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Capital Markets Flashcards

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SIE Exam flashcards
1
Q

Securities Act of 1933

A

■ Governs the new issuance (primary) market, which involves the money-raising activities of issuers
■ Requires issuers to register their securities when selling to the public

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2
Q

Securities Exchange Act of 1934

A

■ Governs trading markets for existing securities and registration requirements of BDs, BD employees, and exchanges

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3
Q

Investment Company Act of 1934

A

■ Governs the regulation of packaged products such as mutual funds, closed-end funds, and unit investment trusts

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4
Q

Investment Advisers Act of 1940

A

■ Governs the regulation of firms that earn fees for providing investment advice

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5
Q

Securities Investor Protection Act of 1970

A

■ Covers the protection thresholds for customers in the event of a BD’s bankruptcy

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6
Q

Insider Trading and Securities Fraud Enforcement Act of 1988

A

■ Defines penalties for the misuse of material, nonpublic information by both firms and individuals

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7
Q

The USA PATRIOT Act of 2001

A

■ Covers anti-money laundering (AML) policies and procedures that must be followed by financial firms

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8
Q

What does FINRA regulate?

A

all matters related to investment banking (securities underwriting), trading in the over-the-counter (OTC) market, trading in NYSE-listed securities, and the conduct of FINRA member firms and associated persons. FINRA also regulates investment companies and limited partnership transactions.

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9
Q

FINRA’s purpose and objectives?

A

■ promote the investment banking and securities business, standardize principles and prac- tices, promote high standards of commercial honor, and encourage the observance of fed- eral and state securities laws;
■ provide a medium for communication among its members and between its members, the government, and other agencies;
■ adopt, administer, and enforce rules designed to prevent fraudulent and manipulative practices as well as to promote just and equitable principles of trade; and
■ promote self-discipline among members and investigate and resolve grievances between the public and members and between members

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10
Q

What are FINRA’s 4 sections of rules?

A

■ Conduct Rules
■ Uniform Practice Code (UPC) rules
■ The Code of Procedure (COP)
■ The Code of Arbitration (COA)

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11
Q

What are FINRA’s UPC rules?

A

■ technical aspects of trading and payment for securities transactions. Examples of UPC issues include good delivery of securities, the payment procedures for dividends on common stocks, and interest on bonds.

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12
Q

What does FINRA’s COP cover?

A

■ the enforcement of FINRA rules and details the punishment of members who incur rule violations. COP decisions may be appealable to the SEC.

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13
Q

What is the COA?

A

■ a FINRA-run dispute resolution process to settle monetary disputes. The goal is to provide a faster and cheaper resolution versus going through the traditional court system. Decisions are final and binding.

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14
Q

What are FINRA’s conduct rules?

A

establish the relationship between firms and their customers. These rules cover areas such as fair dealing with customers, compensation-related issues, standards for communications, and various sales practice violations.

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15
Q

What does the Chicago Board Options Exchange (cboe) regulate?

A

all matters related to trading standardized options and related contracts listed on that exchange

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16
Q

What does the Municipal Securities Rulemaking Board (MSRB) regulate?

A

all matters related to the underwriting and trading of state and municipal securities. It regulates but does not have enforcement powers—it depends on other SROs (e.g., FINRA) for the enforcement of its rules. In this light, it should be noted that it has no regulatory power over the municipalities who issue municipal securities.

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17
Q

What are some functions of the Federal Reserve Board (FRB)?

A

■ acting as an agent of the U.S. Treasury;
■ regulating the U.S. money supply;
■ setting reserve requirements for members;
■ supervising the printing of currency;
■ clearing fund transfers throughout the system;
■ examining members to ensure compliance with federal regulations; and
■ auditing the deposit-taking activities of member banks.

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18
Q

All BDs must be Securities Investor Protection Corporation (SIPC) members except:

A

■ banks that deal exclusively in municipal securities;
■ firms that deal exclusively in U.S. government securities; and
■ firms that deal exclusively in redeemable investment company securities.

