Intro to Securities Industry

A rep has 120 days after their 2 year anniversary to complete the Regulatory Element (every 3 years thereafter)
Firm Element must completed by the rep annually
MSRB members must provide duplicate statements to employer if opening an outside account; FINRA if only requested

Code of Procedure – rules that cover disciplinary actions by FINRA and the process
Dept of Enforcement will seek authorization from the Office of Disciplinary Affairs to issue a complaint. Firm or person
must respond to complaint in 25 days, if not, a second notice will be sent and the firm or person has 14 days to respond.
If there is no response, it is treated as an admission to the allegations. Firm or person may request hearing in its
response.
Hearing Panel (Hearing Officer & 2 panelists) – may impose the following penalities
*Censure; Fine; Suspension of membership; Expulsion from membership; Bar a person from associating with a firm; etc.
*If the rep is barred from the firm, they MUST cease employment – can’t do clerical work

Respondent has 25 days to appeal to the National Adjudicatory Council (NAC). Then may appeal SEC; then Fed Courts.

Respondent may waive the right to appeal and sign a Letter of Acceptance, Waiver, and Consent (AWC).
Minor violations that are not disputed may have a fine of $2,500 or less, and/or censure

Code of Arbitration – disputes b/w member firms, its employees or clearing house must be settled by arbitration.
If a customer accepts arbitration, the majority of arbs must be outside the securities industry.
For disputes of $25,000 or less, there is only 1 arbitrator.
All decisions by the arbitrator(s) are final.

For the first year that a B/D is doing business, all adverts must be filed with FINRA 10 days prior to publication; also
applies to any adverts for options, CMOs or investment companies, or any firms under FINRA. Must retain copies.
Letters sent to 25+ people is advertising.
**Does NOT include communications with individuals, internal memos, tombstones, routine adverts on personnel
changes and prospectuses.
B/D must retain files for 3 years, first 2 years must be within immediate reach (at the office)

New Account Requirements

Customer signature is NOT required for a cash account, but it is required for a margin account.

FINRA requires: Customer’s name and residence; is of legal age; signature of rep; signature of partner
*If it’s a business account: also names of authorized people to transact business

Rep must make a reasonable effort to obtain: SS#, customer’s occupation info, if customer is associated with other
member firm, fin’l background, tax status, and investment objectives. Educational background is NOT required.

*Corp Account: need corporate resolution. Also need charter for margin accounts.
*Partnership Acct: need info on each partner and all partner signatures with a copy of the partnership agreement

Firm may hold a client’s mail for up to 2 months (domestic travels) or 3 months (overseas) with written instruction

To transfer a deceased client’s account, the firm needs: copy of death cert, letters testamentary, inheritance tax waiver,
affidavit of domicile.
*Any existing POA is automatically cancelled at death of client.
B/Ds must send quarterly statements for inactive accounts and monthly for active accounts. Showing all activity, fees
Must provide a current fin’l statement of the B/D upon customer request.
Firm must complete an account transfer upon validation of ALL transfer instructions within 3 business days

Confirmations to Client – must be sent at or before completion of the transaction, which is generally the settlement date
*Security Name, Amount#, Price, Buy/Sell, Date (Time if requested), B/D’s capacity, Yield on Debt securities,
Callable?, Settlement Date
Mark-ups on principal transactions must be disclosed. Rule 10b-10/Industry rules

SIPC – protection of customers’ funds and securities in the event a B/D becomes insolvent
*All B/Ds that use the mails or any other means of interstate commerce must be members of the non-profit org SIPC
*Maximum of $500,000; no more than $100,000 for cash losses
*All accounts are aggregated by ownership – cash and margin account would be combined, but joint accts are separate
*Does NOT cover commodity or futures accounts! Nor to a B/D’s account held at the failed B/D.
*Any amount exceeding coverage will make the customer a general creditor of the B/D
*Securities that are specifically identified as a customer’s (e.g. stock cert w/ name on it) will not count towards coverage

SEC Regulation S-P – all B/Ds, investment cos and investment advisers registered w/ SEC must comply
*Customers – must receive privacy notice at relationship inception and annually thereafter
*Consumers – must receive privacy notice before the it discloses any nonpublic personal info to nonaffiliated 3rd party
*The notice must disclose: info collected, types of affiliated/nonaffiliated 3rd parties it may disclose, opt-out option

