14-20 Flashcards
1
Q
what disclosures are made prior to execution
A
Risk associated with specific investments (options, penny stock, high yield bonds); potential conflict of interest, and investment limitation of firm
2
Q
disclosures of costs and fees
A
mutual funds for share classes and redemption fees, annuity surrender charge and mortality exp, nondiscretionary fee based account, soft dollar arrangements
3
Q
For executing a trade when is compensation disclosued
A
agent’s commission is disclosed on confirmation, principal / dealer - markup on MNS securities are disclosed on client purchases and markdowns on sales, compensation is calc on NBBO (national best bid best offer). Dual agency cross - internal trades that are executed between bid and odder, commissions charged on both and disclosed on confirmation
4
Q
what is a riskless principal trade
A
firm’s purchase and resale to its client (reported as one trade) mark up is disclosed on confirmation.
5
Q
what is net basis capacity for BD
A
firms purchases and relate to client at a new price. reported as two trades. markup is not disclosed. retail client must provide written consent and institutional may provide oral, written, or negative consent
6
Q
what are acceptable vs un acceptable soft dollar arrangements
A
acceptable - research reports, access to analysts, portfolio software, IA software, seminars etc. not acceptable - hardware (even bloomberg), travel reimbursement, office space accounting fees, marketing, licensing fees. mass marketed publications
7
Q
what is included on a trade confrim
A
name of customer, buy or sell, price and quantity, firm capacity, trade and settle date, (bond price and yield), name of contra party of statement that it is available
8
Q
when must customer account statements be sent
A
quarterly, for active accounts, monthly
9
Q
when must customer information be updated
A
every 3 years. and require firms to send a copy of update change to a customer within 30 days or time next statement is mailed
10
Q
who falls under the financial exploitation rules
A
persons 65 or older, or any person 18 or older who are believed to have mental or physical impairments. i
11
Q
if signs of diminished capacity are identified the firm places a tempory hold on disbursements of funds or securities, how long and who is notrified
A
trusted contact should be notified (reasonable basis to get trusted contact upon opening) and for 15 days
12
Q
how can customers transfer to new BDs
A
- fill out Automated Customer Account Transfer Service form ACATS to new BD. New BD inputs for and a transfer initial form is sent to old BD. Old BD has 1 BD to validate or protest transfer and three bd later new BD must complete transfer. Once validated, original account is frozen, open orders and cancelled. if a discrepancy claim does occur, old BD must resolve in 5 days
13
Q
examples of systematic risk (can’t avoid by diversifyuing)
A
market risk, interest rate risk, inflation fist, event risk
14
Q
risks that are specific to security and can be managed through diversification
A
unsystematic risk
15
Q
risk that a company may perform poorly causing a decline in value of stock
A
business risk
16
Q
risk that new regulation may have negative impact on investments value
A
regulatory risk
17
Q
risk that political event outside US could affect domestic market
A
political risk
18
Q
risk due to lake of market ability
A
liquidity risk
19
Q
risk that investors losing their invested capital (lower for bonds)
A
capital risk
20
Q
risk that a bond may not repay
A
credit risk
21
Q
risk of loss when converting an investment that’s make in a foreign current to USD
A
currency risk
22
Q
risk that new lays may have negative impact on value of investmetn
A
legislative risk
23
Q
risk of passing on the opportunity of making a higher return on another investment
A
opportunity risk
24
Q
risk that interest rates will fall and semiannual coupons will be reinvested at a lower rate., zero coupon bonds eliminate reinvestment risk
A
reinvestment risk
25
risk that mortgages will be paid off early due to lower interest rates resulting in reinvestment in lower yielding investments
prepayment risk
26
current yield calc
annual div / current market price
27