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19
Q

What is a fully disclosed BD?

A

AKA, an introducing BD, is one that introduces its customers to a clearing firm. Because the risk associated with holding customer funds and securities is not present, net capital requirements are lower for introducing BDs than they are for self-clearing or carrying BDs. May receive customer checks, but checks must be made out to clearing firm.

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20
Q

What is a carrying firm?

A

carries customer accounts and accepts funds and securities from customers. Capability to do trade executions, clear and settle transactions, take custody of customer funds and securities, and handle all back office tasks such as sending trade confirmations and statements.
A firm carrying customer funds and securities clearly has a line of business that is inherently risky, and it is required to maintain levels of net capital higher than that of firms who do not accept custody of funds or securities.

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21
Q

What is a full service firm?

A

carrying firms or clearing firms who clear their own transactions. In other words, firms like Merrill Lynch, in addition to clearing their own transactions, may accept transactions from other smaller, fully disclosed firms—and in so doing so, are acting as the smaller firms’ clearing firm.

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22
Q

What is the role of executing brokers?

A

Handles all trades placed by the customer and responsible for compliance of certain trading rules.

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23
Q

What is the role of prime brokers?

A
  1. Enters into written agreements with each executing broker named by the customer.
  2. Provides the customer with trade confirmations and account statements.
  3. Facilitates the clearance and settlement of the securities transactions.
  4. Provides a client with the ability to trade with multiple brokerage houses while maintaining a centralized master account with all of the client’s cash and securities.
  5. Often includes a list of specialized services, such as securities lending, margin financing, trade, cash management, and operational support.
  6. Likely to be offered to a BD’s more active trading clients, such as hedge funds, who may require a number of executing broker outlets to conduct their transactions and who can benefit by having margin requirements that are netted across all of the prime broker’s positions.
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24
Q

What is an investment advisor?

A
  1. Anyone who, as part of his business, gives investment advice for compensation, must reg- ister as an investment adviser under the Investment Advisers Act of 1940.
  2. BDs who provide advice for a fee are subject to registration under this act.
  3. Agents of investment advisers must register and pass the Series 65 exam or Series 66 exam (for representatives with a Series 7).
    BUT, providing advice and not charging separately for it—in other words, acting as a registered representative (RR) and charging only for transactions—does not require registration as an adviser.
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25
Q

What is a municipal advisor?

A

■ provides advice to or on behalf of a municipal entity with respect to municipal products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or
■ undertakes a solicitation of a municipal entity.

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26
Q

What is an issuer of a security?

A

An entity, such as a corporation or municipality, that offers or proposes to offer its securities for sale to the investing public for the purpose of raising capital.

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27
Q

What is an underwriter?

A

groups of BDs or investment bankers that work with an issuer to bring its securities to the market and sell them to the investing public

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28
Q

What is the role of an investment banker?

A

help the issuer to structure capital raises, and at times, form syndicates with other
underwriters to facilitate this money-raising process.

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29
Q

What is a market maker or trader?

A

Any entity, individual, or institution willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security. Generally stand ready to buy or sell (make markets) in securities with the ultimate goal of being profitable.

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30
Q

What is arbitrage trading strategy?

A

simultaneously buying and selling a security that trades in multiple locations. Attempts to profit from pricing differentials that may temporarily exist between markets. For example, if a stock is trading at $10.00 in Market A and $10.12 in Market B, the trader would buy stock in Market A and simultaneously liquidate the shares in Market B for a quick $.12 per share profit.

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31
Q

What is a custodian?

A

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another

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32
Q

What is a trustee?

A

an institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to do so. An example would be the fiduciary appointed to manage assets in a trust.

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33
Q

What are two distinct functions that, by law, cannot be performed by a single person or department operating within the same institution.

A

Transfer and Registration of stock certificates.

34
Q

What is the transfer agent of a corporation responsible for?

