SIE Chapter 1 and 2 Flashcards by Jenna Marcante

Types of Issuers

Legal entities that raise capital by issuing securities i.e. corporations, US Treasurey, State and Local governments, bank, foreign government

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Types of securities that can be issued

Equity (used by corporations, represents ownership) and debt (notes and bonds, issuers promise to pay)

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Agent or conduit that finds another party willing to take the other side of the trade

Brokers

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Firm acts as the principal, takes the other side of the trade, have inventory risk

Dealers

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Brokers make money though X

Commissions

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Dealers make money through X

Mark up and mark down, the additional fee in addition to the spread

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A broker dealer that chooses to display quotes to buy or sell specific securities at a specific price (must buy or sell at lease 100 shares at their quoted price)

market maker - subject to SRO rules (self-regulated rules)

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Quotes are firm for at least x amount of shares

100 shares or “a round lot”

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A client’s selling price that a brokerage is firm buying

Bid price

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Client’s purchase price

Ask or Offer price

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Difference between bid and ask price

Spread

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How market makers make money

spread

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a firm that charges customers fee for managing their securities, fee is based on AUM

Investment Advisor (IA)

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A firm that advises municipalities on bond offerings and must be registered with the SEC

Municipal Advisor (MA)

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Investors with large amount of assets to invest (i.e. 50 million)

Institutional invetsor

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Individual investors without large assets

Retail Investor

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Examples of Institutional investors

Banks, Insurance companies, investment companies corporations, individuals with large amounts of money, registered investment advisors, public and private pension plans, hedge funds

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More sophisticated investors who can take on more risk and purchase private placements

Accredited Investors

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What makes an accredited investor

an Institutional or individual who meets the following: net worth of 1 million excluding primary residence or annual income of 200,00 in each of the last two yeas (300k for married)

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What makes a Qualified Intuitional Buyer (QIB)

Must own and invest a minimum of 100 million in securities and cannot be a natural person (cant be Jeff Bazos but can be his pension plan)

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New Issue market when company is raising money through equity or debt (investment bankers help with this by underwriting)

Primary Market

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What act looks over the primary market, requires SEC registration of new issues, goal to provide full and fair disclosure, must have prospectuses to proceed any solicitation of a new issue.

The Securities Act of 1933

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Trading market that facilities the exchange of existing financial instruments among investors

Secondary market

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What act regulates the secondary market, created to enforce securities laws, create margin requirements (reg T), registration requirements for BDs and RR, trading regulation, insider regulations

The Securities Exchange act of 1934

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Where can securities trade?

Exchanges (NYSE or NASDAQ) or Over the Counter (OTCBB and PINK)

Two networks which provide dealers with | quotes on OTC securities, non exchanges just provide real time quotes

OTC Bulletin Board (OTCBB) or the Pink Marketplace (a platform that was created by the OTC Markets Group

Role is to facilitate distribution of new issues, assumes liability that varies with offering type

Underwriter

When an IPO does not sell all the securities initially, then sells another round of equity

Follow-on

Examples of physical or centralized exchanges

NYSE, Boston Stock Exchange, Chicago Stock Exchange, only 1 designated market maker per company

Non-physical electron exchange with unlimited number or market makers, classified as an securities exchange

NASDAQ, still defined as an exchange

Non-exchange issue / dealer to dealer market

OTC - often low price and thinly traded

Market for listed securities traded OTC, trades included in NYSE volume totals

Third Market

Market for transactions between institutions, most are internal crosses set up by money managers

Fourth Market

Provides liquidity for large institutional investors (anonymously) and high frequency traders, quotes are not disseminated to the public and limit the impact on the market

Dark pools

The payment and delivery process between the two parties

Settlement

electronic system of market centers (i.e., exchanges) that allow for both the quoting and trading of exchange-listed securities and can be used by investors who want to trade anonymously

Electronic Communication Networks (ECNs)

Securities depository and a national clearinghouse for the settlement of transactions and automated book entry changes in ownership in equities, corporate, municipal, and U.S. government bonds, mortgage backed securities, money-market instruments, and over-the-counter derivatives. Provide clearing, settlement, and information services, guarantees settlement, removes counterparty risk. Goal is to expand the ability to process transactions by automating clearing and settlement

The Depository Trust & Clearing Corporation (DTCC)

clears equity trades for both U.S. and foreign issuers

National Securities Clearing Corporation (NSCC)

clears bond trades

Fixed Income Clearing Corporation (FICC)

Back office for clearing firms, process trades

Introducing (correspondent) firms

Two ways for introducing firms to process trades: Fully disclosed vs Omnibus

Fully disclosed account - clearing firm is responsible for individual client information, Omnibus account - introducing firm is responsible for individual client information

Issues and guarantees options contracts, regulates exchange traded options, dealers directly with broker deals, trade settlement between broker dealers and OCC next business day

OCC (Options Clearing Corp)

