Title Details

ABOUT THIS BOOK XXIII

ABOUT THE TEST BANK XXIV

ABOUT THE SECURITIES INSTITUTE OF AMERICA XXV

CHAPTER 1 BROKERAGE OFFICE PROCEDURES 1

Hiring New Employees 1

Resignation of a Registered Representative 2

Registration Exemptions 3

Persons Ineligible to Register 3

Disciplinary Actions Against a Registered Representative 4

Termination for Cause 5

Outside Employment 5

Private Securities Transactions 5

Gift Rule 6

Sharing in a Customer’s Account 7

Borrowing and Lending Money 7

Order Tickets 7

Executing an Order 8

Becoming a Stockholder 9

Violation 10

Clearly Erroneous Reports 10

Execution Errors 11

Corporate and Municipal Securities Settlement Options 11

When-Issued Securities 12

Government Securities Settlement Options 12

Accrued Interest 13

Close Outs 14

Customer Confirmations 15

Rules for Good Delivery 16

Rejection of Delivery 17

Reclamation 17

Marking to the Market 17

Customer Account Statements 18

Carrying of Customer Accounts 18

Dividend Distribution 19

Pretest 23

CHAPTER 2 RECORD KEEPING, FINANCIAL REQUIREMENTS, AND REPORTING 27

Blotters 27

General Ledger 28

Customer Accounts 28

Subsidiary (Secondary) Records 28

Securities Position Book (Ledger) Stock Record 29

Order Tickets 29

Confirmations and Notices 29

Monthly Trial Balances and Net Capital Computations 29

Employment Applications 29

Records Required to Be Maintained for Three Years 30

Records Required to Be Maintained for Six Years 30

Records Required to Be Maintained for the Life of the Firm 30

Requirement to Prepare and Maintain Records Under SEC 17a-3 and 17a-4 32

Financial Requirements 32

Aggregate Indebtedness 35

Haircuts 36

Box Counts 37

Missing and Lost Securities 37

The Customer Protection Rule 39

The Early Warning Rule 41

FINRA Financial Requirements 43

Subordinated Loans 43

Temporary Subordination Agreements 45

Fidelity Bonds 45

Pretest 47

CHAPTER 3 ISSUING CORPORATE SECURITIES 53

The Prospectus 54

The Final Prospectus 55

Providing the Prospectus to Aftermarket Purchasers 55

SEC Disclaimer 56

Misrepresentations 56

Tombstone Ads 56

Free Riding and Withholding/FINRA Rule 5130 57

Underwriting Corporate Securities 58

Types of Underwriting Commitments 59

Types of Offerings 60

Awarding the Issue 61

The Underwriting Syndicate 61

Selling Group 62

Underwriter’s Compensation 62

Underwriting Spread 63

Factors That Determine the Size of the Underwriting Spread 63

Review of Underwriting Agreements by FINRA 64

Underwriter’s Compensation 64

Exempt Securities 65

Exempt Transactions 66

Rule 137 Nonparticipants 72

Rule 138 Nonequivalent Securities 72

Rule 139 Issuing Research Reports 72

Rule 415 Shelf Registration 73

Securities Offering Reform Rules 73

SEC Rule 405 74

Pretest 77

CHAPTER 4 TRADING SECURITIES 81

Types of Orders 81

The Exchanges 85

Priority of Exchange Orders 85

The Role of the Specialist/DMM 85

Crossing Stock 88

Do Not Reduce (DNR) 89

Adjustments for Stock Splits 89

Stopping Stock 90

Commission House Broker 91

Two-Dollar Broker 91

Registered Traders 91

Super Display Book (SDBK) 91

Short Sales 92

Affirmative Determination 92

Regulation SHO 93

Rule 200 Definitions and Order Marking 93

Rule 203 Security Borrowing and Delivery Requirements 94

Threshold Securities 95

Block Trades 96

Trading Along 97

Circuit Breakers 97

Limit Up Limit Down (LULD) 98

Listing Requirements for the NYSE 98

Reading the Consolidated Tape 99

Exchange Qualifiers 101

Over-the-Counter/Nasdaq 101

Market Centers 111

SEC Regulation NMS 112

SEC Regulation ATS 112

Nasdaq International 113

Non-Nasdaq OTCBB 114

Pink Sheets 114

Third Market 115

Nasdaq Market Center for Listed Securities 115

Fourth Market 115

Nasdaq Listing Standards 116

Market Maker Regulations and Responsibilities 117

