Chapter 2:

Bearer bonds dont record owners information with issuer and bond certificate doesnt have legal
owners name printed on it (must clip coupons)
Registered bonds have owners name recorded on books of issuer and buyers name appears on bond
certificate
Principal only only have owners name printed on bond certificate (receives principal at maturity but
still must clip coupons)
Book entry/Journal Entry no physical certificate issued to holder as evidence of ownership; fully
registered and issuer knows who is entitled to receive semi-annual interest and principal payments

Serial Maturity portion of issue matures over a series of years (larger portion of principal later years)
Balloon Maturity serial maturity but largest portion of principal amount is due on last date

Secured bonds backed by specific pledge of assets; trustee holds title to collateral
Mortgage bonds bond backed by pledge of real property (real estate owned by company)
Collateral Trust Certificate bond backed by pledge of securities issuer has purchased for investment
purposes (both stocks and bonds held by trustee)
Unsecured bonds known as debentures; only backed by good faith/credit of issuer
Income/adjustment bonds unsecured and investor only promised if issuer has enough income to pay

Trust Indenture Act of 1939 requires corporate bond issues in excess of $5,000,000 (that are repaid in
excess of one year) issue a trust indenture for the issue; only applies to corporate issuer (federal and
municipal issuers are exempt)
- trust indenture is contract between issuer and trustee

Chapter 3:

GNMA only agency backed by full faith/credit of U.S. Gov.; provides liquidity to mortgage markets;
buys pools of mortgages issued by FHA and Dept. of Veteran Affairs
- pools sold off to investors as pass through certificates ($25,000)
- taxable on all levels; risk is early refinancing

FNM public for profit corporation; provides mortgage capital
- purchases mortgages and packages them into MBS ($5,000 1,000,000)
- pays interest semi-annually; also issues debentures ($10,000)

FHLMC purchases residential mortgages from lenders and packages them into pools for investors

FFCS privately owned lenders that provide financing for farmers

Chapter 4:
Bankers Acceptances in order to facilitate foreign trade, import/export; acts like line of credit or post-
dated check; maturity is from one day to 9 months
Negotiable CDs 30 days 10+ years; minimum denomination is $100,000; exchanged b/t investors
Commercial Paper corporations sell unsecured promissory note; 1 day to 9 months; issued at discount
to face value; issued in book entry form
Federal funds loans loans between two large banks for $1,000,000 or more
Repurchase agreement fully collateralized loan made b/t dealer and large institution; borrower agrees
to repurchase securities from lender at slightly higher price

Government and municipal issues with less than one year to maturity may be traded in money market

Discount rate interest rate that Federal Reserve Bank charges on loans to member banks
Federal Funds rate rate that member banks charge each other for overnight loans
Prime rate rate banks charge largest and most creditworthy customers on loans

Chapter 5:
Read if have time

Chapter 6:
- registration under review by SEC for minimum of 20 days
- prospectus delivery requirements: 90 days for IPOs quoted on OTCBB/pink sheets, 25 days for NASDAQ
listed securities (for additional offerings: 40 days for OTCBB/pink sheet securities, none for NASDAQ)

FINRA rule 5130 requires broker/dealer to obtain eligibility statement from all account owners who
purchase a new issue of stock within 12 months prior to purchase;

Blueskying the issue registering securities in states in which it will be sold

Selling concession > underwriting fee > management fee (all add up to underwriting spread)

Exempt Securities: debt securities with maturities less than 270 days and sold in $50,000+ increments
Exempt issuers: US government, state/municipal governments, insurance companies, banks and trusts,
credit unions and savings and loans, religious and charitable organizations

Rule 144 regulates how control or restricted securities may be sold; must file form 144 at time order is
entered and order is greater of avg. weekly trading volume for last 4 weeks or 1% outstanding stock

Reg A offering small business; file abbreviated notice of sale to SEC; same 20 day cooling period

Rule 145 requires shareholders approve any merger or reorganization

Chapter 7:
Super DOT customer orders electronically routed directly to specialist post for execution; all listed
securities with following limits (preopen 30,099 shares, post open market order 2,099, pre/post
open limit orders 99,999)

Reg Sho:
Rule 200 determines who is long security; considered long security if they hold a security future
contract and have been notified they will receive underlying
- broker dealers must aggregate positions unless qualifies to keep each unit independent
Rule 203 broker dealer must not sell short an equity without having borrowed the security
- must close out all fail to delivers within 35 days of trade; exempt if broker dealer has accepted order to
sell short equity from another broker dealer
- if block trading desk has any of block left, they may not purchase the same stock on a plus tick within
20 minutes of close

NYSE Listing Requirements:
- at least 2,000 shareholders owning at least 100 shares, 1,100,000 publicly held shares with market
value of at least $1billion or $60 million for IPS
- to get delisted: board of directors must approve, 35 largest shareholders notified, boards audit
committee must approve

NASDAQ Subscription Levels:
Level 1: info to inside market, last sale, and daily volume; quotes for RRs
Level 2: inside market, quotes of all market makers, total daily volume, high/low for the day
Level 3: all features of level 2 and firm can enter/update their own markets

- all quotes published over NASDAQ workstation are firm quotes (violation is backing away)

NASDAQ Execution Systems:
- NMCES accepts market orders and immediately executable limit orders for customer and firm accts
- if market makers quote is exhausted, NMCES will generate quote that is one price level up from worst
quote

- ADF operated by FINRA 8 AM 6:30 PM; allows unlinked ECN participants to enter quotes, match,
and report trades (quotes do not appear in NMCES unless improves inside market)
*** no execution capabilities; all participants required to provide direct and indirect electronic access to
quotes (direct access allows others to execute order electronically; indirect access allows others to
execute firms quote through firms broker dealer customer)
- two seconds for accepting or declining order; three seconds or less turnaround for communication

- TRACS collects trade information for market participants who use ADF; established by FINRA to assist
those who are not eligible to use NASDAQ Market Center Trade Reporting Facility (TRF)

- ECNs operated independently of FINRA; display/execute third party orders; allowed access to NMCES
- not required to maintain two-sided market and do not take positions in security
- full participant ECN may displays quotes, enter/accept directed/nondirected orders; accept
automatic executions; send orders for automatic execution through NMCES #+ notation
- order entry ECN may fill, decline, price improve, or allow order it has received to expire

UTP given access to NMCES; may enter quotes and enter directed/nondirected orders as long as UTP
exchange has agreed to accept automatic executions

MARKET CENTERS:
SEC Rule 11Ac1-5 requires market centers to disclose certain order execution information for covered
securities (a market center is: an OTC MM, MM that internalizes orders, ATS, NSA, NSE)
- requires broker dealers to file quarterly reports regarding execution of non-direct customer
orders; reports remain public and posted on Internet

SEC Regulation NMS ensures trades dont get executed at inferior prices order protection rule
Non NASDAQ OTCBB for OTC securities that cant meet listing standard (DPPs and ADRs) 8AM 8PM
Third Market broker dealer to broker dealer; reported through TRF and must enter quotes through
CQS if exchange listed security

Market Maker Regulations and Responsibilities
- Opening Cross begins 9:28; all executions reported to ACT/TRF with .T modifier
- 9:28-9:29 imbalances indications sent out every 15 seconds; after 9:29 sent out every 5 seconds

- under NASDAQ halt Cross imbalance information every 5 seconds until trading begins
- voluntary quote withdraw (20 business day penalty) sudden influx of orders, trading losses, lack of
interest

OATS developed by FINRA, tracks order through each stage of its life from receipt to execution to
cancellation; must be submitted by firms daily

ACT (now known as TRF) facilitates reporting, matching, and clearing of trades executed through
NASDAQ and other OTC environments

- for trades not automatically reported to ACT/TRF, order entry firms may enter, review, accept, decline,
or cancel transactions using the ACT/TRF Trade Scan function
- must enter terms of trade within 20 minutes (Level II) or accept/decline within 20 mins
*** ACT/TRF is NOT an order execution system; used to match, report, and clear trades
Exempt from ACT/TRF reporting: private placements, securities part of primary/secondary distribution,
odd lot transactions, purchase of securities as part of tender offer, transactions executed on exchange

Regulation M, Rule 101 sets restricted period for prior to effective date
5 days if: Avg. Daily volume < $100,000, value of public float < $25 million
1 day if: Avg. Daily volume > $100,000, value of public float > $25 million
No restrictions: Avg Daily volume > $1,000,000 and public float > $150 million
- exceptions to rule 101: Gov/Municipal securities, non convertible investment grade bonds/preferred
stock, investment company securities, odd lot orders

Regulation M, Rule 102 issuers and selling shareholders may not bid for a covered security
Regulation M, Rule 103 market makers may only act as passive market makers; may not enter a bid
that exceeds highest bid entered by an independent party
- syndicate manager must apply by filing Underwriting Activity Form one business day prior

- stabilizing bid must request by filing UAR no later than end of first day entered stabilizing bid

TRACE FINRA members use to report transactions in eligible fixed income securities
Exempt from TRACE: gov/municipal debt, CMOs, repurchase agreements, money market instruments,
MBS, Asset back securities, Development bank debt
Time of Execution: 8AM 6:30 within 15 minutes, 6:30 PM 11:59 PM T+1 within 15 mins of TRACE
opening next day

Trade Complaints reviewed by Hearing Officer