Series 7 Notes

Open market operations= most common tool that fed uses to control money supply (controlled by the FOMC) Fed increases money supply by buying T-bills and other securities from banks M1= currency+ checking deposits+ NOW accounts (interest paying accounts) M2= everything in M1 + savings + money market accounts M3= everything in M2+ jumbo CD’s  Trade deficit= strong dollar + more imports than exports  Trade credit= weak dollar+ more exports than imports (more competitive) Recession= mild 6 month decline in business and stock activity Depression= 18 month economic decline CPI= measures change in prices of consumer goods Deflation= price of consumer goods decrease Disinflation= when inflation rates decrease Stagflation= increased inflation inflation in a slow economy (price of commodities increase is common cause) Gross domestic product= sum of all goods and services produced in an economy (considers inflation) Disintermediation= Disintermediation= people take money out of savings to put in to short term money markets (tight money is common cause) Fiscal spending= taxes and government spending and use towards controlling the economy Keynesian= theory that government should stay active through spending and intervention to ensure economic growth Supply side= theory that governments should stay inactive and let the economy grow by itself  Monetarist= theory that money supply needs to be controlled for economy to prosper Moral suasion= when chairmen of the fed asks banks to expand or contract their lending levels Economic indicators:

1) Leading indicators= indicators= how the economy economy is going going to do: money supply/ stock stock prices/ fed funds rate/ discount rate/ reserve requirements/ housing and new construction+ unemployment+ orders for durable goods 2) Coincidental indicators= how the economy is performing right now: industrial production+ personal income+ GDP 3) Lagging indicator= indicator= mirror leading indicators but but reach peaks and trough at later dates: prime rate+ call loan rate + corporate profits+ credit cards+ duration of unemployment Contraction= high levels of consumer debt+ bearish stock market+ decreasing GNP+ rising corporate inventories+ rising number of bond defaults and inventories Expansion then peak then contraction then trough Whip theory= change in interest rates cause long term bonds to change more in price than short short term debt however short term term debt changes more quickly Breakout= when price breaks out of normal trading range by at least %3  Trading channel= area between resistance (upper portion of trading range) and support (lower portion) Advance-decline ratio= determines whether the majority of stocks are up or down Odd lot theory= small investors are usually wrong so if odd lot volume increases you should be bearish Short interest theory= based on number of short sales because investors must eventually cover their shorts (if shorts increase then bullish) Random walk/ dartboard/ efficient market theory= every security is correctly priced and undervalue/ arbitrage does not exist Beta = volatility in respect to overall market (beta>1 more volatile if beta=1 then equally volatile if beta<1 then less volatile) Alpha(Sharpe ratio)= volatility of a stock in comparison to that companies industry(large alpha means performed better than expected compared to its beta) Accumulation/distribution Accumulation/distribution line= tracks relationship between stock price and trading volume Moving average chart= line graph of prices of a security over a period of time Capital asset pricing model= model that prices stock by evaluating risk to expected return Narrow based index= tracks performance of a particular industry

Broad based= tracks an overall market S+P 500=500 listed and OTC common Wilshire= largest index tracking 6000 listed and OTC Russell 2000 = index of small cap Lipper= mutual fund index DJ composite= 65 common stock (63 NYSE and 2 OTC) DJ: Industrial (30) transportation (20) utilities (15) Circuit breaker=NYSE will restrict trading if DJIA moves up or down dramatically Rule 80a= restricts program trading if DJIA changes up or down by more than 2% Rule 80b= all trading is halted for a period of time because of dramatic decreases in the DJIA Decreases in DJIA: 1) Level Level 1= 1= decli declines nes by> 10% 2) Level Level 2= 2= decli declines nes by >20% >20% 3) Level 3= declines declines by at least 30% exchange exchange halts for remainder of the day CHAPTER SEVEN Self-regulatory organizations: NYSE +NASD= FINRA FINRA cannot imprison since note affiliated with the government MSRB= regulates municipal bonds (can’t enforce its own rules) Maloney act= created the NASD Securities amendment Act established the MSRB Discretionary account= registered rep can execute trades without verbal approval of client (needs written power of attorney) Limited power of attorney= reg. rep cant withdraw securities or cash without permission of customer Full power of attorney= no restriction on transfer of assets Corporate account needs: 1) tax ID of Corp. +copy of corporate resolutions+ corporate charter when opening a margin account

