Unit 1 - Terms Flashcards
Terms and definitions from first unit
Securities and Exchange Commission (SEC)
is the securities industry’s primary regulatory body
Broker dealers that transact securities with customers must apply and be approved for registration with the SEC
SEC regulates all exchanges and trading markets
Broker Dealer Registration and Compliance
broker dealer may not claim that registration in any way implies that the SEC has passed upon or approved the broker dealers financial standing, business, or conduct. any such claim or statement is misrepresentation
Broker Dealer that does not comply is subject to:
- Censure
- limits on activities, functions, or operations
- suspension of its registration
- revocation of registration
- Fine
Self Regulatory Organizations (SRO’s)
- Function under SEC Oversight
Financial Industry Regulatory Authority (FINRA)
Regulates all matters related to investment banking (securities underwriting), trading in the OTC Market, trading in NYSE listed securities., conduct of FINRA member firms.
Regulates investment companies and limited partnership transactions
FINRA’s purpose and objectives are to:
Promote
Provide
Adopt
Promote
Chicago Board Options Exchange (CBOE)
Regulates all matters related to trading standardized options and related contracts listed on that exchange
Municipal Securities Rulemaking Board (MSRB)
regulates all matters related to the underwriting and trading of state and municipal securities.
Does Not have enforcement powers - depend on FINRA
has no regulatory power over the municipalities who issue municipal securities.
Department of Treasury / IRS
USDT - Overseas the collection of taxes
IRS - collects taxes and enforces tax laws
North American Securities Administrator Association (NASAA)
is a voluntary association whose members provide insight from their unique perspective to the SEC and SRO.
Advocates Pro - Investor policies, provides investor education, offers resources to community
Federal Reserve Board (FRB)
Consist of 12 regional banks and hundreds of national and state banks that belong to the system.
FRB determines monetary policy and takes actions to implement its policies.
Through actions determine how much money available
decisions are critical aspect of US Economy
FRB Actions to Implement Monetary policies include
- acting as agent of US treasury
- regulating the US money supply
- setting reserve requirements for members
- supervise printing of currency
- clearing fund transfers
- examine member ensure compliance with federal regulations
Securities Investor Protection Corporation (SIPC)
created under the securities investor protection act of 1970
is a nonprofit membership organization
members pay assessments into general insurance fund that is used to meet customer claims in the event of a broker dealer bankruptcy.
SIPC Coverage
Basic Coverage is no more than $500,000 per separate customer
of $500,000 total, SIPC covers no more than $250,000 in cash
cash and margin accounts for the same customer are combined for the purposes of determining SIPC coverage. However only the equity in a margin account is covered, not the full market value
Federal Deposit Insurance Corporation (FDIC)
an independent agency of the United States federal government that preserves public confidence in the banking system by insuring deposits.
funds are provided same way for private insurance company, premiums are paid by all participating institutions.
FDIC Coverage
FDIC provides deposit insurance guaranteeing the safety of a depositor accounts for members banks up to $250,000 for each deposit ownership category in each insured bank.
FDIC Coverage Types
FDIC Covers traditional types of bank deposits
- Checking and Savings Accounts
- Money Market Deposit Accounts
- Certificate of Deposit (CDs)
- Self Directed IRA
FDIC Does Not Cover
- Mutual Funds
- Annuities
- Life Insurance Policies
- Stocks and Bonds
Investor
Someone who provides money or resources for an enterprise with the expectation of financial or other gain.
Retail Investor
Individual who makes investments
Purchase of securities for personal account rather than an organization
Institutional Investor
Entity that pools money to purchase securities and other investment assets
Institutional Investors can include insurance companies, pensions, hedge funds, and mutual funds
Accredited Investor
Has a net worth of $1m or more, not including net equity in primary residence
Annual income of $200k or more in each of the two most recent years, 300k with join spouse, has reasonable expectation of reaching same income level during current year.
officers and directors of an issuer of securities
Broker Dealers - Full Service
are carrying or clearing firms who clear their own transactions.
