Terms Flashcards
Regulation S-P
is an SEC regulation designed to safeguard privacy of confidential information and data about customers. See Privacy Notices.
Regressive Taxes
Regressive Taxes - a tax which is the same percentage for all taxpayers regardless of how much one earns. Examples include sales tax, gasoline tax, cigarette tax, and whiskey tax. A regressive tax imposes a higher burden on the poor than on the rich, because it represents a higher percentage of a poor man’s disposable income. See Progressive Tax.
SEC
Securities Exchange Commission, U.S. Congress created in 1934, federal agency. Mission to protect investors to maintain fair orderly efficient markets worthy of the public’s trust
Securities Act of 1933
Truth in securities act. Material info accurate n not misleading provided before stocks n bonds are purchased in the primary market.focus on initial securities offerings and requires registration with SEC before being allowed to offer or sell securities to the public.
Prospectus is a disclosure detailing all the investor needs to know about the company because of securities act of 1933. Sec nor any state securities commission has approved it disapproved the accuracy must be prominently mentioned.
Issuer
Any individual or entity issuing a stock or bond or other security to investors for our abuse. Example Facebook is an issuer of common stock.
Blue sky-ing
State level registration. Usually for securities not traded on NYSE or NASDAQ or any other major securities exchange which require SEC exclusive registration.
Effective date
The release date that SEC allows sales to be finalized and issuers receives Capital it is seeking.
Securities Act of 1934
Securities and Exchange Commission created authority over all aspects of the securities industry. Gives SEC disciplinary powers over entities and persons including SRO.. Allows requires periodic reporting of info like quarterly and annual reports with the SEC. additional reports when officers and members sell shares. Mergers and acquisitions.
Capping - illegal attempt to put a lid on the price of a stock or other security. This is a good example of market manipulation. It violates the Securities Exchange Act of 1934. But really, it’s hard to fathom how any one person could successfully keep the price of a stock from rising in today’s volatile markets. See Market Manipulation.
SRO
Self regulatory organizations that regulates its own members and enforced its own rules along with the SEC. ex. FINRA, NASDAQ, NYSE. OCC
OPTIONS CLEARING CORPORATION
FIXED INCOME CLEARING CORPORATION
NSCCNATIONALSECURITIES CLEARING COORPORATION AND DEPOSIT trust corporation ARE PART OF DTCC DEPOSITORY TRUST & clearing corporation
U.S.A.
Uniform Securities Act. Model legislation for each state’s admin office that regulate securities and the professionals. U.S.A. For state. SEC for federal.requires both persons working in the securities industry and offerings of securities be registered with the state securities department.
FinCEN
Financial crimes enforcement networK if the United States treasury. Firms
T-notes t-bonds
Financing of the federal government by issuing department of treasury securities such as t-notes and t-bonds
SIPC
Securities investor protection corporation. Protects bd customers missing assets.
Securities investor protection act 1970
Requires bds to belong to SPIC. An industry funded insurance company. Protection up to $500k. $250 cash.
Primary vs secondary market
New issue of stocks issued to investors for the first time vs stocks and bonds trading among investors
Recision
the act of refunding monies to a client when an I.A. representative or agent has made a sale that violates a state’s U.S.A. See Uniform Securities Act. See U.S.A.
12b-1 Fees
sometimes a mutual fund tacks on charges to pay for its selling overhead generated by its sales force. The industry calls these charges “12b-1 fees” or “distribution fees.” A mutual fund would deduct these charges, typically 0.5 percent per annum, on a daily basis.
403(b) Plans
retirement plans allowed by IRS for employees of public schools, employees of tax-exempt organizations, and religious ministers. A 403(b) plan was formerly known as a tax-sheltered annuity (TSA). However, today 403(b) plans are not limited to annuities. A public corporation may not set up a 403(b) plan. Nor are they intended for employees of the federal government.
457 Plans
these are deferred compensation plans that offer tax deferral until monies are withdrawn. They are intended for employees of local and state governments.
529 Plans
529 Plans—These plans allow a contributor to build up a tax-advantaged fund to pay for university/college education expenses for a lucky young person. Also for expenses at private schools for grades K-12. A donor makes contributions to a 529 plan with after-tax dollars. IRS considers earnings generated to be tax-free, not merely taxdeferred, assuming that the student uses the proceeds for education expenses at a college or university, or at a private school for grades K-12, the latter being limited to $10,000 distribution per student per year.
Accelerated Cost Recovery System (ACRS)
a method of accounting for depreciation. The amount of depreciation is greater in earlier years, thus the name “accelerated.”
“acid test” is the “quick ratio.”
quick assets (i.e., current assets minus inventories and minus other questionable assets) divided by current liabilities.
Agency capacity vs principal capacity
a brokerage firm may act either as “agent” or “principal” in its securities business. When it acts as agent, it stands in the middle between a customer who purchases and another person who sells. The brokerage firm is acting as agent in this example. See Commissions. See Principal Capacity. See Agency Cross Transaction.
