Intro to Securities Industry A rep has 120 days after their 2 year anniversary to complete the Regulatory Element

(every 3 years thereafter) Firm Element must completed by the rep annually MSRB members must provide duplicate statements to employer if opening an outside account; FINRA if only requested Code of Procedure rules that cover disciplinary actions by FINRA and the process Dept of Enforcement will seek authorization from the Office of Disciplinary Affairs to issue a complaint. Firm or person must respond to complaint in 25 days, if not, a second notice will be sent and the firm or person has 14 days to respond. If there is no response, it is treated as an admission to the allegations. Firm or person may request hearing in its response. Hearing Panel (Hearing Officer & 2 panelists) may impose the following penalities *Censure; Fine; Suspension of membership; Expulsion from membership; Bar a person from associating with a firm; etc. *If the rep is barred from the firm, they MUST cease employment cant do clerical work Respondent has 25 days to appeal to the National Adjudicatory Council (NAC). Then may appeal SEC; then Fed Courts. Respondent may waive the right to appeal and sign a Letter of Acceptance, Waiver, and Consent (AWC). Minor violations that are not disputed may have a fine of $2,500 or less, and/or censure Code of Arbitration disputes b/w member firms, its employees or clearing house must be settled by arbitration. If a customer accepts arbitration, the majority of arbs must be outside the securities industry. For disputes of $25,000 or less, there is only 1 arbitrator. All decisions by the arbitrator(s) are final. For the first year that a B/D is doing business, all adverts must be filed with FINRA 10 days prior to publication; also applies to any adverts for options, CMOs or investment companies, or any firms under FINRA. Must retain copies. Letters sent to 25+ people is advertising. **Does NOT include communications with individuals, internal memos, tombstones, routine adverts on personnel changes and prospectuses. B/D must retain files for 3 years, first 2 years must be within immediate reach (at the office) New Account Requirements Customer signature is NOT required for a cash account, but it is required for a margin account. FINRA requires: Customers name and residence; is of legal age; signature of rep; signature of partner *If its a business account: also names of authorized people to transact business Rep must make a reasonable effort to obtain: SS#, customers occupation info, if customer is associated with other member firm, finl background, tax status, and investment objectives. Educational background is NOT required. *Corp Account: need corporate resolution. Also need charter for margin accounts. *Partnership Acct: need info on each partner and all partner signatures with a copy of the partnership agreement Firm may hold a clients mail for up to 2 months (domestic travels) or 3 months (overseas) with written instruction To transfer a deceased clients account, the firm needs: copy of death cert, letters testamentary, inheritance tax waiver, affidavit of domicile. *Any existing POA is automatically cancelled at death of client.

B/Ds must send quarterly statements for inactive accounts and monthly for active accounts. Showing all activity, fees Must provide a current finl statement of the B/D upon customer request. Firm must complete an account transfer upon validation of ALL transfer instructions within 3 business days Confirmations to Client must be sent at or before completion of the transaction, which is generally the settlement date *Security Name, Amount#, Price, Buy/Sell, Date (Time if requested), B/Ds capacity, Yield on Debt securities, Callable?, Settlement Date Mark-ups on principal transactions must be disclosed. Rule 10b-10/Industry rules SIPC protection of customers funds and securities in the event a B/D becomes insolvent *All B/Ds that use the mails or any other means of interstate commerce must be members of the non-profit org SIPC *Maximum of $500,000; no more than $100,000 for cash losses *All accounts are aggregated by ownership cash and margin account would be combined, but joint accts are separate *Does NOT cover commodity or futures accounts! Nor to a B/Ds account held at the failed B/D. *Any amount exceeding coverage will make the customer a general creditor of the B/D *Securities that are specifically identified as a customers (e.g. stock cert w/ name on it) will not count towards coverage SEC Regulation S-P all B/Ds, investment cos and investment advisers registered w/ SEC must comply *Customers must receive privacy notice at relationship inception and annually thereafter *Consumers must receive privacy notice before the it discloses any nonpublic personal info to nonaffiliated 3rd party *The notice must disclose: info collected, types of affiliated/nonaffiliated 3rd parties it may disclose, opt-out option CTR must be filed for any cash transactions of $10,000+ in 1 business day CMIR must be filed when anyone physically transfers $10,000+ into or out of the USA SAR must be filed when a trans (or group of trans) is $5,000+ AND the firm suspects: *Client is violating fed criminal laws, funds related to illegal activity, trans designed to evade reporting Penalties for violating AML laws: $500,000 and/or 20 yrs in prison or 2x the amount of $$$ involved, whichever more Equities Statutory Voting vote each share once for each director slot. If 100 shs, then no more than 100 votes to each slot Cumulative Voting If 100 shs and 5 slots, then may vote all 500 shs to one slot or more divide it up Preemptive rights current common shareholders have right to buy new shares before they are offered to the public Rights offering expires in 2 months or less. Each share held will receive one right to purchase one share. Trade openly Warrants may expire only in years or be perpetual. Subscription price usually higher than the market price. Fundamentals of Debt Serial Bonds Mature sequentially (year-by-year) and are quoted on a YTM basis Term Bonds Mature at the same time and are quoted in dollar price (% of par) Corporate Bonds Trust Indenture Act of 1939 new issues of corp bonds must be registered under Sec Act of 1933 and comply with the Trust Indenture Act. If issuing more than $10mm, corp must provide an indenture (agreement) b/w the issuer and a trustee who will act on behalf of the bondholders. Trustee is usually a bank or trust co. All terms must be spelled out.