 Trust account= grantor opens account for a beneficiary with the trustee managing the account+ need a trust agreement when opening that specifies details on what type of assets+ when to transfer  Transfer on death= investor designates a beneficiary which avoids going to court upon death Omnibus account= opened in name of reg. rep for customer Uniformed gifts to minors account (UGMA)= 1 minor and 1 custodian per account+ minor is responsible for taxes (14 and over =pays at minors tax rate)+ registered in name of custodian for the benefit of minor+ securities can’t be sold on margin or sold short+ anyone can give cash or securities and the custodian cannot refuse+ custodian cannot allow rights received by account to expire+ custodian cannot give anyone else power of attorney UTMA= extension of UGMA that allows the account to receive art, real estate etc. Fiduciary= anyone who makes decisions for another investor Prudent man rule= fiduciary must act in the best interest of the investor (diversify) Legal list= state guideline of investments for fiduciary accounts If customer dies firm needs copy of the following: 1) 2) 3) 4)

Affida Affidavit vit of domici domicile le Letter Letters s of testam testament entary ary Deat Death h certif certific icat ate e An inh inheri eritan tance ce tax tax waver waver

 Joint with rights of survivorship= if one investor dies the remainder of the account belongs to survivor  Joint with tenants in common= if one investor dies their portion is transferred to their estate Partnership account= if one partner dies: freeze account+ cancel open orders+ cancel power of attorney Account transfer= customer must give notice to firms receiving assets+ new firm notify old firm+ old firm must verify instructions within 3 business days of  notification+ notification+ old firm must deliver securities within 3 business days of verification Street name accounts (numbered accounts)= accounts registered in the name of a broker dealer with an ID# (can be changed to regular accounts at any time) Reg rep needs written statement attesting to ownership of account

Margin accounts must be in street name  Transfer and ship = certificates are printed in the name of and delivered to the investor  Transfer and hold= printed in name of investor and held by brokerage firm Cash accounts are opened in street name or transfer and hold/ship accounts All accounts need a street address but can have certificates mailed to a P.O box Broker dealer can hold mail for 2 months if traveling and 3 months if over seas Even if a customer has multiple accounts it is as if they have 1 account Insiders= officers/directors/anyone officers/directors/anyone with over 10% of outstanding shares/ anyone who has access to non- public info and their immediate family Control stock= stock held by insiders that was purchased publicly Form 3= when buying enough stock to become an insider must notify SEC within 10 business days Rules for insiders= all trades must be reported to SEC within 2 business days after the trade by filling a form 4 (form 3= when becoming / form 4= after becoming) Insiders cannot short their corporation Insiders cannot sell short against the box unless covering their short position within 20 days Insiders must hold onto their stock for at least 6 months (only if at a capital gain/ may sell at loss earlier) NASDAQ Market watch= system that monitors unusual price and volume activity for insider trading Regulation FD (full disclosure)= insider information must be released to entire public simultaneously (8k) Max criminal penalty for insider trading= 1 million (2.5 million for a business) or years in prison per violation Max civil penalty= 3 times gains or losses avoided based on inside information or 1 million dollar fine (whichever is greater) SEC may offer bounties of up to 10% of penalty charged  Trade date= date a trade is executed

Settlement date= day issuer updates its records and the delivery of certificates is completed Payment date= day that the buyer must pay for trade Corp stocks+ bonds : settlement- t+3 and payment-t+5 Muni: t+3 for both U.S. bonds: t+ 1 for both Option: settlement t+1 payment- t+5 Cash trades always settle same day Stocks+ corp. bonds+ muni= settle in clearinghouse funds U.S. gov. bonds= settle in federal bonds Extension from payment date may be acquired from NASD/ FED/ any exchange Sell out= when customer fails to pay for trade by the payment date the brokerage sells securities that customer did not pay for and the customer’s account is frozen for 90 days Buy in= when seller fails to deliver certificates to brokerage and the customer’s account is frozen for 90 days Sellers option= extension of normal settlement date arranged between firms (if  seller can deliver earlier than agreed upon then must give 1 day written notice)

Comingling= mixing a customer’s fully paid and margined securities Inter positioning= executing a trade through a third party Reg. reps can’t give or receive gifts of over $100 Free riding= buying a security with intention of selling a security to pay for trade (freeze account up to 90 days) Backing away= failure to honor a firms quote Churning= excessive trading for the purpose of generating commission Matching orders (wash sales)= illegal manipulation of the price of a security(trading a security back and forth (painting the tape)) Front running= trading based on knowledge of an upcoming block trade