For Example - Merrill Lynch in addition to clearing their own transactions, may accept transactions from other smaller, fully disclosed firms, in doing so, acting as the smaller firms clearing firm.
Carrying Firms (Clearing Firms)
Carries customer accounts and accepts funds and securities from customers.
Capable of trade executions, clear and settle transactions, take custody of customer funds and securities, handle all back office task such as sending trade confirmations and statements.
Carrying firms must segregate customer funds and securities held in their custody from the firms capital and securities.
smaller regional BDs are typically introducing or fully disclosed firms who introduce their transactions to larger carrying firms in order to clear their transactions
Fully Disclosed Firm or Introducing BDs
one that introduces its customer to clearing firm.
Clearing firm holds funds and securities of introducing firm.
net capital requirements for clearing firms are lower for introducing BDs than they are for self clearing or carrying BDs.
An introducing firm may receive customer checks, but they must be made out to the clearing firm .
Prime Broker
Facilitates the clearance and settlements of securities transactions.
Prime Brokerage accounts often includes a list of specialized services such as securities lending, margin financing, trade processing, cash management, and operational support.
ability to trade with multiple brokerage houses while maintaining a centralized master account with all of the client’s cash and securities.
Investment Advisers
Anyone, Part of business gives investment advice for compensation.
Must register as investment adviser under the Investment Advisers Act of 1940.
Broker Dealers who provide advice for a fee are subject to registration under this act.
Providing advice and not charging separately for it (acting as a registered representative) doe snot require registration as an adviser)
Municipal Advisors
Provides advice to or on behalf of a municipal entity with respect to municipal products or the issuance of municipal securities.
Undertakes a solicitation of a municipal entity
Issuers of Securities
When an entity such as a corporation or municipality offer or proposes to offer its securities for sale to the investing public
Underwriters
Groups of broker dealers or investment bankers that work with an issuer to bring its securities to the market and sell them to the investing public.
Market Maker or Trader
any entity, individual, or institution, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security.
generally stand ready to buy or sell (make markets) in securities with ultimate goal of being profitable.
Custodian
Making all investment, management, and distribution decisions in an account maintained in the best interest of another.
Ex) custodian for account of minor
Trustee
Making all investment, management, and distribution decisions in an account maintained in the best interest of another.
Legally appointed to do so
Fiduciary appointed to manage assets in a trust
Transfer Agent
transfer and registration of stock certificates cannot be performed by a single person or department operating within same institution.
Issuers typically use commercial banks and trust companies to handle these functions
Transfer Agent for Corporation are responsible for
- ensuring securities issued in correct owners name
- canceling old and issuing new certificates
- maintaining records of ownership
- handling problems
Clearing Agency
An intermediary between the buy and sell sides of transactions.
Clearing agency receives and delivers payments and securities on behalf of both parties.
Broker dealers, and commercial banks can act as clearing agencies and depositories for purpose of clearing securities transactions and taking custody of funds and securities
Depository Trust and Clearing Company (DTCC)
Is a member of the federal reserve system
Is not in retail banking business
Exist to serve custody needs of security industry worldwide
Options Clearing Corporation (OCC)
Clearing Agent for listed options contracts
must be listed for trading on US option exchange
primary function are to standardize, guarantee performance, and issue option contracts.
determines when should be offered to market
for new contracts designates strike price and expiration month utilizing standard to maintain uniformity and liquidity
Market
Any physical place or electronic venue where buyers and sellers can come together for purpose of trading assets.
Types of Markets
Equities - Stocks, bonds, currencies, and derivative products like options can be offered and traded in financial markets.
Capital Markets
Stocks and Bonds.
Both public and private sectors sell securities in order to raise funds.
Primary Market
Where securities are sold to investing public in what are known as issuer transactions.
Secondary Market
Where securities trade between investors.
