Overview
This lecture covers key Series 7 exam topics, including communications, account types, securities offerings, investment vehicles, risk, and essential regulatory definitions, providing a comprehensive review for test-takers.
Communications & Account Approvals
- Correspondence: 25 or fewer clients; principal can approve pre- or post-distribution.
- Retail communication: More than 25 clients; principal approval required pre-distribution.
- Options accounts must be approved by a Registered Options Principal; customer must return the option agreement within 15 days.
Securities Offerings & Regulations
- Registration statement starts the cooling-off period (minimum 20 days); only red herrings and tombstones allowed during this period.
- Underwriting agreement: Between issuer and underwriters; selling group agreement: between underwriters and selling group.
- Blue sky laws: Securities must also be registered in states unless exempt.
- Qualified Institutional Buyer: $100 million+ in assets, can buy unregistered securities.
- Accredited investor: $1M net worth (excluding primary residence), or $200K income ($300K joint).
- Reg A: Tier 1 (up to $20M), Tier 2 (up to $75M, 10% investment limits).
- Reg D 506(b): Up to 35 non-accredited investors, no solicitation; 506(c): only accredited, solicitation allowed.
- Rule 147: Intrastate offerings; 80% of business in-state; resale restricted for 6 months.
Types of Accounts & Customer Suitability
- Day trader: 4+ trades in 5 days; $25,000 minimum.
- DVP accounts: Institutional; 35 days to deliver securities for payment.
- Joint accounts: JTWROS (surviving party), Tenants in Common (estate/beneficiary).
- Retirement accounts: Cash only, no margin; rollovers must be completed within 60 days.
- Defined benefit: Employer risk; defined contribution (e.g., 401k): Employee risk.
Investment Concepts & Analysis
- Systematic (market) risk can’t be diversified away; nonsystematic risk can, usually via mutual funds.
- Beta measures volatility vs. market; Alpha is excess return over expected.
- Fundamental analysis uses balance sheets, income statements (10K, 10Q).
- Working capital = current assets - current liabilities; Current ratio = current assets ÷ current liabilities.
- Price/Earnings ratio: Stock price ÷ EPS; lower is value, higher is growth.
- Dividends: Not guaranteed; payout ratio = dividends ÷ earnings.
- Total return: Dividends + price appreciation.
Types of Securities
- Common stockholders: Preemptive rights, vote, residual claim.
- Rights: Short-term, below market; warrants: Long-term, above market.
- Preferred stock: Par $100, preference in dividends/liquidation, may be cumulative/convertible.
- Penny stock: Non-NASDAQ OTC, under $5; special suitability/disclosure rules.
- American Depository Receipts (ADRs): US-traded foreign stocks, subject to currency risk.
Mutual Funds & Investment Companies
- Open-end funds: Continuously offer shares, must provide prospectus, max sales charge 8.5%.
- ETFs: Trade like stocks, marginable, passive management, lower costs.
- Money market funds: Short-term, high-quality debt (<12 months).
- Breakpoints: Quantity discounts; LOI valid for 13 months, can be backdated 90 days.
- REITs: Must distribute 90% of net income; similar to mutual funds.
Options
- Options Clearing Corporation is issuer/guarantor.
- American style: Exercise anytime; European: Only at expiration.
- Intrinsic value: Calls “in the money” if market > strike; puts if market < strike.
- Covered calls: Stock owned, written to generate income.
- Basic positions: Four main—long/short call, long/short put; break-even formulas are testable.
- LEAPS: Only long LEAP held >12 months may get long-term gain treatment.
Bonds & Municipal Securities
- Bonds: Interest rate risk and default risk are primary.
- Eurobond: Denominated in foreign currency (currency risk); Eurodollar: in USD (no currency risk).
- Nominal yield = coupon; current yield = coupon ÷ market price.
- Accretion: Zero-coupon bonds' taxable imputed interest.
- GOs: Backed by taxes, property taxes for local; overlapping debt possible.
- Revenue bonds: Backed by project revenues; trust indenture outlines covenants/flow of funds.
- Industrial development revenue bonds: Corporate credit, subject to AMT.
Regulatory Rules & Procedures
- Written Supervisory Procedures (WSPs): Must address senior exploitation, insider trading, AML.
- Margin: < $2K, pay in full; $2K–$4K, pay $2K; >$4K, pay 50%.
- Order flow: Order → Purchase & sales → Margin → Cashiering.
- Soft dollars: Can’t be used for rent, travel, or furniture.
- Account updates: Verify within 30 days; send updates every 36 months.
- Transfer (ACAT): 1 day to validate, 3 days to transfer.
Key Terms & Definitions
- Correspondence — Communication to 25 or fewer retail investors.
- Retail Communication — Communication to more than 25 retail investors.
- Accredited Investor — Meets income/net worth thresholds for private placements.
- Qualified Institutional Buyer (QIB) — Institution with $100M+ in assets.
- JTWROS — Joint account with rights of survivorship.
- Tenants in Common — Joint account, decedent’s share goes to beneficiary.
- Systematic Risk — Market-wide, cannot be diversified away.
- Alpha/Beta — Alpha: excess return; Beta: volatility vs. market.
- Right — Short-term, below market, to buy new shares.
- Warrant — Long-term, above market, to buy shares.
- Penny Stock — Non-NASDAQ OTC, price under $5.
- ADR — US-traded certificate for foreign stock.
- Spread — Difference between two financial quantities (e.g., bid-ask, issuer spread).
- Breakpoints — Mutual fund quantity discounts.
- LEAPS — Long-term option contracts (up to 39 months).
- GO Bond — General obligation; backed by taxing authority.
- Revenue Bond — Backed by specific project revenues.
Action Items / Next Steps
- Review key definitions and formulas for suitability, mutual funds, options, and bonds.
- Memorize break-even and parity formulas for options and convertibles.
- Refresh the characteristics and risks of different securities types before the exam.