Average weekly unemployment claims, Building permits, Manufacturer’s new

orders, S&P 500

Lagging – Indicators that tell us “where we have been”, they “lag” behind the economy

Prime rate investing, Change in CPI for services, Duration of unemployment

Coincident – Indicators that tell us “where we are”, they tend to move with the economy

Non-Agricultural employment, GDP, Industrial Production, Personal income, Manufacturing, and

Trade sales

Inflation Consumer Price Index (CPI). Measures the costs of a standard “basket” of goods to determine

inflation rate.

Basic effects on bond and equity markets (e.g., cyclical, defensive, growth)

Cyclical Stocks that go up and down, follows business cycle: Auto, Steel, Heavy Equipment, etc

Defensive Stock that is generally resistant or immune from downturns. Tobacco, Alcohol, Food, Utilities, etc

Growth Stocks with low dividends, generally trading at higher end of 52-week range, and are focused

more on capital growth

Value Stocks with generally higher dividends, generally trading at lower end of 52-week range, and

are not necessarily going to have capital growth.



pg. 77/105

Principal economic theories Keynesian – In short run, especially during recessions, economic output strongly

influenced by aggregate demand. Monetarist – changes in money supply are most significant determinants of economic

growth and business cycles Supply-Side – Economic growth can be most effectively created by lowering taxes,

deregulation, and work on the “Supply Side” of the market.

Gross domestic product (GDP) and Gross National Product (GNP)

GDP – All production within a COUNTY Consumption + Investment + Government Spending + (exports – imports)

GNP – All production by all CITIZENS GDP + Money coming in – Money going out

Economic/Money Stuff Inflation

Inflation refers to a general increase in the price of goods and services. This occurs when

demand for these items grows faster than the supply. The result is more money chasing fewer

goods, and therefore prices increase.

Deflation Deflation is a general decline in prices, often caused by a reduction in the supply of money or

credit. Deflation can also be caused by a decrease in government, personal

or investment spending.

Stagflation This is a condition of slow economic growth and relatively high unemployment - a time of

stagnation - accompanied by a rise in prices, or inflation.



pg. 78/105

International Economic Factors Strong/Weak Dollar

U.S. balance of payments

The record of all economic transactions between the residents of the US and of the world in a particular period (usually quarter or a year).

Negative Balance of Payments, or Trade Deficit More money going out than coming in, but more materials coming in than going out

Getting cheaper materials to have better life for citizens

Positive Balance of Payments, or Trade Surplus More money coming in than going out, but less materials coming in and more going out

Producer for the world, but not necessarily benefiting from their production ability



pg. 79/105

Investment Returns Components of return

Interest – Taxed as ordinary income Dividends – Taxed as ordinary income Ordinary Income

All Earned Income

Earnings from employment, dividends, interest, and annuity payment.

Alimony is Earned Income, Child Support is not.

Taxed at marginal rates, progressive

Cost Basis/Principal – You are not taxed on money twice; if money was taxed before being invested, it creates a cost basis. You are not taxed on withdrawals of cost basis. LIFO/FIFO important. *Image in a few pages

Any nondeductible investment creates a cost basis.

Individual cost basis per shares is affected by stock dividends.

The only way to change the overall value of cost basis is to invest more money or take out

money.

Transferring:

Gifts keep same Cost Basis

Inheritance steps up to fair market value at death

Capital Gains- The type of income from selling securities. Long Term a year and a day or longer, Short Term a year or less.

Capital Losses go against Capital Gains Dollar for Dollar.

Excess Long-Term Capital Losses can be written off against Ordinary Income $3,000 a year

until used up.

Unrealized Gains/Losses are those that exist before a sale has occurred. No taxes are owed

until they are realized.

Realized Gains/Losses are those once a sale has occurred.

Short-Term realized gains charged Ordinary Income

Long-Term realized gains charged Capital Gains rate



pg. 80/105

Different types of dividends Only declared by Board of Directors Cash Dividends

Given in the form of cash. Can be reinvested (at no sales charge) or can be received in cash.

Either way Ordinary Income Tax will be paid that year.

Stock Dividends A stated percentage of stock will be given, so number of shares will increase.

A 10% stock dividend, with someone owning 1,500 shares, means they get 10% more, or 150

shares more, so after the dividend they have 1,650 shares.

Not directly taxable, but will effect cost basis for capital gains calculations if portions of the

portfolio are sold.

Dividend payment dates Declaration Date

The day the Board of Directors authorizes the dividend

Payment Date The date on which the declared dividend will be paid

Record Date The day the shareholder must officially own shares to receive the dividend

Ex-Dividend Date First day you purchase the security, and will NOT get the upcoming dividend

ONE business days prior to the Record Date

Must purchase shares before EX-date if you want to receive the dividend



pg. 81/105

Corporate Actions Types of corporate actions:

Splits (Forward Splits) Designed to decrease an expensive security to get more people interested and able to purchase

Reverse Splits Designed to increase a cheap securities price to get the price into a more attractive price area,

and to potentially keep it from getting delisted if there are minimum prices to be listed on certain

exchanges.

Buybacks The company purchases its shares on the open market to turn them into Treasury Stock. Does not

require shareholder approval.

Tender Offers Type of public takeover bid

Offer to all stockholder of a publicly traded company to tender their stock for a specified price

during a specific time, subject to tendering of a minimum and maximum number.

Usually at a premium

Exchange Offers Like a Tender Offer, but securities are offered instead of cash; trading.

Rights Offers An issue of Rights to existing shareholders that entitle them to buy additional shares from the

issue in proportion to their existing holdings, within limited period of time.

Mergers and Acquisitions When two companies combine into 1 (merger), or when one company takes over another

company (acquisition)



pg. 82/105

Impact of stock splits and reverse stock splits on market price and cost basis

The total value of the portfolio won’t change, simply the number of shares. Cost basis per share is always (Total Cost Basis) divided by (Total number of shares).

Unless you invest more, or sell, the Total Cost Basis never changes. Only the number of shares changes.

If the number of shares increases (stock splits), that means each share decreases in value, proportionally, so the total value stays the same.

If the number of shares decrease (reverse splits), that means each share increases in value, proportionally, so the total value stays the same.

With Fractions, multiply by the number on top, divide by the number on bottom. Larger number on top makes answer Larger, Smaller number on top makes answer

Smaller. Stock Splits multiply number of shares by larger fraction Stock Reverse Splits multiply price by larger fraction

Adjustments to securities subject to corporate actions Dilution/Antidilution

Dilution means your number of shares is fixed, so when more shares are issued, your power

goes down.

