1Knowledge of Capital Markets16%
Know who does what. Be able to say what the SEC does that a self-regulatory organization such as FINRA or the MSRB does not, where state regulators, the Federal Reserve, SIPC and the FDIC fit, and what each kind of market participant is paid to do. Then the mechanics: the four markets, how monetary policy differs from fiscal policy, how to read the business cycle and the common indicators, and how a new issue reaches investors.
- 1.1.1Explain why securities are regulated and what the SEC is, what it oversees and what powers it has.
- 1.1.2Describe the purpose of self-regulatory organizations such as FINRA, the MSRB and Cboe, and the reach of their authority.
- 1.1.3Identify the other bodies that touch the industry (Treasury/IRS, state regulators and NASAA, the Federal Reserve, SIPC, the FDIC) and what each one does.
- 1.1.4Distinguish the market participants (investor types, broker-dealers, advisers, municipal advisors, issuers, underwriters, market makers, custodians, transfer agents, clearing entities) and their roles.
- 1.2.1Differentiate the primary, secondary, third and fourth markets and how trading takes place in each.
- 1.3.1Explain how the Federal Reserve affects the economy through monetary policy, open market operations and key interest rates, and how that differs from fiscal policy.
- 1.3.2Interpret business-side economic factors: financial statements, the business cycle, economic indicators, sector behavior (cyclical, defensive, growth) and the main economic theories.
- 1.3.3Explain international factors such as the balance of payments, GDP and GNP, and currency exchange rates.
- 1.4Describe how securities are offered: the participants, public vs. private and initial vs. follow-on offerings, underwriting commitments, shelf registration, offering documents, and registration requirements and exemptions.
Where people lose points: Pairs that sound alike. SIPC protects customers when a broker-dealer fails and the FDIC insures bank deposits; neither covers a fall in market value. Monetary policy belongs to the Federal Reserve, fiscal policy to the government's taxing and spending. In a firm commitment the underwriter buys the issue and carries the risk of unsold securities; in a best efforts deal it sells as agent and does not. And the third market (listed securities traded over the counter) is not the fourth (institutions trading directly with each other).
2Understanding Products and Their Risks44%
This is 44% of the exam. For every product in the outline be able to answer four things: what the holder owns or is owed, how it pays, how it is priced and bought, and what can go wrong. That covers common and preferred stock, rights and warrants, the bond family from Treasuries to municipals, options, mutual funds and other packaged products, 529 plans and ABLE accounts, partnerships, REITs, hedge funds, and exchange-traded funds and notes. Topic 2.2, on the types of risk, ties the section together: most product questions are risk questions in the end.
- 2.1.1Compare equity securities (common and preferred stock, rights, warrants, ADRs), including ownership and voting rights, convertibility and resale limits on control or restricted stock.
- 2.1.2Compare debt instruments (Treasuries, agencies, corporates, municipals, money market instruments) and apply core bond concepts such as par, coupon, yield, ratings, call features and the price-rate relationship.
- 2.1.3Explain options basics: puts and calls, equity vs. index options, premium, strike, expiration, moneyness, covered vs. uncovered positions, exercise and assignment, and the roles of the ODD and the OCC.
- 2.1.4Describe packaged products (open-end and closed-end funds, UITs, variable annuities) and their pricing, share classes, sales charges, breakpoints and fees.
- 2.1.5Describe municipal fund securities (529 plans, LGIPs, ABLE accounts), including owner vs. beneficiary, permitted uses and tax treatment.
- 2.1.6Describe direct participation programs such as limited partnerships and tenancy-in-common interests, their pass-through taxation and their lack of liquidity.
- 2.1.7Distinguish private, non-listed and listed REITs, and explain what REITs invest in and how their income is taxed.
- 2.1.8Describe hedge funds: minimum investment, partnership structure, private equity exposure and why they are generally illiquid.
- 2.1.9Compare exchange-traded funds and exchange-traded notes with mutual funds, including fees and active vs. passive management.
- 2.2Identify the main investment risks (credit, interest rate, inflation, liquidity, market, currency, political, prepayment and others) and how diversification, rebalancing and hedging reduce them.
