Series 7 LEM

Kaplan

📚 GENRE: Business & Finance

📃 PAGES: 752

✅ COMPLETED: January 8, 2021

🧐 RATING: ⭐⭐⭐

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Short Summary

The Kaplan Series 7 License Exam Manual is designed to help individuals pass the FINRA Series 7 exam. The LEM includes information about stocks, bonds, options, financial services industry regulations, and more.

Key Takeaways

1️⃣ Hold Stocks For at Least a Year  — When you hold a stock for over one year, you receive a reduced capital gains tax rate (15%) when you sell it. If you sell prior to that one year mark, you are taxed at your ordinary income tax rate.

2️⃣ Use Options to Your Advantage — You can fairly easily haul in $100 every few weeks using put options. When you sell a put option, you pocket a ‘premium’ from the buyer. If the stock price does not fall below the contract’s stock price before the contract’s end date, you do not have to buy the stock. If it does fall below the strike price and the contract is exercised by the buyer, you will have to buy 100 shares, but this is OK if you like the underlying stock anyway.

3️⃣ Time Horizon Matters — Young investors have a longer time horizon and can afford to take a few more risks with their portfolio using stocks. Older investors looking to conserve their money should instead lean primarily towards bonds or money market instruments, which are much safer. If you need money in the very near future (i.e. for a house) the money market is where you should be investing.

Book Notes 📑

*Did not take chapter-by-chapter notes on this one. Running list below.

  • P. 104: Bond Yields
    • Nominal Yield=Coupon Rate
    • Current Yield=Annual Interest or Dividends/what you paid for the bond or stock (market price)
    • Yield to Maturity=Annual Interest-(Premium/Years to Maturity)/Average Price of Bond
    • Average Price of Bond is just the purchase price + par (1,000)/2
    • Example: 10% coupon bond at 105 with 10 years left to maturity.
      • 100-(50/10)/1025=95/1025=0.093 or 9.3%
    • With yield to maturity, if you bought the bond at a premium, you are subtracting in the top part of the equation. If bought at a discount, you are adding because you will be earning more based on the fact you bought at a discount. 
  • P. 122: Convertible Bonds: Finding how many shares a bond will convert to if exercised
    • Bond: 1,000/conversion price 
    • Preferred Stock: 100/conversion price 
    • Conversion price listed in the indenture 
  • Convertible Bonds: Finding the conversion price 
    • 1,000/# of convertible shares 
    • Question may give you the # of convertible shares and ask for the conversion price. Or it may give you the conversion price and ask for the # of convertible shares. Should be ready for both. 
  • P. 125: Convertible Bonds: Finding parity price for deciding when to convert bonds
    • First find number of shares you can convert to (1,000/conversion price) 
    • Market Price of Bond/# of convertible shares 
    • This gives the parity stock price that would result in you essentially getting shares at the same price you spent on the bond (COST BASIS 7!!). Anything at or above parity is worth converting the bond
    • Another method is to go by percentage. For example: Convertible bond is trading at $1200 and the conversion price is listed at $50. What is the parity price? Well, 1200 is 20% above par value of 1,000 (200/1000). Apply that 20% to the conversion price to get the parity price. So add 20% to $50 (50 * 0.20 = $10). So, $50 + $10 = $60. Parity price would be $60. Either method works. 
  • P.127: Zero-Coupon Taxation
    • First take the discount and divide by years to maturity. This gives how much you are phantom taxed every year — Taxed annually at OI!!
    • If sold before maturity, add the phantom tax to the price you paid (not the discount you got the bond at) for the bond every year for as long as the investor held it. This gives you the new cost basis. 
    • From there, determine the capital gain or loss by subtracting the price sold at by the new cost basis. This gives the gain or loss that will be taxed. If the bond is held to maturity, you obviously won’t pay a capital gains tax. This is only if it is sold early. The phantom tax is applied regardless though. If you don’t sell early, no taxes to be paid
  • P.155: Tax Equivalent Yield Muni Bonds
    • Muni Bond Coupon Rate / (100% – tax bracket %)
    • To find the equivalent Muni Bond Yield when you have a Corporate bond: Corporate bond yield * (100-tax bracket)
    • The answer to this tells you the rate as a % that an investor would have to buy of a corporate bond or some other bond to equal the after-tax rate of the muni bond
  • P.153: Muni Bond Accretion
    • Discount (In Points) / years to maturity
  • P.170: T-Notes and T-Bonds and GNMAE’s and TIPS are listed as a percentage of par (1/32%)
    • T- Note bought at 101.20
    • 101= 1,010
    • .20 = 20/32 = 0.625
    • Slide decimal over one point so 6.25
    • 1,010 + 6.25 = 1,016.25
  • T-Bills and all Bonds sold at a discount: These are quoted on a discounted yield to maturity basis
    • Ex. 2.20 bid 2.18 offered
  • P.189: Mutual Fund Sales Loads
    • POP-NAV=sales charge in $
    • Sales charge in $/POP=sales charge as a %
    • NAV+sales charge as $=POP
    • NAV/(100%-Sales Charge %)=POP
  • P. 197: Mutual Fund Taxes: Net Investment Income (NII)
    • NII=dividends+interest-expenses of the fund
  • Mutual Funds have 8.5% maximum sales load on POP
  • Mutual funds have flow-through/conduit theory characteristic
    • Regulated Management companies (which means they pay out a certain level of annual NIIto shareholders that meets IRS standards) are eligible for a tax exemption on 90% of income (dividends) generated from the stock the fund holds. This passes through to shareholders
    • Dividend income from a mutual fund is taxed at OI
    • Dividends that are automatically reinvested into the fund are taxed in the appropriate year at OI
  • P. 275: Options Time Value
    • Total Premium – Intrinsic Value
  • Partnerships (DPP) are not taxed at the entity level. Corporations are (35%) before you’re taxed again
    • Therefore you retain more earnings because you are only taxed at your OI with a DPP
  • P. 324: DPP Cost Basis Formula
    • Investment in DPP + recourse debt (or non recourse debt in real estate DPP) – any cash distributions = cost basis
  • Only Buy limit and sell stop orders (orders that are placed below market price) are reduced for cash dividends 
  • Margin: Determining the lowest Market Value can drop to stay above maintenance
    • DEBIT BALANCE x 4/3
    • For short margin account (determining the most the SMV can rise to: CB / 1.3)
  • Margin: When a customer withdraws credit from the SMA, the debit balance goes up (not his money) and equity will then fall
  • Margin: Once established, SMA does not decrease with a fall in LMV (market value). 
  • Margin: The greater of SMA balance or EE is what goes in the SMA account
  • Margin: if securities are sold in a restricted account, half the proceeds must be kept in the account to reduce the DB.