A

■ ensuring that its securities are issued in the correct owner’s name;
■ canceling old and issuing new certificates;
■ maintaining records of ownership; and
■ handling problems relating to lost, stolen, or destroyed certificates.

35
Q

What is a clearing agency?

A

an intermediary between the buy and sell sides of a transaction. Receives and delivers payments and securities on behalf of both parties. Agents include any organization that fulfills this function, including a securities depository. Includes the National Securities Clearing Corporation (NSCC) and securities depositories such as the DTCC.

36
Q

What is the DTCC?

A
  1. Depository Trust & Clearing Corporation is the world’s largest securities depository.
  2. It provides custody services for virtually all securities except those subject to transfer or ownership restrictions, which are known as restricted securities.
  3. It is a member of the Federal Reserve System, and is not in the retail banking business (one can’t open a savings or checking account there).
  4. It provides automated clearing and settlement services in book-entry format to banks and BDs for stock and bond trades and employs a continuous net settlement (CNS) system.
  5. It (and its subsidiaries) function as a central securities depository by providing custody and safekeeping services in more than 60 countries worldwide.
37
Q

What are restricted securities?

A

Those subject to transfer or ownership restrictions

38
Q

What is the OCC?

A
  1. Options Clearing Corporation is the clearing agent for listed options contracts—that is, those listed for trading on U.S. options exchanges.
  2. Its primary functions are to standardize, guarantee the performance of, and issue option contracts. 3. It determines when new option contracts should be offered to the market on an underlying security.
  3. It also designates the contract specifications such as strike prices and expiration months. These standardized features for options help to maintain uniformity and liquidity in the marketplace.
39
Q

What is the FDIC?

A
  1. the Federal Deposit Insurance Corporation is an independent agency of the U.S. federal government that preserves public confidence in the banking system by insuring deposits.
  2. Created during the Great Depression of the 1930s in response to widespread bank failures and massive losses to bank customers.
  3. The funds for the agency are provided in the same way as the funds for a private insurance company; premiums are paid by all participating institutions.
  4. In the event of the failure of a member financial institution, the FDIC may do any of sev- eral things. Usually, customer deposits and loans of the failed institution are sold to another institution, and in this way, the depositors become customers of the new institution.
40
Q

What does the FDIC provide for bank depositors?

A

deposit insurance guaranteeing the safety of a depositor’s accounts in member banks up to $250,000 for each deposit ownership category in each insured bank.

41
Q

What does FDIC deposit insurance not cover?

A

Investment products that are not deposits, such as mutual funds, annuities, life insurance policies, and stocks and bonds.

42
Q

What is the SIPC?

A

Securities Investor Protection Corporation, created under the Securities Investor Protection Act of 1970. The corporation is a nonprofit membership organization. Members pay assessments into a general insurance fund that is used to meet customer claims in the event of a BD bankruptcy.

43
Q

What happens if the SEC or any SRO finds indications that a BD is in financial difficulty?

A
  1. SIPC will be notified immediately.
  2. If SIPC determines that the member has failed or is in imminent danger of failing, it may petition a federal court to take action by appointing a trustee to liquidate the firm and protect its customers. A customer can be broadly defined as anyone who has cash or securities in the possession of a BD.
  3. The court, upon receipt of SIPC’s petition, will issue a protective decree if the BD is, in fact, insolvent and will then promptly appoint a trustee for the liquidation of the BD’s business.
  4. Once a trustee has been appointed, the member firm is prohibited from engaging in business as a BD. It also is prohibited from attempting to conceal assets, file false statements, or
    alter securities records to defraud the trustee or SIPC.
44
Q

What is basic coverage under SIPC?

A

No more than $500,000 per separate customer, not per separate account. Of that $500,000 total, SIPC covers no more than $250,000 in cash. How an account is titled will determine if it represents a separate customer. Cash and margin accounts for the same customer are combined for the purposes of deterring coverage. However, only the equity in a margin account is covered, not the full market value.

45
Q

What happens to a customer with claims in excess of SIPC coverage limits when a BD fails?