Pre arrange trades= a firm cannot make a deal with a client to buy back a security at a fixed price  Trading ahead= firm cannot trade its inventory based on forthcoming research reports unless unsolicited Marking the close/ open= can’t manipulate the open/ close price Paying the media= brokerage firms cannot pay employees of the media to affect the price of a security Freeriding and withholding= hot issues cannot be withheld for firm employees or family members Rule 2790= IPO’s can’t be sold to brokerage firms or affiliates (lawyers, accounts etc.)  Telephone act of 1991= (excluding non-profit) calls to potential customers (excludes current clients) clients) can’t be made before 8 am and after 9pm of the the potential customers local time Caller must give name +company name+ company address+ phone number If person requests then must put on “do not call list” Moonlighting= if receiving outside employment the employee must notify the firm Private securities transaction (selling away)= if reg rep executes trades outside of  their employment they must notify their firm in writing and if compensated they must receive permission in writing If a reg. rep enters bankruptcy they must notify their firm. The firm must send them an updated u-4 form Office of supervisory jurisdiction= compliance office or any office in which marketing/structuring/holding marketing/structuring /holding of assets takes place (needs principle w/ series 24) and inspected annually by FINRA and the firm Principals must approve: new accounts+ all trades (same day)+ advertisement+ complaints Principals do not need to improve a prospectus or recommendations over the phone FINRA rules are divided into rules of fair practice (member+ customer) and uniform practice code Fines over $2,500 are major fines Person being complained against has 25 days to respond to a complaint

Arbitration (mandatory between members) is binding and non-appealable Statue of limitations for arbitration is 6 years Simplified arbitration is used fir disputes under $25k Mediation= arbitration alternative where fee is split between both parties In case of corporate distribution occurs in the following order: 1)IRS 2)Unpaid workers 3) secured creditors 4) general creditors 5) subordinated creditors 6)preferred stock 7)common stock SIPC= protects each customer account up to $500k of which no more than $100k is cash in the case of a broker-dealer bankruptcy (does not cover commodities accounts) (cash and margin accounts are 1 account) Regularity of sending out account statements: active accounts= monthly // inactive accounts= quarterly// mutual funds = semi annually Firm must send copy of balance sheets to costumers semiannually (if requested send immediately) Declaration date=date that corporation announces that a dividend will be paid to investors Ex- dividend date= first day that a stock trades without dividends Record date= day the corporation inspects records to see who gets dividends (2 business days after ex- dividend date) (trade must settle on or before record date to receive dividend) Payment date=day the corporation pays the dividend Registrar= financial institution hired by issuer to maintain a list of shareholders  Transfer agent= sends items to investors (proxies/dividends etc.)+ can act as a rights agent Rights agent= if investor wants to exercise rights Stock denominations= multiples of 100/ divisors of 100/ units that add up to 100 Mutilated certificates may only be validated by issuer CUSIP#= ID of securities that were issued at the same time Stock power= signing on separate piece of paper instead of on certificate Rejection= refusal of securities at time of delivery

Reclamation= refusal of securities previously accepted at delivery Nine bond rule= any order for 9 listed bonds or less must be executed on the exchange unless 1)the customer customer wants OTC 2)there is a better price OTC 3)it’s a muni/ govt. bond Flow of order through brokerage: 1) Wire room= execution execution of all all orders orders 2) Purchasing and sales= sales= enter all all transactions transactions into firms blotter and sends sends out confirmation date 3) Margin= Margin= determines determines the status status of margin accoun accountt after trades executed executed 4) Cashier= Cashier= determine determines s the cost cost of the trade and how how much the investo investorr gets back (also responsible for receiving and delivering securities) Rule 405 (suitability)= reg. rep should know customers investment objectives+ employment+ financial background+ marital status Reg rep does not need to know= Investment experience+ educational background+ previous employment Currency and foreign transactions reporting act of 1970= must report cash/money withdrawals of over $10k through the CTR to FINCEN (must be reported within 15 calendar days) Suspicious activity activity of $5k or more must be reported to FINCEN immediately 3 stages of money laundering= Placement/ Layering/ Integration CIPs= customer identification program which is required to be implemented by brokerage firms Employees of financial institutions need written permission from employer when opening a margin account (officers and cash accounts don’t) Reg. rep can only open a joint account with a customer if he gets written permission from principle %5 markup maximum on transactions is a guide line not a rule Dealer cost= price dealer paid for a security Don’t know notice= when a firm receives a confirmation for a trade that it does not recognize Corp. must always pay for mailing costs Proxy contest= when a group of shareholders try to throw out the board of directors