    • This is called “retention requirement”
  • Margin: If SMA is used to buy more stock, the LMV and DB go up by the amount used to buy the stock
  • Pattern Day Trader: Executes 4 or more day trades in 5 day period
  • Margin: Maintenance on Long Margin Accounts = 25%. For short margin accounts: 30%
  • Muni Bonds: Ad Volerem/Mills
    • 0.001 = 1 mil 
    • Multiply mills given by 0.001 to get the mileage rate in cents. Then multiply that by the ASSESSED property value to get the taxes due on a property
  • Muni Bonds: Accrued Interest
    • Interest accrues as of dated date up to, but not including, the settlement date 
    • Ex. January 1 is dated date. January 31 is settlement date. How many days of accrued interest does customer pay? Answer: 30
    • Accrued interest is always based on a 30 day/360 day monthly schedule unless it’s a Gov. bond
  • Muni Bonds: Real estate/ad volerem tax is a local gov thing. State gov. does not charge these taxes
  • Muni Bonds: Also known as “Dollar Bonds” and are quoted as a percentage of par
    • Ex. 90% bond = 900 dollar bond
    • 100 basis point movement = 1% movement = $10 price change
  • Variable Annuities: Qualified vs NonQualified
    • Qualified = Buy in uses pre-tax dollars
    • Non-Qualified = Buy in uses after tax dollars 
  • Good Delivery: If the certificate ends in 00 = good delivery by UPC standard.
    • For certificates delivered that are under 100, you have to be able to make 100 out of them for it to be good delivery. 
    • Ex. 300 share delivery using three 60 share certificates and three 40 share certificates. The 60 and 40 can be combined into 100. Four 75 share certificates adds up to 300 but you can’t make 100 out of it. 
    • If the trade has an odd-lot (under 100 shares, any number of certificates can add up to it. Ex. 67 — 50 and 17)
  • Indiv. Retirement Accounts: Penalties
    • Excessive Contribution: 6%
    • Catch Up: $1,000 after 50
    • Pre-59 1/2 Withdrawal: 10%
      • Your taxable income for the year also goes up by the amount withdrawn 
    • Max Contribution: $6k? (ROTH)
    • Neglecting to Pull Out After 72 1/2: 50% penalty on distributions
    • Once per 12 months, you can liquidate an IRA and roll it into another IRA without penalty. You have 60 days to do it. You can do this unlimited times if you as an individual don’t touch the money and it goes straight from trustee to trustee (not liquidated)
  • Keogh Plan: Only self-employed income, not earned income, can be contributed
    • Max Contribution: 20% of pretax income or 40,000, whatever is less
  • Employer Sponsored Retirement Plan
    • Qualified: Does not Discriminate. Abides by ERISA
    • Non-Qualified: Discriminates. Does not abide by ERISA
    • Only companies with qualified plans can deduct all of their contributions from taxable income. Companies with Qualified plans also don’t pay taxes on income (interest or dividends) generated by the retirement fund. Qualified plans also get tax credits. This is why corporations work hard to abide by ERISA and offer qualified plans 
  • ERISA Requirements
    • Funding 
    • Planned Management
    • Vesting
    • Definition of who can take part
  • Patriot Act
    • Currency Transaction Report: If you deposit any CURRENCY above $10,000, you have to sign it 
    • SAWRS: Surveillance. Must report if you suspect suspicious activity
  • Coverdell Education Account
    • Max contribution/year: $2k
    • After tax dollars used. Thus, withdrawals are tax free.
    • Must be used for education. Earnings and full withdrawals are tax free is used for qualified educational expenses.
    • Anything distributed that doesn’t go towards education is taxed to the beneficiary not the donor and may be subject to a 10% penalty
    • Needs official statement
    • Donor income limits 
    • Contributing age limit: 18 Distribution age limit: 30
    • Used for pre and post secondary education 
  • 529 Plan
    • Similar to Coverdell but 529 is state run. Contributions set by state. Taxed at state level but not federal. 
    • No age limits at all
    • Needs official statement 
    • No donor income limits 
    • Can use for up to $10k per year towards K-12 education
  • U4: To register a FP
    • Name and Aliases
    • 5 year residency history
    • 10 year employment history
    • Last 3 years employment history must be verified 
    • Disclose any felony or securities related misdemeanor
    • Changes must be made no later than 30 days after being aware
  • Muni Bonds: IPO
    • GO Bonds: Think syndicate manager. The QB. Via a syndicate letter he and the syndicate members get selling group members to bid on IPOs via official notice of sale and then sell those to their client. COMPETITIVE or NEGOTIATED BID. The winner of the bid is the underwriter whose bid results in the lowest net interest cost to the issuer.
      • Western/Divided Account: Only have to sell their divided amount. Then they done.
      • Eastern/Undivided Account: If Goldman Sachs, for example, doesn’t sell their full portion, every syndicate selling member has to help sell the rest based on their previously established divided percentages
    • Revenue Bonds and Corporate Bonds: One underwriter and one issuer in play — that’s it. NEGOTIATED BID. 
  • Feasibility study/flow of funds analysis is used for revenue bonds because project hasn’t been built yet. Engineers go in and look at these forecast to determine how feasible the revenue will be:
    • Gross profit
    • Maintenance costs
    • Net revenue
    • Debt service to bond holders (aka who/what is paid first) 
  • Types of Communication:
    • Correspondence: 25 or fewer retail investors in 30 day window.
      • Must be reviewed by a principal either before or after distribution.
    • Retail Communication: 26 or more retail investors in 30 day window
      • Registered principle must approve before distribution 
      • Must be kept on file for 3 years after first use
    • Institutional Communication: Targeted at institutional clients
      • No pre approval needed 
  • Muni Bonds: Muni Notes (short term notes) can be issued to fund muni operating expenses. The types:
    • Tax Anticipation Notes (TANS)
    • Revenue Anticipation Notes (RANS)
    • Bond Anticipation Note (BANS)
    • Construction Loan Notes (CLNS)
    • Grant Anticipation Notes (GANS)
  • IPOs: Unless exempt, issuers looking to sell securities must file a registration statement with SEC
  • IPOs: Selling GROUP members have no financial liability and act as agents because they have no commitment to buy securities from issuer. They’re helping. Syndicate managers do have liability (in a firm commitment) and act as principals.
  • IPOs: Types of Commitments
    • Firm: Underwriter buys the securities from issuer and resells to public. Underwriters have the risk. If any go unsold, they have to buy/take them. Act as principals. Muni Bonds.
      • Standby (used for rights) for corporate offerings is example of firm. 
    • Best Efforts: Underwriter is agent. Underwriter sells as much as possible with no financial liability for not selling all of it.
      • All or None: Issuer states that you better sell all of the shares, or the underwriting is cancelled completely. 
      • Mini-Max: Underwriter has to sell the minimum. Once they break through that, they can continue to the maximum amount the issuer wants to sell
  • Muni Bond: Spread
    • Total takedown is largest portion of spread. Smallest is manager’s fee. 
    • Additional takedown is part of the total takedown amount
    • Syndicate member can only get the full/entire spread if it is also the syndicate manager
    • Syndicate group members get the concession 
    • Total takedown = concession + additional takedown
  • Muni Bonds: Allocation Priority Order:
    • Presale
    • Group Net Order
    • Designated Order
    • Member Order
    • Just remember “Pretty Girls Date Me”
  • IPOs: State Registration
    • Qualification: The issuer registers only with the state. No federal registration because the issue is sold intrastate.
    • Coordination: Issuer registers with state and SEC. Multi-State offering. 
    • Notice Filing 
  • Muni Bonds: Broker’s Broker Roles:
    • Represent a muni dealer/BD in primary or secondary market 
    • Match and facilitate orders in secondary market. Are paid by the selling BD. 
