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FINRA Series 7
| Question | Answer |
|---|---|
| Securities Exchange Act of 1934 | - 1934 act is aimed at brokers (secondary market). established SEC. Mandates annual reports. - Identifies the following activities as being criminally fraudulent: - Abusing discretionary authority - Churning - Insider trading - Regulation T |
| Insider Trading | Anyone who is an officer, executive, director or 10%-or-more owner of the company, as well as his or her immediate family. - Insider status only has to do with equity ownership, not debt holding. - Must ACT on information to be criminal |
| Securities and Exchange Commission (SEC) | Act of 1934 created SEC Regulates brokerage firms, transfer agents, clearing agencies, SROs. - Antifraud provisions - Annual reports - Proxy Material - Segregation of customer assets - Supervision (principal) - Regulating Representatives (U-4) |
| Supervision Process (roles of a principal) | Principal reviews and approves: - account opening - transactions - marketing material/ads - correspondence - customer complaints |
| Trust Indenture Act of 1939 | - Corp. bond issues over $5 million must include a formal written agreement (an indenture) - Requires trustee be appointed for all bond issues |
| Investment Company Act Of 1940 | Defines the responsibilities and limitations placed of Investment companies: open-end mutual funds, UITs, closed-end funds. - Enforced by SEC - Have a BOD - Charge fee for advice - Wrap fee (% of AUM) |
| Penny Stock Cold-Calling Rule | Solicitation of non-NASDAQ and non-listed equity securities traded OTC for less than $5/share - Suitability statement required pre-trade (excluding established customers) - Monthly statements regardless of acct activity - provide disclosure information |
| Bank Secrecy Act | Currency Transaction Reports (CTRs): deposits in one day over $10k Suspicious Activity Reports (SARs): $5k or more, structuring Anti-Money Laundering |
| Anti-Money Laundering | 3 stages (placement, layering, integration) No concern for investment risk |
| Regulation NMS (National Market System) | Bring trade reporting uniformity - Order Protection Rule: ensure that investors receive the best price (prohibits trade-throughs) - Minimum Increment Pricing Rule: sub penny pricing allowed <$1/share -Improve access to quotations from trading centers |
| Business Cycle | Expansion (recovery) Peak Decline (recession) Trough *Recession = 6 consecutive months *Depression = 6 consecutive quarters/18 months |
| Leading Economic Indicators (where we are headed) | - building permits - manufacturers' new orders - S&P 500 index - M2 (amount of $ ppl have) - # new unemployment claims |
| Coincident Economic Indicators (where we are now) | - GDP - industrial production - personal income (# hours worked) - manufacturing/trade sales |
| Lagging Economic Indicators (where we have been) | - corporate profits - duration of unemployment - prime rate (determined by banks) |
| Economic Influences: Fiscal Policy | Congress/Presidential - taxation - government spending: demand/supply-side economics - Keneysian |
| Economic Influences: Monetary Policy | Federal Reserve - money supply M1: cash/checks M2: M1 + CDs + money market + overnight repos (increase = good) M3: M2 + jumbo/negotiable CDs + term repos - alter money supply = alter economy (Friedman) |
| Laffer | Economy self-regulates |
| Federal Reserve Board (FRB) | Reserve requirement - multiplier (most drastic) - fed funds rate - discount rate |
| Discount rate | Controlled by FRB increase rate = slow economy - rate banks charge for loans |
| Federal Funds rate | (bank's overnight loan rate); bank to bank; most volatile rate; tool of last resort; amount of $ banks must have in reserve |
| Open Market Operations (FOMC) | most frequent way to regulate money - fed buys t-bills = increase money supply/decrease interest rates (ease money supply) - fed sells t-bills = decrease money supply/increase interest rates (tighten money supply) |
| Margin Account deposit requirements | - minimum deposit = 50% (reg T) - <$2k = full amount - $2k - $4k = $2k minimum - >$4k = 50% minimum deposit |
| Margin Account: SMA | - can't lose with change in market value - use to buy securities |
| Margin Account: Long account requirements | 25% long market value = minimum maintenance (firm may require more as a house call) |
| Margin Account: Short account requirements | 30% short market value = minimum maintenance (firm may require more as a house call) |
