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Index

AAbsentee ballot, 71ACAT (Automated Client Account

Transfer), 177Acceptance waiver and consent

(AWAC), 271Access equals delivery rule, 103Accounts:

bulk transfers of, 178–179combined margin, 201–202corporate, 171customer, See Customer accountsday trading, 181discretionary, 172for employees of other broker

dealers, 176error, 59–60fi duciary, 172–174foreign, 159individual, 169IRAs, 240–244joint, 169long margin, 190–195margin, See Margin accountsnew customer, 165–167numbered, 176omnibus, 92partnership, 170–171portfolio margin, 202prime brokerage, 176–177short margin, 195–200SMAs, 193–194, 197–198special reserve bank, 87–88suspense, 78TDAs, 245–246

third party, 172–174TOD, 170trusts, 171UGMA, 174–176U.S., 159wrap, 181–182

Accredited investors:LPs off ered to, 39and private placements, 109–110

Accrued interest, 63–64Accumulation units, 235–236“Th e Act,” 281ACT (Automated Confi rmation of

Transaction), 137Additional issues, 107ADF (Alternative Display Facility),

138Adjustment bonds, 29ADRs (American Depositary

Receipts), 20ADSs (American Depositary

Shares), 20Advertising, 265–266Advertising and sales literature,

278–279Affi liated persons, 213Affi rmative determination, 131Aft ermarket prospectus

requirements, 103Agency issues, 32–34Agents:

dividend disbursement, 70registration of, 260–261specialists/DMMs as, 127–128transfer, 66, 215

Agreements:credit, 180customer, 166hypothecation, 180loan consent, 180partnership, 38, 170–171repurchase, 36subscription, 39trust, 173underwriting, 106, 107

AIR (assumed interest rate), 237–238Allegations, resolving, 271All or none (AON) orders, 124–125Alternative Display Facility (ADF),

138Amendment, posteff ective, 116American Depositary Receipts

(ADRs), 20American Depositary Shares

(ADSs), 20American exercise, 95Annual audit reports, 217Annual compliance review, 157Annual privacy notices, 182Annuities:

bonus, 233–234combination, 233equity indexed, 234fi xed, 232periodic payment deferred, 235single payment deferred, 235single payment immediate, 235TSAs, 245–246variable, 231–239

Annuity units, 236

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Anti-reciprocal rule, 218AON (all or none) orders, 124–125Arbitration, 272–274“A” shares, 220Assets:

on balance sheets, 3junior claim on corporate, 9preferred stock and distribution

of, 10residual claim to, 8

Asset-based fee, 221Asset-to-debt ratio, 211Assets under management (AUM),

276–277Associated persons, 260–261Assumed interest rate (AIR),

237–238At the money options, 18–19Audit reports, annual, 217AUM (assets under management),

276–277Authorization, trading, 171–172Authorized stock, 3–4Automated Client Account Transfer

(ACAT), 177Automated Confi rmation of

Transaction (ACT), 137AWAC (acceptance waiver and

consent), 271Awards, under arbitration, 274

BBackdating (of letter of intent),

222–223Back-end loads, 220–221Backing away violations, 137Balance sheets:

available to customers, 89to determine capitalization of

company, 2–3Ballot, absentee, 71Banks:

clearing, 83custodian, 214special reserve, 87–88

Bankers’ acceptances, 35Bearer bonds, 22Bearish investors, 16Benefi ciaries, 250Bills, due, 70–71

Blind pools (term), 42Blotters, 77Blue-sky laws, 281Board of directors, 212–214Bonds:

adjustment, 29bearer, 22book entry, 22–23certifi cates for, 23convertible, 29corporate, 21to cover key investment company

employees, 214as debt, 2discount, 24fi delity, 91fully registered, 22income, 29journal entry, 22–23mortgage, 28municipal, 21–22, 34–35premium, 24pricing of, 23–25principal-only registration of, 22registered, 22secured, 27–28Treasury, 31–32types of, 20–23unsecured, 28–31warrants attached to, 15yields of, 25–27zero-coupon, 29

Bond certifi cates, 23Bond pricing, 23–25

corporate bonds, 24municipal bonds, 25Treasury bills, 25Treasury bonds and notes, 24

Bonus annuities, 233–234Book entry, 168Book entry bonds, 22–23Book inspection, 7–8Book value, 5Borrowing money, 55Borrowing securities, 133Box counts:

in custody departments, 57and record keeping, 85–86

Branch offi ces, 156–157Breakpoint sale violations, 223

Breakpoint schedule, 222Brokers:

dealers vs., 141prime, 176

Brokerage offi ce procedures, 49–75for accrued interest, 63–64for borrowing and lending

money, 55for clearly erroneous reports, 59for close outs, 64and covered persons, 71–72for customer account

statements, 68for customer confi rmations,

64–66for delivery, 66–67for disciplinary actions against

registered representatives, 52for dividend distribution, 68–71for execution errors, 59–60and gift rule, 54–55for hiring new employees, 49–50for marking to the market, 67for order execution, 56–57for order tickets, 55–56for outside employment, 53pretest, 73–75for private securities transactions,

53–54for proxies, 71for purchasing stock, 57–59for registration exemptions, 51for registration ineligibility, 51–52for resignation of registered

representatives, 50–51for securities settlement options,

61–63for sharing in customers’

accounts, 55for termination for cause, 53for unconfi rmed trades, 60for when-issued securities, 62

Broker dealers:accounts for employees of other,

176carrying, 82–83clearing, 82–83fully disclosed, 84introducing, 82–84, 91websites of, 264–265

Index 363

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(k)(2)(A) broker dealer exemptions, 88

(k)(2)(B) broker dealer exemptions, 88

Broker transactions, 111–112“B” shares, 221Bulk account transfers, 178–179Bullish investors, 16Business continuity plan, 157Buyer’s option (settlement option),