    • Maintain confidentiality 
    • Act as AGENTS 
    • DO NOT keep inventory 
  • Muni Bonds: The Bond Buyer
    • The Bible of muni bonds publications
    • Covers the primary market 
    • A newspaper all about muni’s
    • Prepared by Standard and Poors
    • The 30 Day Visible Supply 
      • Details upcoming muni bonds that will be available on next 30 days. This shows the supply side of the muni bond market
      • The Placement Ratio: shows buying power, which shows the demand side of the muni bond market 
    • RevDex: Index for revenue and GO bonds (25 bonds indexed?)
    • Muni-Facts: Bond news service that provides up to second pricing on muni bonds
  • Trust Indenture Act of 1939: 
    • Handles corporate bonds
    • Issue Size must be more than $50 mil within 12 months
    • Maturity of 9 or more months 
    • Offered interstate
  • Muni Bonds: Official Notice of Sale
    • Placed in Bond Buyer by issuer to attract a syndicate manager/syndicate members 
    • Bond rating and underwriter name are not included in this 
  • Rule 144: 
    • Control Securities: Those owned by directors, officers, or general people who own at least 10% of the issuer’s voting stock. These are insiders.
      • No hold period but volume limits always apply
    • Restricted Stock: Shares acquired through means other than a registered public offering (private placements) 
      • Must be held 6 months regardless
      • For non-insider, 6 month hold and can sell freely
      • For insider, 6 month hold period and volume limits to sell
    • Volume Rules: Can sell the greater of 1% of total shares outstanding by the issuer OR the weekly average of the past 4 weeks’ trading volume in 90 day window
  • Muni Bonds IPO: Under MSRB rules, a firm CAN act as a financial advisor and syndicate manager/underwriter on a GO Bond/Competitive Bid. It CANT act as both an advisor and underwriter in a Revenue Bond/Negotiated Bid
    • Conflict of Interest (MSRB)
  • GNMA: Pay monthly interest 
  • Government and Agency Securities: Most U.S gov and agency securities are exempt from state and local tax. Mortgage-backed securities, though, like from FNMA and FHLMC and GNMA are taxed at all three levels
  • Treasury STRIPS
    • Issued by US Treasury 
    • Mature at Par
    • Treasury bonds with coupons removed/stripped. No regular interest payments. Sold at deep discount instead.
  • Only GMAE’s are backed by fed gov. Not FMAE or FHLMC or SMAE or Federal Farm System agencies
    • Other than GNMAE, all other agencies are INDIRECT/Sponsored obligations of US gov
  • Treasury Receipts 
    • Issued by broker dealers
    •  Non-interest bearing bonds based on U.S gov. debt instruments but are made by broker dealers NOT the U.S. gov. Not backed by U.S gov /treasury
    • These trade flat (non interest-bearing security that trades flat, which means it is quoted at discounted yield to maturity basis with no accrued interest)
  • Zero-Coupon Bond: These are corporate bonds that trade flat at deep discounts and are non-interest bearing. Similar to the t-bill
  • Federally-Sponsored Agencies: Types
    • FFCB: Fed Farm Credit Bank
      • Issues short term discount and interest-bearing bonds with short and long term maturities 
        • Three other federally sponsored agencies that benefit from FFCB:  Bank for Cooperatives, the Intermediate Credit Banks, and the Federal Land Banks
      • Taxed at federal level only 
    • SLMAE: Student Loans
      • Sell common stock on NYSE to raise money for student loans. $10,000 needed to buy one though??
    • FHLB: Federal Home Loan Bank
      • Didn’t
  • GNMAE: Sells certificates, which is another word for security 
    • Technically called a modified pass through certificate 
    • Each certificate is backed by 30 residential home mortgages with 30-year maturities 
    • You get income, which is based on the interest rate on the mortgages, every month for 30 years. This is considered “lifetime income”
    • Only way you don’t get income every month from one of these certificates is if home owners refinance due to shifting interest rates
  • CollateralMortgageObligations(CMO) 
    • Think “tranches”. CMOs are bonds/corporate instruments 
    • Backed by portfolio of mortgages that generate principal and interest payments 
    • AAA rated. Backed by GNMAE, FHLMC, FNMAE. 
    • Can be corporate CMOs too. 
    • Issued in $25k denominations. Also Issued in $1,000 denominations. Interest payed monthly. Taxed at all three levels. 
    • Yields are quoted based on each tranche’s expected life not the average life of the mortgages in the tranch
    • Prepayment and Extension Risk = Primary risks with these 
  • Discretionary Account: Time and Price are NOT considered discretionary 
    • It’s a discretionary trade if the FP chooses any of the following: 
      • Action (Buy/Sell)
      • Asset (ABC Stock)
      • Amount (100 shares)
    • If customer says “Buy 15 shares of XYZ whenever you think the price or time is right”, a discretionary account is NOT needed
    • These accounts require written principal approval to open
  • Mutual Funds: Letter of Intent
    • Reaching the LOI only counts the amount you put in, not any appreciation that might have happened 
    • Ex. LOI for 25k was signed. Original investment was 13k. Account is now worth 17k. How much needs to be invested to reach the LOI? 12k
    • 13 months to send in enough funds. Otherwise, liquidation through escrow. You get the reduced sales charge immediately.
  • Mutual Funds: A fund can call itself “no-load” as long as 12b-1 charge doesn’t exceed .25% ANDthere is no sales charges
  • Mutual Funds: Funds can only send long-term capital gains distributions to investors once every 12 months
  • Variable Annuities: 10% tax penalty (surrender charge) on earnings/growth if withdrawn before age 59 1/2
    • Qualified = pre tax contributions
    • Non-Qualified= After tax contributions 
  • Variable Annuities: When partial withdrawals are made, the earnings (not initial contributions) are taken out first for tax purposes (last in, first out). Earnings are taxed at OI. So even if it’s a nonqualified plan, if you do an early withdrawal, earnings will be taken out first and be taxed. 
  • Variable Annuities: For NonQualified, only earnings/growth are taxed at OI. Contributions are made with after tax dollars, therefore contributions are not taxed when withdrawn 
    • When you annuitize and begin receiving monthly payments, each payment is partially taxed and partially tax free. The taxed part is growth/earnings, while the non-taxed part is a return of capital, which you already paid taxes on
  • Oil and Gas Program
    • Intangible Drilling Costs (ITC) = largest expense of a Wildcat/Exploratory program 
    • Depletion is based on sales of oil not the reserves 
    • Rule 2310: Max total offering expenses is 15%. Therefore 85% of an investor’s contribution must be put to work in the program. 
      • Member firm selling the program can make up to 10% of that 15%
  • REITs: Must distribute at least 90% of their income to shareholders in form of cash dividends
    • Must invest at least 75% of total assets in real estate
    • 75% of gross income must come from rents/interest on mortgages
    • Cannot distribute losses. Is not a flow through entity like a DPP
  • DPP: General Partners pay the partnerships’s debt. They have unlimited liability.