| Economic Industry: Defensive | Defensive (noncyclical) - ppl will use regardless of economic health - food - utilities (always make money/highest payout ratio) - clothing - drugs - tobacco - liquor |
| Economic Industry: Cyclical | - steel - heavy equipment - capital goods - autos |
| Economic Industry: Counter cyclical | precious metals (high when market is down) |
| Company assets | current = next 12 months; cash in bank + receivables + inventory fixed = real estate intangibles = patent, goodwill, brand recognition |
| Company balance sheet | Assets = liabilities + net worth Assets - liabilities = net worth |
| Company liabilities | current = next 12 months; wages, interest, operations long term = bonds |
| Inverted Yield curve | - Indicates recession - Fed has tightened short-term rates (raises) The Fed's influence = primarily on the short end of the yield curve. The discount rate, which it sets, and the federal funds rate, which it influences, are short-term rates. |
| SIPC | SIPC covers each separate customer. industry-funded org. - Account coverage up to $500,000 in securities, ($250,000 max cash). - In margin accounts, the equity, not the market value, is used for securities coverage purposes. - commodities not covered |
| Accretion | When a municipal bond is purchased at a discount the amount of the discount is accreted. Accretion is the process of adjusting the cost basis each year upwards, until maturity. At maturity the cost basis will equal PAR. |
| Wash sale rule | The loss transaction the loss is disallowed under the wash sale rule and therefore not deductible. A wash sale occurs when the same shares are purchased within 30 days before or after the date of sale that the loss is incurred. |
| Stagflation | The unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy isn't growing (there is a lack of consumer demand and business activity), yet prices for goods are still rising. |
| Securities Investor Protection Act of 1970 | determination of a broker/dealer's financial failure is made under the provisions of this act |
| Retail communication - Investment Companies | must be filed within 10 business days of first use if the communication does not include a performance ranking. For retail communications that do include a performance ranking, a 10 day pre-filing is required. |
| Capital asset pricing model (CAPM) | - takes into account a stock's sensitivity to risk that cannot be lessened by diversification. - takes into account systemic and nonsystemic risk - investors rewarded for taking risks |
| Cost basis - inherited securities | When securities are inherited, the heir receives a cost basis calculated as of the deceased party's date of death |
| Municipal bonds - taxation | Tax exempt for corporations and individuals. |
| Interpositioning | When a FINRA member places a third party between it and the best available market. |
| Accreting Interest | Original issue discounts are accreted, which allows for a step-up in cost basis. Accretion on original issue discount municipal bonds is not taxed. |
| contemporaneous traders | Insider Trading and Securities Fraud Enforcement Act of 1988 - corporate outsiders who make trades at about the same time as insiders. They are granted the right to sue inside traders for damages sustained. |
| CAV A municipal bond originally issued at 90 with a 10-year maturity will have a compound accreted value (CAV) after 5 years equal to: | CAV= cost basis of the bond, in this case, after 5 years accretion. There are 10 points to accrete (the difference between the issue price of 90 and par) over 10 years. One point each year will be added, the adjusted cost basis will be 90 + 5, or 95. |
| Supply Side Economic Theory | (Reaganomics) - reduced tax rates will result in a healthier economy, which will generate more taxes to compensate for the reduced rates |
| Shorting against the box | - tax strategy used to lock in capital gains in a long position and defer them to a later period. - selling short shares that are currently owned in the long position when a profit already exists in the long position. |
| Beta coefficients | - greater than 1.0 signify that the stock will fluctuate more than the market as a whole. - the higher the beta is, the greater the risk - beta measures a security's systemic risk (associated with the market) |
| Bond taxation - amortization | - municipal bond is bought at a premium, the premium must be amortized over the life of the bond. - At maturity, no capital gain or loss would occur because the premium would have been fully amortized. - reduces cost basis and reported interest income |
