SIE Exam for Dummies Book

Tax Anticipation Notes (TANs)

These notes provide financing for current operations in anticipation of future taxes, such as valorem taxes, that the municipality will collect.

Revenue Anticipation Notes (RANs)

These notes provide financing for current operations in anticipation of future revenues that the municipality will collect.

Tax and Revenue Anticipation Notes (TRANs)

A combination of the characteristics of both TANs and RANS.

Grant Anticipation Notes (GANs)

These notes provide interim financing for the municipality while it's waiting for a grant from the U.S. government. The notes are paid off from the grant funds once received.

Bond Anticipation Notes (BANs)

These notes provide interim financing for the municipality while it's waiting for long-term bonds to be issued.

Construction Loan Notes (CLNs)

These notes provide interim financing, typically for the construction of housing projects.

Project Notes (PNs)

Provide interim financing for building of subsidized housing for low-income families.

Tax-Exempt Commercial Paper

Usually issued by organizations such as universities with permission of the government. This debt obligation usually lasts up to 270 days to help the organization cover its short term liabilities.

Section 529 Savings Plan

Specialized educational savings accounts available to investors. Also called qualified tuition plans (QTP's) because they're designed to allow money to be saved for qualified expenses for higher education.

ABLE accounts (achieving a better life experience)

Designed for people with provable disabilities and their families. Because of the extra needs and expenses involved in taking care of people with disabilities, they allow people to invest after- tax dollars into them. Any earnings are tax free as long as they're used to pay for disability expenses.

LGIP's (local government investment pools)

Established by states to provide other government entities a short term investment vehicle for investing their funds. Exempt from registration with the SEC.

Taxable Equivalent Yield (TEY)

-Tells you what the interest rate of a municipal bond would be if it weren't federally tax free.

-Municipal bonds are better suited for investors in higher tax brackets

-(TEY)= municipal yield/(1-tax bracket)

- The interest received on municipal bonds is federally tax free.

Municipal Equivalent Yield (MEY)

- The yield on a taxable bond after taxes.

- MEY= municipal yield x (100- investors tax bracket)

Places where triple tax free bonds are issued

Puerto Rico, Guam, U.S. Virgin Islands, American Samoa, Washington D.C.

Confirmations

Must be sent or given to customers at or before the settlement date. Municipal securities settle the regular way (2 business days after the trade date).

Items included in the confirmation:

- The broker dealers name, address, and phone number.

- The capacity of the trade (whether the firm acted as a broker dealer).

- The dollar amount of the commission (if the firm is acting as a broker).

- The customer's name.

- Any bond particulars, such as the issuer's name, interest rate, maturity, and call features (if any).

- The trade date, time of execution, and settlement date.

- Committee on the uniform securities identification procedures (CUSIP) identification number (if there is one).

- Bond yield and dollar price.

- Any accrued interest.

- The registration form (registered as to principal only, book entry, or fully registered).

- Whether the bonds have been called or pre funded.

- Any unusual facts about the security.

The commission items that firms must consider:

- The market value of the securities at the time of the trade.

- The total dollar amount of the transaction. Although you're usually going to charge more money for a larger transaction, the percentage charged is usually lower.

- The difficulty of the trade. The harder the trade, the more you're entitled to charge.

- The fact that you and the firm that you work for are entitled to make a profit.

Bond Resolution (Indenture)

Provides investors contract terms including the coupon rate, years until maturity, and collateral backing the bond (if any).

Ex- Legal

Doesn't contain a legal opinion.

Legal opinion

The purpose of this is to verify that the issue is legally binding on the issuer and conforms to tax laws. May state the interest received from the bonds is tax- exempt.

Official Statement

Come in preliminary and final versions. The preliminary version of this statement doesn't include an offering price or coupon rate. It is the document that the issuer has prepared, it states what the funds will be used for, provided the information about the municipality, and details how the funds will be repaid.

Items included in the Official Statement

- The offering terms.

- The underwriting spread (basically, who gets what).

- A description of the bonds.

- A description of the issuer.

- The offering price.

- The coupon rate.

- The feasibility statement (how much sense project makes).

- The legal opinion (unless stamped ex- legal).

Rule G-2 (standards of professional qualifications)

Before effecting any transaction in, or inducing or attempting to induce the purchase or sale of any municipal security, the dealer and every person associated with that dealer must be qualified in accordance with MSRB rules.

Rule G-3 (Professional Qualification Requirements)

Broker- dealers that conduct a business in general securities must have at least one associated person qualified as a municipal securities principal to oversee and supervise their municipal securities business.