  • DPP: In a failed program, LP gets nothing back 
  • DPP: If an LP is sold, the gain or loss is diff between sales proceeds and adjusted cost basis
  • DPP: For a DPP to qualify for flow through taxation, it has to avoid at least 2 of 6 of the following characteristics of a corporation:
    • Associates/Employees
    • Profit Motive/Economic Viability 
    • Centralized Management 
    • Limited Liability
    • Freely Transferrable Interests 
      • With DPP, must get GP approval to sell your unit
    • Continuity of Life 
      • DPP has set end date 
  • Real Estate DPP: NonRecourse financing will increase an LP’s original cost basis
  • Hedge Funds: Are unregulated. Don’t have to register with SEC
    • Usually limit to 100 investors or less. Otherwise, would have to register with SEC
    • Technically considered a DPP where fund manager is the GP
  • CMO: Tranches
    • PAC: designed for Reduced prepayment and extension risk. 
    • TAC: Higher Prepayment and Extension Risk
    • Z: only paid after PAC and TAC have been paid mortgage principle. High risk. 
  • Modern Portfolio Theory: Risk can be diversified away by building portfolios of assets whose returns are not correlated 
  • Muni Bonds: State debt can not overlap with other municipal entity, so it cannot be considered overlapping debt 
  • Muni Bonds: Unqualified Legal Opinion
    • Bound counsel clears the issuer and gives the right to issue the security
    • Also looks at the municipality’s tax situation
    • Hired by the issuer 
    • Qualified Legal Opinion: The bound counsel has reservations about the issuer’s abilities
  • Muni Bonds: Only interest income from muni bonds is exempt from taxation. Capital gains are taxed at federal and state level. 
    • In other words, if you buy a muni bond and then sell it for a higher market price before maturity, you still have to pay capital gains taxes (Accretion)
  • Muni Bonds: Defeasance 
    • Occurs when an outstanding bond issue is paid off prior to maturity via a refunding 
  • FDIC Insurance: $250k per depositor, per ownership category, per bank
    • Investor could have more than one ownership category though. 
      • Ex. Customer has a savings and IRA with the bank. The total covered would be $500k
  • Grey Market: Is OTC trading of securities with little or no activity, usually because of regulatory issues
  • Mutual Fund Redemption: Must be made in 7 days
  • FINRA 5% Rule: is not mandatory. More of a suggestion. Applies to all secondary market trades. IPOs and muni securities do not apply. Applies to: 
    • Markups (Principle)
    • Markdowns
    • Commissions (Agent)
  • “Short Interest” = Bullish
  • Dividend Payout Ratio: “Dividends are paid out of earnings made”
    • Ex. Dividends paid = 3. Earnings Made (net income) = 5. Answer: 3/5=60%
  • Beta: Measure of a stock’s volatility relative to overall market, as measured by SnP 500
    • Ex. Beta of 2.0 will move twice as fast as overall market 
    • Ex. Beta of 0.5 will move half as fast as overall market
    • Anything over 1.0 = more volatile than market. Vice versus 
  • Alpha: Compares investment’s actual return to its expected return
    • Used to analyze a asset manager’s performance
  • For Gift Shares: The receiver of the gift gets the gifter’s original cost basis
    • Ex. Grandpa buys 1,000 shares XYZ at $10 per share. Cost basis of $10,000. Grandpa gifts the stock to grandchild when the stock is at $50 per share. The grandchild later sells at $55 per share or $55,000. Because original cost basis is used, it’s 55,000 – 10,000 = 45,000 capital gain.
  • For Inherited Shares: Grandchild in above example would have received the stock at the stepped-up basis of $50,000 (AS OF THE DAY GRANDPA DIED) which would have led to a 5,000 capital gain if the grandchild sold at $55 per share.
  • Modern Portfolio Theory:
    • Designs a portfolio that maximizes returns while minimizing risk
    • Increases diversification 
  • Safe Harbor Provision: BD’s cannot provide payment to advisors for travel/meal, furniture, equipment under Section 28E of the 1934 Act
    • Only the fee to attend the seminar/event is allowed 
    • Clients’ commission money is being used, so whatever is paid for is only allowed if it benefits clients indirectly in some way
    • Key term: soft dollars — paying the customer back with brokerage related business rather than cash
  • Records Keeping:
    • 6 Years:
      • Blotters
      • Ledgers 
      • Stock records
      • Customer Account Records (After account is closed and transfers too)
    • Lifetime:
      • Articles of Incorporation
      • Partnership Agreement
      • Meeting Minutes
      • Stock Certificate Book
    • 3 Years:
      • Bank Statements/Trial Balance
      • Customer Correspondence
      • Order tickets/confirmations 
      • Terminated Advisors
    • 5 Years:
      • Info gathered to ID customer for Patriot Act
    • 4 Years:
      • Customer Complaints (FINRA). The SEC requires these to be kept 3 years. MSRB requires 6 years.
    • During first 2 years of a record, the records must be kept in a readily accessible place
  • Customer Accounts: Any change in a customer’s status requires a BD to update the account record and send to the customer within 30 days
    • Also, customer account info must be updated at least every 36 months
  • MSRB Rule G-15: Callable Bonds sold on a yield basis must reflect lower of YTM or YTC on the customer confirmation statement
    • Example of a Yield Basis Quote: 9s of 35 with a basis quote of 7%. 
    • 9s=Coupon Rate
    • 35= the year (2035)
    • 7%=Basis (AKA YTM)
    • In this case, it is trading at a premium because the basis (7%) is lower than the coupon (9 %). YTC would be on confirmation.
  • Customer Confirmations: Must be sent on or no later than the settlement date. It must disclose:
    • Principal or Agent
    • If it is a market maker in the security 
    • If a control relationship exists 
  • Bond Customer Confirmation: if you buy a bond at par, yield to maturity does not need to be on the statement because yield is equal to the coupon
  • Tenants in Common Account (TIC)
    • Death = dependent’s interest in account goes to his estate not the other person. 
    • Also, the BD must freeze the account and acceptance of orders until required documents come in 
  • Customer Statements: Just like dividends, customer account statements must be sent quarterly
    • Unless customer is in penny stocks, then it’s monthly
  • Muni Bonds: Flow of Funds
    • Net Revenue Pledge: Operation and Maintenance of the facility are paid first. Debt service (paying bond holders) is second. 
    • Gross Revenue Pledge: Debt Service (paying bond holders) is first. Operations and maintenance are paid second. 
  • Muni Bonds: Industrial Development Revenue Bond (IDR/IDB)
    • This is a type of revenue bond and is a “private purpose bond”
    • Not backed by the revenue of the facility. Instead, backed by the corporation that leases the facility
      • Think hospital example from videos
    • IRS found a way to still tax these since a corporation is backing the bonds. It’s called the alternative minimum tax (AMT)
    • AMT is only associated with revenue muni bonds    
  • Muni Bonds: Public Housing Authority (PHA) Bonds
    • Type of revenue bonds
    • The safest revenue bond possible because it is backed by full faith of US gov
    • These bonds help support low income (Section 8/HUD) housing. Because rents are so low, the US gov steps in and helps support the bonds.
  • Investment Companies: Diversified vs NonDiversified (Applies to both open and closed end funds)
    • Diversified: For 75% of the assets invested:
    • No more than 5% can be invested in a single security 
    • No holding can represent more than 10% of the voting control of a single company 
    • There are no restrictions on the other 25%.
