Unit 1 Finra SIE

Purpose of Securities Exchange Commission (SEC)

• Protect investors
• Maintain fair, orderly, and efficient markets
• Facilitate capital formation

Securities Act of 1933

• To ensure that all corporate securities sold interstate were registered
• To give the public the opportunity to make a well-founded judgment before purchasing a security issued by a corporation

Securities Exchange Act of 1934

• Requires the registration of the national securities exchanges and broker/dealers
• Requires publicly held companies to report to the SEC
• Emphasizes the requirements to abide by the antifraud provisions of the Securities Act of 1933
• Provides for the ongoing communications with stockholders, including:
- Annual statement requirements (Form 10-K annually and Form 10-Q quarterly)
- Voting rights and the forwarding of proxies

Example of Material Events

• Change of CEO or other significant officer positions
• Change of auditing firm
• Declaration of a stock split
• Declaration of a merger or tender offer
• The purchase or sale of significant company assets

Self Regulatory Organizations

Have the power to create and enforce
industry regulations and standards through the establishment of rules designed to promote fair and equitable markets.

Finra

(Financial Industry Regulatory Authority)

• Oversees OTC market trading
• Governing body for all broker/dealers.
• For the test, called the appropriate SRO

Formally known as NASD (National Association of Securities)

Municipal Securities Rule making Board

Protect investors, state and local government issuers of municipal bonds and public interest

Chicago Board Options Exchange

Improve quality of the options markets to benefit all participants, and partner closely with customers to provide a better trading experience

Department Of The Treasury (IRS)

• An agency of the Department of the Treasury
• Responsible for the collection of taxes and enforcement of tax laws

The North American Securities Administrators Association (NASAA)

• Consists of state administrators, met in 1956 to formalize a general guide that each state could use to model its securities laws.
• This guide became the Uniform Securities Act.
•Not a regulatory agency, and has no state or federal powers, but it does have influence with state legislators and regulatory authorities.

Federal Reserve

• Founded by Congress in 1913.
• Its purpose is to regulate the economy by establishing the monetary policies of the government, regulate banks, maintain stability of the financial system, and provide financial services to the U.S. government.
• One of its most visible tasks is to set the discount rate and influence the federal funds rate.

Securities Investor Protection Act of 1970

• A federally chartered nonprofit corporation designed to protect customer securities accounts at broker/dealer firms that go bankrupt.
• Coverage is $500,000 of which no more than $250,000 in cash per separate “customer”
• Single and joint accounts - each are fully covered
• Account holder becomes a creditor for amounts exceeding SIPC coverage.

FDIC (Federal Deposit Insurance Corporation)

Deposits up to $250,000 per depositor, IF
institution is a member firm. Covered accounts include:
• Checking accounts
• Savings accounts
• Certificates of Deposits (CDs)
• Money market accounts
• Cashier’s checks and money orders issued by the failed bank

Investors

• Person or entity who commits capital
with the expectation of financial returns.
• Variety of objectives including growth,
income, or preservation of capital.
• Objectives in mind include income, net worth, risk tolerance, time horizon, and other information that is relevant to an investment recommendation

Brokers/Dealers

• Compensated per trade
• Must register with FINRA and be approved by the SEC
• Must register in states where they conduct business
• Representative must register in each state where they conduct business
• Must provide current balance sheet to customers upon request

Investment advisers (Investment Advisers Act of 1940)

• Compensated for advice (% of assets under management)
• Must maintain a brochure with all required disclosures
• Must register with the SEC or individual states

Broker (ABC= Agent, Broker, Commission)

• Acts as broker, or agent, when trading on behalf of a customer
• Charges a COMMISSION

Dealer

• Acts as dealer, or PRINCIPAL, when trading for or from its inventory ➔ risk
• Charges a MARKUP/MARKDOWN

• Transactions may have a commission or a markup, but never both!

• Dealer, principal, markup/down, inventory, risk

Municipal Advisors

• Registered with a broker/dealer or investment adviser
• Provides advise on municipal products and offerings

Issuer

Corporation or municipality who raises money through a securities offering

Underwriter

Investment banking firm who assists issuer with offering

Market Maker

Type of registered broker/dealer that trades a specified security from inventory at its published price

Traders

Buy and sell securities to fill customer orders

• Must choose with which market maker they will trade.
• Not market makers themselves, but execute trades with market makers who give quotes to securities investors on Nasdaq, in the Pink Sheets, or on the OTCBB.

Custodian

Entity, usually a bank or broker/dealer, charged with the physical possession and control of the assets in the pension plan.

Roles of Custodian

Responsible for the safekeeping and protection of the assets from theft, but makes no decision regarding the investment of the funds

Trustee

Person in charge of making investment decisions for the pension plan, and is considered a fiduciary.

Clearing Corporation

Compare transactions, clear the matched trades,
and prepare instructions for automated settlement of those trades.

