SIE Exam Unit 1

The Securities and Exchange Commission (SEC)

a U.S. government agency responsible for regulating and enforcing federal securities laws to protect investors, maintain fair markets, and facilitate capital formation.

Purpose of Securities Regulation

To protect investors, ensure fair and efficient markets, and facilitate capital formation.

SEC Jurisdiction and Authority

authority over securities markets, including regulation of stock exchanges, brokers, investment advisors, and enforcing securities laws

Self-Regulatory Organizations (SROs)

SROs are non-governmental organizations authorized to create and enforce industry regulations, ensuring fair practices and investor protection

Examples of SROs

CBOE (Chicago Board Options Exchange), FINRA (Financial Industry Regulatory Authority), MSRB (Municipal Securities Rulemaking Board)

Purpose of SROs

To regulate members within the industry, maintain market integrity, and protect investors

Department of the Treasury

U.S. government department responsible for managing federal finances, including tax policy and issuing government debt

State Regulators North American Securities Administrators Association (NASAA)

represents state-level regulators who oversee securities activities and protect investors at the state level

Federal Reserve

The central banking system of the U.S., which regulates monetary policy, interest rates, and oversees the stability of the financial system

Securities Investor Protection Corporation (SIPC)

A non-profit organization that protects clients of brokerage firms in the event of the firm's failure, up to certain limits

Federal Deposit Insurance Corporation (FDIC)

A U.S. government agency that insures deposits at banks and savings institutions, protecting depositors against bank failures

Accredited Investors

Individuals or entities that meet specific financial criteria, allowing them to invest in securities not registered with the SEC.

Broker-Dealers

Firms that buy and sell securities for clients (broker) or for their own accounts (dealer). Categories include introducing, clearing, and prime brokers

Investment Advisers

Firms or individuals that provide advice on securities investments for a fee

Municipal Advisors

Entities that advise municipalities on bond issuances and other financial matters

Issuers

Companies or governments that issue securities to raise capital.

Underwriters

Firms that assist issuers in selling securities to the public, typically through initial public offerings (IPOs).

Traders

buy and sell securities for themselves or their clients

Custodians

Institutions that hold customers' securities for safekeeping and manage transactions.

Trustees

Individuals or entities responsible for managing assets or securities on behalf of others, often in a fiduciary capacity

Transfer Agents

Firms responsible for maintaining records of securities ownership and handling transactions like issuing certificates or dividends.

Depositories and Clearing Corporations

Entities that provide services for the settlement and clearing of securities transactions, such as the Depository Trust & Clearing Corporation (DTCC) and the Options Clearing Corporation (OCC).

Primary Market

The market where new securities are issued and sold to investors for the first time, typically through an initial public offering (IPO).

Secondary Market

The market where previously issued securities are traded among investors. Examples include stock exchanges and electronic trading platforms.

Electronic Markets (Secon Market)

A type of secondary market where securities are traded electronically, often through networks or platforms like NASDAQ.

Over-the-Counter (OTC) Markets

A decentralized market where securities are traded directly between parties, often without a centralized exchange.

Physical Markets (Secon Market)

Traditional, centralized locations where securities are bought and sold, such as the New York Stock Exchange (NYSE).

Third Market

The trading of exchange-listed securities in the over-the-counter (OTC) market by institutional investors without using a traditional stock exchange.

Fourth Market

Direct trading of securities between large institutional investors without using a broker or exchange, often done electronically.

Monetary Policy

Actions taken by the Federal Reserve to control the money supply and interest rates to influence economic activity, such as open market operations or setting reserve requirements

Fiscal Policy

Government policies on taxation and spending designed to influence economic conditions, such as stimulating growth or controlling inflation

Open Market Activities

The buying and selling of government securities by the Federal Reserve to control the money supply and influence interest rates.

Interest Rate

The cost of borrowing money, typically expressed as a percentage, and influenced by the Federal Reserve’s monetary policy.