61Buy in, 64Buy limit orders, 122Buy stop orders, 123

CCage (term), 57Calls:

maintenance, 195, 199margin, 195, 199–202

Callable preferred stock, 12Call feature, 12Call options, 16Canadian small businesses, 114Canceled trades, 60Capital appreciation, as objective, 8Capitalization, 2–3Capital requirements, 277Cap rate, 234Carrying broker dealers, 82–83Carrying fi rms, 91–92Cash:

as dividend, 12as settlement option, 61

Cashiering department, 57Caucuses, in mediation, 272CDs (certifi cates of deposit),

negotiable, 35–36CDSC (contingent deferred sales

charge), 220Central Registration Depository

(CRD):communications fi led with,

262–263Form U4 fi led with, 50

Certifi cates:collateral trust, 28equipment trust, 28face-amount, 208of limited partnership, 38–39

negotiable CDs, 35–36right, 14

Certifi cates of deposit (CDs), negotiable, 35–36

Th e Characteristics and Risks of Standardized Options (OCC), 94

Claims on assets:junior, 9residual, 8

Clearing, 91–94American vs. European exercise,

95and carrying of customer

accounts, 91–92and DTCC, 92–94expiration and exercise, 95and OCC, 94pretest, 99

Clearing banks, 83Clearing broker dealers, 82–83Clearly erroneous reports, 59Closed-end companies, 209–210Close outs, 64CMOs (collateralized mortgage

obligations), 34COD, 62Code of Arbitration, 258–259Code of Procedure, 258Collateralized mortgage obligations

(CMOs), 34Collateral trust certifi cates, 28College savings plans, 242Combination privileges, 224Combined margin accounts,

201–202Combined off erings, 107Commercial paper, 36Commingling, of customers’

pledged securities, 181Common stock:

converting bonds into, 30as equity securities, 3–9

Communications:correspondence, 264and ERISA, 250institutional, 263–264misleading, 266with public, 261–266retail, 262–263

Companies, investment, 207–229Competitive tenders, 32Complaints:

customer, 155industry rules and regulations for,

270–274trade, between members, 145

Compliance review, annual, 157Confi rmations:

customer, 64–66and record keeping, 79

Consolidated Quotation System (CQS), 140

Consumers, 182Contingent deferred sales charge

(CDSC), 220Continuing education, 153–154Continuous primary off erings, 209Contributions:

to annuities, 238employer’s, to SEP IRAs, 242to IRAs, 242to Keogh plans, 244political, 274–275to Roth IRAs, 241to SEP IRAs, 241–242to TDAs/TSAs, 246to traditional IRAs, 240to UGMA accounts, 175

Control securities, 110–112Control stock, 111Conversion privileges, 224–225Convertible bonds, 29Convertible preferred stock, 11Cooling-off period, 102Coordination Act, 276–277Corporate accounts, 171Corporate action department, 57Corporate bonds, 21Corporate money market

instruments, 35–36Corporate resolutions, 171Corporate retirement plans, 246Corporate securities, 101–119

exempt securities, 108–109exempt transactions, 109–115and FINRA Rule 5130, 105–106pretest, 117–119prospectuses for, 102–104and Rule 137, 115

364 WILEY SERIES 99 Exam Review 2015

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Corporate securities (continued)and Rule 138, 115and Rule 139, 116and Rule 415, 116and Securities Act of 1933,

101–102tombstone ads for, 104–105underwriting, 106–108

Corporate timeline, 3–4Corporations, 207–208Correspondence, 264Counterfeit securities, 86Court orders, 173Covered persons, 71–72CQS (Consolidated Quotation

System), 140CRD, see Central Registration

DepositoryCredit:

extension of, 257and FRB, 179regulation of, 187–190

Credit agreements, 180Crossing stock, 128–129“C” shares, 221CTRs (currency transaction

reports), 157–158Cumulative method (voting), 7Cumulative preferred stock, 10–11Currency risks, 20Currency transaction reports

(CTRs), 157–158Currency transactions, 157–158Current yields (bonds), 25–26Custodians:

for IRA accounts, 243for UGMA accounts, 174–175

Custodian banks, 214Custody department, 57Customers:

death of, 170defi ned by Regulation S-P, 182established, 270

Customer accounts, 165–185and bulk account transfers,

178–179carrying of, 91–92commingling customers’ pledged

securities, 181corporate accounts, 171

day trading accounts, 181and death of customers, 170discretionary accounts, 172and DTC, 168for employees of other broker

dealers, 176fi duciary accounts, 172–174guaranteeing, 180–181holding securities for, 167–168mailing instructions for, 168–169margin accounts, 179–180numbered accounts, 176opening new, 165–167partnership accounts, 170–171pretest, 183–185prime brokerage accounts,

176–177and record keeping, 78and Regulation S-P, 182sharing in, 55trading authorization for, 171–172transfers of, 177–178trusts, 171types of ownership of, 169–170UGMA accounts, 174–176wrap accounts, 181–182

Customer account statements, 68Customer agreements, 166Customer complaints, 155Customer confi rmations, 64–66Customer coverage, 267Customer protection rule, 87–90

DDark pools (term), 140Day orders, 121Day trading:

defi ned, 181margin requirements for,

200–201Day trading accounts, 181Day trading margin calls, 200–201DEA (designated examining

authority), 256Dealers, 141Death:

of custodian of UGMA account, 175

of customers, 170of minor of UGMA account, 175

Debentures, 28–29Debt securities, 20–37

agency issues, 32–34bond certifi cates, 23bond pricing, 23–25bond types, 20–23bond yields, 25–27CMOs, 34defi ned, 2and money market, 35–37municipal bonds, 34–35pretest, 46secured bonds, 27–28Treasury bills, notes, and bonds,