CTR – must be filed for any cash transactions of $10,000+ in 1 business day
CMIR – must be filed when anyone physically transfers $10,000+ into or out of the USA
SAR – must be filed when a trans (or group of trans) is $5,000+ AND the firm suspects:
*Client is violating fed criminal laws, funds related to illegal activity, trans designed to evade reporting

Penalties for violating AML laws: $500,000 and/or 20 yrs in prison or 2x the amount of $$$ involved, whichever more

Equities
Statutory Voting – vote each share once for each director slot. If 100 shs, then no more than 100 votes to each slot
Cumulative Voting – If 100 shs and 5 slots, then may vote all 500 shs to one slot or more divide it up

Preemptive rights – current common shareholders have right to buy new shares before they are offered to the public
Rights offering – expires in 2 months or less. Each share held will receive one right to purchase one share. Trade openly
Warrants – may expire only in years or be perpetual. Subscription price usually higher than the market price.

Fundamentals of Debt
Serial Bonds – Mature sequentially (year-by-year) and are quoted on a YTM basis
Term Bonds – Mature at the same time and are quoted in dollar price (% of par)

Corporate Bonds
Trust Indenture Act of 1939 – new issues of corp bonds must be registered under Sec Act of 1933 and comply with the
Trust Indenture Act. If issuing more than $10mm, corp must provide an indenture (agreement) b/w the issuer and a
trustee who will act on behalf of the bondholders. Trustee is usually a bank or trust co. All terms must be spelled out.
Liquidation Rights
*Wages  Taxes  Secured Creditors  Gen Creditors  Subordinate Creditors  Preferred Stock  Com Stock

Income Bonds – usually issued by a corp in reorg (bankruptcy). Issuer promises to pay principal at maturity, but only
pays interest if it has sufficient earnings. These bonds trade flat (no accrued interest), at a deep discount and are spec.

Eurodollar Bonds – dollar-denominated deposit outside USA. Pay in US $$ and primarily issued in Europe. Not
registered with the SEC, and may not be sold in US until 40 or 90 days after issuance.

Yankee Bonds – allow foreign entities to borrow money in the US marketplace. Registered with SEC and sold in USA.

Eurobonds – sold in one country and denominated in the currency of another. Issuer, currency and primary market can
all be different

Yellow Sheets – published weekly by the Nat’l Quotation Bureau. Give Bid/Ask for corp bonds trading OTC, alongwith
market maker information. Does NOT give info for bonds trading on the NYSE.

Accrued Interest – for corp bonds, it is calculated on a 360/30 day basis. Calculated from last payment up to, but not
including, the settlement date

Seller must include amount of accrued interest as ordinary income. Buyer would include the net interest payment.

US Government and Money Market Securities

Gov’t notes and bonds are quoted in increments of 1/32nds of par

TIPs – the annual adjustment will be taxed as ordinary income that year

T-Bills BEY is ALWAYS greater than its discount yield

CMBs (Cash Mgmt Bills) are unscheduled short-term debt used to even out Treasury cash flows. Issued at discount

STRIPs are sold at a discount. Zero-coupon bonds. Quoted on a yield basis.

Accrued Interest on Gov’t notes and bonds is calculated on 365/Actual Day basis. Next business day settlement.

Savings Bonds are non-marketable. Can only be redeemed by the US gov’t. All interest is exempt from state/local tax.

Series EE bond – 30 year denominations from $50 - $10,000. Purchased at 50% discount. If purchased b/w 5/1997 –
5/2005, receive interest rate of 90% of average yield on 5 year note during last 6 months. Fixed rate if purchased after
5/2005. This rate is reset twice a year. Can defer taxes on interest until maturity.

Series HH bond – 20 year denominations from $500 - $10,000. Receive interest payments semiannually. NOT sold
directly to the public. Only obtained by exchanging an EE bond that is 6+ mos old and did not mature more than a year
ago. As of 8/2004, NO longer available to the public.

