ABOUT THE SERIES 24 EXAM XIX
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 4
Disciplinary Actions Against a Registered Representative 5
Termination for Cause 5
Outside Employment 6
Private Securities Transactions 6
Gift Rule 6
Sharing in a Customer’s Account 7
Borrowing and Lending Money 8
Order Tickets 8
Executing an Order 8
Becoming a Stockholder 10
Violation 11
Clearly Erroneous Reports 11
Execution Errors 11
Corporate and Municipal Securities Settlement Options 12
When-Issued Securities 13
Government Securities Settlement Options 14
Accrued Interest 14
Close Outs 15
Customer Confi rmations 16
Rules for Good Delivery 17
Rejection of Delivery 18
Reclamation 18
Marking to the Market 19
Customer Account Statements 19
Carrying of Customer Accounts 20
Dividend Distribution 20
Pretest 25
CHAPTER 2 RECORD KEEPING, FINANCIAL REQUIREMENTS, AND REPORTING 29
Blotters 29
General Ledger 30
Customer Accounts 30
Subsidiary (Secondary) Records 30
Securities Position Book (Ledger) Stock Record 30
Order Tickets 31
Confi rmations and Notices 31
Monthly Trial Balances and Net Capital Computations 31
Employment Applications 31
Records Required to Be Maintained for Three Years 31
Records Required to Be Maintained for Six Years 32
Records Required to Be Maintained for the Life of the Firm 32
Requirement to Prepare and Maintain Records Under SEC 17a-3 and 17a-4 34
Financial Requirements 34
Aggregate Indebtedness 37
Haircuts 38
Box Counts 39
Missing and Lost Securities 40
The Customer Protection Rule 41
The Early Warning Rule 44
FINRA Financial Requirements 45
Subordinated Loans 46
Temporary Subordination Agreements 47
Calculating Net Capital 47
Fidelity Bonds 48
Pretest 49
CHAPTER 3 ISSUING CORPORATE SECURITIES 55
The Prospectus 56
The Final Prospectus 57
Providing the Prospectus to Aftermarket Purchasers 57
SEC Disclaimer 58
Misrepresentations 58
Tombstone Ads 59
Free Riding and Withholding/FINRA Rule 5130 59
Underwriting Corporate Securities 61
Types of Underwriting Commitments 61
Types of Off erings 63
Awarding the Issue 64
The Underwriting Syndicate 64
Selling Group 64
Underwriter’s Compensation 65
Underwriting Spread 66
Factors That Determine the Size of the Underwriting Spread 66
Review of Underwriting Agreements by FINRA 66
Underwriter’s Compensation 67
Exempt Securities 68
Exempt Transactions 69
Rule 137 Nonparticipants 75
Rule 138 Nonequivalent Securities 75
Rule 139 Issuing Research Reports 75
Rule 415 Shelf Registration 76
Securities Off ering Reform Rules 77
SEC Rule 405 77
Additional Communication Rules 78
Pretest 81
CHAPTER 4 TRADING SECURITIES 85
Types of Orders 85
The Exchanges 89
Priority of Exchange Orders 90
The Role of the Specialist/DMM 90
Crossing Stock 93
Do Not Reduce (DNR) 93
Adjustments for Stock Splits 94
Stopping Stock 95
Commission House Broker 95
Two-Dollar Broker 95
Registered Traders 96
Super Display Book (SDBK) 96
Short Sales 96
Affirmative Determination 97
Regulation SHO 97
Rule 200 Definitions and Order Marking 98
Rule 203 Security Borrowing and Delivery Requirements 99
Threshold Securities 100
Block Trades 101
Trading Along 101
Circuit Breakers 102
Limit Up Limit Down (LULD) 102
Listing Requirements for the NYSE 103
Reading the Consolidated Tape 104
Exchange Qualifiers 105
Over-the-Counter/Nasdaq 106
Market Centers 118
SEC Regulation NMS 119
SEC Regulation ATS 119
Nasdaq International 120
Non-Nasdaq OTCBB 121
Pink Sheets 121
Third Market 122
Nasdaq Market Center for Listed Securities 122
Fourth Market 123
Nasdaq Listing Standards 123
Market Maker Regulations and Responsibilities 124
Times for Entering a Quote 124
Withdrawing Quotes 126
Handling and Displaying Customer Limit Orders 128
