SIE exam

What type of risk is unique to a specific industry, business enterprise, or investment type?

Nonsystematic risk

Under which of the following circumstances is an investor in a position to acquire stock?

Buy a call, sell a call (The holder of a call has the right to buy stock at the strike price if exercised. The seller of a put is obligated to buy stock at the strike price if exercised)

Options- a premium

the cost of an option contract, expressed in dollars per share of the underlying stock

Options- strike price

The price at which the stock will be bought or sold if the contract is exercised, expressed in dollars per share

A customer believes that ABC's price will go up but does not have the money to buy 100 shares right now. How could the customer use options to profit from an increase in the stock's price?

buy calls, write puts (both are bullish)

A corporation's offer to current stockholders of the ability to purchase a proportionate number of new shares at a specific price for a limited time is called a

right (they usually expire in 30-45 days)

American depositary receipts (ADRs)

issued by banks, represent a specific number of shares of a foreign company, and trade and pay dividends in dollars

Which of the following records must be maintained for 6 years?

Customer ledgers (statements)

While underwriters can assist with preparation and filing, the accuracy and adequacy of these documents is the responsibility of the

Issuing corporation

What institutions serve as depository and clearing facilities?

Depository Trust Company and National Securities Clearing Corporation (most specifically) then carrying and clearing firms can act as these as well.

What is a transfer agent?

(often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates

What is the function of the clearing corporation?

Acting as an intermediary in a trade, examples of these can be a commercial bank, can be a broker-dealer but doesn't have to be

Who is considered a control person (security)

those owned by directors, officers, or persons (which include corporations, trusts, etc.) who own or control 10% or more of the issuer's equity securities (an unaffiliated person would have to own 10% or more of the outstanding shares)

What are the two components of Return on Investment?

Capital gains and income

To expand the overall economy, we want to

buy securities via open-market operations, pushing interest rates down

To meet a Regulation T margin call, a customer would have how long?

settlement plus 2 additional business days (or S + 2)

What is A fully disclosed broker-dealer

one that introduces its business to a carrying firm to clear transactions

The regulation enacted by the SEC to protect the privacy of customer information is known as

Regulation S-P

A market maker that does not honor its firm quote is said to be

"backing away"

A deficit in the U.S. balance of payments can occur if

interest rates in foreign countries are higher than U.S. domestic rates and U.S. consumers are purchasing (importing) foreign goods

The general partner of a limited partnership has responsibility of

Organizing and managing the partnership, assumes unlimited liability, and is responsible for paying all partnership debts

To grow or expand the economy, U.S. fiscal policy should be to

cut taxes (so consumers have more money to spend) and increase government spending for programs and development (to create more jobs)

What is the federal funds rate

the rate commercial money center banks charge each other for an overnight, unsecured loan

The Federal Open Market Committee (FOMC)

buy or sell Treasury securities in the open market. Purchases add money to the economy, making the money available to lend more plentiful, and sales take money out of the economy, making money available to lend less plentiful.

Reports of rising inventories generally occur during which period of the business cycle?

Contraction, due to a lack of consumer demand

Who is exempt from registering with SIPC?

Those who deal exclusively with US Government securities (i.e.-Treasury bonds), exclusively municipality securities, and in redeemable investment company securities

Retail investor

An individual who makes investments such as the purchase of securities for his or her account rather than for an organization

Market maker

Any entity, individual or organization, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security

When the Federal Reserve Board wants to expand (loosen) the money supply, it will

buy Treasury securities from banks in the open market

SROs functioning under the SEC include...

FINRA, MSRB and CBOE

Mild inflation can

encourage growth and stimulate the economy

Discount rate

The rate the FRB charges member banks

Prime rate

The rate commercial banks (Wells Fargo) charges their most creditworthy investors (Lincoln Financial). Prime rate decreases when banks sell securities because there's money money in the market and don't need to charge as much. Raise the rate when they buy securities.

4 stages of the business cycle

expansion (recovery), peak (prosperity), contraction (decline), trough, and then expansion (recovery) again

Securities Act of 1933

(The Paper Act, Prospectus Act, New Issues Act) requires that issuers who want to raise capital by making a public offering of securities to the public, provide full and fair disclosure of all material facts about the company and the securities being offered.

