Series 7 Exam

terms & concepts

Free writing prospectus

written communication from an issuer or underwriter that supplements the preliminary/final prospectus, cannot be inconsistent with it

Underwriting spread

Selling group will purchase shares at a discount, however investors will purchase at POP

Reg D records

Must be kept for 3 years

Secondary Market Joint Account

All participants must sell bonds at the same price in this account

Broker’s broker

Do not work with the public, cannot maintain inventory, make market, or participate in new issues of securities. Anonymity is another “pro” of this player.

Muni Advertising

May include initial price and yield of issuance, provided that the date of original sale is also included.

Underwriting scale

List of all maturity dates and yields of a bond issuance

Total takedown

Muni: additional takedown + selling concession

Underwriting concession (corporations): underwriting fee + selling concession

NIISD (New Issue Information Dissemination Service)

Promotes price transparency and efficient trading reporting in muni markets, with real time date feeding into EMMA

Research and ratings

If BD distributes research/ratings, a % of its buy/sell/hold recommendations and list of issuers that provided IB services w/in last 12 months must be included

Name change on an account

Authorized by a registered principal

New account form

Completed account form must be sent within 30 days and updated every 3 years

Numbered account

To open this type of account, a written statement of ownership must be provided by the customer

UTMA taxation

For this account, any surplus income over the previous contributions is taxed when received by the minor, and any gifts over the gift tax exclusion amount are taxable

Defined benefit plan

Retirement plan in which the employer promises to pay a specified benefit to the employee at retirement

Finder’s Fees

Paid to persons who identify/introduce potential parties for a financing transaction/business deal. Registration for finders isn’t required, but limits their financial reward to hourly pay/flat fee untied to success of the deal

Margin risk disclosure

BD must provide this risk disclosure at account opening and annually thereafterI

Immediate action if customer dies

Open orders are immediately cancelled, the account is frozen

SPIC

Protects customers from BDs. It covers securities accounts if the brokerage firm fails, helping return the customer’s securities and cash. Same coverage as FDIC

Coverdell Account

Education savings account type, with a maximum of $2,000 contributed every year until beneficiary reaches 18 yrs old. Must be fully used by age 30 or transferred to another eligible family member or they will be taxed as ordinary income with a penalty

Prohibited Investments in IRAs

Collectibles, life insurance, real estate for personal use

Cumulative preferred stock

Pays dividends in arrears to shareholders before any common stock dividends are paid

OTCQX

Top tier of OTC markets for established, reputable companies

Qualified dividends

Stock held for 61 days during the 121 day period surrounding the ex-dividend day (essentially preventing wash sales) will receive dividend preferential tax rate of 15-20%. The same is true for corporations with a max of 15% tax rate

Dividend exclusion

If a company owns CS or PS of another company and receives a dividend, 50% of that div is tax free and the other 50% is taxed at the corp. rate

OTCQB

OTC’s venture market or middle tier. Designed for developing companies that are current in reporting

OTC Pink

Lowest tier OTC market, includes penny stocks, shell companies, and distressed issuers

Reverse Merger

Private company goes public by acquiring a public company E

ETN

Unsecured debt instrument whose return is tied to the performance of an equity security. Investor participates in upside of the investment but receives back principal if investment declines in value. Maximum loss is a 0% return. Credit quality determined by the issuer not the underlying stock

ELN

structured notes that derive value from performance of an equity

Trust indenture act of 1939

Requires corporate bond issuances of more than $50MM to be issued with a trust indenture

Limited tax GO

Bond secured by a specific tax at a specified maximum rate. Risker than a comparable GO bond backed by full taxing authority of the municipality.

Certificate of participation

Type of muni lease Rev bond where investors participate directly in the lease payments

Feasibility study

Analyzing a revenue bond’s likelihood that the project will generate enough revenue to pay the debt service on the bonds

Flow of funds

Bond with a net revenue pledge pays expenses from gross revenue first, then subtracts debt service from net revenues. Important to revenue bonds

Additional bonds test

Assesses whether an issuer has the financial strength to issue more bonds, given it already has outstanding debt. Important for revenue bonds

BABs Build America Bonds

Taxable muni bonds where the fed subsidizes 35% of the interest expense to bondholders

Muni notes’ use in money markets

Because they mature <1 year, TANS, BANS, and RANS are purchased for tax-exempt money market funds and offer investors liquidity combined with low rate of tax-exempt interest