Depositories

Hold (carry) the securities certificates in bulk form for their participants and maintain ownership records of the securities

Primary Market

Where securities are created and sold for the first time to raise capital for the issuer
• Public offering price
• Initial public offerings (IPOs)
• Additional public offerings (APOs)

Secondary Market

Indicate that the securities are
being traded for at least the second time (outstanding securities)
• Bid/ask
• Trading

Third Market (Nasdaq InterMarket)

Trades in listed securities (listed on an exchange) that are executed in the OTC market rather than on an exchange.

• Large blocks – 100,000+ shares
• Trades executed by InterMarket market makers
• Formerly called Third Market, and still on the exam
• Now officially the Nasdaq INTERMARKET.

Fourth Market

Direct electronic trading between institutional investors -- no B/D involved

Gross Domestic Product

Is the value of all the goods and services produced within a country’s economy. It is the generally accepted measure of an economy and its growth or contraction.

Gross National Product (GNP)

Attempts to measure the value of goods and services produced by a country.

Consumer Price Index (CPI)

Measures the prices of a basket of goods and services at the retail level (Indicator of Inflation)

Producer Price Index (PPI)

Measures the prices of goods (not services) at the wholesale level

Inflation

General rise in the level of prices due to the law of supply and demand (Too many dollars competing for too few goods, prices of those goods will rise)

Disinflation

Prices are still rising, but at a lower rate than
previously reported

Deflation

Decrease in prices.

Stagflation

Inflation in a stagnant economy

Rising prices as proven in CPI

No GDP growth

Monetarist Theory

Believes it is most effective for Fed to influence the direction of economy by (controlling money supply and influencing interest rates)

Keynesian Theory

The government must increase spending to motivate the economy.

Supply-Side Theory

Is the reverse of the Keynesian theory — it
proposes that tax cuts and less government spending generate a healthy economy

Federal Reserve System/Fed

Governors (7)
• Appointed by President
• Approved by Senate
• Staggered 14-Year Terms

How many federal reserve banks are there

12

Monetary Policy

Controlled by the Federal Reserve Board and consists of controlling the money supply.

Fiscal Policy

Controlled by the president and Congress and consists of government spending and taxation

Investment Bankers (underwriting)

Broker/dealer firms that help corporations and
municipalities raise necessary capital.

Short Term Underwriting

Usually under 270 days, corporations may bring the security to market itself or have a local firm sell the security through the money market sector of the securities market

Long Term Underwriting

These investment bankers are also called underwriters, and usually form what is called a syndicate of other brokers/dealers to help sell the issue to investors

Purpose of forming syndicate with brokers/dealers

• Larger Sales Force to Distribute Issue Quickly
• Reduces Risk

Syndicate is made of two groups

• The underwriter or co-underwriters (including a lead underwriter)
• The selling syndicate

Syndicates Lead Underwriter

Broker/dealer firm in the syndicate that is managing the underwriting:
• Facilitates the Offering/Distribution (“Running the Book”)
• Works with Issuer
• Sets Offering Price
• Financial Commitment/Risk

Selling Syndicate

Is composed of one or more broker/dealers that are willing to commit themselves and large sums of money to bringing the securities issue to market

Selling group member

Made up of all of the other broker/dealers that are not financially committed to the underwriting, yet are able to sell a portion of the issue (no financial commitment risk)

Municipal Advisors (Series 50)

Any person, other than a municipality or
employee of a municipality, that provides advice to or on behalf of a municipal entity with respect to municipal products or the issuance of municipal securities.

Initial Public Offering

First time a company offers it shares

Secondary Offerings

Distinguished from a primary offering in that the proceeds of the sale of securities go to the shareholder instead of the issuer

Follow on Offerings

• A company can only have one initial public offering
• Selling additional shares is a subsequent primary offering and is referred to as a follow-on offering

Shelf Offerings

• Continuous or Delayed Offering
• 3-Year Maximum

Firm Commitment

• Involves the underwriter’s promise to sell all of the new issue

• Underwriter buys the issue from the issuer and then brings it to market to sell through the syndicate

• Any shares that are not sold to the public remain in the inventories of the syndicate members.

Best Efforts

Underwriting for a new issue is when the underwriter(s) are not required to buy any shares they do not sell. Any shares not sold to public go unused

All or None

The syndicate must sell the entire issue or the underwriting is cancelled because the entire amount of securities (i.e., any stocks or bonds) is not sold

Minimum-maximum

The issuer sets both a minimum and a maximum
amount of securities that must or can be sold.

Shelf Offering/Registration

This is a new issue that is coming to market. The issuer may feel the time is not quite right to have the new shares sold; however, the issuer wants the issue to be registered and ready to go when the company needs the money.

Material Information

Is defined as any information that a reasonable
person would want to know in order to make an informed decision regarding the purchase of the security.