Times for Entering a Quote 117

Withdrawing Quotes 119

Handling and Displaying Customer Limit Orders 120

The Order Audit Trail System (OATS) 122

The Manning Rule 123

Automated Confirmation System (ACT)/Trade Reporting Facility (TRF) 124

ACT Trade Scan 124

Nasdaq Trade Reporting Facility (TRF) 125

Step Out Trades 128

Market Making During Syndication 129

Regulation M, Rule 101 129

Penalty Bids 130

Regulation M, Rule 102 130

Regulation M, Rule 103 130

Passive Market Makers’ Daily Purchase Limit 131

Regulation M, Rule 104 131

Syndicate Short Positions 133

Regulation M, Rule 105 133

Trade Reporting and Compliance Engine (TRACE) 133

Broker vs. Dealer 135

FINRA 5 Percent Markup Policy 136

Markups/Markdowns When Acting as a Principal 137

Riskless Principal Transactions 138

Proceeds Transactions 138

Firm Quote Rule 138

Trade Complaints Between Members 139

Arbitrage 140

Trading Securities 141

Pretest 141

CHAPTER 5 RECOMMENDATIONS TO CUSTOMERS 147

Investment Objectives 148

Capital Asset Pricing Model (CAPM) 150

Risk vs. Reward 150

Alpha 152

Beta 153

Developing the Client Profile 153

Professional Conduct when Making Recommendations 154

Recommending Mutual Funds 155

Periodic Payment Plans 156

Mutual Fund Current Yield 156

Fair Dealings with Customers 156

Recommendations to an Institutional Customer 160

Short Sales in Connection with Recommendations 161

Issuing Research Reports 161

Regulation FD 164

Pretest 165

CHAPTER 6 GENERAL SUPERVISION 169

The Role of the Principal 169

Supervisor Qualifications and Prerequisites 170

Continuing Education 171

Tape Recording Employees 172

Information Obtained from an Issuer 173

Customer Complaints 173

Investor Information 174

Member Offices 174

Annual Compliance Review 176

Business Continuity Plan 176

Currency Transactions 176

The Patriot Act 177

U.S. Accounts 177

Foreign Accounts 178

Pretest 179

CHAPTER 7 CUSTOMER ACCOUNTS 183

Holding Securities 185

The Depository Trust Company (DTC) 186

Mailing Instructions 187

Individual Account 187

Joint Account 187

Joint Tenants with Rights of Survivorship (JTWROS) 187

Joint Tenants in Common (JTIC) 188

Transfer on Death (TOD) 188

Death of a Customer 188

Corporate Accounts 189

Trust Accounts 189

Partnership Accounts 189

Trading Authorization 190

Operating a Discretionary Account 190

Managing Discretionary Accounts 191

Third-Party and Fiduciary Accounts 191

Uniform Gifts to Minors Act (UGMA) 192

Accounts for Employees of Other Broker Dealers 194

Numbered Accounts 195

Prime Brokerage Accounts 195

Account Transfer 195

Margin Accounts 196

Guaranteeing a Customer’s Account 198

Day Trading Accounts 198

Commingling Customer’s Pledged Securities 199

Wrap Accounts 199

Regulation S-P 199

Pretest 201

CHAPTER 8 MARGIN ACCOUNTS 205

Regulation of Credit 205

House Rules 208

Establishing a Long Position in a Margin Account 208

An Increase in the Long Market Value 209

Special Memorandum Account (SMA) Long Margin Account 211

A Decrease in the Long Market Value 212

The Minimum Equity Requirement for Long Margin Accounts 213

Establishing a Short Position in a Margin Account 214

A Decrease in the Short Market Value 215

An Increase in the Short Market Value 216

The Minimum Equity Requirement for Short Margin Accounts 217

Margin Requirements for Day Trading 218

Combined Margin Accounts 219

Portfolio Margin Accounts 220

Pretest 221

CHAPTER 9 INVESTMENT COMPANIES 225

Investment Company Philosophy 225

Types of Investment Companies 226

Open-End vs. Closed-End Funds 227

Exchange-Traded Funds (ETFs) 228

Exchange Traded Notes (ETNs) 228

Diversified vs. Nondiversified 229

Investment Company Registration 230

Registration Requirements 230

Investment Company Components 232

