Final Prep Flashcards
FINRA rules that protect the integrity of securities markets can be broken down into the following four sections:
- Conduct rules
- Uniform Practice Code (UPC): covers the technical aspect of trading and payment for securities transactions.
- Code of Procedure (COP): covers the enforcement of FINRA rules and details the punishment of members who incur rule violations.
- Code of Arbitration (COA): FINRA-run dispute resolution process to settle monetary disputes.
What is the NASAA?
North American Securities Administrators Association. Provides insight from their unique perspective to the SEC and SROs (self-regulatory organizations).
Define SIPC.
The Securities Investor Protection Corporation. Created under the Securities Investor Protection Act of 1970. Nonprofit membership organization where members pay assessments into a general insurance fund that is used to meet customer claims in the event of a BD bankruptcy. ALL BD BANKS THAT REGISTER WITH THE SEC MUST BE SIPC MEMBERS, EXCEPT:
- banks that deal exclusively in municipal securities
- firms that deal exclusively in US government securities and
- firms that deal exclusively in redeemable investment company securities.
How much is SIPC Coverage?
Basic coverage under SIPC is no more than $500K per separate customer. Of that, SIPC covers no more than $250K in cash.
What is a carrying Firm?
Also know as “clearing” firm, these BDs “carry” customer accounts and accept fund and securities from customers. They have the capability to do trade executions, clear and settle transactions, take custody of customer funds and securities and handle related back office tasks. Carrying firms must segregate customer funds and securities held in their custody from the firm’s capital and securities.
What is the DTC?
The Depository Trust Company
Define Stagnation
Economic “stagnation” refers to prolonged periods of slow or little economic growth, unusually accompanied by high unemployment.
A broker-dealer has a line of business restricted solely to the purchase and sale of securities with trade executions being handled by another member firm. Which of the following would best describe this type of firm?
Introducing/fully disclosed. A fully disclosed “introducing” broker-dealer is what the word implies—it introduces its customers to a clearing firm. Clearing firms (often referred to as carrying firms) hold their customer’s funds and securities as well as those of their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm’s back office. Because the risk associated with holding customer funds and securities is not present, net capital requirements are much lower for introducing firms than they are for self-clearing or carrying broker-dealers.
What are the key purposes of the Securities Act of 1933?
The primary purpose of the Act of 33 is to require full and fair disclosure in connection with the sale of securities to the public. The Securities Act of 1933 protects investors who buy new issues regulating, among other things, registration of new issues, underwriting, full disclosure, and the potential for fraud in the issuance of securities.
- 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.
Offering non-exempt securities (those that must be registered with the SEC) such as common stock to the public requires the registration of the securities under the Securities Act of 1933. The offering must be made by prospectus.
The Securities Act of 1933, is also known as the Paper Act, Prospectus Act, or New Issues Act. This federal law requires that issuers who want to raise capital by making a public offering of securities to the public, provide full and fair disclosure of all material facts about the company and the securities being offered.
What are the key purposes of the Securities Act of 1934?
Governs trading markets for existing securities and registration requirements of BDs, BD employees, and exchanges.
What is the main purpose of the Investment Company Act of 1940?
Governs the regulation of packaged products such as mutual funds, closed-end funds, and unit investment trusts.
Define “custodian” and compare with “trustee.”
An institution or person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a custodian. A trustee is an institution or a person responsible for making all investment, management and distribution decision in the best interests of another who has been legally appointed to do so.
What is a transfer agent.
The transfer agent for a corporation is responsible for:
-ensuring that its securities are issued in the correct owner’s name.
-canceling old and issuing new securities
-maintaining records of ownership
handling problems related to lost, stolen or destroyed certificates.
*The transfer and registration of stock certificates are two distinct functions that by law cannot be performed by a single person or department operating within the same institution.
What is a clearing agency?
A clearing agency is an intermediary between the buy and sell sides of a transaction. The clearing agency receives and delivers payments and securities on behalf of both parties. Two largest are the National Securities Clearing Corporation (NSCC) and Depository Trust & Clearing Corporation (DTCC). The DTCC is a member of the Federal Reserve System.
What is the OCC?
Clearing Agency. Options Clearing Corporation. Clearing agent for listed options contracts (e.g. those listed on US options exchanges.
What is the “Third Market”.
Nasdaq Intermarket, 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 third market.
What is the “Fourth Market”.
The fourth market is a market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by BDs.
Describe Keynesian economic theory.