municipal bond return calc
tax free yield / (100%-tax bracket %)
28
securities received as a gift use whos cost basis
original cost basis and donor's holding period. if FMV is less that donors cost, use FMV at time of gift
29
if securities are inherited what is the cost basis
stepped up if deceased cost basis is lower, stepped down if deceased cost basis is higher. always considered long term holding period
30
in tax relief funds, you could invest in taxable securities because you are deferring tax to a later date rather than investing in tax deferred investments
true
31
largest equity index
Wilshire associates
32
how to measure systematic risk
BETA - measure volatility of an asset relative to the entire market i.e. S&P is fixed at 1, if beta is more than 1, its expected to outperform when the market is up and underperform when market is down. if beta is less than 1 - its expected to underperform when the market is up and outperform when market is down
33
how is unsystematic risk measured
alpha - measure an investments risk adjusted performance against a benchmark index. outperforming market is positive alpha, underperforming is negative
34
what is used to determine if the return of an investment equals the risk premium in excess of the risk free rate of return
Capital Asset pricing model (CAPM) expected return = risk free rate + equity risk premium x beta
35
is short interest (number of shares sold short but not yet covered) bearish or bullish
bullish
36
bond buyer indexes
20 bonds - 20 GO bonds with 20 year maturities AA or Aa2 11 Bonds - 11 of the above 20 at AA+ or Aa1 . 25 revenue or revdex - A+or A1 25 revenue bonds with 30 year maturities. 40 Bond - 40 recently issued and actively traded bonds based on average price quarter by brokers broker. treasure bond index used as a BM, highest yield since interest is taxable
37
Technical analysis types (basic chart patterns and terms used to indicate directions of prices)
1. trend lines - straight line showing direction and speed of price movements 2. Sauce / inverted saucer - chart formation showing that an upward trend has to come to an end (saucer) or downward has come to an end (inverted saucer) 3. Moving averages - provide current direction of process over period 4. overbought / oversold - buying has pushed the price high or low and bounce back is expected
38
Resistance / support levels
in order to profit on a breakout - one could enter sell stop orders or put below a support level or enter buy stop orders or call above a resistance level
39
head and shoulder formation
reversal of an upward trend. bearish indicator. if head and shoulders bottom formation, reversal of a downward trend and bullish indicator
40
working capital formula
current assets - current liabilities. working capital decreases when you declare a cash dividend but not change when you pay cash dividend
41
current ratio
current assets / current liabilities
42
quick asset ratio (acid test)
current assets - inventory / current liabilities
43
Bond ratio
total debt / total capitalization (total debt capital + shareholder equity)
44
Debt-to-equity ratio
total debt / total shareholder's equity
45
interest coverage ratio
EBITA / bond interest
46
earnings per share
earning available to common shareholders / average number of share outstanding or MV/PE
47
dividend payout
annual dividend / EPS
48
during inflation profits will be greater if inventory is valued using what
FIFO
49
what is the trade process
order entry -> execution -> clearing -> settle (when customers name is added or removed) -> custody
50
Non-exchange OTC quotation systems
often low priced and thinly traded 1. OTCBB (must be reporting companies and 2. OTC pink markets (may be non-reporting companies)
51
what market is for listed securities traded OTC, trades include NYSE volume totals
Third market
52
what market is for transactions between institutionas
Fourth market
53
Market that provides liquidity for large inst investors and high frequency traders anonymously. Limits impact to market
Dark Pools
54
what does the term inside market reprsent
the highest bid and lowest offer of all market makers for a given stock
55
if a market maker fails to honor its quote, it is considered what?