VRDOs

Long term muni securities with interest rates that periodically reset and include a put feature to tender at par

ARS

Long term securities with interest rates reseting through periodic auctions, with risk of auction failure

Ex-legal bonds

For a muni bond to be “good delivery” without the legal opinion, it must be marked ex-legal

CAB (Capital Appreciation bonds)

Zero-coupon municipal bonds that pay no interest and accrete in value until maturity. Often used to delay debt service, especially in early stages ofa project

Compound accretion

Term for valuation process of a zero-coupon bond, which includes inital principal plus interest accrued and compounded to maturity

Leveraged ETFs

Securities seeking to return a multiple (2x, 3x) of return of related benchmark

Inverse ETFs

Securities seeking to return a multiple (2x, 3x) of the opposite of the benchmark they are related toI

Interval funds

funds allowing investors to redeem a percentage of their shares (5-25%) at specified intervals, usually quarterly, at the fund’s NAV with provided notice. Shares can be directly purchased anytime and are sold with a prospectus. They carry high fees (up to 3.5%) and with limited liquidity, only appropriate for LT investing. One of two types of close end funds that redeems shares

BDC (Business Development Company)

Closed-end investment company that invests in small, developing, or financially troubled businesses. Rather than trading shares on the secondary market, one of the two types of close-end funds that redeems shares

MF/UIT Investment goals

Mutual funds, close-end funds, and UITs named in association w a security must invest at least 80% of assets consistent with the name

MF majority vote

If a MF wants changes to its fundamental investment policy, majority vote of outstanding stock is required

Taxation of fund transactions

Tax treatment of MF cap gains is based on holding period of the mutual fund, not how long the shareholder holds the fund. I.E. if XYZ holds ABC stock for >1 yr, the capital gains distributed automatically become long term for all.

MF exchanges

Exchange of MFs within the same fund family is a taxable event

Mutual fund taxation on capital gain

Investors can chose FIFO, LIFO, or average cost basis as a form of specific share identification method for their taxation

Section 1035 exchange

A tax-free exchange is permitted from a variable life insurance policy into a variable annuity. (annuities into life insurance are not permitted exchanges)c

Combination annuity

Includes features of both a fixed annuity and a variable annuity. Divided between the general and separate accounts.

Variable annuity benefits

No IRS imposed limits, lifetime income, no RMDs, and death benefit exists in the accumulation phase

Ratio writing

Options position where an investor writes more than one call option for every 100 shares of stock.

Covered Call

Sell a call on a stock you own. Objective is to earn a premium income on a stable market

Covered put

Sell stock short and write a put, unlimited risk

Collar strategy

Long stock, long put, short call combo. Used to limit downside risk while capping upside potential

Synthetic long stock

Mirrors risk and reward of underlying stock without actually purchasing the shares via buying calls and selling puts on the same security

Yield base option

European style, option where the underlying instrument is a debt security's yield, rather than the price of the bond itself. Important to consider with yield and price moving opposite directions

contrary exercise advise

If a client wanted to exercise a contract that wouldn’t be automatically exercised/don’t want to exercise a contract that normally would be

ACATS (Automated Customer Account Transfer System)

System that external transfers or transfer to another firm take place through

Syndicate letter

The agreement among underwriters serving as a contract among the members of the underwriting syndicate establishing the syndicate's terms and conditions

State and Local Government Series (SLGs)

Special Treasury securities sold by the United States Treasury Department to states, municipalities and other local government bodies. The interest rates and maturities of can be tailored to comply with limits prescribed by the Internal Revenue Code for escrow accounts in connection with the issuance of refunding bonds.