To contract or slow economic growth U.S. fiscal policy should be to

raise taxes and cut government spending for programs and development

Out of the federal funds rate, discount rate, prime rate and broker call loan rate, which is the most volatile?

Federal funds rate because of the overnight offerings (short-term)

The shelf offering (registration) provision under the Securities Act of 1933 allows

issuers to quickly raise capital when needed or when market conditions are favorable.

Types of direct participation programs (DPPs)

real estate, gas and oil, and leasing programs

Long vs short investor

Long (buy), short (sell)

Debenture

a debt obligation of a corporation backed only by its word and general creditworthiness, written promises of the corporation to pay the principal at its due date and interest on a regular basis.

Municipal revenue bonds

bonds issued to finance a project or facility with the bonds' debt service backed by the facility's revenue stream. The revenue might come from rents, tolls, or admission fees, among other sources.

Build America Bonds (BABs)

Taxable municipal securities. Two types: Direct Payment ( provide the municipal issuer with payments from the U.S. Treasury) and Tax Credit, or Issuer (provide the bondholder with a federal income tax credit)

Long 1 XYZ January 50, put at 2. What is the max. potential gain?

"Investor BOUGHT 100 shares of XYZ in January at $50 per share, the premium is $2."

Maximum gain for a long put is calculated by subtracting the premium from the strike price (50 − 2 = 48 per share). One contract represents 100 shares, so the buyer's maximum gain is $4,800 (this occurs if the stock becomes worthless).

Adjusted cost basis problem

see example on page 129 under dividends

When must a suspicious activity report (SAR) be filed with FinCEN after noticing suspicious activity in an account?

within 30 calendar days, the client may not know he is subject to an SAR.

When can corporate accounts trade on margin?

Only when it is not listed as being restricted for doing so.

When securities are held in street name, who is the beneficial owner?

The security is put in the broker-dealers name, but the customer is still the beneficial owner.

What are the requirements of a business continuity plan (BCP) if there is a major business disruption in the firm?

Data backup and recovery (hard and electronic copies), alternate business location for employees, and prompt customer access to funds and securities

What securities can be purchased on margin?

Equities, bonds and warrants. Mutual funds cannot be purchased on margin, but can be used as collateral after being held for 30 days.

Spin-off

When one company sells all of the shares of another it own

Stagflation

When inflation and stagnation occur simultaneously: a period of high unemployment and lack of growth and business activity (stagnation) and high unemployment and lack of growth and business activity (inflation)

Keynesian theory

Government intervention in the economy is a significant force in creating prosperity by engaging in activities that affect aggregate demand.

Deflation

a general decline in prices occurring during severe recessions and the unemployment rate is rising.

Fourth market

market for institutional investors in which blocks of stock trade through electronic communications networks (ECNs) that are open 24 hours a day acting as agents

bullish position are...

long (owning/buying a security in hopes that they can resell it at a higher price later & owning securities that can be converted into rights, warrants and long calls)

bearish positions are...

short

An investor purchased 100 shares of Acme Shoelace stock for $20 per share. Four years later, the investor sold the stock for $28 per share. This investor would report these transactions, on a per share basis, as

$20 cost base, $8 capital gains (cost base: the price paid for the security, capital gain/loss: difference between the cost base and price security sold for later)

A member firm holding stock in street name may vote the shares as it sees fit if

the customer does not return the signed proxy statement by the 10th day before the shareholders' meeting, and if the matters to be voted on are of minor importance.

What records have to be maintained for 6 years?

Blotters, general ledger, stock ledger, customer ledger, and customer account records

Churning

Excess trading in a customer's account, can happen in discretionary and nondiscretionary accounts

What will be found in a trade confirmation?

trade date, account number, description of the security, CUSIP number, commissions (not markups or markdowns), RR's ID number, BOT (bought) or SLD (sold) position, number of shares, yield, price per share, amount paid, and net amount

DERP

Declarate date: When the BOD approves the dividend payment

Ex-Dividend date: one business day before the record date, or two business days after the trade date (regular way settlement), stock must be purchased before Ex date

Record date: when stockholders receive the dividend distribution

Payable date: when the shareholders receive dividend checks (the actual payment)

Interest payments for securities

corporate bond: pay semiannually

inflation

Rising employment due to an increase in demand for goods and services

best efforts underwriting types:

All or none: underwriter sells all of the shares or cancels the underwriting

Mini-max: fixing a minimum/maxiumum (floor or ceiling) dollar amount to be sold in order to move forward with the entire offering

market maker

A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security

Prime rate

the rate charged to their most credit worthy corporate customers for unsecured loans, set by individual commercial banks

balance of payments

the flow of money between the US and other countries

trustee

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services (i.e.-fiduciary appointed to manage assets in a trust)

custodian

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another (i.e.-Custodian of an account of a minor)

Cooling-off period lasts...