    • 75% of the fund must be in securities offered by the fund or any of its affiliates 
    • NonDiversified: Fails to meet these criteria 
  • Margin Accounts: Minimum equity requirement for a short account is $2k on an initial opening transaction 
    • This goes towards CB on top of whatever Reg T requirement is needed
    • Basically there is no FINRA “under 2k, deposit X amount rule with short accounts. It’s $2k regardless. Unless penny stocks trading under $5. 
  • Types of Orders:
    • FOK: Must be executed immediately in its entirety or it is canceled. “You better execute this whole order right now or the whole thing is cancelled”
    • All or None: Must fill the order in its entirety, but doesn’t have to be immediately
    • Immediate or Canceled: Only get 1 chance to fill the order (immediately), but it can be partially filled aka not in its entirety. IOC = Partial fill is ok. 
  • ECN Trading = Think Fourth Market/Institutions. Used for Institution-to-institution trading
  •  TRF = only FINRA system that tracks transactions on NYSE and Nasdaq, including OTC transactions 
    • OATS = Only Nasdaq (tracks orders, quotes)
    • TRACE = reporting system that tracks corporate and government agency bonds + ABS + CMO + Treasury securities trading OTC
  • Variable Annuities: Level sales charge. No maximum level sales charge; the charge just has to be “reasonable”
  • Variable Annuities: Pay Out Options (From biggest check to smallest, based on risk)
    • Life Annuity/Straight Life/Life Only: No beneficiary. “When you stop (die), the check stops”
    • Life with Period Certain: Guaranteed variable payments for a certain time period (like 10 years). Variable payments continue after though. If you die before the period certain, your beneficiary continues to get the checks until the end of the period. Then the check stops. If you live past the period certain, you keep getting variable checks, but the beneficiary is eliminated.
    • Joint with Last Survivor: 1 check for the benefit of 2 people.  Check stops at the last death.
    • Unit (Cash) Refund: Guarantees that all of your money will be distributed. This is the onlyoption that guarantees all of your money will be distributed. 
  • Variable Annuities: Assumed Interest Rate (AIR) 
    • Separate Account is measured against AIR to determine amount of payment each month 
      • Greater than AIR = Greater payment than this month
      • Same as AIR = Same payment as this month
      • Less than AIR = Less payment than this month 
  • Life Insurance: Characteristics 
    • Pays a death benefit to a named beneficiary when the insured dies
    • Creates an instant estate
  • Life Insurance: Types
    • Term Insurance: Purchased for a staged period of time. Not designed to go to age 100
    • Whole Life: Form of permanent insurance (designed to go to age 100). Can take a loan against your policy AFTER 3 years
    • Universal Life: No guaranteed minimum death benefit 
    • Variable Universal Life: No guaranteed death benefit. Tied to a separate account
    • Variable Life: Part of premium goes into General Account, part goes to Separate Account. The part that goes to the General Account guarantees a death benefit
  • Life Insurance: Contract Exchanges
    • Variable Life to Whole Life: 2 years. You have 2 years to switch your contract if you want
      • Free-Look Period: 45 days from policy execution or 10 days after delivery, whichever gives more time 
  • Accredited Investors: 
    • Net worth of $1 million ($2 million if married couple)
      • Does not include equity in a house
    • Income Standard: Must reach $200,000 in income as an individual for past 2 years with expectations of similar income for the current year
      • For combining with spouse: $300k for past 2 years
  • Reg D: Think “Private Placement”
    • Allows offering of private securities to a max of 35 non accredited investors (506-b)
    • The issuer files Reg D form when selling private securities 
  • Preliminary Prospectus = Red Herring
    • Can be used to gather indications of interest during the cool down period
    • Does not include effective date or offering price (these are unknown at the time)
  • Sovereign Debt: Think loans to governments. Think securities issued by national governments. 
    • Ex. U.S. Treasury securities are sovereign debt
  • Bankruptcy Liquidation Order:
    • Secured creditors
    • Unsecured creditors/general creditors 
    • Subordinated Debt
    • Preferred stock
    • Common stock 
  • Muni Bonds: Overlapping Debt (AKA Coterminous Debt)
    • This is debt of another issuing body that is paid by property taxes of residents (like someone getting taxed by a school district and a municipality because his house is in both areas)
    • States do not issue real estate taxes so they are not included in overlapping debt. 
    • States charge sales and income taxes primarily
  • Muni Bonds: Protective Covenants = Only on Revenue Bonds 
    • Found in Bond Resolution/Trust Indenture
    • These are “promises” that come with the bond
    • Rate, maintenance, catastrophe, sinking fund covenants are a few of the promises 
  • Muni Bonds: Moral Obligation Bond
    • Issuers have moral, but not legal, obligation to service the debt
    • State legislature has to get involved if the bond defaults and bond holders want to sue
  • TIPS: Subject to Phantom Tax
    • Adjust semiannually based on consumer price index (CPI) 
    • Principal value of these securities are adjusted semiannually
    • There is a Coupon and it is fixed
    • Quoted in 1/32nds 
  • The T-Bill will be the only quote you see on the exam that looks like this:
    • Bid: 2.273/Ask:2.263
  • In a bond calculation question, always assume par value is $1,000
  • Mutual Funds: Using the exchange privilege IS a taxable event. Sales charges are avoided using exchange. 
  • Mutual Funds: Reinvesting dividends IS a taxable event. 
    • The benefit is that you don’t have to pay a sales charge. 12-b-1 fees still apply though. You reinvest the dividends at NAV.
  • Variable Life Insurance: Once a policy has been held for 3 years, you can take a loan on it up to 75% of the current cash value
  • Options: For straddles, there are always two break evens
    • One above the strike price and one below the strike price. 
    • The BE is found by adding the total premium and then adding and subtracting the total premium amount from the 2 SP
  • Rights: Shareholders always get 1 right per share of common stock no matter how many rights it takes to buy each new share
    • Preferred stock never has rights
  • Stock Splits: P/E does not change in a stock split situation 
  • Settlement Dates:
    • T1: Govys and Options
    • T2: Munis and Equities 
    • T4: Reg T deposit date (cash and Margin accounts) 
  • DPP: Certificate of Limited Partnership contains:
    • Amount of time partnership will exist
    • Conditions of dissolution 
    • LPs Name and business 
  • DPP: Subscription Agreement 
    • Once signed by LP and GP, gives official status and entry into the program for the LP
    • This doc officially signs your money away and into the program 
  • DPP: The Partnership Agreement
    • Rights, duties, and liabilities of the GP and LP are outlined 
    • Contract between the LP and GP
  • DPP: Max amount a firm selling a DPP can take in commissions = 10%
    • This charge does not reduce the investor’s cost basis. It’s taken from the cost basis, but what the  investor puts into the program is his cost basis. What he paid into the program is what he is obligated to get as a cost basis.
  • CDOs: Asset backed securities backed by contractual obligation to make payments 
    • Auto loans
    • Student loans 
    • Credit card loans
    • Trade OTC
  • Spread Options: Notes
    • Break Even will always fall in the middle of the spread
    • Max gain and max loss will always equal the spread when added together 
    • On calls, add net premium to the lower strike price to get BE
    • On puts, subtract net premium from the higher SP to get BE
  • Systematic Risk AKA Market Risk: Cannot be lessened via diversification
    • Inflation/Purchasing Power Risk is one example
  • Customer Confirmations: Must be sent by or before settlement
  • ACATS: used to transfer a customer’s account to another firm. TIF is sent by the receiving firm.