Series I bond – indexed for inflation. Available from $50 - $10,000, but sold at FACE VALUE. Interest rate reset
2x/year depending on inflation rate. 30 year maturity. Can defer taxes on interest until maturity.
Agency Securities

*GSEs
Federal Farm Credit Banks (FFCBs) – provide funds for: Banks for Co-ops; Intermediate Credit Banks; Fed Land Banks
Issues short-term discount notes and interest-bearing bonds, both short and long. Interest is exempt from state/local tax

Federal Home Loan Banks (FHLBs) – 12 FHLBs provide liquidity to S&Ls to meet seasonal demands for money. Issue
discount notes (less than 1 yr) and consolidated bonds (1+ yr). NOT backed by US Gov’t, but Treasury may buy $4b.
Interest is exempt from state/local tax.

Student Loan Marketing Assoc (SLMA) (Sallie Mae) – provides liquidity to student loan makers and financing for state
student loan agencies. NOT backed by US Gov’t, but has direct line of credit with US Gov’t. Interest exemption from
state/local varies by state.

Federal Home Loan Mortgage Corp (FHLMC) (Freddie Mac) – provides liquidity to federally insured savings
institutions needing extra funds to finance new housing. Freddie Mac does this by purchasing residential mortgages
from them. It issues MBS, pass-through certs, and guaranteed mortgage-backed certs. NOT backed by US Gov’t, but
they are backed by other agencies. Interest is fully taxable. Issues trade on the NYSE.

Federal National Mortgage Assoc (FNMA) (Fannie Mae) – buys insured FHA, VA and conventional residential
mortgages from lenders (banks, S&Ls). Issues are backed by its authority to borrow from the Treasury. NOT backed by
the US Gov’t. Interest is fully taxable. Issues trade on an exchange.

Government National Mortgage Assoc (GNMA) (Ginnie Mae) – part of HUD and, therefore, backed by the US Gov’t. It
provides financing for residential housing. Interest is fully taxable!! Issues MBS, participation certs, and modified pass-
through securities (which are backed by a pool of FHA/VA residential mortgages). Mortgages in the pool range from
25-30 years. However, average life is 12 – 14 years.

CMOs
All ads about CMOs must be filed with FINRA 10 days before use. If FINRA disapproves or requests changes, the
member must resubmit the corrected material and receive approval before using.
It must be approved by a principal of the firm. The term collateralized mortgage obligation must be included within the
name of the product and it must disclose that the government agency backing (if any) only applies to the face value of
the securities (not any premium paid). Claims about safety, simplicity, etc. must be accurate and not misleading.
They may NOT be compared to any other types of investment, including CDs.
Must also include the following:
The yield and average life shown above consider prepayment assumptions that may or may not be met.
Changes in payments may significantly affect yield and average life. Please contact your rep for info on
CMOs and how they react to different market conditions.

Members must still submit the standardized print ad prepared by FINRA.

B/Ds must offer customers educational materials about the features of CMOs, such as:
*Characteristics and Risks: changing interest rates, prepayment risk, avg life, tax considerations, credit risk, liquidity…
*Structure: tranches, and risks associated with each type. Similar CMOs may have different prepayment, interest risk
*Relationship b/w mortgage loans and mortgage securities
*Glossary of terms applicable to MBS
Commercial Paper: matures in 270 days or less. Rated by Moody’s as P-1 (Prime 1)(the best), P2, P3 and NP.
S&P rates A1 to A3. Fitch from F1+ to F3.
Minimum denomination is typically $100,000

Bankers’ Acceptances are used to facilitate foreign trade. Actively trade and quite safe.

Repos – Dealer sells securities and agrees to buy them back

Reverse Repos – Dealer buys securities and agrees to sell them back on a certain date at a certain price.

CDs mature in 7 days to unlimited. Currently insured up to $250,000 by FDIC. Penalty if redeemed early.
Jumbo CDs (negotiable CDs) have a minimum denomination of $100,000 buy trade in denominations of $1mm.

Municipals
Muni issuers must prepare an official statement. Contains detailed info on the bond and fin’l info on the issuer. It also
contains the legal opinion, which verifies that the municipality has the authority to issue the bonds.

Bonds issued by US territories (Puerto Rico, Guam, US Virgin Islands, Samoa) are fully tax-exempt no matter residence

Laws prevent municipalities from borrowing at a low interest rate an investing the money in higher yielding treasuries.

School districts may only issue limited tax general obligations. Unlimited tax GOs are issued by other gov’t units

Analyzing GOs:
*Economic health of the community – property values, largest employers, average income and demographics
*Tax burden and sources of tax payments
*Budgetary structure and fin’l condition of issuer
*Existing debt using such measures as Debt per Capita and overlapping debt

Most GO issues are secured by property taxes.

