SIE EXAM 2024

Federal Reserve Board

Founded on December 23rd 1913, to oversee financial panics. Independent of direct political influence. Federal Reserve Act was passed to stabilize prices, maximize employment, moderate long term interest.

FINRA vs MSRB

FINRA oversees brokerage firms and their associated persons.
MSRB- regulates the municipal securities market including dealers, municipal advisers, and issuers.
Municipal Securities Rulemaking Board

Structure of the Fed

The Board of Governors/The Federal Open Market Commitee/ Twelve Regional Federal Reserve Banks/Member banks throughout the United States. Made up of the Federal Reserve Board FRB which is appointed by the US president and 12 regional Federal Reserve Banks which supervise private commercial banks.

FOMC (Federal Open Market Committee)

a body that consists of the seven members of the board of governors and the twelve presidents of the regional Federal Reserve Banks. Not all of the twelve presidents have a vote at any given time.

Department of the Treasury

Collects, borrows, spends, and prints money

Roles and Responsibilities of the FED

Strengthening the US standing in the World Economy/ Maintaining a balance between the private interests of banks and the centralized responsibilities of the government, including supervising and protecting the credit rights of consumers/ ensuring the financial system's stability and mitigating systemic risk within the financial markets.

Federal Deposit Insurance Corporation (FDIC)

an agency created in 1933 to insure individuals' bank accounts, protecting people against losses due to bank failures. Extends to checking and saving accounts, money market accounts, Certificates of Deposit, and IRAs but not annuities, mutual funds, life insurance policies, bonds or stocks. Covers up to 250,000 dollars per individual.

State (Blue-Sky) Regulation

Established under the Uniform Securities Act (USA) - Each state has the authority to impose additional requirements for both issuers and financial intermediaries. Requires that private investment funds register in their home state and every state where they conduct business.

North American Securities Administrators Association (NASAA)

Established in 1919 in Kansas, 67 securities administrators from all over North America are responsible for licensing securities firms, investment professionals, and other tasks. Protects clients who seek investment advice or deal with securities such as a small business who wants to review financial offerings .

Securities Act of 1933

The first major law regarding the sale of securities. It required that companies register their securities sold to the public with the SEC and that investment bankers must provide full and accurate information related to new securities issues to potential investors. Stipulates that companies must provide a description of the security being offered, description of the company's business and properties, and Financial statements that have been certified by independent accountants.

Securities Exchange Act of 1934

An act that regulates the trading of securities such as stocks and bonds in the secondary market. Purpose was to promote financial transparency and accuracy while reducing the incidence of fraud and market manipulation. Established the SEC led by five commissioners appointed by the president. These five are split into divisions including division of trading and markets, investment management, corporation finance, enforcement, economic and risk analysis.

Investment Advisers Act of 1940

Legislation governing who must register with the SEC as an investment adviser. Prohibits advisers from engaging in front-running and churning practices. Entities that are excluded are Banks and bank holding companies, Lawyers, accountants, engineers, and teachers, Brokers and dealers, Publishers, Government securities advisers, credit rating agencies, family offices.

Securities Investors Protection Act (SIPA)

Non-profit organization established by Congress to safeguard the customers of brokerage firms that become insolvent by utilizing multiple bodies including the SEC, self-regulating organizations, and the securities investor protection corporation (SIPC).

SIPC Coverage

$500,000 per customer of which no more than $250,000 in cash per account. (only the equity in margin accounts, not the full market value). Some examples include Joint Accounts, Corporate accounts, Individual accounts, Trust Accounts, Roth IRAs and Traditional IRAs, Accounts held by a legal guardian or estate executor.

Penny Stock Reform Act of 1990

regulates the solicited sales of certain low-priced securities to potential new customers. A penny stock is a stock that trades below 5$ a share or stocks that don't meet the NYSE official listing standards.

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)

The act aims to increase the liability penalties to all involved parties for insider trading.

The Investment Company Act of 1940

Its chief aim is to safeguard investors by making them aware of the risks of purchasing and holding securities.

Telephone Consumer Protection Act of 1991

A federal law that places restrictions on telephone solicitation of business.

Financial Industry Regulatory Authority (FINRA)

a self-regulatory organization and the largest non-governmental regulator of securities firms in the US; registers and provides qualification exams to industry professionals, writes rules for trading, educates the investing public, provides trade reporting, resolves disputes between customers and firms

Important FINRA rules

Rule 2266 - SIPC Info, this rule requires SIPC member firms to provide written notice to customers about SIPC protections.
Rule 2269- Disclosure of Participation or Interest in Primary or Secondary Distribution, rule requires firm to disclose any participation or interest in a primary or secondary distribution of securities to customers.
Rule 5250- Payments for Market Making, prohibits firms from accepting payments from issuers or promoters.