Liquidation Rights *Wages Taxes Secured Creditors Gen Creditors Subordinate Creditors Preferred Stock Com Stock Income Bonds usually issued by a corp in reorg (bankruptcy). Issuer promises to pay principal at maturity, but only pays interest if it has sufficient earnings. These bonds trade flat (no accrued interest), at a deep discount and are spec. Eurodollar Bonds dollar-denominated deposit outside USA. Pay in US $$ and primarily issued in Europe. Not registered with the SEC, and may not be sold in US until 40 or 90 days after issuance. Yankee Bonds allow foreign entities to borrow money in the US marketplace. Registered with SEC and sold in USA. Eurobonds sold in one country and denominated in the currency of another. Issuer, currency and primary market can all be different Yellow Sheets published weekly by the Natl Quotation Bureau. Give Bid/Ask for corp bonds trading OTC, alongwith market maker information. Does NOT give info for bonds trading on the NYSE. Accrued Interest for corp bonds, it is calculated on a 360/30 day basis. Calculated from last payment up to, but not including, the settlement date Seller must include amount of accrued interest as ordinary income. Buyer would include the net interest payment. US Government and Money Market Securities Govt notes and bonds are quoted in increments of 1/32nds of par TIPs the annual adjustment will be taxed as ordinary income that year T-Bills BEY is ALWAYS greater than its discount yield CMBs (Cash Mgmt Bills) are unscheduled short-term debt used to even out Treasury cash flows. Issued at discount STRIPs are sold at a discount. Zero-coupon bonds. Quoted on a yield basis. Accrued Interest on Govt notes and bonds is calculated on 365/Actual Day basis. Next business day settlement. Savings Bonds are non-marketable. Can only be redeemed by the US govt. All interest is exempt from state/local tax. Series EE bond 30 year denominations from $50 - $10,000. Purchased at 50% discount. If purchased b/w 5/1997 5/2005, receive interest rate of 90% of average yield on 5 year note during last 6 months. Fixed rate if purchased after 5/2005. This rate is reset twice a year. Can defer taxes on interest until maturity. Series HH bond 20 year denominations from $500 - $10,000. Receive interest payments semiannually. NOT sold directly to the public. Only obtained by exchanging an EE bond that is 6+ mos old and did not mature more than a year ago. As of 8/2004, NO longer available to the public. Series I bond indexed for inflation. Available from $50 - $10,000, but sold at FACE VALUE. Interest rate reset 2x/year depending on inflation rate. 30 year maturity. Can defer taxes on interest until maturity.