Full valuation x basis of assessment = Assessed Value; Assessed Value x millage rate = property tax
Millage is per 1,000. So 20 mils equals 0.02

Direct Debt – all debt issued by the municipality. Total Bonded Debt is often referred to as Funded Debt.

Net Direct Debt = Direct Debt minus any self-supporting debt (e.g. revenue issues, note issues). The GOs

Overlapping Debt – debt of a political entity (school district/county) where its tax base overlaps with another tax base
If a city and school district lie within the same boundaries, they are coterminous.
Analyst will typically use the ratio of Net Direct Debt plus Overlapping Debt to Assessed Value or Debt per Capita

Bank qualified munis allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the
bonds. This encourages banks to invest in munis. To qualify, the municipality may only issue up to $10mm annually.
Revenue Bonds – yields are usually higher than GOs because they are riskier.
Rev Bonds can be issued when the voters do not approve GOs OR when the debt limits have been reached for GOs

Industrial Development Revenue (IDR) and Pollution Control Revenue (PCR) – issued by municipalities and secured by
a lease agreement with a corp. Issued to build a facility for a private company. The credit is based on the corp’s ability
to make the lease payments, therefore the bond is NOT backed by the municipality. If the holder of an industrial bond is
a substantial user of the facility, then the federal tax exemption on the interest earned would not apply.

Special Tax bonds – payable only from the proceeds of the special tax, e.g. highway bonds from excise tax on gasoline

Special Assessment Bonds – payable from the assessment on the facilities that benefit, e.g. water, sewer, sidewalk, street

Double-Barreled Bonds – backed by 2 sources of revenue. First from revenue from the project, then general tax dollars

Moral Obligation bonds – secured by revenue from project, but the gov’t will back it (not required). Legislative approval

Parity Munis – the revenue stream has already been promised to another existing bond

Taxable Munis – issued when muni exceeds $150mm in private activity bonds.

Public Housing Authority/New Housing Authority – construction of low-income housing. No longer issued, but trade

Advance Refunded Munis/Escrowed to Maturity – also called prerefunded or defeased bonds. Collateralized by US
Gov’t securities. Usually paid off at next call date. Escrowed bonds do not have call feature, so remain outstanding.

Private Activity Bonds (AMT Bonds) – if 10% or more of the proceeds finance a project of a private corporation and if
10% or more of the proceeds will be secured by property used by the private business, then the interest is subject to
AMT. May trade at a higher yield.

Analyzing Revenue Bonds

Not necessary to analyze the tax base. Most important factor is the comparison of monies available to service debt.

Net revenue is used to pay bondholders, which means operating expenses and maintenance are deducted first.
Debt service ratio = Net Revenue (Gross after operating/maintenance expenses) / Debt Service

Feasibility Study – issuer hires consultants to estimate if project can generate the needed revenue. Includes Engineering
Report.

Rate Covenant – issuer pledges to maintain rates at sufficient levels to meet operational and debt service

Maintenance Covenant – pledges to maintain the project in good working order

Insurance Covenant – pledges to maintain insurance on the property

Nondiscrimination Covenant – issuer will not grant special rates to any person or group

Operating/Maintenance  Debt Service  Debt Service Reserve  Reserve Maintenance  Replacement/Renewal 

Sinking Fund  Surplus Fund
Muni Notes

Tax Anticipation Notes (TANs) – issued to finance current operations in anticipation of future tax receipts. GOs

Revenue Anticipation Notes (RANs) – issued in anticipation of revenues other than general tax receipts. GOs

Bond Anticipation Notes (BANs) – issued to obtain financing that will be financed thru sale of long-term bonds

Grant Anticipation Notes (GANs) – issued in anticipation of receiving federal grants

Construction Loan Notes (CLNs) – to provide funds for construction of a project that will be funded by a bond issue

Moody’s Rating = MIG1 (VMIG 1): Best Quality; MIG2; MIG3; MIG4

S&P Rating = SP-1 (strong capacity to pay P&I); SP-2; SP-3

Auction Rate Notes

Long-term Notes that are marketed as short-term investments. Dutch auction process. Interest reset every 7, 28, 35 days
based on an auction. All investors will receive the same, clearing rate.

