Series 24 - Facts & Information Flashcards
Minimum Maintenance Margin Required in Long Accounts
_____________________
Minimum Maintenance Margin Required in Short Accounts
=25%
___________________
=Greater of $5/share or 30%
Restricted Margin Account
___________________
Regulation T Requirement For Initial Purchases
- % equity (Margin) fallen below initial 50% requirement
- Can buy additional securities on margin, but must put up initial margin requirement (50% of new purchase)
________________
Initial Trade Size Reg T Required Deposit
$4000 Long & Short: $4000
Aggregated Indebtedness
All unsecured liabilities and all customer related liabilities (all monies the BD must pay if liquidates)
Included:
- Accounts Payable
- Customer Credit Balances
- Fails to Receive - Customer Accounts (Customer has paid for securities not yet received, firm owes these securities to the customer)
- Fails to Receive - Firm Account (Sold)
- Stocks Loaned - Customer Account
- Bank Loans - Customer Collateral (Margin Securities)
Not Included:
*Fails to Receive - Firm Account (Unsold) [FINRA close out procedures would cancel these transactions]
*Subordinated Loans (loans only repaid after all other creditors
____________
Important Note: For AI/NC Ratio, subtract the special reserve bank account from AI balance
Maximum AI/NC Ratio
_________
Early Warning Ratio Level
8:1 for First Year Firms
15:1 for Established Firm
_______________
Early Warning if exceeds 12:1
Market Value Where Account Will Be at Maintenance Margin - Long & Short Accounts
Long = Debit Balance/0.75 Short = Credit Balance/1.3
Restrictions on Member Activity
FINRA Rule 5121
Members Cannot Expand Business If:
*Net Capital < 150% of Minimum Requirement
*AI/NC >10:1
For 15 consecutive business days
Members May Have to Reduce Business If:
*Net Capital 12:1
For 15 consecutive business days
IF NET CAPITAL IS LESS THAN MINIMUM REQUIREMENT, FINRA CAN SHUT THE FIRM DOWN
Minimum Net Capital Requirements
Clearing BD $250,000
Fully Disclosed BD (receives securities) $50,000
Fully Disclosed BD (does not receive securities) $5,000
Clearing Prime Broker $1,500,000 Executing Broker (in Prime Relationship) $1,000,000
Market Maker BD (NASDAQ, OTCBB, Pink)
$1000 for each security with bis $5
and
Min $100,000 - Max $1,000,000
Mutual Fund Firms
- accept wire orders $25000
- only accept subscriptions $5000
Net Capital - Definition
Liquid Net Worth
Liquid Assets Less Total Liabilities
Allowable Assets:
- Cash
- Cash in Reserve Account
- Customer Debit Balance
- Receivable (if secured)
- Stock Borrowed
Allowable with Haircut
* Aged Fails to Deliver - 15% haircut if over 4 bus days after settlement
* Inventory (Securities)
- 15% if >4 market makers
- 40% if 2-3 market makers
- 100% if you are only market maker
PLUS: if single security accounts for more than 10% of tentative net capital, extra 15% haircut on amount over 10%
Debt/Equity Ratio
Subordinated Debt/Total Available Capital
Cannot Exceed 70% for Greater than 90 Days
Subordinated Debt
Minimum Term of 1 Year
Repayment is suspended if AI/NC increases above 12:1
Prepayment prohibited if AI/NC increases above 10:1 or NC falls below 120% of minimum
Temporary Subordinated Debt
Maximum duration of 45 days
Maximum number of loans per year = 3
Cannot get a temporary loan if AI/NC > 10:1 or net capital is below 120% of minimum
Eastern Syndicate vs Western Syndicate
Eastern Syndicate: Undivided as to selling responsibility and liability
Western Syndicate: Divided as to selling responsibility and liability
New Issue Prospectus Delivery
Provided to customers at or prior to confirmation
Required to provide a Final Prospectus to all initial purchasers for a 90-day period.
