Series 7 Key Concepts

free writing prospectus

• any written communication from an issuer or underwriter that supplements the preliminary or final prospectus

• the information included cannot be inconsistent with the final prospectus but can be used to update information that was previously delivered

• ex. copy of a letter outlining company objectives from the CEO

underwriting spread

• as part of this the selling group will purchase shares at a discount: POP - selling concession

• all shares sold in the offering must be sold at the POP and cannot be sold at a discount to any investor

Blue Sky Laws

• issuers are subject to these state securities laws

• each state’s securities administrator enforces these laws within their state

Private placement trading

has the least after-market activity vs primary offering or a secondary offering

Unregistered non-exempt

• registered reps must only recommend to customers stock that is SEC registered or exempt from registration

• recommending unregistered, non-exempt stock is a regulatory violation

account approval

• a designated principal - either a general securities principal or municipal securities principal - must approve a new municipal securities acccount

secondary market joint account

in a municipal secondary joint account, all participants must sell the bonds at the same price

Broker’s broker

• they do not work with the public and cannot participate in new issues

• they cannot maintain an inventory of securities or make a market in a security

• they can work with other broker dealers

political contributions

• up to $250 per election is permitted

• if an MFP makes a political contribution from a joint checking account and is the only individual that signs the check, the entire amount of the contribution is attributed to the MFP

municipal securities solicitation

only appropriately registered representatives or municipal securities principals may solicit municipal securities business

Muni advertising

an advertisement for a new issue muni can show the initial price and yield of the issuance, even if the information has since changed, if it also includes the date of original sale

underwriting scale

a list of all the maturity dates and yields of a bond issuance

total takedown

• equals the additional takedown + selling concession in a municipal underwriting

• same as the underwriting concession in corporate underwriting which equals underwriting fee + selling concession

NIISD

• stands for the New Issue Information Dissemination Service and promotes price transparency and efficient trade reporting in the muni market

• disseminates info in real time and feeds data directly into EMMA

sharing links

• sharing a link to specific content makes that content subject to the firm’s communication compliance standards

online interactive forum

use of this communication method by an RR is a retail communication and must be approved by a principal but each post does not require approval

research with ratings

if a BD distributes research that includes ratings it must both:

1) include a percentage of all its buy, sell and hold recommendations

2) identify which of the subject issuers were provided IB services within the past 12 months

Bond funds w/ volatility ranking

these rankings describe the sensitivity of the fund to changes in market conditions and the general economy, especially interest rates

name change on account

if a customer wants to change the name on their account (after marriage), a registered principal must authorize the change

changing reps

if a client changes to another RR at the same firm, a good first step would be for the new RR to view the client’s account

suitability requirements

if a new customer asks a RR to replicate the portfolio of his friend, the RR should first touch base with the new customer to review the suitability of the investments

new account form

• when a customer opens a new account, the completed new account form must be sent to them within 30 days

• after that, the account information must be updated every three years at a minimum.

numbered accounts

To open a numbered account, the customer must provide a written statement of ownership.

JTWROS VS JTIC

JTWROS accounts offer equal, undivided ownership, whereas TIC accounts permit unequal, divided ownership.

Non-spousal JTWROS account

If an unmarried couple opens a joint account, where they both have ownership, but want statements, checks and confirmation sent to only one of their social security numbers, they must specify this at the time the account is opened

UTMA taxation

For UTMAs income is taxable when received by the minor and any gift amounts over the gift tax exclusion amount are taxable

Trust account

If an individual sets up a trust on behalf of a parent, but wants the account statements to go to them, this would be permissible if they are the sole trustee

Defined benefit plan

An individual with a corporate retirement plan that promises to pay 40% of their salary for 3 years after retirement is enrolled in a defined benefit plan.

Gifting above annual exclusion without triggering tax

A donor who has exhausted the annual gift tax limit and wishes to gift more to that recipient without triggering gift tax could pay for that recipient’s qualifying medical and educational expenses during the year without limit.

finders’ fee

• paid to persons who identify or introduce potential parties for a financing transaction or other business deal

• registration for finders is not required, but unregistered finders can only be paid a flat or hourly fee which should not be tied to the success of the deal and should be paid in cash rather than securities.