Hold Order (Roll) – current holder will continue to hold in spite of the clearing rate – assumed order if no election made

Bid – prospective buyer will submit rate they will buy at. Current holder may indicate they will continue to hold only if
rate is set at or above a specified rate. Holder will be required to sell at the clearing rate if it is below their bid rate.
Buyer will NOT get it if rate is below their specified rate

Sell Order – holder wants to sell without regard to the clearing rate.

Exposed to sale is the total amount of securities that is subject to sell orders or roll-at-rates. Based on the submitted bids,
the auction agent will set the next interest rate as the lowest rate to match supply and demand.

The clearing rate is the lowest rate bid sufficient to cover all the securities exposed for sale.
If, however, the quantity of bids is insufficient to meet the quantity that is exposed for sale, the auction is deemed to fail.
In that case, the interest rate will be reset in accordance with the terms of the issue.

VRDO – similar to an ARS, except it is putable to the issuer/third party. Reset rate is set by the dealer at a rate that
allows the security to be sold at par value.

AMBAC, MBIA, FGIC and FSA – largest insurers of munis

Bond selling at a discount will always be priced to maturity

Bond selling at a premium, which is callable at par, will always be priced to the call
Bonds selling at a premium, which is callable at a premium, will be priced either way that gives the lower yield

Accrued interest is calculated on a 360/30 basis. T+3 settlement

Underwriting Securities

Firm-Commitment – underwriter takes the entire issue and absorbs any securities that are not sold – acting as principals

Standby Agreement – syndicate will purchase any unsubscribed stock under a preemptive rights offering, for a fee

Best-Efforts – underwriters act as agents and return any unsold shares to the issuer.

All-or-None – underwriters act as agents, partial sale will be cancelled. Also, mini-maxi = requires a certain dollar
amount (70% of total offering) or the offering will be cancelled.

Syndicate
Factors that affect he public offering price:
*corp earnings; dividend payouts; price of similar cos currently trading; indications of interest; current market conditions

Underwriting Spread = Total spread received by the underwriter

Manager’s fee – managing underwriter (usually the smallest piece of the spread)
Underwriting fee – shared by the syndicate
Concession – paid to the B/Ds selling the shares (usually the largest piece of the spread)

The underwriter fee and concession are the Takedown/Total Takedown

Managing underwriter would earn the full spread; a syndicate member would earn the underwriting fee and concession

Western Account – each syndicate member is responsible only for its share
Eastern Account – each syndicate member is responsible for a percentage of the unsold balance

New issues include ALL IPOs of equity securities that are sold under a registration. These may not be sold to restricted
persons.

A member firm that sells new issues must re-verify eligibility every 12 months and retain copies of all info for 3 years

Member firm or person associated may not purchase a new issue unless exemptions apply.

Restricted person – Member firms; employees of firm; immediate family (does NOT include aunts, uncles or cousins)
Immediate family member is restricted if the employee gives/receives material support (25%+ of person’s income) or
living in the same household. OR if the employee is employed by the selling member firm. OR the employee has the
ability to control the allocation of the new issue

Also restricted are finders and fiduciaries (e.g. attorneys and accountants), portfolio managers, persons who own a B/D
(i.e. they hold 10%+ of the firm).

General Exemptions
Investment Cos (mutual funds), insurance co account, common trust fund, restricted person’s beneficial interest <10%,
publicly traded entities (other than a B/D or its affiliates), foreign investment cos, ERISA accts, benefit plans
B/D may purchase shares if the new issue is undersubscribed. Also, restricted person may buy if they already own
shares to prevent equity interest dilution, but they must have owned the shares for at least one year.

Green Shoe Clause – allows underwriters to buy add’l shares form the issuer (max of 15%) if issue is oversubscribed.

Stabilization – managing underwriter bids for the issue in the secondary market at or below the public offering price.
Must end when all of the new issue is sold.

Tender Offer – a customer may NOT tender borrowed (short) shares.

