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Accelerated Cost Recovery System (ACRS)
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12b-1 fees: Advertising and promotional
costs incurred by a mutual fund and charged against the assets in
the fund under a Rule 12b-1 plan filed with the SEC. Funds filing
a 12b-1 plan may distribute the shares themselves or distribute
them through an underweriter and charge an additional sales load.
The maximum 12b-1 fee charge is .75% of net assets.
Accelerated Cost Recovery System (ACRS):
A statutory schedule of depreciation deductions for assets put into
service after 1980 and before 1987. Salvage value is disregarded
in computing ACRS allowances. Replaced by Modified Cost Recovery
Acceptance, Waiver, and Consent Procedure:
A disciplinary procedure used when the Department of Enforcement
of the NASD believes a violation has occurred and the member or
associate does not dispute the violation With this procedure, the
Department of Enforcement prepares and asks the respondent to sign
a letter that accepts the charges, waives rights to have a hearing
and appeal the decision, and consents to imposition of sanctions.
Account Guarantee Acknowledgment: A written
acknowledgment to the firm that it may use the money and securities
in the guaranteeing account without restriction to carry the guaranteed
account and pay any deficit in the guaranteed account. The margin
to be maintained is then calculated by combining the two accounts.
Accredited investor: An
investor in an offering who meets certain criteria under Regulation
D, who does not have to be counted for purposes of limitations on
the number of purchasers in an offering. At least one of the
following criteria must be met to be an accredited investor:
(i) a buyer with a net worth individually or with a spouse of $1,000,000
or more; (ii) institutional investors including banks, insurance
companies, registered broker/dealers, and large pensions plans;
(iii) tax-exempt organizations with total assets in excess of $5,000,000;
(iv); private business development companies; (vii) directors, officers,
or general partners of the issuer; and (viii) entities owned entirely
by accredited investors.
Acid test ratio: See Quick
ACRS: See Accelerated
Cost Recovery System.
Actively traded securities:
Securities that have a current worldwide average daily trading volume
over 60 consecutive calendar days (ADTV) of at least $1 million
and an issuer with common equity securities having a public float
value of at least $150 million. This condition is used for an exemption
from Regulation M, which restricts the trading of an existing security
by participants in a public offering of that security.
Additional bond test: An
income test, which ascertains that revenues must meet certain levels
to allow the sale of additional bonds against the financed facility.
A provision in the trust indenture of an open end revenue bond.
Adjustment bonds: See
ADR: See American
Advertising: Under NASD rules, means promotional items that have uncontrolled distribution. In other words, the firm has no way to know who will see the item. The material is published or designed for use in newspapers, magazines or other periodicals, radio, television, telephone or tape recording, video tape display, signs or billboards, motion pictures, telephone listings (other than white-page listings), or other public media. Does not include communications that are neither advertising nor sales literature.
Adviser's client account: An account with a brokerage firm in which an investment adviser pools the funds of all his customers, keeping a record of each customer's percentage of the account. The brokerage firm does not know the identity of the individual customers. The investment adviser pays for securities and meets margin calls. The customers make their checks out to the investment adviser. Also called an omnibus account.
Affiliated Persons: Persons (individuals, corporations, trusts, etc.) in a position to influence a corporation's decisions. Includes officers, directors, and principal stockholders (those with 10% ownership or more) of the corporation, and their immediate families. Also called insiders or control persons.
The inquiry a registered representative makes to ensure that
a customer who has custody of the securities certificates in a trade
can deliver the certificates in good delivery form within three
days of the trade date. The registered representative must talk
with the customer and make a notation on the order ticket about
his conversation with the customer.
Aggregate indebtedness: A firm's unsecured liabilities, including any customer-related liabilities. Aggregate indebtedness does not include subordinated agreements or loans fully collateralized either by fixed assets such as real estate or by the firm's securities.
Aggregate exercise price: In an options position, the total amount of money involved in the resulting stock trade if the position is exercised. If a customer is long 1 XYZ July 50 Put, the aggregate exercise price is $5,000.
Alternative minimum tax: A tax on certain "preference items," most of which are tax deductions allowed under the normal income tax calculation. Taxpayers pay either the regular tax or the alternative minimum tax, whichever is greater.
Alternative orders: An order with two parts. When one part is filled, the other part is automatically canceled. For example, a customer may enter an order to buy at 32 or 38 stop. He is trying to buy the stock for $32 or less, but if the price increases to or above $38, it becomes a market order.
Alternative trading system: An electronic system that brings together buyers and sellers of securities and completes trades by matching orders according to a predefined logic. Electronic Communications Networks (ECNs) are alternative trading systems that have sufficient volume in non-government securities and commercial paper that they must be registered with the SEC. Unregistered ATSs include the Arizona Stock Exchange, BRASS, and Optimark. The Arizona Stock Exchange is an electronic call market where buy and sell orders are combined into one large daily trade that takes place at a single price. BRASS is a system management network to rout orders, and Optimark is an electronic trading system that can be purchased by an exchange or broker, but is not an exchange or broker in itself.
Amortization: A reduction in a debt or fund by periodic payments covering interest and part of the principal. In municipal bonds, amortization refers to adjusting the cost of a bond for any premium paid.
Annuity: Money is paid (usually to an insurance company) to someone who invests the money for a set period of time and then pays money to the annuitant (the one receiving the annuity) when he/she reaches a certain age. Fixed annuities guarantee a fixed payment amount, while variable annuities pay a varying amount depending on the fixed amount of initial investment.
Annuity units: An accounting measurement used to determine the annuitant's ownership in the separate account during the annuity period when payments are being made to the investor on a variable annuity contract.
Anti-dilution clause: A clause in the trust indenture of a bond offering which provides that the conversion price (or conversion ratio) of a convertible bond be adjusted in the case of stock splits or stock dividends paid to common stockholders.
AON: See all-or-none
Arbitrage: Taking advantage of minor aberrations in the market to try to profit as the market returns to normal. Arbitrage might take advantage of imbalances in prices between two markets for the same security (such as a domestic and a foreign market) or between two types of securities whose value depends on the same underlying security (such a stock and a bond convertible into the stock).
Asked price: The lowest price a seller of a security is willing to take for a unit of a security at a particular time. (Note that the OTC market uses the term "asked," while the exchanges use the term "offered" or "offering.")
Asset allocation: A fundamental concept in portfolio management in which an investment adviser determines the investment profile for a client, including their risk tolerance and time horizon, then uses this information to split the client's funds between appropriate classes of investments. As relative movements in the market for the various asset classes change the mix of assets in the portfolio over time, the adviser must rebalance the portfolio.
Asset class: A group of investments with similar risk and return characteristics, such as cash equivalents, government bonds, municipal bonds, corporate bonds, common stock (or industry groupings within the broad category of common stocks), real estate, precious metals, and collectibles.
Assistant Representative-Order Processing: A Series 11 representative who only accepts unsolicited customer orders for execution. Cannot solicit customers, give investment advise, make recommendations to customers, or effect transactions for the NASD-member's account. Must not be registered in any other capacity for the firm. Compensation cannot be based on the number or size of transactions they handle.
ATS: see Alternative
At-risk rule: A provision in the tax code stating that a limited partner may only include debt as part of his or her basis in the partnership if he or she is personally liable for the debt (i.e., if it is a recourse loan).
Auditor's report: The public accountant's statement as to the scope of the review of the books and records of the corporation and the accountant's opinion as to the accuracy of the financial statements (i.e., unqualified or to some degree qualified approval).
Automated Confirmation Transaction (ACT): A computer system that matches trade information, determines locked-in trades, and submits them to clearing through the National Securities Clearing Corporation (NSCC). The primary way that OTC transactions in equity securities are reported. Participation is mandatory for all brokers that are members of a registered clearing agency and for all brokers who have a clearing arrangement with such brokers.
Balance of payments: A summary statement comparing the money coming into a country with the amount of money leaving the country for one period of time. Usually divided into the current account (showing imports and exports of goods and services), the capital account (showing movement of investments), and gold (showing movement of gold). The statement uses double-entry bookkeeping, which ensures that though individual categories may have a deficit or surplus, the overall statement must not.
Balance of trade: The net difference in imports and exports of goods by a country for a period of time. (Note: This is not the same as the change in the current account portion of the balance of payments, since the current account also includes imports and exports of services.) More exports than imports produce what is generally considered a favorable balance of trade, while the reverse is generally considered unfavorable.
BAN: See Bond
Basis book: A series of tables used to determine the dollar price of a serial municipal bond issue (quoted on a yield to maturity basis), or to determine the yield to maturity on a term bond (quoted in the same manner as corporate bonds).
Bear Spreads: An options spread position that is profitable when the stock price decreases. The position is characteristically entered by purchasing a high strike price option and selling a low strike price option.
Blanket fidelity bond: Insurance brokerage firms are required to carry to protect customers from the dishonesty or carelessness of brokerage employees and officers. Covers loss of money or securities, forgery, and fraudulent trading. The amount of coverage required is linked to the firm's required net capital under SEC Rule 15c3-1. The minimum bond allowed for all categories is $25,000.
Board Broker: The employee of the CBOE who maintains the public limit order file, which is similar to a specialist's book, and executes limit orders for customers. Also known as an Order Book Official, or OBO.
Bond: A long-term debt instrument issued by a corporation or government entity. The bondholder loans the issuer money and the issuer promises to pay the bondholder interest at a specified rate on the loan for a specified period of time and then to repay the loan at expiration. The bondholder is a creditor of the issuer rather than a partial owner.
Bond Anticipation Note: A short-term municipal note issued in advance of long-term bond financing, commonly referred to as a BAN. The BAN is repaid from the proceeds of the bond issue. BANs are normally general obligations of the issuer.
Bond Swap: Selling municipal bonds (usually at a loss) and using the proceeds to buy other municipal bonds, to establish a loss for tax purposes, to diversify a portfolio, to increase cash flow, or increase yield. Also known as tax swaps.
Book entry: A bond registration procedure in which the bondholder does not receive the physical certificates held by a depository. The depository maintains ownership records and forwards interest payments.
Book value: The value of a corporation's assets or liabilities on its balance sheet. Assets are valued at their original purchase price less any depreciation taken for accounting purposes. The book value of common stock is the corporation's assets less its liabilities and the liquidation value of its preferred stock. Book value may have little relationship to market value.
Branch office: Any location identified to the public as a location where an NASD member conducts investment banking or securities business. However, telephone directories, business cards, etc. may refer to a non-branch, as long as they also give the address and telephone number of the branch office or office of supervisory jurisdiction that supervises the non-branch.
Breadth of the Market: See Advance/Decline Ratio.
Broker: See Agent.
Bull spread: An options spread
position that is profitable if the stock price rises. The position
is characterized by a low strike price for the long position and
a high strike price for the short position.
Business cycle: A recurring cycle of economic conditions starting with credit expansion, economic activity becoming feverish, then depressed. Recovery occurs when the malinvestments and maladjustments have been corrected.
Buyer's option: A contract giving the buyer the right to specify a later date on which to settle the trade. The specified date must be from six business days to sixty calendar days after the trade date.
Canadian interest cost:
See True Interest Cost.
CBOE: See Chicago Board Options Exchange.
CD: See Certificate of deposit.
Certificate of Limited Partnership: A document summarizing the provisions of a limited partnership. It must be filed with the secretary of state in the state in which the partnership is formed. Filing the certificate creates the limited partnership.
CFTC: The Commodity Futures Trading Commission.
Chinese Wall doctrine: Doctrine by which firms must establish barriers restricting information flow between departments to ensure that insider information acquired by one department (legal or investment banking, for example) will not be used in trades of another department or in recommendations to customers.
Circuit breakers: Trading halts, curtailment of automated trading systems and/or price movement limits used by the exchanges to attempt to prevent the free-fall of stock or stock index futures markets. Established after Black Monday in 1987 by major stock and commodities exchanges. The breakers are triggered when the market has fallen by a specified amount in a specified period. Amounts that trigger the breakers are changed from time to time.
Code of Arbitration: Procedure of the NASD for settling disputes among participants in the securities markets by arbitration. Applies to disputes between and among members, members and their associates, members and public customers, associates of members and public customers, and members and clearing agencies or persons using the facilities of a clearing agency (however, only when the clearing agency has an arbitration agreement with the NASD).
Collateral: Securities or other assets that a borrower pledges to a lender to secure repayment of a loan. If the borrower does not make payments as promised, the lender may legally seize the collateral and use the proceeds from its sale to pay off the loan.
Combination: An options position in which an investor is long both a put and a call option on the same stock or short both a put and a call option on the same stock. The options usually have different strike prices.
Communications that are neither advertising nor sales literature: Items exempt from the NASD's advertising and sales literature rules, including: 1. tombstone advertisements or similar communications; 2. documents intended for the internal use of the firm and not given to the public; 3. communications which only identify the member and/or offer a specific security at a stated price; 4. prospectuses, offering circulars, etc. used in connection with a public offering of a security that has been registered or filed with the SEC or a state (except for the prospectus for investment company shares); and 5. communications merely stating facts, such as the member's new name or address, facts concerning a merger or acquisition, the firm's NASDAQ® symbol, or the NASDAQ® symbol of a security in which the member is a registered market maker.
Complaint: Defined by the NASD as a written statement of a grievance by a customer or his agent, involving persons associated with the member concerning the solicitation, execution, or disposition of funds or securities.
Registered Options Principal: A registered options principal
who has been designated by the broker/dealer to maintain compliance
with industry rules and federal law, usually referred to as a CROP.
He must approve all items of advertising, sales literature, and
Conduit Theory: Theory governing an exemption on paying taxes for Regulated Investment Companies. The theory governing this exemption is that an RIC that distributes most of its income is acting only as a conduit for income on investments.
Consent to service of process: Legal document used by the state administrator to simplify filing of complaints under state securities laws. The person or entity signing it (such as the issuer of a security, or a securities registrant with the state) agrees that, for noncriminal complaints, any legal papers regarding the signee that are served on the state administrator in lieu of the signee have the same force and validity as if they were served directly on the signee.
Consolidated Tape: System for providing the last sale price and volume of trades in exchange-listed securities. The system has two tapes: Network A and Network B. All trades in NYSE securities, regardless of where they occur, are listed on Network A with an identifier as to where they originated. Transactions in securities listed on AMEX and other regional exchanges are reported on Network B. Participants in addition to the NYSE and AMEX include BSE, CBOE, CSE, CHX, NASD, PSE, and PHLX.
Continuous issue of redeemable securities: Manner in which shares of a mutual fund are issued. The shares purchased are new shares, and when a shareholder wishes to sell shares, he sells them back to the fund itself (redeems them) rather than selling them on the open market. The shares repurchased by the mutual fund are retired: they do not become treasury stock, nor may they be reissued; the shares simply cease to exist.
Continuous net settlement: The offsetting of payments and certificates when multiple trades involving a particular security have the same two parties on opposing sides. Used by registered clearing agencies.
Contractual plans: A contract committing an investor to invest money over a period of time. The sales charges are deducted over the life of the contract, being higher in the early part of the contract.
Control persons: See Affiliated persons. Control persons are also called "Insiders."
Convertible: Designation for a bond, debenture, or preferred stock which signifies that it may be exchanged by the owner for common stock or another security, usually one issued by the same corporation. Conversions are subject to terms established in the issue of the original security.
Cost basis: See Basis.
CROP: See Compliance Registered Options Principal.
Currency exchange risk: The risk that the value of an investor's domestic currency may drop against the value of the currency in which an investment is held. Much of this risk can be hedged away through the market for forwards and futures.
Customer: Any person or entity for whom the broker/dealer holds funds or securities, unless that entity is another broker/dealer. (Though municipal securities dealers may be considered customers on transactions not involving municipal securities.)
Defeasance: Annulment of trust indenture conditions granting new bonds a claim on revenues, and the old bonds a claim on the escrow account containing the proceeds (the money) from the pre-refunding issue.
Defined benefit plan: A corporate pension plan that guarantees a specific level of benefits for participants, usually based on levels of compensation and years of service. For example, an annuity purchased by the corporation for the employee.
Defined contribution plan: A corporate pension plan that guarantees the employer will pay a specific amount into the plan each year. Either a money purchase plan, such as a 401(k) or a SEP, or a profit sharing plan, or some combination of the two.
Delivery versus payment: A type of settlement, commonly used by bank trust departments, in which the security is paid for when the broker/dealer has it deliverable in the purchaser's name. Also referred to as DVP or COD.
De minimus transactions: A small amount of transactions allowed in a state for a registered rep who is not registered in that state. Applies when an existing customer of a firm moves to another state or stays in another state for less than 30 days. Subject to restrictions.
Depository Trust Company (DTC): A central depository for the physical certificates evidencing securities held by its members. The members transfer securities among themselves to effect transactions using electronic bookkeeping entries.
Depository trust receipt: A written guarantee that can be used for money or stock, and to cover either calls or puts. Unlike escrow receipts or bank guarantee letters, which can only be used once, a depository trust receipt may be used again upon expiration of the option.
Depreciation: A noncash expense reflecting wear and tear of property used as part of a trade or business or held for the production of income. Usually, the cost of an asset, less an appropriate salvage value, is "written off" over its useful life by periodically reducing the book value of the asset with an increase to accumulated depreciation and charging an equal and offsetting amount as depreciation expense. Depreciation used for book purposes may be different from the amounts allowed on tax statements.
Derivative security: A contract whose value depends on the performance of some other security, index, or other investment. For example, a stock option is a derivative security whose value depends on the value of the underlying stock.
Direct Participation Program: An investment program that allows the flow-through of all tax consequences to the investor, often referred to as a DPP. The most common form of DPP is a limited partnership.
Discount: The difference between some nominal amount for a security and the lower current market price. For example, the discount on a preferred stock or bond is the amount by which it is currently selling below par or face value. For securities sold or loans made "at a discount," the issue or loaned amount is the face amount reduced by the amount of the interest.
Discretionary orders: Orders where the customer allows the registered representative to decide whether to buy or sell, which security; and the number of shares. The order is discretionary even if the customer supplies the other information required to order, such as when to place the order and whether the order is at market price or a limit order at a stated price.
Disproportionate sharing arrangement: A sharing arrangement in an oil and gas program granting the general partner a greater share of income than would be merited by his capital contribution. For example, the general partner contributes 10% of the total capital but receives 25% of the income.
District executive representative: Person designated by a member of the NASD to vote on NASD matters related to a particular district for the member. A member may designate one district executive representative for each district in which it has at least one branch office. However, the firm cannot designate a district executive representative in addition to an executive representative in the district that is its principal place of business.
Diversification: Reducing risk by spreading investments among several markets and/or industry segments within a market. Diversification reduces the risk that an individual investment will perform worse than other investments in its same class (i.e., non-systematic risk).
Diversified investment management company: An investment company with 75% of the value of its assets held in cash or cash equivalents, government securities, securities of other investment companies, or securities of other issuers; no more than 5% of its total assets in the securities of any one company; and ownership of no more than 10% of the outstanding voting stock of any one company.
Dividend Re-Investment Plan (DRIP): A program offered by some corporations (particularly investment companies) in which shareholders may opt to use their dividends to purchase additional shares in the corporation in lieu of receiving cash payments. Since the shares are purchased directly from the corporation, brokerage fees do not apply. However, the shareholder is still responsible for taxes on the dividends.
Dollar-cost averaging: A method of investing where the investor makes fixed dollar purchases at regular intervals regardless of the price per share. The investor purchases more shares with this method when the share price is low and fewer shares when the share price is high. Thus, the investor benefits from temporary downturns in share price.
Don't know procedures (DK procedures): Procedures followed by dealers if confirmations between dealers are in disagreement, or if one party fails to confirm a trade prior to the settlement date. Literally means we "don't know" this trade.
Due bill: A written admission of a debt. Due bills are given when a stock split or stock dividend is pending and the shares are sold prior to the ex-date, but too late to transfer them to the buyer's name.
Due-bill check: A postdated check dated to the payment date of a cash dividend. Due bill checks are used when a cash dividend is pending and the shares are sold prior to the ex-dividend date, but too late to transfer them to the buyer's name.
DVP: See Delivery versus Payment.
agreement: A firm commitment underwriting in which syndicate
members are liable for their share of any unsold securities, regardless
of how much of their allotment they sold. Eastern underwriting agreements
have joint and several liability.
Easy money: A phenomenon occurring when new money is injected into the economy by the Federal Reserve System. The new money stimulates demand for existing goods, thus making it simple to make more money.
ECN: see Electronic Communication Network
Electronic Communications Networks (ECNs): Alternative trading systems that have sufficient volume in nongovernment securities and commercial paper that they must be registered with the SEC. An ECN may register with the SEC as either a broker/dealer or an exchange. ECNs registered as broker/dealers must comply with Regulation ATS, which includes a requirement to link to a registered exchange or the NASD and publicly display their best priced orders for any security in which they have had 5% or more of the average daily volume share in the past four out of six calendar months. ECNs registered as exchanges must comply with exchange requirements for self-regulation. ECNs registered as exchanges include Archipelago, Attain, Island, and REDIBook. ECNs registered as broker/dealers include B-Trade, BRUT, Instinet, NexTrade, and Strike. POSIT Crossing Network is registered as a broker, but is not considered an ECN because of its low volume. POSIT is a call market that matches sell and purchase orders six times a day, creating a single trade at the midpoint each time.
Eligible Worker-Owned Cooperative (EWOC): A retirement plan structured as either a cooperative farmers' association or any corporation operating on a cooperative basis except for a tax-exempt organization, a mutual savings bank, an insurance company, or a corporation which furnishes electric energy or telephone service to persons in rural areas. Restrictions apply.
Employee Retirement Income Security Act (ERISA): Act regulating pension plans with regard to eligibility for participation, vesting, funding, fiduciary responsibility, and reporting and disclosure. ERISA also created the Pension Benefit Guaranty Corporation (PBGC), a mandatory pension insurance fund used to guarantee pension benefits.
Equity trader: Category of registration both for market makers, agency traders, and proprietary traders in Nasdaq® and other OTC market equity or convertible debt securities and for supervisors of those activities. Does not include traders who primarily execute orders for a registered investment company. Equity traders must pass the test for limited representative-equity trader (Series 55) and, in addition, either Series 7 or Series 62.
Exchanges: Organizations or groups of individuals and/or firms that provide a means of bringing buyers or sellers of securities together. Unless their volume is so small to qualify for an exemption, exchanges must register with the SEC as national exchanges and abide by their rules.
Ex-dividend date: The date on which a stock starts trading without a pending dividend, usually four business days prior to the record date. It is set by either the exchange or the Uniform Practice Committee of the NASD.
Executive representative: Individual designated by a member in the NASD to vote for the member in all NASD matters. Must be a registered principal of the member who participates in senior management of the member.
Exercise: Demand from the holder of an option that the writer perform according to the terms of the option contract. When a holder exercises a call option, the writer of the option must sell the underlying stock to the holder at a predetermined price. When a holder exercises a put option, the writer of the option must buy the underlying stock from the holder at the predetermined price.
Ex legal: Designation at time of trade that is required for municipal securities to be considered good delivery if certificates are delivered without legal opinions or other documents legally required to accompany the certificates.
Extension: When a customer fails to pay for a purchase of securities by the seventh business day after trade date, the broker/dealer may choose to request an extension, allowing an additional five business days to make payment.
Face-amount certificate: An obligation on the part of its issuer to pay a specific amount or amounts at a specific date or dates at least 24 months in the future. If the purchase is made in periodic payments, the face-amount certificate is an installment type.
Face-amount certificate company: A fairly rare category of investment company that issues face-amount certificates, backed with specific assets, such as real estate or securities. The issuer promises to pay the holder at maturity the face amount of the certificate, which is the return of capital plus accrued interest. Investors may also be able to get a surrender value if the certificate is presented prior to maturity.
Face value: The amount on the face of a bond on which interest payments are calculated. This amount is also the amount due at maturity. May be higher or lower than market value. Also called par value.
Federal covered security: A security that is exempt from state registration because either it must be registered with the Federal government under the Securities Act of 1933 or it is exempt from federal registration under the 1933 Act (except that municipal securities may be regulated by the state of which the issuer is a part). Includes securities listed or authorized for listing on the NYSE, AMEX, the National Market System of Nasdaq®, or securities of the same issuer as those above with equal or higher seniority; registered investment company securities; securities offered or sold to qualified purchasers; securities with respect to certain transactions exempt from Federal registration, including some private placements; and securities that are exempt from Federal registration.
Fidelity bond: see Blanket fidelity bond.
FIFO: First-In, First-out, a method of accounting for which shares or inventory items are being sold from a pool of similar shares or items. Assumes that when a sale is made, the items purchased first are sold first.
Financial futures: Contracts to buy or sell specific amounts of a financial instrument at a specific price on some specific date in the future. Underlying securities include Treasuries, CDs, and currencies. Used by banks and other financial institutions to hedge against changing interest rates.
Financial and operations principal: Person in a NASD-member firm who is responsible for the financial reports of the firm, keeping of books and records, supervision of back office operations, and compliance with financial responsibility rules, including compliance with net capital requirements. At least one person in each member firm must be registered with the NASD as such.
Fixed-unit investment trust: A trust that buys a fixed portfolio of securities (usually municipal bonds) and sells that portfolio to investors in units. Each unit represents an undivided interest in the portfolio. The holdings of the trust are static. When the holdings mature, the redemptions are passed proportionately to the unit holders. The unit shares do not trade on a secondary market.
FNMA: See Federal National Mortgage Association.
FOCUS report: Financial and Operational Combined Uniform and Single reports that all registered broker/dealers must regularly file with the SEC. Shows the firm's activity volume, cash position, amount of customer exposure, inventory, money and securities owed to or from other broker/dealers, net income, and net capital position. The type and frequency of filing varies by the type of firm.
FOK: See Fill-or-Kill.
FRB: See Federal Reserve Board.
Free credit balances: A credit balance in a customer's account that the customer can withdraw upon request. Not all credits are free credits. For example, the credit balance related to a short sale in a margin account is not a free credit, since the customer cannot withdraw that credit until the short sale is covered. The firm must send customers statements concerning any existing credit balances at least quarterly.
Freeriding and withholding: Failure of a member firm to make a bona fide public distribution of a hot issue. Such an issue may not be purchased by any broker/dealer or his employees or families, except under certain conditions.
Fundamental analysis: The study of certain factors affecting prices such as the management of a corporation, the economy, the industry, supply and demand, and so forth. Compare with technical analysis.
Futures: Contracts to buy or sell a specific amount of some product at a specific price on a specific date in the future. The underlying asset might be a financial instrument (financial future), a stock index (stock index future) or an agricultural product, such as wheat, soybeans, or pork bellies. If the underlying asset is a stock index, settlement is made in cash due to the difficulty in delivering a market basket of stocks.
GNMA: See Government National Mortgage Association.
Good faith margin account: Type of account allowed under Reg T for margin transactions in exempt securities, non-equity securities, money market mutual fund shares, or shares in a mutual fund that has at least 95% of its assets continuously invested in exempted securities. The initial good faith margin required for purchases is the "amount of margin which a creditor would require in exercising sound credit judgment." For short sales, the initial margin required is the current market value of the security plus the good faith margin.
Government National Mortgage Association: A government owned corporation that is backed by the full faith and credit of the U.S. government, creating pools of mortgages insured by either the Department of Veterans Affairs or the Federal Housing Administration and are sold to investors, commonly referred to as GNMA. Also called Ginnie Mae.
Government securities principal: An associated person who supervises government securities activities and is not registered as any other kind of principal. Must be registered, but no qualification exam applies. A principal who also performs tasks of a government securities representative must pass the appropriate exams for that function.
Green shoe offering: A new issue in which the issuer grants the underwriters an option or a warrant to purchase up to 15% more shares from the issuer at prices below the public offering price. The additional shares are used to cover certificates borrowed when the manager shorted stock to purchasers. The option is exercisable within thirty days after the effective date of the offering. The additional shares are registered with an amendment to the original registration statement. Profits earned by the manager on covering the short position are distributed to syndicate members pro-rata. So-called because the Green Shoe Company first used this arrangement.
Gross-revenue pledge: In a municipal revenue bond, a trust-indenture provision stipulating that the revenues first go to pay the debt servicing costs. The operating costs may be paid from some other source of revenues.
Group sales: Sales in an underwriting made to institutional customers, such as banks and insurance companies, and for which all of the members of the underwriting group share in the commissions proportionate to their takedown in the offering.
Haircut: A haircut is a percent reduction required to certain valuations of assets included in a firm's net capital calculation. Percentages are set by the SEC to allow for three types of potential losses in rapid liquidation: fluctuations in the market value of securities positions, losses in open contractual commitments made in firm commitment underwritings, and losses for aged fail-to-delivers.
Hedging: An investment strategy by which the investor tries to eliminate all potential future gain or loss on an investment. For example, investors may hedge their investments with stock options, future contracts, or by selling short.
Howey test: The test established in the 1946 case of SEC v. W.J. Howey Co. to determine what an investment contract is. According to the Howey test, an instrument is only an investment contract if it involves an investment of money or other tangible or definable consideration in a common enterprise with a reasonable expectation of profits to be derived primarily from the entrepreneurial or managerial efforts of others. The form of the security (whether it is a formal certificate or nominal interests in the physical assets employed by the enterprise) is irrelevant. Thus, notes that a furniture store issues to finance a customer's purchases are not securities, since their primary purpose is to facilitate the purchase. However, notes issued by a corporation for the general use of the company, where the buyer is primarily interested in the interest to be earned on the notes, would be considered an investment contract.
Hypothecation: A broker/dealer's pledge of a customer stock to a bank as collateral for a bank loan. The proceeds of the bank loan are used to finance the debit balance in the customer's margin account.
Hypothecation agreement: Agreement signed by a margin customer which pledges the securities in the account as collateral for the loan and allows the broker/dealer to use the securities as collateral with the bank supplying the loan money. Also called the margin agreement. Usually combined with the Loan Consent Form into one document with two signature lines. The combined document is called the Customer Agreement.
Income statement: The financial statement showing a corporation's performance over a period of time, such as a month, a quarter, or a year. The income statement shows revenues, cost of sales, and expenses.
Index: A statistical measure of the price activity of some composite group, usually expressed in relation to some previously established base market value. For example, the Consumer Price Index is a measure of the price of a market basket of goods relative to what those goods cost in 1984-85. The NYSE Composite Index is computed relative to the price at the close of market at year-end 1965.
Indication of interest: A customer statement that he may consider purchasing securities in a new issue. Indications of interest are taken during the cooling-off period, after the customer has received a red herring.
Insider: Anyone in a position to influence the decisions of a corporation. Insiders include officers, directors, principal stockholders, and their respective immediate families. Insiders of a corporation are also referred to as affiliated persons or control persons.
Institutional investor: A investor who is a bank, savings and loan association, insurance company, registered investment company, federal- or state-registered investment adviser, or any other person, corporation, partnership, trust, or other entity with total assets of at least $50 million.
Intermarket Trading System (ITS): Electronic system that electronically links seven exchanges (New York, American, Boston, Cincinnati, Midwest, Pacific, and Philadelphia) and, to a limited extent, the NASD (National Association of Securities Dealers). For securities being quoted in more than one market, the system allows orders to execute in whatever market offers the best quotation. The system may be used by brokers affecting trades for public customers and by specialists and market makers trading for their own accounts.
In-the-money: A call option is in-the-money if the market price of the underlying stock is higher than the strike price of the call. A put option is in-the-money if the market price of the stock is lower than the strike price of the put. An in-the-money option contract is more likely to be exercised than one that is either at-the-money or out-of-the-money.
Introducing broker/dealers: Brokers or dealers who use another broker/dealer to carry and clear transactions and accounts for their customers and do not themselves hold customers' fund or securities. The receiving broker/dealer, usually a general securities firm, carries the account with the names and addresses of the customers fully disclosed. Customers write checks directly to the carrying broker/dealer. The introducing broker/dealer can receive securities, but must forward them immediately to the carrying firm. Customers may be public customers or other broker/dealers.
Inverted head and shoulders pattern: A technical charting pattern that resembles an upside-down head-and-shoulders. It is a reversal pattern signalling the end of a down-trend and the beginning of an up-trend.
Investment adviser: In investment companies, the person or firm making the trading decisions. In other uses, a person or firm (i) providing investment advice for a fee; (ii) managing money for investors; or (iii) publishing investment newsletters for paid subscriptions.
Investment banker: A firm acting as intermediary either between a corporation issuing new securities and the public or between the holder of large blocks of securities and potential buyers. The investment banker may operate individually or in a syndicate with other investment bankers, and as an underwriter or an agent in the transaction.
Investment contract: The catchall term for any securities that are not explicitly named but remain within the context of what the SEC was attempting with the 1934 Securities Exchange Act. The 1946 case of SEC v. W.J. Howey Co. established a test to determine what is an investment contract. See Howey test.
IOC: See Immediate-or-cancel.
IPO: See Initial Public Offering.
LEAPS (Long-Term Equity AnticiPation Securities): Long-term equity options traded on the CBOE with expirations of up to thirty-nine months distant (although in practice usually no more than 30 months hence). LEAPS are available on a number of blue chip (large capitalization) stocks. Work much the same as other equity options, but are not as time sensitive and tend to have a larger premium (price).
Legal list: A list of investments compiled by a state government as the only investments acceptable for certain institutions or fiduciaries. States without such lists typically use the Prudent Man Rule.
Legal opinion: A written opinion by a bond counsel stating whether or not a bond issue conforms with all the laws of the issuer, and the state and federal governments. It also addresses the tax status of the bonds.
Letter of intent: In mutual funds, a written statement by a customer promising to purchase a stated number of mutual fund shares. The letter assures the investor a reduced sales charge on the entire purchase, provided it is completed within thirteen months.
Leveraged Buy-Out (LBO): Financial transaction in which a corporation's management repurchases all public shares, usually by incurring substantial debt, and the company goes private. Usually involves fairly stable, mature companies with good cash flows. Equity money for the LBO often comes from the investment banker or LBO specialist that arranges the buyout and underwrites the debt issue.
LIFO: Last-in, First-out: A method of accounting for which shares or inventory items are being sold from a pool of similar shares or items. Assumes that when a sale is made, the items purchased last in a group are sold first.
Liquidity: For an investment, portfolio, or account, the ease with which assets may be converted into cash. For a market, the ability of the market to absorb fairly large volumes of sales without drastically affecting the price.
Load fund: A mutual fund that either sells shares through an underwriter or broker/dealer and charges either an up-front or deferred sales charge, or sells the shares directly but charges more than .25% in 12b-1 charges per year.
Long Straddle: An options position in which the customer is long a call and a put on the same underlying asset. The position is profitable if the price of the underlying asset moves outside the two breakeven points. Long straddles are only profitable in volatile markets.
Maloney Act of 1938: The act that added section 15A to the Securities Exchange Act of 1934, allowing for the establishment of registered securities associations to promote self-regulation of the securities industry, properly supervised by the government.
Manipulation: The illegal act of creating a false impression of trading volume or price for a security. Includes engaging in wash sales or matching orders, lying, giving or circulating misleading information, or trying to illegally peg, fix or stabilize the price of an issue (i.e., not following the allowable procedure for stabilizing).
Margin: The amount a client pays for a security purchase in a credit (or margin) account with a broker/dealer. Initial margins on purchases are set by the Federal Reserve Board. Minimum margin maintenance amounts are set by the exchanges.
Markdown: A reduction in price below that at which the security is offered. Acting as dealer and buying stock for its own account from a customer, the firm charges a markdown. This is the firm's compensation.
Markup: An amount added to the price of a security. Acting as dealer and selling stock to a customer from his own account, the dealer charges a markup. The markup is the firm's compensation in the trade.
Matching orders: A prohibited practice similar to a wash sale but involving two or more firms trading a security back and forth at the same price in an attempt to show more trading volume than is actually occurring.
Maturity class of option: Options of the same type (put or call) on the same underlying asset with the same expiration month. All XYZ January call options belong to one maturity class; all XYZ April call options belong to another.
Minimum-maximum underwriting: A type of best efforts underwriting. It is similar to an all-or-none underwriting until the minimum amount is raised, in that the offering is canceled if that amount is not raised. It then becomes a normal best efforts underwriting above that amount. An example is a real estate limited partnership with a $2 million minimum and a $50 million maximum.
Minor Rule Violation Plan Letter: Procedure of the NASD for certain minor violations of rules by members and their associates when the facts are not in dispute. Mechanics are identical to the Acceptance, Waiver, and Consent Procedure, except that sanctions are limited to a fine of $2,500 and/or a censuring letter. The violations that qualify are all related to the keeping, approving, and reporting of data.
Money market account: An account with a bank or broker/dealer where the funds are invested in short-term interest-bearing securities. Similar to checking accounts, except that they have limits on checks written per month and pay interest. Accounts with banks are insured by the FDIC.
Moral suasion: Tactic used by the Federal Reserve Board to pressure banks into doing what they want. Officials of the Fed might have heart-to-heart talks with the banks' directors, increase the severity of bank inspections, appeal to community spirit, or make vague threats. Since the Fed has the power to close banks, remove officers, and fire directors, the arguments of the Fed are likely to be very persuasive indeed.
Mortality risk: The risk that the remaining lifetime for an annuitant will be different than expected by the mortality tables used by the insurance company. If the annuitant chooses to receive payments over his remaining life, the insurance company accepts that risk.
Mortgage-backed security: The most common type of pass-through security, secured by homeowners' mortgages and sometimes guaranteed by the Veteran's Administration, the Farmer's Home Administration, or the Federal Housing Administration.
National Medallion Signature Guarantee: A statement (a stamp and signature) given by a participant in the guarantee program to ensure that the sale, transfer, or assignment of a security certificate is not fraudulent. The guarantor could be a commercial bank, credit union, brokerage firm, or other financial institution that is a member of a medallion signature guarantee program approved by the Securities Transfer Association and the SEC. Three such programs exist: Securities Transfer Association Medallion Program (STAMP), the NY Stock Exchange Program (MSP), and the Stock Exchange Medallion Program (SEMP). The medallion program is not a guarantee by a notary public.
NAV: See Net Asset Value.
Net Asset Value: In a mutual fund, the assets of the fund less its liabilities divided by the number of shares outstanding, usually referred to as the NAV. This is the price a mutual fund shareholder receives when selling shares of the fund.
Net capital: The net worth of the firm less an adjustment for illiquid assets (i.e., the net liquid assets of the firm). The Securities Exchange Act of 1934 establishes uniform and comprehensive net capital standards for all broker/dealers, including members of national securities exchanges and municipal securities broker/dealers.
Net capital ratio: A ratio of the firm's aggregate indebtedness to the firm's net capital. The lower the net capital ratio, the better the financial condition of the firm. For example, a net capital ratio of 6:1 is better than a net capital ratio of 9:1.
Net interest cost: In a syndicate bid on a competitive bid underwriting, the cost of the offering to the issuer. It is adjusted for premium or discount prices, but does not include any net present value computations. (Compare with True Interest Cost.) The firm offering the issuer the lowest net interest cost wins the bid and underwrites the issue.
Net revenue pledge: In a municipal revenue bond, a provision in the trust indenture stating that revenues will first be used to pay the operating and maintenance costs of the facility. The net revenues will then be used to support the debt.
Nine-bond rule: Requirement that members of the NYSE first attempt to execute any order for less than ten bonds on the floor of the NYSE before trading in the over-the-counter market. The only exception is when the customer initiates an unsolicited request to trade in the OTC market.
NMS: See National Market System.
Non-tax-qualified annuity: The normal type of annuity. Contributions are not tax deductible; when payments are received, the annuitant is taxed only on the portion representing earnings. The return of capital is not taxed.
Notice of public offering: Notice that Rule 135 allows issuers to publish stating that they intend to make a public offering of securities to be registered under the 1933 Act. May be a news release, a written letter to employees or shareholders, or a published statement. Sometimes used to solicit competitive bids for underwriting the offering. Not considered to be an actual offer of the securities.
Notice of sale: Same as notice of public offering.
OBO: See Order Book Official.
OCC: See Options Clearing Corporation.
Offering price: The lowest price a seller of a security is willing to take for a unit of a security at a particular time. (Note that the OTC market uses the term "asked," while the exchanges use the term "offered" or "offering.")
Offer of Settlement: An offer to settle a dispute made by the respondent in a disciplinary action of the NASD. May be made any time after the respondent is notified of a complaint. All rights of appeal are waived if the settlement offer is accepted.
Offices of Supervisory Jurisdiction (OSJs): A branch office of an NASD member where registered personnel execute orders; engage in market making; structure public offerings or private placements; hold customer's funds; hold customer's securities; accept new accounts; review and endorse customers orders; approve advertising or sales literature; and/or supervise associates at one or more of the member's branch offices. The main office would automatically be an OSJ.
Oil and gas income program: Buying existing oil and gas wells and producing the wells to generate income. The program does not generate intangible drilling and development costs, and does not generate high tax deductions.
Omnibus account: A special account a broker/dealer opens with another firm to trade on behalf of a subsidiary or affiliate. Also, an account an investment adviser opens to trade on behalf of his or her clients, where the brokerage firm does not know the individual identities of the clients.
Open-end investment company: See Mutual Fund.
Option: A contract that gives the right to a holder to buy (call option) or sell (put option) a fixed amount of a security at a specific price anytime before the stated expiration date (for an American-style option). If the holder does not exercise his option, the option expires and he forfeits the amount he paid for the option (the premium).
Options Clearing Corporation: The Options Clearing Corporation, which is the actual issuer of option contracts. It acts as a clearing house, or bookkeeper. When an exercise notice is received, it assigns the notice. It is also considered the obligor and guarantor of option contracts, guaranteeing performance.
Options Disclosure Document: An OCC prospectus explaining the nature of options, the types of options available, and the basic strategies and risk factors. Must be sent to new options customers when an options account is opened. Updated prospectuses must be sent to existing customers no later than with the confirmation of the customer's next options trade.
Order book official: An employee of the CBOE who maintains the public limit order file, which is similar to a specialist's book. Also referred to as an OBO or Board Broker, he executes limit orders for options.
OTC Bulletin Board (OTCBB): Quotation system developed for penny stocks and other thinly traded securities. The system lists domestic and foreign equity securities (including registered ADRs) that have at least one market maker, are not listed on NASDAQ or a national securities exchange, and are not listed on a regional exchange and eligible for consolidated tape reporting. To be eligible for listing, foreign equity securities must be fully registered with the SEC and domestic securities must be providing current financial information to the SEC.
OTC market: See Over-the-Counter Market.
Out-of-the-money: Lacking intrinsic value. A call option is out-of-the-money if the market price of the underlying stock is less than the strike price of the call. A put option is out-of-the-money if the market price of the underlying stock is higher than the strike price of the put.
Overlapping debt: Multifarious debt that rests on a single debtor. In general, obligation municipal bonds, bonds issued by a city, county, school district, and water district may all look to the same people for taxes to support the debt.
Participating preferred stock: Preferred stock that shares in exceptional earnings of the corporation. Participating preferred stocks may be paid an extra quarterly dividend if the company has a very good year.
Participating (semi-fixed) Trusts: A unit investment trust that purchases shares of a particular investment company and then sells shares of the portfolio on a contractual basis to investors. Virtually all contractual plans are structured as participating trusts, also referred to as periodic payment plan companies.
Pass-through security: In a pass-through security, debt obligations are purchased by an intermediary who packages them into new securities backed by the pooled obligations and then sells shares in the pool in the open market. The interest and principal payments made by the debtor flow through the intermediary, who pays them to the investor net of service fees. The most common type of pass-through security is a mortgage-backed security, secured by homeowners' mortgages and sometimes guaranteed by the Veteran's Administration, the Farmer's Home Administration, or the Federal Housing Administration.
P/E ratio: See Price/Earnings ratio.
Penny stocks: Speculative equity securities (excluding options and investment company shares) with prices under $5 per share. Usually do not meet the listing requirements for Nasdaq or the exchanges. Their sale through broker/dealers is subject to certain rules as to approval of customers, maintenance of information to support quotations, distribution of account statements, and disclosure of risk, quotations, and compensation.
PHA Bonds: See Public Housing Authority Bonds.
Placement Ratio: The ratio of new issue municipal bonds sold during a particular week divided by the dollar amount of new issue municipal bonds available during that week. It is published by the Bond Buyer.
Plan completion life insurance: Insurance with an optional feature stipulating that if the planholder dies before completing the contract, a life insurance policy will complete the purchase. The insurance proceeds are paid to the custodian bank of the plan, which completes the purchase.
PN: See Project Note.
Position limits: A limit set by the exchange on which an option trades as to the number of standard options contracts on the same side of the market on the same underlying security that an investor may hold at any given time. Set at 75,000, 60,000, 31,500, 22,500 or 13,500 contracts for each option class. Reviewed semiannually (January 1 and July 1). See side of market.
Preferred stock: A type of corporate stock with a stated dividend which must be paid before the common stockholders may receive a dividend. A preferred stock also has priority in liquidation over the common stock.
Preliminary prospectus: A preliminary version of the prospectus that is published as soon as the offering is registered with the SEC. It does not include the final price or spread, and may not be used to solicit orders, but may be used to solicit indications of interest. It is often referred to as a "red herring."
Pre-refunding: Selling a new bond issue to refund (refinance) an old issue prior to the call date of the old bonds. The proceeds of the offering are placed in an escrow account until the call date is reached.
Price to Earnings ratio: The ratio of the price of a common stock to its earnings per share, often referred to as the P/E ratio. It is used to measure how expensive a stock is, relative to its earnings.
Private placement: A securities offering under Regulation D, which is not registered with the SEC. The offering is generally made to a limited number of persons who meet certain suitability standards.
Private placement memorandum: A disclosure document which must be prepared by the issuer in a Schedule D offering if any offers are made to nonaccredited investors. This document must be given to all offerees, not just the nonaccredited investors.
Private securities transaction: A transaction by a registered representative acting outside the scope of his employment with a broker/dealer. If done without the knowledge and consent of the employer, it is prohibited. This is also known as "selling away."
Production purchase program: See Oil and gas income program.
Profile: A summary prospectus for registered mutual funds, permitted by Rule 498 of the 1933 Act. It summarizes key information about the fund and gives investors the option of purchasing the fund's shares based on the information in the profile. An investor who purchases fund shares based on the profile will receive the fund's prospectus with the purchase confirmation. The fund must file a profile with the Commission at least 30 days prior to first use.
Profit-sharing plans: Type of corporate retirement plan in which contributions are made out of net profits, either based on a precise formula or merely made in substantial and systematic way. An employee stock ownership plan (ESOP) is a profit sharing plan where the contribution is made in stock.
Prospectus delivery period: The period after a public offering during which dealers must usually give a final prospectus to purchasers who buy the security in the secondary market. Extends to 40 calendar days after the offering date, or for 90 calendar days if it was an initial public offering. Calculated for shelf distributions the same as for other issues, even though the offering may continue for some time beyond that point. The delivery period is dropped to 25 calendar days if the security is listed on an exchange or included in Nasdaq® by the offering date.
Proxy: A written authorization by a stockholder giving his voting rights to someone else. Shareholders who cannot attend the annual meeting usually give their proxies to someone else, often to management.
Prudent Man Rule: A standard by which a fiduciary is required to invest the funds under his care in some states. The standard demands that a fiduciary should act with the care, skill, prudence, and diligence that a prudent man who is familiar with such matters would use if he were acting under conditions in which the circumstances, his capacity, the character of the enterprise, and the goal of the enterprise were similar. This is a general standard adopted by some states. Other states, called legal list states, specify the particular investments a fiduciary may use.
Public Housing Authority Bonds: Municipal bonds that provide long-term financing (mortgages) for low income housing projects, commonly referred to as PHA bonds, and guaranteed by the U.S. government. Sometimes they are called New Housing Authority Bonds, or NHAs.
Public offering price: For a mutual fund, the price at which an investor may buy a share, or the net asset value plus the sales load. If the fund does not charge an up-front sales charge, the public offering price is the net asset value.
Purchaser's representative: In a Rule 506 offering under Regulation D, pertaining to a private placement, investors are encouraged to appoint someone to act as their representative. He is to analyze the offering to ensure that it is a suitable investment.
Qualified purchasers: Under the Investment Company Act of 1940, individuals with investments of at least $5 million or persons who have discretion over investments of at least $25 million for their own accounts or the accounts of other qualified purchasers. Exemptions from the definition of an investment company are allowed for companies who sell their shares only to qualified purchasers.
Qualified retirement plan: A pension, profit sharing, or stock bonus plan set up by an employer to provide retirement benefits for employees that qualifies for special tax treatment. In general, a plan qualifies if participation in the plan and benefits do not discriminate in favor of the employer's key employees.
RAN: See Revenue Anticipation Note.
Random walk theory: An investment theory holding that all that can be known about a stock is incorporated into its price. It is, therefore, impossible to outperform market averages in the long run. It suggests that stock prices move in a random way that cannot be foreseen.
Redeemable security: Security that entitles the holder to receive approximately his proportionate share of the issuer's current net assets (or its cash equivalent) upon presentation of the security to the issuer or its designated representative.
Red Herring: See Preliminary Prospectus.
Reference security: Security X is a reference security for another security, Y, if Y may be converted into, exchanged for, or exercised to purchase or sell X, or if X in whole or part determines the value of Y. For example, if a convertible bond is convertible into common stock, the common stock would be a reference security for the bond, but the bond would not be a reference security for the stock.
Registered bond: A bond whose ownership is recorded on the books of the issuing corporation. A registered bond must be endorsed by the registered owner before it is transferrable (as opposed to a bearer bond).
Registered Options Trader: A person on the floor of an options exchange who buys and sells options for his own account, also known as a Market Maker or ROT. He performs the dealer functions of the specialist on the floor of the NYSE.
Registration: Process by which securities must be filed with the SEC. Registration of new issues is covered under the Securities Act of 1933. Registration of securities admitted to trading on a national securities exchange is covered under the Securities Exchange Act of 1934.
Regular way settlement: For corporate and municipal securities, settlement three business days after the trade date. For U.S. government securities, the next business day. The word "settlement" applies only to broker/dealers, not customers.
Regulation D: The federal regulation pertaining to private placements of offerings to a limited number of people meeting certain suitability standards. Private placements need not register with the SEC.
REIT: See Real Estate Investment Trust.
REMIC: See Real Estate Mortgage Investment Conduit.
Representative: Any associate of an NASD member firm who is engaged in the investment banking or securities business for the member but is not a principal. Representatives can include assistant officers, people who supervise or train employees, and people who solicit or conduct business in securities. Member firms must register all representatives with the NASD.
Repurchase agreement: A contract committing a U.S. government securities dealer to sell U.S. government securities to a purchaser (often to a municipality or institutional investor), with a provision that he repurchase the securities at a set price at a specified time, usually the next day. This is a money market instrument.
Reserve requirements: A specified percentage of customers' deposits which a bank must keep on deposit with the Federal Reserve System. The reserve requirements vary according to whether the deposits are time deposits or demand deposits.
Restricted securities: Securities that have been purchased directly from the issuer or an affiliate of the issuer rather than through a public offering. Affiliated persons might obtain restricted securities by exercising stock options included in the person's compensation plan. Nonaffiliated persons would normally purchase restricted stock through a Regulation D offering or in a transaction subject to Rule 144A, Private Resales of Securities to Institutions. Subject to holding periods before resale.
Retention: 1) When securities are sold in a restricted margin account, at least 50% of the sale proceeds must remain in the account and be applied to reduce the debit balance. 2) In an underwriting, the number of shares sold on a retail basis by a syndicate member. This is the syndicate member's allotment, less any shares held in "the pot" for sale to institutional investors, and any shares given up to the selling group.
Revenue Anticipation Note: A short-term municipal note sold when the issuer is expecting to receive a large sum of money, usually from the federal government, commonly referred to as a RAN. When the funds are received, the RAN is repaid.
Revenue bond: A municipal bond that is to be paid from the revenues of a specific project, such as a stadium. If the revenues are insufficient to support the debt, the bond goes into default. The issuer is not required to use other revenues to redeem the bond.
Reverse split: Combine multiple stock shares into one share such that the stockholder's equity (both in total and for the individual stockholder) remains unchanged, but each stockholder holds fewer shares worth more each. For example, in a one-for-two reverse split, each stockholder receives one share for every two shares held. The new shares are worth twice as much as the old shares, but since the stockholder has half as many shares, his investment remains unchanged.
Rights offering: A rights offering occurs when a corporation makes new shares (called "rights") available to its existing shareholders, thus allowing them to maintain their existing proportion of ownership in the corporation.
Riskless transaction: A transaction by a broker/dealer who, upon a customer's request, buys a security for its own account first, then sells it to the customer as a dealer, and charges a markup. Riskless transactions are also known as simultaneous transactions.
Rollover: Distribution from an employer's qualified pension plan into an IRA or the direct and immediate transfer of funds from one IRA to another (such as switching between funds). Usually does not generate a penalty or tax on the withdrawal.
Rollup of a DPP: A transaction where a direct participation program not listed on an exchange or Nasdaq® is "rolled up" into another public DPP, a public trust, or a public corporation. The form of the rollup could be an acquisition, merger, or consolidation.
ROP: See Registered Options Principal.
ROT: See Registered Options Trader.
Rule 144A: Rule that exempts private placements of some issuers from the SEC registration and disclosure requirements, and allows qualified institutional investors (insurance companies, investment companies, pension plans, investment advisers, etc.) to trade these securities among themselves without some of the restrictions imposed to protect the public. Securities must not be of the same class as securities listed on a registered national securities exchange or quoted on a U.S. automated inter-dealer quotation system (or be convertible or exchangeable into a class thus listed or quoted). Issues of foreign securities are sometimes traded in this fashion.
Rule 147: An exemption from federal registration for securities offered within a single state and thus regulated by that state. The issuer and the purchasers must meet certain requirements. Limitations on resales apply.
Rules of Fair Practice: See Conduct Rules.
Sallie Mae: See Student Loan Marketing Agency
Sales charges: Any charges or fees paid by the investor and used by the investment company to cover sales or promotional expenses, regardless of whether they are paid up-front, deferred, or assessed against the assets of the fund. Also called sales load.
Sales literature: All promotional items with a controlled distribution, meaning the firm knows in advance who will see the item. Examples include reports given to customers, circulars, market letters, performance reports or summaries, telemarketing scripts, seminar texts, research reports, form letters, or reprints or excerpts of any other advertisement, sales literature, or published article. Does not include communications that are neither advertising or sales literature.
Savings Incentive Matching Plan for Employees (SIMPLE): Plan created to give small business owners (including self-employed individuals) the ability to offer retirement plans to employees without incurring excessive costs or administrative burdens. To be eligible, companies must have 100 or fewer employees. The plan must normally be the only retirement plan of the employer.
SEC: See Securities and Exchange Commission.
Securities Exchange Act of 1934: The federal law regulating the markets for existing securities, and governing public companies, broker/dealers, and exchanges. It allowed for the creation of self-regulatory organizations, such as the NASD.
Securities Investor's Protection Corporation (SIPC): Organization that insures customers of brokerage firms in the event of the bankruptcy of a brokerage firm, much the same way the FDIC insures customers of banks. The SIPC is a nonprofit corporation that is not an agency of the U.S. government. The NASD requires virtually all brokerage firms to be members of the SIPC. The only exception is firms that deal only in mutual funds and variable annuities. The SIPC is funded by assessments on member firms. The SIPC insures customers for up to $500,000 of cash and securities on deposit with a member firm. Of the $500,000, no more than $100,000 may be cash on deposit with the member.
Security: SEC definition includes: investment notes, stocks, treasury stocks, bonds, or debentures; certificates of interest or participation in a profit-sharing agreement or in oil, gas, or other mineral royalty or lease; collateral-trust certificates or voting-trust certificates; investment contracts; certificates of deposit for one of the above; options, rights or warrants on one of the above or on any group or index of the above; or foreign currency options or rights. Includes temporary securities but does not include currency, or any note, draft, bill of exchange, or banker's acceptance with a maturity of less than nine months. Commodity futures contracts or commodity options are not generally considered securities, but fall under the jurisdiction of the Commodities Futures Trading Commission. While whole life, term, and universal life insurance are not considered securities, even though they may include some investment risk, variable life insurance is considered a security.
Self-regulatory organizations (SROs): Private organizations owned and operated by their members and to whom the SEC delegates much of its authority to oversee both securities markets and participants in those markets. All SRO rules and regulations must be approved by the SEC. An SRO may be either a national exchange, such as the New York Stock Exchange (NYSE), or a national securities association such as the NASD.
Selling away: See Private Securities Transactions.
Selling dividends: Inducing a customer to buy mutual fund shares just prior to an exdividend date, so that he receives the dividend. Because the price of the shares is likely to drop by the amount of the dividend, the customer is effectively getting his own money back, and is taxed on the dividend, besides.
Semi-fixed unit investment trust: A contractual plan investment company that creates its own portfolio, consisting solely of shares in an underlying mutual fund. The plan sells shares of its portfolio to investors on a contractual basis. See participating trust.
Separate account: In a variable annuity, the investment account into which the annuitant's funds are deposited. The account is segregated from the insurance company's other investments, and registered as an investment company under the Investment Company Act of 1940.
Shelf distribution: Method of distributing shares in which the seller registers the shares with the SEC, but does not immediately sell them to the public . The shares are "put on the shelf" and held for later sale at any time within two years of the registration that market conditions seem appropriate. Originally designed for use by insiders of the issuer, such as major shareholders who own unregistered shares acquired directly from the issuer, but now expanded to allow issuers to use the process.
Short against the box: A position of an investor who is long and short the same security, usually for tax purposes, to lock in a sales price, but defer the gain into the year the short position is covered.
SIC: See Securities Information Center.
Side of market: Description of an options position referring to whether a person would buy or sell the stock upon exercise of an option. Long call positions are added to short put positions to arrive at the buy side of the market. Long put positions are added to short call positions to determine the sell side of the market.
Simplified Arbitration: Arbitration procedure of the NASD that must be used for disputes of less than $25,000, which either involve public customers or are employment disputes that qualify for this type of arbitration. Usually only one public arbitrator handles such disputes.
Simplified Employee Pension (SEP) plan or SEP-IRA: Essentially an IRA with more liberal contribution limits, established and financed by an employer for all its eligible employees. The employer may set up a SEP even if it has already established a qualified pension or profit sharing plan. The company may or may not be incorporated.
Simplified Industry Arbitration: Arbitration procedure of the NASD that must be used for disputes of less than $25,000 that do not involve a public customer and are not employment disputes that qualify for Simplified Arbitration. One to three securities industry arbitrators arbitrate the dispute. Unless one of the parties requests a hearing or a majority of the panel call for a hearing, the matter is decided solely on the pleadings and evidence filed.
Simultaneous transaction: See Riskless Transaction.
SIPC: See Securities Investors Protection Corporation.
Special Reserve Account for the Exclusive Benefit of Customers (SRA): Account required for all brokerage firms that hold customers' cash and securities for the protection of customers. May be maintained in one or more banks. Must be kept separate from the firm's other bank accounts. Assets in the account may not be used by the bank as collateral and the bank may not attach any claim to the account. The amount of cash or qualified securities the firm must deposit in the SRA is calculated either weekly or monthly based on the excess of customer credits over customer debits (i.e., the net credits).
Special situation: Circumstances that may cause a company to buy or sell its securities other than the fundamental prospects of the corporation. An example is a company that has received a tender offer by someone trying to buy all outstanding shares. The decision to buy or sell stock is made more on the basis of the likely success or failure of the tender offer than on the long-term prospects of the company.
Special tax bond: A municipal bond that is supported only by the revenues from a specific tax. It is considered to be a revenue bond; for example, a state pledging its gasoline taxes to finance construction of roads.
Split: Divide stock shares into multiple shares such that the stockholder's equity (both in total and for the individual stockholder) remains unchanged, but each stockholder holds more shares worth less each. For example, in a two-for-one split each stockholder receives two shares for every share held. The new shares are worth half as much as the old shares, but since the stockholder has twice as many shares, his investment remains unchanged.
Spousal IRA: An individual retirement account that may be established for one of a pair of married persons filing a joint return, even if the individual has either no income or a small amount of income.
Spread: An option position in which the investor is long an option and short another option of the same type. For example, he is long 1 ABC July 50 Call and short 1 ABC July 55 Call. Also the difference in price between what the principal who offers an IPO pays and what the investor pays for the newly offered securities.
Stabilizing bid: In a corporate underwriting, a bid by the managing underwriter to buy outstanding shares of the issuer's stock. This is done to support the stock price so the new issue can be distributed. For example, if a company offers a new issue at $30 per share, and the price of the old shares falls below $30, the managing underwriter may enter a stabilizing bid at $30 or slightly less to support the price.
Standby underwriting: A corporate underwriting related to a rights offering. The syndicate agrees to underwrite any shares not sold through the rights offering. Standby underwritings apply only to offerings of common stock.
Staying power: An investor's ability to maintain his or her positions by meeting margin calls and/or holding onto his or her investments through down markets rather than having to liquidate at a disadvantageous time.
Stock dividend: A dividend in the form of stock. Shareholders are given additional shares of stock, rather than being paid cash. Stock dividends are stated as a percentage. For example, if a 10% stock dividend is paid, the owner of 100 shares receives an additional 10 shares.
Stock split: Issuing additional new shares for those now outstanding. For example, a 2 for 1 stock split doubles the number of shares outstanding. The price is likely to fall to one-half the previous price.
Subordinated debt: Subordinated debt is money that is owed, but must stand in line behind other debt. In other words, other debt, which has a higher standing, must be paid off first in the event of a default, before the subordinated debt is paid off. Subordinated debt can be either secured or unsecured by assets. An example of subordinated (secured) debt is a second mortgage on a house. If the debtor defaults on his debt, when the house is sold, the first-mortgage holder is paid off from the proceeds. If there is any money remaining from the sale, the second mortgage holder is then paid off (partially or completely).
Subordination agreement: Agreements that the firm makes with a lender in which the lender agrees to subordinate itself to all other creditors of the firm, present or future. In other words, if the firm went out of business, all other creditors would be paid before the lender on the subordination agreement.
Subscription agreement: In a limited partnership, the document a limited partner signs when he joins the partnership. It typically asks many questions regarding the investor's suitability for the program.
Summary complaint procedure: An NASD procedure investigating possible violation of the rules. If the violation is not severe, and the facts are not in dispute, NASD may offer Summary Complaint Procedure. If accepted, the maximum penalty is censure and a fine up to $2,500.
Summary prospectus: A document for use by most issuers that are not investment companies which summarizes information in the registration statement and can be used as a prospectus to solicit orders. The summary prospectus must be labeled at the beginning or end with the words "Copies of a more complete prospectus may be obtained from (insert name(s), address(es) and telephone number(s)."
Syndicate: In an underwriting, a group of firms acting together to market a stock or bond issue. They are required to buy unsold shares for their own accounts if they fail to sell them to their customers.
Systematic risk: The portion of an investment's risk that is coincident with the market and thus cannot be eliminated by diversification. Measured by the security's beta coefficient. Also called market risk.
TAN: See Tax Anticipation Note.
Tax Anticipation Note: A short-term municipal note offered before receiving tax revenues, commonly referred to as a TAN. It may be issued three to six months before property tax bills are sent out. They are general obligation issues, and are repaid from property taxes.
Tax-qualified annuities: Plans available only to employees of nonprofit organizations, such as schools, churches, and charities, also known as 403(b) plans. When the employee makes the contribution to the annuity, it is tax-deductible. When the contract is annuitized, the entire payment is taxable as ordinary income.
Tax swap: See Bond Swap.
Tippee: Person who is given material secret information by an insider to a corporation and buys or sells a security while in possession of such information. The possession of such information gives the holder an unfair (and illegal) advantage over the investor on the other side of the trade who does not have the information. Both the tippee and the tipper may be prosecuted.
Total return: On a mutual fund, the increase in value of an investment in the fund over a given period, assuming reinvestment of distributions. Includes capital gains and unrealized appreciation and depreciation in value of the fund's assets in addition to net investment income. The total return is the appreciation in investment value an investor who reinvested all distributions would have achieved over the period described. Does not take into account taxes the investor would have had to pay on dividends and does not consider the sales load for the initial purchase of the fund shares.
Trade date: The date a firm accepts a bid or offer for a security, even if time differences mean that the acceptance may not reach the firm making the bid or offer until the next day. The trade date may be different than the day the order was placed with a firm.
Trading authorization: A power of authority given to someone outside the firm, such as an investment adviser. The person holding this power is said to have trading authority in the account. The trading authorization will typically be given in the investment adviser contract.
Treasury receipt: A type of zero coupon bond representing only the principal payment on a Treasury Bond with twenty years to maturity. Since there are no interest payments, they trade at a steep discount.
True interest cost: In a competitive bid municipal bond offering, a method of calculating the interest cost that takes into account the time value of money. The calculation is done in constant dollars, considering not only what payments are made, but also when they are made. The other method of determining the bid is the Net Interest Cost, which does not involve any net present value computation. True Interest Cost is also referred to as Canadian Interest Cost.
Trust Indenture Act of 1939: The federal law requiring all bond issuers to create a trust indenture, which is the contract between the issuer and the bondholders. The trust indenture appoints a company (usually a bank) to act as trustee on behalf of the bondholders.
Turnover rate: The number of shares traded in a year as a percentage of the total shares outstanding. May be calculated for a particular security, a portfolio (such as a mutual fund), or a securities exchange.
UGMA: See Uniform Gift to Minors Act.
Uncovered options: A short options position in which the writer has no obvious means of fulfilling the exercise requirement. For example, a person who is short a call option and does not own the stock. They are also called naked options.
Underwriter's book: Place where the syndicate manger in an underwriting records indications of interest in order to determine how well the offering is being received. This information is used to price the issue and determine the share of each member of the syndicate.
Underwriting spread: The amount the underwriters retain for distributing an offering. Composed of the management fee paid to the syndicate manager for management services and the underwriter's concession paid to each member of the syndicate (including the manager) for the shares they are allotted. The selling group concession paid to the selling group members for their assistance in distributing the securities comes out of the underwriter's concession.
Undivided interest: Form of ownership such as a shareholder has in a mutual fund in which he owns a proportionate share of each of the fund's holdings rather than a particular piece of the fund's holdings.
Uniform Securities Act: A model developed by the National Conference of Commissioners on Uniform State Law that serves as a basis for most state securities laws. The model makes it easier for securities professionals to do business across state lines. However, individual states, even those that adopted a version of the Act, might have individual variances.
Unsecured liabilities: Loans or other obligations not collateralized by either fixed assets such as real estate or by the firm's securities. Could be payable to customers, banks or other lenders, suppliers, other broker/dealers, employees or anyone else having a business relationship with the firm.
Variable annuity: A type of annuity that assigns the investment risk to the annuitant. If the investments perform well, the monthly payment increases, and vice versa. Variable annuities must be registered as investment companies with the SEC.
Venture capital: Equity investment for a company not large enough to go public that is supplied by partnerships set up to pool funds and invest in untried companies, by wealthy individuals, or by large institutional investors. Venture capitalists take on high risks in hopes of making extraordinary returns on some of their investments.
Warrant: A security that gives the holder the right to buy the common stock of the issuer at a specified price for a period of time, usually years. Warrants resemble rights, except warrants are long-term.
Wash sale: 1) Buying and selling the same security, usually through different brokerage firms, in an attempt to manipulate the price and inflate the trading volume without actually taking a position in the market. 2) In tax law, selling a security at a loss, and repurchasing the same or similar security within thirty days before or after the sale; the loss is not tax deductible.
Western underwriting agreement: In a firm commitment underwriting, an agreement that makes syndicate members liable severally, but not jointly. If one syndicate member cannot sell its entire allotment, only it must buy the unsold securities. Usually used in corporate underwritings.
Without recall: In the municipal bond market, a dealer quote with an option to buy the bond at a guaranteed price for some period of time (often one hour). The dealer cannot recall the bond and cancel the option.
With recall: In the municipal bond market, a dealer quote with an option to buy the bond at a guaranteed price for some period of time (often one hour); the dealer retains the right to recall the bonds and cancel the option.
Wrap Fee: A wrap fee is an amount charged to a client of an investment advisor for several services wrapped together, such as portfolio management, asset allocation, custodial services, execution of transactions, and preparation of quarterly performance reports. The wrap fee is calculated as a percentage of net assets in the clients account rather than on transactions. Traditional wrap programs typically charge wrap fees of 1-3%.
Wrap Fee Brochure: A written disclosure statement or brochure that includes at least the information designated in Schedule H to Form ADV for a wrap program, including the fees, services, and policies of the wrap program, and any restrictions on clients. One sponsor of each wrap fee program must prepare the wrap fee brochure. Advisers must deliver the wrap fee brochure to potential wrap fee clients and also offer it annually to any existing wrap fee client in lieu of the standard adviser brochure.
Wrap Program (Wrap): Program offered by an investment adviser that wraps several services together for a fee based on the size of the client's account. Traditional wrap programs are based on the original model developed by E.F. Hutton in 1975, with minimum investments between $100,000 and $200,000, fees between 1% and 3% of the net assets in the account, and "wrapped" services that include portfolio management, asset allocation, custodial services, execution of transactions, and preparation of quarterly performance reports. In one variation (with smaller minimum investments), the adviser selects a mixture of mutual funds for the client. Wrap programs, unlike a registered investment companies, are tailored to the individual investor. Wrap fee programs that offer similar advise to a number of clients must be carefully structured to conform to the safe harbor provisions in Rule 3a-4 of the Investment Company Act of 1940.
Wrap Program Sponsor: A person or entity is a sponsor of a wrap fee program if he receives compensation for sponsoring, organizing, or administering the wrap fee program, selecting investment advisers in the program, or for giving advice to clients about selecting advisers in the program. The sponsor typically manages the client's account using discretion and previously determined investment objectives.
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