Series 7 Study Guide

Margin account – must sign hypothecation; minimum $2k and day trader $25k Opening discretionary margin account – new account form, margin agreement (hypothecation, loan consent, credit agreement) and power attorney Custodial accounts (UGMA/UTMA) always cash Fiduciary who incurs losses w prudent man rule must restore those losses JTWROS – surviving member will inherit the total JTIC (tenants in common) – no survivorship rights Regulation T - Governed by Fed - Loan amount of 50% - Cash trades settle same day – paid in full Maintenance Rules: - 50% long MV - greater $2.5 or 100% of MV for short stock < $5 - greater $5 or 30% MV for short stock > $5 - greater 5% principal or 30% for short bond - LEAPS (9months) 75% cash - Options 100% cash - Short equity and narrow index options 20% cash - Short broad based index options 15% cash - Short interest rate options 10% cash Treasury 3% initial margin; IG/Convertible bonds 30% margin Margin account cannot be used for IPO stock 30 days or stock under $5 SIPC provides protection if broker dealer fails of $500k per account Bank qualified muni – issue up to $10M, commercial banks deduct 80% of interest cost paid to depositors of the funds Regulation NMS – prohibit trade through protected quote (inside market) Rule enforcement – SEC/FINRA for broker-dealers Comptroller currency for federal banks FRB for member banks FDIC for member banks Annuity withdrawal before 59.5 = 10% penalty IRA withdrawal must begin at 70.5 or be subject to 50% penalty o Roth IRA no required minimum withdrawal Withdrawal from tax deferred account ALWAYS at ordinary income rate o After tax contributions have return on capital If a net loss is established, can only deduct $3k from ordinary income in 1 tax year ETN – subordinate debt linked to perf of currency, commodity, index & does not pay coupon Accrued Interest Corporate / muni’s use 30/360 Gov’t use actual/365 CMO

PAC (planned) tranche – directs irregularities towards support tranches (most safe, receive principal first) Tac (targeted) tranche – sinking fund but also callable Non PAC tranches (support) Z tranche (accrual) – pay no interest until lock out period ends, last tranche usually 20yr maturity

Rules & Regulations Reg A – raising under $5million in 1yr period except from SEC registration – file offering circular Reg D - < $1million exempt; $5mil & more sometimes - if sell to no more than 35 individuals Private placement – must be bought for investment, not resale

Volume

Restricted Share Unregistered w/ SEC - Private placement / Reg D - Employee stock benefits 6months for SEC registered 12months for Non-SEC N/A

Public Information Notice of Sale

Rule 144 – must be public information (10k,10Q) None

Description: Holding period:

Control Shares Insiders (execs, board, 10%+ shareholders) N/A Greater of 1% outstanding & avg 4 week trading volume N/A Must file 144 and then 90 day window, Excempt if 5000 shares or less worth less than $10k

Portal Market (rule 144a) = able to sell before a year to a qualified institutionalbuyer ($100mm+ in assets) Sales charge is the difference in bid & offer, expressed as a % of the offer

Margin Long margin account formula Long market value (LMV) – debit record (DR) = equity (EQ) Short margin account formula Short market value (SMV) + equity (EQ) = credit record (CR)

Bonds U.S. Bonds are quoted in 32nds (“95.8”=95 and 8/32) can be shown as 95:08 or 95-08) T-bills (6m or less) not quoted in 32nds Bond trading at Premium: Nominal, Current, YTM, YTC Libor = Average fed fund rate of foreign banks’ lending money to each other in U.S.dollars

REPO (repurchase agreement) = overnight loan (up to 90 days) that is secured by T-bills as collateral (fed lends banks) Reverse Repo (matched sale) = banks lend to fed and hold T- Bills as collateral Interbank market= unregulated market for foreign currency transactions

