Flashcards
Joint tenants in common is an ownership designation where two or more individuals hold fractional interests in an undivided asset. At the death of one of the tenants, the decedent’s interest passes to his or her heirs, not to the other tenants, going through the probate process. The asset may be owned unequally.
Joint tenants with right of survivorship is an ownership designation whereby the entire asset is owned by two or more individuals equally. At the death of one of the tenants, the decedent’s interest passes to the survivor(s), avoiding probate.
FINRA rule 2090, Know Your Customer, requires firms to use reasonable diligence in regard to the opening and maintenance of every account, and to know the essential facts concerning every customer. The know your customer obligation arises at the beginning of the customer-broker relationship and does not depend on whether or not the broker has made a recommendation. Essential facts include those required to; effectively service the customer’s account, act in accordance with any special handling instructions for the account, understand the authority of each person acting on behalf of the customer, and comply with applicable laws, regulations, and rules.
A letter of intent allows the investor to qualify for the reduced sales charge currently by promising to invest an amount qualifying for a breakpoint within 13 months from the date of the letter. The letter is a unilateral agreement; the client is not bound to the terms of the letter. A letter of intent may be back-dated up to 90 days, leaving 10 months going forward. Shares will be held in an escrow account to pay the additional sales charge owed if the client does not fulfill the letter of intent. Reinvested dividends and capital gains distributions do not count toward a letter of intent.
A limited power of attorney grants a third party limited trading authority. It allows a person other than the account owner to place trades in the account, but they cannot withdraw money or securities. Often referred to as a limited trading authorization.
Dealers make the market. Market making involves a firm buying a particular over-the-counter stock for its own account at its own risk (taking a position).
Management companies actively buy, sell and trade the securities that are held in the company’s portfolio according to a prescribed investment objective. All mutual funds are management companies. Management companies may be open end funds, closed end funds, ETFs, diversified or non-diversified.
A margin sale involves the purchase of a security with the use of borrowed money. The Federal Reserve Board sets the percentage of the price that the buyer must provide under Regulation T as initial equity, currently, 50% or $2,000, whichever is greater. To buy securities on margin is risky.
The market maker is the dealer side of broker-dealer. The dealer takes an inventory position in a security, making the market.
The markup is the amount added to the lowest current offering price when the broker-dealer is acting as a dealer and trading with a client.
Matched orders are a form of market manipulation where simultaneous trading of a security is done to create the misleading appearance of active trading. Matched orders are prohibited.
Money laundering involves the conversion of illegally obtained funds into legal tender. There are three stages to money laundering: placement, layering, and integration. Broker-dealers must have Anti-Money Laundering procedures designed to detect this practice.
The money market is the market where short-term debt issues trade. Money market instruments are forms of debt that mature in one year or less and are very liquid. Treasury bills make up the bulk of trading in the money market.
Municipal bonds are debt issued by any district, authority, or government (state, county, city, township, and so on) other than the federal government. The debt is issued at face value, paying a stated interest rate semi-annually. Interest on municipal debt is federal income tax-free, but capital gains are taxable. If the investor purchases municipal debt issued in the same state that they live in then the interest is double-exempt, tax-free at both the state and federal levels.
The MSRB is the self-regulatory agency for the municipal securities industry. The MSRB has rule-making authority but does not have enforcement ability. MSRB rules are enforced by various regulatory agencies, including FINRA and the SEC.
An open end mutual fund is a type of management company that continuously offers new shares. The shares are redeemable and represent ownership in a pool of securities (the fund’s portfolio). The shares are redeemed at their next determined net asset value per share, within seven calendar days. Mutual funds must be sold with a prospectus. The prospectus will describe the costs associated with the fund and the fund’s investment objective.
NASDAQ, or the National Association of Securities Dealers Automated Quotation system, lists the bid and offering prices for the securities that are listed on the NASDAQ. Market makers enter their prices into this negotiated marketplace.
The NSCC is an organization that acts as the middleman between broker-dealers and exchanges.
It is the National Securities Markets Improvement Act of 1996 that created federally covered securities and federally covered advisers.
A negotiable CD is sold by banks to institutional investors. They are money market instruments, with high face amounts. Negotiable CDs are backed by the FDIC, up to $250,000. They are sold at face value and pay semi-annual interest.
The over-the-counter market (OTC) is a negotiated market.
Net capital requirements are how much in cash, and readily convertible into cash, the firm must maintain under customer protection laws. The SEC or state set net capital requirements for broker-dealers and investment advisers.
A new issue is a security that is being sold to the public for the first time. A prospectus is required when selling a new issue.