Principal Capacity - a brokerage firm may act either as “agent” or “principal” in dealing with customers and other persons. When the brokerage firm acts in a principal capacity, it buys and sells for its own account as a “principal,” i.e., one of the parties to the transaction. If a brokerage firm, acting as principal, buys from a customer or sells to a customer, it will usually add a “markup” or subtract a “markdown.” See Commissions. See also Agency Capacity. See also Markups.
Commissions - these are charged by a brokerage firm when acting in an agency capacity for a customer on a trade. A brokerage firm must send a confirmation on every trade. Here’s an example. “As agent, we have purchased for your account 100 XYZ common at $44.00 per share. Total due $4,400 plus $35.00 commission.” See Markups. See Agency Capacity. See Principal Capacity.
Agency Cross Transaction
this occurs when an advisory firm executes trades, which it has recommended, for two clients, one who buys and the other who sells. It does this through its brokerage affiliate. The brokerage affiliate acts as agent, and collects two commissions. In addition, the advisory firm earns an advisory fee. There are serious conflicts of interest inherent in this arrangement.
Alpha
Alpha - this measures the percentage gain of a stock portfolio or mutual fund, as compared to the return of a passively managed portfolio, such as an index fund. See Index Fund.
Index Fund - a type of mutual fund with a passively managed portfolio. There is no active management of portfolio. The performance of a broad-based index fund mirrors the performance of the market as a whole.
Alternative investments
Alternate Investments—other than plain vanilla stocks and bonds, alternate investments include limited partnerships, exchange-traded notes (ETN’s), leveraged funds, inverse funds, structured products, and viatical/life settlements.
Bank Secrecy Act, AmL, FinCEN, CMIR
Bank Secrecy Act—the platform for anti-money laundering laws and regulations, applying to financial firms, (but not yet applying to investment advisory firms), although FinCen has proposed rules that would apply to advisory firms in the near future. See FinCen.
CMIR—a report under the Bank Secrecy Act, regulating the transmittal of cash in excess of $10,000 in or out of the U.S. See Anti-Money Laundering. See also Currency Transportation Report.
Currency Transportation Report—also abbreviated as CMIR. This is a report under the Bank Secrecy Act regulating the transmittal of cash in or out of the U.S., in an amount exceeding $10,000, and also including checks without naming the payee. See CMIR.
Annuities
Annuities - issued by life insurance companies, the basic premise of all annuities is that the annuity will periodically pay an amount of money to the annuitant until death. See Fixed Annuities. See Variable Annuities. See Equity Indexed Annuities.
Assessable
there are some investment contracts whose terms allow the general partner or manager to levy future assessments or charges on investors. This assessment requires that investors put up additional money. Be careful before investing in an investment or scheme where there is possibility of a future assessment. Make sure you know what you are signing!
Securitization, asset based securities, collateralized debt obligations
Asset-Backed Securities—these are bonds that have backing of certain assets, such as auto loans, credit card receivables, or trade receivables. An investment bank will group these receivables into a package, and then sell bonds and other debt instruments, backed by these packages. See Securitization. See also Collateralized Debt Obligations.
Collateralized Debt Obligations—these are bonds backed up by debt or bonds, other than mortgage indebtedness.
Securitization—Many investment banks, if not all, engage in the process of securitization. They assemble items, such as trade receivables, student loans, credit card receivables, mortgages, into a package, and then arrange to sell shares of this package to investors. By so doing, the investment bank has converted trade receivables into a security. See Asset-Backed Securities.
Auditor disclosures and the types
Auditor Disclosures—the reports of auditors giving their opinions of a company’s financial statements. These include non-qualified opinions, qualified opinions, adverse opinions, and disclaimer of opinion.
Authorized Stock, Issued Shares, Outstanding Shares, Treasury Shares.
Authorized Stock - when a corporation files for its incorporation in a state, it lists the number of shares that it wishes to authorize. The corporation can then issue shares up to the number authorized. See Issued Shares. See Outstanding Shares. See Treasury Shares.
Treasury Shares - after a company issues common shares, sometimes it decides to repurchase some of them. These are called “treasury shares.” They do not vote or receive dividends. See Issued Shares. See Outstanding Shares.
BCP / Business Continuity Plan
BCP—stands for business continuity plan. The SEC requires that every investment advisory firm registered with it have a business continuity plan in its manual of supervisory or compliance procedures that allows a firm to remain in business and fulfill its fiduciary obligations to clients. See Business Continuity Plan.
C Corporation vs S Corporation
C Corporation - a regular corporation, such as General Motors Corp. Unlike a direct participation program, it does not pass through any tax benefits to shareholders. See S Corporation. See Direct Participation Program.
Direct Participation Program (DPP)
Direct Participation Program (DPP) - a form of business organization that passes through to its shareholders or partners all of its income, expenses, tax deductions, and tax benefits. See Limited Partnership. See also S Corporation. See also Limited Liability Corporation. See also General Partnership.