Stock Exchange is an example
Third Market
Nasdaq intermarket
trading market in which exchange listed securities are traded in OTC market
Broker dealers must be registered as OTC market makers can do transactions
All securities on NYSE and most listed on regional exchanges are eligible for OTC trading
Fourth Market
For institutional investors in which large blocks of stocks, both listed and unlisted, trade in transactions unassisted by broker dealers.
Use of ECNs, can trade 24/7
FRB Affects Money Supply
Three Policy tools
- Open Market Operations (buy/sell government securities)
- changes in discount rate
- changes in reserve requirements
Monetary Policy
What FRB engages in when it attempts to influence the money supply
Fiscal Policy
Government budget decisions enacted by president and congress and include increase or decrease in:
- Federal Spending
- Money raised through taxes
- Federal Budget
Fiscal policies are those enacted by our president and congress such as tax laws and federal spending appropriations
Money Supply - M1
Most readily type of money
Largest and most liquid component of money supply
Money Supply - M2
time deposits (less than 100,000) fairly easy to convert into demand deposits.
savings accounts, nonnegotiable CDs, money market funds and overnight repurchase agreements.
Money Supply - M3
Time deposits more than $100,000 and repurchase agreements with terms longer than one day
FRB - Influence
FRB influences money supply by buying and selling US government securities in open market.
When FOMC buys securities it increases supply of money, sell it decreases
FRB / FOMC - Selling
securities go into economy and money comes out,
money supply decreases, interest rates increase, borrowing and spending for consumers becomes more difficult, economy contracts
FRB / FOMC - Buying
securities come out of economy and money goes in
money supply increases, interest rates decreases, borrowing and spending for consumers is easier, economy expands
Interest
Cost of Money.
Money available exceeds demand, interest rates fall
Demand Money exceeds supply, interest rates rise
Level of interest rate can be tied to federal funds rate, prime rate, discount rate, and broker loan rate
Federal Funds rate
Rate commercial money center banks charge each other for overnight loans of $1m or more.
Most volatile rate in economy
Discount Rate
Rate the federal reserve charges for short term loans to member banks.
Discount rate indicates direction of FRB monetary policy
Discount Rate - Increasing
An increasing discount rate indicates a tightening (contraction) of FRB policy.
Discount Rate - Decreasing
A decreasing discount rate indicates an easing of FRB policy.
To expand credit during a recession, to stimulate a slow economy
Buy US government securities
Lower Discount Rate
Lower Reserve Requirements
To tighten credit to slow economic expansion and prevent inflation
Sell US government securities
Raise Discount Rate
Raise Reserve Requirements
Prime Rate
Interest rate large US money center commercial banks charge for most credit worthy corporate borrowers for unsecured loans.
banks lower prime rates when FRB or FED ease money supply
banks raise prime rate when Fed contracts money supply
Broker Loan Rate
interest rate banks charge broker dealers on money they borrow to lend to margin account customers.
also known as call loan rate or call money rate
call loans are callable on 24hr notice
when a bank needs to borrow money it can borrow from the FRB or another bank
- Borrowing from FRB - pays discount rate
- Borrowing from another Bank - Pays Federal Funds Rate
Financial Statements
assess a corporations profitability, financial strength, and operating efficiency.
determine how financial viable a company is
Balance Sheet
Provides a snapshot of company financial position at a specific time.
Assets - liabilities = net worth
assets = liabilities + net worth
Income Statement
summarizes a corporations revenues and expenses for a fiscal period,
compares revenue with cost and expenses
judge efficiency of company’s operation and its profitability
Business Cycle - Expansion
increased business activity, increasing sales, manufacturing, and wages throughout the economy.
Business Cycle - Contracting
declines from its peak
Recessions
mild short term contractions
economy is in a recession when a decline in GDP last for six months or more
Depression
Severe Downturn lasting for six quarters
Expansions are characterized by
- Increased consumer demand for good and services
- increases in industrial production
- rising stock prices
- rising property values
- increasing gross domestic product
Downturns are characterized by
- Rising number of bankruptcies and bond defaults
- higher consumer debt
- falling stock prices
- rising inventories
- decreasing gross domestic product
Leading Indicators
spot checks that reliable predict trends.
