WEEK 1: Market Regulators & Taxation of Securities

Question 1

regulatory authorities

Answer 1

congress, SEC, commodity future trading commission, FINRA, Exchanges

Question 2

Securities and Exchange Commission (SEC)

Answer 2

independent US regulatory agency established to enforce Congressional securities laws

Question 3

Self-regulatory Organizations (SROs)

Answer 3

FINRA, exchanges, MSRB, clearing houses, industry organizations

Question 4

Financial Industry Regulatory Authority (FINRA)

Answer 4

private, non-profit regulatory entity with the mission of safeguarding the investing public against fraud and bad practices

Question 5

Municipal Securities Rulemaking Board (MSRB)

Answer 5

regulatory, non-profit entity with the mission to protect the public who invest in state/local government debt

Question 6

Securities Exchanges

Answer 6

exchanges provide an efficient and transparent platform to trade securities (secondary market)

Question 7

Securities Act of 1933

Answer 7

new securities, full disclosures, prospectus, prohibit fraud

Question 8

Securities Exchange Act of 1934

Answer 8

created SEC, registration broker-dealers, 10k fillings all publicly-traded securities

Question 9

Maloney Act of 1938

Answer 9

established NASD

Question 10

Investment Company Act of 1940

Answer 10

regulation of all investment companies that are open to the public,

Question 11

Investment Advisers Act of 1940

Answer 11

establishes standards for persons deemed to be investment advisers

Question 12

Federal Deposit Insurance Co (FDIC)

Answer 12

government agency that examines and supervises financial institutions. protected assets include traditional bank products for up to $250,000

Question 13

Securities Investor Protection Co (SIPC)

Answer 13

non-proft, member-based entity that insures customer accounts at SIPC-member brokerage firms. protected assets include securities held in street name and up to $500,000

Question 14

Institutional investors

Answer 14

business entities (asset managers, pension funds, insurance companies, mutual funds, etc.)

Question 15

Retail investors

Answer 15

general public who buy/sell securities for own account. non-professional investors (self-directs or advised)

Question 16

“Accredited” retail investors

Answer 16

considered sophisticated retail investors who are capable of informed decisions without regulatory protection. Based on assets (>1M excluding residence) income (200/300k test over last two years with expectation of same in the current year) and/or relevant certifications

Question 17

broker-dealer (firm)

Answer 17

as a dealer, the firm will buy securities for their own accounts and then sell those securities to customers. as broker, they serve as an intermediary between customer and a third party. Apart of DTCC and OCC.

Question 18

brokers (registered representative)

Answer 18

employed by broker-dealer and act in an agent capacity, build a customer book of business, solicit and receive customer buy or sell orders

Question 19

investor advisers vs municipal advisers

Answer 19

investor advisers receive compensation for offering investment advice. municipal advisers are registered professional offering advice about municipal financial products to states, cities, and districts

Question 20

market makers

Answer 20

firm or individual who is willing to buy and sell a particular security on a continual basis and publish bid-ask quotes. profits by buying at the bid and selling at the ask

Question 21

traders

Answer 21

buys and sells securities for customers or own account, do not provide market-maker duties. profit from customer fees or gains on own account.

Question 22

custodians

Answer 22

firm that holds and safeguards customer securities and cash

Question 23

trustees

Answer 23

legal ownership of trust and power to manage assets. beneficiary holds equitable title to property

Question 24

depositories and clearing corporations

Answer 24

process daily security transactions and trades

Question 25

Depository Trust Clearing Corporation (DTCC)

Answer 25

settles stock, bonds, mortgage-backed securities, mutual fund and money market trades.

Question 26

Option Clearing Corporation (OCC)

Answer 26

settles option and future trades

Question 27

transfer agents

Answer 27

keep track of individuals and entities that own company securities

Question 28

issuers

Answer 28

company that offers equity or debt to investors in exchange for the capital contribution

Question 29

underwriters

Answer 29

analyze company issue to determine fair price. intent is to bring security to market at a price that will be filled by demand.

Question 30

private offering

Answer 30

placement to one or small group accredited investors, terms can be customized, exempt from SEC, lack of liquidity

Question 31

public offering

Answer 31

placement to the general public which requires SEC, high costs, 4 types

Question 32

Qualified Institutional Buyers

Answer 32

QIB status necessary in order to buy private placements, restricted stock, below investment grade securities.

Question 33

Follow-on offering (after IPO)

Answer 33

issuing company offers additional set of shares into marketplace, thereby diluting the number of existing shares, SEC registration and prospectus.

Question 34

Content of Prospectus

Answer 34

describes essential information about security issue, company information, underwriters, type of offering, share count, business objective/strategy, etc

Question 35

secondary offering

Answer 35

following IPO, existing shareholder offers large number of shares to the public, typically offered at a discount to market price

Question 36

stock rights offering

Answer 36

allows existing shareholders to purchase additional shares (right), number of shares is in proportion to current percentage of ownership in company

Question 37

primary market

Answer 37

market where new or existing securities are offered to institutional or retail investors for first time

Question 38

secondary market

Answer 38

market in which retail investors and institutional investors trade exchange-listed securities, physical stock exchange or electronic market

Question 39

third market

Answer 39

over the counter, large-block trades between institutional investors and/or broker-dealers

Question 40

fourth market

Answer 40

over the counter trading of non exchange listed securities directly between two institutions, without broker-dealer

Question 41

ordinary income taxes

Answer 41

applied on earned income, passive income, portfolio interest, ordinary dividends

Question 42

capital gain taxes

Answer 42

sale of capital assets, including financial securities and property, and qualified dividends

Question 43

ordinary stock dividends

Answer 43

cash, stock or property paid out to shareholders. dividends paid from profits or retained earnings are taxed as ordinary income

Question 44

qualified companies

Answer 44

dividends from domestic and certain foreign companies that meet the IRS definition. taxed at long-term capital gain rates