Form 13d= filed by an investor who becomes a 5% owner of a company who is trying to gain control of a company (tender offer) Form 13g= filed by an investor who becomes a 5% owner of a company who is planning on remaining a passive investor Factors that a company needs to be listed on NYSE: pretax earnings+ number of  outstanding shares+ total market value of outstanding shares+ national interest (spread out share holders geographically)+ trading volume+ common stock must be voting If a company wants to delist from the NYSE: approval from the majority of the board of directors+ majority of accountants+ accountants+ notification to 35 largest shareholders+ application to the SEC  To be listed on the NASDAQ a company needs at least 3 market makers initially and 2 continuing Penny stock= stock valued under $5 that’s not traded on an exchange Customers must receive a risk disclosure document when purchasing purchasing penny stocks Exceptions to risk disclosure= accredited investor/unsolicited/establish investor/unsolicited/established ed customer Advertisements must be filed with FINRA within 10 days after first use (new firms=10 days prior) Corporate/partnership documents documents must be kept for the lifetime of the firm Blotters (records of trades)+ ledgers(customer account statements)= must be kept for 6 years All records must be easily accessible for 2 years CHAPTER EIGHT Unit investment trusts= invests in fixed portfolio of securities with no management fee Net asset value= indicates the performance of a fund If NAV>public offering price then must be a close ended fund Regulated investment company= company= not taxed like a corporation of at least 90% of  income is derived from interest/capital gains/dividend gains/dividend and it distributes at least 90% of dividends and interest received to investors each year

Diversified investment company= company= at least 75% of assets assets are diversified : <5% of  75% is put into any one company’s company’s security+ security+ can’t own more 10% of outstanding shares of the any company that is owned A mutual fund must have at least 80% of assets meeting the objectives of the fund Hedge fund is most speculative Aggressive growth fund= speculative in new companies ETF= close ended and traded between investors Breakpoint= reduced sales charge for large investments in a mutual fund Letter of intent= allows you to receive breakpoint immediately (valid for 13months+ may be backdated for up to 90 days) Rights of accumulation = allows investor to contribute money at their own pace to qualify for a breakpoint later Dollar cost averaging= depositing a fixed dollar amount into the same mutual fund periodically Fixed share averaging= buying a fixed amount of shares periodically Constant dollar plan= invest a constant dollar amount invested at all times Sales charge=( POP- NAV)/POP = (ASK-BID)/ASK  Mutual funds cannot charge more than 8.5% of the amount invested No load funds usually charge redemption fees  Types of mutual fund shares: 1) Class Class A= A= front front end load load 2) Class Class B= B= back back end end load load 3) Class Class C= level level load (pays (pays a sales sales charge charge each each year) Investment Company must have at least $100,000 from at least 100 investors before public offering Board of directors must be at least 75% outsiders 12b-1 fees= investor must pay for all advertising+ promotional expenses of fund Investment company distributions are taxed as income and capital gains Distributions are taxed even if reinvested

Reinvested capital gains cannot have a sales charge If fund charges 8.5% sales charge they must offer reinvestment of distributions and rights of accumulation for free A fund is not required to provide a letter of intent New prospectus of mutual fund must be filed annually with the SEC Redemption of mutual fund must be completed in 7 calendar days Break point sales= selling right below breakpoint without telling client about option to qualify (illegal) Anti-reciprocal rule= recommendations can’t be based on sales charges or commissions Continuing commission= commission= automatic commission given to a reg. rep who promotes the fund REIT= (not redeemable) at least 75% must be invested in real estate + at least 90% of net income must be distributed annually Fixed annuities do not have to register with the SEC variable annuities do Accumulation units= units purchased purchased during the paying period of an annuity Annuity units= units liquidated during the payout period Annuitize= withdrawing money Assumed interest rates= annual rate of interest rate necessary to receive expected payouts Single payment immediate= pay lump sum and immediately start receiving payments Deferred= start receiving payments at a later date Straight life (life annuity)= stops payout when investor dies (highest payout) Life with period certain= minimum period of payout even if investor dies  Joint and survivor= in case of death payments are transferred (lowest payout) Investors cannot outlive their annuities guaranteed 403b (public school) + 501c3(non profit)= only qualified annuities (can contribute pre tax)