Agency Securities *GSEs Federal Farm Credit Banks (FFCBs) provide funds for: Banks for Co-ops; Intermediate Credit Banks; Fed Land Banks Issues short-term discount notes and interest-bearing bonds, both short and long. Interest is exempt from state/local tax Federal Home Loan Banks (FHLBs) 12 FHLBs provide liquidity to S&Ls to meet seasonal demands for money. Issue discount notes (less than 1 yr) and consolidated bonds (1+ yr). NOT backed by US Govt, but Treasury ma y buy $4b. Interest is exempt from state/local tax. Student Loan Marketing Assoc (SLMA) (Sallie Mae) provides liquidity to student loan makers and financing for state student loan agencies. NOT backed by US Govt, but has direct line of credit with US Govt. Interest exemption from state/local varies by state. Federal Home Loan Mortgage Corp (FHLMC) (Freddie Mac) provides liquidity to federally insured savings institutions needing extra funds to finance new housing. Freddie Mac does this by purchasing residential mortgages from them. It issues MBS, pass-through certs, and guaranteed mortgage-backed certs. NOT backed by US Govt, but they are backed by other agencies. Interest is fully taxable. Issues trade on the NYSE. Federal National Mortgage Assoc (FNMA) (Fannie Mae) buys insured FHA, VA and conventional residential mortgages from lenders (banks, S&Ls). Issues are backed by its authority to borrow from the Treasury. NOT backed by the US Govt. Interest is fully taxable. Issues trade on an exchange. Government National Mortgage Assoc (GNMA) (Ginnie Mae) part of HUD and, therefore, backed by the US Govt. It provides financing for residential housing. Interest is fully taxable!! Issues MBS, participation certs, and modified passthrough securities (which are backed by a pool of FHA/VA residential mortgages). Mortgages in the pool range from 25-30 years. However, average life is 12 14 years. CMOs All ads about CMOs must be filed with FINRA 10 days before use. If FINRA disapproves or requests changes, the member must resubmit the corrected material and receive approval before using. It must be approved by a principal of the firm. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the government agency backing (if any) only applies to the face value of the securities (not any premium paid). Claims about safety, simplicity, etc. must be accurate and not misleading. They may NOT be compared to any other types of investment, including CDs. Must also include the following: The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your rep for info on CMOs and how they react to different market conditions. Members must still submit the standardized print ad prepared by FINRA. B/Ds must offer customers educational materials about the features of CMOs, such as: *Characteristics and Risks: changing interest rates, prepayment risk, avg life, tax considerations, credit risk, liquidity *Structure: tranches, and risks associated with each type. Similar CMOs may have different prepayment, interest risk *Relationship b/w mortgage loans and mortgage securities *Glossary of terms applicable to MBS

Commercial Paper: matures in 270 days or less. Rated by Moodys as P-1 (Prime 1)(the best), P2, P3 and NP. S&P rates A1 to A3. Fitch from F1+ to F3. Minimum denomination is typically $100,000 Bankers Acceptances are used to facilitate foreign trade. Actively trade and quite safe. Repos Dealer sells securities and agrees to buy them back Reverse Repos Dealer buys securities and agrees to sell them back on a certain date at a certain price. CDs mature in 7 days to unlimited. Currently insured up to $250,000 by FDIC. Penalty if redeemed early. Jumbo CDs (negotiable CDs) have a minimum denomination of $100,000 buy trade in denominations of $1mm. Municipals Muni issuers must prepare an official statement. Contains detailed info on the bond and finl info on the issuer. It also contains the legal opinion, which verifies that the municipality has the authority to issue the bonds. Bonds issued by US territories (Puerto Rico, Guam, US Virgin Islands, Samoa) are fully tax-exempt no matter residence Laws prevent municipalities from borrowing at a low interest rate an investing the money in higher yielding treasuries. School districts may only issue limited tax general obligations. Unlimited tax GOs are issued by other govt units Analyzing GOs: *Economic health of the community property values, largest employers, average income and demographics *Tax burden and sources of tax payments *Budgetary structure and finl condition of issuer *Existing debt using such measures as Debt per Capita and overlapping debt Most GO issues are secured by property taxes. Full valuation x basis of assessment = Assessed Value; Assessed Value x millage rate = property tax Millage is per 1,000. So 20 mils equals 0.02 Direct Debt all debt issued by the municipality. Total Bonded Debt is often referred to as Funded Debt. Net Direct Debt = Direct Debt minus any self-supporting debt (e.g. revenue issues, note issues). The GOs Overlapping Debt debt of a political entity (school district/county) where its tax base overlaps with another tax base If a city and school district lie within the same boundaries, they are coterminous. Analyst will typically use the ratio of Net Direct Debt plus Overlapping Debt to Assessed Value or Debt per Capita Bank qualified munis allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This encourages banks to invest in munis. To qualify, the municipality may only issue up to $10mm annually.