The Order Audit Trail System (OATS) 130
The Manning Rule 130
Automated Confirmation System (ACT)/Trade Reporting Facility (TRF) 131
ACT Trade Scan 132
Nasdaq Trade Reporting Facility (TRF) 132
Step Out Trades 136
Market Making During Syndication 136
Regulation M, Rule 101 137
Penalty Bids 137
Regulation M, Rule 102 138
Regulation M, Rule 103 138
Passive Market Makers’ Daily Purchase Limit 139
Regulation M, Rule 104 139
Syndicate Short Positions 140
Regulation M, Rule 105 141
Trade Reporting and Compliance Engine (TRACE) 141
Broker vs. Dealer 143
FINRA 5 Percent Markup Policy 144
Markups/Markdowns When Acting as a Principal 144
Riskless Principal Transactions 145
Proceeds Transactions 146
Firm Quote Rule 146
Trade Complaints Between Members 147
Arbitrage 148
Pretest 149
CHAPTER 5 RECOMMENDATIONS TO CUSTOMERS 155
Investment Objectives 156
Capital Asset Pricing Model (CAPM) 158
Risk vs. Reward 158
Alpha 160
Beta 161
Developing the Client Profi le 161
Professional Conduct when Making Recommendations 162
Recommending Mutual Funds 163
Periodic Payment Plans 164
Mutual Fund Current Yield 164
Fair Dealings with Customers 164
Recommendations to an Institutional Customer 168
Short Sales in Connection with Recommendations 169
Issuing Research Reports 169
Regulation FD 172
Pretest 173
CHAPTER 6 GENERAL SUPERVISION 177
The Role of the Principal 177
Supervisor Qualifications and Prerequisites 178
Continuing Education 179
Tape Recording Employees 180
Heightened Supervisory Requirements 181
Information Obtained from an Issuer 182
Customer Complaints 182
Investor Information 183
Member Offices 183
Annual Compliance Review 185
Business Continuity Plan 185
Currency Transactions 185
The Patriot Act 185
U.S. Accounts 187
Foreign Accounts 187
Pretest 189
CHAPTER 7 CUSTOMER ACCOUNTS 193
Holding Securities 195
The Depository Trust Company (DTC) 196
Mailing Instructions 197
Individual Account 197
Joint Account 197
Joint Tenants with Rights of Survivorship (JTWROS) 197
Joint Tenants in Common (JTIC) 198
Transfer on Death (TOD) 198
Death of a Customer 198
Corporate Accounts 199
Trust Accounts 199
Partnership Accounts 200
Trading Authorization 200
Operating a Discretionary Account 200
Managing Discretionary Accounts 201
Third-Party and Fiduciary Accounts 201
Uniform Gifts to Minors Act (UGMA) 203
Accounts for Employees of Other Broker Dealers 205
Numbered Accounts 205
Prime Brokerage Accounts 205
Account Transfer 206
Margin Accounts 207
Guaranteeing a Customer’s Account 208
Day Trading Accounts 208
Commingling Customer’s Pledged Securities 209
Wrap Accounts 209
Regulation S-P 209
Pretest 211
CHAPTER 8 MARGIN ACCOUNTS 215
Regulation of Credit 215
House Rules 218
Establishing a Long Position in a Margin Account 218
An Increase in the Long Market Value 219
Special Memorandum Account (SMA) Long Margin Account 221
A Decrease in the Long Market Value 222
The Minimum Equity Requirement for Long Margin Accounts 223
Establishing a Short Position in a Margin Account 224
A Decrease in the Short Market Value 225
An Increase in the Short Market Value 226
The Minimum Equity Requirement for Short Margin Accounts 227
Margin Requirements for Day Trading 228
Combined Margin Accounts 229
Portfolio Margin Accounts 230
Pretest 231
CHAPTER 9 INVESTMENT COMPANIES 235
Investment Company Philosophy 235
Types of Investment Companies 236
Open-End vs. Closed-End Funds 237
Exchange-Traded Funds (ETFs) 238
Exchange Traded Notes (ETNs) 238
Diversifi ed vs. Nondiversified 239
Investment Company Registration 240
Registration Requirements 240
Investment Company Components 242
Mutual Fund Distribution 244
Selling Group Member 245