    • Validation: 1 day to validate TIF
    • Transfer: 3 days to deliver funds
  • OTC Market: Trading of listed and unlisted securities over the counter
    • If it trades on secondary market and/or is listed, it is eligible for OTC
    • Prices are based on dealer’s/market maker’s quotes rather than supply and demand like on exchanges 
    • OTC is Negotiated Market not an Auction Market 
  • Options: Types
    • Combination: long call and long put or short call and short put, each with different strike price or expiration month
      • Ex. Long one RIF Apr 120 call and Long one RIF Jul 130 put
    • Diagonal Spread: If the Strike prices and/or expiration months are different, it’s a diagonal spread
    • Time Spread: Everything the same except expiration dates. Also called “horizontal spread”
  • Options: Class and Series
    • Class: The calls and puts on same security (AKA calls and puts of Apple) 
    • Series: The expiration date and exercise price 
  • Options: OCC randomly assigns BD who has to exercise. BD can then use a random selection or FIFO or any other fair method to choose the investor who is assigned. 
  • Options: Premium is considered short-term capital gains not ordinary income 
  • Options: The OCC issues options to the exchanges like NYSE and CBOE
  • Margin: You can’t withdraw your SMA if it will put you under the maintenance requirement. You can only withdraw an amount that will keep you at maintenance or above
  • Margin: Mutual funds and options can’t be bought on margin 
    • If customer wants to buy these in a margin account, they have to pay full, 100% price for them 
  • Non-public Arbitrators: Always somebody who HAS worked in financial industry at some point
  • Bond Underwriting: 
    • If a Syndicate Member sells a bond, they get the full total takedown on each bond 
    • If a Selling Group Member sells a bond, they get the concession on each bond
    • Syndicate Manager gets the entire spread 
  • Syndicate Letter: Also called The Agreement Among Underwriters
    • Spells out each member’s rights and obligations
    • Western or Eastern is detailed in this
  • Reg D: Private Placements
    • Rule 506(b): offering limited to a max of 35 non-accredited investors. All accredited investors welcome. Advertising is not allowed. 
    • Rule 506(c): Accredited investors ONLY.  Advertising is permitted. 
  • Rule 147: State securities — Exempt from registering with SEC
  • DPP: Can only use passive losses (of program) to offset passive income (of program)
    • Can’t use passive income to offset capital gains (like from your fidelity account) or ordinary income
  • Zero Coupon Bonds: 
    • Interest not paid until maturity 
    • Suitable as a target investment? (ex. College education)
    • Greatest sensitivity to interest rate movement 
    • Safety of principle!
  • Money Market Securities: Think safety of principle here. Short maturities offer safety. 
    • Banker’s acceptances: Think companies. Think international and import/export business. 
    • Commercial paper: Large corporations use to meet short-term debt payments on bonds. Maturities of 270 days or less 
    • CDs: Sold by banks. CDs are not issued at a discount. They do bear interest and are issued at face value 
    • T-Bills: Sold by US Treasury. Discount yield to maturity quotes. Auctioned weekly. Trade flat.
    • Repurchase Agreements
  • Muni Bonds: Max political contribution allowed by MSRB = $250
  • Retirement Accounts: 
    • Defined Benefit Plan pays a specific benefit to a participant at his normal retirement age. Designed for employees close to retirement (older). 
      • Qualified Plan
    • Defined Contribution Plan: Designed for employees further from retirement (younger)
      • Think 401k
      • Qualified Plan
    • Profit Sharing: Not required to contribute annually 
  • Stock Splits: Multiply # of shares by the stock split ratio
    • Ex. 400 shares owned and a 5/4 stock split: 400 * 5/4 = 500 shares
    • From there, find the price that will equal the total investment before the stock split
  • Mutual Fund Sales Loads/Classes
    • Class A: Front end sales load (designed for long term horizons and LARGE investments)
    • Class B: Back-End sales load. So no ($0) front-end sales charge at first. Typically charge a deferred sales charge that decreases each year until eliminated. (Appropriate for SMALLinvestments and long term horizons)
    • Class C: Level load – (Used for short term horizon). No front-end or back-end sales load.12-b1 fees are higher than class A
  • T Bills = Short term maturities. Money Market
  • STRIPS = long-term maturities
  • Short Margin Account: For every $1 decrease in market value, $1.50 in SMA is created
    • Ex. Market value falls by $5k, $7.5k of SMA is created
  • Corporations receiving dividends on preferred stock from another corporation get a 50% (half) tax break on those dividends for tax purposes. Only have to pay taxes on half the amount. 
  • Retirement Accounts: 
    • Non Qualified = Allow an employer to discriminate and pick who participates in plan
      • Think older employees near retirement who make a ton of $$ already.
      • Deferred Compensation Plan
    • Qualified: Does not allow employer to discriminate 
      • Defined Contribution Plan
      • Defined Benefit Plan
  • Options: On long stock and option  positions, the break even is controlled by the long position 
  • Mutual Funds: Summary prospectus is required by SEC. 
    • Statement of Additional Information (SAI) is not.
  • Voting: Cumulative voting benefits minority shareholders. 
    • Cumulative voting allows the minority shareholder to stack all of their votes on one position rather than having to spread them out
  • Voting: Statutory voting allows one vote for each share and you can use those votes for each open seat on the board 
    • Ex. You own 50 shares and are voting on 6 board of director spots. You can cast 50 votes for each board member for a total of 300 votes. You cannot cast 20 votes for 5 of the board members and 200 for the 6th.
  • SEC Reg FD: If disclosure of information is intentional, issuer must make a simultaneous disclosure to public. If disclosure is unintentional, issuer must make disclosure promptly (within 24 hours)
  • Bonds: Maturity Dates
    • Term: All principle matures at a single date 
    • Serial: Maturities are staggered and retired at intervals. Most muni bonds are serial. 
    • Balloon: Little bit of both
  • Reg T/Margin: If a customer has not paid in a margin account by T4:
    • Can request time extension from FINRA or exchange 
    • Required to sell out of the position no matter what the price is and freeze account for 90 days
      • In a frozen account, client can still make trades, but only if they have cash in the account. The freeze prevents client from using credit to make trades
    • If what is owed to the firm in the margin account is less than $1k, not required to do anything
  • Custodial Accounts: UTMA vs UGMA
    • UTMA: Transfers to custodial account. Allow almost any kind of asset, including works of art and real estate. Age of majority: 21.
    • UGMA: Gifts. Limited to cash , stocks, bonds, mutual funds, insurance policies. Age of majority: 18
  • USA Patriot Act: These identification and verification procedures should be applied to all newcustomer accounts — individuals and business 
  • Rule 147 (Intrastate): Qualifications (Only 1 has to be met):
    • 80% of gross business rev must come from sales in home state
  • Partnership Account: If the partner dies, freeze the account until new or amended partnership agreement is made. Also, each partner’s share goes to his estate not the other partners
  • ADRs: Dividends received are subject to a “foreign withholding tax”. They are “credited” for tax purposes. 