backing away
56
Types of quotes
1. firm quote (guaranteed for size indicated, quoted in round lots) 2. Subject (not firm, needs reconfirmation) usually over phone 3. Bid wanted (on bulletin board) 4. Offer wanted (on bulletin board)
57
what are market maker quotes
interdealer but adjusted when trading with retail customers. allows dealers to profit on trades
58
examples of alternative trading systems
Electronic Communication Networks ECNs, trade crossing networks, firm internal execution systems
59
components of an order ticket
branch identifier, RR, purchase or sale, long or short, quantity, security, cash or margin, time stamp (entry and execution). what is not included - fir capacity, accrued interest, comp, and CUSIP
60
what is regulation SHO
regulation for selling short - 1. marking requirements (sell order tickets must be marked long or short) and 2. locate requirements (applied if sell order is marked short, BDs must use easy to borrow list that is less than 24 hours old. Difficult to borrow stocks may need to be manually located prior to short sell
61
Types of orders
market order, limit order (not guaranteed, your price or better), stop order (will not exceed price set), sell stop limit (activate when price is hit then becomes limit order)
62
order duration
Day order - unless otherwise indicated, all orders are day orders 2. good til cancelled or open order. 3.all or non 4. immediate or cancel (as many as possible) 4. fill or kill (entire order) 5. market open market close
63
marked as discretionary or non vs non discretionary account
in a discretionary account where client initiates trade, write discretion not exercised. in non-discretionary account use solicited or non solicited
64
when a customer specifies the action, amount, and asset but allows RR to determine price and time
Not held order (only good for that day)
65
what is regulation NMS
National market system - quote increment - minimum price / sub penny rule - prohibits market participants from accepting of displaying orders less than 1 penny unless stock is valued less than $1. Limit order display rule- customer limit orders are subject to display, allowing customer orders to complete with Market makers 3. limit order protection rule, manning rule, firms may not trade ahead
66
prohibited trading practices
1. interpositioning (insertion of a third part between customer and best market) 2. trading ahead of research 3. market rumors 4. front-running 5. marketing the close or marking the open 6. anti-intimidation / coordination
67
what is the 5% policy
FINRA policy but not rule - mark up and mark downs should be reasonable but not exceed 5% excludes munis
68
the SEC may issue halt or trading
1. for any individual securities for 10 Bds or any exchange for up to 90 days. if the market declines 7% halt for 15 minutes, if 13% halt for 15 minutes if 20% halt for remainder of day
69
Regulation for Margins
Reg T
70
Per Reg T, what is the deposit requirement
50% deposit either using cash or double the amount if using stock, for initial margin 2k.
71
To open a margin account, what must you sign
1. Credit agreement, margin disclosure document (when acct is open), and hypothecation (pledge) agreement, pledging securities as collateral against the loan. BD can borrow 100% of cash debit balance from bank and 140% of debit balance for securities
72
what additional margin docs are there
1. loan consent agreement (typically used for shore sales), not mandatory, if signed BD is able to lend the customers securities to others
73
what securities are not marginable
OTC equities, options, and new issues *ALL LISTED SECURITIES ARE MARGINABLE
74
For a long account, what is the equity calculation (for margin)
Long Market Value less debit balance (amount borrowed) = equity . equity must be at least 25% of market value
75
For a short account, what is the equity calculation (for margin)
Credit (amount generated by initial short sale plus reg T deposit) less Short Market Value = Equity
76
SMA - Special Memorandum Account
A line of credit that exists in the margin account created by having excess equity (over 50% reg T requirement) only way to lose SMA is to use SMA
77
what is a restricted account in margin
if equity is less than 50% of market value but is not required to be remedied . for long positions, maintenance requirement is 25% and for short positions 30% of market value
78
what does R T require for payment
2 bds after settle (T+4) unless maintenance call, must be met promptly
79
what is the initial margin requirement
for long positions, lesser of 2k of 100% of MV (or Reg T margin requirement of 50%). For short positions, 2k always (or Reg T margin requirement of 50%)
80
also known as risk-based margin - margin requirement is based on net risk in the portfolio
portfolio margin
81
what is the minimum maintenance for leveraged ETFs
25% (long) and 30% (short) of leverage factor (i.e. 2x or 3x the factor to outperform the BM)
82
margin requirement for pattern day trading
minimum equity requirement of 25k
83
who determines the list of marginable securities
the Fed reserve Board
84
A system that tracks the life of both customer and internal firm orders in Nasdaq and OTC equities for life of trade
Order Audit Train System OATS
85
what systems are used to report trade execution REPORTING SYSTEMS)