For the first registered offering of an issuer:
* the final prospectus must be provided to all purchasers (primary or secondary market) for 90-days * only 25 days if issue is listed on an exchange
Securities Act of 1933
Regulates Primary Market (issuance of securities)
Securities Act of 1934
Regulates the Secondary Market (trading of securities)
Forms F-3 & F-6
F-3 Foreign Issues that wish to directly register shared for sale in the US
F-6 ADRs (US banks that create ADRs from foreign securities held on deposit in an overseas branch)
Regulation D
Allows a “private placement” exemption if an issue is sold to a maximum of 35 non-accredited investors. The issue can be sold to an unlimited number of accredited investors under this exemption and still be considered a private placement.
Rule 144 Exemption
vs
Rule 144A
Rule 144 Exemption allows small amounts of restricted stock to be sold periodically without formal registration.
Rule 144A Allows large institutional purchasers to trade private placement securities.
Rule 144 Exemption Requirements and Other Implications
Requires:
- Issuer must be registered with SEC
- Seller files Form 144 with SEC prior to sale date
- Securities are fully paid for at least 6 months
- Files Form 144 no more than 4x per year
- Max sale is greater of 1% of shares outstanding or weekly average of last four weeks trading volume.
Rule 144 extends to control stock, but without the 6 month holding period.
No filing required for sales of 5000 shares or less, with market value of no more than $50,000 (once every 90 days)
Once shares are sold they are considered registered.
Rule 144A
Rule permits any QIB (qualified institutional buyer) to purchase unregistered security directly from the issuer or from a BD.
QIBs can sell to other QIB
Reg A Exemption
Reg A - Small Dollar Offering
Issuer can sell $5,000,000 of its own securities in a 12 mo period.
Affiliates can sell $1,500,000 of securities under the Exemption
No prospectus but
- Form1A and a copy of the Offering Circular must be filed 20 calendar days prior to the proposed effective date.
- Offering Circular provided to purchaser at least 48 hours prior to confirmation of sale.
Reports of sales must be made within 30 days of the end of each 6-mo period.
Issues are registered.
Exemptions that Require Filing
vs.
No Filing Requirement
Private Placements are exempted from full registration under Reg D
Sale of Restricted Stock are exempted from full registration under Rule 144
Sale of Small dollar amounts of securities are exempted under Reg A
No Filing for transactions between private parties as these are not covered under the Act.
Rule 405
Well Known Seasoned Issuer
Rule 405/WKSI Requirements
Min Mcap of $700mil or at least $1Bil in non-convertible senior securities registered with the SEC in past 3 yrs.
Can only be used for add on offerings
Automatic Shelf Registration (S-3)
Pay as you go registration fees
3-Yr Shelf Registration
Electronic Prospectus Delivery Permitted (assuming meets access equals delivery requirements)
Free Writing Prospectus Allowed - can be used before or after the registration statement is filed. must be filed with the SEC prior to or at first use.
Section 4(6) of Securities Act of 1933
Offers of no more than $5,000,000 made only to accredited investors where no advertising is done, are exempt
Section 4(6) of Securities Act of 1933
Generic private placement exemption stating transactions by an issuer not involving a pubic offering are exempt.
Details of what is required to meet this general exemption are provided in Reg D and Rule 144A
Shelf Registration Rules
Rule 415 & Rule 405 (WKSI)
Rule 405 is newer and more liberal
These are also “natural offerings”…allow issuers to sell based on natural demand in the market (there is no cooling off period).
Rule 415
An issuer can sell securities on a continuous or delayed basis.
Only securities reasonably expected to be sold in the following 3 yrs can be included in the registration
No IPOs (only add on offerings)
Only seasoned issuers can do a primary offering
Unseasoned issuers can do a secondary offering (where proceeds go to shareholders (PIPE))
Section 12g of the 1934 Act
Requires issuers of non-exempt securities with assets greater than 10mil and at least 2000 shareholders, must register shares with the SEC
Underwriters who are Market Makers
Under Reg M
Requires firms that are market makers and in the syndicate for an additional issue offering to either seek an excused withdrawal from making a market in that issue or elect to operate as a passive market maker.
Passive market makers are limited to making daily net purchases of 30% of ADV or 200 shares, whichever is greater.
Passive market maker cannot bid any higher for a security than the current highest independent bid.