Margin risk disclosure

Before opening a margin account, a broker-dealer must provide customers with a risk disclosure document. This information must also be provided to customers annually

dealing with vulnerable investors

• If the elderly customer asks the rep to make an investment that differs from their normal practices, the RR should discuss the situation with their supervisor

• If an elderly investor seems confused when making a trade, the rep should contact the trusted person on the account if the customer has one. If not, the RR should discuss the situation with his supervisor

Customer-specific suitability

FINRA customer-specific suitability rules do not apply to recommendations made for certain institutional accounts. This includes accounts for a bank, insurance company, registered investment company, registered investment adviser, or any person – individual, corporation, partnership, trust, or other – with total assets of at least $50 million.

Suitability for complex products

FINRA defines the following as complex products with heightened suitability concerns: asset-backed securities, equity-linked notes, exchange-traded notes, private placement debt securities, and leveraged ETFs.

networking arrangements

A visiting registered representative must be seated in a location that is visible to and supervised by the host firm.

Accredited investors with licenses

Individuals who hold either a Series 7, 65, or 82 license in good standing qualify as accredited investors. There is no income or net worth requirement.

401(k) rollover

If an individual completes a rollover of their 401(k) and mixes the funds with previous funds in an IRA, the proceeds are ineligible to be put back into a qualified corporate plan in the future. To retain eligibility for a qualified corporate plan, the proceeds from the 401(k) must be maintained in a separate and distinct IRA.

Inherited IRA beneficiary rules

• Non-spouse beneficiaries cannot treat an inherited IRA as their own and generally must withdraw all funds within 10 years of the owner’s death.

• Minor children are an exception and may take distributions based on life expectancy until reaching the age of majority, at which point the 10-year rule applies.

• Spousal beneficiaries may assume the IRA as their own.

transferring a Coverdell

A Coverdell Education Savings Account can be transferred to a family member of the beneficiary who is under age 30.

prohibited IRA investments

• collectibles, life insurance & real estate (for personal use)

• borrowing and lending are prohibited IRA transactions as well

Class F preferred stock

• a type of preferred stock issued only to founders

• they have super-voting rights which allow founders to retain control and avoid hostile takeovers

Class Q common stock shares

common shares associated with an issuer’s dividend reinvestment plan (DRIP).

OTC Link ATS – penny stock trades

• an Alternative Trading System (ATS) and electronic inter-dealer quotation system for penny stocks

• these stocks are unlisted, thinly traded and speculative. OTC Link provides less trading and price information than exchanges.

OTCQX

• Top tier of OTC markets. For established, reputable companies.

• No penny stocks, no shells. Must meet stricter financial standards.

Share class comparison

A company may offer multiple share classes (Class A, Class B, etc.). Class A shares in a company typically may offer super voting privileges of many times the number of votes of Class B.

Qualified Dividends

• If an investor holds a stock for greater than 60 days during the 121- day period surrounding the ex-dividend date, the cash dividends will be qualified and taxed at a preferential rate for investors

• If the investor does not meet this holding period, then the cash dividend is taxed as ordinary income.

• these have a max tax rate of 15%

Nonqualified corporate dividends

taxed at an individual’s ordinary income rate

dividend exclusion

if a company owns common or preferred stock of another company and receives a dividend, 50% of that dividend is tax-free, while the remaining 50% is taxed at the company’s corporate rate

OTCQB (Venture Market)

Middle tier for developing companies that are current in reporting.

OTC Pink (Open Market)

Lowest tier with minimal standards; includes penny stocks, shell companies, and distressed issuers

reverse merger

-also called a reverse takeover, a private company goes public by acquiring a public company

-private foreign companies acquire public U.S. companies in a reverse merger in order to access U.S. capital markets

exchange traded note (ETN)

• an unsecured debt instrument whose return is tied to the performance of an equity security.

• the investor shares in the upside of the equity but not the downside → if there is a decline in price, the investor receives back their principal, with no loss incurred from the equity component (their rate of return is zero percent and not negative)

• credit quality is based on the the credit worthiness of the issuer → the investment bank that structures it and not the underlying asset (common stock)

Currency Risk on Foreign Denominated Bonds

Equity linked notes

Auto-callable yield notes

Convertible bond volatility

Trust Indenture Act 1939

Agency Security Interest Taxation

Tax free equivalent yield calculation

taxable yield x (100% - tax rate)

Taxable equivalent yield calculation

Municipal Bond Tax-Free Rate / (100% - tax rate)