Prospectus Requirements
If to be listed on a nat’l exchange or NASDAQ, then 25 days from effective date
If OTC but not NASDAQ, then 90 days for first time issuer and 40 days if previous issuer

Rule 144 – sale of restricted stock and affiliate (control) stock. Not registered, usually acquired thru private placement
Purchaser of restricted stock must hold for 6 months before selling. Control stock has NO holding period requirement
Must notify SEC at the time he places order to sell with broker. NOT required if does not exceed 5,000shs AND $50K
If not sold within 90 days of the original notice to SEC, then an amended notice must be filed.
For exchange listed/NASDAQ stock, maximum sold over any 90 day period is the greater of 1% of total share
outstanding or average weekly trading volume of the past 4 weeks. If not listed on the NASDAQ, then max of 1%.
For private placement stock held for more than one year, there is no volume restriction for non-affiliates. Still applies to
insiders and affiliates of the issuer.

B/D may solicit a Rule 144 if the customer indicated an unsolicited interest in the preceding 10 business days
OR may inquiry of another B/D that indicated interest in the preceding 60 days.

Rule 144A – exemption for the purchase of restricted stock by a qualified institution ($100mm invested in securities).

Shelf registration – permitted periodic sale of a new issue within 3 years.

Rule 145 – reclassification defined as a sale

*Reclassification of the securities of an issuer that involves the substitution of one security for another
*A merger or consolidation in which the securities of a corp are exchanged for the securities of another corp
*Transfer of assets from one corp to another
DOES NOT include stock splits, reverse splits or change in par value

Negotiated Sale – issuer brings its issue to market by working with an underwriter
Competitive Sale – issuer invites bids and best bid wins. Underwrite is committed to the bid and its risks
*Issuer will submit Notice of Sale to attract the bids (in fin’l newspapers or Bond Buyer). Must include specific bidding
requirements and the dated date. It will describe the structure (term/serial offer). Include legal opinion as well.

Syndicate Letter – Sent by managing firm to invite other firms, will include obligations, settlement, type and priority

Net Interest Cost (NIC) – total interest cost to the issuer, need # of bonds, maturities, coupon rates, dated date and price
True Interest Cost (TIC) – the Canadian method that takes into account the time value of money.

Reoffering yield must be calculated to submit the bid, but this not used in determining who wins the bid, rather it
represents the yield to a customer.
Syndicate manager is responsible for allocating the offer to the syndicate. Priority of Orders it to give maximum benefit
to the syndicate and not one particular member.
Usually: presale orders, group net orders, designated orders, member orders (syndicate manager may change the order if
beneficial to the syndicate)
Priority of Orders is not shown on any official statement, but must be presented to customer upon request.

New bonds that do not have a settlement date will trade When Issued and the buyer does NOT pay accrued interest

MSRB – composed of 15 members from 3 groups: securities firm reps, bank dealer reps, and public members

SEC has control of the MSRB, which has no enforcement powers. Other regulatory bodies enforce MSRB rules.
*For B/Ds – enforced by SEC and FINRA
*For bank dealers: Comptroller of the Currency for nat’l banks; FRB for non nat’l banks that are FRB members; and
FDIC for non nat’l banks that are nonFRB members

Settlement Date
Treasuries and Option settle in T+1
Stock, bonds, etc settle in T+3

Payment Date
Corps in cash or margin account 5 business days – Reg T
Munis Exempt from Reg T; payment generally due at settlement
US Gov’t Exempt from Reg T; payment generally due at settlement
Options 5 Business days

SEC Regulation FD (Fair Disclosure) - Material non public information

*If intentionally released by comp, then must simultaneously disclose to the public
*If unintentional, then make public within 24 hours or until the next trading day opens on the NYSE/NASDAQ
May accomplish by filing Form 8-K with SEC

Stopping Stock – specialist guarantees a price for a floor broker. May only do for public orders, not a firm’s account

Specialist may NOT compete with public orders. He may only bid higher or ask lower to reduce the spread.

Order Ticket Components

*Account Type (cash/margin), Security Name/Symbol, Terms and conditions of order (limit, GTC), discretionary?,
solicited/unsolicited, special directions, buy/sell

Order Dept (Wire Room)  Purchase/Sales Dept  Margin Dept  Cashiering Dept

Highest Bid/Lowest Ask  Timing (first in line)  Size (larger orders first)

Specialist may NOT accept a Not-Held (NH) order – which gives floor broker discretion

Rule 80B – if DJIA declines 10% then 1 hour halt; 20% then 2 hour halt; 30% closed for remainder of the day
Nasdaq
Level I: provides subscribers with highest bid/lowest offer for a security where there are at least 2 market makers
Level II: provides bids and offers and quotation sizes for all market makers that enter quotes for each security
Level III: allows a market maker to enter quotes into the Nasdaq system.