Uniform Practice Code (UPC)

It standardizes practices, customs, trading techniques, and operational and settlement issues as much as possible. Such as Trade terms, payment and delivery, dividend and interest payments, reclamations, exchange of confirmations.

Code of Procedure (COP)

FINRA's formal procedure for handling trade practice complaints involving violations of the Conduct Rules. The Department of Enforcement is the first body to hear and judge complaints.

Municipal Securities Rulemaking Board (MSRB)

A self-regulatory organization that regulates the issuance and trading of municipal securities. The Board functions under the Securities and Exchange Commission's supervision; it has no enforcement powers. Related item(s): Securities Acts Amendments of 1975.

Chicago Board Options Exchange (CBOE)

regulates all matters related to trading standardized options and related contracts listed on that exchange. Does not trade US and European Stocks or International exchange products directly.

Investors

Can Invest in mutual funds, bonds, stocks, ETFs, foreign exchange, precious metals like silver and gold, and real estate.

Venture Capitalists

invest in start-ups and small businesses. Seek an equity stake in return for their investment and help grow the company

Angel Capitalists

Provide capital to entrepreneurs and start-ups when the risk is high, i.e., in the early stages

Institutional Investors

Large organizations - such as pension funds, mutual funds, and insurance companies - that invest their own funds or the funds of others

Personal Investors

invest their own capital in stocks, bonds, mutual funds and Etfs, seeking higher returns than traditional savings accounts or CDs. NOT PROFESSIONAL INVESTORS

Broker

A broker carries out orders for clients. They help investors buy and sell securities.

Dealers

Market intermediaries that always stand ready to buy from sellers at the bid (low) price and sell to buyers at the ask (high) price, thus taking the bid-ask spread as the per-unit profit. Examples of Broker-Dealers include but not limited to E-Trade, TD Ameritrade, and Charles Schwab.

Investment Advisors

person/group making investment recommendations or doing security analysis for fee thru direct management of assets or written publications

Municipal Advisor

person or firm that provides advice on behalf of a municipal entity or official with respect to municipal financial products or issuing municipal securities

Primary Roles of Municipal Advisers

Marketing of Bonds- Creating suitable offering documents for the type of issuance and providing support with a bond rating.
Approach for Sale- Assisting the issuer in determining, the transaction's optimal sales method and selecting underwriters.
Project Feasibility- Creating financing alternatives for the issuer's assessment, considering present and future capital requirements,
Selling of a Bond- Compiling information and evaluating bond conditions on comparable bonds to assist in pricing.
After-sale- Creating a closed deal with important information, option pricing calculations, and ongoing disclosure filings.

Issuers and Underwriters

Companies, organizations, or governments that sell securities to raise capital are known as issuers. Issuers hire underwriters, also called investment banks, to advertise and arrange the sale of securities. The underwriter may purchase entire IPO issues and sell it to investors.

Traders and Market Trustees

A board of directors is a group of individuals appointed or elected to oversee an organization's management. They serve as the organization's governing body and safeguard stakeholders' interests in all management decisions .

Transfer Agents

an institution, such as a company or bank, that a corporation designates to manage investor financial records and monitor account balances

Depositories and Clearing Corporations

Established in 1999 its primary services include clearing and settlement services for the financial markets.

State and Local Governments

They regulate transactions, enforce property rights and contract law rules, stabilize markets, and provide institutional framework.

Foreign Governments

Impact cross border commerce in the region by decreasing import and export duties and encouraging investment in international trade. Negatively when countries have disagreements, there could be complete stoppage of trade or embargoes.

Equity

Equity securities are financial instruments that represent ownership in an entity, such as a company, partnership or trust. Gives the holder some control over the company through voting rights. In the event of bankruptcy, holders of equity securities only receive residual interest after all obligations to creditors have been paid. Not typically described as "payment in kind.

CMOs

Collateralized Mortgage Obligations (CMOs) contain a pool of mortgages that are grouped together and sold as an investment. Are Sold by financial Institutions as fixed income investments offer regular payments. Can Be affected by factors such as prepayments, credit risk, and fluctuating interest rates.

CDOs

Collateralized Debt Obligations are divided into tranches, each of which reflects a different level of risk. Senior tranches have the lowest risk because holders of these tranches will be paid first from the corresponding collateral in case the loan proceeds to default. CDOs are packaged and in turn rated by credit rating agencies which allows Wall Street to sell them to investors. CDOs contain a range of loans such as car loans, credit cards, commercial loans, and even mortgages.

Debt Securities

Includes government and corporate bonds, CDs, and collateralized securities (like CDOs and CMOs), typically provide the holder with regular interest payments and repayment of the principal loan amount.