Where the economy is going
+ = economic improvement
- = economic contract
Money supply (m2), building permits, average weekly initial claims for state unemployment compensation, average work week in manufacturing, new orders for consumer goods, machine tool orders, changes in inventories of durable goods, changes in sensitive materials prices, stock prices, changes in business and consumer borrowing.
Coincident Indicators
Confirm where economy is
number of hours worked, employment levels, nonagricultural employment, personal income, industrial production, manufacturing and trade sales, GDP
Lagging Indicators
Change after economy has begun new trend and differentiate LT / ST trends.
corporate profits, average duration of unemployment, labor cost per unit of output, ratio of inventories to sales, commercial and industrial loans outstanding, ratio of consumer installment credit to personal income.
Inflation
General Increase in prices,
High inflation reduces dollar buying power
Deflation
decline in prices
occurs during severe recessions when unemployment is on the rise
stagnation
prolonged periods of slow or little economic growth accompanied by high unemployment
stagflation
unusual combination of inflation (rise in prices) and high unemployment (stagnation)
occurs when economy isn’t growing, lack of consumer demand, prices of goods and services still rising.
Defensive industries.
least affected by normal business cycle.
produce nondurable consumer goods such as food, pharmaceuticals, tobacco, utility
During recession and bear markets - decline less
During expansion and bull markets - advance less
involve less risk, lower investment return
Cyclical Industries
Highly sensitive to business cycles and inflation
Produce durable goods, heavy machinery, raw material, automobiles.
During recessions - demand for products decline, consumers postpone purchases.
Growth Industries
if industry is growing faster than the economy as a whole because of technological changes, new products, changes in consumer taste.
growth companies retain nearly all of their earnings to finance business expansion.
typically pay little or no dividends
Special Situation Stocks
Unusual profit potential resulting from non recurring circumstances.
New management, discovery valuable natural resource, patents pending, new product
Keynesian Theory
Active government involvement through fiscal policy
Monetarist Theory
amount of money in the system is major influence on economic performance.
monetary policy
Reserve requirements, discount rate, and open market operations are tools used by monetarist to regulate the economy.
Supply Side Economics
government should allow market forces to determine prices of all goods.
Federal government should reduce government spending as well as taxes.
Balance of Payments
flow of money between the US and other countries
Balance of Payments - Surplus
more money flowing into the country than out
Balance of payments - Deficit
more money flowing out of country than in.
a deficit may occur when interest rates in another country are high because money flows to where it earns the highest return
Balance of Trade
Largest component of the balance of payments.
Exporting - US selling more foreign than consumers importing, have more money out than in. Credit Side
Importing - More import causing money flow out, ultimately lead to deficit
when debits exceeds credits, deficit in balance of payments
when credits exceed debit, surplus exists
Gross Domestic Product (GDP)
a nationals annual economic output of all good and services produced within nation.
Personal Consumption, government spending, gross private investment, foreign investment, net exports.
GNP
Ownership based
US building plant overseas counted to GNP but not to GDP
Exchange Rate
Value of one currency against another
Dollar is Weak - Exports Increase - Surplus
Dollar is Strong - Imports Increase - Deficit
Underwriter Syndicates
Bring securities too market
Primary Offering
One in which the proceeds raised go to issuing corporation
Done in primary (new issue) market
increase capitalization by selling stock (either new issue or previously authorized but unissued)
Public Offering
Regulated Under Securities Act of 1933
Securities are offered and sold to investing public
Utilize services of investment bankers and broker dealers known as underwriters of securities.
Are subject to registration requirements of Act 1933
Securities Act of 1933
require full and fair disclosure in connection with the sale of securities to public.
requires that a new issues, unless exempted, must be registered with SEC before public sale.