Rule G-7 (Information Concerning Associated Persons)

Associated persons (municipal securities sales principal, municipal securities principal, general securities principal engaging in municipal securities business, municipal securities representative, limited representatives) must provide their employer a form U-4 or MSD-4 for bank dealers. A u-4 form is an application from sent to the central registration deposit along with the applicant's fingerprints. The employer is responsible for calling previous employers to find out whether the information on the form is accurate.

Rule G-8 (Books and Records Requirements)

All brokers, dealers, and municipal securities dealers must keep records regarding municipal securities business. Among the many items they have to keep the following:

- Records of original entry: itemized daily records of all purchases and sales of municipal securities.

- Account records: account records for each customer account.

- Securities records: separate records showing all municipal securities positions

- Subsidiary records: records of municipal securities in transfer, borrowed or loaned, not completed by the settlement date.

- Put options and repurchase agreements.

- Records for agency transactions.

- Records concerning primary offerings.

- Copies of confirmations.

- Customer account information.

- Customer complaints

- Records concerning political contributions.

Rule G-9 (Preservation of Records)

MSRB's record- keeping requirements are very similar to but not exactly the same as FINRA's requirements. Most records have to be kept for four to six years.

Rule G-10 (Delivery of Investment Brochure)

Broker- dealers and municipal securities dealers must send yearly written statements (which may be electronic) to each customer stating that they're registered with the SEC and MSRB. The statement must also include the web address for the MSRB and a statement of how to receive an investment brochure on the website describing customer protections and how to file a complaint to the proper authority. The same holds true of municipal advisors, who must also send yearly statements with the same information as well as provide information on how to get the client brochure on the MSRB website.

Rule G-17 (Conduct of Municipal Securities and Municipal Advisor Securities)

Municipal securities broker- dealers, municipal securities dealers, municipal advisors, and agents shall deal fairly with all people and not engage in dishonest, deceptive, or unfair practices.

Rule G-18 (Best Execution)

When entering into a municipal securities transaction with a customer or customer of another broker, dealer, or municipal securities dealer, a broker must use reasonable diligence to attempt to get the best price for the security (lowest buying price or highest selling price for the customer).

Rule G-21 (Advertising)

Advertisements by municipal securities dealers, brokers, and dealers cannot contain false or misleading statements. Advertisements include published material used in electronic or other public media, promotional literature (written or electronic) made available to customers or the public, circulars, market letters, seminar text, or press releases. Preliminary official statements, official statements are not considered to be advertisements. Must be kept for minimum 3 years and easily accessible for at least 2 years

Rule G-25 (Improper Use of Assets)

Brokers, dealers, and municipal securities dealers shall not make improper use of municipal securities or funds held on behalf of another person. In addition, no broker, dealer , or municipal securities dealer can make a guarantee against loss, and they may not share directly or indirectly on the profit or losses in a customer's account. An associated person may set up a partnership or joint account with a customer and share in the profits or losses based on the contribution made into the account. In that case, a proportionate sharing agreement should be in place.

Rule G-30 (Pricing and Commissions)

If buying or selling municipal securities for a customer on a principal basis (for or from a dealer's inventory) the aggregate price including markdown or markup must be fair and reasonable. If buying or selling municipal securities on an agency basis for a customer, the broker- dealer is responsible for making a reasonable effort to obtain the best price for the customer, and the commission charged must be fair and reasonable in relation to prevailing market conditions.

Rule G-34 (CUSIP numbers, new issue and market information requirements)

For new issues of municipal bonds (whether negotiated or competitive offerings), the managing underwriters must apply to CUSIP to receive identification numbers for the bonds for each maturity, if more than one. For negotiated offerings, in which the underwriter is chosen directly, the managing underwriter must apply before the pricing of the new municipal issue. For competitive offerings, the managing underwriter must apply after the winning bid. In the event that the municipal issuer hired an advisor, the municipal advisor must apply no later than the business day after the notice of sale is is published.

Rule G-37 (political contributions and prohibitions on municipal securities business)

Prohibits brokers, dealers municipal securities dealers and municipal advisors from engaging in municipal advisor business with municipal entities if they've made political contributions to officials of such municipal entities. In the event that they did make political contributions, those contributions must be disclosed to the public. In addition, if a political contribution was made as described in the first sentence, they're not allowed to engage in municipal securities business with that municipal entity for a period of two years after the contribution. Municipal finance professionals are allowed to make political contributions of up to $250 per election to a candidate they're entitled to vote for.

Rule G-47 (Time of Trade Disclosure)

Brokers, dealers, and municipal securities advisors may not trade a municipal security (buy from or sell to) with a customer (whether solicited or unsolicited) without providing all material information about the trade. The information must be provided before or at the time of sale and can be disclosed orally or in writing.