A no-load fund is a mutual fund that does not impose a sales charge. In a no-load fund, the bid price is equal to the ask.
A non-exempt security must be registered prior to sale.
Nonissuer transactions are secondary market transactions, shareholder to shareholder.
NASAA was founded in 1919 in Kansas. It is the oldest investor protection organization. Its members include securities Administrators from over 65 states, territories, and districts in the United States. The Series 63, 65, and 66 exams are written by NASAA and administered by FINRA.
Notice filing is required at the state level when an issuer that has previously sold securities will be selling more securities across state lines. Registration by notice filing is also called registration by filing. Federally covered advisers are also required to do notice filings in each state in which they do business, paying fees at the state level in addition to their federal fees.
The NYSE is the New York Stock Exchange. The NYSE has a physical trading floor. Historically trading was conducted by the specialists at auction. Today the NYSE is a hybrid marketplace, with trading occurring both electronically and on the floor. The NYSE is the largest stock exchange in the United States.
Under the Uniform Securities Act an offer includes any attempt to solicit a purchase or sale of a security for value.
The offering price of an open-end mutual fund share is net asset value per share plus the sales charge. The offering price is also known as the ask price. When it is a no-load fund the nav per share is equal to the offering price.
Every broker-dealer must have at minimum one OSJ. The OSJ is where the principal works. The OSJ is responsible for the supervision of the activities of the associated persons at the branch offices of the member firm.
An omnibus account is an account opened for an investment adviser or a broker-dealer for the benefit of their customers. The carrying firm does not know the individual customers’ names or holdings.
An open-end investment company is a mutual fund company that is managed according to a specific investment objective and continuously offers new redeemable shares in the primary market.
The option agreement is a form that the customer must sign and return to the broker-dealer within 15 days of being approved for options trading. If the form is not returned, the client will not be able to open any additional positions until it is returned. The options agreement requires the client to abide by options rules, including market position limits and exercise limits.
The Options Clearing Corporation is the guarantor of all listed options. They issue standardized options contracts.
The Options Disclosure Document is a document that must be given to all options trading clients, at the opening of the account. It is written by the OCC. It includes an explanation of the risks and rewards of investing in options.
The order ticket contains the customer’s instructions regarding a securities transaction. Information that is included on an order ticket includes the customer’s name and account number, description of the security, type of order (buy, sell, short), and any price qualifications (such as stops or limits). The order ticket is also sometimes referred to as the order memorandum.
An OTC margin security is a security that does not trade on an exchange but that the Federal Reserve Board has approved for margin trading. The Fed publishes a list of marginable securities.
The OTC market is a negotiated market. Both listed and unlisted securities trade in the OTC market. Municipal and U.S. government securities also trade in the OTC market.
Painting the tape is a form of market manipulation and is prohibited. Painting the tape occurs when a group of investors works together to create the misleading appearance of active trading.
The POP is the public offering price. On a new issue, the public offering price is the fixed price that the new share will be sold to the public in the initial public offering. The POP is listed in the prospectus.
A pre-emptive right is the right of the stockholder to maintain his proportionate share of the corporation by purchasing shares in a new issue in direct proportion to those already owned before the new issue is offered to the general public. Rights are short-term options, good for 30 days.
The preliminary prospectus is the first prospectus that is distributed during the cooling-off period and that includes the essential facts about the forthcoming offering. The preliminary prospectus does not include the underwriting spread, the final public offering price, or the date the shares will be delivered. The preliminary prospectus is often called a red herring.
A preorganization certificate is an indication of interest in the purchase of a new issue. Under state law, the issuance of preorganization certificates is considered to be an exempt transaction, so long as there are no more than ten subscribers in 12 months.
A primary distribution is the sale of a new issue of securities to the general public. A prospectus is required when selling a primary distribution.
The primary market is where brand new shares of stock sold in an IPO trade. Also called an issuer market. Shares trade in the primary market only one time.
In a primary offering the issuer is selling securities to raise capital. The issuer may be selling stock or debt. A primary offering is also called an issuer transaction.
A prime brokerage account is an account set up for an institutional client in which one firm is responsible for providing custody and other services (prime broker) while a different firm is responsible for the execution of transactions (executing broker).
A principal is anyone who is actively engaged in the management of an investment banking or securities business. This designation includes sole proprietors, officers, directors, or partners of a company, or managers of offices of supervisory jurisdiction. The term principal also includes an investment banker who assumes risk by actually buying securities from the issuer and reselling them, it is the dealer side of broker-dealer. The term principal can also refer to an investor’s capital. Additionally, the term principal can be used to refer to the face value (par value) of a bond.