If you had 3,000 of 10,000 shares, you own 30% of the company, but if the company issues 10 million more shares, and you still only have 3,000 shares, you just got diluted to almost no control.

Antidilution is a property of certain investments to make sure the ownership control percentage

won’t decrease when additional shares are issued.

Common Stock: Has rights offerings designed to allow current shareholders to maintain their proportional ownership

Convertible Securities: Will convert to more shares, so that the fixed number of shares it converts to at issue, that percentage of all shares will be the same percentage the bond converts to after issue. Decreases the conversion price.

With stock splits, the number of shares the convertible converts to is affected the same way as a split and reverse split; The bond converts to more shares, at a lower conversion price in a stock split, and converts to fewer shares, at a higher conversion price in a reverse split.



pg. 83/105

Cost Basis Adjustments The total portfolio cost basis only changes if money is deposited or removed. Individual share cost basis changes with stock dividends and splits. Only needed for partial surrenders/sales. Per share cost basis is found by dividing cost basis by number of shares in total.



pg. 84/105

Types of Risks Capital

The risk of loss of principal.

Business/Credit The risk the issuer will go out of business, or default on debt.

Business Risk relate to stock.

Credit Risk relates to bonds.

Market/systematic The risk that the market will go down.

Cannot be diversified away.

Legislative Risk Risks that laws will change.

Regulatory Risk Risks that regulations will change (FDA, FCC, EPA, etc)

Risk that a rule changes.

Taxability Risk Not going to be seen

The risk that a municipal bond loses tax exempt status.

Sovereign/Political Risk The risk in foreign investments that the political climate, changes.

Interest rate Risk The risk that changes in interest rates will affect the security.

Longer the maturity the more generally effected

The longer the duration, the more effected.

Fixed income.

Inflationary/purchasing power Risk The risk in fixed income securities that over time the value of the principal is losing purchasing

power.

Liquidity Risk The risk that the investment can’t be turned into cash.

Minimal/nonexistent in exchange-listed securities, government securities, mutual funds and

similar.

Certain specialty investments have major liquidity problems; Real estate, hedge funds, and

similar.



pg. 85/105

Marketability Risk The risk you will not be able to market, or sell your investment

Similar, but not the same as liquidity

Marketability has nothing to do with price/value, only the ability to sell.

Currency Risk The risk that exchange rates will change and effect the investment.

Primarily think ADRs.

Reinvestment Risk The risk at maturity that you won’t be able to get as good an investment.

Prepayment Risk The risk that the principal will be returned before the investor wants. Present in Callable

securities, GNMA, CMO.

Call Risk The risk that a security’s issuer will call the security; returning principal and ending income.

Only on preferred stock or bonds

Does come with higher income on the bonds though

Only get called during falling interest rates.

Extension Risk Not likely to be seen. Opposite of Reinvestment Risk.

The risk it will take longer than expected to get the money back.

Non-systematic Risk Risks that can be easily diversified away, generally by simply purchasing more issuers.



pg. 86/105

Strategies for Mitigation of Risk Diversification

The purpose of mutual funds; to diversify the risk Certain risks can be diversified away called “nonsystematic risk”; business, credit,

reinvestment, liquidity, etc. Some risks can’t be diversified away called “systematic risk”; market risk, interest

rate, if the market crashes, all stocks crash.

Portfolio rebalancing Moving assets around to put it back the original percentages chosen, to ‘rebalance’ the

percentages. In any given year, some assets will grow, others will shrink; Rebalancing is then

selling some of the winners, to buy more of the losers, cause next year things could switch.

Hedging Insurance. Buying negatively correlated investments (investments that have historically moved

opposite) Buying puts when you are long the security (you bought the stock)

Buying a call when you are short the security (when you sold borrowed securities and still owe

the securities to the person you borrowed them from)



pg. 87/105

Benchmarks and indices Index

Statistical tool designed to measure performance of something over time. Dow Jones Index

measures performance of 30 big companies. Consumer price index measures inflation.

Benchmark Something that serves as a standard by which others are measured or judged, point of

reference. Almost all benchmarks are indexes, but not all indexes are benchmarks.

Beta (β) The risk of the security compared to an underlying index or benchmark

A beta of .8 means if the index moves +10, the security is expected to move .8*10= up 8. If the market moves down 5, the security is expected to move .8*5= down 4.

Negative beta means opposite movements

Beta less than 1 means the security is less risky than the underlying index or benchmark

Beta of more than 1 means the security is more risky than underlying index or benchmark

Alpha (α) The difference between what is expected (use beta to calculate) and what is actually returned

Generally used to measure the effectiveness of a money manager.

Figure out what you SHOULD have gotten (using beta), and then subtract that from what you ACTUALLY got. That is the alpha.

Should have got 5, actually got 7, 7-5=2, alpha of 2

Should have got 8, actually got 3, 3-8=-5, alpha of -5



pg. 88/105

Securities Investor Protection Corporation (SIPC) Cash Accounts, 100% fully owned $500,000 total value, of which at most $250,000 can be in liquid cash Per account title (Husband, Wife, and Husband & Wife are 3 accounts)

Federal Deposit Insurance Corporation (FDIC) Insurance on bank accounts, guaranteed to not lose money. Not Securities. Any bank that has securities on premises must have separate location, and notify

customers securities are not FDIC covered.



pg. 89/105

Orders and Strategies Types of orders

Market – An order to buy or sell at the next available market price.

Limit – An order to buy or sell at a given price or better. Will never be bought or sold at a price

‘worse’ than the limit price, but even if the market price hits or goes through the limit price, the

order may not place if the market price comes back.

Stop – An order to buy or sell once a given price has been reached. Once that price is hit, the

order “Triggers”, and becomes a market order. Could be bought or sold at prices better or

worse than the Triggered price.

Stop-Limit order – Like a stop order, but instead of becoming a market order at Trigger, it becomes a limit order. A stop price, and limit price are given.

Going to set a bound, so that if the price changes too quickly, the stop won’t execute.

Good-til-Canceled (GTC) – An order that will not expire until it is filled

Discretionary vs Non-Discretionary – If any of the 3 A’s are missing (Action, Asset, or Amount)

it must be in a discretionary account with discretionary authority

Solicited – A client buys a security that the rep recommended to them

Unsolicited – A client requests a security the rep did not recommend, but simply wants to do

something themselves.



pg. 90/105

Appendix – Acronyms Acronym Meaning Definition

ADR

American Depository Receipt

A type of investment, that represent foreign companies, but trade on US exchanges in US dollars.

AIR Assumed Interest Rate An accounting methodology used to calculate annuity payments.