| FinCEN Form 112 | A cash or currency transaction totaling more than $10,000 on a single business day must be reported on FinCEN Form 112. |
| Bond taxation - accretion | - municipal bond purchased at discount, discount must be accreted for cost-basis purposes. - the accretion is taxable as ordinary income. - At maturity, cost basis is accreted to par. Therefore, there is no reported gain or loss on redemption. |
| New Account Form | - copy sent to customer w/in 30 days - firm verifies acct information every 36 months |
| TOD Joint Account | transfer on death - owner ID successor - new person is full new owner |
| JTWROS Joint Account | - either party makes decisions - assets divided evenly - $ stays in account (not distributed to estate upon death) - for married couples |
| TIC Joint Account | - keep proportional interest - proportionate distribution - upon death, cxl open orders and await instructions from estate - assets transfer to estate - for unrelated people - anyone can give instructions |
| Fiduciary accounts | look for permitted investment strategies - "silent" assumes that it's not allowed |
| Discretionary accounts | Rep has authority over: - buy/sell (action) - security (asset) - quantity (amount) **if rep makes any one of these, it's discretionary **timing and price are not significant |
| UGMA vs UTMA | UGMA - assets transfered to minor at age 18 UTMA - assets retained until age 25 **one custodian for one minor **funds irrevocable **no margin, short sales, options **carries minor's SSN **unlimited contributions |
| Account status upon death | - cancel open orders - mark account deceased - await instructions and legal papers |
| Account transfers | - new BD validates with old firm w/in one business day - transfer w/in 3 business days |
| USA Patriot Act | BDs required to: - verify identity of new customers - maintain records - determine if person is known/suspected terrorist - maintain customer identification program (CIP) |
| Office of Foreign Asset Control (OFAC) | - maintains list of ppl viewed as threats in US. - Must freeze assets |
| Holding customer mail | - firm can hold for up to 2 months (domestic travel) - up to 3 months (foreign travel) - request made in writing |
| Wrap account | investment advisory account - provide group of services like asset allocation, portfolio management, administration |
| Prime Brokerage Account | institutional customer select one firm (prime broker) to provide custody; other firms handle trades. - prime broker facilitates clearing, lending, settlement - enables customer to trade at multiple brokerage houses and maintain central master account |
| Opening accounts for other BD employees | FINRA: notify in writing before any transactions; supply duplicate copies upon request MSRB: notify in writing before any transactions; supply duplicate |
| Equity Linked Notes | (ELNs) are debt instruments - have a partial fixed return as well as a final payment linked to the performance of a single stock or equity index. - Some are exchange traded while others trade OTC. |
| Ethics | - BDs required to maintain written supervisory procedures - principal must enforce rules - BD may have own house rules (more stringent, not less) - Conduct Rules deal with ethical treatment of customers |
| Outside buisiness activity | - must be disclosed in writing - permission is not required - BD can reject/restrict affiliations - passive investments (ltd partnership) is exempt |
| Private Securities Transactions / Selling Away | - sale of securities outside a rep's regular business - prior written notice required - describe transaction and role - disclose compensation (BD must approve/disapprove. if approved, BD supervises) |
| Borrowing from customers | - allowed in the case of family or business relationships - " if customer is in business of lending (ie bank) - " members of same firm - written notice and permission generally required |
| Soft dollar arrangements | - must be disclosed - allowed: research reports, financial journals, analytical software, seminars |
| Painting the Tape | - when one party sells a stock with the understanding that it will be repurchased later in the day - intent is to make it appear that stock has more activity |
| Marking the Close | - falsely reporting trades to influence the closing price of a stock |
| Front running | - when a rep places an order to buy or sell [personal positions in front of the block order (10,000+ shares) |
| Interpositioning | - adding another BD to a transaction when there is no benefit to the customer - purpose is to generate commissions or fees |