Insider Forms
FORM 3 - any person must notify the SEC on becoming an insider within 10 business days
FORM 4 - insider trades are reporting within 2 business days
Investor Holding Filings (13_ filings)
13d - accumulate 5% or more with intent to exercise control…must file with 10 days of crossing the threshold
13g - accumulate 5% of more as passive investor…must file annually within 45 calendar days of year end.
Information to be filed with the Committee on Corporate Financing
Registration Statement
Amendments to the Registration Statement
Underwriting Agreement
Agreement Among Underwriters
All forms of Compensation:
- Exact or Estimated POP
- Exact or Estimated Underwriting Discount (spread)
- Exact or Estimated Reimbursement for underwriter’s expenses, underwriter’s counsel’s fees, advisory fees, finder’s fees, etc.
- Any other type of compensation that may accrue to the underwriter and related persons
- Details of ownership of any of the issuer’s securities acquires during the 180 days prior to the filing date by the member firm, its officers, and employees
- Details of any other arrangement entered into with the issuer during the 180-day period preceding the filing that provides for the transfer of warrants, options or other securities to the member firm, its officers or employees.
When Does Filing with the Committee on Corp Financing Need to Occur?
If Filing Required:
15 days in advance of offering date
Except for Intrastate Offerings and Filing under Reg A exemption where 1 business day in advance is required.
No Filing Required For:
- Add-On Offerings
- Straight Debt Issues Rated BBB or better with at least a 4-yr maturity
- Securities registered under Rule 415
- Securities that may be purchased under a Standby Underwriting
- Any Financing Backed Instrument rated BBB or better
Issues Required to/Exempt from Filing with Committee on Corporate Financing
Exempt From Filing:
- Private Placements under Reg D with appropriate Rule 144 resale restriction legend
- Open End Mgt Co Shares
- Unit Investment Trusts
- Variable Annuitie
- Issues under Section 14D tender offer
- Competitively Bid Utility Issues
Issues Requiring Filing:
- Equities
- Convertible Debt
- Straight Debt Rated BB or lower
- Direct Participation Programs
- REITs
- Rights
- Intrastate Issues
- Reg A Filings
- Issues of Banks, S&Ls, Charitable Institutions, Common Carriers, even if exempt under the ‘33 Act
FINRA Rule 1530
Only prohibits industry insiders from purchasing IPOs of common stock. It does not apply to new preferred stock or debt issues; secondary offerings; or private placements
Unreasonable Compensation or Terms for Underwriters
- Convertible Securities, Options or Warrants granted in an offering exercisable at a price lower than identical publically traded securities
- Options or Warrants with life longer than 5 years
- “Free Stock”
- “Green Shoe Clauses” -overallotment clauses that allow for more than 15% extra shares to be issued
- Agreement giving underwriter the right to handle subsequent offerings for more than 3 years in the future.
- Expense allowances to cover such accountable expenses as overhead, salaries and supplies
- Non-accountable expenses in excess of 3% are expressly forbidden
All Offering Costs (including legal, accounting, and underwriting fees) cannot exceed 15%
Rule 145 Reorganizations
Corporate Reorganizations requiring filing of a registration statement:
- involving substitution of one security for another
- merger or consolidation in which existing securities will be exchanged for a new entity
- transfer of assets from one person to another in consideration for the issuance of new securities
Rule 145 Exemptions:
- stock split
- change in par value
- stock dividend
Reg MA
Covers required disclosures and procedures for tender offers and takeover transactions
Rule 5150
Requires all member firms to disclose all potential conflicts of interest that they may have when rendering a “fairness opinion”
6 items that must be disclosed:
- contingent compensation
- other compensation
- material relationship
- verification of information
- fairness committee
- insider compensation
Hart-Scott-Rodino Act
Provides for Federal Review of any possible anti-competitive effects of the merger or acquisition.