All investors must receive detailed disclosure document known as a prospectus prior to purchase .
Private Securities Offering
Assistance of investment banks, sells securities to private investors as opposed to general public.
Are Generally exempt from registration requirements of Act 1933 and also known as exempt offerings
Initial Public Offering (IPO)
First time issuer distributes securities to public.
Issuer ( Company) receives proceeds from investor.
All IPOs are primary Issuer transactions
APO / SPO
any subsequent issue of new shares to public
Follow on Public Offering (FPO)
Another name for SPO or APO
issuing of shares by public company already listed on exchange and gone through IPO process
FPO are popular method for companies to raise additional equity capital in capital markets through a stock issue
IPO - Rules and Regulations
- Bona fide Public Offering
- do not withhold securities
- industry insiders do not take advantage
prohibit member firms from selling a new issue to any account where restricted persons are beneficial owners
IPO - Restricted Person
- Member Firms
- Employee of MemberFirms
- Finders and Fiduciaries
- Portfolio Managers
- Any person owning 10% or more
- any immediate family
aunts, uncles, grandparents are not considered immediate family unless live in same house as restricted person
IPO - De Minimis Exemption
if restricted person has interest in account does not exceed 10%, than they can invest
Secondary Offering
One or more stockholdings in corporation are selling all or major portion of holdings to public.
Proceeds of sale are paid to stockholders rather than the corporation.
Split Offering
an offering can be a combination of primary and secondary offering. these are known as split offering. in a split offering corporation issues a portion of shares offered to the public and existing shareholders off the balance.
Best Efforts Underwriters
calls for underwriters (syndicate) to buy securities from issuer acting simply as an agent, not as principal.
contingent on underwriters ability to sell shares in either a public offering or private placement
not at risk, issuer is.
All or None - AON
underwriter must sell all of shares or cancel underwriting.
any funds collected from investors must be held in escrow
Mini - Max
set floor - minimum amount issuer needs to raise
set max - max amount to raise
once the minimum is met underwriter can expanding to maximum amount of shares issuer specified
Firm Commitment Underwriting
Contract with issuer to buy securities
underwriters are acting as principal rather than agents.
underwriters commit to purchase any unsold shares for syndicate account.
Underwriters are at risk for any shares cannot sell to public, not issuer
Securities Act of 1933
also referred to as
Paper act, full disclosure act, new issues act, truth in securities act, and prospectus act
Act protects investors who buy new issues by
- requiring registration new issues that are distributed interstate
- requiring full and fair disclosure
- issuer makes all info available to judge merit
- criminal penalties for fraud
SEC Registration Statement
issuer must file with SEC
discloses all material information about information and includes prospectus which much be provided to all purchase of new issues
Registration Statement Contains
- description of business
- names of officers, directors, salaries
- amount of corporate securities company own and identify investors have 10% or more
- company’s capitalization, equity and debt
- description how proceeds will be used
- any legal proceedings
Cooling Off Period
after issuer files registration statement with SEC, a 20 day cooling off period begins.
during cooling off period no one can solicit sales of securities.
can use red herring -
Tombstone Advertisements
Bare bones, minimum information provided.
only form of advertising permitted from time of registration statement filed with SEC and effective date of offering
Tombstone advertisements Contains
- Name of Issuer
- Type of Security Being Offered
- Number of Shares to be Sold
- Public Offering Price (Range)
- Name of Underwriting Members
This announcement is neither an offer to sell nor a solicitation of an offer for any of these securities. this offer is made only by prospectus.
Shelf Registration
issue already publically traded can register new securities without selling nay of shares until later.
Once filed - good for two years
allows issuer to sell portion over 3 year period
for securities offered via a shelf registration, a supplemental prospectus must be filed with the SEC before each sale.