CUSIP

Committee on Uniform Security Identification Procedures.

MSRB

Municipal Securities Rulemaking Board.

Packaged Securities

Securities such as open- end funds, closed- end funds, face- amount certificate companies, unit investment trusts, and annuities, offer variety within one security by investing a customer's money in a diversified pool of securities for a cost.

When registering with the SEC, investment companies must disclose:

- Whether the investment company will be open or closed end.

- The names and addresses of affiliated people.

- Whether the company plans to raise money by borrowing.

- Whether they plan on investing in commodities or real estate.

- How they plan on investing (a single industry, many industries, debt securities, and so on)

- Conditions under which the investment plan can change (a vote of shareholders).

- The business experience of each director and officers.

To be diversified, a company must spread out at least 75% of its assets in these ways:

- The management company can't own more than 10% of the outstanding shares of the company.

- No more than 5% of the management company's money can be invested in one company's securities.

Open- End Fund

More commonly known as a mutual fund. Invest in many different securities to provide diversification for investors.

Net Asset Value (NAV) for Open- End Fund

Determined by dividing the value of the securities held by the fund by the number of shares outstanding. With open- end funds, the NAV is the bid price. When investors redeem shares of a mutual fund, they receive the NAV. Mutual funds can never trade below the NAV.

Public Offering Price (POP) for Open- End Funds

For mutual funds, the public offering price (ask) is the NAV plus the sales charge. If a mutual fund doesn't charge a sales charge, it's called a no- load fund.

12b-1 Fees

Fees paid by a mutual fund out of the fund assets to cover promotional expenses such as advertising, printing, and mailing of prospectuses to new investors.

Closed- End Funds

Unlike open- end funds, these funds have a fixed number of shares outstanding. They act more like stock than open- end funds because they issue new shares to the public; after that, the shares are bought and sold in the market. Because they trade in the market, they are often called publicly traded funds.

Net Asset Value (NAV) for Closed- End Funds

The parity price at which the fund should be trading. You determine it by taking all of the assets owned by the fund, subtracting the liabilities and dividing by the number of shares outstanding. These may trade below the NAV (at a discount).

Public Offering Price (POP) for Closed- End funds

For closed- end funds, this price is (ask) depends more on supply and demand than the NAV. Investors of closed- end funds pay the POP (current market price) plus a broker's commission.

Major Types of Funds (Safest to Riskiest)

- Money market fund

- Income fund

- Balanced fund

- Growth fund

- Specialized (sector) fund

- International or global fund

Money Market Fund

This fund invests in money market instruments (short- term debt securities). It usually provides a check writing feature as a way of redeeming shares. It is always no- load (there's no sales charge, it computes dividends daily and credits them monthly, there's no penalty for early redemption.

Income Fund

The primary objective of this fund is to provide current revenue (not growth) for investors. This type of fund invests most of its assets in a diversified portfolio of debt securities that pay interest and in preferred and common stock of companies that are known to pay consistent dividends in cash. Considered much safer than growth funds. Better investment choices for retirees and investors who are looking for a steady cash flow without much risk.

Balanced Fund

A combination of a growth and income fund. These invest in common stocks, preferred stocks, long- term bonds, and short- term bonds, aiming to provide both income and capital appreciation while minimizing risk. These funds don't get hammered to badly when the market is bearish but usually underperform when the market is bullish.

Growth Fund

Invest most of their assets in a diversified portfolio of the common stock of relatively new and existing companies, looking for big increases in the stock prices. Offer a higher potential for growth but at a higher risk for the investor. Ideal for an investor who's looking for long- term capital appreciation potential. They're better for younger investors who can take risk because they have the time to recover losses. Some are labeled as aggressive because the securities it invests in are even riskier than those of the standard fund.

Specialized (Sector) Fund

A type of fund that invests primarily in in the securities of a single industry. This fund may invest only in financial services, healthcare, automotive, technology, and so on. Because these funds are limited in their investments, you can assume that they're a little riskier than the average fund.

International or Global Fund

This fund invests in companies based anywhere outside of the investor's home country. This fund invests in securities located anywhere in the world including the investor's home country. Although these funds may be good to round out a portfolio, they aren't without risks. Along with the risk that investors face by just investing in securities in general, holders of these funds also face currency risk which is the risk that the currency exchange rate between the U.S. and foreign issuers will hurt investors. There's also the additional risk that politics in a particular country will harm the value of the fund.