AMT

Alternative Minimum Tax

A separate taxing system. Used to determine if additional taxes are necessary. Has fewer exclusions than ordinary taxes. Must pay greater of AMT or traditional.

APO Additional Public Offering A public offering after and IPO. Same as a Subsequent Public Offering.

AUM Assets Under Management Total assets that the individual (generally institution) has under its control, and managers.

BD Broker/Dealer Someone who acts as either a Broker or Dealer in the securities industry.

BOD Board of Directors Elected by the shareholders of a corporation to make decisions on their behalf.

bp Basis Point 1/100th of a percent, 100 bp=1%.

CB Cost Basis

Generally the cost of an investment, can be adjusted for certain events, used to determine taxable gain.

CD Certificate of Deposit A bank savings instrument, or in the case of Jumbo a money market.

CDO/CMO Collateral Debt/Mortgage Obligation

A security backed by mortgages. Uses the word Tranche.

CEF Closed-Ended Fund A type of investment company.

CMV Current Market Value The value the specified asset would get in the current market.

COP Code of Procedure The code dealing with arbitration and other areas. CPI Consumer Price Index Measure of Inflation. CV Cash Value The cash value of an insurance product.

CY Current Yield The annual income divided by the current market price of the investment.

DB Death Benefit The death benefit of an insurance product.

DCP Defined Contribution Plan A type of retirement plan where the employee has the responsibility, and must make contributions.

DJIA Down Jones Industrial Average 30 large cap stocks used as an index for the health of the US securities markets.

DPP Direct Participation Program A type of investment with pass through. EBP Employee Benefit Plan

ED Expiration Date The time an option (put/call) expires.

EIA Equity Indexed Annuity Insurance product, not a security, with caps based on an index.



pg. 91/105

Acronym Meaning Definition

ERISA Employment Retirement Income Securities Act (1974)

Law around retirement accounts, what qualified and non qualified refer to.

ESA Educational Savings Accounts Another name for a Coverdell Education Savings Account.

FBO For Benefit Of Put on checks for custodial accounts, UGMA/UTMA, etc.

FDIC Federal Deposit Insurance Corporation

Bank insurance program.

FIFO First In, First Out The first money taken out is principal, and untaxed until all principal has been removed.

FINRA Financial Industry Regulatory Authority

The SRO in charge of Broker Dealers.

FMV Fair Market Value Around CMV, but could be off based on commissions, and fees.

FRB Federal Reserve Board The government body in charge of monetary policy.

FRS Federal Reserve System The central bank system of the US. Primarily managing flow of money and credit.

GDP Gross Domestic Product Sum of all good and services produced by residents of a given country.

GDP

Gross Domestic Product

Monetary value of all finished goods and services produced within a country's borders in a specific time period.

GNMA

Government National Mortgage Association (Ginnie Mae)

Monthly Income, backed by US gov't.

GNP Gross National Product Sum of all final goods and services produced within the borders of a given country.

GOs General Obligation Bonds Munis backed by full taxing authority of municipality.

GTC Good Til Canceled A limit or stop order that remains open until executed or canceled by investor.

IA

Investment Advisor

Any person who for compensation engages in business of advising other to value of securities or advisability of investing in securities, or as part of regular business, issues analysis or reports concerning securities.

IAA40 Investment Advisors Act of 1940 The Federal Act regulating Investment Advisors.

IAR Investment Advisor Representative

A representative of an IA.

IC Investment Company A company defined in the ICA40

ICA40 Investment Company Act of 1940 The Law primarily where Investment Company regulations are found

IPO Initial Public Offering The first time securities are offered to the market.



pg. 92/105

Acronym Meaning Definition IRC Internal Revenue Code The tax code.

JTWROS Joint Tenants With Right Of Survivorship

Account where when one dies the other acquires 100% assets in the account.

LC Large Cap

LI Life Insurance Variable Life is a security, all other life insurances are not

LIFO

Last In, Last Out

The first money taken out is growth, and fully taxed until only thing left remaining in account is principal.

LOI Letter Of Intent Allows an investor to meet a breakpoint over time.

MF Mutual Fund Another name for an open-end investment company.

MSRB Municipal Securities Rulemaking Board

SRO charged with monitoring municipal offerings.

MV Market Value The current stock price

NAV Net Asset Value The total value of the portfolio divided by the number of shares outstanding.

NW Net Worth Assets - Liabilities

NY Nominal Yield aka Coupon Yield The printed interest rate on a bond.

OI Ordinary Income What is taxed on the progressive, marginal tax rates.

OTC Over the Counter

Stocks trading over computer system, rather than on an exchange. Can be for stocks that also trade on exchange.

P/I

Principal and Interest

Payments from a bond. Interest based on $1000 face, and coupon rate, regardless of price actually paid. Final interest payment made with principal payment.

POA Power Of Attorney Allows designated person to act on individuals behalf POP Public Offering Price The price the public is charged for a purchase.

REIT Real Estate Investment Trust A collection of physical properties for lease, mortgages for interest, or both.

RIA Registered Investment Advisor An Investment advisor that is registered under the USA or IAA

RMD Required Minimum Distribution The required amount of money to be taken out of qualified accounts at age 70.5 and after

ROI Return on Investment Percentage return made on investment ROR Rate of Return The return credited to an investment.

SA33

The Securities Act of 1933

Primary purpose to ensure that buyers of securities receive complete and accurate information before they invest in securities

SD Supply and Demand Economic concept in markets to price goods and services.

Acronym Meaning Definition

SEA34 The Securities Exchange Act of 1934

Primary purpose to regulate exchange and OTC markets to prevent unfair practices

SEC Securities and Exchange Commission

The government body in charge of securities regulations and enforcement.

SEP Simplified Employee Pension A type of qualified retirement plan.

SIMPLE Savings Incentive Match Plans for Employees

A type of retirement account

SOL Statute of Limitations The amount of time until charge and lawsuits can no longer be brought.

SPO Subsequent Public Offering A public offering after and IPO. Same as a Additional Public Offering.

SRO

Self Regulating Organization

One of the organizations that exercise a degree of regulatory authority over some aspect of the securities industry. SEC, FINRA, MSRB, etc

STRIPS

Separately Trading of Registered Interest and Principal Securities

A Treasury Note or Bond broken up into individual coupon payments, that are then sold as Zero coupon bonds.

TA Transfer Agent

TIC Tenants in Common A type of joint account.

TIPS Treasury Inflation Protected Securities

A Treasury with no Inflation risk.

TSA Tax Sheltered Annuity A 403(b) plan qualified retirement account.