Maker of the offer must file with the FTC and Department of Justice Anti-Trust Division
Reg AC
Analyst Certification on research reports and public appearances
SOX
Major provisions relating to issuers and brokerage firms:
- accounting firm cannot provide consultant services
- accounting firm must report to independent audit committee at the issuer
- CEO & CFO cannot have been employed by auditor with past year
- CEO & CFO must certify to appropriateness of financial statements
- No personal loans to officers
- Speed up disclosures of special events to 4 days (from 15)
- Insiders prohibited from trading during blackout period
- insiders must report trades within 2 days
SOX Section 15D
Established Research Analyst Conflict of Interest Rules
Reg S
Permits offshore distribution of US securities to non-US residents without registration of the issue with the SEC
…sold outside the US to non-US residents
Resale of securities:
- if offshore, no problems
- if in the US, must either be registered or sold under an exemption (typically Rule 144 or Rule 144A)
Trust Indenture Act of 1939
Requires each non-exempt (under ‘33 Act) issuer of debt who publicly offers an issue of $5,000,000 or more must:
- be sold under a Trust Indenture that spells out the obligations of the issuer
- independent trustee be appointed
- trustee is a fiduciary to the bondholders
- trustee must have combined capital and surplus of at least $150,000 and cannot have conflicting interests with the issuer
Applies to both convertible and non-convertible debt. Does not apply to government or municipal debt.
Reg SK vs Reg SX
SK - covers required corporate disclosures in registration statements for offerings of securities
SX - details requirements for the issuer’s audited financial statements included in a registration statement.
Stop & Limit Orders - Executed When?
OSLOBS (Open Sell Limit & Open Buy Stop) - placed above market and executed in rising market
OBLOSS (Open Buy Limit & Open Sell Stop) - placed below market and executed in falling market
Note only OBLOSS orders are reduced on ex-date.
First Market
Exchange Trading
Second Market
OTC Trading (OTCBB & Pink Sheets)
Third Market
OTC Trading for Exchange Listed Stocks
Fourth Market
ECNs/ATSs (listed stocks)
Network A Tape
Trades of NYSE Listed Issues (wherever trade took place)
Network B Tape
Trades of AMEX (NYSE-MKT) and Regional Exchange Listed Issues (wherever trade took place)
Network C Tape
Trades of NASDAQ Listed Issues (wherever trade took place)
Reg NMS Rule 605
Requires market centers prepare monthly reports on the quality of their trade executions. Report is posted on each exchange’s website.
Reg NMS Rule 606
Requires each BD
- disclose payments for order flow (on trade confirm)
- disclose, on request, routing of customer orders for prior 6 months that were “non-directed”
- quarterly report detailing order routing procedures
Reg ATS
Requires any ATS
* that display orders to anyone other than ATS employees
and
* with average daily volume in an NMS security 5%+ of agg volume
… Must link with a national securities exchange so the ECN quote is displayed and can be accessed under Reg NMS
ADF
Alternative Display Facility - created to display ECN quotes if the ECN was not going to post the quote in an exchange order book.
CQS
Consolidated Quotations Service
Provides current price quotes for exchange listed stocks (except NASDAQ), regardless of the source
Also includes quotes for OTC stocks with exchange trading priviledges
Any OTC market maker that trades 1% or more of the trading volume in an exchange listed security in a calendar quarter us obligated to register as a CQS market maker
UQDF
UTP Quote Data Feed
Provides current price quotes for NASDAQ listed securities, regardless of the source
Floor Brokers - Prohibitions
Prohibited
- initiate a trade as a principal
- initiate a trade for an account s/he has an interest
- initiate discretionary transactions
Prohibitions do not apply to:
- specialists on the exchange floor
- odd lot transactions
- stabilizing transactions
- bona-fide arbitrage transactions
Single Stock Limit Up Limit Down Rule
and
Limit State
Tracks each NMS stock’s price movement in 5-minute windows
Tier 1 Stocks (actively traded) - trades that are 5% above/below the average price for the preceding 5 minutes are prohibited for stocks included in the S&P 500, Russell 1000 and specified ETFs
Tier 2 Stocks (less actively traded) - trades that are 10% above/below the average of the preceding 5-minute window are prohibited
Note: Bands are doubled during opening and closing periods and broader bands apply to stocks priced less than $3
If NBO = lower price band or NBB = upper price band, limit state exists
If security remains in limit state for 15 seconds, security enters a 5 minute trading pause
Marketwide Circuit Breakers
Level 1 Drop = 7%
Level 2 Drop = 13%
Level 3 Drop = 20%
Results:
Level 1 or 2 Drop before 3:25pm = 15min market close
Level 1 or 2 Drop after 3:25pm = No close
Level 3 drop, anytime = close for rest of day