How a Broker Functions

acts as an intermediary between sellers and buyers in a transaction. When working for an agency, brokers will execute on behalf of clients and receive a commission for their services. When working individually, brokers will execute and buy and sell orders for clients to earn a commission

How a Dealer Functions

buy and sell securities from their inventory and earn a profit when the sale is higher than the purchase price. The difference between the two is known as a markup or markdown. Principal dealers trade securities from their inventory, which means they take the risk on the transaction. In contrast, a broker acts as a middleman who facilitates the buying and selling without taking on the risk.

Investment Banking (50%)

The largest department of a Securities Firm. Issue new debt and equity securities for corporations. Also aid in selling securities and facilitate mergers, acquisitions, reorganizations and also broker trades for institutions and private investors.

Research (12.5%)

helps support other departments by giving insight into data, salespeople, and underwriters as well as giving traders help with pricing and selling securities. Includes technical analysts, economists and research analysts. Can be divided into institutional and retail.

Investment Management 12.5 %

Devises long term and short term strategies for disposing of and acquiring portfolio holdings. Stock selection, asset allocation, financial statement analysis, monitoring of existing investments, and portfolio strategy are the duties.

Sales and Trading 12.5%

has separate divisions focused on trading stocks, bonds, or other financial instruments. Executes orders from institutional sales and retail staff.

Private Clients 12.5 %

individuals or families with significant financial portfolios. Directly deals with client and does not use third party brokers or distributors.

Market Makers

Firms or Individuals who quote two sided markets in security, they proved bids and offers (asks). Provide liquidity and depth to markets.

Retail Investors

Individuals who invest their own capital at lower volumes and frequencies. Primarily invest in Bonds, Stocks, Retirement Accounts, and cryptocurrency.

Institutional Investors

Trade large volumes of securities on behalf of a collective group of shareholders. Sometimes Accredited Investors (Rich People). Usually work within organizations, such as pension funds, endowments, or insurance companies. Typically invest in Mutual funds, Hedge Funds, Real estate, Stocks.

Qualified Institutional Buyer (QIB)

an institutional investor with at least $100 million in assets under discretionary management. For a registered broker or dealer, the threshold is 10 million. Unlike accredited Investors who can be individuals, QIBs are always entities such as banks or insurance companies.

The Primary Market

A source of new securities. Facilitated by underwriting groups that consist of investment banks. Not a physical place but deals with the IPO process. Securities are directly purchased from an issuer. All issues are subject to strict regulations before they are approved for sale to investors.

Secondary Markets

Investors can buy and sell securities without the involvement of the issuing company. Trading is overseen by a specialist market maker who overlooks the trading. The specialist also acts as an intermediary, who buys and sells securities for their own accounts when there is a shortage of buyers and sellers. Includes auction and dealer markets.

NYSE American and NYSE MKT

serves as a listing platform for small-cap companies and offers investors an alternative to the larger companies listed on the NYSE. NYSE MKT was formerly known as the AMEX or AMerican stock exchange, employs market makers to oversee securties trading. The Intercontinental Exchange (ICE) is now the owner of both the NYSE and NYSE MKT.

Boston Stock Exchange

one of the oldest regional stock exchanges in the USA, founded in 1834.

Chicago Stock Exchange CHX

Founded in 1882, it offers trading in more than 3,000 stocks including NASDAQ, NYSE AMEX Equities and NYSE.

Pacific Stock Exchange PCX

Founded in 1882, ceased physical operations in 2002 and served as a regional stock exchange in California. Merged with the Archipelago Exchange to form NYSE ARCA, which now operates as an electronic trading platform.

Dealer to Dealer Markets

A financial arena where multiple dealers buy or sell specific securities or instruments at different quoted prices.

Nasdaq

the first electronic exchange where investors can buy and sell stock. Opened on February 8 1971 and now has an index of more than 3700 stocks.

Traders

people who purchase or sell assets in financial markets, either on their own behalf or on behalf of others. Hold the asset for a shorter period of time than investors.

Third Markets

It allows for greater liquidity and efficiency during trading because it provides another venue for investors to buy and sell securities such OTC and are subject to regulation by the SEC.

Fourth Markets

exclusive to institutional investors such as banks and hedge funds. Usually there is greater regulation in this market, larger amounts of funds are traded in a single transaction.

Dark Pools

Allow large trades to proceed without affecting the market at large, but their lack of transparency creates potential conflicts of interest.

Clearing Process

Primarily establishes the obligations of funds. During clearing, the obligations between the two parties are established and confirmed.

Settlement Process

may occur later and involves the actual transfer of funds or securities between the two parties.

