Series 7 Study Points 3u4q70

CHAPTER ONE: Number of votes= shares owned times vacancies on board Statutory voting= must divide votes equally among candidates Cumulative voting= divide anyway you want Class b stock= non-voting Company issuing new security= corporate charter + registration statement with the SEC Shelf registration= authorized shares can remain unissued for 2 years Preferred stock= fixed income security Participating preferred= get fixed preferred dividend + common dividend Cumulative preferred= missed payments must be made up ADR (American depository receipt) = bank holds foreign securities and receipts trade in place(div. paid in U.S. dollar) Warrant= long term call option Standby underwriter= sells securities that were not sold through preemptive rights Cumulative right value= (market price of stock-discount price)/(number of rights+1) Ex- rights (without rights= (market price of stock-discount price)/(number of rights) Stockholder cannot vote for dividends CHAPTER TWO: Bonds pay interest Semiannually (interest/2) Indenture for a bond (deed of trust) = legal agreement between issuer and bond holder (includes: maturity, par, rate, collateral, callable/convertible features and trustee who delivers interest payments) Bearer (coupon) bond= whoever holds it gets interest Fully ed= no coupons, whoever is ed collects interest Book entry bond= owner only receives a receipt, and automatically receives payments through database Term bond= bonds issued at the same time with the same maturity (called randomly)(sinking fund)

Serial bonds= bonds issued at the same time with equal amounts maturing at different dates (called by longest maturity first) Balloon bonds= more bonds mature at a later date (called by longest maturity first) Series bond= issued in successive years with the same maturity date Sinking fund= bank that issuer deposits money to pay off debt (term bonds usually have mandatory) Pre- refunded= issuer has deposited money needed to pay off the bond already in a sinking fund Refunding= issues new bonds to repay outstanding bonds Senior bonds= paid first Open ended mortgage bond= can borrow money using same property as collateral Collateral trust= backed by stocks and bonds owned by company Guaranteed bond= backed by the assets of the issuing company as well as a second company Unsecured bonds (debentures) = last to be paid in bankruptcy since no collateral Unsecured bond (income bond/adjustment) = don’t pay interest until company become profitable (bankruptcies) Equipment Trust= backed by equipment (used by transportation companies) Zero coupon= discount bond (interest + principal not received until maturity (“trades flat”) Bond in default= when interest payments are late Eurodollar bonds= foreign securities which pay interest and principal in dollars In bonds: a point= $10 and a basis point= $0.10 U.S. Bonds are quoted in 32nds (“95.8”=95 and 8/32) can be shown as 95:08 or 9508 Nominal yield (coupon rate) = face interest rate on bond (face interest x par) Current yield= face interest/ market price PR^ NY! CY! YTM! YTC!

(!=down

^=up)

If bond is trading at par then , nominal yield (coupon rate), current yield, yield to maturity and yield to call would all be equal Junk bonds= moody Ba/ s+p BB Corporate and muni bonds calculate interest using 30 day month 360 day year Corp + muni bonds settle T+3 (business days)(360 day years) U.S. bonds settle T+1 (actual days 365 day years) First coupon if longer than 6 months= long coupon less= short Accrued interest= add settlement date and then subtract from previous coupon date (assume 30 day months) (be careful to business days) Calendar= Jan+1 Feb-2 Mar+1 Apr+0 May+1 June+0 July+1 Aug+1 Sep+0 Oct+1 Nov+0 Dec+1 Put bonds= right to sell bond back to issuer Ex: ABC 7s015-20= 7% callable 2015 and matures 2020 ZR20= zero coupon maturing in 2020 Conversion ratio for bond= par (usually $1000)/ conversion price Parity= stock and bond are trading equally (worth the same) T- Bills= mature in 6 months or less (sold at discount +non callable) (not quoted in 32nds) T- Notes= 1-10 year maturity (pay semi- annually) T- Strips (receipts)= 10-30 year maturity (sold at a discount + don’t pay interest) Non marketable: Series EE (DISCOUNT) +Series HH (semi annual interest) Moral obligations= not directly backed by government Mortgage Backed securities= Ginnie Mae ($25,000 min. + pays interest and principal monthly) + Fannie Mae ($10,000 min.)/ Freddie Mac ($25,000 min.) CMO= Diversifies between Fannie, Freddie and Ginnie (usually AAA) PSA (public securities association)= Publishes statistics on prepayment + extension risk Prepayment= early payment because of refinancing (interest rate decline)

Extension risk= bonds repaid later than expected (interest rate increase) Plain vanilla Tranche= no special features PAC (planned amortization class) Tranche= safest because has sinking fund TAC (Targeted amortization) Tranche= sinking fund but is also callable Companion () Tranche= Absorbs risk of extension + repayment from other tranches and there for has a higher interest rate and uncertain repayment date IO (interest only) tranche= only pays interest never repays through principal PO (principal only) tranche= pays principle but no interest Z (zero coupon) tranche= longest maturity Money Market= less than a year maturity Capital market= Over a year Commercial Paper= unsecured debt that is sold at discount and matures in under 270 days Bankers Acceptance= Postdated checks used for import + export Jumbo CD’s= minimum of $100,000 and can be traded like regular bonds (pays interest) Fed Funds Rate= rate of loans between financial institutions (fastest to change) Effective Fed Fund Rate= average fed fund rate of all commercial banks Libor= Average fed fund rate of foreign banks’ lending money to each other in U.S. dollars REPO (repurchase agreement) = overnight loan (up to 90 days) that is secured by T-bills as collateral (fed lends banks) Reverse Repo (matched sale) = banks lend to fed and hold T- Bills as collateral Interbank market= unregulated market for foreign currency transactions CHAPTER THREE: Selling group= helps syndicate sell new issues without buying the securities (no risk) Underwriting agreement types: 1) Firm commitment= unsold securities are retained by syndicate