CHAPTER NINE Fed determines what can be traded on margin (OTCBB+ Pink Sheets stocks are usually not marginable) New issues can’t be purchased on margin for the first 30 days Current market value – debit balance (DR) = equity Reg T= Margin requirement (50% unless otherwise stated) Margin call= amount investor must deposit when buying on margin Sma (special memorandum account) account) = taking excess equity after reg t of new cmv Withdrawing sma is borrowing (DR increases and equity decreases)  You can also use sma to buy more stock on margin  You cant lose SMA even if the stock goes down in price (like line of credit)  You cant use SMA to lower a debit balance Restricted account= when equity is below reg T requirement (same calculation as SMA) Investor cant use sma to pay off a restricted account (can still withdraw) When selling stock from a reg T account the money received pays off DR (although equity stays the same SMA increases which they can borrow) In long margin account EQ must be at least 25% of the CMV (FINRA) if goes below then maintenance call is required for the difference 1.33 x DR= minimum value before maintenance call If investor fails to meet margin call then the broker must sell double the securities worth of the call (within 5 days of trade) U.S. + Muni bonds don’t don’t have the same same reg T (between 1-6%) If customer does not pay enough for a security by less than $1000 the deficiency is added to DR Withdrawing SMA= DR increases Depositing cash= DR decreases Buying stock on margin= DR increases Selling stock= DR decreases and EQ decreases

Interest charges= DR increases Cash dividends= DR decreases and SMA increases by the full amount of the dividend (stock dividend makes no impact) New long margin account= minimum $2000 (for reg T) deposit or pay trade in full If EQ falls below $2000 no money is necessary until making another trade Hypothecation= firm lends money to a customer to buy a security All margin accounts require a Hypothecation agreement to be signed by customer+ credit agreement which sets terms for loans (interest rates etc.) Re- Hypothecation= brokerage firm uses margined securities as collateral to borrow money from a bank (up to 140% of DR can be re hypothecated in case of decreased value of customers securities) Max amount of money that can be borrowed through using customer’s securities as collateral through re-hypothecation is 100% of the DR Amount that must be segregated and cant be used=CMV- 140% of DR When selling short (reg T is 50% unless otherwise stated)= CMV+ EQ=CR (credit balance stays the same even if CMV changes) Maintenance requirement in a short account is 30% of CMV 10/13 of CR is the highest the market value can increase too in a short account before maintenance call  To open a new short margin account= minimum requirement is $2000 no matter what Cheap stock rule= when selling short a low priced stock= $0-$2.50 the maintenance requirement is automatically $ 2.50…..from $2.50-$5.00 requirement is 100% of CMV…..$5-%10 req. is $5.oo per share Combined account (both long and short) find maintenance requirement for e ach separately then add Securities in lieu of cash= fully paid securities deposited to meet margin call =Margin call/%100- Reg. T Reg U= using securities as collateral to borrow money from a bank Reg. G= using securities as collateral to borrow money from another financial institution besides besides for a bank or broker dealer

Loan consent agreement= optional agreement by customer allowing the firm to loan their securities to short sellers Loan value= max a broker dealer can lend to customer ( 100%- Reg. T) Margin requirements= Arbitrage 10% Short against the box 5% CHAPTER TEN Option= derivative Sell/short/write= investor has obligation to meet terms of the contract @#= premium of option Same type options= both calls or both puts Same class= same stock + same type Same series= same stock+ same type+ same expiration+ same strike price When deciding if in or out of the money ignore the premium At the money= stock price= strike price Premium= Intrinsic value (how much in the money…can never be 0) + Time value More volatile the higher the premium If out if the money then Premium= Time value (For anyone using these notes, I did not include option gain/ loss pages 333-338) Closing an option= trading the opposite way of first trade Closing purchase= buying an option to cover an option you wrote Options are considered capital gains/losses Long straddle (volatility) = buying a call and a put with the same stock, expiration and strike price Short straddle (stability) = selling a call and a put with the same stock, expiration and strike price Long Combination (volatility) (volatility) = Buy a call and buy a put with the same stock, but different expiration dates and/or strike price Short combination (stability) (stability) = Sell a call and a put with the same stock, but different expiration dates and/or strike price

