Section Two - Recordkeeping,
Financial Requirements, and Reporting 21
Introduction 21
Blotters 21
General Ledger 21
Customer Accounts 21
Subsidiary (Secondary) Records 21
Securities Position Book (Ledger)
Stock Record 22
Order Tickets 22
Confirmations and Notices 22
Monthly Trial Balances and
Net Capital Computations 22
Employment Applications 22
Records Required to Be Maintained
for Three Years 22
Records Required to Be Maintained
for Six Years 23
Records Required to Be Maintained
for the Life of the Firm 23
Financial Requirements 26
The Customer Protection Rule 28
Temporary Subordination Agreements 32

Section Three - Recommendations
to an Institutional Customer 39
Introduction 39
Recommendations to Customers 39
Recommending Mutual Funds 39
Periodic Payment Plans 40
Mutual Fund Current Yield 40
Fair Dealings with Customers 40
Churning 41
Manipulative and Deceptive Devises 41
Unauthorized Trading 41
Fraudulent Acts 41
Blanket Recommendations 42
Selling Dividends 42
Misrepresentations 42
Omitting Material Facts 42
Making Guarantees 42
Recommendations to an Institutional Customer 42
Information Obtained from an Issuer 43
Customer Complaints 43
Investor Information 43

Section Four - General Supervision 47
Introduction 47
The Role of the Principal 47
Member Offices 47
Office of Supervisory Jurisdiction 48
Branch Offices 48
Satellite Offices 48
Annual Compliance Review 48
Currency Transactions 49
The Patriot Act 49
U.S. Accounts 49
Foreign Accounts 49
Missing and Lost Securities 49

Section Five - Customer Accounts 55
Introduction 55
Holding Securities 56
Transfer and Ship 56
Transfer and Hold in Safekeeping 56
Hold in Street Name 56
Mailing Instructions 57
Types of Accounts 57
Individual Account 57
Joint Account 57
Joint Tenants with Rights of
Survivorship (JTWROS) 57
Joint Tenants in Common (JTIC) 57
Transfer on Death (TOD) 58
Death of a Customer 58
Partnership Accounts 58
Corporate Accounts 58
Trading Authorization 59
Operating a Discretionary Account 59
Managing Discretionary Accounts 59
Third Party and Fiduciary Accounts 59
Uniform Gifts to Minors Account
(UGMA) 60
Responsibilities of the Custodian 61
Contributions of a UGMA Account 61
UGMA Taxation 61
Death of a Minor or Custodian 62
Uniform Transfer to Minors Act 62
Accounts for Employees of
Other Broker Dealers 62
Numbered Accounts 62
Account Transfer 62
Margin Accounts 63
The Credit Agreement 63
The Hypothecation Agreement 64
Loan Consent 64
Commingling Customer’s
Pledged Securities 64
Wrap Accounts 64
Regulation S-P 64

Section Six - Investment Companies 69
Introduction 69
Investment Company Philosophy 69
Types of Investment Companies 69
Face Amount Company/Face Amount
Certificates 70
Unit Investment Trust (UITs) 70
Management Investment Companies
(Mutual Funds) 70
Open End vs. Closed End 71
Diversified vs. Non-Diversified 71
Investment Company Registration 72
Registration Requirements 72
Investment Company Components 74
Board of Directors 74
Bonding of Key Investment
Company Employees 75
Investment Advisor 75
Custodian Bank 75
Transfer Agent 75
Mutual Fund Distribution 76
Selling Group Member 76
Distribution of No-Load Mutual
Fund Shares 76
Distribution of Mutual Fund Shares 77
Mutual Fund Prospectus 77
Additional Disclosures by a
Mutual Fund 78
Anti-Reciprocal Rule 79
Characteristics of
Open-End Mutual Funds 79
Additional Characteristics of
Open-End Mutual Funds 79
Mutual Fund Investment Objectives 80
Equity Funds 80
Equity Income Fund 80
Sector Funds 80
Index Funds 80
Growth and Income
(Combination Fund) 80
Balanced Funds 81
Asset Allocation Funds 81
Other Types of Funds 81
Bond Funds 81
Corporate Bond Funds 81
Government Bond Funds 81
Municipal Bond Funds 82
Money Market Funds 82
Money Market Guidelines 82
Valuing Mutual Fund Shares 82
Changes in the NAV 83
Increases in the NAV 83
Decreases in the NAV 84
No Effect on the NAV 84
Sales Charge 84
 

