Record Date 24
Payment Date 24
Stock Price and the Ex dividend Date 24
Taxation of Dividends 25
Selling Dividends 25
Rights and Warrants 25
Rights 25
Possible Outcomes for a Right 26
Exercised 26
Sold 26
Expire 26
Terms 26
Standby Underwriting 26
Warrants 26
How Do People Get Warrants? 27
Units 27
Attached to Bonds 27
Secondary Market 27
Possible Outcomes of a Warrant 27
Rights vs. Warrants 27
Options 28
Types of Options 28
Calls 28
Puts 28
Bullish vs. Bearish 28
Bullish 28
Bearish 28
Characteristics of All Options 29
Exercise Price 29
Buyer vs. Seller 29
Possible Outcomes for an Option 30
Exercised 30
Sold 30
Expire 30
American Depository Receipts (ADRs)/American
Depository Shares (ADSs) 30
Currency Risks 30
Securities Markets 30
The Exchanges 31
Over the Counter/NASDAQ 31
Market Makers 31
Third Market 32
Fourth Market 32
Broker vs. Dealer 32
Debt Securities/Bonds 32
Types of Bonds 33
Corporate Bonds 33
The U.S. Government 33
U.S. Government Agencies 33
Municipal 33
Types of Bond Issuance 34
Bearer Bonds 34
Registered Bonds 34
Principal Only Registration 34
Fully Registered 34
Book Entry/Journal Entry 34
Bond Certificate 35
Bond Pricing 35
Par Value 35
Discount 35
Premium 36
Corporate Bond Pricing 36
Treasury Bond and Note Pricing 36
Treasury Bill Pricing 36
Municipal Bond Pricing 37
Bond Yields 37
Nominal Yield 37
Current Yield 37
Yield to Maturity 38
Yield to Maturity — Premium Bond 38
Yield to Maturity — Discount Bond 38
Types of Corporate Bonds 39
Secured Bonds 39
Types of Secured Bonds 39
Mortgage Bonds 39
Equipment Trust Certificates 40
Collateral Trust Certificates 40
Unsecured Bonds 40
Subordinated Debentures 40
Income/Adjustment Bonds 40
Zero Coupon Bonds 41
Convertible Bonds 41
Converting Bonds into Common Stock 41
Parity Price 42
The Trust Indenture Act of 1939 42
Treasury Bills, Notes, and Bonds 43
Treasury STRIPS 43
Treasury Receipts 43
Non-Marketable Government Securities 43
Series EE 43
Series HH 44
Agency Issues 44
Types of Agency Issues 44
Government National Mortgage Association
(GNMA) 44
Federal National Mortgage Association (FNMA) 45
Federal Home Loan Mortgage Corporation
(FHLMC) 45
Collateralized Mortgage Obligation (CMO) 45
CMOs and Interest Rates 45
Municipal Bonds 46
Types of Municipal Bonds 46
General Obligation Bonds 46
Revenue Bonds 46
Industrial Revenue Bonds/Industrial
Development Bonds 46
Taxation of Municipal Bonds 46
Legal Opinion 47
Municipal Bond Insurance 47
Tax Equivalent Yield 47
Purchasing a Municipal Bond Issued in the
State in Which the Investor Resides 48
Triple Tax-Free 48
Capital Gains 48
The Money Market 48
Money Market Instruments 48
Corporate Money Market Instruments 48
Banker’s Acceptances 49
Negotiable Certificates of Deposit 49
Commercial Paper 49
Federal Fund Loans 49
Repurchase Agreements 49

