SIE Exam- Unit 1 (Knowledge of Capital Markets)

SEC-

Securities and exchange commission is the securities industry's primary regulatory body.

Which act created the SEC?

The securities exchange act of 1934

What is the purpose of registering with the SEC

If you conduct securities business with either customers or broker dealers; you must be apply and be approved for registration with the SEC

Additional role of the SEC

It regulates all exchanges and trading markets

Under the Uniform Securities act, registrations must be renewed how frequently?

Annually

The statement "These securities have not been approved or disapproved nor have any representations been made about the accuracy or the adequacy of the information" is found where

Commonly known as the Securities and Exchange Commission's disclaimer, the SEC mandates that it be found in the final prospectus.

What happens a when a broker dealer does not comply with SEC rules

Censure, limits on activities, functions, or operations.

Suspension or revocation of registration

Fine

Self Regulatory Organizations (SROs)

Function under SEC's oversight. Each SRO is accountable to the commission for enforcing federal securities as well as supervising securities practices within assigned jurisdiction (FINRA, CBOE, MSRB)

FINRA

Financial Industry Regulatory Authority- More or less they regulate all matters related to investment banking (securities underwriting, trading in the OTC Market, trading in NYSE-listed securities and conduct of their member firms

Purpose and objective of FINRA

1. Promote the investment banking and securities business

2.promote high standards of commercial honor

3. Provide a medium for communication among its members and between members, the govt/other agencies

4. Enforce rules to prevent fraud and manipulative practices

CBOE

Chicago Board options exchange- regulates all matters related to trading standarized options and related contracts listed on that exchange

MSRB

Municipal securities Rulemaking Board- Regulates all matters related to the underwriting and trading of state and municipal securities. Regulates but does not enforce, that's where other SROs like FINRA come in.

Dept of treasury

Oversee the collection of taxes. This dept is administered by the secretary of the treasury

IRS

Internal Revenue service- Collects taxes and enforces tax laws

NASAA

North American Securities Administrators association-

This is a voluntary association whose members provide their unique insight to the SEC and SROS as they move forward in the rulemaking process.

Advocates for pro-investors policies, offer resources to its communities.

Federal Reserve board

Consists of 12 regional federal reserve banks and hundreds of national and state banks that belong to the system.

What is the role of FRB

The federal reserve board

1. acts as an agent of the U.S treasury

2.Regulates the U.S money supply

3.Supervise the printing of currency

4. Make sure members are compliant with federal regulations

Which act created the SIPC

Securities Investor Protection Corp. was created under the securities investor protection act of 1970

SIPC

Securities Investor Protection Corp- is a nonprofit membership organization. protects the clients of brokerage firms that are forced into bankruptcy.

Basic coverage under SIPC

No more than $500,000 per separate customer not per account. Of that $500,000 total SIPC covers no more than $250,000 in cash

What happens if a broker dealer fails and a customer with claims that are in excess of SIPC coverage

The customer becomes a general creditor of the broker-dealer

Why was the FDIC created

It was created in response to widespread bank failures and massive losses to bank customers. Federal Dept. insurance corporation

How are the funds for this agency created? (FDIC)

Premiums are paid by all participating institutions

In the event of the failure of a member financial institution, what does the FDIC do?

A customer deposits and loans of the failed institution are sold to another institution. This way they become new customers of that institution

The FDIC provides deposit insurance up to how much?

up to $250,000 for each deposit ownership category in each insured bank

What does the FDIC cover?

Covers traditional types of bank deposit accounts (checking, savings, money markets, CDs and self directed IRAs)

What is not covered FDIC?

Investment products, mutual funds, life insurances, stocks, bonds, annuities

Investor

Someone who provides money or resournces for an entreprise such as a corporation

Retail investor

an individual who makes investments such as the purchase of securities for their own personal accounts

Institutional Investor

An entity (bank, insurance company, hedge funds etc) that pools money to purchase securities and other investment assets

Accredited investor

Define as someone that has 1 million or more net assets including house.