UGMA Uniform Gift to Minors Act

Law gifting irrevocable gifts to a minor. Must have custodian, typically donor. Most rules apply to both UGMA and UTMA

UIT Unit Investment Trust A type of Investment Company. UL Universal Life Not security, cash value life insurance

UTMA Uniform Transfers to Minors Act Another law gifting irrevocable gifts to a minor. Most rules apply to both UGMA and UTMA

UVL Universal Variable Life Life insurance that is also a security. Cash Value

UW Underwriter Investment bank that helps getting new issues to market.

VA

Variable Annuities

Insurance product where client has guaranteed DB, and CV tied to separate account performance. Sort of like insured MF

VL Variable Life Life insurance that is also a security. Cash Value VUL Variable Universal Life Life insurance that is also a security. Cash Value WL Whole Life A permanent type of Life Insurance

YTC Yield To Call The yield on a bond calculated to call date on a callable bond

YTM Yield to Maturity One of the yields, not needed much.



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Appendix – Definitions Word Definition

10-K SEC report required by SEA34 annually of public companies 10-Q SEC report required by SEA34 quarterly of public companies 8-K SEC report required by SEA34 of public companies announcing unusual material events

Accredited Investor

Defined in Rule of 501 of Reg D. For individual must have NW excluding prim residence of $1M+, annual income of $200k, $300k w/spouse for both 2 most recent years and expected to maintain.

Accumulation Stage/Period

Period during annuity where contributions are made.

Accumulation Unit Accounting idea used during annuity accumulation phase to figure out proportional share of separate account.

All or None

Type of underwriting where if all the shares aren't sold (or specific dollar minimum), the syndicate cancels at no cost. Also could be an order where investor wants order to be canceled if broker can't acquire all shares requested in ONE attempt.

American Style Option that can be exercised anytime up to expiration. As opposed to European Style.

Arbitrage A trading tactic taking advantage of price differentials, generally temporary, in a market

Arbitration Settling a dispute without going to an actual court

A-Shares Front end loaded shares, lower annual than B and C

Ask, Asked, Offer The higher price in a quote, representing what investor pays, or what the seller will get.

Assessable stock Stock issued below par for which the issuer or creditors have the right to assess shareholders for the balance of unpaid par

Asset-based sales load

Financing by MF of sales/promo services in connection of distribution of shares. Limited to .75% with additional .25 "service fee"

At The Money An option whose strike price is equal to market price of underlying investment

Authorized Stock The number of share a company is allowed to issue as stated in its corporate charter. Can be changed by majority vote of voting shares.

Back-End Load Commission/Sales charge when mutual fund or variable contract is sold. Load generally declines gradually, eventually becoming A shares.

Backing Away Violation in which a MM fails to honor a published firm quote to buy/sell a security at a stated price

Bear, Bearish Bear attacks DOWN, means downward market, or belief market will go down

Beta

Risk management, comparing volatility of the security or group to volatility of overall market. Beat of 1 equal market, less than 1 is less volatile, more than 1 is more volatile. Negative is inversely correlated.

Bond Point 1% of bond's par value. 1 bond point =$10. Different from basis point

Bond Quote

One of a number of quotations listed in the financial press and most daily newspapers that provide representative bid prices from the previous day’s bond market. Quotes for corporate and government bonds are percentages of the bonds’ face values (usually $1,000). Corporate bonds are quoted in increments of Z\,. Government bonds are quoted in increments of Z\cx. Municipal bonds may be quoted on a dollar basis or on a YTM basis.

Breakpoint Discounted sales charge or "volume discount" on purchases of A-Share mutual funds for different levels of investment

B-Shares Back end loaded shares, higher annual fees than A, lower than C. After time converts to A shares



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Word Definition Bull, Bullish Bull gores UP, means upward market, or belief market will rise

Buy Stop Order An order to buy a security that is entered at a price above the current offering price and that is triggered when the market price touches or goes through the buy stop price.

Buy-Limit An order to buy security at price below CMV, executed at specific price or lower.

Buy-Stop An order to buy security at price above CMV, executed if trigged by price hitting or thru target

Call A contract that gives the holder(buyer) the right to buy something from the seller (writer)

Call Provision On some issues, allows issuer to redeem securities at call price on call date, with certain conditions

Callable Bond A bond with call provision Callable Preferred

Stock Preferred stock with a call provision

Cap Max appreciation an Equity Indexed Annuity can credit in a given year, or even month. Always written in contract

Capital Asset Securities, real estate, and other tangible property.

Capping An illegal form of market manipulation that attempts to keep the price of a subject security from rising. It is used by those with a short position.

Cash Equivalent A security that can be readily converted into cash. Examples include Treasury bills, certificates of deposit, and money market instruments and funds.

Cash Flow Net income plus depreciation/amortization.

Chinese Wall The name for the division within firm that prevents insider info from being shared

Churning Illegal practice of excessive trading simply to generate commissions.

Commercial Paper

Unsecured, short-term promissory note issued by a corporation for financing accounts receivable and inventories. Usually issued at discount reflecting prevailing market interest rates. Maturities ≤270 days.

Commingling

The combining by a brokerage firm of one customer’s securities with another customer’s securities and pledging them as joint collateral for a bank loan; unless authorized by the customers, this violates SEC Rule 15c2-1.

Complex Trust A trust that both accumulates income and doesn't need to distribute.

Consumer Price Index (CPI)

A measure of price changes in a “basket” of consumer goods and services used to identify periods of inflation or deflation.

Control Person An officer, director, or owner of >10% voting stock, or any immediate family of those.

Cooling-Off Period The period (a minimum of 20 days) between a registration statement’s filing date with the SEC and the registration’s effective date. In practice, the period varies in length.

Coupon Rate Nominal Yield. Rate stated on bond representing percentage of par ($1000)

C-Shares Level load fund, highest annual fees, no front or back load. Useful if client expects to switch between funds somewhat often. Can be difficult to justify for compliance purposes.

Cumulative Preferred Stock

Preferred stock where missed dividends must be paid before any other dividends

Cumulative Voting Method of voting whereby shareholder may take total votes and split in anyway they choose. Evenly or all for 1 item.

Current Yield Annual interest divided by market price of bond.



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Word Definition Custodial Account An account in which a custodian enters trades on behalf of the beneficial owner, often a

minor.

Custodian A person responsible for all decisions in an account maintained for best interest of another. MFs use custodian banks for safeguarding certs and clerical duties.

Debenture A debt obligation backed by the issuing corporation’s general credit. Syn. unsecured bond.

Deflation General drop in demand and level of prices across the whole economy. Usually with economic slump.

Direct Participation

Program (DPP)

A business organized so as to pass all income, gains, losses, and tax benefits to its owners, the investors; the business is usually structured as a limited partnership. Examples include oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, and Subchapter S corporate offerings.