31–32and Trust Indenture Act

of 1939, 31unsecured bonds, 28–31

Declaration date (dividends), 68–69Deferred compensation retirement

plans, 247Defi ned benefi t retirement plans,

248Defi ned contribution retirement

plans, 248Delivery:

brokerage offi ce procedures for, 66–67

of investment adviser brochures, 279

requirements of, 133Depository Trust & Clearing

Corporation (DTCC), 92–94Depository Trust Company (DTC):

and clearing, 93partial account transfers handled

by, 178transfer of securities by, 168

Designated examining authority (DEA), 256

Designated market makers (DMMs), 126–128

Direct investment (variable annuities), 233

Direct participation programs (DPPs):

as limited partnerships, 41quoted on OTCBB, 139

Direct Registration System (DRS), 168

Index 365

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Disciplinary actions, 52Disclosures, by mutual funds, 218Discount bonds, 24, 27Discretionary accounts, 172Dissolving limited partnerships, 43Distributions:

of assets, 10automatic reinvestment of, 224of dividends, 68–71of mutual funds, 215–216of no-load mutual fund shares,

215from TDAs/TSAs, 246

Dividends:cash as, 12from common stock, 8distribution of, 68–71from equity securities, 12–13from preferred stock, 10product as, 13property as, 13stock as, 12–13stopped or reduced, 9

Dividend disbursement agents, 70DK (don’t know), 60DMMs (designated market makers),

126–128DNR (do not reduce) orders, 129Dodd Frank Wall Street Reform Act

of 2010, 276–277Do not reduce (DNR) orders, 129Don’t know (DK), 60Double ETFs, 226DPPs, see Direct participation

programsDRS (Direct Registration System),

168“D” shares, 221DTC, see Depository Trust

CompanyDTCC (Depository Trust &

Clearing Corporation), 92–94Due bills, 70–71DVP, 62

EECNs (Electronic Communication

Networks), 138Education, continuing, 153–154Educational IRAs, 242

Electronic Communication Networks (ECNs), 138

Electronic format, 83Employees:

hiring, 49–50of other broker dealers, accounts

for, 176Employee Retirement Income

Security Act of 1974 (ERISA), 249–250

Employee stock ownership plans (ESOPs), 248

Employment, outside, 53Employment applications, 79Equipment leasing programs, 41Equipment trust certifi cates, 28Equity (in margin accounts):

customer’s, 190–191excess, 191–192, 197–198

Equity indexed annuities, 234Equity requirements:

for long margin accounts, 194–195

for short margin accounts, 199–200

Equity securities, 2–20ADRs/ADSs, 20and capitalization, 2–3common stock, 3–9defi ned, 2dividends, 12–13options, 15–20preferred stock, 9–12pretest, 45–47rights, 13–14warrants, 14–15

ERISA (Employee Retirement Income Security Act of 1974), 249–250

Errors, execution, 59–60Error accounts, 59–60ESOPs (employee stock ownership

plans), 248Established customers, 270ETFs (exchange traded funds), 226European exercise, 95Excess equity:

in long margin accounts, 191–192in short margin accounts,

197–198

Exchanges, 125Exchange privileges, 224–225Exchange traded funds (ETFs), 226Ex dividend date (dividends), 69Execution:

errors in, 59–60of order, 56–57

Exemptions:(k)(2)(A) broker dealer, 88(k)(2)(B) broker dealer, 88to penny stock cold call rule, 270to registration, 51to Rule 203, 133to SEC 17a-3–17a-4, 82to SEC Rule 15c3-3, 88to Telephone Consumer

Protection Act of 1991, 269Exempt securities, 108–109Exempt transactions, 109–115Exercise:

American vs. European, 95and clearing, 95as outcome of option, 17as outcome of right, 6, 13

Exercise price, 17Expiration:

and clearing, 95as outcome of option, 17as outcome of right, 6, 14

Extension of credit, 257

FFace-amount certifi cates, 208Face-amount companies, 208Fannie Mae, 33Federal Bureau of Investigation

(FBI), 86Federal fund loans, 36Federal Home Loan Mortgage

Corporation (FHLMC), 33–34Federal Income Clearing

Corporation (FICC), 94Federal National Mortgage

Association (FNMA), 33Federal Reserve Board (FRB), 179,

187FHLMC (Federal Home Loan

Mortgage Corporation), 33–34FICC (Federal Income Clearing

Corporation), 94

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Fidelity bonds, 91Fiduciary accounts, 172–174FIFO (fi rst in, fi rst out), 95Fill or kill (FOK) orders, 124–125Final prospectuses, 102–103Financial operations principals

(FINOPs), 151Financial requirements, 83–85,

90–91fi delity bonds as, 91of FINRA, 90pretest, 98and SEC, 83–85

Financial statements, 89FINOPs (fi nancial operations

principals), 151FINRA:

fi nancial requirements of, 90organization of, 258–259

FINRA membership, 259–260FINRA Rule 2210, 262–264FINRA Rule 5130, 105–106FINRA’s 5% markup policy, 142Firewalls, 268–269Firm element (continuing

education), 153–154Firm quotes, 135Firm quote rule, 144–145First in, fi rst out (FIFO), 95501c3 organizations, 246529 plans, 242Fixed annuities, 232Fixed rate, 9Floor rate, 234FNMA (Federal National Mortgage

Association), 33FOCUS reports:

as fundamental reporting form, 89

net capital computations on, 79

FOK (fi ll or kill) orders, 124–125Foreign accounts, 159Form 1-A, 114Form 4789, 157–158Form ADV Part II, 279Form G37, 275Form G38, 275Form N-CSR, 218Form N-PX, 218