Open-End Funds 84
Closed-End Funds 84
Front-End Loads 84
Back-End Loads 85
Other Types of Sales Charges 85
12B-1 Fees 85
Limits of 12B-1 Fees 86
Calculating a Mutual Fund’s
Sales Charge Percentage 86
Finding the Public Offering Price 87
Sales Charge Reductions 87
Breakpoint Schedule 87
Letter of Intent 88
Back-Dating a Letter of Intent 88
Breakpoint Sales 88
Rights of Accumulation 89
Automatic Reinvestment of
Distributions 89
Other Mutual Fund Features 90
Combination Privileges 90
Conversion or Exchange Privileges 90
30-Day Emergency Withdrawal 90
Taxation of Mutual Funds 91
Distribution of Capital Gains 92
Receiving and Reinvesting Distributions 92
Calculating Gains and Losses 92
Cost Base of Multiple Purchases 93
First In First Out 93
Share Identification 93
Average Cost 94
Deducting Net Capital Losses 94
Wash Sales 94
Other Tax Rules 94
Inherited Securities 94
Withholding Tax 95
Corporate Dividend Exclusion 95
Voting Rights 95
Mutual Fund Recommendations 95
Performance 96
Costs… 96
Expense Ratio 96
Yields 96
Portfolio Turnover 96
Services 96
Taxation 97
Purchasing Mutual Fund Shares 97
Lump Sum Deposit 97
Structured Accumulation Plans 97
Voluntary Accumulation Plans 97
Dollar Cost Averaging 98
Contractual Accumulation Plans 99
Sales Charges 99
45-Day Free Look 101
Withdrawal Plans 101
Fixed Dollar Amount 101
Fixed Share 101
Fixed Time 101
Fixed Percentage 101

Section Seven - Variable Annuities,
Life Insurance, and
Retirement Plans 107
Introduction 107
Annuities 107
Fixed Annuity 107
Variable Annuity 107
Direct Investment 108
Indirect Investment 108
Combination Annuity 108
Annuity Purchase Options 109
Single Payment Deferred Annuity 109
Single Payment Immediate Annuity 109
Periodic Payment Deferred Annuity 110
Accumulation Units 110
Annuity Units 110
Annuity Payout Options 110
Life Only/Straight Life 111
Life With Period Certain 111
Joint with Last Survivor 111
Factors Affecting the Size of
the Annuity Payment 111
The Assumed Interest Rate (AIR) 111
Taxation 112
Types of Withdrawals 112
Annuitizing the Contract 112
Expenses and Guarantees 113
Mortality Expense Risk Fee 113
Operating Expense Risk Fee 113
Other Charges 113
Sales Charges 113
Investment Management Fees 113
Variable Annuity vs. Mutual Fund 114
Life Insurance 114
Whole Life 114
Variable Life 115
Universal Life 115
Variable Universal Life/Universal
Variable Life 115
Premiums and Death Benefits 116
Mortality Risk Fee 116
Investment Management Fee 116
Expense Risk Fee 116
Assumed Interest Rate (AIR) 117
Variable Policy Features 117
45-Day Free Look 117
Loans… 117
Contract Exchange 118
Voting. 118
Sales Charges 118
Retirement Plans 119
Individual Plans 120
Individual Retirement Accounts (IRAs) 120
Traditional IRA 120
Roth IRA 121
Simplified Employee Pension IRA
(SEP IRA) 121
Participation 121
Employer Contributions 121
SEP IRA Taxation 122
Educational IRA 122
529 Plans 122
IRA Contributions 122
IRA Accounts 122
IRA Investments 123
It Is Unwise to Put a Municipal Bond
in an IRA 123
Rollover vs. Transfer 123
Rollover 123
Transfer 124
Keogh Plans (HR-10) 124
Contributions 124
Tax-Sheltered Annuities/Tax-Deferred Accounts 124
Public Educational Institutions (403B) 125
Nonprofit Organizations/Tax Exempt Organizations (501C3) 125
Contributions 126
Tax Treatment of Distributions 126
Corporate Plans 126
Non-Qualified Corporate
Retirement Plans 126
Payroll Deductions 126
Deferred Compensation Plans 126
Qualified Plans 127
Types of Plans 127
Defined Benefit Plan 127
Defined Contribution Plan 127
Profit Sharing Plans 128
401(k) Thrift Plans 128
Rolling Over a Pension Plan 128
Employee Retirement Income Security Act
of 1974 (ERISA) 128
Plan Participation 129
Funding 129
Vesting 129
Communication 129
Beneficiaries 129

Section Eight - Securities Industry Regulations 133
Introduction 133
Issuing Securities 133
The Prospectus 133
The Final Prospectus 134
SEC Disclaimer 134
Misrepresentations 134
Tombstone Ads 135
Freeriding And Withholding 135
The Securities Exchange Act of 1934 135
The Securities Exchange Commission (SEC) 136
Extension of Credit 136
The National Association of
Securities Dealers (NASD) 136
The Rules of Fair Practice/Rules of Conduct 137
The Uniform Practice Code 137
The Code of Procedure 137
The Code of Arbitration 137
Becoming a Member of the NASD 138
Communications with the Public 138
Advertising 138
Sales Literature 139
Blind Recruiting Ads 139
Generic Advertising 139
Tombstone Ads 140
Filing and Retention Requirements 140
Testimonials 140
Free Services 141
Misleading Advertising and
Sales Literature 141
Securities Investor Protection
Corporation (SIPC) 141
Net Capital Requirement 141
Customer Coverage 141
The Insider Trading and Securities
Fraud Enforcement Act of 1988 142