Durable Power of Attorney

A POA that holds should the individual become incapacitated.

Duration Weighted average of bond's cash flows; a bonds sensitivity to small changes in interest rates. The higher the bigger the changes. Think of it like how long the bond takes to pay for itself.

Earned Income

Income derived from active participation in a trade or business, including wages, salary, tips, commissions, and bonuses. Also included is alimony received. One must have earned income in order to make contributions to an IRA. See portfolio income; unearned income.

Eastern/Undivided Account

Syndicate account in which participants are responsible for percentage of all bonds, even if they sell their own allotment

Effective Date Date established by SEC as to when UWs may sell new securities to investors, "release date".

Effective Tax Rate The overall rate paid on a taxpayer’s total taxable income. Always less than the marginal tax rate.

Employee Stock Options

A form of employee compensation where the employing corporation makes available the opportunity for employees to acquire the issuer’s stock. two forms: nonqualified (NSOs) and incentive (ISOs).

Equipment Trust Certificate

Bond secured by a pledge of equipment; airplanes, trucks, etc.

European Style An option that may be exercised on expiration only. Not before.

Executor The party that administers an estate. Exempt Not subject to registration requirements of particular law, rule, or regulation.

Exempt Security A security not required to be registered under the SA33. Still subject to anti fraud rules. Exempt

Transaction A transactional exemption from registration requirements based on manner in which securities offered and sold.

Federal Reserve Board (FRB)

A seven-member group that directs the operations of the Federal Reserve System. The President appoints board members, subject to Congressional approval.

Fiduciary A person legally appointed and authorized to hold assets in trust for another person and manage those assets for that person’s benefit.

Final Prospectus Disclosure document delivered with final confirmation of a new issue of securities (including all mutual funds) detailing price, delivery date, and underwriting spread.

Financial Industry Regulatory Authority

(FINRA) Organized in July 2007 as a joint effort of NASD and the NYSE to harmonize regulation in the securities industry.



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Word Definition Firm Commitment An underwriting commitment where UWs agree to purchase all shares from issuer, even

those that failed to sell to investors. Firm Quote A quote by a dealer representing the price at which dealer is prepared to trade. First Market Another name for exchange market, NYSE is model.

Fiscal Policy The federal tax and spending policies set by Congress or the President. Affect tax rates, interest rates, and gov't spending in an effort to control the economy.

Fixed Annuity

An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal. Syn. fixed dollar annuity; guaranteed dollar annuity.

Form ADV Registration form for an IA. Form BD Registration form for BD.

Forward Pricing

The valuation process for mutual fund shares, whereby an order to purchase or redeem shares is executed at the price determined by the portfolio valuation calculated after the order is received. Portfolio valuations occur at least once per business day.

Fourth Market Electronic Communications Networks used by IIs to trade directly through an electronic alternative display facility.

Front-End Load A mutual fund commission or sales fee that is charged at the time shares are purchased. The load is added to the share’s net asset value when calculating the public offering price.

Hedge Clause Any legend, clause, or other provision that is likely to lead an investor to believe that he has in any way waived any right of action he may have.

High Net Worth Individual

An individual with at least $1 million managed by the IA or whose net worth the firm reasonably believes exceeds $2 million. The net worth of an individual may include assets held jointly with that individual’s spouse. Performance-based fees may be charged to these clients.

Hypothecate To pledge securities purchased in a margin account as collateral to secure the loan for margin.

Hypothecation In margin accounts, Brokerages extend credit, and hold securities in collateral, hypothecation is the pledging of these securities.

Hypothecation Agreement

Document that gives a BD the legal authority to pledge a margin customer's securities as collateral to secure the loan. Must be signed.

Immediate Annuity Insurance contract purchased with single payment that starts to may out immediately

Immediate or Cancel Order

Order to buy or sell securities to which investor will accept any part of the order that becomes available at a certain price, remainder to be canceled.

Index A theoretical grouping of stocks or other investments.

Indication Of Interest

An investor’s expression of conditional interest in buying an upcoming securities issue after the investor has seen a preliminary prospectus. An indication of interest is not a commitment to buy.

Insider Any person who possesses or has access to material nonpublic info about a company; includes directors, officers, and owners of more than 10% of any class of equity security of a corporation.

Institutional Account

An account held for the benefit of others. Examples of institutional accounts include banks, trusts, pension and profit-sharing plans, mutual funds, and insurance companies.

Intestate To die without a will

In-The-Money A call option when CMV>exercise or put option when CMV<exercise

Intrinsic Value Amount by which an option is in-the-money. If in the money, difference between CMV and exercise.



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Word Definition Inventory Finished goods that have not yet been sold by a corporation. Current asset, included in

current ratio, excluded in quick ration Inverse

Relationship Means that the two things compared move in opposite directions.

Investment Company

Any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading securities.

IRA Rollover

The reinvestment of assets that an individual receives as a distribution from a qualified tax-deferred retirement plan into an individual retirement account within 60 days of receiving the distribution. The individual may reinvest either the entire sum or a portion of the sum, although any portion not reinvested is taxed as ordinary income. See also individual retirement account; IRA transfer.

IRA Transfer

The direct reinvestment of retirement assets from one qualified tax-deferred retirement plan to an individual retirement account. The account owner never takes possession of the assets but directs that they be transferred directly from the existing plan custodian to the new plan custodian. See also individual retirement account; IRA rollover.

Jumbo A CD of large denominations that can be traded on secondary market, and usually not FDIC

Junk Bond A bond with a credit below investment grade. High yield, High income, higher risks

K-1 Tax form required of people who own DPPs (limited partnerships, S-Corps)

Legal Opinion The opinion of the bond counsel attesting to the muni's legal authority to issue the bonds as well as the tax status of the bonds

Level Load On going asset based sales charge (12b-1) associated with C-Shares

Leverage Using borrowed money to increase returns. Debt securities and margin accounts are associated with leverage

Limit Order

An order that instructs the broker/dealer to buy a specified security below a certain price or to sell a specified security above a certain price. These orders are entered either for the day or good-til- canceled (GTC).

Listed Security A security that is traded on an exchange such as NYSE, CHX, and Nasdaq.

Long The term used to describe the owning of a security, contract, or commodity. For example, a common stock owner is said to have a long position in the stock. See short.

Marginal Tax Rate Using Progressive tax policy, the tax rate on the next dollar earned. Always higher than effective.

Market Cap Total value of issuer's outstanding shares. Number of shares MV per share

Market Order An order to buy/sell securities at whatever price at first available time.