5% Policy – a guide not a rule that markups or commissions are around 5%

*Markup/down should be based on the current market and not the dealer’s inventory cost. Also, should consider type of
security, availability, price and total transaction amount.
*New issues, registered secondaries and mutual funds are exempt from the 5% policy as are munis

Interpositioning – insertion of a third party b/w the customer and the market maker to the detriment of the customer

Nasdaq Global Market (NGM) – provides more comprehensive info about OTC socks that are more widely known, etc
Nasdaq Capital Market (NCM) – for smaller companies that trade OTC, which meet less stringent requirements to list

Nasdaq Market Center Execution System (SuperMontage) – accepts only market orders or immediately executable limit
orders (buy limit orders priced at the offer or higher, or sell limit orders priced at the bid or lower). Orders up to 999,999
shares.

Third Market – OTC trading of exchange-listed securities

Consolidated Quotation Service (CQS) – provides bid/ask of stocks that are listed on the Exchange and are also OTC

ECNs – buy/sell anonymously, execute after-hours.

Fourth Market – institution-to-institution trading without a B/D

Consolidated Tape reports all round-lot executions of securities listed on the exchange. Includes 2nd and 3rd markets

OTC Bulletin Board and Pink Sheets – non Nasdaq securities are quoted here.

Telephone Protection Act of 1991 – may solicit from 8 am – 9 pm local time of party called. Must disclose name,
business entity, telephone number/address, and purpose of the call. If person requests no further calls, must place on do
not call list for 5 years. Calling co must have written policy on do not call list. No unsolicited Faxes.

Bond Buyer
30-Day Visible Supply – total dollar volume of bonds expected to reach the market over the next 30 days (13+ mos mat)

Bond Buyer Placement Ratio – Demand side of the market

Revenue Bond Index – average yield on 25 revenue bonds with 30 yr maturities rate A1 or A+

20 Bond Index – average yield on 20 GOs with 20 yr maturities rated Aa2 and AA

11 Bond Index – average yield on 11 of the 20 bonds in the 20 Bond Index rate Aa1 to AA+

Blue List – provided secondary market info. No longer published

MuniFacts – wire service used by muni dealers. News articles and secondary market offerings from the Bond Buyer
Margin Accounts

Reg T initial margin requirement is 50%. New issues and mutual funds are NOT marginable, but they may be used as
collateral after 30 days of being held.

Margin requirement must be deposited within 2 business days of the settlement date. (If <$1,000, may ignore and add to
the existing account loan).
If using securities to meet margin call, then must equal 2x the amount of the call

Interest paid in a margin account is generally tax deductible against any investment income.

Hypothecation Agreement: pledge of the securities in the account to the firm to secure the loan. Firm may pledge 140%

Day traders must be designated as such by the B/D. If he executes 4+ trades per day over any 5 business days, they are a
pattern day trader. Thus, the trader must meet a minimum equity requirement of $25,000. This amount must be in the
customer’s account prior to any day-trading activity, and must remain in the account for 2 business days following.

Minimum initial requirement of $2,000 or 100% or the purchase price, whichever is less

Long Market Value – Debit Balance = Equity

Maintenance Requirement: For a long position = 25%

*Multiply the Debit Balance by 4/3 to determine the minimum market value,

Special Memorandum Account (SMA) – excess equity is notated in a SMA. It will NOT decrease once established.
*Also, cash dividends, interest, voluntary cash deposits, and sales proceeds will generate SMA.

SMA is not cash or equity, but a line of credit. Withdrawing the SMA will increase the Debit Balance & decrease equity
However, SMA is buying power in that it can purchase 2x its value with current Reg T requirements, which would keep
equity the same.

Restricted Account – when the equity is above 25% minimum but below the 50% initial requirement
Add’l purchases are okay, if they meet the 50% min, but any sales proceeds in the restricted account are used reduce the
debit balance. However, an amount equal to 50% of the sale is credited to SMA and may be withdrawn by the customer.
The customer can NOT withdrawal SMA if it reduces his equity below the minimum 25% = phantom SMA

Same-day Substitutions are allowed, i.e. purchase and sale of the same amount in a restricted account

Credit Balance - Short Market Value = Equity

Minimum deposit is $2,000. Minimum maintenance level is 30%.