Government Money Market Instruments 49
Interest Rates 50
Discount Rate 50
Federal Funds Rate 50
Broker Call Loan Rate 50
Prime Rate 51
Economics 51
Gross Domestic Product 51
Expansion 52
Peak 52
Contraction 52
Trough 52
Recession 52
Depression 52
Economic Policy 52
Tools of the Federal Reserve Board 53
Reserve Requirement 53
Changing the Discount Rate 53
Federal Open Market Committee 53
Moral Suasion 54
Fiscal Policy 54
The Consumer Price Index 54
Inflation/Deflation 55
Real GDP 55
International Monetary Considerations 55
Issuing Corporate Securities 56
Types of Underwriting Commitments 56
Firm Commitment 56
Best Efforts 56
Standby 57
Types of Offerings 57
Initial Public Offering (IPO)/New Issue 57
Subsequent Primary/Additional Issues 57
Primary Offering vs. Secondary Offering 57
Awarding the Issue 57
The Underwriting Syndicate 57
Selling Group 58
Underwriter’s Compensation 58
Management Fee 58
Underwriter’s Fee 58
Selling Concession 58
Underwriting Spread 58
Customer Suitability 59
Investment Objectives 60
Income 60
Growth 60
Preservation of Capital 60
Tax Benefits 61
Liquidity 61
Speculation 61
Risk vs. Reward 61
Capital Risk 61
Market Risk 61
Nonsystematic Risk 62
Legislative Risk 62
Timing Risk 62
Credit Risk 62
Reinvestment Risk 62
Call Risk 62
Liquidity Risk 62

Chapter Two - Investment Companies,
Mutual Funds, New Accounts, and Taxes 67
Introduction 67
Investment Company Philosophy 67
Types of Investment Companies 68
Face Amount Company/Face Amount Certificates 68
Unit Investment Trust (UITs) 68
Management Investment Companies
(Mutual Funds) 68
Open End vs. Closed End 69
Diversified vs. Non-Diversified 69
Investment Company Registration 70
Registration Requirements 70
Investment Company Components 72
Board of Directors 72
Investment Advisor 73
Custodian Bank 73
Transfer Agent 73
Mutual Fund Distribution 73
Selling Group Member 74
Distribution of No-Load Mutual Fund Shares 74
Distribution of Mutual Fund Shares 74
Mutual Fund Prospectus 75
A Mutual Fund Prospectus: 75
Characteristics of Open-End Mutual Fund Shares 76
Mutual Fund Investment Objectives 76
Equity Funds 76
Equity Income Fund 76
Sector Funds 77
Index Funds 77
Growth and Income (Combination Fund) 77
Balanced Funds 77
Asset Allocation Funds 77
Other Types of Funds 78
Bond Funds 78
Corporate Bond Funds 78
Government Bond Funds 78
Municipal Bond Funds 78
Money Market Funds 78
Money Market Guidelines 79
Valuing Mutual Fund Shares 79
Changes in the NAV 80
Increases in the NAV 80
Decreases in the NAV 80
No Effect on the NAV 80
Sales Charges 81
Open-End Funds 81
Closed-End Funds 81

Front-End Loads 81
Back-End Loads 82
Other Types of Sales Charges 82
12B-1 Fees 82
Limits of a 12B-1 Fee 83
Calculating a Mutual Fund’s Sales Charge
Percentage 83
Finding the Public Offering Price 83
Sales Charge Reductions 84
Breakpoint Schedule 84
Letter of Intent 85
Back-Dating a Letter of Intent 85
Breakpoint Sales 85
Rights of Accumulation 85
Automatic Reinvestment of Distributions 86
Other Mutual Fund Features 86
Combination Privileges 86
Conversion or Exchange Privileges 86
30-Day Emergency Withdrawal 87
Taxation of Mutual Funds 87
Distribution of Capital Gains 88
Receiving and Reinvesting Distributions 88
Calculating Gains and Losses 89
Cost Base of Multiple Purchases 89
First In First Out 90
Share Identification 90
Average Cost 90
Deducting Net Capital Losses 90
Wash Sales 90
Other Tax Rules 91
Inherited Securities 91
Withholding Tax 91
Corporate Dividend Exclusion 91
Voting Rights 91
Mutual Fund Recommendations 91
Performance 92
Costs 92
Expense Ratio 92
Yields 92
Portfolio Turnover 92
Services 93
Taxation 93
Customer Accounts 93
Holding Securities 94
Transfer and Ship 94
Transfer and Hold in Safekeeping 94
Hold in Street Name 94
Mailing Instructions 95
Trading Authorization 95
Discretionary Account 95
Custodial Account 95
Fiduciary Account 95
Types of Accounts 95
Individual Account 95
Joint Account 96
Joint Tenants with Rights of Survivorship
(JTWROS) 96
Joint Tenants in Common (JTIC) 96
Corporate Accounts 96
Operating a Discretionary Account 96
Managing Discretionary Accounts 97
Uniform Gifts to Minors Act 97
Responsibilities of the Custodian 97
Contributions of a UGMA Account 98
UGMA Taxation 98
Death of a Minor or Custodian 98
Uniform Transfer to Minors Act 98
Accounts for Employees of Other Broker Dealers 98
Purchasing Mutual Fund Shares 99
Lump Sum Deposit 99
Structured Accumulation Plans 99
Voluntary Accumulation Plans 99
Dollar Cost Averaging 99
Contractual Accumulation Plans 101
Sales Charges 101
45-Day Free Look 102
Withdrawal Plans 102
Fixed Dollar Amount 102
Fixed Share 102
Fixed Time 102
Fixed Percentage 102