Mutual Fund Distribution 234

Selling Group Member 235

Distribution of No-Load Mutual Fund Shares 235

Distribution of Mutual Fund Shares 235

Mutual Fund Prospectus 235

Additional Disclosures by a Mutual Fund 237

Anti-Reciprocal Rule 237

Money Market Funds 238

Valuing Mutual Fund Shares 238

Changes in the NAV 239

Sales Charges for Open-End Funds 240

Sales Charges for Closed-End Funds 240

Front-End Loads 240

Back-End Loads 241

Other Types of Sales Charges 241

12B-1 Fees 241

Calculating a Mutual Fund’s Sales Charge Percentage 242

Finding the Public Off ering Price 243

Sales Charge Reductions 243

Breakpoint Schedule 244

Letter of Intent 244

Breakpoint Sales 245

Rights of Accumulation 245

Automatic Reinvestment of Distributions 246

Combination Privileges 246

Conversion or Exchange Privileges 247

30-Day Emergency Withdrawal 247

Voting Rights 248

Yields 248

Portfolio Turnover 248

Voluntary Accumulation Plans 249

Dollar Cost Averaging 249

Contractual Accumulation Plans 250

Pretest 253

CHAPTER 10 VARIABLE ANNUITIES AND RETIREMENT PLANS 257

Annuities 257

Annuity Purchase Options 261

Accumulation Units 261

Annuity Units 262

Annuity Payout Options 262

Factors Affecting the Size of the Annuity Payment 263

Taxation 264

Sales Charges 264

Variable Annuity vs. Mutual Fund 265

Retirement Plans 265

Individual Plans 265

Individual Retirement Accounts (IRAs) 266

Keogh Plans (HR-10) 270

Tax-Sheltered Annuities (TSAs) and Tax-Deferred Accounts (TDAs) 271

Corporate Plans 273

Employee Stock Ownership Plans (ESOPs) 275

Profit Sharing Plans 275

401(k)s and Thrift Plans 276

Rolling Over a Pension Plan 276

Employee Retirement Income Security Act of 1974 (ERISA) 276

Pretest 279

CHAPTER 11 SECURITIES INDUSTRY RULES AND REGULATIONS 283

The Securities Exchange Act of 1934 283

The Securities and Exchange Commission (SEC) 284

Extension of Credit 285

Trading Suspensions 285

Issuers Repurchasing Their Own Securities 285

Tender Offers 287

Stockholders Owning 5 Percent of An Issuer’s Equity Securities 288

The National Association of Securities Dealers (NASD) 288

Becoming a Member of FINRA 290

Foreign Broker Dealers 292

Registration of Agents/Associated Persons 292

Retiring Representatives/Continuing Commissions 293

State Registration 293

Retail Communications/Communications with the Public 293

FINRA Rule 2210 Communications with the Public 294

Broker Dealer Websites 296

Blind Recruiting Ads 297

Generic Advertising 297

Tombstone Ads 298

Testimonials 298

Free Services 299

Misleading Communications 299

Securities Investor Protection Corporation Act of 1970 299

Customer Coverage 300

The Securities Acts Amendments of 1975 300

The Insider Trading and Securities Fraud Enforcement Act of 1988 300

Firewall 301

The Telephone Consumer Protection Act of 1991 302

The Penny Stock Cold Call Rule 302

Violations and Complaints 303

Resolution of Allegations 304

Minor Rule Violation 304

Electronic Blue Sheets 305

Mediation 305

Code of Arbitration 306

The Arbitration Process 306

Political Contributions 308

Investment Adviser Registration 309

Investment Adviser Representative 309

The National Securities Market Improvement Act of 1996 310

Investment Adviser Registration 311

Investment Adviser Capital Requirements 311

Exams for Investment Advisers 311

Investment Adviser Advertising and Sales Literature 312

Investment Adviser Brochure Delivery 313

Soft Dollars 313

Broker Dealers on the Premises of Other Financial Institutions 314

The Uniform Securities Act 315

Sarbanes-Oxley Act 316

SEC Regulation S-K 317

SEC Regulation M-A 318

The Hart-Scott-Rodino Act 319

FINRA Rule 2290 (Fairness Opinion) 320

SEC Regulation S-X 320

Pretest 323

ANSWER KEYS 329

GLOSSARY OF EXAM TERMS 339

INDEX 405