Can also be someone that has an income of $200,000 ($300,000 jointly) for the past two years and is set to make that again this.

OFficer or managers are also considered accredited investors

Broker-Dealers

Institutions or person, that buy securities, investment products(mutual funds, stocks, bonds) for their selves or for their customers

What does the membership agreement of a B/D explain?

It explains what lines of business the broker-dealer undertakes. Some are referred as full-service offering all types of investment products..

Carrying (Clearing Firm)

Carries the customer accounts and accepts funds and securities from customers.

Clearing firm rank among the larger B/D.

They can do it all, trade execution, clear and settle transaction, handle all back office tasks such as sending statements and transactions confirmation.

Why is the line of business for Carrying (Clearing firm )considered risky

This is due to the fact that it is handling customers funds and securities. Thus it requires to maintain levels of net capital higher than other firms that do not accept custody of funds/security

Fully Disclosed firm (Introducing firm)

This firm can solicit customers but it cannot hold their funds/securities. they introduce the customer to a clearing (carrying firm) that will be in charge of doing this. So more or less the clearing firm acts as the introducing firm's back office.

Prime brokers

special group of services that many brokerages give to clients with more complex financial needs. The services provided under prime brokering include securities lending, leveraged trade executions and cash management, among other things. While other firms called executing firms handle all trades placed by the customer.

Key advantage of a prime brokerage

It provides a client to trade with multiple brokerage house while maintaining a centralized master account with the client's cash/funds

Investment Advisors

Anyone who gives investment advice for compensation. Thanks to the investment advisor act of 1940

Municipal Advisor

Anyone who provides advice on/for municipal entities

Issuers of securities

They offer its securities for sale to the investing public for the purpose of raising capital

Underwriters

group of broker-dealer or investment that work with an issuer to bring its securities to the market and help them sell it to the public

Market makers/traders are ____.

Any individual that is willing to accept the risk of holding securities in their own account to trade and then liquidate them.

Custodian

A person or financial institution that has charge or custody of securities or property of another. the custodian is the person or financial institution that operates the account as a fiduciary for the minor who is the beneficial owner.

Trustee

Legally appointed to make all investment decisions for someone

Transfer agents

a person or company who keeps track of stock ownership for a corporation. Prepares a list of stockholders who should receive dividends, issue meeting notices and perform other tasks for the corporation

Clearing Agencies

firms that clear/process transactions between clearing member firms. Includes depositories.

DTCC (Depository Trust and Clearing Corporation)

World's largest securities depository, provides custody services for virtually all securities restricted securities (transfer/ownership restrictions)

OCC (Options Clearing Corporation)

Clearing corporation for all options

Market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. Can be physical or electronic

Some expectations of markets

Basic regulations, transparent prices, cost/fees

Capital market

A stock or a bond market where firms can raise money for investment purposes

Primary market

a market in which new issues of securities are offered to the public. Known as issuer transactions

Secondary Market

the market in which previously issued securities are traded among investors

Third market

exchange-listed stock traded OTC primarily by institutional investors

Fourth Market

Where big institutional investors (pension funds, insurance companies, mutual funds, etc.) trade directly through electronic communications networks (ECNs)

Federal reserve board affects the money supply through what three tools?

1.Through open market operations (buying/selling govt. securities)

2.Changes in the discount rate

3.Changes in reserve requirements

Monetary policy

Is what the type of policy the FRB uses when it wants to influence the money supply

Fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

-Federal spending

-Money raised through taxes

-Federal budget deficits or surpluses

Why is fiscal policy considered the least efficient when it comes to solving short term problems?

Due to the length of the political process, that comes about from enacting policies,

Business cycles are

Expansion, Peak, contraction, Trough.

Mild short term contractions

Called recessions, and they are considered a recession if the GDP has been dropping for 2 or more quarters.