20 CALENDAR days, not business, since the SEC has received it

When the FOMC buys treasury securities, interest rates will...

be lowered since the money supply is loosening and there is more money being pumped into the economy

What investment products are NOT covered by the FDIC?

Mutual funds, annuities, life insurance policies, and stocks/bonds.(An annuity with a self-directed IRA or mutual fund with a certificate of deposit are covered)

Types of interest rates charged

Discount rate- FRB

Federal Funds Rate- Large commercial banks to one another for overnight loans of $1M or more (short-term, most volatile)

Prime Rate- Large commercial banks charge to credit worthy investors

Broker Loan Rate- banks charge broker dealers on money they borrowed to lend to margin account customers

Shelf offering registration

when issuers can raise money quickly when needed or when market conditions are just right by selling shares, the transaction does not have to happen immediately, can occur in the primary and secondary offerings

Supply-side theory

Government should allow market forces to determine prices of all goods and that the federal government should reduce government spending as well as taxes.

Access equals delivery rule

Applies to the final prospectus and aftermarket prospectus delivery obligations. It does not apply to preliminary prospectuses. No prospectus can be delivered before the registration date

A strong US dollar leads to..

more affordablility for U.S. consumers to buy more foreign goods, so U.S. imports increase. As more imported goods flow in, more money flows out—deficit.

prime brokerage account

a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers.

Depository trust company (DTC)

serves the custody needs of securities industry participants in the US and a number of foreign countries as well.

carrying firm

or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers.

introducing/fully disclosed

A broker-dealer has a line of business restricted solely to the purchase and sale of securities with trade executions being handled by another member firm, it introduces its customers to a clearing firm

Main purpose of issuer/primary market transactions

hopes of raising capital by selling securities to the investing public

Secondary market transactions are where...

investors buy and sell securities to and from one another

Primary market transactions are where...

Issuers, or someone acting as an issuer, sells securities to the investing public

U.S. consumers are increasing their imports of foreign-made goods, what will likely happen to the GDP?

The GDP will decrease (it is a measure of goods and services produced), so if there are more foreign goods being shipped in, there are less US goods being produced domestically

What is the only form of advertising permitted before the effective date?

Tombstone ads

What is the primary regulatory body for the securities industry?

the SEC, not FINRA

The cost of doing business is closely linked to the cost of money, which is known as

interest

Firm commitment underwriting is when...

Underwriters acting as principals and committing to purchase any unsold shares for the syndicate account

FINRA regulates

all matters related to investment banking (securities underwriting), trading in the OTC market, trading in NYSE-listed securities, and the conduct of FINRA member firms and associated persons

Syndicate

two or more broker-dealers (investment bankers) which work with an issuer through, for example, the registration process in the case of corporate securities and bring the issuer's securities to the market by selling them to investors. There are syndicates that specialize in underwriting municipal bonds. The members of a syndicate are also known as the underwriters or collectively the underwriting group.

A depository

A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction

What type of risk can be reduced through diversification?

Nonsystematic risk (i.e.-business, capital, financial, call, prepayment, currency, liquidity, regulatory, legislative, and political risk)

What type of risk cannot be reduced through diversification?

Systematic risk (i.e.-market, interest rate, reinvestment, and inflation/purchasing power)

Limited partnerships

An investment that allows for a share in the income, gains, losses, deductions, and tax credits of the business entity to pass through to investors

The effect of continually rising retail prices on the investment returns of one's portfolio is best described as

Inflation risk

Long call and long put

call buyer owns the right to buy shares (bullish), while the put buyer has the right to sell the shares (bearish)

Short call and short put

call writer has the obligation to sell the shares (bearish), while the put writer has the obligation to buy the shares (bullish)