Flashcards
The Securities Exchange Act of 1934 is the federal legislation that established the Securities and Exchange Commission (SEC). Its purpose is to provide regulation of securities exchanges and the over-the-counter market and to protect investors from unfair and inequitable practices. The SEA requires the registration of broker-dealers and registered representatives. The SEA is commonly referred to as the People Act.
The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation created by an act of Congress to protect clients of brokerage firms that are forced into bankruptcy. Membership is composed of all brokers and dealers registered under the Securities Exchange Act of l934, all members of national securities exchanges, and most FINRA members. SIPC provides customers of brokerage firms that go broke coverage of up to $500,000 for their cash and securities held by the firm (coverage of cash is limited to $250,000). SIPC does not cover issuer insolvency or market risk.
The definition of the term security is quite broad. It does not include fixed insurance products or commodities. An investor that purchases a security expects that by the management of a third party, they will have more money over time. The term security includes any note, stock, bond, investment contract, debenture, certificate of interest in a profit-sharing plan or partnership agreement, certificate of deposit, collateral trust certificate, and all options.
A self regulatory organization is an organization that has rules of conduct that it expects its members to follow. There are many SROs within the securities industry. FINRA is an SRO. All broker-dealers must be members of FINRA. Registered representatives are registered with FINRA. The MSRB and the CBOE are also SROs.
To sell is the act of conveying ownership of a security for money or other value.
A sell stop is an order that exists on the books of the specialist below the current market price. If a transaction occurs at the trigger price, the stop becomes a market order to sell. Sell stops can be used to limit a long position’s downside risk or they can be used to lock in profit when the inventory position for the stock is lower than the current market price.
Selling dividends is a prohibited practice under FINRA rules. It involves the practice of inducing the sale of investment company shares or common stock by use of an impending dividend. A registered representative must explain that the amount of the dividend is included within the market price and that the dividend is taxable to the investor. The market price will decrease by the amount of the dividend as of the ex-dividend date, resulting in a lower cost for the client. If the registered representative does not explain how dividends work it would be a violation of the rule that prohibits the selling of dividends.
Bonds and preferred stocks are senior to common stock regarding income distributions and repayment of principal upon liquidation of the company, they are commonly referred to as senior securities.
When purchasing a variable insurance product the insurer must keep the money contributed separately from the general investments of the insurance company. These accounts are called separate accounts. Separate accounts of life insurance companies must register as investment companies under the Investment Company Act of l940 and are set up as either unit investment trusts or open-end investment companies. There is no guarantee as to the rate of return in a separate account. The insured or the annuitant has the risk in a separate account.
A serial bond issue is one that is issued at once but with differing maturity dates. Most municipal debt offerings are serial bond issues.
A series of options are options of the same class with the same expiration date and the same exercise price.
The Series 24 exam is the general securities principal examination. A person holding this license is responsible for the supervision of the broker-dealer’s business.
The Series 26 exam is the investment company and variable contracts products principal examination. The Series 26 is a limited principal examination, overseeing only those individuals who hold a Series 6 license.
The Series 6 is the investment company/variable products top-off exam. Holding an SIE and a series 6 license allows an individual to sell mutual funds and variable products.
The Series 63 is the agent’s license examination covering state securities laws, the Uniform Securities Act. Most states require a registered representative to hold a series 63 license, in addition to a product license.
The Series 7 is the general securities registered representative exam. An individual holding an SIE and a series 7 license can sell all types of securities, except for commodities futures.
Different from a serial bond, a series bond is issued at once and matures all at once.
The settlement date is the date on which payment is made for the purchase of a security. FINRA regular-way delivery requires settlement by the next business day following the trade date (T + 1). FRB Regulation T requires settlement by the third business day following the trade date (allowing for two additional business days).
Share identification is an accounting method whereby the shares selected for liquidation are identified in any order. Specific share identification is often the most beneficial for the investor.
With a shelf offering one registration statement is filed and the issuer is allowed to sell shares over a two-year period of time.
To short an option is to sell an option. To short a stock is to sell shares that the investor does not own, but has borrowed from the broker-dealer. Shorting a stock is only allowed in a margin account.
A short-term capital gain or loss occurs when the securities being sold have been held by the investor for 12 months or less. Short-term capital gains are taxed as ordinary income.
A simplified employee pension plan is a qualified plan for a self-employed person or small business.
sinking fund is the money set aside to retire an outstanding bond issue.