  • Orders: Good-til-canceled (GTC) must be renewed on last business day of April and October 
  • Limited Power of Attorney: Trade confirmations are only sent to the account holder. If the customer gives written permission, the third party can also get the confirmations 
  • UIT: Redeemable at NAV — just like mutual funds 
  • TIPS Question: Take the inflation rate and add it to the principle (1,000) then pick the answer that has a number just above the calculated result 
  • Reg SP: Firm must disclose its privacy policy to retail/individual customers initially and annually
  • Customer Accounts: If an employee at a FINRA member firm wants to open an account at another FINRA member firm, he must give prior written notice AND receive prior written consent before the account can be opened 
  • T-Bills: Maturity dates
    • 4, 8, 13, 26, 52 weeks 
  • Current Ratio = Current Assets / Current Liabilities 
  • Quick Ratio = Current Assets – Inventory / Current Liabilities 
  • Working Capital = Current Assets – Current Liabilities 
  • Modern Portfolio Theory: The lower an asset’s correlation to the overall portfolio, the greater the diversification. Securities with a negative correlation offers lowest risk. 
    • Ex. Security with -1.0 correlation
  • Margin: Initial Margin Requirements 
    • Set by FED
  • Margin: Minimum Maitanence Requirements for nonexempt and exempt securities: Set by the the firm/ the firm’s SRO
  • Keogh Plan: Commodities, collectibles, antiques, metals, uncovered options are not allowed 
  • Margin Requirements: To short stocks below $5 (penny stocks) in a margin account, you have to deposit the full market value or $2.50 per share (whichever is greater)
    • $2.50 and Below: You’re gonna pay $2.50 per share
    • $2.51 and up: You’re gonna pay full price of stock
  • “Flat” Bonds: Trade without accrued interest! Securities that trade flat:
    • Bankers acceptances
    • Zero-coupon bonds
    • Treasury bills
    • Negotiable CDs do trade with accrued interest. They bear interest.
    • It has to pay interest to accrue interest 
    • Flat bonds will be non-interest bearing
  • Interval Fund: A type of closed-end investment company that allows you to redeem shares back at intervals (like quarterly) at NAV
  • Retail Communications: REIT retail communications do not have to be approved by FINRA within 10 days of first use
    • Mutual Funds/ETFs, CMOs, DPPs do need that approval 10 days prior to first use
  • Markups/Markdowns/Commissions: Member firms should never consider the price they paid as a basis for a markup. Inside market should be used. 
  • FINRA TRF (Trade Reporting Facility): Automated electronic system that reports trades that occur on NASDAQ-listed stocks and exchange-listed securities when they occur off the exchange trading floor 
  • Muni Bond Underwriting: For all types, a firm CANNOT act as the financial advisor and the underwriter 
  • Margin: Securities can be deposited to pay for securities. You have to put in double Reg T aka the full purchase price in marginable stock value. 
    • Ex. To buy 12,000 of stock using marginable securities, you need to deposit 12,000 worth of stocks as collateral 
  • Balanced Fund/Portfolio: Stocks and Bonds
  • Growth and Income Fund/Portfolio: Blue Chip Stocks and Growth Stocks
  • Aggressive Fund/Portfolio: Small Cap stocks with potential for significant capital appreciation 
  • Gift Tax: Paid by donor and based on gift’s value on the date it is given
  • IPO: Cooling Off Period
    • Offering Price and Effective Date are not included in a preliminary prospectus/red herring because these are not known yet 
    • SEC sets the effective date 
  • Margin: Leveraged ETFs can be bought on margin because they are listed on exchanges
  • Client Dies: immediately mark the account deceased and cancel all open orders 
  • Agreement Among Underwriters (Syndicate Letter): Signed by managing underwriters and all syndicate members
  • The Underwriting Agreement: Signed by the issuer and the managing underwriter
  • Inside Market/Bid: Spread between the highest bid price and lowest ask price among various market makers in a particular security 
    • Markups are always based on the inside offer (lowest ask price in the security) 
  • Ex-Legal: Means a legal opinion is not attached to the bond 
    • Regular way delivery usually requires this to be attached 
  • OID (Original Issue Discount) Bonds: Must accrete the discount and pay capital gains tax unless held to maturity 
    • If you buy a bond at a discount in secondary market, you have to accrete and still pay taxes each year (phantom income?)
  • Government Bonds: Government bonds actually use an actual-days-elapsed basis when determining accrued interest. So January has 31 days. 31 days would be used. Other bonds use the 30 days per month calculation 
  • ITC Drilling Costs (Oil DPP): These are fuel, wages, rent NOT actual drilling 
    • Biggest source of expenses/losses in a exploratory oil and gas DPP
  • Alternative Minimum Tax: Subjects:
    • Local income and prop taxes
    • Private purpose bonds (IDBs)
    • Oil and Gas ITCs
  • Muni Bond Underwriting Compensation: 
    • Syndicate Manager = ENTIRE Spread
    • Syndicate Member = Total Takedown (Additional Takedown + Concession)
    • Selling Group Member = Concession 
  • Technical Analysis: Bull vs Bear
    • Head And Shoulders = Bullish
    • Inverse Head And Shoulders = Bearish
    • If Odd Lot traders are buying, everybody else should sell. Vice versa. Do the opposite of odd lot traders.
  • Muni Bonds: Net Total Debt = Direct Debt + Overlapping Debt 
  • Tombstone Ad: Allowed during cooling off period (between the time the registration statement is placed and the effective date for the bond to go live is set by SEC) 
    • Effective date and final offering price are not included in a tombstone ad until after the effective date. Same with the red herring. 
  • Treasury STRIPS: Safest Zero-Coupon security available. Promise definite return until maturity. These are long-term securities. 
    • Suitable for a long term goal like saving for a child’s college expenses
  • FINRA Rule on Suitability: FPS have to satisfy three obligations 
    • QUANTitative Suitability 
    • Reasonable Basis
    • Customer Specific 
  • IPO: Determining lowest net interest cost to issuer for winning bid. Issuer should:
    • Subtract any premium to total interest cost
    • Add any discount to total interest cost 
  • Options: Always include the premium when asked what an investor’s cost basis will be after exercise of a contract
  • Retail Communications: Do not need prior principal approval if its something posted in an interactive electronic forum or if it does not make  a financial or investment recommendation/does not promote a product or service of the firm
  • Communications: FINRA Filing Requirement 
    • For non-established firms in first year, must file at least 10 days before first use
    • For established firms who have been around over a year, file within 10 days of first use
  • Restricted Stock: Securities acquired through a Reg D private placement
    • Ex. In-N-Out stock 
  • Control Securities: Shares that are held by an affiliate (AKA insider). Affiliates are officers, directors, or shareholders who have 10% or more of outstanding voting stock
    • Control securities definition applies to private placements and public companies 
  • Rule 144: Only restricted stock has a holding period (6 months)
    • Controlled stock, unless it’s restricted, can be sold immediately but volume limits alwaysapply 
  • Restricted Persons: 
    • Member Firms
    • Their employees
    • Immediate family members are restricted people. Also, family members that live in the same household as a restricted person. 
  • Shares: Outstanding shares are shares in the hands of the public 
    • To determine, take # of shares issued minus what’s in the treasury 
    • Outstanding shares go up if company sells treasury stock. More stock in the public’s hands. 