Uniform Securities Act (USA)
provides legal framework for the state registration of securities.
require the broker dealers with an office, direct calls or receive calls into state must be registered in that state.
registered representatives must register if solicit business in state
2 exemptions
Isolated nonissuer transactions
transactions occur in secondary market (nonissuer) that occur infrequently.
Unsolicited Transactions
transactions initiated by client not the agent or representative
Coordination
Issuer files with state at same time it files with SEC, registration is effective at time the federal filing becomes effective
Qualification
registration cannot be accomplished by coordination or filling, it must be registered by qualification
issuer respond to any requirements the state specifies .
most difficult way to register
Notice Filing
Under Nat. Sec. Market Improvement act 1996 certain categories, list on national exchanges and investment companies registered under Investment Act of 1940, are deemed to be federal covered.
state do not have jurisdiction over registration requirements.
Prospectus
SEC 1933 requires full and fair disclosure of all material information regarding issuance of securities
Preliminary Prospectus - Red Herring
can be used as prospecting tool, allowing issuers and underwriters to gauge investor interest.
indication of interest is not a commitment to buy because sales are prohibited until after registration becomes effective (effective date)
During Cooling Off Period - underwriters may not
- make offers to sell securities
- take orders
- distribute sales literature or advertising material
During Cooling off Period - underwriters may
- take indication of interest
- distribute preliminary prospectuses
- publish tombstone advertisements to provide information about potential availability of securities.
Indication of Interest
investors declaration of potential interest to purchase some of issues.
is not commitment to buy
Final Prospectus
when registration becomes effective, issuer amends preliminary prospectus and adds information, including the final offering price.
registered representatives may then take orders
Final Prospectus Contains
- Description of Offering,
- Offering Price
- Selling Discounts
- Offering Date
- Use of Proceeds
- Description of Underwriting, but not actual contract
- Statement price may be stabilized
- history of business
- risk to purchasers
- description of management
- material financial information
- legal opinion
- SEC disclaimer
SEC Disclaimer
the SEC does not approve or endorse any offering for sale, they simply clear , or release the offering for sale.
These securities have not been approved or disapproved by the SEC nor have any representations been made about he accuracy or adequacy of the information.
Prospectus Delivery Requirements
final prospectus must be delivered to all buyers in secondary market for specified time.
For IPO
90 days if quoted on Pink or over OTCBB
25 days if quoted over Nasdaq/ exchange
For Additional Issue Offering
if over Nasdaq, prospectus must be delivered in connection with purchase at public offering price. Once complete no obligation to deliver prospectus in secondary market transactions
If non Nasdaq, prospectus delivery requirement period is 40 days.
Equal Access Delivery
investor can see copy of final prospectus by logging on to SEC.
applies to final prospectus and aftermarket prospectus delivery obligations
does not apply to preliminary prospectuses
does not apply to mutual funds
Non Exempt Securities
Securities Required to be registered in order to be sold to public
Exempt Securities
exempt from registration statement and prospectus requirements.
- US government securities
- Municipal Bonds
- Commercial paper and bankers acceptance have maturities less than 270 days
- insurance policies and fixed annuity contracts
- national and state bank securities
- building and loan securities
- charitable, religious, education, nonprofit
- interest in railroad equipment certificates
- banks
Exempt - Banks
only applies to securities bank, not securities of bank holding companies
variable annuities, variable life insurance, variable universal must be registered as securities with SEC
Exempt Transactions
securities offered by industrial, financial, other corporations may qualify from registration statement and prospectus act
Regulation A+ : small and medium corporate offerings
Regulation D: Private Placements
Rule 147: securities offered and sold exclusively intrastate
Regulation S: Offers and sales made outside US by US issuers
Official Statement
Serves as disclosure document and contains material information an investor might need about municipal bond issue.
must be signed by an officer of issuer,
is municipal securities industry’s equivalent of corporate prospectus
Notice of Sale
In regulation A+ offering issuer files an abbreviated notice of sale or offering circular with SEC
investors are provided with offering circular rather than full prospectus
