Flashcards
A principal transaction is the dealer side of broker-dealer. When acting as a principal the firm is buying and selling for its own account. Also referred to as a market maker. Engaging in principal transactions involves risk for the firm. When acting as a dealer with a client the firm will charge a mark-up or mark-down.
A private placement is a type of securities transaction in which very specific rules are followed. A private placement allows for the legal sale of unregistered non-exempt securities. SEC Regulation D is the federal private placement rule. Regulation D allows for the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors. Under the Uniform Securities Act, the definition of a private placement is stricter. Under state law, a minimum of 10 offers can be made in a 12-month period of time, and no commission may be paid.
A prospectus is a legal document that must be given to every investor who purchases registered securities in a primary offering. It describes the details of the company and the particular offering.
A proxy is a power of attorney given by a stockholder to another person authorizing the holder to vote in place of the stockholder.
The Prudent Investor Act of 1994 sets forth the guidelines for fiduciaries to follow when purchasing securities. It built upon Modern Portfolio Theory replacing the Prudent Man Rules.
A public appearance is when a registered representative engages in a seminar, webinar, interactive electronic forum, radio or television interview, or other public speaking activity.
The public offering price is the price at which open-end mutual fund shares are sold to the public. In a fund that charges a sales charge the POP is equal to the net asset value per share plus the sales charge.
A quotation is the price of a given security. A quote consists of two prices, the bid, and the ask. The ask is the least a dealer will sell at, the client buys at the ask. The bid is the most the dealer will buy at, the client sells at the bid.
Red flags are warning signs. Broker-dealers must have anti-money laundering programs that are alert for red flags. Privacy requirements also require financial services firms to look out for red flags related to identity theft and misappropriation of client funds.
A red herring is a preliminary prospectus used for informational purposes only. It cannot offer a security for sale. Also known as a preliminary prospectus.
Redemption of a mutual fund share is the return of a client’s interest (net asset value per share). By law, open-end mutual fund shares must be redeemed within seven calendar days.
A registered options principal is responsible for approving new clients who desire to engage in options trading. This approval must be in writing.
Broker-dealer firms must have at minimum two registered principals unless the firm is a sole proprietorship (then it can have only one). Series 24 is the license to be registered as a general securities principal. Firms must also have at least one individual registered as a financial and operational principal (series 27). If the firm offers options trading it must also have at least one registered options principal (series 4). It is the registered principals of a firm that are responsible for managing and supervising the daily activities of the firm.
The term registered representative refers to the individual who works for the broker-dealer in the securities or investment banking business. Registered representatives are registered with FINRA. At the state level, these same individuals are referred to as agents.
The registrar is the entity that keeps track of the issuer’s outstanding securities.
When an issuer has not sold securities across state lines before they must follow the rules of registration by coordination, under the Uniform Securities Act. Registration by coordination is a form of dual registration, with a full registration statement being filed at both the state and federal levels. The security may be sold in a state when it is cleared for sale federally by the SEC.
When an issuer has sold securities before and will be selling more securities across state lines they must follow the rules of registration by notification, under the Uniform Securities Act. A full registration statement must be filed with the SEC, but at the state level, a short form of registration may be filed (notice filing). The new issue may be sold in a state when it is cleared for sale federally by the SEC.
Registration by qualification is used when an issuer will be selling new securities in one state only, and intrastate offering. The full registration statement is filed with the Administrator. The security may be sold in the state when it is cleared for sale by the state. A security that has been registered by qualification may only be purchased by residents of that state for the first six months. After six months, the issue is freely saleable across state lines.
Before securities can be offered to the public, they must be registered under the Securities Act of l933. The statement that discloses all the pertinent information about the corporation that wants to make the offering is the registration statement. This statement is submitted to the SEC in accordance with the requirements of the l933 Act.
Regular way settlement is a type of delivery that allows for one full business day following the trade date for the broker-dealer to deliver the securities and for the buyer to pay. Regular way settlement is set by FINRA under the Uniform Practice Code. All securities (stocks, corporate bonds, Government bonds, and options settle T + 1 business day.