  • EPIC: Exporters buy Puts, Importers buy Calls 
  • T-Bills: If a T-Bill falls in yield (4.82% to 4.71%), you are paying more for it
  • Penny Stocks: These are non-Nasdaq stock trading under $5 per share. If it’s listed on an exchange or Nasdaq, it is not a penny stock.  
  • Reclamation is used to correct a bad delivery after it has happened 
    • Rejection is used to at the time of delivery 
  • Dividends: You have to buy stock before the ex-date to get the dividend 
  • IRA: Only earned income can be contributed. Dividends and capital gains do not count.
    • Contributions can be made by anyone with earned income (even minors), but it may or not be deductible based on the individual’s income level
  • VIX: Trades on the CBOE and tracks the S&P 500
    • Predictions for next 30 days
    • Increases when put buying increases 
  • Debit Spread = You want the spread to widen and options to be exercised
    • Credit Spread: You want the spread to narrow and the options to expire
  • Options: The BEST way to hedge is to buy options not sell them (although selling offers limited protection via income)
  • Senior Exploitation: If you have reason to believe this might be occurring, place a temporary hold (15 days) on the disbursement of funds and securities in the account
  • Married Put: When you purchase stock and purchase a put on it at the same time
    • The purchase of the put will not affect the holding period of the stock. Otherwise, inside of a year, holding period resets
  • Mutual Fund Breakpoints: Spouses are allowed to combine to meet a breakpoint
  • Voting: Shareholders can’t vote on anything dividend related
  • Not-Held Orders: Sent to floor broker
    • Floor broker not held responsible by the shareholder if he can’t fill the whole order 
    • Gives floor broker ability to use best judgement on execution strategy
    • These are Day Orders
  • Form 144: De Minimus Rule
    • Control stock controlled by an affiliate does not need a Form 144 if 5,000 or fewer shares are being sold and the dollar amount is $50k or less in any 90 day window
  • Margin: SMA cannot be used to meet a minimum maintenance calls
  • Mutual Funds: Money Market Funds
    • These have low betas
    • These have no sales load
    • Objective is to maintain a stable NAV ($1 per share)
    • The yield is what might change
  • Standby Underwriting
    • Used by corporations for rights offerings
    • Underwriter commits to purchasing any unsold shares (firm commitment) 
  • Rights: If they give you the dumb question about value of rights use the following formula only if the rights occur before the ex-rights date
    • Market Price – Subscription Price/# of Rights + 1
  • DPP: Economic viability of a DPP program can be measured with a cash flow analysis or an internal rate of return (IRR)
  • Private Placements: Rule 144A:
    • During 6 month restricted period after buying a private placement, you are allowed to sell to a QIB (qualified investment buyer)
  • Rule 147: Buying state securities
    • Can sell to someone outside the state after 6 months of holding 
  • Form 112: Currency Transaction Report (CTR)
    • Filed when CURRENCY is deposited, withdrawn, or transferred in an amount over $10k in a single day 
    • Part of Patriot Act
  • Regulation SHO: Think “SHO me the Securities”
    • You have to locate equity securities (not bonds) before making short sales
  • Traditional IRA: You can always make contributions if you make earned income, but contributions will not be tax deductible if you make a ton of money/high income because you will exceed the contribution/deduction limit
  • TIF: The receiving firm sends this to ACATS to start an account transfer process to a new firm 
  • Options: Stock Split
    • An even stock split (2-for-1, 3-for-1) will increase the # of contracts not the number of shares
    • Strike price will decrease also
  • Mutual Funds: You can combine holdings in your other accounts (401k, UTMA, IRA, etc.) to meet break points 
  • Bonds: The day of the month of the maturity date tells you the day interest is paid. 
    • Ex. July 1, 2030 maturity date = pays interest on the 1st of the month
    • Ex July 15, 2030 maturity date = pays interest on the 15th of the month 
  • Direct Market Makers: Can act as a principal and/or agent to facilitate trading in specific stocks on the floor of the NYSE
    • Maintain fair market
    • Floor Brokers bring/run the DMM their member firm’s client orders 
  • Investment Companies: The Business Development Company
    • Is a closed-end IC
    • 70% of assets must be in eligible assets 
  • Trades: Customer must accept the actual transaction price, even if the reported price on his confirmation states something different (there was a reporting error)
  • Muni Bonds: If a callable bond has been prefunded/advance funded/defeased and a stated call price is listed, the confirmation must state the yield to call at that listed price because there is no uncertainty due to the advance funding 
    • Therefore, do not pick the answer that says “yield to maturity or yield to call, whatever is lower”
  • FP Transfers BDs: In first 3 months at new place, FINRA educational materials must be sent to former customers if you try to get them to switch accounts to your new firm 
  • Accounts: When opening a new cash account, only the principal’s signature is needed
  • FDIC = Protects Bank Accounts
    • Does not cover money market mutual funds 
  • SPIC = Insures/Protects BD clients
  • ARS: Auction Rate Securities
    • Long term securities that reset the rate paid at predetermined short term intervals
    • Have the risk of failed auctions
    • Use a Dutch auction method to establish a new clearing rate 
    • Considered a muni bond
  • Exempt from SEC Registration:
    • Munis 
    • Government debt
    • Intrastate (147)
    • Private Placements (144)
    • Money market (less than 270 day maturity. Too short to bother registering)
  • NO HOLDING PERIOD RULE ON STOCK BOUGHT IN OPEN MARKET (EVEN IF AN OFFICER BOUGHT IT). ONLY ON PRIVATE SECURITIES. 
  • Short Swing Rule: Only applies if sold inside of 6 months
  • Trust Indenture Act of 1939: Requires that corporate bonds with issues over $50 mil sold interstate must be issued with a trust indenture 
    • Corporate Bond
    • Issue Size Over $50 Mil
    • 9 Month Maturity or Longer
    • Offered Interstate
  • Customer Gifts: You can give gifts to each individual customer as long as it doesn’t go over $100 per customer 
  • Free Riding: Buying a stock and then quickly selling it without paying for it first
    • Customer gets the profit from the transaction
    • But Account is frozen for 90 days unless customer pays for the buy side transaction in T4
  • Nominal/Subject Quote = An estimate
  • Hold Quote = A price offering held for a certain time period  
  • Investment Objectives Include:
    • GROWTH
    • INCOME
    • CAPITAL PRESERVATION 
    • Investors use these objectives to REACH goals 
    • Investing goals have a target/something they are trying to achieve 
      • Ex. Save for child’s education or save for retirement 
  • Prime Broker Account: 
    • Usually used by institutions 
    • One broker, the prime broker, clears and settles trades and provides back office support 
    • The other brokers used are responsible for executing trades 
  • Eurobond: Long-Term debt issued and sold outside the country of the currency in which it is denominated 
  • Long Margin: SMA goes up when you sell securities (LMV, DB drop. Equity stays the same)
  • Margin: You CANNOT use SMA to meet a Maitanence Call  
  • Communications: Filing correspondence with FINRA is not required 
  • Retirement: Assets from any qualified corporate plan or another IRA can be rolled into an IRA
  • Stock Split and Stock Dividend: the aggregate amount of the investment is always gonna add up before and after the split or dividend 
  • Mail: With written request, a firm can hold a customer’s mail for up to 3 months if it wants
  • Bonds: Long and Low bonds respond the greatest to interest rate shifts
  • 100 Basis Points = $10 = 1%