If equity is <$5 per share, the required equity is the greater of the market value or $2.50 per share.
If equity is >$5 per share, the required equity is the greater of $5 per share or 30% of the market value.

(LMV – DR) + (CR – SMV) = Combined Equity

US Govt Margin Requirments: 1% for less than 1 year maturity to 6% for 20+ year maturities
Munis: 7% (both initial and maintenance requirement)
Investment Grade Debt: 10% High Yield: 20% of current market value or 7% of principal amount

Convertible Bonds require 50% per FRB

Short against the box: (both long and short the same security) = 5% maintenance requirement

Straddle – Long a Put and Call for the same security on the same expiration at the same strike, speculate on the volatility
*Seller of a straddle expects no volatility (i.e. sideways movment)

Spreads – purchase and sale of either 2 calls or 2 puts on the same security. Expiration and/or strike will be different.
Price Spread (Vertical Spread) – same expiration but different strike prices
Time Spread (Horizontal Spread) – same strike but different expirations
Diagonal Spread – different strike and different expiration

Net Credit Spread – when an investor buys an option with a lower premium and sells an option with a higher premium.
The investor is a net seller and the maximum gain is the net premium received. Wants both options to expire worthless.
The trade becomes profitable when the credit spread narrows. Maximum loss is difference in premiums.
Breakeven equals the difference in premiums added to the lowest call or subtracted from the highest put.

Net Debit Spread – when an investor buys an option with a higher premium and sells an option with a lower premium.
The investor is a net buyer and the maximum gain is the net premium received. Wants the spread to widen. The
maximum loss is the difference in premiums. Breakeven equals the difference in premiums added to the lowest call or
subtracted from the highest put.

Non-equity Options: Stock indexes, Foreign Currencies, Debt Securities, Yield-based

Operate as European exercise. Index value is multiplied by $100. Settlement is in cash.

Hedging a portfolio with Index Puts. How many?

Portfolio Value / Index value x $100 = Z
Z x portfolio beta = # of contracts

Capped Index Options: similar to a vertical spread, it trade as a single security that executes both legs of the spread
guaranteed when the underlying index reaches a predetermined price (capped price)
E.G. capped index option with strike of 400 and capped interval of 30. Investor receives $3,000 if the index closes at or
above 430 before expiration. He may also only receive the in-the-money value if above 400, but below 430.
This is reversed for a Put Capped Index Option.

Options expire at 11:59 pm ET on the Saturday following the third Friday of the expiration month. The option must be
exercised by 5:30 pm ET on the last business day prior to expiration. Expiring option will cease to trade at 4 pm ET.

T-Bill Contracts expire quarterly in March, June, September and December

LEAPs – call and put equity options with expirations of up to 39 months.

Order Book Official (OBO) assists the board brokers in maintaining the public customer limit order book on options

If trading is halted on an underlying security to an option, then that option contract will also halt trading.
Client’s broker must settle the options trade with the OCC prior to 10 am ET on the next business day.

OCC will randomly assign the exercise notice to a B/D whose account shows a short position in the contract.

Options that are in the money by at least 1 cent will automatically be exercised.

Customers have 5 business days in which to pay for options purchase in a margin account (100% of premium). House
rules may shorten this period though

If a long option position matures in 9+ months, then it has a marginable loan value of 25%.

Margin of uncovered call or put = the current premium + 20% of the current market value of the underlying – any amt
that the contract is out of the money

Minimum requirement of an uncovered call or put = the current premium + 10% of current mkt value of the underlying

Covered Spreads in margin accounts do NOT have a margin requirement.

Uncovered Spreads in margin accounts must deposit margin.

Buyer of a straddle must pay for the options in full. Position will NOT have a loan value in the account.
Short straddles will have margin requirements based on the value of the underlying securities.

Stock Splits on Options – increase the number of contracts and decrease the strike (reverse stock split is reversed)
*For an odd-lot split (3 for 2 OR 5 for 4, etc), the number of shs per contract increases and strike decreases, the number
of contracts stays the same

Stock Dividend on Options – adjusted on the ex-div date. Number of shs / contract increases and strike price decreases

NAV/ (100 – Breakpoint%) = $$ Offering Price

Fund may assess a maximum 8.5% sales charge only if it offers breakpoints and rights of accumulation