Fully Disclosed Accounts

disclose the complete identity of the account holder. These accounts are individually held and provide complete transparency and control to individual traders.

Omnibus Accounts

utilized by futures commission merchants, facilitate managed trading for multiple individuals while ensuring their anonymity.

Depository Trust & Clearing Corporation (DTCC)

A clearing corporation with the primary role of facilitating the exchange, payment, and settlement process for securities transactions. Handles Securities worth trillions of dollars daily.

Options Clearing Corporation

Clearing agent for listed options contracts and is owned by the exchanges that trade options

Prime Brokerage Accounts

a suite of bundled services offered to hedge funds and other large institutional investors by banks and wealth management firms

Business Cycle

Alternating periods of economic expansion and economic recession

Expansion

A period of economic growth as measured by a rise in real GDP. Employment is high, income rises, consumer spending is high and debtors are paying their debts.

Peak

the height of an economic expansion, when real GDP stops rising. The employment rate, income, and wages do not increase any further. The demand for goods and services also stops growing, which causes an increase in prices and ultimately, inflation.

Contraction

The economic growth in this phase slows, investing becomes cautious, and unemployment rises, which decreases income and consumer spending leading to a tough time.

Trough

Has the lowest national income and expenditure point in the cycle. However, it also marks the beginning of the next expansion phase. Businesses start to recover and invest in new endeavors, and the employment rate gradually increases and starts the next phase in the business cycle.

Leading Indicators

key economic variables that economists use to predict a new phase of a business cycle

Building Permits

The number of building permits issued for private housing plans is a leading economic indicator.

Manufacturers' New Orders, Consumer Goods, Non-defense Capital Goods

leading economic indicator, consumer goods produced by manufacturers are also leading indicators.

S &P 500 Index

an indicator of overall stock market performance based on the average stock prices of 500 top U.S. companies, compiled by Standard & Poor's

Initial Claims for Unemployment Insurance

Benefits claimed by jobless citizens can serve as a leading economic indicator. A significant number of claims indicates a weak economy.

Interest Rates Spreads

Measures the difference between a long- and short-term interest rate. If the spread is wide, it indicates a higher growth for future economic conditions.

The Index of Industrial Production

The number of products or services industries produce as an output. It is a coincidental indicator as it reflects the current state of the economy.

Employees on Nonagricultural Payrolls

People who are employed in industries such as Construction, manufacturing, and retail are a coincident indicator.

Disposable Personal Income

income remaining for people to spend or save after all taxes have been paid. Reflects the consumers' buying power

Lagging Indicators

Factors observed to change after an economic shift in the business cycle, they lag behind the correlated economic change. Such as unemployment, corporate profits, and labor costs.

Change in the Consumer Price Index (CPI)

The average change in the price consumers are willing to pay for a service can be an excellent lagging economic indicator. Is a Measure of inflation or deflation.

The Average Prime Rate

offered to customers who have high credit ratings. The average prime rates of banks also determine other kinds of loans, it leaves a trail of how the economy will look over time.

The Average Duration of Unemployment

The period in which people are unemployed, the unemployment phase can indicate a fallen economy or a thriving economy about to fall.

How to Measure Interest Rates

The interest rate represents the extra sum a lender levies on the borrower over and above the primary amount (the loaned sum). The loan interest rate is noted yearly and called the annual percentage rate (APR).

Prime Rate

Rate of interest banks charge on short-term loans to their best customers. If prime rate increases so does an increase in interest rates for various types of loans and credit. It affects the liquidity in financial markets, if prime rate is low, liquidity increases.

Discount Rate

rate the Federal Reserve charges for loans to commercial banks, discount and interest rates are directly related. Encourages banks to borrow more money from the FED and can potentially increase the money supply and lower interest rates.

Federal Funds Rate

the interest rate at which banks make overnight loans to one another. The FOMC sets this rate according to their own understanding of economic factors. If the federal funds rate increases, money becomes less readily available, and the short-term interest rate rises.

Call Money Rate

The interest rate brokerage firms pay for call money loans from banks. This rate is used as the basis for customer rates on margin loans. The interest is not paid over a set amount of time but on demand.

Cyclical (Stocks )

Stocks whose success is closely linked to the rise and fall of the general economy. Examples include companies that provide luxury products, such as the automotive industry and hospitality.

Defensive (Stocks)

stocks that tend to hold their value, and even do well, when the economy starts to falter. Include health care and staple products such as Procter & Gamble, Johnson and Johnson, Phillip Morris International, and Coca-Cola.

Growth (Stocks)

stocks that tend to have higher price-earnings ratios and are expected to have higher future earnings. Retain their earnings and reinvest in themselves rather than pay dividends. Examples are Amazon, Facebook, and Netflix.