SEC Regulation D is the federal private placement rule. A private placement is a type of securities transaction in which very specific rules are followed. A private placement allows for the legal sale of unregistered non-exempt securities. Regulation D allows for the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors.
Title V of the Gramm-Leach-Bliley Act (GLBA) required that the SEC and certain other federal agencies adopt rules relating to the privacy of nonpublic personal information of consumers and customers. Regulation S-P includes the securities industry’s privacy rules.
Regulation T is the Federal Reserve Board regulation that governs the amount of credit brokerage firms and dealers may extend to clients for the purchase of securities in a margin requirement. Regulation T sets the initial margin requirement at 50% of the market value or $2,000 whichever is greater, not to exceed the value of the securities being purchased. Regulation T also governs cash accounts by establishing the latest that a customer can pay. A customer purchasing securities must pay no later than by the end of the third business day following the trade date (when regular way is T + 1).
The Federal Reserve Board regulation governing loans by banks to brokerage firms to refinance clients’ margin accounts.
In a margin account, the client pledges their securities in the margin account as collateral for the loan in a process called hypothecation. Rehypothecation occurs when the broker-dealer pledges those same securities again, this time to the bank, for the loan that the broker-dealer will then offer to the client in their margin account.
Rescission is the act of buying back securities from a client that were inadvertently sold in violation of state law. To rescind the contract is to make it go away. When offering a client the right of rescission, the registered representative must offer to pay what was paid for the security, plus interest (as set by the Administrator), minus any income received. An offer of rescission is good for 30 days. If the client does not take up the registered representative’s offer, after 30 days the client may no longer sue the representative.
Under FINRA rules a retail communication is a written communication (including electronic) that is distributed or made available to more than 25 retail investors in any 30-calendar day period. Retail communications are subject to the principal pre-approval requirement under FINRA rules.
A retail investor is an individual or a noninstitutional client.
Rights, also called stock rights, are stock purchase options issued to existing stockholders only. The right is an option to purchase a company’s new issue of stock at a predetermined price that is less than the price the shares will be offered to the general public. An investor who exercises the rights will maintain proportionate ownership (preventing dilution). The right is issued for a short period of time, normally for 30 days, with the option expiring after that time. Rights may also be sold in the secondary market.
In a rights offering the existing shareholders are given the right to buy additional shares at a fixed price to maintain their proportion of ownership (prevent dilution). A right is a short-term option that is good for 30 days.
The rules of conduct are the rules adopted by FINRA to guide members in the observance of high standards of commercial honor and just and equitable practices of trade. They are FINRA’s code of ethics.
The secondary market, also called the non-issuer market, is where securities are traded from one investor to another (shareholder to shareholder). Listed securities trade on an exchange. The three major exchanges include the NASDAQ Stock Market (a negotiated marketplace), the NYSE (a hybrid/auction marketplace), and the BATS Exchanges (a negotiated marketplace). Non-listed securities trade in the OTC marketplace, such as the Pink List or the OTCBB (Over the Counter Bulletin Board).
The Securities Act of 1933 is a federal statute enforced by the Securities and Exchange Commission regulating interstate commerce of new securities that are being offered for sale to the public. The Securities Act of 1933 requires the filing of the registration statement and the delivery of the prospectus. It is commonly referred to as the Paper Act.
The Securities and Exchange Commission was created by Congress to protect investors. The SEC enforces all federal securities laws including the Securities Act of l933, the Securities Exchange Act of l934, the Trust Indenture Act of l939, the Investment Company Act of l940, the Investment Advisers Act of l940, and others. There are five commissioners on the SEC, appointed by the President and confirmed by the Senate. No more than three of the five can come from the same political party. They may not engage in any securities transactions during their time on the Commission.
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.
Selling away is a prohibited practice. It involves a registered representative engaging in the securities business away from the employing broker-dealer.
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.
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 65 exam is the investment adviser representative examination.
The Series 66 exam is the Combined State Law exam, allowing an individual holding a Series 7 to become both an investment adviser representative and an agent in one exam.
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.
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).
Social media includes online platforms that allow communications between financial services professionals, firms, and their clients. Social media platforms include Facebook, Instagram, TikTok, LinkedIn, and the firm’s website. Social media must comply with all applicable securities regulations.