Monetary Policy The Federal Reserve Board’s actions that determine the size and rate of the money supply’s growth, which in turn affect interest rates. See fiscal policy.

Naked Call Selling a call against a security that the seller doesn't already own. As the security could increase price to limitless highs, naked calls have limitless risk.

Negotiable Characteristic of many securities that allow them to be traded to another party

Negotiated Market Another name for the second or OTC market

No-load Fund MF sold without a sales charge, but may charge 12b-1s of up to 0.25%

Nominal Quote A quote in which a dealer is giving an estimate as opposed to firm quote. Must be clearly identified as nominal to avoid backing away.



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Word Definition Nonsystematic Risk

The potential for an unforeseen event to affect the value of a specific investment. Examples of such events include strikes, natural disasters, poor management decisions, introductions of new product lines, and attempted takeovers. This risk is diversifiable.

Not Held (order) AKA Market Not Held. A market order where the investor allows the BD to enter the trade when they feel the price is right, as opposed to market, which is filled ASAP.

Numbered Account

Account identified by a number as opposed to a name. Only allowed if owner fills out statement with the BD attesting to ownership.

Odd Lot Order for shares in interval of not 100s

Offer

(1) Under the Uniform Securities Act, any attempt to solicit a purchase or sale in a security for value. (2) An indication by an investor, a trader, or a dealer of a willingness to sell a security; the price at which an investor can buy from a broker/dealer.

Out-of-the-Money A call option when CMV<exercise or put option when CMV>exercise

Over The Counter (OTC)

The term used to describe a security traded through the telephone-linked and computer-connected OTC market rather than through a stock exchange.

Par The face amount of a bond payable at maturity, or preferred stock. Preferred=$100, Bond=$1000, Stocks also have par, generally meaningless and usually like $0.01

Parity When a convertible security's market price is the same as the value of the shares to which it converts

Parity Price Of Common

The dollar amount at which a common stock is equal in value to its corresponding convertible security. It is calculated by dividing the convertible security’s market value by its conversion ratio.

Parity Price Of Convertible

The dollar amount at which a convertible security is equal in value to its corresponding common stock. It is calculated by multiplying the market price of the common stock by its conversion ratio.

Passive Income As opposed to earned income. From rental, limited partnerships, or other enterprises where investor is not directly involved

Pegging An illegal form of market manipulation that attempts to keep the price of a subject security from falling. It is used by those with a long position. See capping.

Per Stirpes Used in wills to pass on to heirs of a deceased listed beneficiary of the will. Grandparent to grandchild if parents died previously.

Person

As defined in securities law, an individual (living, of age, not incompetant), corporation, partnership, association, fund, joint stock company, unincorporated organization, trust, government, or political subdivision of a government.

Pre-emptive Right Right of common to maintain proportional ownership when new stock is issued. Done with rights, short term negotiable security allowing purchase of additional securities for below MP.

Primary Market Where securities are issued to raise capital for issuer; "new issue market"

Primary Offering Offering of securities in which proceeds go to entity issuing securities

Prime Rate Interest rate charged to corporations with high credit ratings for unsecured loans

Put Contract giving owner(buyer) right to sell something to buyer (writer) at stated exercise

Quick Ratio More stringent liquidity measure than current as inventory is excluded from current assets before comparing to current liabilities. The Acid Test.

Quote, Quotation Price that a dealer is willing to pay or accept for a security. Two sided quote has bid and ask/offer



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Word Definition

Rating

An evaluation of a corporate or municipal bond’s relative safety, according to the issuer’s ability to repay principal and make interest payments. Bonds are rated by various organizations, such as Standard & Poor’s and Moody’s. Ratings range from AAA or Aaa (the highest) to C or D, which represents a company in default.

Realized Gain Amount of profit investor receives when closing positions. (Usually selling, but also buy to cover)

Reg A Short for Regulation A. An exempt transaction under the SA33 for small offerings of securities

Reg D Short for Regulation D. An exempt transaction under SA33 for private placements

Reg FD Legislation requiring that any material non-public information disclosed by a public corporation to analysts or other investors must be made public

Reg SHO Rules requiring BDs to locate securities before executing short sales

Reg T Short for Regulation T. FRB requirements for cash and margin accounts

Reg U FRB requirements for credit extended by banks to BDs for margin accounts.

Registrant Person registering securities.

Regular Way Settlement

The typical time frame for purchasing and settling securities transactions., T+3 for common, T+1 for treasuries

Regulation D

The provision of the SA33 that exempts from registration offerings sold in private placements. Rule 506(b) limits the sale to max of 35 nonaccredited investors during a 12-month period w/ no advertising permitted, while Rule 506(c) permits advertising but requires all purchasers be accredited investors.

Regulation T

The FRB reg that governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase of securities. Regulation T currently sets loan value of marginable securities at 50% and payment deadline at two days beyond regular way settlement. Credit extended for 2 days after settlement.

Required Minimum Distribution (RMD)

The amount Trad and SEP IRA owners and QP participants must begin withdrawing from retirement accounts by April 1 following year they turn 70½. Exceptions apply to those covered under a QP who are still employed. RMD amounts must then be distributed by Dec 31 that year and subsequent years.

Restricted Person Person ineligible to purchase equity IPO including members of brokerage industry and immediate family members

Restricted Security

An unregistered, nonexempt security acquired either directly/indirectly from issuer, or an affiliate of the issuer, in a transaction that does not involve a public offering. See holding period; Rule 144.

Restricted Stock Stock whose transfer is subject to restrictions, such as holding periods. Example is stock purchased in private placements.

Right

A security representing a stockholder’s entitlement to the first opportunity to purchase new shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued for a short time only, after which they expire. Syn. subscription right; subscription right certificate.

Right Of Accumulation

A benefit offered by a mutual fund that allows the investor to qualify or reduced sales loads on additional purchases according to the fund account’s total dollar value.

Rights of Accumulation

Feature of many mutual funds whereby a rise in account value is counted the same as new money for purposes of achieving a breakpoint

Sale, Sell To dispose of securities for something of value



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Word Definition Sales Charge, Sales

Load One time deduction from investor's deposit that goes to distributors/sellers of fund. Either front end, or back end. Most likely changing due to new fiduciary rules.

SEC Release IA- 1092 Document explaining the SEC's approach to defining IAs using three prong approach

Secondary Market Where investors trade securities among themselves and proceeds stay private, not issuer.

Secondary Offering/

Distributions

Distributions of securities owned by major stockholders, not issuers.

Section 457 Plan Deferred comp. Used by government employees, and certain tax-exempt (hosp, charity, unions), Not churches.