Hedgefund regulation

1. They are exempt from the Investment Company Act of 1940

2. Large hedge funds must usually register with the SEC

Arbitration $ amounts and appearances

≤ $50,000 → 1 arbitrator + simplified + no personal appearance required

$50,001–$100,000 → 1 arbitrator + regular procedures + personal appearance if requested

> $100,000 → 3 arbitrators + regular procedures + personal appearance if requested

Variable annuity advertising

Communication must clearly state the type of product, and hypothetical illustrations must show maximum return of 12%

RILA (Registered Index Linked Annuity

“Buffer annuity” is like an equity indexed annuity, but losses may occur outside the buffer limit. (i.e. a 20% index dip results in a 15% loss for a client with a 5% buffer)

Sort combination

Investor sells both a call and a put with different strike prices and/or expiration months

Short combo strategy

An options strategy that involves selling both a call and a put on the same underlying security with the same strike price AND OR same expiration dateLike a short straddle, this is a neutrality play, with the investor short on volatility. Also called a short strangle

Short straddle

An options strategy that involves selling both a call and a put on the same underlying security with the same strike price and same expiration date. Used when investor does not expect any change in the market

Spread order ticket

Single trade ticket used to enter both sides of an options spread together. This single trade must be entered at the limit price.

Spreads

In a spread, the investor is buying and selling calls or buying and selling puts on the same underlying stock. The spread refers to the difference between the premium paid for one option and the premium received for the other.

EPIC FX (Exporters Purchase Inverse Currency

Domestic exporters (who receive foreign payment) buy put options to hedge against a decline in the foreign currency’s value

IPEC FX Importers Purchase Equivalent Currency

Foreign importers (who pay in USD) buy put options to hedge against a decline in their own currency’s value relative to the dollar

Spot rates v put premiums

If spot rates for foreign currencies increase, the premium on foreign currency puts would decrease

Put interrupting holding period

If you own a stock and at a later date purchase a put on the same stock, the holding period is interrupted until the put is sold/expired

Increase in put/call ratio

As the number of put options traded increases, bearish sentiment rises

Maximum underwriting compensation for DPPs

The maximum underwriting compensation paid on new DPPs is limited to 10% of gross proceeds from the offering

Recourse loan

Loans that permit the lender to continue to collect any additional amount owed on debt once collateral has been taken (can include wage garnishments/issuance of a lien)

Non-recourse loans

Loans that permit the lender to only collect the collateral and no further legal action for any amount more than the collateralBa

Barrier funds

Structured financial products with returns based on if an underlying index breaches a performance level (i.e. a 20% barrier would protect from a 20% decline)

These are not investment companies, structured notes are issued by financial institutions and are not regulated by ‘40 Act. Vulnerable to credit risk, limited liquidity (typically held to maturity), and subject to Securities Act of ‘33

Z-tranche

Zero coupon CMO (collateralized mortgage obligation, for an investor wanting to invest in RE and who doesn’t need the income)

Muni bond fund dividends

Muni pays out net investment income to investors via tax-free dividends (because they represent tax free interest income), though any capital gains distributions are taxable

Short against the box

Shorting against the box is when an investor opens a short stock position on a stock they already own, eliminating risk of investor’s long position and can be used to defer taxable gain

Inflation hedges

TIPs, gold, stocks, variable annuities, and RE

Net price

A stock quoted this way includes price and commission/mark up

Dealer comparison

When a dealer receives a comparison for a trade it doesn’t recognize, the dealer will send the other party a DK (don’t know) notice

Record keeping standards

Most customer records: 3 years

Customer complaints: 4 years

MSRB complaints & non listed: 6 years

deceased clients: 6 years after the account closes (not the death itself)

MSRB advertisements: 4 years

MOC (market on close) order

This order myst be submitted by 3:55pm for NASDAQ securities

Trade halt

A quote only period will begin, where a firm can accept/enter customer orders, but will not execute until halt is liftedS

Spinning

Underwriter allocates high-demand IPO shares to individuals who can direct securities business to the underwriter

Consolidated Tape

The reporting facility for transactions executed on the NYSE. Trades in NYSE securities must be reported to the Consolidated Tape within 10 seconds of execution.

Grey market trade

Involves quasi-legal trading of a security that is not listed on a stock exchange or quoted on the OTC pink.

SIPC for margin accounts

Under SIPC, margin accounts are covered based on the net equity position (not the market value or the debit)

Pattern day trader

Pattern day trader’s minimum equity is $25,000

Level 1-3 halts S&P 500

Level 1 - trading halt triggered at 7% decline in the S&P 500

Level 2 - trading halt triggered at 13% decline in the S&P 500

Level 3 - trading halt triggered at 20% decline in the S&P 500

Order tickets

Must include if the order is discretionary, solicited, or unsolicited.

DRS Direct Registration System

Enables shareholders to hold stock on the records of a transfer agent in book-entry form instead of holding a physical certificate