2) Best effort= unsold securities returned to issuer----All or Non 3) Best effort= Mini- Max (minimum # issues must be sold) Stand by rights= back up underwriter in case any left-over shares (only for stocks) Primary Offering= authorized but previously unissued shares (within 2 years of authorization) Secondary Offering= treasury shares or shares held by insiders) Combined offering=primary + secondary offering Preliminary Prospectus (red herring) = Post SEC filing but pre-issuance Prospectus = includes relevant info + earnings of current and 3 previous years + use of money +business description + officers + potential benefits and risks (can’t be used as an ment) Final Prospectus = available after securities are issued SEC puts a disclaimer on the prospectus saying: does not guarantee+ judge+ approve + recommend anything Effective date= first day the security trades (decided by the SEC) Investor buys security within 90 days after effective date in an IPO Other types of offerings=within 40 days after effective date New offerings must be paid in full (no margin) within the first 30 days Trust indenture act 0f 1939= newly issued corporate bonds file an indenture with the SEC Rule 145= in the event of major change a company must file a new registration statement with the SEC Exemptions from listing with the SEC= U.S. securities+ muni + commercial paper + non-profit +banks issues+ insurance and annuity policies+ rule 147 offerings (only within corporations own state) +reg A offering ($5million or less within 12 months) + reg D (private placement/up to 35 unaccredited investors and unlimited accredited) Accredited investors= Financial institutions+ insiders and family or owners of more than %10+ annual income over 200,000/ (300,000 t) +Net worth over a million+ Corporation worth over 5 million Restricted stock= Private placement

Rule 144= Restricted stock must be held for at least 1 year After waiting period you can sell up to %1 of outstanding shares or average weekly trading volume of the last four weeks whichever is greater Must file a 144 w/ sec when selling and it is valid for 90 days If selling 500 shares or less worth $10000 or less then exempt from filing a 144 Portal Market (rule 144a)= able to sell before a year to a qualified institutional buyer ($100mm+ in assets) Blue Sky= Must be ed in the customers state “Cooling off period”= 20 day period between registration of new issue and the approval of the SEC Green shoe clause= Underwriters can indicate interest for up to %15 more than securities available Rule 145= Major changes in a company must re-file with SEC Order of allocation= Pre-sale/ syndicate/designated/member (“please give Dave money”) Takedown= Profit for syndicate Reallowance= profit of non-syndicate sellers Concession= Profit for selling group member Managers fee= Fee received by managing under writer for a sale by anyone Spread= Takedown+ Managers fee Western Syndicate (divided) = each syndicate member sells what they are responsible for Eastern (undivided) = If a firm sells all of their own they are responsible for a percentage of the unsold (percentage of their allotment in respect to total offering is reapplied to leftover shares) Stabilization= Agreement to be a market maker Market out clause= ability to withdraw from offering due to negative market conditions Sticky issue= hard to sell Hot issue= easy to sell

Debentures must be filed with the SEC CHAPTER FOUR Unlisted Securities= only trade on the OTC Muni +Gov’t bonds always trade on the OTC Within the secondary markets: 1) 2) 3) 4)

First market= listed securities trading on an exchange Second market= unlisted securities trading OTC Third Market= Listed security trading OTC Fourth market= Trading of securities between institutions without using a broker-dealer Instinet= reporting system for the fourth market

Broker (agent)= does not use own inventory to execute trades Dealer (principal/market maker)= uses own inventory A firm must disclose if they are a broker or dealer for each trade (on receipt) and cannot be both for same trade Commissions must be disclosed (markups/markdowns don’t have to be disclosed) A specialist order of priority= 1) best price 2) which order was placed first 3) if same time and price then bigger order goes first Stopping Stock= Specialist guaranteeing a certain price (only done with public orders) Stops= immediately executed (becomes market order when triggered) Limits= Specific price or better Sop limit= when entered starts as a stop order and when triggered becomes a limit order (wont execute until at a better price than order) Buy limit and Sell stops (bliss) are reduced on dividend days (SLoBS remain the same) Inside the market= highest bid and lowest ask (does not include stops) Size of the market= number of shares available “inside the market” Specialist can only bid inside the market Immediate or cancel order= fill as much as possible and cancel the rest

Discretionary order= order without prior verbal permission carried out by broker (need power of attorney) If an order does not include one of the following it is discretionary: which security/ buy or sell/ quantity Not held order= order which the rep has the ability to decide when to execute an order at a price he thinks is right (power of attorney is NOT needed) (can’t be executed by specialist) Either Or= Execute one order and cancel the other Market on Close= Execute as close to the market close as possible (cancelled if not executed at the close) Market on Open= If order not executed on the opening price or better it is cancelled Unsolicited order= customer order that rep never suggested Tape A= NYSE listed stocks (shows all secondary market) Tape B= Amex listed stocks (shows all secondary market) Round lot= normal unit (100 shares) ABC 9s15.50= 900 shares of ABC @ $15.50 .P/PR=preferred .R/RT= Rights .W/WT= warrant .X=mutual fund “SLD” on a ticker means a trade occurred out of sequence (can’t trigger stop or limit) Super dot= System that by es floor brokers and goes straight to specialist (used for 3 million shares or less and is only available to public customers) (Large orders CANT be broken up) NASQAQ is divided into two parts: NASDAQ Global Markets= Largest and mostly actively traded stocks that are OTC (majority of stocks) (can be bought on margin) NASDAQ Capital Markets= actively traded stocks that don’t meet earning requirements of NGM

Level 1= shows inside of the market Level 2= shows all bid and asks entered Level 3= Allows market makers to enter their own quotes Super Montage= System used by NASDAQ to automatically execute orders of under 1 million shares (bigger orders may be broken down) OTCBB (OTC bulletin board)= FINRA’s quotation system for non- exchange traded securities Pink sheet= newsletter for non- NASDAQ securities Yellow sheet= newsletter for OTC corporate bonds Blues list= newsletter for quotes of municipal bonds Non-NASDAQ stocks are not marginable Firm Quotes= entered by market makers Backing Away= Failure to honor a firm quote Subject (nominal) quotes= are subject to change Workable indication= likely bid price Firm with a recall option= used by a firm to give another broker-dealer a chance to sell the firms inventory and then both firms split commission. (Recall= time the lending firm, must give before taking back the loaned security)(firm cant change quote) Long sale= sale of security an investor owns Reg SHO= uptick rule on short sales Threshold Security= FINRA determined non- liquid security. (If sold short must be delivered to buyer within 10 business days of settlement) Tender offer= Arbitrage for Mergers and Acquisitions Risk arbitrage= in anticipation of an acquisition or merger being short the buyer and long the one being acquired Selling short against the box= selling short a security you already own Securities Exchange act of 1934= created the SEC and made price manipulation illegal