Rules Exemptions from listing with the SEC= U.S. securities+ muni + commercial paper +non-profit +banks issues+ insurance and annuity policies + rule 147 offerings (onlywithin corporations own state) + reg A offering ($5million or less within 12 months) + reg D (private placement/up to 35 unaccredited investors and unlimitedaccredited) Accredited investors= Financial institutions + insiders and family or owners of more than %10 + annual income over 200,000/ (300,000 joint) + Net worth over a million + Corporation worth over 5 million Green shoe clause= Underwriters can indicate interest for up to %15 more thansecurities available Takedown = Profit for syndicate members Reallowance = profit of non-syndicate sellers Concession = Profit for selling group member Managers fee= Fee received by managing under writer for a sale by anyone Spread= Takedown+ Managers fee Chapter 4 Unlisted Securities = only trade on the OTC Muni +Gov’t bonds always trade on the OTC Within the secondary markets: 1)First market= listed securities trading on an exchange 2)Second market= unlisted securities trading OTC 3)Third Market= Listed security trading OTC 4)Fourth market= Trading of securities between institutions without using a broker-dealer Instinet = reporting system for the fourth market Broker (agent) = does not use own inventory to execute trades Dealer (principal/market maker) = uses own inventory Stopping Stock= Specialist guaranteeing a certain price (only done with public orders) Stops = immediately executed (becomes market order when triggered) Limits= Specific price or better Stop limit = when entered starts as a stop order and when triggered becomes a limit order (wont execute until at a better price than order) Buy limit and Sell stops (bliss) are reduced on dividend days (SLoBS remain the same) Inside the market = highest bid and lowest ask (does not include stops) Size of the market= number of shares available “inside the market”

Specialist can only bid inside the market Immediate or cancel order = fill as much as possible and cancel the rest Not held order = order which the rep has the ability to decide when to execute an order at a price he thinks is right (power of attorney is NOT needed) (can’t be executed by specialist) “SLD” on a ticker means a trade occurred out of sequence (can’t trigger stop orlimit) NASDAQ: Level 1= shows inside of the market, Level 2= shows all bid and asks entered, Level 3= Allows market makers to enter their own quotes Selling short against the box= selling short a security you already own Chapter 5 Progressive tax = more you make the more you are taxed Regressive tax= flat rate Net capital gains loss you can deduct up to $3000 dollars per year against ordinary income and rollover the rest (no limit to how much you can roll over) Ordinary income= Interest on bonds+ dividends Cash dividends are taxed a maximum of %15 if stock is held for more than 60 days If corporation buys stock (common or preferred) of another company %70 of dividends are tax free (if corp. owns over %20 then %80 tax free) Up to $13,000 per year in gifts per person is tax free Cost basis gets transferred if gain but if market loss then new cost basis of recipientis market price on day of transfer (for gift and inheritance) Withdrawals on retirement plans are taxed as ordinary income Money withdrawn from a retirement plan before age 59 and a half has a %10 tax penalty Payout must start the April that the investor has turned 70 and a half (% 50 taxpenalties on what should have been withdrawn) Qualified retirement plans = pretax dollars+ withdrawals are fully taxed at investors tax bracket Non-Qualified retirement plans = after tax dollars + withdrawals are only taxed for money beyond contributions (capital gains) (both plans are only taxed after withdrawal) Keogh Plan (Hr-10)= self-employed income only + may deposit $49k per year and up to %20 of gross income max IRA’s= for employed people + max contribution of $5k w/ excess contribution taxed an extra %6 + joint account treated like two single accounts with a $10k max. If covered by another retirement plan deductions are only possible for those making under $56k or jointly making under $89k Ira’s can only invest in securities and not: commodities/ life insurance/ stamp and coin collections Educational IRA (Coverdell) = $2k per child under 18 + must be used before student turns 30 (primary schooling/HS)

529 educational plan = by the state and similar to a Coverdell (college) SEP IRA = small business IRA where contributions are made by employer and employee (all contributions are vested) Vesting= pension benefits belong to employee even if they leave the company Fixed annuity= fixed amount of payout Variable annuity= variable and based on underlying portfolio ERISA= act that regulates qualified retirement plans (only private pensions) Defined contribution = variable benefit (based on portfolio) Defined benefit = employer pays and liable Rollover= transferring between retirement plans (must be done within 60 days of withdrawal) (have to wait one year to rollover again Current ration= current assets/ current liabilities (ratio of over 2 means liquid) Quick ratio (acid test)= quick assets( current assets- inventory)/ current liabilities(ratio over 1 means liquid) Fed funds rate= rate that banks and financial institutions charge each other (usuallyovernight loans) Call loan rate= rate that banks charge brokerage firms to use for customer margin accounts Prime rate= rate that banks charge their best customers (usually corporations) M1= currency+ checking deposits+ NOW accounts (interest paying accounts) M2= everything in M1 + savings + money market accounts M3= everything in M2+ jumbo CD’s