Distribution of No-Load Mutual Fund Shares 245
Distribution of Mutual Fund Shares 245
Mutual Fund Prospectus 245
Additional Disclosures by a Mutual Fund 247
Anti-Reciprocal Rule 247
Money Market Funds 248
Valuing Mutual Fund Shares 248
Changes in the NAV 249
Sales Charges for Open-End Funds 250
Sales Charges for Closed-End Funds 250
Front-End Loads 250
Back-End Loads 251
Other Types of Sales Charges 251
12B-1 Fees 252
Calculating a Mutual Fund’s Sales Charge Percentage 253
Finding the Public Off ering Price 253
Sales Charge Reductions 254
Breakpoint Schedule 254
Letter of Intent 255
Breakpoint Sales 255
Rights of Accumulation 255
Automatic Reinvestment of Distributions 256
Combination Privileges 256
Conversion or Exchange Privileges 257
30-Day Emergency Withdrawal 257
Voting Rights 258
Yields 258
Portfolio Turnover 258
Voluntary Accumulation Plans 259
Dollar Cost Averaging 259
Contractual Accumulation Plans 260
Hedge Funds 261
Pretest 263
CHAPTER 10 VARIABLE ANNUITIES AND RETIREMENT PLANS 267
Annuities 267
Annuity Purchase Options 271
Accumulation Units 272
Annuity Units 272
Annuity Payout Options 272
Factors Affecting the Size of the Annuity Payment 274
Taxation 275
Sales Charges 275
Variable Annuity vs. Mutual Fund 275
Retirement Plans 275
Individual Plans 276
Individual Retirement Accounts (IRAs) 276
Keogh Plans (HR-10) 281
Tax-Sheltered Annuities (TSAs) and Tax-Deferred Accounts (TDAs) 282
Corporate Plans 284
Employee Stock Ownership Plans (ESOPs) 286
Profit Sharing Plans 286
401(k)s and Thrift Plans 287
Rolling Over a Pension Plan 287
Employee Retirement Income Security Act of 1974 (ERISA) 287
Pretest 289
CHAPTER 11 SECURITIES INDUSTRY RULES AND REGULATIONS 293
The Securities Exchange Act of 1934 293
The Securities and Exchange Commission (SEC) 294
Extension of Credit 295
Trading Suspensions 295
Issuers Repurchasing Their Own Securities 295
Tender Offers 297
Stockholders Owning 5 Percent of An Issuer’s Equity Securities 298
The National Association of Securities Dealers (NASD) 298
Becoming a Member of FINRA 300
Foreign Broker Dealers 302
Registration of Agents/Associated Persons 302
Retiring Representatives/Continuing Commissions 303
State Registration 303
Retail Communications/Communications with the Public 303
FINRA Rule 2210 Communications with the Public 304
Broker Dealer Websites 307
Blind Recruiting Ads 307
Generic Advertising 308
Tombstone Ads 308
Testimonials 309
Free Services 309
Misleading Communications 309
Securities Investor Protection Corporation Act of 1970 309
Customer Coverage 310
The Securities Acts Amendments of 1975 311
The Insider Trading and Securities Fraud Enforcement Act of 1988 311
Firewall 312
The Telephone Consumer Protection Act of 1991 312
The Penny Stock Cold Call Rule 313
Violations and Complaints 314
Resolution of Allegations 314
Minor Rule Violation 314
Electronic Blue Sheets 315
Mediation 316
Code of Arbitration 316
The Arbitration Process 316
Political Contributions 318
Investment Adviser Registration 319
Investment Adviser Representative 319
The National Securities Market Improvement Act of 1996 320
Investment Adviser Registration 321
Investment Adviser Capital Requirements 321
Exams for Investment Advisers 321
Investment Adviser Advertising and Sales Literature 322
Investment Adviser Brochure Delivery 323
Soft Dollars 323
Broker Dealers on the Premises of Other Financial Institutions 324
The Uniform Securities Act 325
Sarbanes-Oxley Act 326
SEC Regulation S-K 327
SEC Regulation M-A 328
The Hart-Scott-Rodino Act 329
FINRA Rule 2290 (Fairness Opinion) 330
SEC Regulation S-X 330
Pretest 333
ANSWER KEYS 339
APPENDIX 349
GLOSSARY OF EXAM TERMS 371
INDEX 437