Life- Cycle Funds

Also called targeted or age- based funds. The idea behind these funds is to automatically adjust the composition of the fund so that investors take less risk as they get older. As investors grow older, the percentage should change so that a larger percentage of the portfolio is in fixed income securities and a lesser percentage is in equity securities. Set up with targeted retirement dates. They choose the fund that matches their retirement date, and the fund adjusts its holdings occasionally so that equity funds gradually decrease and fixed income securities gradually increase.

Rights of Accumulation

Allows shareholders to receive a reduced sales charge when the amount of the funds held plus the amount purchased is enough to reach a breakpoint.

Breakpoint

- Must be disclosed in the prospectus

- Aren't available to to partnerships or investment clubs (several people pooling money to receive reduced sales charges).

- Generally available to individual investors, joint accounts with family members, UGMA accounts, and corporations.

Breakpoint Sale

Occurs when you induce a sale just below the level where an investor would receive a breakpoint or an additional sales discount.

Letter of Intent (LOI)

-Allows an investor to receive a breakpoint right away, even if they haven't deposited enough money yet.

- The investor has 13 months after the first deposit to live up to the terms of the agreement in order to maintain the reduced sales charge.

- It may be backdated for 90 days, meaning it may apply to a precious purchase .

- While the investor is under this, shares are held in escrow to pay for the difference in the sales charge. If the investor doesn't live up to the terms of the obligation, the fund sells the shares held in escrow.

Sales Charge

(ask- bid)/ask= (POP-NAV)/ POP.

Public Offering Price

= NAV/ (100%- sales charge %).

Classes of Mutual Funds

- Class A (front- end load)

- Class B (back- end load)

- Class C (level load)

- Class D (no- load)

Class A (Front- End Load)

The investor pays the load when purchasing the shares of the fund. These funds typically are better for long- term investors because they usually have lower expense ratios, and they have breakpoints for larger dollar purchases.

Class B (Back- End Load)

The investor pays the load when redeeming shares of the fund. These funds have higher expense ratios than class A but often convert to class A if held for many years.

Class C (Level Load)

The investors pay a periodic fee (usually annually) over the time period that they hold the fund. These funds have higher expense ratios than class A and have an exit fee which is often eliminated after a year or two. These funds typically are the best option for short- term investors.

Class D (No- Load)

Investors don't pay a sales charge but may be charged some sort of transaction fee.

Face Amount Certificate

A type of packaged security that's similar to a zero-coupon bond; investors make either a lump-sum payment or periodic payments in return for a larger future payment. The issuer of this guarantees payment of the face amount (a fixed sum) to the investor at a preset date. Very few are around today.

Unit Investment Trust (UIT)

A registered investment company that purchases a fixed portfolio of income producing securities (typically bonds) and holds them in trust, which means that a UIT acts as a holding company for its investors' interest in the trust. These are setup for a specific period of time and have a set termination date.

Two main categories of UIT's

Fixed investment trusts, participating trusts.

Fixed Investment Trusts

These companies invest in a portfolio of debt securities, and the trust terminates when all the bonds in the portfolio mature.

Participating Trusts

These companies invest in shares of mutual funds. The mutual funds that the trust holds don't change, but the securities held by the underlying mutual funds do.

Exchange Traded Fund (ETF)

Closed- end index funds that are traded on an exchange. Provide investors diversification along with the ability to sell short or purchase shares on margin. Can be traded during the day , unlike mutual funds which have forward pricing (if you buy or redeem, you get the closing price at the end of the day).

Inverse ETF's (short ETF's or Bear ETF's)

Designed from many derivative products, such as options to attempt to profit from a decline in the value of the underlying securities. Can be used to profit from a decline in a broad market index or in a specific sector such as energy or financial.

Exchange Traded Notes (ETNs)

Are unsecured debt securities issued by a bank or financial institution. Their return is linked to a particular market index. May be purchases on margin or sold short. If an investor holds one until the maturity date, the investor receives a principal amount based on the performance of the index the note is tracking.

Rule 17-a-6

Affiliated persons of investment companies (persons affiliated with the manager of the fund, the custodian bank, and owners of 5% or more of the outstanding shares of the fund) are not allowed to trade securities within the funds portfolio of securities. However, affiliated persons are certainly allowed to buy and redeem shares of the fund like regular, public investors.

Rule 17a-7

Says that advisors, officers, or directors may trade securities held by funds within the same family of funds (for example, trading securities held from the portfolio of securities of one of Fidelity's large value funds to one of Fidelity's large blend funds or vice versa).

Fixed Annuitites

They have fixed rates of return that the issuer guarantees. Investors pay money into these, and the money is deposited into the insurance company's general account. Because of guaranteed payout, these are not considered securities and therefore exempt from SEC registration requirements and from the investment company act of 1940.