Chapter Three - Variable Annuities,
Variable 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 123
Keogh Plans (HR-10) 124
Contributions 124
Tax-Sheltered Annuities (TSAs )/Tax-Deferred
Accounts (TDAs) 124
Public Educational Institutions (403B) 125
Non-Profit Organizations/Tax-Exempt
Organizations (501C3) 125
Contributions 125
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

Chapter Four - Security Industry
Rules and Regulations 135
Introduction 135
Issuing Securities 135
The Prospectus 135
The Final Prospectus 136
SEC Disclaimer 136
Misrepresentations 136
Tombstone Ads 137
Free Riding and Withholding 137
The Securities Exchange Act of 1934 137
The Securities Exchange Commission (SEC) 138
Extension of Credit 138
The National Association of Securities
Dealers (NASD) 138
The Rules of Fair Practice/Rules of Conduct 139
The Uniform Practice Code 139
The Code of Procedure 139
The Code of Arbitration 139
Becoming a Member of the NASD 140
Registration of Agents/Associated Persons 140
Disciplinary Actions Against a
Registered Representative 141
Resignation of a Registered Representative 141
Termination for Cause 141
Retiring Representatives/Continuing
Commissions 142
State Registration 142
Registration Exemptions 142
Persons Ineligible to Register 142
Advertising and Sales Literature 143
Advertising 143
Sales Literature 143
Blind Recruiting Ads 144
Generic Advertising 144
Tombstone Ads 144
Tombstone Ads Must Include: 144
Filing and Retention Requirements 145
Testimonials 145
Free Services 145
Misleading Advertising and Sales Literature 145
Securities Investor Protection Corporation
Act of 1970 (SIPC) 145
Net Capital Requirement 146
Customer Coverage 146
Fidelity Bond 146
The Insider Trading and Securities Fraud
Enforcement Act of 1988 147
Fire Wall 147
The Telephone Consumer Protection Act of 1991 148
Exemption from the Telephone Consumer
Protection Act of 1991 148
Recommendations to Customers 148
Recommending Mutual Funds 149
Periodic Payment Plans 149
Mutual Fund Current Yield 149
Professional Conduct in the Securities Industry 150
The Role of the Principal 150
Fair Dealings with Customers 151
Churning 151
Manipulative and Deceptive Practices 151
Unauthorized Trading 151
Fraudulent Acts 152
Blanket Recommendations 152
Misrepresentations 152
Omitting Material Facts 152
Making Guarantees 152
Sharing in a Customer’s Account 152
Borrowing and Lending Money 153
Disclosure of Client Information 153
Numbered Accounts 153
Gift Rule 153
Outside Employment 153
Private Securities Transactions 154
Violations and Complaints 154
Resolution of Allegations 154
Summary Complaint Procedure/Acceptance
Waiver and Con 154
Code of Arbitration 155
The Arbitration Process 155
Simplified Arbitration 156
Larger Disputes 156
Awards Under Arbitration 156
Annual Compliance Review 156
Currency Transactions 156
The Patriot Act 156
US Accounts 157
Foreign Accounts 157