Spread= buying and selling a call or put of the same class Vertical spread= different strike prices Horizontal spread = different expiration dates Diagonal spread= different expiration dates and different strike prices Bullish spread= buying at a lower strike price and selling at a higher strike price Bearish= Buy high sell low An investor who is receiving more from premiums then paying wants premiums to narrow and remain unexercised in a spread  To determine if credit (more money coming in from premiums) or debit (more going out) in a situation where there is no premiums listed, use difference in expiration dates to determine When bullish you can reduce risk by either buying a put or selling a call If reducing risk by buying an option= protection If reducing risk by selling an option= partial hedge (“increase yield”) Married put= when an investor buys and a put on the same day (holding period starts immediately) If buying a put option after buying a stock the holding period for the stock doesn’t start until put is closed or expired Covered option= when seller has a position to reduce the risk of the trade (owning stock/convertible/option, stock/convertible/opt ion, If the option you bought is in the money first) Naked= uncovered (must be executed in a margin account, as do selling short+ spreads) When buying an option you must pay in full Options cant be used as collateral to borrow money Cash dividends do not affect options Stock dividend= # of shares per contract increases and the strike price decreases Even split (2:1) = # of contracts increase (# of shares per contract stays the same) + strike price decreases Uneven split (3:2) = # of contracts remains the same+ number of shares increase+ strike price decreases

Options Clearing Corporation= issuer and guarantor of all listed options (decides which stocks may have publicly traded options) also establishes contract size+ expiration dates+ strike price When opening a new options account: 1) Reg. rep must must send client client a copy of the “options “options risk disclosure disclosure document” document” at or prior to the approval of a new account 2) Reg. rep determines determines the suitability suitability of a customer by by way of a new account account form 3) The registere registered d options options principal principal approve approves s the account account 4) Execute Execute the trans transact action ion 5) The reg. rep must send an an “options account agreement” to the customer customer (must be signed within 15 days after approval of the account) Options trade on the Chicago Board Options Exchange Expiration= 11:59 pm on the Saturday after the third Friday of the expiration month (last trade=4:02 and last exercise=5:30 pm of the business day prior to expiration) Any option that is at least a penny in the money will be automatically exercised by the OCC at expiration An investor can’t have more the 75,000 option contracts on the same side of the market for a particular stock (buying calls and selling puts count together) order support system= used for smaller orders on the CBOE and is used to bypass floor brokers Index options: 1) OEX- S+P S+P 100= 100= 100 Blue chip companie companies s 2) SPX SPX-- S+P S+P 500=S 500=S+P +P 500 500 INDE INDEX X 3) MMI (major (major market market index)20 index)20 stocks= stocks= based based on 15 DJIA DJIA stocks stocks and 5 other other large cap NYSE stock Index options always settle in cash (index options can only be exercised at the close of the market) Capped index option= automatically exercised once 30 points in the money (if not in the money by 30 points then can only be exercised the business day before expiration (European style) Leaps= long term option which expire in 39 months instead of 9 months like a regular option Debt option= option based on bond

 Yield options= based on interest rates (buy calls if believe imminent interest rate hike) Foreign currency options= traded on the Philadelphia exchange (PHLX) and the Pacific Exchange (PSE) Priced by units in which each point= $0.01 besides for the Yen which is in denominations of $0.0001 CHAPTER ELEVEN Direct participation programs (limited partnerships)= allows partners to participate and use for write offs and often invests in real estate/ oil and gas (must have at least 1 general partner (manages) + 1 limited partner (invests) DPPs’ can be used as tax shelters and are considered “passive” income/losses income/losses Must file K-1 tax form that shows the income and write offs passed through investors DPP needs: 1) Certificat Certificate e of limited partnersh partnership ip (like a corporate corporate charter) charter) 2) Agreement of limited partnership (includes rights and and responsibilities) responsibilities) 3) Subscription agreement (general (general partner partner signs application application given upon payment to accept new partner ) General partners make decisions for partnership (can demand money from other partners if needed) General partners can’t compete and have unlimited liability Limited partners cannot make management decisions+ limited liability+ can compete+ voting rights Corporate characteristics a DPP must avoid at least 2 of in order not to be taxed: 1) 2) 3) 4) 5) 6)

Profit Profit dire directe cted d busine business ss Provid Providing ing limit limited ed liabi liabilit lity y Having Having 2 or or more more indivi individua duals ls Having Having a central central managem management ent (hardes (hardestt to avoid) avoid) Having Having perpetua perpetuall life life (easiest (easiest to to avoid) avoid) Have free liquidity liquidity of shares (second (second easiest easiest to avoid since since application application need for new partner)

