Chapter 1- Overview Of Financial Markets And Regulation Flashcards
What is FINRA’s primary objective?
To adopt, administer, and enforce rules in the securities industry.
What is the primary purpose of the Securities Act if 1933?
Provide investors with full and fair disclosure regarding new issues (prospectus)
What is the role of an SRO?
Maintain fair and orderly securities markets and establish rules and regulations for protecting investors
What does FINRA stand for?
Financial Industry Regulatory Authority
What does an SRO stand for?
Self-Regulatory Organization
The Securities Act of 1933 regulates _______.
The Securities Act of 1933 regulates new issues.
Which department of a broker-dealer handles the underwriting and issuance of securities for clients?
Investment banking
What US Government agency, created by the ‘34 Act, enforces securities laws?
The Securities and Exchange Commission (SEC)
The _______________ is the SRO for the OTC market.
The Financial Industry Regulatory Authority (FINRA) is the SRO for the OTC market.
Name some Self-Regulatory Organizations (SROs)
FINRA, MSRB, CBOE, and other exchanges
The Securities Exchange Act of 1934 regulates the _______________________.
The Securities Exchange Act of 1934 regulates the Secondary Market.
What is an issuer?
A legal entity that sells securities in order to finance its own operations.
What are the two primary methods that issuers use to raise capital?
Debt Securities (bonds, notes, or debt instruments) and issuing equity securities (stocks)
What is a debt security?
Bonds, notes, or debt instruments
What is a bond?
A security that evidences the amount of indebtedness (principal), of an issuer.
What is a creditor?
An investor who purchases a bond
When do issuers repay the bond?
Issuers are required to repay the principal balance of the bond at a future date and will typically make interest payments over the life of the loan.
What are the principal and interest payments also known as?
Issuers Debt Service Obligation
What is an equity security?
Stock (equity)
What does an investor get from purchasing a stock?
They get an ownership interest in the underlying business and, at some point, may be entitled to a portion of the corporation’s profits (through a dividend distribution).
When does an issuer have to repay a stock?
Stocks typically do not have a maturity date, and the payment of any dividends is voluntary for the issuer.
What does IPO stand for?
Initial Public Offering
What is an Initial Public Offering?
An IPO represents a corporation’s first attempt to attract capital from financial institutions and the public.
What are the two basic types of capital markets?
Primary and Secondary (Trading) Markets
What is the primary market?
Considered the market that issuers sell their securities to investors (such as issuers conducting their initial public offering (IPO)
What happens in a primary market transaction?
The securities being sold by the issuer and the proceeds of the offering are directed to the issuer.
What are secondary markets also referred to as?
Trading markets
What happens in trading markets?
They provide a system for trading existing financial instruments among investors.
Why are secondary/trading markets beneficiary?
Even though the resale of securities has no direct effect on the issuing corporation, the ability to resell a stock or bond (liquidity) increases an investor’s willingness to invest money in securities in the first place.
Trading markets are broken down into what two categories?
Traditional trading floors, and electronic marketplaces
What is an example of a traditional trading floor?
The New York Stock Exchange (NYSE)
What is an example of an electronic marketplace?
Nasdaq and NYSE Arca
What is a broker dealer?
A financial firm
What is a broker?
Any person engaged in the business of effecting transactions in securities for the account of others
What is a dealer?
Any person engaged in the business of buying and selling securities for its own account
What are the different broker-dealer departments?
Investment banking, research, sales, trading, and operations
What is investment banking?
The area that works directly with the issuers to arrange and structure the needed financing.
What happens in a broker-dealer’s research department?
The research department’s analysts study both the markets and securities in order to issue recommendations (whether to buy, sell, or hold)
What happens in the sales department?
Referred to as stock or bond brokers, professionals who work in sales typically market products, such as pension plans and college endowments, both to retail investors and institutions.
What does the trading department do?
Handles the execution of trades for both the firm’s clients and the firm’s own proprietary account.
What does the operations department do?
They ensure that all of the paperwork, funds, and securities transfers that are associated with a trade (or processing) are handled efficiently and according to specific industry standards. Personnel perform functions such as generating customer statements, confirmations, and tax records as well as assisting in the transfer of securities and/or funds. Also responsible for ensuring that all firm and client assets are organized properly and safeguarded.
What are the four tiers of regulation?
Federal laws, SRO rules and regulations, state regulation, and firm-specific policies and procedures
What do federal regulation laws cover?
All capital raising, sales, trading, and operations.
Where do federal regulation laws come from?
Primarily Congress, and are enforced by the Securities and Exchange Commission (SEC)
What SRO regulation cover?
The creation and enforcement of day-to-day rules that brokerage firms must follow, that are often handled by SROs such as FINRA and the MSRB
What does State (Blue-sky) regulation cover?
Each state has the authority to impose additional requirements for both issuers and financial intermediaries. Normally requires registration in state business is being conducted in.
What are Written Supervisory Procedures (WSPs)?
A firm’s clearly outlined policies and procedures. Essentially a manual that details the rules and the person responsible for their enforcement.