Bonds are not shown on consolidated tape CHAPTER FIVE Progressive tax= more you make the more you are taxed Regressive tax= flat rate Capital gains= profit when selling a security above price you paid Short term= Capital gains made in 1 year or less If net capital gains loss you can deduct up to $3000 dollars per year against ordinary income and rollover the rest (no limit to how much you can roll over) Ordinary income= Interest on bonds+ dividends Cash dividends are taxed a maximum of %15 if stock is held for more than 60 days In order to calculate loss/gain for taxes you must determine LIFO or FIFO and match the stocks sold with the first/last one bought If claiming a stock as a loss cannot by back within 30 days (you can buy bonds+ preferred) Tax (bond) swap= selling a capital loss bond and buying a new bond (higher coupon rate/shorter maturity/ better rating) while using as tax write off If corporation buys stock (common or preferred) of another company %70 of dividends are tax free (if corp. owns over %20 then %80 tax free) Up to $13,000 per year in gifts per person is tax free Cost basis gets transferred if gain but if market loss then new cost basis of recipient is market price on day of transfer (for gift and inheritance) Withdrawals on retirement plans are taxed as ordinary income Money withdrawn from a retirement plan before age 59 and a half has a %10 tax penalty Exempt from penalty if death or disability Some plans allow early withdrawal in case of buying a 1st time home/ medical expenses/ college tuition Payout must start the April that the investor has turned 70 and a half (% 50 tax penalties on what should have been withdrawn)

Qualified retirement plans= pretax dollars+ withdrawals are fully taxed at investors tax bracket Non-Qualified retirement plans= after tax dollars + withdrawals are only taxed for money beyond contributions (capital gains) (both plans are only taxed after withdrawal) Keogh Plan (Hr-10)= self-employed income only + may deposit $49k per year and up to %20 of gross income max. IRA’s= for employed people+ max contribution of $5k w/ excess contribution taxed an extra %6 + t treated like two single s with a $10k max If covered by another retirement plan deductions are only possible for those making under $56k or tly making under $89k Ira’s can only invest in securities and not: commodities/ life insurance/ stamp and coin collections Educational IRA (Coverdell)= $2k per child under 18 + must be used before student turns 30 529 educational plan= by the state and similar to a Coverdell SEP IRA= small business IRA where contributions are made by employer and employee (all contributions are vested) Vesting= pension benefits belong to employee even if they leave the company Fixed annuity= fixed amount of payout Variable annuity= variable and based on underlying portfolio ERISA= act that regulates qualified retirement plans (only private pensions) Defined contribution= variable benefit (based on portfolio) Defined benefit= variable contribution 401k= percentage of salary is contributed by employee and sometimes employer Profit sharing plans= percentage of company profits are placed in tax deferred s for employee retirement Deferred compensation= receives part of salary after retirement Payroll reduction plan= part of employee salary is used to pay for mutual funds etc. that the company has the ability to acquire at a cheaper price

Rollover= transferring between retirement plans (must be done within 60 days of withdrawal) (have to wait one year to rollover again) Trustee to trustee transfer is without withdrawal Accretion= difference between market value and par(when buying at a discount)difference is split over time until maturity and every year that amount of accretion is taxed as ordinary income and there is a new cost basis every time you add accretion Amortization= difference between market value and par (when buying at a ) - difference is split over time until maturity and every year that amount of amortization may be written as a tax write off while lowering the cost basis yearly CHAPTER SIX Fundamental analysis=what to buy Technical analysis= when to buy Market risk= systematic risk Business risk= non systematic risk which is based on company performance Liquidity (marketability risk)= possibility of future illiquidity Interest rate risk= possibility that interest rates will increase causing value of bonds owned to decrease Reinvestment risk= risk of dividends and interest received Purchasing power risk= risk of inflation Capital risk= risk of losing all money invested (options) Regulatory risk= legislative risk Assets= liabilities + equity Current assets = assets that are convertible into cash within one year Fixed assets= assets that are not easily convertible into cash (land + equipment) Intangible assets= assets based on reputation of a company Current liabilities= debt owed within the year Long term liability= debt maturing in over a year Working capital= current assets – current liabilities

Current ration= current assets/ current liabilities (ratio of over 2 means liquid) Quick ratio (acid test)= quick assets( current assets- inventory)/ current liabilities (ratio over 1 means liquid) Net worth= total assets- total liabilities Paid in capital= amount received over par for stock issue Retained earnings= after expenses + interest+ taxes + dividends Inventory turnover ratio= sales/ inventory cost (low turnover ratio means inefficiency) Read pages 173 - 177 (balance sheet + income statement + EPS ratios…) (empire training institute) Blue chip stock= high earnings and high dividends consistently for several years Cyclical company= performance depends on economy Counter cyclical= companies that do well when economy is slow Defensive= company that remains stable regardless of the economy Utilities= are high leveraged and have good ratings (stock price is sensitive to interest rates) PE= Market price / EPS Growth companies have high PE’s Fed controls monetary policy (12 regional fed banks) Interest rate increase= decrease in money supply (tight money) Reserve requirements= percentage of a banks money that can’t be lent out Discount rate= rate fed charges banks for loans (lowest possible rate) Fed funds rate= rate that banks and financial institutions charge each other (usually overnight loans) Call loan rate= rate that banks charge brokerage firms to use for customer margin s Prime rate= rate that banks charge their best customers (usually corporations)

Open market operations= most common tool that fed uses to control money supply (controlled by the FOMC) Fed increases money supply by buying T-bills and other securities from banks M1= currency+ checking deposits+ NOW s (interest paying s) M2= everything in M1 + savings + money market s M3= everything in M2+ jumbo CD’s Trade deficit= strong dollar + more imports than exports Trade credit= weak dollar+ more exports than imports (more competitive) Recession= mild 6 month decline in business and stock activity Depression= 18 month economic decline I= measures change in prices of consumer goods Deflation= price of consumer goods decrease Disinflation= when inflation rates decrease Stagflation= increased inflation in a slow economy (price of commodities increase is common cause) Gross domestic product= sum of all goods and services produced in an economy (considers inflation) Disintermediation= people take money out of savings to put in to short term money markets (tight money is common cause) Fiscal spending= taxes and government spending and use towards controlling the economy Keynesian= theory that government should stay active through spending and intervention to ensure economic growth Supply side= theory that governments should stay inactive and let the economy grow by itself Monetarist= theory that money supply needs to be controlled for economy to prosper Moral suasion= when chairmen of the fed asks banks to expand or contract their lending levels Economic indicators:

1) Leading indicators= how the economy is going to do: money supply/ stock prices/ fed funds rate/ discount rate/ reserve requirements/ housing and new construction+ unemployment+ orders for durable goods 2) Coincidental indicators= how the economy is performing right now: industrial production+ personal income+ GDP 3) Lagging indicator= mirror leading indicators but reach peaks and trough at later dates: prime rate+ call loan rate + corporate profits+ credit cards+ duration of unemployment Contraction= high levels of consumer debt+ bearish stock market+ decreasing GNP+ rising corporate inventories+ rising number of bond defaults and inventories Expansion then peak then contraction then trough Whip theory= change in interest rates cause long term bonds to change more in price than short term debt however short term debt changes more quickly Breakout= when price breaks out of normal trading range by at least %3 Trading channel= area between resistance (upper portion of trading range) and (lower portion) Advance-decline ratio= determines whether the majority of stocks are up or down Odd lot theory= small investors are usually wrong so if odd lot volume increases you should be bearish Short interest theory= based on number of short sales because investors must eventually cover their shorts (if shorts increase then bullish) Random walk/ dartboard/ efficient market theory= every security is correctly priced and undervalue/ arbitrage does not exist Beta = volatility in respect to overall market (beta>1 more volatile if beta=1 then equally volatile if beta<1 then less volatile) Alpha(Sharpe ratio)= volatility of a stock in comparison to that companies industry(large alpha means performed better than expected compared to its beta) Accumulation/distribution line= tracks relationship between stock price and trading volume Moving average chart= line graph of prices of a security over a period of time Capital asset pricing model= model that prices stock by evaluating risk to expected return Narrow based index= tracks performance of a particular industry

Broad based= tracks an overall market S+P 500=500 listed and OTC common Wilshire= largest index tracking 6000 listed and OTC Russell 2000 = index of small cap Lipper= mutual fund index DJ composite= 65 common stock (63 NYSE and 2 OTC) DJ: Industrial (30) transportation (20) utilities (15) Circuit breaker=NYSE will restrict trading if DJIA moves up or down dramatically Rule 80a= restricts program trading if DJIA changes up or down by more than 2% Rule 80b= all trading is halted for a period of time because of dramatic decreases in the DJIA Decreases in DJIA: 1) Level 1= declines by> 10% 2) Level 2= declines by >20% 3) Level 3= declines by at least 30% exchange halts for remainder of the day CHAPTER SEVEN Self-regulatory organizations: NYSE +NASD= FINRA FINRA cannot imprison since note d with the government MSRB= regulates municipal bonds (can’t enforce its own rules) Maloney act= created the NASD Securities amendment Act established the MSRB Discretionary = ed rep can execute trades without verbal approval of client (needs written power of attorney) Limited power of attorney= reg. rep cant withdraw securities or cash without permission of customer Full power of attorney= no restriction on transfer of assets Corporate needs: 1) tax ID of Corp. +copy of corporate resolutions+ corporate charter when opening a margin

Trust = grantor opens for a beneficiary with the trustee managing the + need a trust agreement when opening that specifies details on what type of assets+ when to transfer Transfer on death= investor designates a beneficiary which avoids going to court upon death Omnibus = opened in name of reg. rep for customer Uniformed gifts to minors (UGMA)= 1 minor and 1 custodian per + minor is responsible for taxes (14 and over =pays at minors tax rate)+ ed in name of custodian for the benefit of minor+ securities can’t be sold on margin or sold short+ anyone can give cash or securities and the custodian cannot refuse+ custodian cannot allow rights received by to expire+ custodian cannot give anyone else power of attorney UTMA= extension of UGMA that allows the to receive art, real estate etc. Fiduciary= anyone who makes decisions for another investor Prudent man rule= fiduciary must act in the best interest of the investor (diversify) Legal list= state guideline of investments for fiduciary s If customer dies firm needs copy of the following: 1) 2) 3) 4)

Affidavit of domicile Letters of testamentary Death certificate An inheritance tax waver

t with rights of survivorship= if one investor dies the remainder of the belongs to survivor t with tenants in common= if one investor dies their portion is transferred to their estate Partnership = if one partner dies: freeze + cancel open orders+ cancel power of attorney transfer= customer must give notice to firms receiving assets+ new firm notify old firm+ old firm must instructions within 3 business days of notification+ old firm must deliver securities within 3 business days of verification Street name s (numbered s)= s ed in the name of a broker dealer with an ID# (can be changed to regular s at any time) Reg rep needs written statement attesting to ownership of

Margin s must be in street name Transfer and ship = certificates are printed in the name of and delivered to the investor Transfer and hold= printed in name of investor and held by brokerage firm Cash s are opened in street name or transfer and hold/ship s All s need a street address but can have certificates mailed to a P.O box Broker dealer can hold mail for 2 months if traveling and 3 months if over seas Even if a customer has multiple s it is as if they have 1 Insiders= officers/directors/anyone with over 10% of outstanding shares/ anyone who has access to non- public info and their immediate family Control stock= stock held by insiders that was purchased publicly Form 3= when buying enough stock to become an insider must notify SEC within 10 business days Rules for insiders= all trades must be reported to SEC within 2 business days after the trade by filling a form 4 (form 3= when becoming / form 4= after becoming) Insiders cannot short their corporation Insiders cannot sell short against the box unless covering their short position within 20 days Insiders must hold onto their stock for at least 6 months (only if at a capital gain/ may sell at loss earlier) NASDAQ Market watch= system that monitors unusual price and volume activity for insider trading Regulation FD (full disclosure)= insider information must be released to entire public simultaneously (8k) Max criminal penalty for insider trading= 1 million (2.5 million for a business) or years in prison per violation Max civil penalty= 3 times gains or losses avoided based on inside information or 1 million dollar fine (whichever is greater) SEC may offer bounties of up to 10% of penalty charged Trade date= date a trade is executed