1. Trade Reporting Facility TRF (Nasdaq and 3rd market securities) 2. OTC reporting Facility ORF - for OTC equities OTCBB and Pink 3. TRACE trade reporting and compliance engine - reporting for secondary market transactions in fixed income securities 4. Real Time Transactions Reporting System RTRS only MSRB system - for trades in municipal securities not municipal fund securities
86
what is the MSRB system for Municipal securities, official source for documents from issuers and underwriters related to primary market, continuing disclosure information, daily stats, investor education materials
Electronic Municipal Market Access System EMMA
87
what are the two options when clearing a trade
1. DK - terms of the trade do not match you have 20 minutes to affirm the trade or DK 2. Affirmation - trades are locked in and DTCC is notified
88
Types of ownership for bonds
1. Bearer - in certificate form with no owner name but interest coupons physically attached 2. Registered to Principal Only certificate form with name of owner evidenced and coupons physically attached 3. Fully registered - in certificate form with name of owner evidenced (interest payments mailed or paid electronically) 4. Book Entry - position held at depository
89
method of holding securities
1. DVP delivery vs payment or COD collect on delivery (client is buying securities) or Receipt vs Payment (client is selling) 2. Direct Registration System - enables investors to hold their assets in book entry with the issuer or TA in investor's name
90
What provides clearing, settlement, and information services for depository eligible securities. book entry settlement only
Depository Trust and Clearing Corp DTCC
91
what two entities are under the DTCC
DTC(custody and safekeeping) and NSCC National Securities Clearing Corp (clearing and settlement)
92
Settlement dates (regular way)
Corp and Munis - T+2. Treasury US Gov and Options- T+1. Cash settlement for any security - same date. sellers option - negotiation for longer than 2 bd. When issued - determined by the National Uniform Practice Committee
93
what are payment dates (under reg T)
Corp securities - S+2 (T+4) Muni Securities - Exempt for Reg T US Securities - exempt and Options S+2 (T+4)
94
settlement of options
Third Friday - trading ends at 4pm, customer who owns option must submit exercise notice by 5:30 (if in the money, automatic) option expires at 11:59 pm.
95
How does exercising an option work
customer notifies BD, BD notifies OCC, OCC at random picks a BD to match, BD from there picks client by random, FIFI, or anything that is fair
96
Good Delivery
TA makes final determination if security is in good delivery. restricted securities are not considered good delivery. Needs to be registered, CUSIP, endorsed (if joint, both sign), signed, in multiples of 100 (1000 for bonds) unless identified as odd lot prior to delivery
97
Settlement concerns
For ex-dividend or ex-rights - buyers might settle on or before record date. Due Bill - security is sold before it trades ex and delivered too late to be transferred on or before record date, becomes due bull. Due Bill check - due bill in form of check payable on ate of payment of a cash div
98
Types of errors when executing trades
1. Fail to follow instructions (principal must be consulted and trade goes into error acct ) 2. Client errors - BD is not responsible . If client receives an erroneous trade report, the actual price is binding
99
Customer compliants
must be written, quarterly reports must be sent to FINRA (not SEC) and are maintained in an OSJ (office of supervisory jurisdiction)
100
how long must customer compliance be kept
4 years
101
what is the code of procedure
used for handling violations of FINRA rules, respondent is given first 25 days then 14 days to respond, if rejected you have a hearing with the FINRA hearing panel (fine, suspend or revoke registration) you can appeal to national adjudicatory council, then SEC, then Fed court
102
what is the code of arbitration
resulting disputes - members and or customer provided customer has signed pre-dispute clause of new account form
103
who makes up the arbitration panel
Typically three people. if a public customer is involved, a majority of the panel must be independent (no associated with securities industry)
104
what is a simplified arbitration
does not exceed $50k. one arbitrator (if public customer they cannot be in securities industry) no hearing just documents submitted
105
what is the statute of limitations for arbitration
6 years
106
FINRA requires firms to report customer complaints and other incidents involving RRs regarding theft, misappropriated of funds, forgery, indicted of felonies or misdemeanor involving securities, violating securities laws, withholding commissions or fines in excess of 2,500 or defendant awarded more than 15k
30 days
107
what form is filed when registration is terminated
U5 - copy needs to be provided to RR and FINRA maintains jurisdiction for 2 years, if inactive more than 2 years, you lose registration
108
what form is filed for disciplinary actions and final arbitration rewards
U6
109
system allows investors to check background and disciplinary history of RRs, including firm, 10 years of history, registrations, felonies, investment related violations, arbitrations, compliances from the last year for sales practices violations of 5k or more.
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