Series 7 Trading Markets Section 5 (Customer Disclosure & Settlement Rules)

Front 1

When are Customer trade confirmations sent out?

Back 1

If Regular way trade, sent the day after the trade.

If Cash trade, sent that day

Front 2

What is included in customer disclosures?

Back 2

always: name, address, firm name, firm address & telephone number, name of security, size, price, trade date, settlement date, CUSIP number (committe on Uniform security identification procedures number)
-if bond: accrued interest
-if agency trade: disclosed commission
-if principle transaction: mark-up NOT disclosed for non-NASDAQ stocks. if NASDAQ - mark-up disclosed
-Whether a PAYMENT FOR ORDER FLOW was made
-Whether it is a cash or margin account

Front 3

Who sets the rules for Municiple Bonds?

Back 3

MSRB : Municiple securities rulemaking board
-DISCOUT BONDS are priced to MATURITY
-PREMIUM BONDS are priced to near term CALL DATE

-only "in whole" calles are considered when pricing municipal issues
-dated date for new issues is used

Front 4

Agency Basis

Back 4

-The order is match with another party (buy worders are matched to sell orders) COMMISSIONS GET CHARGED

Front 5

Principal Basis

Back 5

-The firm buys teh stock into its inventory (as te customer sells it); or sells the stock from its inventory (as the customer buys it); mark-ups and mark-downs are charged

Front 6

What is FINRA's 5% policy?

Back 6

-it is the guideline for commissions AND Mark-ups on OTC transactions

-apllies to BOTH OTC and exchange trades of non-exempt securities
-NOT to

Front 7

Pricing of commissions or mark-ups on trades are determined by many factors. what are these factors?

Back 7

1. the type of security. [ex. NASDAQ Global Market stocks would have a lower percentage than a high yield bond trade]
2. availability of the security [thinly traded stocks are mroe difficult to buy/sell and could justify a higher percentage]
3. total dollar amount of the trade
4. price of the security
5. disclosure of teh charges to the customer before the trade
pattern of mark-ups [these shoud be consistent with other similar trades doen by the firm]
6. nature of the member's business [ex. full service brokers can justify higher percentage mark-ups]

Front 8

What does FINRA 5% policy apply and not apply to?

Back 8

-NOT apply to exempt securites nor to NEW issues
-Applies to:
--trades effected on the exchange floor
--traes effected in NASDAQ stocks
------NASDAQ trades can be on an agency or principal basis, either way both will be disclosed
--OTC agency and Principal trades
--RISKLESS OR SIMULTANEOUS TRADES
--PROCEEDS TRANSACTIONS (where cust liquidates one position and use proceeds to buy another. YOU get "combined" commission or mark up

Front 9

what are some Agency transaction considerations

Back 9

-avalability of the security
-expenses associated with the trade
-value of servies rendered
-amount of other compensation received (ie. muni bon tax wap - one bond is being 'swapped' for another- two transactions are occuring)

Front 10

What are some Principal Transaction Considerations

Back 10

-best judgement as the fair erket value
-expenses associated with the trade
-fact that the firm is entitled to a profit
-total dollar amount of the transaction

Front 11

How many days is Reular way trade needed to settele?

Back 11

3 days

Front 12

What is regular way settlement date for U.S. Gov't & Options?

Back 12

the NEXT business day

Front 13

What is the settlement date for cash trades?

Back 13

occurs same day before 2:30 pm EST.
-prices sellers get from this are lower because of the dificulty of arranging settlent on that day

Front 14

What is the settment date for SELLER'S OPTION

Back 14

if more than 3 Business days are needed tod eliver; delivery cannot occur earlier than the 4th business day

Front 15

what is the settlement date for new issues

Back 15

"When, As, And If Issued"
-used for new issues whose issuance is announced, but the certificates aren't yet available for trading

-specifies price adn trade date but NOT settlement date b/c securites are not available yet

Front 16

what are comparisonand who do they involve?