Land can’t be written off for depreciation Accelerated (ACRS/MACRS)= depreciates more in the early years

Write offs= interest payments+ business expenses+ depreciation+ depletion of  natural resources Revenue- write offs = Net income Cash flow= net income+ write offs Passive loses can only be used to offset passive gains Alternative minimum tax= mostly used by DPPs’ when write offs cause to low of a tax base Cost basis= maximum loss for limited partnership (tax deduction limit= any money put in and then decreased by cash distribution/depreciation/depletion distribution/depreciation/depletion  Types of partnership: Real estate: 1) Raw land= looking for for long term capital appreciation (riskiest +no cash flow cannot depreciate) 2) New construction= construction= appreciate appreciate property by constructing constructing (risk (risk of higher higher than expected cost+ no cash flow) 3) Condominiums= cash flow flow depends depends on economy economy (according (according to IRS limited partners cannot stay for more than 14 days or 10% of the days rented out per year whichevers greater) 4) Public housing housing (section (section 8)= backed U.S. U.S. govt. subsidies (receives tax deductions on income received)(govt. subsidizes any deficient payment + safest+ guaranteed cash flow) 5) Existing properties= properties= cash cash flow depends on economy, economy, buys property that is fully operating already (high maintenance cost) 6) Blind pool= pool= offers offers diversification diversification of different different types of properties Oil and Gas: 1) Exploratory(wildcatting)= Exploratory(wildcatting)= drilling drilling in unproven areas (riskiest+ (riskiest+ long long term appreciation potential+ high intangible drilling cost) 2) Developmental= drilling in in proven areas(high drilling cost+ cost+ lower risk since since proven) 3) Income= drilling drilling in an area which is is already producing and developed(no developed(no risk) 4) Combinati Combination= on= diversif diversified ied between between three three above above Operating lease= buy equipment and lease it out for a short time Full payout lease= lease payments cover the entire cost of equipment

Functional agreement= general partners are responsible for tangible costs and limited partners are responsible for intangibles  The reg rep must make sure client is suitable for DPP= proof of financial background+ ability to tie up money for long periods of time+ ability to sustain loss+ need for tax benefits Compensation of underwriter for DPP can be up to 10% of the gross amount of the securities+.5% of due diligence cost Crossover point= point in which partnership income exceeds the deductions (becomes profitable) Recourse debt= loans taken by partnership which the limited partners can be personally responsible for Non- recourse debt= lender has no claims on limited partners personal assets Recapture= IRS takes back excessive deductions claimed in the previous year Abusive shelter= when a partnership does not attempt to make a profit In the dissolution of a partnership the limited partners are paid before general partners (creditors first) CHAPTER TWELVE General obligation bond= issued to fund non-revenue projects (backed by full taxing power of muni) voter approval is required Ad valorem tax (property tax) = largest source of revenue for GO bonds (based on assessed value) Mills=.001  There is a maximum that a muni can borrow Limited tax bond= type of GO that limits tax rates used to pay off bonds Unlimited tax bond= normal type of GO Revenue bond= issued to fund revenue producing projects (voter approval not necessary) Industrial development revenue bond= issued to fund construction of a commercial facility for the benefit of a corporation (riskiest because not backed by muni) Substantial user rule= company cant buy its own IDR and receive tax free interest Private purpose (activity) bond= interest is taxable at a regular tax rate on all levels

Qualified private purpose bond= interest is taxable only to investors subject to the Alternate Minimum Tax Double barrel bond= bond= combo if revenue + GO GO bond (if revenue fails then then backed by taxing power) Special tax bond= backed by regressive (excise)taxes (sales/tobacco) Special assessment assessment bond= backed by charges on those that benefit from project More obligation bond= if muni fails to pay the state has a moral obligation to pay Public housing authority (PHA)= backed by U.S. govt. (considered safest) All muni’s must be issued with a legal opinion(validates+ opinion(validates+ makes sure indenture is binding+ verifies federally tax exempt) Unqualified legal opinion (unconditional)= (unconditional)= issuer meets all conditions without restrictions Qualified legal opinion= issuer meets conditions with potential restrictions (lean on property etc.) Ex legal= Bond delivered without legal opinion Muni notes= mature in less than a year  TAN (tax anticipation note)= issued with expectation of receiving corporate/individuall tax in next few months corporate/individua RAN (revenue anticipation notice)= anticipation of revenue producing facility in the next few months  TRAN= tax and revenue anticipation note BAN= bond anticipation note (anticipation of writing long term bonds) CLN (construction loan note)= notes issued to finance large construction projects for muni PLN (principal note)= provides interim financing from public housing projects Rating for muni notes: Moody’s investment grade= MIG 1-4 Standard and Poor’s= SP 1-4 Prime= P1-4 (only used for tax exempt commercial paper (short term IDR)