A

It becomes a general creditor of the BD for the uncovered amount. It should also be noted here that commodities and commodities futures contracts are not covered by SIPC, nor are futures contracts or losses related to currencies, because they are not considered securities.

46
Q

What disclosures are required for SIPC BD members?

A
  1. BDs must include their SIPC membership on all advertising but may not imply that SIPC coverage is more than it actually is or that its benefits are unique to only that BD.
  2. The term SIPC may not appear larger than the firm’s own name.
  3. Also, all member firms must post a sign on its premises that indicates SIPC membership.
  4. In addition, SIPC members must provide written disclosure to customers that they may obtain information about SIPC, including the SIPC brochure, by contacting SIPC. This disclosure must be made to new customers at the time an account is opened and to all customers at least once each year thereafter.
47
Q

What is a market?

A

any physical place or electronic venue where buyers and sellers can come together for the purpose of trading assets. Can be found in nearly every nation in the world, and while some are small (such as local farmer’s markets), others (like stock exchanges) have billions of dollars in transactions daily.

48
Q

What can financial markets be expected to have?

A

transparent pricing, basic regulations on how trading is to be conducted, costs and fees, and prices of securities determined by market forces such as supply and demand.

49
Q

What are capital markets?

A

stock and bond markets.
Both public and private sectors sell securities to raise funds in these.
Consider that government entities like states and other municipalities and corporations use these to obtain funding to finance their operations and to engage in their own short- and long-term initiatives by raising capital through the sale of securities such as stock and bonds issued in the company’s name, which are then traded by individuals and institutions.

50
Q

What is the primary market?

A

where securities are sold to the investing public in what are known as issuer transactions. In other words, the issuer of the securities receives the proceeds generated by the sale of the securities.

51
Q

What is a secondary market?

A

where securities trade between investors. Transactions have one investor selling securities to another, and the issuer is not involved in the transaction. Stock exchanges are an example, where investors buy securities from and sell securities to each other throughout the trading day.

52
Q

What is the third market?

A

Nasdaq Intermarket, is a trading market in which exchange-listed securities are traded in the OTC market. BDs registered as OTC market makers in listed securities can do transactions in the this market. All securities listed on the NYSE and most securities listed on the regional exchanges are eligible for OTC trading as long as the trades are reported to the Consolidated Tape within 10 seconds of execution.

53
Q

What is the fourth market?

A

market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by BDs. These transactions take place through electronic communications networks (ECNs). ECNs are open 24 hours a day and act solely as agents.

54
Q

How does the FRB affect the money supply?

A

■ Open-market operations (buying and selling government securities)
■ Changes in the discount rate (on loans at the Fed’s “window,” a borrowing facility for member banks)
■ Changes in reserve requirements

55
Q

What are monetary policies?

A

those enacted by the FRB to influence the money supply.

56
Q

What are fiscal policies?

A

Those enacted by the president and congress such as tax laws and federal spending appropriations

57
Q

What is M1 money?

A

The most readily available type of money. Consists of currency in circulation and demand deposits (checking accounts) that can be converted to currency immediately. It is the money that consumers use for ordinary purchases of goods and services. Most is in demand deposits—that is, checking accounts. The largest and most liquid component of the money supply.

58
Q

What is M2 money?

A

includes some time deposits (less than $100,000) that are fairly easy to convert into demand deposits. These time deposits include savings accounts, nonnegotiable CDs, money market funds, and overnight repurchase agreements.

59
Q

What is M3 money?

A

includes time deposits of more than $100,000 and repurchase agreements with terms longer than one day.

60
Q

What is the FOMC (Federal Open Market Committee)

A

Meets regularly to direct the governments open market activities. It buys securities to increase the supply of money in the banking system, and it sells securities, to decrease the supply.

61
Q

What happens when the FRB buys securities?

A

Securities come out of the economy and money goes in. The money supply goes up, interest rates go down, borrowing and spending for consumers is easier, and the economy expands.