Discount Rate

The interest rate the Federal Reserve charges commercial banks for short-term loans.

Federal Funds Rate

The interest rate at which banks lend to each other overnight, influenced by the Federal Reserve through open market operations.

Financial Statements

Documents such as the balance sheet and income statement that provide a snapshot of a company's financial condition and performance

Business Cycle

The natural rise and fall of economic growth over time, consisting of four phases: contraction, trough, expansion, and peak

Leading Indicators

Economic factors that change before the economy starts to follow a particular trend, such as new orders for durable goods

Lagging Indicators

Economic indicators that reflect changes after the economy has begun to follow a trend, like unemployment rates

Coincident Indicators

Economic indicators that move in line with the economy, such as GDP

Inflation

A general increase in prices and fall in the purchasing value of money.

Cyclical Stocks

Stocks whose performance is closely tied to the business cycle, often doing well during economic expansions and poorly during contractions

Defensive Stocks

Stocks that are relatively unaffected by the business cycle, typically in industries like utilities or consumer staples

Growth Stocks

Stocks of companies expected to grow at an above-average rate compared to the market, often reinvesting profits into business expansion

Keynesian Economics

An economic theory that advocates for government intervention to stabilize the economy through fiscal and monetary policy

Monetarist Economics

An economic theory that emphasizes the role of governments in controlling the amount of money in circulation.

U.S. Balance of Payments

A record of all financial transactions made between consumers, businesses, and the government in the U.S. and the rest of the world

Gross Domestic Product (GDP)

The total value of all goods and services produced within a country in a specific time period.

Gross National Product (GNP)

The total value of all goods and services produced by a country’s residents, both domestically and abroad.

Exchange Rates

The value of one currency for the purpose of conversion to another, influencing international trade and investments.

Investment Bankers

Financial professionals who help companies raise capital by underwriting and issuing new securities, and advising on mergers and acquisitions.

Underwriting Syndicate

A group of investment banks or broker-dealers that work together to underwrite and distribute a new securities offering

Municipal Advisors

Professionals who advise municipalities on issuing securities and other financial matters related to public finance

Public Securities Offering

The sale of securities to the general public, typically requiring SEC registration and full disclosure through a prospectus.

Private Securities Offering

The sale of securities to a limited group of investors, typically exempt from SEC registration under Regulation D

Initial Public Offering (IPO)

The first sale of a company’s stock to the public, allowing the company to raise capital from external investors.

Secondary Offering

The sale of additional shares by existing shareholders, usually after an IPO, without the issuance of new shares by the company

Follow-on Offering

An offering of additional shares by a company after its initial public offering, often to raise more capital.

Best Efforts Distribution

A method of distributing securities where the underwriters agree to sell as much of the offering as possible but do not guarantee the sale of the entire issue.

Firm Commitment Distribution

A method of distributing securities where the underwriters purchase the entire offering from the issuer and then resell it to the public, assuming full financial risk.

Shelf Registration

A method where a company registers new securities with the SEC but does not immediately issue them, allowing the company to sell them at a later date when market conditions are favorable.

Official Statement

A document issued in municipal securities offerings that provides investors with detailed information about the offering and the issuer’s financial condition.

Prospectus

A legal document issued to potential investors in a public offering that includes information about the company’s business, financials, and risks.

Program Disclosure Document

A document provided in some securities offerings that outlines the details of a specific investment program or product.

SEC Filing Requirements

The rules set by the Securities and Exchange Commission (SEC) that require companies to file certain documents, like registration statements and periodic reports, to provide transparency to investors.

Blue-Sky Laws

State regulations that protect investors from securities fraud by requiring the registration of securities offerings and salespersons within the state.

Exempt Offerings

Securities offerings that are exempt from SEC registration under specific conditions, such as private placements under Regulation D.

Market Makers

provide liquidity by continuously offering to buy and sell specific securities.