Form S-1, 101Form SB1, 114Form SB2, 114Form U4:

for new employees, 49–50and record keeping, 79for registration of associated

persons, 260Form U5, 50–51401K plans, 249403b institutions, 245Fourth market, 140FRB (Federal Reserve Board), 179,

187Freddie Mac, 33–34Free riding and withholding rule,

105–106Free services, 266Front-end loads, 220Full discretion:

for fi duciary accounts, 173investment advisers with, 277

Full power of attorney:for discretionary accounts, 172for fi duciary accounts, 173

Fully disclosed broker dealers, 84Fully registered bonds, 22Funding (of retirement plans), 250

GGeneral ledgers, 78General partners, 37–38General Securities Principal exam

(Series 24), 152–153Gift rule, 54–55Ginnie Mae, 33GNMA (Government National

Mortgage Association), 33Good til cancel (GTC) orders,

121Government money market

instruments, 36–37Government National Mortgage

Association (GNMA), 33Gramm-Leach-Bliley Act, 182Green provisions, 106Growth, as objective, 8GTC (good til cancel) orders, 121Guaranteeing, customer accounts,

180–181

HHiring, 49–50Holding securities, 167–168Hold in street name, 168Hot issues, 105House rules, 190Hypothecation, 188Hypothecation agreements, 180

IIDC (intangible drilling costs),

40–41Immediate or cancel (IOC) orders,

124Income:

as objective of common stock, 8phantom, 29

Income bonds, 29Indirect investment, 233Individual accounts, 169Individual retirement accounts

(IRAs), 240–244Individual retirement plans, 239Ineligibility, for registration, 51–52Information:

customer, regular updates of, 167

investor, 155material, 268for new customer accounts,

165–166nonpublic, 182, 268nonpublic material, 268nonpublic personal, 182obtained from issuers, 154–155public, 268

Initial public off erings (IPOs):for closed-end companies, 209defi ned, 106and warrants, 14

Inside market, 136–137Insiders, 268Insider trading, 268Insider Trading and Securities

Fraud Enforcement Acts of 1988, 268

INSTINET, 140Institutional communications,

263–264Institutional customers, 144

Index 367

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Institutional investors:for institutional communications,

263–264prime brokerage accounts for,

176–177and private placements, 109–110

Insurance, annuities as, 232Intangible drilling costs (IDC),

40–41Interest, accrued, 63–64Interested persons, 213Interest rates:

AIR, 237–238and CMOs, 34and preferred stock prices, 10

In the money options, 18Intrastate off erings, 115Intrinsic value, 19–20Introducing broker dealers:

defi ned, 91fi nancial requirements for, 84and record keeping, 82–83

Investment advisers, 214Investment adviser brochures, 279Investment adviser registration,

275–277Investment adviser representatives,

277–278Investment banker, 106Investment companies, 207–229

and anti-reciprocal rule, 218and disclosures by mutual funds,

218and ETFs, 226and money market funds,

218–219and mutual fund distribution,

215–216and mutual fund prospectuses,

216–217and mutual fund sales charges,

219–221organization of, 207–208and portfolio turnover, 226pretest, 227–229registration of, 210–212and sales charge reductions,

221–225specialized functions in,

212–215

types of, 208–210valuing mutual fund shares by,

219and voting rights of investors,

225–226Investment Company Act of 1940:

board makeup governed by, 213and investment companies, 208

Investment company off erings, 208Investors:

accredited, 39, 109–110bullish vs. bearish, 16institutional, 109–110, 176–177,

263–264nonaccredited, 110voting rights of, 225–226

Investor information, 155Investor-to-investor transactions:

purchasing stock in, 58as secondary market transactions,

121IOC (immediate or cancel) orders,

124IPOs, see Initial public off eringsIRAs (individual retirement

accounts), 240–244Irrevocable trusts, 171Issues:

additional, 107agency, 32–34hot, 105new, 106

Issued stock, 4Issuers, information obtained from,

154–155

JJoint accounts, 169Joint tenants in common (JTIC),

169Joint tenants with rights of

survivorship (JTWROS), 169Joint with last survivor payout

option, 237Journal entry bonds, 22–23JTIC (joint tenants in common),

169JTWROS (joint tenants with rights

of survivorship), 169Junior claim, on corporate assets, 9

K(k)(2)(A) broker dealer exemptions,

88(k)(2)(B) broker dealer exemptions,

88Keogh plans (HR-10), 244–245

LLaundering money, 157–158Legal list, 173Legend stock, 110Lending money, 55Lettered stock, 110Letter of intent, 222Level-load funds, 221Liabilities, 3Liability, limited, 7Life only/straight life payout option,

236Life with period certain payout

option, 236–237Limited discretion:

for fi duciary accounts, 173investment advisers with, 277

Limited liability, 7Limited partners, 37Limited partnerships (LPs), 37–43

analysis of, 42dissolving, 43DPPs, 41pretest, 46structuring and off ering, 38–39and taxation, 41–43types of, 39–41

Limited power of attorney:for discretionary accounts, 172for fi duciary accounts, 173

Limit orders:buy, 122sell, 122stop, 123–124

Literature, advertising and sales, 278–279

LMV (long market value), 190–194Loads:

back-end, 220–221front-end, 220level, 221no-load funds, 218no-load mutual fund shares, 215

368 WILEY SERIES 99 Exam Review 2015

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Loans:federal fund, 36nonrecourse, 42recourse, 42

Loan consent agreements, 180Long margin accounts, 190–195Long market value (LMV), 190–194Lost securities, 86–87LPs, see Limited partnerships

MMailing instructions, 168–169Maintenance calls, 195, 199Maintenance requirements, 79–83Maloney Act of 1938, 257Management investment

companies, 209–210Margin accounts, 187–205

combined, 201–202as customer accounts, 179–180house rules for, 190long, 190–195portfolio, 202pretest, 203–205and regulation of credit, 187–190requirements for day trading,