Where people lose points: Direction and sides. Bond prices move opposite to interest rates, and a bond bought at a discount yields more than its coupon. The buyer of an option pays the premium and holds a right; the seller collects the premium and takes on an obligation, which for an uncovered call has no ceiling. Rights are short-lived and go to existing shareholders; warrants run for years. An open-end fund sells and redeems its own shares at a price based on net asset value, while a closed-end fund trades on an exchange at whatever the market will pay, which can be above or below that value. An exchange-traded note is an issuer's debt and carries that issuer's credit risk, which an exchange-traded fund does not in the same way.
3Understanding Trading, Customer Accounts and Prohibited Activities31%
Three different kinds of material share this section. Trading: order types, bid and ask, acting as principal or agent, returns and yields, settlement and corporate actions. Customer accounts: account types and registrations, retirement accounts, anti-money-laundering duties, records, privacy, communications and the basics of suitability and best interest. Prohibited activities: manipulation, insider trading and the other conduct rules. Be able to carry out the calculations in topic 3.1.2 with a basic calculator, and to say for each prohibited practice what it looks like in a described situation.
- 3.1.1Recognize order types and trading terms: market, limit and stop orders, bid and ask, principal vs. agency capacity, long vs. short and bullish vs. bearish positions.
- 3.1.2Calculate and interpret investment returns: income and gains, dividend types and key dividend dates, yield measures, total return, cost basis and benchmarks.
- 3.1.3State the settlement time frames for different products and distinguish physical delivery from book entry.
- 3.1.4Explain corporate actions (splits, buybacks, tender and rights offers, mergers), their effect on price and cost basis, and how notices and proxy voting work.
- 3.2.1Differentiate account types: cash, margin, options, discretionary vs. non-discretionary, fee-based vs. commission, and education accounts.
- 3.2.2Differentiate account registrations (individual, joint, corporate, trust, custodial, partnership, retirement), including retirement contribution and required-distribution rules.
- 3.2.3Explain anti-money-laundering obligations: the stages of laundering, firm AML programs, SARs and CTRs, FinCEN, and OFAC's SDN list.
- 3.2.4Apply books-and-records and privacy rules: record retention, confirmations and statements, holding customer mail, business continuity, custody of customer assets and Regulation S-P.
- 3.2.5Apply the rules on communications with the public and telemarketing, and the basics of best-interest, suitability and know-your-customer obligations.
- 3.3.1Define market manipulation and recognize its forms, such as pump and dump, front running, marking the close or open, and spreading rumors.
- 3.3.2Define insider trading and material nonpublic information, identify who can be liable and state the penalties.
- 3.3.3Recognize other prohibited conduct: IPO purchase restrictions, misuse of customer assets, borrowing from or sharing with customers, exploiting seniors, acting while unregistered and falsifying records.
Where people lose points: A stop order is not a limit order: once its trigger price is reached it becomes a market order and guarantees no price. With dividends, know which date decides who is paid; a buyer has to buy the stock before the ex-dividend date. A stock split changes the number of shares and the price per share but not the total value or total cost basis. A currency transaction report covers a large cash transaction whether or not anything looks wrong; a suspicious activity report covers activity that looks wrong, and the customer is not told about it.
4Overview of the Regulatory Framework9%
The smallest section: 7 scored questions. Know who has to register and what can disqualify them, what Form U4 and Form U5 are and who files each, the continuing education requirement, and the list of things an associated person must tell the firm about or get approved first.
- 4.1.1Explain SRO registration requirements (who must register, background checks, fingerprinting, statutory disqualification, state registration) and the continuing education requirement.
- 4.2.1Explain Form U4 and Form U5 obligations, the consequences of false or omitted disclosures, and how customer complaints and red flags are handled.
- 4.2.2Identify what an associated person must report or get approved: outside business activities, private securities transactions, political contributions, gifts and entertainment, and criminal or financial events.
Where people lose points: Form U4 registers a person and has to be kept current; Form U5 is filed by the firm when the person leaves. An outside business activity calls for prior written notice to the firm, while a private securities transaction calls for written notice and, where the person is paid, the firm's written approval. Questions here are mostly recall, which makes them cheap points late in your preparation and a poor use of your first week.