Settlement date= day issuer updates its records and the delivery of certificates is completed Payment date= day that the buyer must pay for trade Corp stocks+ bonds : settlement- t+3 and payment-t+5 Muni: t+3 for both U.S. bonds: t+ 1 for both Option: settlement t+1 payment- t+5 Cash trades always settle same day Stocks+ corp. bonds+ muni= settle in clearinghouse funds U.S. gov. bonds= settle in federal bonds Extension from payment date may be acquired from NASD/ FED/ any exchange Sell out= when customer fails to pay for trade by the payment date the brokerage sells securities that customer did not pay for and the customer’s is frozen for 90 days Buy in= when seller fails to deliver certificates to brokerage and the customer’s is frozen for 90 days Sellers option= extension of normal settlement date arranged between firms (if seller can deliver earlier than agreed upon then must give 1 day written notice) Comingling= mixing a customer’s fully paid and margined securities Inter positioning= executing a trade through a third party Reg. reps can’t give or receive gifts of over $100 Free riding= buying a security with intention of selling a security to pay for trade (freeze up to 90 days) Backing away= failure to honor a firms quote Churning= excessive trading for the purpose of generating commission Matching orders (wash sales)= illegal manipulation of the price of a security(trading a security back and forth (painting the tape)) Front running= trading based on knowledge of an block trade

Pre arrange trades= a firm cannot make a deal with a client to buy back a security at a fixed price Trading ahead= firm cannot trade its inventory based on forthcoming research reports unless unsolicited Marking the close/ open= can’t manipulate the open/ close price Paying the media= brokerage firms cannot pay employees of the media to affect the price of a security Freeriding and withholding= hot issues cannot be withheld for firm employees or family Rule 2790= IPO’s can’t be sold to brokerage firms or s (lawyers, s etc.) Telephone act of 1991= (excluding non-profit) calls to potential customers (excludes current clients) can’t be made before 8 am and after 9pm of the potential customers local time Caller must give name +company name+ company address+ phone number If person requests then must put on “do not call list” Moonlighting= if receiving outside employment the employee must notify the firm Private securities transaction (selling away)= if reg rep executes trades outside of their employment they must notify their firm in writing and if compensated they must receive permission in writing If a reg. rep enters bankruptcy they must notify their firm. The firm must send them an updated u-4 form Office of supervisory jurisdiction= compliance office or any office in which marketing/structuring/holding of assets takes place (needs principle w/ series 24) and inspected annually by FINRA and the firm Principals must approve: new s+ all trades (same day)+ ment+ complaints Principals do not need to improve a prospectus or recommendations over the phone FINRA rules are divided into rules of fair practice (member+ customer) and uniform practice code Fines over $2,500 are major fines Person being complained against has 25 days to respond to a complaint

Arbitration (mandatory between ) is binding and non-appealable Statue of limitations for arbitration is 6 years Simplified arbitration is used fir disputes under $25k Mediation= arbitration alternative where fee is split between both parties In case of corporate distribution occurs in the following order: 1)IRS 2)Unpaid workers 3) secured creditors 4) general creditors 5) subordinated creditors 6)preferred stock 7)common stock SIPC= protects each customer up to $500k of which no more than $100k is cash in the case of a broker-dealer bankruptcy (does not cover commodities s) (cash and margin s are 1 ) Regularity of sending out statements: active s= monthly // inactive s= quarterly// mutual funds = semi annually Firm must send copy of balance sheets to costumers semiannually (if requested send immediately) Declaration date=date that corporation announces that a dividend will be paid to investors Ex- dividend date= first day that a stock trades without dividends Record date= day the corporation inspects records to see who gets dividends (2 business days after ex- dividend date) (trade must settle on or before record date to receive dividend) Payment date=day the corporation pays the dividend Registrar= financial institution hired by issuer to maintain a list of shareholders Transfer agent= sends items to investors (proxies/dividends etc.)+ can act as a rights agent Rights agent= if investor wants to exercise rights Stock denominations= multiples of 100/ divisors of 100/ units that add up to 100 Mutilated certificates may only be validated by issuer CUSIP#= ID of securities that were issued at the same time Stock power= g on separate piece of paper instead of on certificate Rejection= refusal of securities at time of delivery

Reclamation= refusal of securities previously accepted at delivery Nine bond rule= any order for 9 listed bonds or less must be executed on the exchange unless 1)the customer wants OTC 2)there is a better price OTC 3)it’s a muni/ govt. bond Flow of order through brokerage: 1) Wire room= execution of all orders 2) Purchasing and sales= enter all transactions into firms blotter and sends out confirmation date 3) Margin= determines the status of margin after trades executed 4) Cashier= determines the cost of the trade and how much the investor gets back (also responsible for receiving and delivering securities) Rule 405 (suitability)= reg. rep should know customers investment objectives+ employment+ financial background+ marital status Reg rep does not need to know= Investment experience+ educational background+ previous employment Currency and foreign transactions reporting act of 1970= must report cash/money withdrawals of over $10k through the CTR to FINCEN (must be reported within 15 calendar days) Suspicious activity of $5k or more must be reported to FINCEN immediately 3 stages of money laundering= Placement/ Layering/ Integration CIPs= customer identification program which is required to be implemented by brokerage firms Employees of financial institutions need written permission from employer when opening a margin (officers and cash s don’t) Reg. rep can only open a t with a customer if he gets written permission from principle %5 markup maximum on transactions is a guide line not a rule Dealer cost= price dealer paid for a security Don’t know notice= when a firm receives a confirmation for a trade that it does not recognize Corp. must always pay for mailing costs Proxy contest= when a group of shareholders try to throw out the board of directors

Form 13d= filed by an investor who becomes a 5% owner of a company who is trying to gain control of a company (tender offer) Form 13g= filed by an investor who becomes a 5% owner of a company who is planning on remaining a ive investor Factors that a company needs to be listed on NYSE: pretax earnings+ number of outstanding shares+ total market value of outstanding shares+ national interest (spread out share holders geographically)+ trading volume+ common stock must be voting If a company wants to delist from the NYSE: approval from the majority of the board of directors+ majority of ants+ notification to 35 largest shareholders+ application to the SEC To be listed on the NASDAQ a company needs at least 3 market makers initially and 2 continuing Penny stock= stock valued under $5 that’s not traded on an exchange Customers must receive a risk disclosure document when purchasing penny stocks Exceptions to risk disclosure= accredited investor/unsolicited/established customer ments must be filed with FINRA within 10 days after first use (new firms=10 days prior) Corporate/partnership documents must be kept for the lifetime of the firm Blotters (records of trades)+ ledgers(customer statements)= must be kept for 6 years All records must be easily accessible for 2 years CHAPTER EIGHT Unit investment trusts= invests in fixed portfolio of securities with no management fee Net asset value= indicates the performance of a fund If NAV>public offering price then must be a close ended fund Regulated investment company= not taxed like a corporation of at least 90% of income is derived from interest/capital gains/dividend and it distributes at least 90% of dividends and interest received to investors each year