Sell

To transfer ownership of asset for money or value. Includes giving as bonus with purchase of securities, gift of assessable stock, selling/offering warrant/right to another security. Not included are bona fide pledge/load.

Sell Limit Order to sell placed above CMV that may be executed only if bid rises to or above limit price

Sell Stop Order to sell placed below CMV, activated only if only if price goes to or through stop price

Sell Stop Order An order to sell a security that is entered at a price below the current market price and that is triggered when the market price touches or goes through the sell stop price.

Selling Away If we don't sell it (and you ask and don't get permission to be able to sell it), You can't sell it.

Selling Dividends Inducing customers to buy mutual fund shares by implying that an upcoming distribution will benefit them. This practice is illegal.

Short

The term used to describe the selling of a security, contract, or commodity that the seller does not own. For example, an investor who borrows shares of stock from a broker/dealer and sells them on the open market is said to have a short position in the stock. See long.

Speculation High-risk investment objective. Short term options/futures, long term warrants/land

Stagflation A rare economic climate where both inflation and stagnation are occurring

Stop Limit Order A customer order that becomes a limit order when the market price of the security reaches or passes a specific price. See limit order; stop order.

Stop Loss Another name for sell-stop

Stop Order

(1) A directive from SEC or Admin that suspends the sale of new issue securities to the public when fraud is suspected or filing materials are deficient. (2) A customer order that becomes a market order when the CMV of the security reaches or passes specific price.

Stop-Limit Order A stop order that can only be activated for exact price or better

STRIPS Separate Trading of Registered Interest and Principal of Securities. Zero coupon issued by Treasury, where all income at maturity, in form of higher principal value. Avoids reinvestment risk

Subchapter M Section of IRC providing "conduit tax treatment", used by RETIs and MFs distributing 90% or more of net income to shareholders.

Systematic Risk

The potential for a security to decrease in value owing to its inherent tendency to move with all securities of the same type. Not diversification nor any other investment strategy can eliminate this risk.

Tax Equivalent Yield

Rate or return that a taxable bond must offer to equal the tax exempt yield on a muni.

Tax-Deferral The ability to delay, but not eliminate, taxation.

Third Market NYSE exchange-listed stock traded OTC primarily by II

Word Definition Time Value of

Money The fact that money today is worth more than money in the future for the inherent ability for the money to receive interest and grow.

Treble Damages Up to 3 times ill-gotten gains, or 3 times losses avoided.

Trustee A person legally appointed to act on a beneficiary’s behalf.

Unit Investment Trust (UIT)

An investment company that sells redeemable shares in a professionally selected portfolio of securities. It is organized under a trust indenture, not a corporate charter.

Unrealized Capital Gain

The increase in the value of a security or portfolio that has not been realized by being sold (or bought to cover). Unrealized gain is not taxed.

Vested Fully vested, means once money deposited in the account, employee owns it.

Vesting

Employees eventually gets entire retirement benefits within given period. Also amount of time employee must work before getting wo/penalty. Even if no longer employed. Min times set by ERISA.

Warrant Allow the holder the right to buy the security at a stated price. Usually long expiration, and typically issued with stated price above CMV.

Wash Sale Deals with having to wait 30 days from date of sale to buying substantially identical security to keep realized capital losses.

Wash Trade Market Manipulation where investor simultaneously sells and buys the same financial instruments.

Western/Divided Account

Syndicate account in which each participant is responsible for their share of the issue only.



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Important Equations 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝒀𝒀𝒀𝒀𝑪𝑪𝒀𝒀𝒀𝒀 =

𝑨𝑨𝑪𝑪𝑪𝑪𝑪𝑪𝑨𝑨𝒀𝒀 𝑰𝑰𝑪𝑪𝑰𝑰𝑰𝑰𝑰𝑰𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑴𝑴𝑨𝑨𝑪𝑪𝑴𝑴𝑪𝑪𝑪𝑪 𝑷𝑷𝑪𝑪𝒀𝒀𝑰𝑰𝑪𝑪

𝑴𝑴𝑪𝑪𝑪𝑪𝒀𝒀𝑰𝑰𝒀𝒀𝑴𝑴𝑨𝑨𝒀𝒀 𝑬𝑬𝑬𝑬𝑪𝑪𝒀𝒀𝑬𝑬𝑨𝑨𝒀𝒀𝑪𝑪𝑪𝑪𝑪𝑪 𝒀𝒀𝒀𝒀𝑪𝑪𝒀𝒀𝒀𝒀 = (𝑪𝑪𝑰𝑰𝑪𝑪𝑴𝑴𝑰𝑰𝑪𝑪𝑨𝑨𝑪𝑪𝑪𝑪 𝑹𝑹𝑨𝑨𝑪𝑪𝑪𝑪) × (𝟏𝟏𝟏𝟏𝟏𝟏%− 𝑻𝑻𝑨𝑨𝑻𝑻 𝑹𝑹𝑨𝑨𝑪𝑪𝑪𝑪)