Prospectus

Primary disclosure document

Provides all material information about the company offering the security (business model, history and qualification of officers and directors, and risks involved with investing)

Official Statement

Most detailed financial analysis of the municipality. It includes:

• The purpose or use of the bonds
• How the funds will be used
• Call provisions
• Other information pertinent to the bond and desired by potential investors

Program Disclosure Document

Document that provides disclosures regarding the program to which it references, similar to a prospectus or offering statement (Municipal fund securities (529 plans), Wrap fee programs, Bank deposit sweep programs)

Preregistration phase

• Background of the Issuer
• Background of Officers/Directors/Insiders
• Amount of Capital to be Raised
• Use of Capital
• Risks

Ends on Sec filing date

Registration Statement

Large, comprehensive document with many hours and the expertise of lawyers and accountants needed to compile it

Cooling Off Period

SEC Reviews Registration Statement. Minimum Length is 20 Days

If information is lacking or unclear, the SEC may send the issuer a deficiency letter requesting additional information, which freezes the cooling-off period until the issuer supplies the requested information

Preliminary Prospectus (Red Herring)

Is a means of creating interest in an issue during the registration of the issue.

Post Registration Period

The effective date is the date on which the SEC releases the securities for sale. The effective date ends the cooling-off period.

Final Prospectus

• The prospectus discloses the public offering price.
• Discloses the underwriter’s compensation (called the spread) and may contain a purchase application.
• On the front cover of every prospectus is the SEC disclaimer

S a of 1933 Exemptions

• Securities issued or guaranteed by the U.S. government or its agencies
• Securities issued by municipalities and U.S. territories
• Securities that mature in 270 days or fewer (e.g., commercial paper, banker’s acceptances)
• Issues of $5 million or less (Regulation A offerings)
• Private placements (Regulation D offerings)
• Securities sold intrastate (Rule 147 offerings)
• Nonprofit organization offerings, including securities of religious, charitable, and educational institution

Private Placements

There is no limit on the number of accredited investors who may purchase the issue. However, there is a limit on the number of retail investors. A maximum of 35 retail investors may purchase a Reg D issue

Blue Sky Laws

Each state has its own securities laws.

Uniform Securities Act

A template of model securities laws that was developed. States are encouraged to adopt this to promote uniformity (Series 63 or 66)

Notification (Filing)

When a state gets notified that a filing is at the federal level

Coordination

Larger national or regional interstate securities offerings that are required to register at both the federal and state levels.

Qualification

Used for intra-state offerings where the issuer is not filing with the SEC

Corporate Charter

Provides a description of the company’s objectives, articles of incorporation, by-laws, and other material information at the time of incorporation

Capitalization

Indicates the company’s sources of funds for long-term use.

Corporations Equity

Composed of shares of preferred stock and shares of common stock that are issued by the company

Shareholders

Owners of the company, and the number
of shares owned by an investor constitutes the amount of ownership the investor has in the company

Purpose of common stock

Establish ownership and to raise money to
do business.

Board of Directors control:

• The distribution of shares
• How many shares should be issued and outstanding in the hands of investors

Investors buy common stock in one of two ways

• When it is issued by the corporation (the company receives the money from the
sale)
• Through the securities market (the seller, usually another investor or a broker/dealer, receives the money from the sale)

Reasons for purchasing common stock

Benefit financially, in two ways:
• Current dividends
• Future share price appreciation

Voting rights

Authorized Shares

The maximum number of shares of stock that has been authorized for issuance by the corporate charter (must be registered with SEC)

Issued Stocks

Authorized stock that has been issued to shareholders. Either outstanding stock or treasury stock

Treasury Stock

Shares that were previously issued and subsequently repurchased by the corporation to reduce the amount of outstanding stock

Does not have the right to receive dividends and right to vote

Reason’s a company would buy back shares:

• To distribute for stock option plans
• For use in acquisitions or takeovers
• To increase earnings per share, which should increase the market value of the outstanding stock (an advantage as compared to cash dividend)

Outstanding Stock (Issued Stock - Treasury Stock)

Shares that are owned by investors

Have been issued and sold by the company to either employees of the company or members of the public.

Par Value

Bookkeeping term used to show the dollar value
assigned to common and preferred stock on the balance sheet.

Common Stockholders Rights

• The right to receive dividends
• The right to elect the board of directors and to vote on major management decisions
• The right to maintain their proportionate ownership in the corporation
• The right to transfer ownership in their stock (sell or give their stock to someone else)
• The right to receive copies of the corporation’s annual report
• The right to inspect the financial records of the corporation

Statutory Voting

Allows a stockholder to cast one vote per share for each directorship to be elected

Cumulative Voting

Allows stockholders to combine all of their votes and vote in any manner they choose

What shareholders vote on

• Board of directors
• Changes in equity structure
• Stock splits
• Mergers & acquisitions
• Not on dividends