Diversified investment company= at least 75% of assets are diversified : <5% of 75% is put into any one company’s security+ can’t own more 10% of outstanding shares of the any company that is owned A mutual fund must have at least 80% of assets meeting the objectives of the fund Hedge fund is most speculative Aggressive growth fund= speculative in new companies ETF= close ended and traded between investors Breakpoint= reduced sales charge for large investments in a mutual fund Letter of intent= allows you to receive breakpoint immediately (valid for 13months+ may be backdated for up to 90 days) Rights of accumulation = allows investor to contribute money at their own pace to qualify for a breakpoint later Dollar cost averaging= depositing a fixed dollar amount into the same mutual fund periodically Fixed share averaging= buying a fixed amount of shares periodically Constant dollar plan= invest a constant dollar amount invested at all times Sales charge=( POP- NAV)/POP = (ASK-BID)/ASK Mutual funds cannot charge more than 8.5% of the amount invested No load funds usually charge redemption fees Types of mutual fund shares: 1) Class A= front end load 2) Class B= back end load 3) Class C= level load (pays a sales charge each year) Investment Company must have at least $100,000 from at least 100 investors before public offering Board of directors must be at least 75% outsiders 12b-1 fees= investor must pay for all advertising+ promotional expenses of fund Investment company distributions are taxed as income and capital gains Distributions are taxed even if reinvested

Reinvested capital gains cannot have a sales charge If fund charges 8.5% sales charge they must offer reinvestment of distributions and rights of accumulation for free A fund is not required to provide a letter of intent New prospectus of mutual fund must be filed annually with the SEC Redemption of mutual fund must be completed in 7 calendar days Break point sales= selling right below breakpoint without telling client about option to qualify (illegal) Anti-reciprocal rule= recommendations can’t be based on sales charges or commissions Continuing commission= automatic commission given to a reg. rep who promotes the fund REIT= (not redeemable) at least 75% must be invested in real estate + at least 90% of net income must be distributed annually Fixed annuities do not have to with the SEC variable annuities do Accumulation units= units purchased during the paying period of an annuity Annuity units= units liquidated during the payout period Annuitize= withdrawing money Assumed interest rates= annual rate of interest rate necessary to receive expected payouts Single payment immediate= pay lump sum and immediately start receiving payments Deferred= start receiving payments at a later date Straight life (life annuity)= stops payout when investor dies (highest payout) Life with period certain= minimum period of payout even if investor dies t and survivor= in case of death payments are transferred (lowest payout) Investors cannot outlive their annuities guaranteed 403b (public school) + 501c3(non profit)= only qualified annuities (can contribute pre tax)

CHAPTER NINE Fed determines what can be traded on margin (OTCBB+ Pink Sheets stocks are usually not marginable) New issues can’t be purchased on margin for the first 30 days Current market value – debit balance (DR) = equity Reg T= Margin requirement (50% unless otherwise stated) Margin call= amount investor must deposit when buying on margin Sma (special memorandum ) = taking excess equity after reg t of new cmv Withdrawing sma is borrowing (DR increases and equity decreases) You can also use sma to buy more stock on margin You cant lose SMA even if the stock goes down in price (like line of credit) You cant use SMA to lower a debit balance Restricted = when equity is below reg T requirement (same calculation as SMA) Investor cant use sma to pay off a restricted (can still withdraw) When selling stock from a reg T the money received pays off DR (although equity stays the same SMA increases which they can borrow) In long margin EQ must be at least 25% of the CMV (FINRA) if goes below then maintenance call is required for the difference 1.33 x DR= minimum value before maintenance call If investor fails to meet margin call then the broker must sell double the securities worth of the call (within 5 days of trade) U.S. + Muni bonds don’t have the same reg T (between 1-6%) If customer does not pay enough for a security by less than $1000 the deficiency is added to DR Withdrawing SMA= DR increases Depositing cash= DR decreases Buying stock on margin= DR increases Selling stock= DR decreases and EQ decreases

Interest charges= DR increases Cash dividends= DR decreases and SMA increases by the full amount of the dividend (stock dividend makes no impact) New long margin = minimum $2000 (for reg T) deposit or pay trade in full If EQ falls below $2000 no money is necessary until making another trade Hypothecation= firm lends money to a customer to buy a security All margin s require a Hypothecation agreement to be signed by customer+ credit agreement which sets for loans (interest rates etc.) Re- Hypothecation= brokerage firm uses margined securities as collateral to borrow money from a bank (up to 140% of DR can be re hypothecated in case of decreased value of customers securities) Max amount of money that can be borrowed through using customer’s securities as collateral through re-hypothecation is 100% of the DR Amount that must be segregated and cant be used=CMV- 140% of DR When selling short (reg T is 50% unless otherwise stated)= CMV+ EQ=CR (credit balance stays the same even if CMV changes) Maintenance requirement in a short is 30% of CMV 10/13 of CR is the highest the market value can increase too in a short before maintenance call To open a new short margin = minimum requirement is $2000 no matter what Cheap stock rule= when selling short a low priced stock= $0-$2.50 the maintenance requirement is automatically $ 2.50…..from $2.50-$5.00 requirement is 100% of CMV…..$5-%10 req. is $5.oo per share Combined (both long and short) find maintenance requirement for each separately then add Securities in lieu of cash= fully paid securities deposited to meet margin call =Margin call/%100- Reg. T Reg U= using securities as collateral to borrow money from a bank Reg. G= using securities as collateral to borrow money from another financial institution besides for a bank or broker dealer

Loan consent agreement= optional agreement by customer allowing the firm to loan their securities to short sellers Loan value= max a broker dealer can lend to customer ( 100%- Reg. T) Margin requirements= Arbitrage 10% Short against the box 5% CHAPTER TEN Option= derivative Sell/short/write= investor has obligation to meet of the contract @#= of option Same type options= both calls or both puts Same class= same stock + same type Same series= same stock+ same type+ same expiration+ same strike price When deciding if in or out of the money ignore the At the money= stock price= strike price = Intrinsic value (how much in the money…can never be 0) + Time value More volatile the higher the If out if the money then = Time value (For anyone using these notes, I did not include option gain/ loss pages 333-338) Closing an option= trading the opposite way of first trade Closing purchase= buying an option to cover an option you wrote Options are considered capital gains/losses Long straddle (volatility) = buying a call and a put with the same stock, expiration and strike price Short straddle (stability) = selling a call and a put with the same stock, expiration and strike price Long Combination (volatility) = Buy a call and buy a put with the same stock, but different expiration dates and/or strike price Short combination (stability) = Sell a call and a put with the same stock, but different expiration dates and/or strike price