Interest+ accretion+ amortization on muni are federally tax free State tax free if investing investing in home state/ state/ or Protectorates(Puerto Rico, Rico, Guam etc.) Muni have the lowest yields of all bonds  TEY= yield that investor needs on a taxable investment to be equal to a muni yield after taxes  TEY= Muni yield/(100%-tax bracket) Muni equivalent yield= taxable bond yield x (100%- investor tax bracket) Margin requirements for muni= 7% of total par value or 15% of CMV whichever is greater Negotiated offering= issuer chooses an underwriter directly with no competition (revenue bonds/IDR) Competitive offering= auction (GO bonds) (muni advertises through “notice of sale)  TIC (true interest cost)= considers inflation Good faith deposit= entry fee and partial payment for bond issue(1-2% of par value of bonds being auctioned)(winners use towards money necessary to buy bonds/losers get deposit back) Official statement= disclosure of facts about muni issuer (does not have to be filed with SEC)+included in advertisements and brochures GO bonds have a higher rating and lower yield than revenue bonds Direct debt= outstanding debt that a muni owes which has not matured Overlapping debt (coterminous)= (coterminous)= debt that muni has to assist assist a higher gov’t(state) in paying Overall debt= direct +overlapping Debt per capita= debt per person  Traffic fines+ licensing fees can be used to pay off GO bonds Feasibility study= engineering report done by independent consultants to see if  facility can generate enough revenue to pay off revenue bonds Covenants= promise on indenture indenture meant to protect investors(rates/maintenance/insurance) Catastrophe call= call used when facility can no longer produce revenues

Project completion clause= allows issuer to borrow more money to properly construct facility Flow of funds= 1)Net=operating and maintenance fund>sinking fund(debt)>reserve fund(debt)>reserve fund(principal and net for next 2 years)> renewal and replacement fund(improvements) fund(improvements) 2) Gross= sinking fund> operating and maintenance fund> reserve fund (principal and net for next 2 years)> renewal and replacement fund(improvements) fund(improvements) Assume net Debt service coverage ratio= net or gross revenue/ principal+ interest Debt per connection= debt per person using the facility  The “Bond Buyer” is the best source of information for new muni bonds Bond buyers index= average yield of 20 , 20 year GO bonds that are investment grade Eleven bond index= index= average yield of 11 , 20 year GO bonds that that are rated AAA or AA Revdex(revenue bond index)= average yield of 25 revenue bonds with 30 year maturity Visible supply= par value of all new issues expected to become public within the next 30 days Placement ratio= percentage of competitive issues in which the auction was completed (measured weekly) “blue list”= best source of info for outstanding bonds Blue list total= total par value of all muni bonds in the blue list except for zero coupon bonds 50M Chicago P/R @ 102 AON 3/1/07 M12 : Pre refunded+ All or none+ 3/1/07= 1 st call date M12 = years to maturity Quotron= wire service for muni Muni insurance agencies= MBIA+ AMBAC+FGIC AMBAC+FGIC MSRB= self regulatory(does not apply to issuers) Reg reps have to do 90 day apprenticeship during which they cant discuss any thing with public customers+ cant earn commission

Confirmation (receipt of trade)= must disclose YTM or YTC whichever is lower (discount bond YTM is lower) In whole call= first time entire issue is callable All MSRB complaints are kept for 6 years (FINRA for 3 years) and must be settled through arbitration Control relationship= firm/employee has a position of authority over issuer being recommended (must be disclosed) Completion of the transaction= buyer= payment date + seller= settlement date If an advisor is chosen to underwrite an offering: Negotiated offering= relationship must terminate+ disclose potential conflict of  interest+ disclose spread Competitive offering= relationship does not need to be terminated+ adviser needs written permission from issuer to participate in the auction G- rules (page 441+442 of the empire stock broker institute)  This is a summary of the EMPIRE STOCKBROKER INSTITUTE TRAINING INSTITUTE and should only be used after reading the actual book at least once. Good luck!! YY 6/7/2010