200–201short, 195–200

Margin calls:day trading, 200–201for long margin accounts, 195for portfolio margin accounts,

202for short margin accounts, 199

Margin department, 57Markdowns, when acting as

principal, 142–143Market:

fourth, 140inside, 136–137negotiated, 135Pink OTC, 139PORTAL, 113secondary, 15, 23, 58, 103third, 140two-sided, 135

Market makers:fi nancial requirements for, 85role in OTC markets, 135

Market on close (MOC) orders, 124

Market on open (MOO) orders, 124Market orders, 121–122Marking to the market:

brokerage offi ce procedures for, 67

and margin accounts, 191Markups, when acting as principal,

142–143Material information, 268Maximum allowable sales charge,

221Medallion Signature Guarantee

Program, 66Mediation, 272Member offi ces, 156–157Mergers, 114MFPs (municipal fi nance

professionals), 274–275Minimum equity requirements:

for long margin accounts, 194–195

for short margin accounts, 199–200

Minor rule violations (MRVs), 271–272

Misleading communications, 266Misrepresentations, 104Missing securities, 86–87MOC (market on close) orders,

124Money laundering, 157–158Money market, 35–37Money market funds, 218–219Money market instruments, 35–37Monthly trial balances, 79MOO (market on open) orders, 124Mortgage bonds, 28MRVs (minor rule violations),

271–272MSRB, 267MSRB Rule 37, 275MSRB Rule G-38, 274Municipal bonds, 21–22

as debt securities, 34–35in IRAs, 243regulated by MSRB, 267

Municipal fi nance professionals (MFPs), 274–275

Mutual funds:disclosures by, 218

distribution of, 215–216prospectuses for, 216–217sales charge reductions for,

221–225sales charges for, 219–221valuing of shares, 219

NNASD (National Association of

Securities Dealers), 257Nasdaq:

execution systems, 137as negotiated market, 135trading securities on, 135–138workstation services of, 136

Nasdaq Level I subscription service, 136

Nasdaq Level II subscription service, 136

Nasdaq Level III subscription service, 136

Nasdaq Market Center Execution System (NMCES), 137–138

Nasdaq Market Operations, 145Nasdaq quotes, 136–137National Association of Securities

Dealers (NASD), 257National Association of Securities

Dealers Automated Quotation System, see Nasdaq

National Securities Clearing Corporation (NSCC):

and clearing, 93–94and threshold securities, 134

National Securities Market Improvement Act of 1996, 276–277

NAV (net asset value), 215, 219Negative response letter, 179Negotiable certifi cates of deposit

(CDs), 35–36Negotiated market, 135Net asset value (NAV), 215, 219Net capital computations, 79Net transactions, with customers,

144Net worth, 3New account card, 166New customer accounts, 165–167New issues, 106

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New York Stock Exchange (NYSE):as exchange, 125and Medallion Signature

Guarantee Program, 66Next day (settlement option), 61NH (not held) orders, 124NMCES (Nasdaq Market Center

Execution System), 137–138No-load funds, 218No-load mutual fund shares, 215Nominal Nasdaq quotes, 137Nominal yields (bonds), 25Nonaccredited investors, 110Noncompetitive tenders, 32Noncumulative preferred stock, 10Nonequivalent securities, 115Noninterested persons, 213NonNasdaq OTC Bulletin Board

(BB), 138–139Nonparticipants, 115Nonprofi t organizations (501c3), 246Nonpublic information, 182, 268Nonpublic material information, 268Nonpublic personal information,

182Nonqualifi ed corporate retirement

plans, 247Nonrecourse loans, 42Nonvoting nature (preferred stock),

10Not held (NH) orders, 124Notices:

annual privacy, 182and record keeping, 79

NSCC, see National Securities Clearing Corporation

Numbered accounts, 176NYSE, see New York Stock

Exchange

OOATS (Order Audit Trail System),

140–141OATS reports, 140–141OCC, see Options Clearing

CorporationOFAC list, 158Off erings:

combined, 107continuous primary, 209

intrastate, 115investment company, 208IPOs, 106limited partnerships, 38–39primary, 107public, for LPs, 39Regulation A, 113–114Regulation D, 109–110Regulation S, 113secondary, 107small business, 114subsequent primary, 107

Off ering circular, 114Offi ces:

branch, 156–157member, 156–157OSJ, 156satellite, 157

Offi ce of Foreign Assets Control, 158Offi ce of supervisory jurisdiction

(OSJ), 156Omnibus accounts, 92Open-end companies, 209–210Open trade, 60Operations professionals, 72Options:

at the money, 18–19call, 16as equity securities, 15–20in the money, 18out of the money, 19put, 16

Options Clearing Corporation (OCC):

and clearing, 94option contracts issued by, 17

Option premium:defi ned, 15types of, 18–19

Orders, 121–125AON, 124–125buy limit, 122buy stop, 123day, 121DNR, 129FOK, 124–125GTC, 121IOC, 124market, 121–122MOC, 124

MOO, 124NH, 124roundtrip, 181, 200sell limit, 122sell stop, 123stop, 122–123stop limit, 123–124stop loss, 122–123