Spread= buying and selling a call or put of the same class Vertical spread= different strike prices Horizontal spread = different expiration dates Diagonal spread= different expiration dates and different strike prices Bullish spread= buying at a lower strike price and selling at a higher strike price Bearish= Buy high sell low An investor who is receiving more from s then paying wants s to narrow and remain unexercised in a spread To determine if credit (more money coming in from s) or debit (more going out) in a situation where there is no s listed, use difference in expiration dates to determine When bullish you can reduce risk by either buying a put or selling a call If reducing risk by buying an option= protection If reducing risk by selling an option= partial hedge (“increase yield”) Married put= when an investor buys and a put on the same day (holding period starts immediately) If buying a put option after buying a stock the holding period for the stock doesn’t start until put is closed or expired Covered option= when seller has a position to reduce the risk of the trade (owning stock/convertible/option, If the option you bought is in the money first) Naked= uncovered (must be executed in a margin , as do selling short+ spreads) When buying an option you must pay in full Options cant be used as collateral to borrow money Cash dividends do not affect options Stock dividend= # of shares per contract increases and the strike price decreases Even split (2:1) = # of contracts increase (# of shares per contract stays the same) + strike price decreases Uneven split (3:2) = # of contracts remains the same+ number of shares increase+ strike price decreases

Options Clearing Corporation= issuer and guarantor of all listed options (decides which stocks may have publicly traded options) also establishes contract size+ expiration dates+ strike price When opening a new options : 1) Reg. rep must send client a copy of the “options risk disclosure document” at or prior to the approval of a new 2) Reg. rep determines the suitability of a customer by way of a new form 3) The ed options principal approves the 4) Execute the transaction 5) The reg. rep must send an “options agreement” to the customer (must be signed within 15 days after approval of the ) Options trade on the Chicago Board Options Exchange Expiration= 11:59 pm on the Saturday after the third Friday of the expiration month (last trade=4:02 and last exercise=5:30 pm of the business day prior to expiration) Any option that is at least a penny in the money will be automatically exercised by the OCC at expiration An investor can’t have more the 75,000 option contracts on the same side of the market for a particular stock (buying calls and selling puts count together) order system= used for smaller orders on the CBOE and is used to by floor brokers Index options: 1) OEX- S+P 100= 100 Blue chip companies 2) SPX- S+P 500=S+P 500 INDEX 3) MMI (major market index)20 stocks= based on 15 DJIA stocks and 5 other large cap NYSE stock Index options always settle in cash (index options can only be exercised at the close of the market) Capped index option= automatically exercised once 30 points in the money (if not in the money by 30 points then can only be exercised the business day before expiration (European style) Leaps= long term option which expire in 39 months instead of 9 months like a regular option Debt option= option based on bond

Yield options= based on interest rates (buy calls if believe imminent interest rate hike) Foreign currency options= traded on the Philadelphia exchange (PHLX) and the Pacific Exchange (PSE) Priced by units in which each point= $0.01 besides for the Yen which is in denominations of $0.0001 CHAPTER ELEVEN Direct participation programs (limited partnerships)= allows partners to participate and use for write offs and often invests in real estate/ oil and gas (must have at least 1 general partner (manages) + 1 limited partner (invests) DPPs’ can be used as tax shelters and are considered “ive” income/losses Must file K-1 tax form that shows the income and write offs ed through investors DPP needs: 1) Certificate of limited partnership (like a corporate charter) 2) Agreement of limited partnership (includes rights and responsibilities) 3) Subscription agreement (general partner signs application given upon payment to accept new partner ) General partners make decisions for partnership (can demand money from other partners if needed) General partners can’t compete and have unlimited liability Limited partners cannot make management decisions+ limited liability+ can compete+ voting rights Corporate characteristics a DPP must avoid at least 2 of in order not to be taxed: 1) 2) 3) 4) 5) 6)

Profit directed business Providing limited liability Having 2 or more individuals Having a central management (hardest to avoid) Having perpetual life (easiest to avoid) Have free liquidity of shares (second easiest to avoid since application need for new partner)

Land can’t be written off for depreciation Accelerated (ACRS/MACRS)= depreciates more in the early years

Write offs= interest payments+ business expenses+ depreciation+ depletion of natural resources Revenue- write offs = Net income Cash flow= net income+ write offs ive loses can only be used to offset ive gains Alternative minimum tax= mostly used by DPPs’ when write offs cause to low of a tax base Cost basis= maximum loss for limited partnership (tax deduction limit= any money put in and then decreased by cash distribution/depreciation/depletion Types of partnership: Real estate: 1) Raw land= looking for long term capital appreciation (riskiest +no cash flow cannot depreciate) 2) New construction= appreciate property by constructing (risk of higher than expected cost+ no cash flow) 3) Condominiums= cash flow depends on economy (according to IRS limited partners cannot stay for more than 14 days or 10% of the days rented out per year whichevers greater) 4) Public housing (section 8)= backed U.S. govt. subsidies (receives tax deductions on income received)(govt. subsidizes any deficient payment + safest+ guaranteed cash flow) 5) Existing properties= cash flow depends on economy, buys property that is fully operating already (high maintenance cost) 6) Blind pool= offers diversification of different types of properties Oil and Gas: 1) Exploratory(wildcatting)= drilling in unproven areas (riskiest+ long term appreciation potential+ high intangible drilling cost) 2) Developmental= drilling in proven areas(high drilling cost+ lower risk since proven) 3) Income= drilling in an area which is already producing and developed(no risk) 4) Combination= diversified between three above Operating lease= buy equipment and lease it out for a short time Full payout lease= lease payments cover the entire cost of equipment