Variable Annuities

Insurance companies introduced these as a way to keep pace with (hopefully exceed) inflation. The investment risk is borne by the investor. These are considered securities and must be registered with the SEC. All must be sold with a prospectus, and only individuals who hold appropriate securities and insurance licenses can sell them.

Seperate account

The money that investors deposit is held in this because money is invested differently. This is invested in securities such as common stock, bonds, mutual funds with the hope that the investments will keep pace with or exceed the inflation rate.

Assumed Interest Rate (AIR)

Projection of the performance of the securities in the separate account over the life of the variable annuity contract. If the assumed interest rate is 4%, the investor receives the payouts he expects. If the securities outperform this, the investor receives higher payouts than expected. If the securities held in the separate account underperform the AIR, the investor gets lower payouts than expected.

Payment options when purchasing fixed or variable annuities:

Single payment deferred annuity, periodic payment deferred annuity, immediate annuity.

Single Payment Deferred Annuity

An investor purchases the annuity with a lump-sum payment, and the payouts are delayed until some predetermined date.

Periodic Payment Deferred Annuity

An investor makes periodic payments (usually monthly) into the annuity and the payouts are delayed until some predetermined date this is the most common type of annuity.

Immediate Annuity

An investor purchases the annuity with a large sum, and the payouts begin within a couple months.

Payout Options for an Annuity

Life annuity, life annuity with period certain, joint life with last survivor annuity.

Life Annuity

This type of payment option provides income for the life of the annuitant; however, after the annuitant dies, the insurance company stops making payments. This type of annuity is riskiest for the investor because if the annuitant dies earlier than expected, the insurance company gets to keep the leftover annuity money. Because it is the riskiest type of annuity for the annuitant, it has the highest payouts of all the options.

Life Annuity with Period Certain

This payout option guarantees payment to the annuitant for a minimum number of years (10,20,and so on). For example if the annuitant were to purchase an annuity with a 20 year guarantee and die after 7 years, a named beneficiary would receive the payments for the remaining 13 years.

Joint Life with Last Survivor Annuity

This option guarantees payments over the lives of two individuals. As you can imagine, this type of annuity is typically set up for a spouse. If the wife dies first, the husband receives payments until his death and vice versa. Because this type of annuity covers the lifespans of two individuals, it has the lowest payouts.

Morality Guarantee

This means that the investor receives payments as long as she lives, even if its beyond her life expectancy.

Early Withdrawal Penalty

As with most other retirement plans, annuity investors are hit with a 10% early withdrawal penalty if they withdraw the money before the age of 59.5. The 10% penalty is added to the investors' tax bracket.

Direct Participation Programs (DPP's)

These can raise money to invest in real estate, oil and gas, equipment leasing. More commonly known as limited partnerships. Were once known as tax shelters because of the tax benefits to investors, but changes in the tax laws took away a lot of these advantages.

For a limited partnership to be considered (and taxed) as a limited partnership, it has to avoid at least 2 of these corporate characteristics:

- Having a centralized management.

- Providing limited liability.

- *Having perpetual (never- ending) life.

- *Having a free transferability of partnership interest.

Having a centralized management

Corporations have management in one place. The challenges of managing a limited partnership from several locations make this corporate trait quite difficult for a partnership to avoid.

Providing limited liability

Corporate shareholders have this. The liability of corporate shareholders is limited to the amount invested, and the liability of limited partners is limited to the amount invested plus a portion of any recourse loans taken out by the partnership (if any). Therefore, investors of a limited partnership would face this.

Having Perpetual (Never- Ending) Life

Unlike corporations, which hope to last forever, limited partnerships are set up for a defined period of time. Limited partnerships are dissolved at a predetermined time, such as when their goals are met after a set number of years.

Having Free Transferability of Partnership Interest

Direct Participation Programs are difficult to get into and out of. Unlike shares of stock, which can be freely bought and sold by anyone, limited partners not only have to pass the scrutiny of a registered representative, but also require the approval of the general partner. DPP investors (limited partners) must show that they have enough money to invest initially and have liquidity in other investments in the event that the partnership needs a loan.

Partnership Agreement

A document that includes the rights and responsibilities of the limited and general partners. Includes the name of the partnership, the location of the partnership, and the names of the general partners.

General Partners Rights in the Partnership Agreement

- Charge a management fee for making decisions for the partnership.

- Enter the partnership into contracts.

- Decide whether cash distributions will be made to the limited partners.

- Accept or decline limited partners.

Subscription Agreement.

An application form that potential limited partners have to complete. The general partner uses this agreement to determine whether an investor is suitable to become a limited partner.