Order Audit Trail System (OATS), 140–141

Order execution, brokerage offi ce procedures for, 56–57

Order marking, Rule 200 and, 132–133

Order room, order execution and, 56Order tickets:

brokerage offi ce procedures for, 55–56

and record keeping, 79OSJ (offi ce of supervisory

jurisdiction), 156OTC market, see Over-the-counter

marketOutcomes:

for options, 17for rights, 6, 13–14of warrants, 15

Out of the money options, 19Outside employment, brokerage

offi ce procedures for, 53Outstanding stock, 4Over-the-counter (OTC) market:

stock purchases on, 58trading securities on, 135–138

Ownership of (customer accounts), 169–170

PParity (exchange orders), 125Parity price, 30–31Participating preferred stock, 11Partners, 37–38Partnerships, limited, see Limited

partnershipsPartnership accounts, 170–171Partnership agreements, 38, 170–171Par value:

of bonds, 24of common stock, 5of preferred stock, 9

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Patriot Act, 158Pattern day traders, 200Payment, from annuities, 237–238Payment date:

for dividends, 69for stock, 58

Payout options, of annuities, 236–237Payroll deduction retirement plans,

247Penny stocks:

defi ned, 269–270and pink sheets, 139

Penny stock cold call rule, 269–270Periodic payment deferred

annuities, 235Perpetual nature (preferred stock),

10Persons:

affi liated, 213associated, 260–261covered, 71–72interested, 213noninterested, 213

Phantom income, 29Pink OTC Market, 139Pink sheets, 139PIPEs (private investments in public

equities), 113Plan participation, 250Pledged securities:

commingling of, 181and Regulation T, 188

Policy and procedures manual, 151Political contributions, 274–275Pools:

blind, 42dark, 140

POP (public off ering price), 215, 219PORTAL Market, 113Portfolio margin accounts, 202Portfolio turnover, 226Posteff ective amendment, 116Power of attorney:

for discretionary accounts, 172for fi duciary accounts, 173

Precedence (exchange orders), 125Predispute arbitration clause, 166Preemptive rights, 5–6Preferred stock:

callable, 12

convertible, 11cumulative, 10–11as equity securities, 9–12noncumulative, 10participating, 11straight, 10

Preliminary prospectuses, 102Premiums:

of bonds, 24option, 15

Premium bonds, 24, 26–27Premium enhancement, 233–234Prepaid tuition plans, 242Primary off erings, 107Prime brokers, 176Prime brokerage accounts, 176–177Principals:

markups/markdowns when acting as, 142–143

review of customer complaints by, 155

role of, in supervision, 151–153Series 24, 152–153specialists/DMMs as, 126–127

Principal-only registration, 22Priority (exchange orders), 125Privacy notices, 182Private investments in public

equities (PIPEs), 113Private placements:

as exempt transaction, 109–110LPs off ered through, 39

Private securities transactions, 53–54

Privileges:combination, 224conversion, 224–225exchange, 224–225

Proceeds transactions, 144Product, as dividend, 13Profi t-sharing retirement plans,

248–249Property, as dividend, 13Prospectuses:

for aft ermarket purchasers, 103for corporate securities, 102–104fi nal, 102–103for mutual funds, 216–217preliminary, 102summary, 216–217

Proxies, 71Prudent man rule, 173P&S (purchase and sales

department), 56–57Public educational institutions

(403b), 245Public information, 268Public off erings, 39Public off ering price (POP), 215, 219Purchase and sales department

(P&S), 56–57Purchase of stock, 57–59Purchase options, for annuities, 235Purchaser representatives, 110Put options, 16

QQualifi ed corporate retirement

plans, 247–248Qualifi ed institutional buyers

(QIBs), 112Quotes:

fi rm, 135Nasdaq, 136–137nominal Nasdaq, 137

RReclamation, 67Records:

secondary, 78–79stock, 79subsidiary, 78–79

Record date (dividends), 69Record inspection, 7–8Record keeping, 77–83, 85–90

blotters, 77box counts, 85–86confi rmations and notices, 79customer accounts, 78and customer protection rule, 87–90employment applications, 79general ledgers, 78and gift rule, 54maintenance requirements for,

79–83missing and lost securities, 86–87monthly trial balances, 79net capital computations, 79order tickets, 79pretest, 97–99

Index 371

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requirements for advertising/sales literature, 278–279

and SEC Rules 17a-3 and 17a-4, 81–83

securities position books, 79subsidiary records, 78–79suspense accounts, 78

Recourse loans, 42Red herring, 102Registered bonds, 22Registered representatives:

disciplinary actions against, 52resignation of, 50–51

Registrations:of agents/associated persons,

260–261exemptions to, 51ineligibility for, 51–52of investment adviser

representatives, 277–278of investment advisers, 275–277of investment companies, 210–212principal-only, of bonds, 22shelf, 116state, 261

Registration statement, 101–102Regular way transactions:

for corporate and municipal securities, 61

for government securities, 62Regulation A off erings, 113–114Regulation D off erings, 109–110Regulation Filing Application

(RFA), 134–135Regulation G, 257Regulation of credit, 187–190Regulation SHO, 131Regulation S off erings, 113Regulation S-P, 182Regulation T:

authority given to FRB by, 179for broker dealers, 257and margin accounts, 187–190violations of, 58–59

Regulation U, 257Regulatory element (continuing

education), 154Rehypothecation, 188Reinvestment, automatic, 224Rejection, of delivery, 67

Reorganization, of ownership, 114Reports:

annual audit, 217clearly erroneous, 59CTRs, 157–158FOCUS, 79, 89OATS, 140–141research, 116SARs, 158short-interest, 134–135

Repurchase agreements, 36Requirements:

for aft ermarket prospectuses, 103capital, 277of delivery, 133fi nancial, 83–85, 90–91maintenance, for record keeping,