Demand for goods ultimately controls employment and prices and, as a result, the government fiscal policies determine the country’s economic health.
Describe Monetarist Theory.
Milton Friedman is considered the originator of the monetarist economic theory. Monetarists believe the quantity of money (i.e. the money supply) is the major determinant of price levels.
Describe Supply-side economics.
Supply-side economics holds that governments should allow market forces to determine prices of all goods. Supply-side adherents judge that the federal government should decrease government spending and taxes. In this way, sellers of goods will price them at a rate that allows them to meet market demand and still sell them profitably.
What is an APO?
The first time that a company issues shares to the public, it engages in an IPO (initial public offering). Later offerings are known as SPOs (subsequent primary offerings) or APOs (additional public offerings). The IPO and any SPO or APO are all issuer transactions and are, therefore, done in the primary market.
Define LGIP.
Local Government Investment Pools. Established by states to provide other government entities within its borders such as cities, counties, school districts or other state agencies with a short-term investment vehicle to invest funds.
REITS are organized as….
Real estate investment trusts, as their name tells us, are organized as trusts. Assets held in the trust and the distributions made can impact the tax consequences for the trust. As an investment vehicle, shares are sold to investors and these shares sometimes trade on exchanges. Whether traded or nontraded, the shares are considered to be equity (not debt) securities.
What is Sovereign Risk?
The risk of default by a country on its debt instruments is specifically recognized as sovereign risk.
How long is a self registration valid for?
Once filed, a shelf registration is good for 2 years and allows the issuer to sell portions of a registered shelf offering over a 2-year period without having to reregister the security. However, a supplemental prospectus must be filed with the SEC before each sale. For a Well Known Seasoned Issuer (WKSI) this extends to three years.
If the U.S. balance of payments is currently running at a surplus, what’s happening to flow of dollars, value of the dollar, exports vs imports and balance of trade?
When the U.S. balance of payments is running at a surplus, the balance of trade shows a credit; that is, exports are greater than imports, meaning more dollars are flowing into the U.S. economy than out. When the value of the U.S. dollar is down, foreign goods become more expensive to U.S. buyers, but U.S. goods become more attractive to those with foreign currency in hand. This also leads to more exports of U.S. goods.
What is a preliminary prospectus?
The preliminary prospectus (red herring) is a prospecting tool used to gauge indications of interest. It is made available to those who request it between the registration date and the effective date (cooling-off period). Receiving it is not a commitment to purchase shares and making it available is not a commitment to sell shares to the recipient. No final price would be found on a preliminary prospectus.
Regarding registration for the sale of securities, those registered under the Investment Company Act of 1940, such as mutual funds, would be considered…
federal covered securities and not required to register at the state level. Investment companies registered under the Investment Company Act of 1940 offer securities that are deemed to be federally covered. The effect of this designation is that states do not have jurisdiction over the registration requirements of these securities; no state registration can be required. Therefore federally covered securities are required to register at the federal level only.
A company is already public with several major stockholders. Sale proceeds for shares being sold to the investing public will go to some of the existing stockholders who want to divest of their shares. This is a….
a secondary offering and an additional public offering. Anytime proceeds are going to the selling shareholders rather than the issuer, it is a secondary offering. Because the company is already public (has shares in the hands of stockholders), this offering of those shares to the investing public would be an additional public offering (APO) rather than an IPO.
The broker loan rate charged by banks is also known as the….
the call loan rate. The broker loan rate or call loan rate is the interest rate banks charge broker-dealers on money that broker-dealers borrow to lend to margin account customers.
Which benchmark interest rate indicates the direction of the Federal Reserve Board’s monetary policy?
The discount rate. The discount rate, being the rate the Federal Reserve Bank charges for short-term loans to its member banks, is generally considered a good indication of the FRBs policy to either tighten or loosen its hold on the amount of money available to banks for lending to consumers.
Some institutions can function as a depository and intermediary for settling transactions between buyers and sellers of securities. All of the following are acceptable for this purpose EXCEPT
national banks. Being a bank alone does not allow for serving as a depository or clearing facility for securities transactions. The National Securities Clearing Corporation and the Depository Trust Company are set up specifically to perform these functions, and they may also be performed by broker-dealers known as carrying or clearing firms.
What is deflation?
Deflation is a general decline in prices. Deflation usually occurs during severe recessions when unemployment is on the rise.
Considered the most volatile of the benchmark interest rates in the economy would be…
the federal funds rate. The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates.
