Chapter 1 Exam Flashcards
How does a corporation increase its capitalization over time?
Through retained earnings
A firm that handles and is held responsible for all paperwork associated with the execution of the transaction and maintains custody of clients assets and securities is a ?
Clearing Broker
What is Rule 147?
-80% of the issuer’s assets must be within the state
-80% of the net proceeds from the offering must be used within the state
-80% of the issuer’s gross revenues must come from business activities within the state
They cannot be sold outside the states for 6 months
What does a dealer do with the bid and ask price?
-Dealer buys at bid
-Dealer sells at ask
What is a security?
It is an investment contract offered through a legal entity managing the efforts for an expected profit.
Ex: Bond, Stock, Mutual Fund
What does the SEC require when reviewing prospectuses and registration statements?
-“No Approval Clause”
-They require prospectuses to be in bold and states the SEC does not approve or disapprove them.
- They do not guarantee adequacy or accuracy of information contained
Who requires registration and oversees the activities of BDs and RRs?
FINRA
What is CBOE?
They examine authority for broker-dealers engaging in the OPTIONS MARKET
What does the MSRB do?
They are the SRO that governs the broker-dealers and banks that engage in the municipal securities business.
What type of contracts do CBOE offer?
Trades are exchanged in Standardized options contracts.
What is Rule 144?
-This is how certain restricted stock can be sold to the public
-The rule states the stock must be from an issuer that has current public information available.
In a broker-dealer who negotiates with issuers when selling securities to the public?
Investment Banking
Who is paid from the underwriting spread?
-Selling Group
-Syndicate
-Managing Underwriter
What are the several subdivisions of the secondary market?
-Auction market is the trading of exchange-listed securities on stock exchanges.
-OTC Market trading of unlisted securities.
-Fourth Market is for direct trading between institutions.
-The Primary Market is where new issues are sold.
When do cash settlements be paid for?
Cash Settlement=”Same Day” (T=S)
When do corporate and municipal securities be settled?
This is done through regular way settlement (T+2)
What is a QIB?
They are an institution with a minimum of $100 million in securities on a discretionary basis.
What federal agency oversees the U.S securities market?
The Securities and Exchange Commision (SEC)
Who acts as the central bank of the United States?
The Federal Reserve
What does the Treasury Department do?
They are an executive agency responsible for promoting economic prosperity and ensuring the financial security of the U.S.
What does the FDIC do?
They protect bank account deposits in U.S. banks from bankruptcy.
What are Book Entry Settlements?
These are securities held in book-entry on the issuer’s books or in the brokerage accounts.
- The securities must be settled through a registered security depository (DTCC)
- A clearing agency will transfer ownership through bookkeeping entries.
- It applies to securities held in book-entry on the issuer’s books or in brokerage accounts.
What type of broker-dealer is typically used by hedge funds to settle trades that were executed through several different firms?
Prime Broker
What’s the Howey Test?
Investment of money
Common enterprise
Expectation of profit
What is the FDIC?
They protect bank account deposits
What does the Federal Reserve do?
Central bank of the U.S.
Maintains stability of the financial system
Responsible for monetary policy
What does the Department of Treasury do?
Executive agency
Economic prosperity
What does the IRS do?
Enforce the tax law
What is the North American Securities Administrators Association (NASAA)?
Uniform Securities Act
Blue sky law (state laws)
What is Equity?
Equity is stocks (Ownership), which is used for growth
What is Debt?
Debit is bonds, which are loans used for income.
What is Over the counter market for?
Its is a negotiated market and for unlisted securities.
What is an Institutional Investor?
Entity making large scale security transaction
What is a qualified institutional buyer?
Institution with more than a $100 million
What does a Trustee do?
Protects bondholders interest.
What does a Transfer Agent do?
- Recordkeeping
- Paper people
What does a Broker do?
They act as an agency capacity and makes commission
What does the Introducing Broker Dealer do?
Introduces the customer accounts to clearing Broker Dealer.
