Series 7 Definitions

Question 1

Uniform Practice Code

Answer 1

The Uniform Practice Code sets a standard how broker dealers conduct business with each other.
(Settlement, payments, deliveries etc)

Question 2

Limited Power of Attorney/ Limited Trading Authorization

Answer 2

If a customer wants to allow a firm or representative to make investments on their behalf without requiring their prior consent, the customer will have to sign a Limited Power of Attorney/ Limited Trading Authorization to document the authority. The customer is bound by the purchases and sales made on their behalf. A discretionary account must be reviewed more frequently to safeguard against abuse and all transactions must be suitable for the customer based on the customer’s investment objectives.

Question 3

Excess Equity (EE)

Answer 3

Excess Equity (EE) is the value of a margin account’s equity in excess of Reg. T

Question 4

5 Percent Markup Policy

Answer 4

FINRA’s guidelines, which require all prices paid by customers to be reasonably related to a security’s market price. The 5 percent policy is a guideline, not a rule, and does not apply to securities sold through a prospectus.

Question 5

Interpositioning

Answer 5

Interpositioning is the placing of another broker dealer in between the customer and the best market. Interpositioning is prohibited, unless it can be demonstrated that the customer received a better price because of it

Question 6

Pass Through Certificate

Answer 6

Pass Through Certificate is a security that passes through income and principal payments made to an underlying portfolio of mortgages. GNMA is one of the biggest issuers of this type of security.

Question 7

Restricted Account

Answer 7

Restricted Account is a margin account that has less than 50% equity but more than 25% equity.

Question 8

The Trust Indenture Act of 1939 requires a contract between the issuer and the trustee who will act to protect the interests of the bondholders. In the event of default the Trustee will take possession of any collateral that was pledged to back the bond and liquidate it to pay off the bondholders

Answer 8

Trust Indenture Act of 1939

Question 9

Assumed Interest Rate (AIR)

Answer 9

Assumed Interest Rate (AIR) is

(1) A benchmark used to determine the minimum rate of return which must be realized by a variable annuity’s separate account during the pay out phase in order to keep the annuitant’s payments consistent, or,
(2) In the case of a variable life insurance policy, the minimum rate of return which must be achieved in order to maintain the policies variable death benefit.

Question 10

Trade Confirmation

Answer 10

Trade confirmation is the printed notification of a securities transaction.
A confirmation must be sent to a customer on or before the completion of a transaction. ( the settlement date)

Question 11

Maloney Act of 1938

Answer 11

An amendment to the Securities Exchange Act of 1934 that gave the NASD the authority to regulate the over the counter market. The NASD is now part of FINRA.

Today the OTC market has developed in to a very efficient electronic exchange known as NASDAQ as well as into other markets where shares of less established issuers are traded.

Question 12

Schedule 13D (Form 13D)

Answer 12

Schedule 13D is a form that must be filed with the SEC by any individual or group of individuals acquiring 5% or more of a corporation’s non-exempt equity securities. Form 13 D must be filed within 10 days of the acquisition

Will declare the investor’s intentions and basis for acquiring such a large percentage ( Passive, Change company, buy outright etc )

Question 13

Head and Shoulders chart pattern

Answer 13

A chart pattern that indicates a reversal of a trend. A head and shoulders top indicates a reversal of an uptrend and is considered bearish. A head and shoulders bottom is the reversal of a downtrend and is considered bullish

Question 14

Group Net Order

Answer 14

Group Net Order is one where the sales credit for the order is shared by members of the syndicate, based on their participation.

In an effort to ensure that a client’s order gets filled a syndicate member may elect to share the commission for selling the bonds with the members of the syndicate by designating the order as a group net or syndicate order.

Question 15

Bond Buyer Indexes

Answer 15

Bond Buyer Indexes are a group of yield based municipal bond indexes published daily in the Daily Bond Buyer

When the indexes rise, they indicate rise in yield ( bond prices in the index are falling )

Question 16

Gross Revenue Pledge

Answer 16

Gross revenue pledge is a flow of funds pledge for a municipal revenue bond that states that debt service will be paid first.

Question 17

Order Book Official (OBO)

Answer 17

Order Book Official (OBO) is an employee of the CBOE who is responsible for maintaining a fair and orderly market in the options assigned to them and for executing orders that have been left with them.

Unlike DMM cannot trade for their own account.

Question 18

BAN
CLN
GAN
RAN
TAN
TRAN

Answer 18

Bond anticipation notes (BANs) – Notes issued by a governmental unit, usually for capital projects, that are repaid from the proceeds of the issuance of long-term bonds.

Construction loan notes (CLNs) – Notes issued to fund construction of projects (typically housing projects).

Grant anticipation notes (GANs) – Notes issued on the expectation of receiving grant funds, usually from the federal government.

Revenue anticipation notes (RANs) – Notes issued in anticipation of receiving revenues at a future date.

Tax anticipation notes (TANs) – Notes issued in anticipation of future tax receipts, such as receipts of ad valorem taxes

Tax and revenue anticipation notes (TRANs) – Notes issued in anticipation of receiving future tax receipts and revenues at a future date.