Functional agreement= general partners are responsible for tangible costs and limited partners are responsible for intangibles The reg rep must make sure client is suitable for DPP= proof of financial background+ ability to tie up money for long periods of time+ ability to sustain loss+ need for tax benefits Compensation of underwriter for DPP can be up to 10% of the gross amount of the securities+.5% of due diligence cost Crossover point= point in which partnership income exceeds the deductions (becomes profitable) Recourse debt= loans taken by partnership which the limited partners can be personally responsible for Non- recourse debt= lender has no claims on limited partners personal assets Recapture= IRS takes back excessive deductions claimed in the previous year Abusive shelter= when a partnership does not attempt to make a profit In the dissolution of a partnership the limited partners are paid before general partners (creditors first) CHAPTER TWELVE General obligation bond= issued to fund non-revenue projects (backed by full taxing power of muni) voter approval is required Ad valorem tax (property tax) = largest source of revenue for GO bonds (based on assessed value) Mills=.001 There is a maximum that a muni can borrow Limited tax bond= type of GO that limits tax rates used to pay off bonds Unlimited tax bond= normal type of GO Revenue bond= issued to fund revenue producing projects (voter approval not necessary) Industrial development revenue bond= issued to fund construction of a commercial facility for the benefit of a corporation (riskiest because not backed by muni) Substantial rule= company cant buy its own IDR and receive tax free interest Private purpose (activity) bond= interest is taxable at a regular tax rate on all levels

Qualified private purpose bond= interest is taxable only to investors subject to the Alternate Minimum Tax Double barrel bond= combo if revenue + GO bond (if revenue fails then backed by taxing power) Special tax bond= backed by regressive (excise)taxes (sales/tobacco) Special assessment bond= backed by charges on those that benefit from project More obligation bond= if muni fails to pay the state has a moral obligation to pay Public housing authority (PHA)= backed by U.S. govt. (considered safest) All muni’s must be issued with a legal opinion(validates+ makes sure indenture is binding+ verifies federally tax exempt) Unqualified legal opinion (unconditional)= issuer meets all conditions without restrictions Qualified legal opinion= issuer meets conditions with potential restrictions (lean on property etc.) Ex legal= Bond delivered without legal opinion Muni notes= mature in less than a year TAN (tax anticipation note)= issued with expectation of receiving corporate/individual tax in next few months RAN (revenue anticipation notice)= anticipation of revenue producing facility in the next few months TRAN= tax and revenue anticipation note BAN= bond anticipation note (anticipation of writing long term bonds) CLN (construction loan note)= notes issued to finance large construction projects for muni PLN (principal note)= provides interim financing from public housing projects Rating for muni notes: Moody’s investment grade= MIG 1-4 Standard and Poor’s= SP 1-4 Prime= P1-4 (only used for tax exempt commercial paper (short term IDR)

Interest+ accretion+ amortization on muni are federally tax free State tax free if investing in home state/ or Protectorates(Puerto Rico, Guam etc.) Muni have the lowest yields of all bonds TEY= yield that investor needs on a taxable investment to be equal to a muni yield after taxes TEY= Muni yield/(100%-tax bracket) Muni equivalent yield= taxable bond yield x (100%- investor tax bracket) Margin requirements for muni= 7% of total par value or 15% of CMV whichever is greater Negotiated offering= issuer chooses an underwriter directly with no competition (revenue bonds/IDR) Competitive offering= auction (GO bonds) (muni s through “notice of sale) TIC (true interest cost)= considers inflation Good faith deposit= entry fee and partial payment for bond issue(1-2% of par value of bonds being auctioned)(winners use towards money necessary to buy bonds/losers get deposit back) Official statement= disclosure of facts about muni issuer (does not have to be filed with SEC)+included in ments and brochures GO bonds have a higher rating and lower yield than revenue bonds Direct debt= outstanding debt that a muni owes which has not matured Overlapping debt (coterminous)= debt that muni has to assist a higher gov’t(state) in paying Overall debt= direct +overlapping Debt per capita= debt per person Traffic fines+ licensing fees can be used to pay off GO bonds Feasibility study= engineering report done by independent consultants to see if facility can generate enough revenue to pay off revenue bonds Covenants= promise on indenture meant to protect investors(rates/maintenance/insurance) Catastrophe call= call used when facility can no longer produce revenues

Project completion clause= allows issuer to borrow more money to properly construct facility Flow of funds= 1)Net=operating and maintenance fund>sinking fund(debt)>reserve fund(principal and net for next 2 years)> renewal and replacement fund(improvements) 2) Gross= sinking fund> operating and maintenance fund> reserve fund (principal and net for next 2 years)> renewal and replacement fund(improvements) Assume net Debt service coverage ratio= net or gross revenue/ principal+ interest Debt per connection= debt per person using the facility The “Bond Buyer” is the best source of information for new muni bonds Bond buyers index= average yield of 20 , 20 year GO bonds that are investment grade Eleven bond index= average yield of 11 , 20 year GO bonds that are rated AAA or AA Revdex(revenue bond index)= average yield of 25 revenue bonds with 30 year maturity Visible supply= par value of all new issues expected to become public within the next 30 days Placement ratio= percentage of competitive issues in which the auction was completed (measured weekly) “blue list”= best source of info for outstanding bonds Blue list total= total par value of all muni bonds in the blue list except for zero coupon bonds 50M Chicago P/R @ 102 AON 3/1/07 M12 : Pre refunded+ All or none+ 3/1/07= 1st call date M12 = years to maturity Quotron= wire service for muni Muni insurance agencies= MBIA+ AMBAC+FGIC MSRB= self regulatory(does not apply to issuers) Reg reps have to do 90 day apprenticeship during which they cant discuss any thing with public customers+ cant earn commission

Confirmation (receipt of trade)= must disclose YTM or YTC whichever is lower (discount bond YTM is lower) In whole call= first time entire issue is callable All MSRB complaints are kept for 6 years (FINRA for 3 years) and must be settled through arbitration Control relationship= firm/employee has a position of authority over issuer being recommended (must be disclosed) Completion of the transaction= buyer= payment date + seller= settlement date If an advisor is chosen to underwrite an offering: Negotiated offering= relationship must terminate+ disclose potential conflict of interest+ disclose spread Competitive offering= relationship does not need to be terminated+ adviser needs written permission from issuer to participate in the auction G- rules (page 441+442 of the empire stock broker institute) This is a summary of the EMPIRE STOCKBROKER INSTITUTE TRAINING INSTITUTE and should only be used after reading the actual book at least once. Good luck!! YY 6/7/2010