Back 16

comparisons are sent to the 'contra' broker on the otehr side of the trade to ascertain that all terms are agreed upon and the settlement can proceed.
-dealer to dealer. no customer information is listed
-the info found on the comparisions are the specifics of the trade [trade date, size of trae, security traded...]

Front 17

what is a DK notice?

Back 17

DK notice = Don't know notice
-are requred to be resolved within 20 minutes of receiving a mismatched trade report
-EX: your firm receives comparison for a trade executed at $50 and comparison shows trade at $60; to clear record, yoru firm will "DK" the comparison

Front 18

DRS

Back 18

-DRS = Direct Registration System
- the good delivery of securities is for those in 'physical form'. the DEPOSITORY TRUST CORPORATION (DTC) maintains custody of most physcial cerrificates and clears and settles trades through its NATIONAL SECURITIES CLEARING CORPORATION (NSCC) subsidiary
-DRS is run by DTC and allows invetors to be registed directly ont eh books of the transfer agent w/o a physical certificate
---the security is moved 'electronically' when trade occurs

Front 19

when are Due Bills requred

Back 19

when a trae takes place prior to ex-date ('cum' distribution) bust settlent does not take place till after record date

Front 20

what is the regular way ex-date for cash dividends?

Back 20

2 business days before record date

Front 21

Rejection

Back 21

When securites are delivered to a brokerage firm on settlement but are rejected for a valid reason

Front 22

Reclamation

Back 22

when brokerage firm ACCEPTS deliver and then later detemines delivery wasn't good

Front 23

How many types of calls are there when considering pricing bonds?

Back 23

FOUR
1. Optional Calls
2. Mandatory Calls
3. Extraordinary optional calls
4. extraordinary mandatory calls

Front 24

Describe what a Optional Call is and when its used.

Back 24

-Gives the issuer the option to call the bonds at present dates and present prices as est. in bond contract
-the issuer will only exercise its option to call if it makes economic sense eg. interest rates have fallen after issuance
-optional calls are known as "IN WHOLE" calls; the whole issue is callable at present dates and prices
-these calls are considered when pricing municipal premium bonds

Front 25

Describe what a Mandatory call is and when its used.

Back 25

- a mandatory call obligates the issuer to call some of the bonds at preset dates and prices as established in bond contract
-the bonds to be called are selected by random lot; or, if it is cheaper, the issuer may buy bonds in the open market to satisfy the mandatory call requirement
-mandatory calls are known as "IN PART" or "SINKING FUND" calls; only a small portion of the issue is called at preset dates
-due to the small chance of being called, these callas are not considered when pricing municipal premium bonds

Front 26

Describe what a Extraordinary Mandatory call is and when its used.

Back 26

-occurs due to some extraordinary, unforseen event
-an example is a calamity call, that requires the issuer to call in the bonds if a facility built with the proceeds is destroyed
-due to the very small odds that this will occur, this call is not considered when pricing municipal premium bonds

Front 27

Describe what a Extraordinary Optional call is and when it is used.

Back 27

-ex. a housing bond issue, where the revenues are mortgage payments. if prepayments occur faster than expected, the issuer has the option of calling in bonds with the monies, rather than continue to pay needless interest on the outstanding bonds
-due to the need for a "crystal ball" to predict whether this might occur, these calls are not considered when pricing municipal premium bonds

Front 28

What determines a fair and reasonable price in a Municipal Principal transaction?

Back 28

-(remember FINRAs 5% rule does not apply here)
1. best judgement of the dealer as to the value of the bond
2. expenses incurred by the dealer executing the transaction
3. dollar amount of the transaction
4. the fact that the dealer is entitled to a profit

Front 29

What determines a fair and reasonable price in a Municipal AGENCY trade?

Back 29

(FINRA 5% does not apply)
1. avalability of the security - meaning how difficult was it to complete the trade
2. expenses associated with effecting the transaction
3. value of services rendered by the municipal broker
4. value of any other compensation received in connection with this transaction
---ex. a customer directs a municipal dealer to sell one bond and use the proceeds to buy another in a "bond swap". the dealer is performing 2 trades instead of 1, and so, should charge a bit less for each trade