Question 19

Commercial paper (CP)

Answer 19

Commercial paper (CP) – Short-term obligations issued by municipal entities usually backed by a line of credit with a bank that mature within 270 days. The issuer typically pays maturing principal of outstanding commercial paper with newly issued commercial paper, referred to as a “roll over,” thereby borrowing funds on a short-term basis for an extended period of time. Rate reset periods may vary from one to 270 days and different portions of a single issue of commercial paper may simultaneously have different reset periods.

Question 20

Preliminary Prospectus / Red Herring

Answer 20

Preliminary Prospectus / Red Herring is a document used to solicit indications of interest during the cooling off period for a new issue of securities.
All of the information in the preliminary prospectus is subject to revision and change.
The cover of a preliminary prospectus must have a statement saying that the securities have not yet become registered and that they may not be sold until the registration becomes effective. This statement is written in red ink and that is where the term “red herring” comes from.

Question 21

Joint tenants in common /JTIC

Answer 21

Joint tenants in common /JTIC is a joint account where the asset of a party who has died transfers to the decedent’s estate, not the other tenant.

Question 22

Crossing Stock

Answer 22

Crossing stock is the pairing off of two offsetting customer orders by the same floor broker. The floor broker executing the cross must first show the order to the crowd for possible price improvement before crossing the orders.

Question 23

Blotter

Answer 23

Blotter is a daily record of broker dealer transactions.

There are several yypes of blotters: receipt and delivery of securities; purchase and sale of securites; receipt and disbursement of cash.
All blotters are considered records of original entry.
They must be posted, i.e.: updated, no later than one business day after the event and copies must be kept for 6 years.

Question 24

Banker’s Acceptance (BA)

Answer 24

Banker’s acceptance is a letter of credit that facilitates foreign trade. BA’s are traded in the money market and have a maximum maturity of 270 days.

It is almost like a post dated check. If the exporter wants to obtain the funds immediately they may sell the BA in the money market at a small discount to its face value or it may hold the BA until its maturity or payment date.

Question 25

Rules for Good Delivery

Answer 25

Be signed by all owners and all owners must be alive
Be in the correct denominations, such as number of shares or par value of bonds
Have all attachments
Be accompanied by a uniform delivery ticket

The owner of a security must endorse the certificate at the time of sale to ensure its negotiability or may sign a stock or bond power, also known as a power of substitution. The stock power, when attached to the certificate, will make it negotiable and includes an irrevocable power of attorney.

Question 26

Nominal Quote

Answer 26

Nominal quote is a quote given for informational purposes only. A trader who identifies a quote as being nominal cannot be held to trading at the prices that were clearly identified as being nominal.

Used in issues that are not actively traded such as pink sheet securities or smaller municipal bond issues may not have active secondary markets.

Question 27

Wildcatting

Answer 27

wildcatting is a term used to describe an exploratory oil- and gas-drilling program.

Drilling for oil in an area of non proven reserves is very speculative in nature and more often than not can result in a “dry hole” being drilled

Question 28

Green Shoe Option

Answer 28

Green Shoe Option is an option given to an underwriter of common stock that will allow them to purchase up to an additional 15% of the offering from the issuer at the original offering price to cover over allotments for securities that are in high demand.

Question 29

Self-Regulatory Organization / SRO

Answer 29

Self-Regulatory Organization / SRO is an industry authority, which regulates its own members. FINRA, NYSE, and MSRB are all self-regulatory organizations, which regulate their own members.

Members of the Self-Regulatory Organization also must agree to be regulated by the organization and to accept its rules and findings in cases of violations. Members who violate the rules may fine themselves expelled from the SRO

Question 30

Accretion / Amortization

Answer 30

Used for Tax purposes

Accretion : An accounting method used to step up an investor’s cost base for a bond purchased at a discount.

Amortization : An accounting method used to step down an investor’s cost base for a bond purchased at a premium.

Question 31

Cooling Off Period

Answer 31

Cooling-off-period the period of time between the filing of a registration statement and its effective date. During this time, the SEC is reviewing the registration statement and no sales may take place. The cooling off period is at least 20 days.

During this time a Registered Representative may accept indications of interest and may send out preliminary prospectuses. (Red Herring)

Question 32

Rehypothecation / Hypothecation

Answer 32

Rehypothecation : the act of a broker dealer re-pledging a customer’s securities as collateral at a bank to obtain a loan for the customer.
Rehypothecation of collateral by broker-dealers is limited to 140% of the loan amount to a client, under Rule 15c3-3 of the SEC

Hypothecation : practice of a borrower pledging an asset as collateral for a loan, the lender has the right to seize the asset if the borrower cannot service the loan

Question 33

Eastern / Western Account

Answer 33

Eastern Account is a type of syndicate account that requires all members to be responsible for their own allocation as well as for their proportional share of any member’s unsold securities.

Western (Divided) Account is a type of syndicate account that requires all members to be responsible for their own allocation only.