| Ways to generate income | corporate and muni bonds, govt securities, some stocks (utilities and REITS), money market funds, annuities, some mutual funds - not Zero Coupon bonds |
| Seeking capital growth | -refers to an investment's value over time - common stock / mutual funds |
| Seeking Tax advantages | - IRA - annuities - muni bonds (tax-free interest income) |
| Seeking liquidity | - Money market funds = liquid - DPP, annuities, bank CDs = illiquid |
| Seeking preservation of capital; safety | - Govt securities - Ginnie Maes |
| Seeking balanced or moderate growth | - blue-chip stocks |
| Seeking aggressive growth/speculation | - technology stocks or sector funds |
| Seeking tax free income | - muni bonds |
| Seeking to keep pace with inflation | - stock portfolio - VAs |
| Interest rate risk | - bonds with long-term maturities, low coupons and deep discounts are most susceptible |
| Reinvestment risk | - mortgage-backed instruments are susceptible - Zero coupon bonds are not subject to reinvestment risk |
| Bond duration | - measure (in years) that a bond will pay for itself - lower coupon = greater duration - longer maturity = greater duration - zero coupons = duration equals maturity - bond duration of 9 = owner receives interest back in 9 yrs |
| Modern portfolio theory | - attempts to quantify and control risk - determine the relationship between risk and reward in the total portfolio vs specific securities |
| Dollar cost averaging | - periodic purchases of a fixed dollar amount in one or more stocks - average cost is always less than the average market price - helps to control the cost of investing |
| Constant ratio plan | - buy/sell securities that keep the portfolio balanced between debt and equity - stays in line with pre-determined ratio |
| Constant dollar plan | buy and sell so that a set dollar amount is invested at all times |
| Regressive taxes | sales, excise, payrool, property, gas = independent of income - greater impact on low income familes |
| Progressive taxes | - estate and income tax - greater impact on high income families |
| Taxable interest income - bonds | Corporate bonds: taxed at all levels US Govt: T bills/notes/bonds are exempt from state/local tax Mortgage-backed securities: taxable at all levels (Fannie Mae/Freddie Mac) Muni bonds: interest is federal tax exempt (triple exemption for territories) |
| Bond's effective after tax yield | - stated YTM on muni bonds = effective after tax yeild - exception is bonds purchased at discount in secondary market (after-tax yield is b/w YTM and CY) |
| Alternative Minimum Tax (AMT) | designed to prevent taxpayers from escaping their fair share of tax liability through certain tax breaks |
| Tactical asset allocation | - attempts to capitalize on short-term market swings - market timing strategy. |
| Maloney Act | Provides for the establishment of SROs (FINRA, MSRD, CBOE) |
| Securities Act of 1933 | Paper act / full and fair disclosure act / new issues act / truth in securities act / prospectus act |
| Shelf offerings | used by publicly traded companies to issue additional equity or debt securities. The issuer must sell the securities within 3 years after the registration is declared effective. |
| Rule 144 | Restricted stock (unregistered), held by nonaffliliate: 6 mo hold + sell freely thereafter Restricted stock (unregistered), held by affliliate: 6 mo hold + volume limits thereafter Control stock (registered), held by affliliate: no hold + volume limit |
| Random Walk Theory | The direction of any stock, sector, or market in general is unpredictable. The theory is based on the "efficient market" theory, which holds that the stock market is perfectly efficient with prices reflecting all known information at any given time. |
| Earnings before interest and taxes (EBIT) | the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company. |
| Technical analysts | rely on price and trading trends - not interested in the specific financial information of an issuer; PE ratios are of greater interest to fundamental analysts. - interested in market statistics indicative of future buying, |
| Highly leveraged companies | - have the largest amount of their capitalization in debt instruments. - Leverage is the use of someone else's money at a fixed cost to benefit the common shareholders. |
| FRB rates | - setting the reserve requirement, the discount rate, and the initial margin requirement for nonexempt securities. The federal funds rate is heavily influenced by Fed action, it is not set by the Fed. and neither is the prime rate |
Created by:
vleigh01
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