Trough

Business activity has stopped declining and levels off

How is a depression defined

Severe downturn lasting for six quarters or more.

leading indicators

key economic variables that economists use to predict a new phase of the economy

Leading Indicator Examples

Money supplies, new order for consumer goods, stock prices

coincident indicators

economic indicators that confirm where the economy is

Coincident Indicators Examples

wages, GDP, unemployment levels, personal income

lagging indicators

Economic signs that change after the economy has turned a new trend, and confirms the new trend.

lagging indicators example

corporate profits, average duration of unemployment

Inflation

Increase in prices. Mild inflation can stimulate the economy, whereas high inflation reduces the dollar buying power and therefore hurts our economy.

Deflation

Prices go down. Periods of deflation is when unemployment is on the rise

Stagnation

Little to no economic growth; accompany by period of high unemployment

Staglation definition

-unemployment: up

-interest rates: up

Defensive Industries

those that are least affected by the stage of the business cycle and include utilities, consumer staples, and basic services. food, pharma, tobacco

cyclical industries

industries with above-average sensitivity to the state of the economy. Auto industry, steel and metal, durable goods.

Growth Industry

An industry that is growing faster than the economy as a whole as a result of technological changes, new products, or changing consumer tastes. Tech and compyter

Special situation stock

Unusual profit potential resulting from nonrecurring circumstances. Example new ceo, new board

Keysenian economics

Govt. fiscal policies affect the health of the economy

Monetarist Policy

the amount of money a government prints and puts into circulation and the basic interest rates the government sets. Federal reserve influences the economy.

supply-side economics

Government is less involved in regulating the economy so supply will keep the economy successful ex: cut taxes so people have more money to spend

Balance of payment

Flow of $ from US to other countries.

Surplus in the balance of payments

The excess of credits over debits in the current and financial accounts, or autonomous transactions.

deficits in the balance of payment

more money flying out of the US than in

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

GNP (Gross National Product)

total dollar value of goods & services produced by a nation at home or away

Offerings

The issue or sale of securities to the investing public

Underwriters

A group of b/d that work with the issuing company to register the security and bring the securities to the market for sale to the investing public.

Primary offering

The corporation sells shares. Proceeds go to directly to the issuing corporation. This can happen at any time and for any amount as long as it doesnt exceed the charter

Public offering

a primary market issue in which new securities are offered to any investors who are willing and able to purchase them. More regulation than private offering. Regulated by the securities act of 1933

Purpose of Securities Act of 1933

Require companies to provide detailed, truthful information about originally issued securities. As well as include detailed prospectus to the investors before purchase

Private securities offering

With the help of investment banks, issuing company offers the sale of securities to the private investors. No need for registering the goods with the SEC

Initial Public Offering (IPO)

the first time a company issues stock that may be bought by the general public

Subsequent public offering

Issuing of new shares to the public after IPO, Can also be follow up public offering (FPO), Additional public offering (APO)

Restricted person from buying IPO

Member firms, employees of member firms, portfolio managers, underwriters, and anybody acting as fidiciuary of those underwriters or member firms employee

Secondary offerings

When stockholders decide to sell their shares of stocks to the public.

Split offering

A public offering of securities that combines aspects of both a primary and a secondary offering. A portion of the issue is a primary offering, the proceeds of which go to the issuing corporation; the remainder of the issue is a secondary offering, the proceeds of which go to the selling stockholders. Syn. Combined distribution. Related item(s): primary offering; secondary offering.

For nonlisted and non-Nasdaq securities, a prospectus must be provided to all those who purchase securities for how many days after the effective date?

For nonlisted and non-Nasdaq securities, the prospectus delivery requirement period in the aftermarket is 40 day

For Nasdaq or exchange listed, a prospectus must be provided to all those who purchase securities for how many days after the effective date?

25 days

Best Efforts Underwriting

the type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility