Chapter Three
Issuing Corporate Securities 51
Introduction 51
The Prospectus 51
The Final Prospectus 52
Prospectus To Be Provided To Aftermarket
Purchasers 52
SEC Disclaimer 53
Misrepresentations 53
Tombstone Ads 53
Free Riding and Withholding 54
Underwriting Corporate Securities 54
Types of Underwriting Commitments 55
Firm Commitment 55
Market Out Clause 55
Best Efforts 55
Mini-Maxi 55
All or None / AON 56
Standby 56
Types of Offerings 56
Initial Public Offering (IPO) / New Issue 56
Subsequent Primary / Additional Issues 56
Primary Offering vs. Secondary Offering 56

Awarding the Issue 57
The Underwriting Syndicate 57
Selling Group 57
Underwriter’s Compensation 57
Management Fee 57
Underwriter’s Fee 57
Selling Concession 58
Underwriting Spread 58
Factors That Determine The Size of The Underwriting Spread 58
Review of Underwriting Agreements by
The NASD 59
Underwriter’s Compensation 59
Exempt Securities 60
Exempt Transactions 60
Private Placements / Regulation D Offerings 60
Purchaser Representative 61
Rule 144 61
Broker Transactions Under Rule 144 62
Rule 144A 62
Regulation S Offerings 63
Regulation A Offerings 63
Small Business Offerings 63
Rule 145 64
Rule 147 Intrastate Offering 64
Rule 137 Non-Participants 65
Rule 138 Non-Equivalent Securities 65
Rule 139 Issuing Research Reports 65
Rule 415 Shelf Registration 66

Chapter Four
Trading Securities 71
Introduction 71
Types of Orders 71
Market Orders 71
Buy Limit Orders 71
Sell Limit Orders 72
Stop Orders / Stop Loss Orders 72
Buy Stop Orders 72
Sell Stop Orders 72
Stop Limit Orders 73
Other Types of Orders 73
All or None Orders 73
Immediate or Cancel Orders 73
Fill or Kill Orders 73
Not Held Orders 73
Market on Open / Market on Close Orders 73
The Exchanges 74
Priority of Exchange Orders 74
The Role of The Specialist 74
The Specialist Acting as a Principal 74
The Specialist Acting As an Agent 75
Crossing Stock 76
Do Not Reduce / DNR 77
Adjustments For Stock Splits 77
Stopping Stock 78
Commission House Broker 78
Two Dollar Broker 78
Registered Traders 79
Super DOT 79
Short Sales 79
Regulation of Exchange Short Sales 79
Affirmative Determination 80
Short Against The Box 81
Block Trades 81
Trading Along 81
Circuit Breakers 82
Listing Requirements for The NYSE 82
Nine Bond Rule 83
Reading The Consolidated Tape 83
Exchange Qualifiers 83
Over The Counter / NASDAQ 85
Market Makers 85
NASDAQ Subscription Levels 85
Level I 85
Level II 85
Level III 85
Registering as a Market Maker 86
Registering as a Market Maker In an
OTC BB Security 86
Piggybacking a Quote 87
NASDAQ Quotes 87
Locked and Crossed Markets 88
Nominal NASDAQ Quotes 88
NASDAQ Execution Systems 89
Super Montage 89
Quotes Entered Through Super Montage 89
Updating NASDAQ Quotes 90
Non Directed Orders 91
Preferenced Orders 91
Directed Orders 91
The Alternative Display Facility / ADF 92
Advanced Computerized Execution System / ACES 92
Electronic Communication Networks / ECNs 93
Unlisted Trading Privileges 93
Market Centers 93
NASDAQ International 94
NASDAQ NMS Short Sales 94
Non NASDAQ OTCBB 95
Pink Sheets 96
Third Market 96
CAES / ITS 96
Fourth Market 96
Market Maker Regulations & Responsibilities 97
Introduction 97
Times For Entering a Quote 97
Withdrawing Quotes 97
Handling and Displaying Customer Limit Orders 98
The Manning Rule 100
Automated Confirmation System / ACT 101
ACT Trade Scan 101
Which Side of The Trade Reports to Act? 101
Bunching Trades / Aggregate Reporting to ACT 102
The Role of ACT in Third Market Transactions 103
Market Making During Syndication 104
Regulation M, Rule 101 105
Penalty Bids 105
Regulation M, Rule 102 106
Regulation M, Rule 103 106
Passive Market Makers’ Daily Purchase Limit 106
Regulation M, Rule 104 107
Syndicate Short Positions 108
Regulation M, Rule 105 108
Trade Reporting and Compliance Engine / TRACE 108
Broker Vs. Dealer 110
NASD 5% Markup Policy 111
Mark Ups / Mark downs When Acting
as a Principal 111
Riskless Principal Transactions 112
Proceeds Transactions 112
Firm Quote Rule 112
Trade Complaints between Members 113
Arbitrage 113
Market Arbitrage 117
Security Arbitrage 114
Risk Arbitrage 114

Chapter Five
Recommendations to Customers 121
Introduction 121
Recommending Mutual Funds 121
Periodic Payment Plans 122
Mutual Fund Current Yield 122
Fair Dealings with Customers 122
Churning 122
Manipulative and Deceptive Practices 123
Unauthorized Trading 123
Fraudulent Acts 123
Blanket Recommendations 123
Selling Dividends 123
Misrepresentations 124
Omitting Material Facts 124
Making Guarantees 124
Recommendations to an Institutional Customer 124
Short Sales in Connection with Recommendations 124
Issuing Research Reports 124
Research Reports Required Disclosures 125
Regulation FD Fair Disclosure 126

Chapter Six
General Supervision 133
Introduction 133
The Role of the Principal 133
Supervisor Qualifications and Prerequisites 134
Continuing Education 134
Firm Element Continuing Education 134
Regulatory Element 135
Tape Recording Employees 135
Information Obtained From an Issuer 136
Customer Complaints 136
Investor Information 136
Member Offices 137
Office of Supervisory Jurisdiction 137
Branch Offices 137
Satellite Offices 137
Annual Compliance Review 138
Currency Transactions 138
The Patriot Act 138
U.S. Accounts 139
Foreign Accounts 139

Chapter Eight
Margin Accounts 159
Introduction: 159
Regulation of Credit 159
Regulation T 159
House Rules 161
Establishing a Long Position in a Margin Account 161
An Increase in The Long Market Value 162
Special Memorandum Account / SMA Long
Margin Account 164
A Decrease in The Long Market Value 165
Minimum Equity Requirement Long
Margin Accounts 165
Establishing a Short Position in a Margin Account 166
A Decrease in The Short Market Value 167
Special Memorandum Account / SMA
Short Margin Account 168
An Increase in The Short Market Value 169
Minimum Equity Requirement Short Margin
Accounts 170
Margin Requirements for Day Trading 171
Combined Margin Accounts 172

Chapter Nine
Investment Companies 177
Introduction 177
Investment Company Philosophy 177
Types of Investment Companies 177
Face Amount Company/Face Amount Certificates 178
Unit Investment Trust (UITs) 178
Management Investment Companies
(Mutual Funds) 178
Open End vs. Closed End 179
Diversified vs. Non-Diversified 179
75% 179
5% 179
10% 179
Investment Company Registration 180
Registration Requirements 180
Investment Company Components 181
Board of Directors 182
Bonding of Key Investment Company Employees 182
Investment Advisor 183
Custodian Bank 183
Transfer Agent 183
Mutual Fund Distribution 183
Selling Group Member 184
Distribution of No-Load Mutual Fund Shares 184
Distribution of Mutual Fund Shares 184
Mutual Fund Prospectus 185
Additional Disclosures by a Mutual Fun 186
Anti-Reciprocal Rule 186
Money Market Funds 186
Money Market Guidelines 187
Valuing Mutual Fund Shares 187
Sales Charges For Open-End Funds 188
Sales Charges For Closed-End Funds 188
Front-End Loads 188
Back-End Loads 189
Other Types of Sales Charges 189
12B-1 Fees 189
Limits of a 12B-1 Fee 190
Sales Charge Reductions 190
Breakpoint Schedule 190
Letter of Intent 191
Back-Dating a Letter of Intent 191
Breakpoint Sales 191
Rights of Accumulation 191
Automatic Reinvestment of Distributions 192
Combination Privileges 192
Conversion or Exchange Privileges 192
30-Day Emergency Withdrawal 193
Voting Rights 193
Yields 194
Portfolio Turnover 194

Chapter Ten
Variable Annuities and Retirement Plans 197
Introduction 197
Annuities 197
Fixed Annuity 197
Variable Annuity 197
Direct Investment 198
Indirect Investment 198
Combination Annuity 198
Annuity Purchase Options 199
Single Payment Deferred Annuity 199
Single Payment Immediate Annuity 199
Periodic Payment Deferred Annuity 200
Accumulation Units 200
Annuity Units 200
Annuity Payout Options 200
Life Only/Straight Life 201
Life With Period Certain 201
Joint with Last Survivor 201
Factors Affecting the Size of the Annuity Payment 201
The Assumed Interest Rate (AIR) 201
Taxation 202
Sales Charges 202
Variable Annuity vs. Mutual Fund 203
Retirement Plans 203
Individual Plans 204
Individual Retirement Plans (IRAs) 204
Traditional IRA 204
Roth IRA 205
Simplified Employee Pension IRA (SEP IRA) 205
Participation 205
Employer Contributions 205
SEP IRA Taxation 206
Educational IRA 206
529 Plans 206
IRA Contributions 206
IRA Accounts 206
IRA Investments 207
It Is Unwise to Put a Municipal Bond in an IRA 207
Rollover vs. Transfer 207
Rollover 207
Transfer 208
Keogh Plans (HR-10) 208
Contributions 208
Tax-Sheltered Annuities/Tax-Deferred Account 209
Public Educational Institutions (403B) 209
Nonprofit Organizations/Tax-Exempt
Organizations (501C3) 209
Contributions 210
Tax Treatment of Distributions 210
Corporate Plans 210
Non-Qualified Corporate Retirement Plans 210
Payroll Deductions 210
Deferred Compensation Plans 211
Qualified Plans 211
Types of Plans 211
Defined Benefit Plan 211
Defined Contribution Plan 211
Employee Stock Ownership Plans / ESOP 212
Profit Sharing Plans 212
401(k) Thrift Plans 212
Rolling Over a Pension Plan 212
Employee Retirement Income Security Act
of 1974 (ERISA) 213
Plan Participation 213
Funding 213
Vesting 213
Communication 213
Beneficiaries 213

Chapter Eleven
Securities Industry Rules and Regulations 217
Introduction 217
The Securities Exchange Act of 1934 217
The Securities Exchange Commission / SEC 217
Extension of Credit 218
Trading Suspensions 218
Issuers Repurchasing Their Own Securities 219
Tender Offers 219
Stockholders Owning 5% of An Issuer’s
Equity Securities 220
The National Association of Securities
Dealers / NASD 221
The Rules of Fair Practice / Rules of Conduct 221
The Uniform Practice Code 221
The Code of Procedure 221
The Code of Arbitration 222
Becoming A Member of The NASD 222
Foreign Broker Dealers 223
Registration of Agents / Associated Persons 223
Retiring Representatives / Continuing
Commissions 224
State Registration 224
Advertising and Sales Literature 225
Advertising 225
Sales Literature 225
Blind Recruiting Ads 225
Generic Advertising 226
Tombstone Ads 226
Tombstone Ads Must Include 226
Filing and Retention Requirements 226
Testimonials 227
Free Services 227
Misleading Advertising and Sales Literature 227
Correspondence 227
Securities Investor Protection Corporation
Act of 1970 (SIPC) 228
Customer Coverage 228
The Securities Acts Amendments of 1975 228
The Insider Trading & Securities Fraud
Enforcement Act of 1988 229
Fire Wall 229
The Telephone Consumer Protection Act of 1991 230

Exemption from the Telephone Consumer
Protection Act of 1991 230
The Penny Stock Cold Call Rule 230
Violations and Complaints 231
Resolution of Allegations 231
Minor Rule Violation 231
Mediation 232
Code of Arbitration 232
The Arbitration Process 233
Simplified Arbitration 233
Larger Disputes 233
Awards Under Arbitration 233
Political Contributions 234
Investment Advisor Registration 235
The National Securities Market Improvement
Act of 1996/The Coordination Act 235
Investment Advisor Representative 235
Investment Advisor Registration 236
Investment Advisor Capital Requirements 236
Exams For Investment Advisors 236
Investment Advisor Advertising and
Sales Literature 236
Investment Advisor Brochure Delivery 237
Broker Dealers on the Premises of Other
Financial Institutions 237
The Uniform Securities Act 238