A one-participant 401(k) plan is sometimes called a Solo 401(k), Solo-k, Uni-k, or a One-participant k. The one-participant 401(k) plan isn’t a new type of 401(k) plan. It’s a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan. With a solo 401(k) the business owner wears two hats: employee and employer. Contributions can be made to the plan in both capacities.
A specialized situation portfolio is a fund in which the investments are concentrated in little-known ventures involving high financial risk, with the hope of a high capital gain in a relatively short time. Special situation funds meet the investment objective of speculation.
The term specialist is a historical term for the person found on the floor of the NYSE who was in charge of maintaining a fair and orderly marketplace for a company’s stock. Phased out in 2009, the “Specialist” was replaced by the “Designated Market Maker” (DMM). DMMs are still required to maintain a fair and orderly marketplace on the floor of the NYSE, but now they also have market maker obligations and are required to provide capital (inject liquidity into the marketplace).
A specialized portfolio offers diversified investments that are concentrated in one industry, field, or geographic area. Sometimes called a sector fund or a geographic fund. These funds are higher than normal risk.
An investor who is engaged in speculation is taking on higher than normal risks in the hope of a higher than normal return. Speculation is an aggressive investment strategy.
The spread is the difference between the bid price and the ask price. The narrower the spread the more active the issue. The spread is sometimes called the inside market.
The market as a whole is the S&P 500. The S&P 500 is comprised of 500 large-cap stocks. It is a market capitalization weighted index.
In a rights offering it is the standby underwriter that is waiting in the wings, ready to sell the shares not subscribed to by existing shareholders to the general public. The underwriter receives a fee for each share that is purchased.
With statutory voting, each share of stock entitles a stockholder to one vote per director.
Stock represents ownership in a corporation. Stock may be either common or preferred. Stock is equity and is purchased by investors looking for appreciation.
A stock certificate is a document stating the number of shares of stock owned by the holder of the certificate.
A stock dividend is a dividend paid to common shareholders in the form of additional stock in the corporation rather than in cash. Preferred stock cannot pay stock dividends, only common stock can pay a stock dividend.
A company will choose to split its stock to pull the market price down. After a stock split, an investor will have more shares, at a lower market price per share. A stock split or reverse split does not change the amount of money the investor has in the stock.
Straight preferred stock is preferred stock with no special features. Straight preferred stock is also called non-cumulative preferred.
The strike price on an options contract is the exercise price. It is the price the owner of a call can buy shares at. It is the price that the owner of a put can sell shares at.
Subchapter M is a part of the Internal Revenue Code setting out the tax treatment of a regulated investment company. It is sometimes referred to as the conduit theory or the 90% rule.
A subordinated debenture is a debenture that is junior to regular debentures in a corporate liquidation.
FINRA rule 2111 is the suitability rule. The suitability rule requires that a firm or associated person have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. The customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation. A broker’s recommendation is the triggering event for the application of this rule. The three main suitability obligations are reasonable-basis, customer-specific, and quantitative suitability.
The support is the lowest the security’s price has been over time. Support is used by technical analysts.
A suspicious activity report must be filed any time a firm or its registered representatives notice a client whose behavior is commercially illogical. SARs are filed with FinCEN electronically within 30 calendar days of the initial behavior.
A syndicate is a group of broker-dealers that is formed to handle the distribution and sale of an issuer’s security. The syndicate typically has one firm managing the underwriting effort. Each member of the syndicate is then assigned the responsibility for the sale and distribution of the issue. The syndicate is bound by the terms of the underwriting agreement.
The investment’s tax basis is the amount of money in the investment that has already been taxed. Also called cost basis or just basis.
The tax equivalent yield is the rate of return that a taxable bond would have to earn to be equal to the yield found on a municipal security.
A TSA is an annuity program available to employees of certain non-profit organizations and public school systems. In a TSA part of the employee’s income is excluded from current taxation and used to purchase an annuity. The employee pays taxes when he begins to draw the annuity. Tax-sheltered annuities are also referred to by the IRC, 403b.
Tenants in common is a form of joint ownership. Each owner has an undivided interest in the property but all the interests need not be equal. There is no right of survivorship. When one of the tenants dies, the interest passes on to the decedent’s estate, going through the probate process.
A tender offer is an offer from the issuer to the securities holders to buy the securities for cash or for cash and securities.