𝑪𝑪𝑰𝑰𝑪𝑪𝑴𝑴𝑰𝑰𝑪𝑪𝑨𝑨𝑪𝑪𝑪𝑪 𝑬𝑬𝑬𝑬𝑪𝑪𝒀𝒀𝑬𝑬𝑨𝑨𝒀𝒀𝑪𝑪𝑪𝑪𝑪𝑪 𝒀𝒀𝒀𝒀𝑪𝑪𝒀𝒀𝒀𝒀 =𝑴𝑴𝑪𝑪𝑪𝑪𝒀𝒀𝑰𝑰𝒀𝒀𝑴𝑴𝑨𝑨𝒀𝒀 𝑹𝑹𝑨𝑨𝑪𝑪𝑪𝑪𝟏𝟏𝟏𝟏𝟏𝟏%− 𝑻𝑻𝑨𝑨𝑻𝑻 𝑹𝑹𝑨𝑨𝑪𝑪𝑪𝑪

𝑵𝑵𝑪𝑪𝑪𝑪 𝑾𝑾𝑰𝑰𝑪𝑪𝑪𝑪𝒕𝒕 = 𝑨𝑨𝑨𝑨𝑨𝑨𝑪𝑪𝑪𝑪𝑨𝑨 − 𝑳𝑳𝒀𝒀𝑨𝑨𝑳𝑳𝒀𝒀𝒀𝒀𝒀𝒀𝑪𝑪𝒀𝒀𝑪𝑪𝑨𝑨

𝑵𝑵𝑪𝑪𝑪𝑪 𝑨𝑨𝑨𝑨𝑨𝑨𝑪𝑪𝑪𝑪 𝑽𝑽𝑨𝑨𝒀𝒀𝑪𝑪𝑪𝑪 (𝑵𝑵𝑨𝑨𝑽𝑽) =𝑻𝑻𝑰𝑰𝑪𝑪𝑨𝑨𝒀𝒀 𝑨𝑨𝑨𝑨𝑨𝑨𝑪𝑪𝑪𝑪𝑨𝑨 𝒀𝒀𝑪𝑪 𝑭𝑭𝑪𝑪𝑪𝑪𝒀𝒀

𝑵𝑵𝑪𝑪𝑰𝑰𝑳𝑳𝑪𝑪𝑪𝑪 𝑰𝑰𝒐𝒐 𝑺𝑺𝒕𝒕𝑨𝑨𝑪𝑪𝑪𝑪𝑨𝑨 𝑶𝑶𝑪𝑪𝑪𝑪𝑨𝑨𝑪𝑪𝑨𝑨𝑪𝑪𝒀𝒀𝒀𝒀𝑪𝑪𝑶𝑶

𝑷𝑷𝑪𝑪𝑳𝑳𝒀𝒀𝒀𝒀𝑰𝑰 𝑶𝑶𝒐𝒐𝒐𝒐𝑪𝑪𝑪𝑪𝒀𝒀𝑪𝑪𝑶𝑶 𝑷𝑷𝑪𝑪𝒀𝒀𝑰𝑰𝑪𝑪 (𝑷𝑷𝑶𝑶𝑷𝑷) = 𝑵𝑵𝑪𝑪𝑪𝑪 𝑨𝑨𝑨𝑨𝑨𝑨𝑪𝑪𝑪𝑪 𝑽𝑽𝑨𝑨𝒀𝒀𝑪𝑪𝑪𝑪 (𝑵𝑵𝑨𝑨𝑽𝑽) + 𝑺𝑺𝑨𝑨𝒀𝒀𝑪𝑪𝑨𝑨 𝑪𝑪𝒕𝒕𝑨𝑨𝑪𝑪𝑶𝑶𝑪𝑪(𝑺𝑺𝑪𝑪)

𝑺𝑺𝑨𝑨𝒀𝒀𝑪𝑪𝑨𝑨 𝑪𝑪𝒕𝒕𝑨𝑨𝑪𝑪𝑶𝑶𝑪𝑪 𝑷𝑷𝑪𝑪𝑪𝑪𝑰𝑰𝑪𝑪𝑪𝑪𝑪𝑪𝑨𝑨𝑶𝑶𝑪𝑪 =𝑷𝑷𝑶𝑶𝑷𝑷 − 𝑵𝑵𝑨𝑨𝑽𝑽

𝑷𝑷𝑶𝑶𝑷𝑷

𝑪𝑪𝑨𝑨𝑴𝑴𝒀𝒀𝑪𝑪𝑨𝑨𝒀𝒀 𝑮𝑮𝑨𝑨𝒀𝒀𝑪𝑪𝑨𝑨 𝑰𝑰𝑪𝑪 𝑳𝑳𝑰𝑰𝑨𝑨𝑨𝑨𝑪𝑪𝑨𝑨 = (𝑷𝑷𝑪𝑪𝒀𝒀𝑰𝑰𝑪𝑪 𝑺𝑺𝑰𝑰𝒀𝒀𝒀𝒀) − (𝑪𝑪𝑰𝑰𝑨𝑨𝑪𝑪 𝑩𝑩𝑨𝑨𝑨𝑨𝒀𝒀𝑨𝑨)

If Positive a Capital Gain, if Negative a Capital Loss

𝑪𝑪𝑰𝑰𝑪𝑪𝑬𝑬𝑪𝑪𝑪𝑪𝑨𝑨𝒀𝒀𝑰𝑰𝑪𝑪 𝑹𝑹𝑨𝑨𝑪𝑪𝒀𝒀𝑰𝑰 (# 𝑰𝑰𝒐𝒐 𝑨𝑨𝒕𝒕𝑨𝑨𝑪𝑪𝑪𝑪𝑨𝑨) =𝑷𝑷𝑨𝑨𝑪𝑪 𝑽𝑽𝑨𝑨𝒀𝒀𝑪𝑪𝑪𝑪

𝑪𝑪𝑰𝑰𝑪𝑪𝑬𝑬𝑪𝑪𝑪𝑪𝑨𝑨𝒀𝒀𝑰𝑰𝑪𝑪 𝑷𝑷𝑪𝑪𝒀𝒀𝑰𝑰𝑪𝑪

𝑪𝑪𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑪𝑪 𝑺𝑺𝑪𝑪𝑰𝑰𝑰𝑰𝑴𝑴 𝑷𝑷𝑪𝑪𝒀𝒀𝑰𝑰𝑪𝑪 = 𝑩𝑩𝑰𝑰𝑪𝑪𝒀𝒀 𝑷𝑷𝑪𝑪𝒀𝒀𝑰𝑰𝑪𝑪𝑪𝑪𝑰𝑰𝑪𝑪𝑬𝑬𝑪𝑪𝑪𝑪𝑨𝑨𝒀𝒀𝑰𝑰𝑪𝑪 𝑹𝑹𝑨𝑨𝑪𝑪𝒀𝒀𝑰𝑰

At parity

Last Minute Study Sheets

Other Ways We Can Help Series 6 Study Course

This is booklet is part of our 2-day Series 6 Class. The 6-class Study Course is a different method of teaching the same material. Membership provides access to the Study Course replays and live webinars. The Study Course is usually $130, but for 2-day Class students it is $80. Information at www.TheSecuritiesGuys.guru/S6Study Please Contact [email protected] for information on how to get the discounted price.

Other Classes We have Webinars for all 4 of the Series Exams (Series 6, Series 63, Series 26, and Series 65). All have a similar membership structure, with material important to those relevant tests. For Information about each class; Series 63: www.TheSecuritiesGuys.guru/S63Info Series 26: www.TheSecuritiesGuys.guru/S26Info Series 65: www.TheSecuritiesGuys.guru/S65Info

Concept Cards We have concept cards for all 4 Series Exams. These are extensively researched and created to contain the most important words and phrases for each exam and the most important concepts about each of them, in bulleted form. Most of the cards are $30, the Series 63 is $20, but the Series 6 and 63 when purchased together are $45 instead of $50. Shipping is a flat $7 regardless of sets purchased. www.TheSecuritiesGuys.guru/Cards for more details and ordering.

Individual Tutoring Brian offers individual tutoring for help passing any of the exams. The hours translate, so what is not used for one exam, can be saved and used for any other. Please contact Brian directly to discuss tutoring. He has plans for 1-hour, 5-hours, and 10-hours. [email protected].