Other Terms
Benchmarks—these are usually well-known indexes on stocks or bonds that are used to measure performance of an investment adviser for his/her clients.
Blind Pool – An offering of new shares of a company that has no stated business, no earnings, no history. An investment in such shares is throwing good money into a speculative, unknown, and untested scheme.
Brady Bonds - these were bonds issued in the late 1980’s by developing countries to replace troubled loans that they owed to megabanks. The bonds were named after the then U.S.
Secretary of the Treasury, Nicholas Brady.
Capital Losses - when a taxpayer sells a stock or other asset for less than she paid, a capital loss results. Capital losses may offset capital gains. A taxpayer may “net” (i.e., subtract) capital gains from capital losses. If Beth has realized $6,000 in capital gains and $10,000 in capital losses, she may net the two, and arrive at a net capital loss of $4,000. Net capital losses can be used to offset a taxpayer’s ordinary income up to $3,000 per year.
CFTC - the Commodities Futures Trading Commission. It has governmental authority to regulate markets in commodities and futures.
Client Contracts—an adviser sometimes induces a client to agree that the client will not press any criminal charges or bring any civil suits against the advisor. Such contracts are illegal, null, and void.
Beta
Beta - a measurement of the price volatility of a stock or mutual fund in relation to the whole market. Stocks with betas of less than one are less volatile and less risky than the average of the whole stock market. Investments with negative betas react in an opposite manner from the stock market, meaning if the market goes up, they go down, and vice versa.
Brochure ; ADV
Brochure for Wrap Fee Clients - Part 2A Appendix 1 is the “brochure” for clients of an investment advisory firm who participate in a wrap fee program sponsored by the advisory firm. See Part 2A Appendix 1.
Brochure Rule - the SEC requirement that federal investment advisers give clients a copy of Part 2A of their Form ADV. Part 2A contains information about the adviser and his/her business practices, such as how much an adviser has under management, his or her methods of securities analysis, how the adviser arranges for brokerage trades to be executed, etc. See Part 2A Form ADV.
Part 2A Form ADV - the part of Form ADV that serves as the basis for the “Brochure” for clients of an investment adviser. It, or information that it contains, must be given to each new client at or before the time that the client signs a contract with an investment adviser, and annually thereafter, if there are any material changes. See Form ADV. Part 2B Form ADV - the part of Form ADV that lists the specifications and qualifications of each officer or advisory firm employee who renders investment advice, including the person’s regulatory and/or disciplinary history. This employee is called a “supervised person.” Distribute Part 2B to each client for every employee/officer who deals with that client, or who devises an investment plan for the client. See Form ADV. See also Part 2A Form ADV. See also Part 2A Appendix 1 Form ADV.
Conflicts of Interest - each investment adviser or investment advisory firm has the obligation to disclose the presence of any and all conflicts of interest. An investment adviser would list potential conflicts in Part 2A of Form ADV, otherwise known as the “Brochure.” See Brochure. See Fiduciary.
Options
Call - an option that gives the holder the right to purchase stock or some other asset at a specified price. The holder of a call will profit if the price of the underlying stock goes up. See Put. See Options.
Capital Asset Pricing Model (CAPM)
this is an approach to evaluating prices of individual securities by comparing the expected return of one stock to its market risk, using beta, and taking into account the risk-free return of a T-bill. See Beta. See Negative Correlation.
Negative Correlation - some assets increase in price when stocks go down, and vice versa. This is an example of negative correlation. See Beta. See Capital Asset Pricing Model.
Capital Market vs money market
Capital Market - the market for long-term debt securities, such as bonds, mortgages, as opposed to the “money market,” the market for short-term debt securities.
Capitalization, retained earnings, paid in surplus
Capitalization - refers to the total amount of monies (i.e., capital) raised by a corporation when it issues stock, bonds, and when it retains earnings from its businesses. Capitalization includes bonds, preferred stock, common stock, paid-in surplus, and retained earnings. See Paid-in Surplus. See Retained Earnings.
Capping in market manipulation
Capping - illegal attempt to put a lid on the price of a stock or other security. This is a good example of market manipulation. It violates the Securities Exchange Act of 1934. But really, it’s hard to fathom how any one person could successfully keep the price of a stock from rising in today’s volatile markets. See Market Manipulation.
Market Manipulation - any illegal attempt to control the price of a security by, for example, spreading false rumors, or by falsely reporting large sales, hoping to create upward or downward pressure on a stock’s price. See Manipulation.
Cash flow
Cash Flow - to arrive at a simplified calculation of “cash flow,” add non-cash charges or expenses, such as depreciation and depletion, to net income. Non-cash charges or expenses don’t require a corporation to write a check. A more complete formula of cash flow is EBITDA—earnings before interest, taxes, depreciation, and amortization. EBITDA shows earnings, or cash taken in, before paying interest on bonds, taxes, and the non-cash expenses of depreciation and amortization. See EBITDA.