No custody
What is Prime Broker?
Used for hedge funds and institutions
What does a Clearning Broker Do?
Maintains the custody of the assets
Behind the scene
What is Market Maker?
Stand ready to buy and sell security
Create efficiencies in the market
Helps to stable the market
What does an Investment Advisor do?
Gives advice for compensation
What does a Municipal Advisor do?
Provides advice for a municipal entity
- Advice for municipal securities
What is the Depository Trst & Clearing Corp?
Provides:
- Institutional Trading Process
- Clearing
- Settlement Services
What is the Initial Public Offering?
First time a corporations security is offered to the public
What is a Follow on Offering?
New sale of additional securities (APO)
- Primary offering
What are the main objectives of the Securities Act of 1933?
- Provide investors with sufficient Information
- Establish laws to prevent misrepresentation and fraudulent activities in the sales of
securities
What is a Syndicate?
A group of Broker dealers formed for large offerings and share the risk.
What is the Selling Group?
Selling group has no risk and is paid for concession based on sales
What is Firm Commitment Underwriting?
- Commits to issuing all the offering
- They purchase entire offering acting as a principal
What is a Standby Underwriting?
- The underwriter stands by to buy additional shares
- Firm commitment
What is Best Efforts underwriting?
- They agree to do their best and will sell any unsold shares to the issuers
- Agency Capacity
What is “All or None” underwriting?
- All MUST be sold or else it is CANCELLED
- Need Escrow account
What is “Mini-Maxi” underwriting?
- If minimum is not met it can be cancelled
- Need Escrow account
What is the Registration Process?
- Registration Statement is filed with the SEC
- Registration statement = 20 day cooling off period
- Preliminary Prospectus
What is the Indication of Interest?
- Provides information on the offering
- Cannot accept money
What is Due Diligence Meeting?
Review all information
Meetings are held at the end of cooling off period
What is the Effective Date?
- This is the date offering can be sold
- SEC disclaimer is in front of the prospectus
What is Preliminary Prospectus?
- Also called Red Herring
- During the cooling off period
- Cannot accept cash (not an offer of sale)
What is regulation D Private Placement?
- Its a private offering
- No more than 35 accredited investors
- There’s a resale restriction of 6 months
- For Restricted stock
- No Prospectus required
What is Rule 147 Intrastate Offering?
- For instate offerings only
- 80 % revenues, assets, proceeds are within the state
- Under blue sky laws
What is Restricted stock?
Restricted Stock - Unregistered stock)
- Rule 144 (6 month holding period, File Form 144 with the SEC)
What is Rule 144A?
Allows trades of unregistered securities of unregistered stock
What is the Regulation of exchanges and broker dealers?
Creation of the SEC
What are the Secondary Market Subdivision?
- Auction Market
- OTC Market
- Third Market
- Fourth Market
What is the Auction Market?
Its a listed market
What is OTC Market?
For unlisted Securities
What is the Third Market?
For sale by owner
- They are listed securities but can exchange OTC
What is the Fourth Market?
- For institutions
- Dark Pools - So large trades dont affect the market
What is Bid?
Market maker buys at bid
Investor sells at the bid
What is ask?
- Market maker sells at the ask
- Investor buys at the ask
What is Interposition?
- Introduces a third party between them and the customer
- Only allowed if better price for customers
What is a trade Date?
Date order is executed
What is a regular way settlement?
for Corporate and municipal security
T + 2
When is Cash Settlement?
Same day settlement
When is government Securities and options settlement?
T + 1
Next business day
What is good Delivery?
Endorsement
Denomination
Physical Condition
CUSIP or ID Number
Customer’s obligation to deliver in a timely manner
What is cost basis?
Original cost associated with purchase of a security
What is the Liquidation Priority?
1st - Secured Creditors
- Taxes, Unpaid Wages, trade creditors
- Debenture holders
- Subordinated Debenture
- Preferred Shareholders
6th - Common Shareholders