79–83margin, for day trading, 200–201

Research reports, 116Residual claim to assets, 8Resignation, of registered

representatives, 50–51Resolution (of allegations), 271Restricted securities, 110–112Restricted stock:

and Rule 144, 111–112sold in private placement, 110

Retail communications, 262–263Retirement plans, 239–250

corporate, 246deferred compensation plans, 247defi ned benefi t plans, 248defi ned contribution plans, 248educational IRAs, 242and ERISA, 249–250ESOPs, 248529 plans, 242401K plans, 249individual, 239IRAs, 240–244Keogh plans (HR-10), 244–245nonqualifi ed corporate, 247payroll deduction plans, 247pretest, 251–253profi t-sharing plans, 248–249qualifi ed corporate, 247–248rolling over pension plans, 249Roth IRAs, 241SEP IRAs, 241–242

thrift plans, 249traditional IRAs, 240TSAs/TDAs as, 245–246

Revocable trusts, 171RFA (Regulation Filing

Application), 134–135Rights:

of common stockholders, 5–8as equity securities, 13–14preemptive, 5–6

Right certifi cate, 14Rights of accumulation, 223Risks:

of common stock, 9currency, 20

Riskless principal transactions, 143–144

Roll over:of pension plans, 249transfer vs., for IRAs, 243–244

Roth IRAs, 241Roundtrip orders, 181, 200Rule 137, 115Rule 138, 115Rule 139, 116Rule 144, 110–112Rule 144A, 112–113Rule 145, 114Rule 147, 115Rule 200, 132–133Rule 203, 133Rule 415, 116Rules of Fair Practice, 257–258RVP, 62

SSales:

as outcome of option, 17as outcome of right, 6, 13

Sales charges:back-end loads, 220–221for closed-end funds, 220for “C” shares, 221for “D” shares, 221front-end loads, 220maximum allowable, 221for open-end funds, 219surrender charges, 23812B-1 fees, 221for variable annuities, 238

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Sales charge reductions, 221–225Sales department, 56SARs (Suspicious Activity Reports),

158Satellite offi ces, 157Schedule H, 182SDBK (Super Display Book), 130SDSC (contingent deferred sales

charge), 220SEC, see Securities and Exchange

CommissionSEC disclaimer, 104Secondary market:

as aft ermarket, 103bonds traded on, 23stock purchases on, 58warrants traded on, 15

Secondary market transactions, 121, 255

Secondary off erings, 107Secondary records, 78–79SEC Rule 15c2-1, 181SEC Rule 15c3-3, 88SEC Rules 15g-2–15g-9, 269–270SEC Rules 17a-3–17a-4, 77,

81–83SEC Rule 17a-5, 89SEC Rule 17f-1, 86SEC Rule 134, 104Secured bonds, 27–28Securities:

borrowing, 133control, 110–112corporate, 101–119counterfeit, 86debt, 20–37defi ned, 1–2equity, 2–20exempt, 108–109holding, 167–168lost, 86–87missing, 86–87nonequivalent, 115pledged, 181, 188private, 53–54restricted, 110–112settlement options of, 61–63threshold, 134–135trading, 121–149when-issued, 62

Securities Acts Amendments of 1975, 267

Securities Act of 1933:and corporate securities, 101–102and investment companies, 208

Securities and Exchange Commission (SEC):

and fi nancial requirements, 83–85securities industry rules and

regulations, 256Securities Exchange Act of 1934:

and proxies, 71and Regulation T, 187securities industry rules and

regulations, 255–256Securities industry rules and

regulations, 255–286for advertising, 265–266for advertising and sales

literature, 278–279for arbitration, 272–274for broker dealer websites, 264–265Code of Arbitration, 258–259Code of Procedure, 258for communications with public,

261–266and extension of credit, 257and FINRA membership,

259–260FINRA Rule 2210, 262–264and fi rewalls, 268–269for free services, 266Insider Trading and Securities

Fraud Enforcement Acts of 1988, 268

for investment adviser registration, 275–277

for investment adviser representatives, 277–278

for mediation, 272for misleading communications,

266and NASD, 257penny stock cold call rule, 269–270for political contributions, 274–275pretest, 283–286for registration of agents/

associated persons, 260–261Rules of Fair Practice, 257–258and SEC, 256

Securities Acts Amendments of 1975, 267

Securities Exchange Act of 1934, 255–256

SIPC, 266–267for soft dollars, 279–281for state registration, 261Telephone Consumer Protection

Act of 1991, 269for testimonials, 266Uniform Practice Code, 258USA, 281for violations and complaints,

270–274Securities Information Center (SIC),

86–87Securities Investor Protection

Corporation Act of 1970 (SIPC), 266–267

Securities position books, 79Self-clearing members, 91–92Self-regulatory organizations

(SROs):defi ned, 256inclusion of threshold securities

by, 134Seller’s option, 61Selling away violations, 53Selling group member, 215Sell limit orders, 122Sell stop orders, 123SEP (simplifi ed employee pension)

IRAs, 241–242Series 24 principals, 152–153Services, free, 266Settlement date (stock), 58Settlement options, 61–63Settlor functions, 249–250Shelf registration, 116Short-interest reports, 134–135Short margin accounts, 195–200Short market value (SMV), 196–199Short positions, 64Short sales, 130–133SIC (Securities Information Center),

86–87Signature card, 166–167Simplifi ed arbitration, 273Simplifi ed employee pension (SEP)

IRAs, 241–242

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Single payment deferred annuities, 235

Single payment immediate annuities, 235

SIPC (Securities Investor Protection Corporation Act of 1970), 266–267

Small business off erings, 114SMAs, see Special memorandum

accountsSMV (short market value), 196–199Soft dollars, 279–281Specialists, 126–128Special memorandum accounts