Offers specialized services such as custody, sec lending, margin financing, clearing, processing, and operational support

Prime Broker

Responsible for providing trade comparison and reporting services, assists brokers dealers in transferring assets in customer accounts to another broker deal, offers customers ability to have real time trade matching

clearing corporation

Function is to hold securities in book entry form

Depository facility

Examples of SROs

FINRA, MSRB, Exchanges. the SEC is NOT an SRO

an independent agency of the US Gov that functions as the US central bank

the Federal Reserve Board (FRB)

Policy that controls money supply and discount rates, goal is to create max employment and stable prices

Monetary Policy

Regulates the banking industry and insures banking depositors up to $250,000

Federal Deposit Insurance Corp (FDIC)

Regulates amounts you have to put down for margins (currently 50%)

Regulation T

State administrator (or commissioner) enforced uniform securities act, which is a model law, not actual law in any state

Sate (Blue Sky) Regulators

Responsible for creating provisions an updating the Uniform Securities Act (USA)

North American Securities Administrators Association (NASAA)

Act that regulates firms that are established as investment advisers (IAs) ABC Test (Advice, Business, Compensation)  Incidental advisers (lawyers, accountants, teachers, engineers) are excluded from the adviser definition

The Investment Advisors Act of 1940

What defines an investment advisor

Provides advice, in the business of doing so, and receives compensation. Includes firms that management wrap accounts (i.e. collect a single fee for providing advice and executing transactions)

What defines an investment advisor

Provides advice, in the business of doing so, and receives compensation. Includes firms that management wrap accounts (i.e. collect a single fee for providing advice and executing transactions). Excludes broker dealers that receive commissions only, banks, savings, and trust companies, professionals (lawyers, accountants, teachers, and engineers, and subscription publishers like WSJ).

SEC can take what action (civil or criminal?)

Civil only, criminal aka jail time is only by the DOJ

Non profit membership corporation, not a government agency, that protects separate customer (not accounts) if a BD bankruptcy accounts. Customers include IRS and joint / custodial accounts .

Securities Investors Protection Corporation (SIPC) establish by he Securities Investor Protection Act of 1970 (SIPA)

Securities that are held in the name of the broker dealer

Street name securities

What coverage does Securities Investors Projection Corp (SIPC) provide

Cash and street names securities of up to 500k, of which, only 250k can be in cash (no matter what, most would be 500k) . Securities specifically identifiable to a customer are distributed back to the customer without limit. if limits are exceeds, customer becomes a general creditor. Fraud, futures contracts, commodities, and fixed annuities are not covered.

Act that defined insides, prohibited use of materials, non-public information, and that both tippers and tipees can be in violation  SEC may sue for treble damages (three-times)  $5,000,000 maximum fine and/or 20 years imprisonment

Insider trading and securities fraud enforcement act of 1988

Definition of an insider

Corporate officer, director, or owner of 10% or more of a companies common equity.

Act regulates the solicited sales of certain low-priced securities to potential new customers

The Penny Stock Reform Act of 1990

Amendments created the Municipal Securities Rulemaking Board (MSRB) to act as the SRO for firms that transact business in municipal securities

The Securities Acts Amendments of 1975

Act that covers the administration of private, qualified retirement accounts, such as the popular 401(k) plans.

The Employee Retirement Income Security Act of 1974 (ERISA)

Defined as non-exchange-traded securities (i.e., OTC equities) that trade for less than $5 per share.

Penny Stock

assed to address consumer complaints that related to the practice of cold calling. )  Do Not Call Lists  Call time limited to 8:00 a.m. to 9:00 p.m. (customer’s time zone)

The Federal Telephone Consumer Protection Act of 1991

The purpose of this Act is to deter and punish any terrorist acts that occur both in the U.S. and around the world, -Anti-Money Laundering (AMLS)  Currency Transaction Reports (CTRs) for transactions exceeding $10,000  Suspicious Activity Report (SAR) for transactions equal to or exceeding $5,000  Customer Identification Program (CIP)

The USA PATRIOT Act of 2001

Act regulates companies that are formed to pool together money from investors and invest the funds in securities mgmt companies, unit investment trusts, face amount certificate companies. More than 100 shareholders  Minimum $100,000 in assets  Annual reports to SEC; semiannual reports to shareholders

The Investment Company Act of 1940

Primary self-regulation organization SRO for the securities industry

Financial Industry Regulation Authority (FINRA)

Formulates and interprets the rules that apply to broker deals and sales persons in the municipal business and municipal advertising but has zero enforcement power (just makes rules)

Municipal Securities Rulemaking Board (MSRB)

Who enforces MRSB

for broker dealers - FINRA or SEC and for bank dealers - FRB, FDIC, or comptroller of currency

Functions as a trading venue for options contracts in individual stocks, stock indexes, interest rates, as well as exchange-traded funds (ETF) and is also the SRO for the options market

Chicago Board Options Exchange (CBOE)