62
Q

What happens when the FRB sells securities?

A

Securities go into the economy and money comes out. The money supply goes down, interest rates go up, borrowing and spending for consumers becomes more difficult, and the economy contracts.

63
Q

What is the federal funds rate?

A

the rate the commercial money center banks charge each other for overnight loans of $1 million or more. It is considered a barometer of the direction of short- term interest rates, which fluctuate constantly and can be considered the most volatile rate in the economy.

64
Q

What is the discount rate?

A

the rate the Federal Reserve charges for short-term loans to member banks. Also indicates the direction of FRB monetary policy—a decreasing rate indicates an easing of FRB policy, and an increasing rate indicates a tightening of FRB policy.

65
Q

How could the FRB expand credit during a recession to stimulate a slow economy?

A

■ Buy U.S. government securities in the open market
■ Lower the discount rate
■ Lower reserve requirements

66
Q

How would the FRB tighten credit to slow economic expansion and prevent inflation?

A

■ Sell U.S. government securities in the open market
■ Raise the discount rate
■ Raise reserve requirements

67
Q

What is the prime rate?

A

the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans. Each bank sets its own, with larger banks generally setting a rate other banks use or follow. Banks lower these when the FRB (or Fed) eases the money supply, and they raise these when the Fed contracts the money supply.

68
Q

What is the broker loan rate (Also known as the call loan rate or call money rate)?

A

the interest rate banks charge BDs on money they borrow to lend to margin account customers. Margin accounts allow customers to purchase securities without paying in full. The amount not paid is essentially loaned to the customer by banks and BDs. This usually is a percentage point or so above other short-term rates. Callable on a 24-hour notice.

69
Q

What is monetary policy?

A

what the FRB engages in when it attempts to influence the money supply (the capital available to be lent to consumers and ultimately spent in the economy).

70
Q

What is fiscal policy?

A

governmental budget decisions enacted by our president and Congress, including increases or decreases in:
■ federal spending;
■ money raised through taxes; and
■ federal budget deficits or surpluses.

based on the assumption that the government can control such economic forces as unemployment levels and inflation by adjusting overall demand for goods and services. Due to politics, not the most efficient means of solving economic problems.

71
Q

What is M1 money?

A

The most readily available type of money. Consists of currency in circulation and demand deposits (checking accounts) that can be converted to currency immediately. It is the money that consumers use for ordinary purchases of goods and services. Most is in demand deposits—that is, checking accounts. The largest and most liquid component of the money supply.

72
Q

What is M2 money?

A

includes some time deposits (less than $100,000) that are fairly easy to convert into demand deposits. These time deposits include savings accounts, nonnegotiable CDs, money market funds, and overnight repurchase agreements.

73
Q

What is M3 money?

A

includes time deposits of more than $100,000 and repurchase agreements with terms longer than one day.

74
Q

What is the expansion stage of the business cycle?

A

increased business activity—increasing sales, manufacturing, and wages—throughout the economy.

75
Q

What is the peak stage of the business cycle?

A

The upper limit of the economy’s business activity. For various reasons, an economy can only expand for so long.

76
Q

What is a recession?

A

When business activity declines from its peak and the economy is contracting. Characterized by a decline in business for two or more quarters, but less than six quarters.

77
Q

What is a depression?

A

decline in real output of goods and services—the gross domestic product (GDP)—lasts for six quarters (18 months) or more.

78
Q

What is the trough stage of the business cycle?

A

When business activity stops declining and levels off.

79
Q

Expansions in the business cycle are characterized by?

A 
■ increased consumer demand for goods and services;
■ increases in industrial production;
■ rising stock prices;
■ rising property values; and
■ increasing GDP.
80
Q

Downturns in the business cycle are characterized by?

A

■ rising numbers of bankruptcies and bond defaults;
■ higher consumer debt;
■ falling stock prices;
■ rising inventories (a sign of slackening consumer demand in hard times); and
■ decreasing GDP.

SIE-J&L (6 decks)

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