(SMAs):for long margin accounts, 193–194for short margin accounts,

197–198Special reserve bank accounts,

87–88SROs, see Self-regulatory

organizationsStandby underwriting, 14Stated dividend rate, 9Statements:

customer account, 68fi nancial, 89registration, 101–102

State registration, 261State securities administrators, 281Statutory method (voting), 7Stocks:

authorized, 3–4callable preferred, 12common, 3–9, 30control, 111convertible preferred, 11crossing, 128–129cumulative preferred, 10–11as dividend, 12–13as equity, 2issued, 4legend, 110lettered, 110noncumulative preferred, 10outstanding, 4participating preferred, 11penny, 139, 269–270preferred, 9–12purchase of, 57–59

restricted, 110–112straight preferred, 10treasury, 4

Stock price, 69–70Stock record, 79Stock split adjustments, 129–130Stop limit orders, 123–124Stop loss orders, 122–123Stop orders, 122–123Straight preferred stock, 10Subchapter S corporations, 41Subordinated debentures, 28–29Subscription agreements, 39Subscription price, 6, 13Subsequent primary off erings, 107Subsidiary records, 78–79Summary prospectuses, 216–217Super Display Book (SDBK), 130Supervision, 151–164

and business continuity plan, 157of continuing education, 153–154of currency transactions, 157–158of customer complaints, 155and foreign accounts, 159and information obtained from

issuers, 154–155and investor information, 155of member offi ces, 156–157and Patriot Act, 158pretest, 161–164role of principals in, 151–153and supervisory manual, 151and U.S. accounts, 159

Supervisory manual, 151Surrender charges, 238Suspense accounts, 78Suspicious Activity Reports (SARs),

158

TTaxation:

of IDC, 40–41of LPs, 41–43of UGMA accounts, 175of variable annuities, 238

Tax benefi ts, of LPs, 38Tax credits, 42Tax deductions, 42Tax-deferred accounts (TDAs),

245–246

Tax-exempt organizations (501c3), 246

Tax-sheltered annuities (TSAs), 245–246

TDAs (tax-deferred accounts), 245–246

Technical analysts, 123Telephone Consumer Protection

Act of 1991, 269Tenders:

competitive, 32noncompetitive, 32

1035 exchange, 238Termination:

for cause, 53of LPs, 43

Term life policy, 247Testimonials, 266Th ird market, 140Th ird party accounts, 172–174Th reshold securities, 134–135Th rift plans, 249Time value, 19–20TOD (transfer on death) accounts,

170“Tolled” registrations, 51Tombstone ads:

for corporate securities, 104–105

industry rules and regulations for, 265–266

Trades:canceled, 60open, 60unconfi rmed, 60

Trade complaints, between members, 145

Trade date (stock), 58Trading, 121–149

brokers vs. dealers in, 141crossing stock, 128–129day, 181DNR orders, 129exchanges for, 125FINRA’s 5% markup policy, 142and fi rm quote rule, 144–145on fourth market, 140insider, 268markups/markdowns when

acting as principal, 142–143

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Trading (continued)net transactions with customers,

144NonNasdaq OTC BB, 138–139and OATS, 140–141on OTC/Nasdaq, 135–138pink sheets, 139pretest, 147–149proceeds transactions, 144riskless principal transactions,

143–144role of specialists/DMMs in,

126–128and SDBK, 130short sales, 130–133and stock split adjustments,

129–130on third market, 140threshold securities, 134–135and trade complaints between

members, 145types of orders, 121–125

Trading authorization, 171–172Traditional IRAs, 240Transactions:

broker, 111–112currency, 157–158exempt, 109–115investor-to-investor, 58, 121net, 144private securities, 53–54proceeds, 144regular way, 61, 62riskless principal, 143–144secondary market, 121, 255

Transfers:bulk account, 178–179of customer accounts, 177–178roll over vs., for IRAs, 243–244

Transfer agents:of investment companies, 215signatures accepted by, 66

Transfer and hold in safekeeping, 168Transfer and ship, 167Transfer on death (TOD) accounts,

170Treasury bills, 31–32Treasury bonds, 31–32Treasury notes, 31–32Treasury receipts, 32

Treasury stock, 4Treasury STRIPS, 32Trusts:

as customer accounts, 171investment companies as,

207–208Trust agreements, 173Trust indentures, 31Trust Indenture Act of 1939, 31TSAs (tax-sheltered annuities),

245–246Turnover, portfolio, 226Two-sided market, 135

UUGMA (Uniform Gift to Minors

Act) accounts, 174–176UIT (unit investment trust),

208–209Ultra ETFs, 226Unconfi rmed trades, 60Underwriters, 215Underwriters’ compensation,

107–108Underwriting:

for corporate securities, 106–108standby, 14

Underwriting agreements:green provisions in, 106reviewed by FINRA, 107

Uniform Application for Securities Industry Registration, 49

Uniform Gift to Minors Act (UGMA) accounts, 174–176

Uniform Practice Code, 258Uniform Reclamation Form, 67Uniform Securities Act (USA), 281Uniform Termination Notice

for Securities Industry Registration, 50

Uniform Transfer to Minors Act (UTMA), 175

Units:accumulation, 235–236annuity, 236and warrants, 14

U.S. accounts, 159U.S. government agencies, 21Unit investment trust (UIT),

208–209

Unsecured bonds, 28–31UPC Rule 11830, 64USA (Uniform Securities Act), 281UTMA (Uniform Transfer to

Minors Act), 175

VVariable annuities, 231–239

and 1035 exchange, 238and accumulation units, 235–236and annuity units, 236payment, size of, 237–238payout options of, 236–237pretest, 251–253purchase options for, 235sales charges for, 238taxation of, 238types of, 231–234

Vesting (of retirement plans), 250Violations:

backing away, 137breakpoint sale, 223MRVs, 271–272of Regulation T, 58–59securities industry rules and

regulations for, 270–274selling away, 53

Voting rights:absentee ballot, 71of common stockholders, 6–7of investors, 225–226

WWarrants, 14–15Websites, of broker dealers, 264–265When-issued securities, 62Wire room, 56Withdrawals, from Keogh plans,

244–245Wrap accounts, 181–182

YYields:

of bonds, 25–27current, 25–26to maturity, of bonds, 26–27nominal, 25

ZZero-coupon bonds, 29