Revenue Bonds yields are usually higher than GOs because they are riskier. Rev Bonds can be issued when the voters do not approve GOs OR when the debt limits have been reached for GOs Industrial Development Revenue (IDR) and Pollution Control Revenue (PCR) issued by municipalities and secured by a lease agreement with a corp. Issued to build a facility for a private company. The credit is based on the corps ability to make the lease payments, therefore the bond is NOT backed by the municipality. If the holder of an industrial bond is a substantial user of the facility, then the federal tax exemption on the interest earned would not apply. Special Tax bonds payable only from the proceeds of the special tax, e.g. highway bonds from excise tax on gasoline Special Assessment Bonds payable from the assessment on the facilities that benefit, e.g. water, sewer, sidewalk, street Double-Barreled Bonds backed by 2 sources of revenue. First from revenue from the project, then general tax dollars Moral Obligation bonds secured by revenue from project, but the govt will back it (not required). Legislative approval Parity Munis the revenue stream has already been promised to another existing bond Taxable Munis issued when muni exceeds $150mm in private activity bonds. Public Housing Authority/New Housing Authority construction of low-income housing. No longer issued, but trade Advance Refunded Munis/Escrowed to Maturity also called prerefunded or defeased bonds. Collateralized by US Govt securities. Usually paid off at next call date. Escrowed bonds do not have call feature, so remain outstanding. Private Activity Bonds (AMT Bonds) if 10% or more of the proceeds finance a project of a private corporation and if 10% or more of the proceeds will be secured by property used by the private business, then the interest is subject to AMT. May trade at a higher yield. Analyzing Revenue Bonds Not necessary to analyze the tax base. Most important factor is the comparison of monies available to service debt. Net revenue is used to pay bondholders, which means operating expenses and maintenance are deducted first. Debt service ratio = Net Revenue (Gross after operating/maintenance expenses) / Debt Service Feasibility Study issuer hires consultants to estimate if project can generate the needed revenue. Includes Engineering Report. Rate Covenant issuer pledges to maintain rates at sufficient levels to meet operational and debt service Maintenance Covenant pledges to maintain the project in good working order Insurance Covenant pledges to maintain insurance on the property Nondiscrimination Covenant issuer will not grant special rates to any person or group Operating/Maintenance Debt Service Debt Service Reserve Reserve Maintenance Replacement/Renewal Sinking Fund Surplus Fund

Muni Notes Tax Anticipation Notes (TANs) issued to finance current operations in anticipation of future tax receipts. GOs Revenue Anticipation Notes (RANs) issued in anticipation of revenues other than general tax receipts. GOs Bond Anticipation Notes (BANs) issued to obtain financing that will be financed thru sale of long-term bonds Grant Anticipation Notes (GANs) issued in anticipation of receiving federal grants Construction Loan Notes (CLNs) to provide funds for construction of a project that will be funded by a bond issue Moodys Rating = MIG1 (VMIG 1): Best Quality; MIG2; MIG3; MIG4 S&P Rating = SP-1 (strong capacity to pay P&I); SP-2; SP-3 Auction Rate Notes Long-term Notes that are marketed as short-term investments. Dutch auction process. Interest reset every 7, 28, 35 days based on an auction. All investors will receive the same, clearing rate. Hold Order (Roll) current holder will continue to hold in spite of the clearing rate assumed order if no election made Bid prospective buyer will submit rate they will buy at. Current holder may indicate they will continue to hold only if rate is set at or above a specified rate. Holder will be required to sell at the clearing rate if it is below their bid rate. Buyer will NOT get it if rate is below their specified rate Sell Order holder wants to sell without regard to the clearing rate. Exposed to sale is the total amount of securities that is subject to sell orders or roll-at-rates. Based on the submitted bids, the auction agent will set the next interest rate as the lowest rate to match supply and demand. The clearing rate is the lowest rate bid sufficient to cover all the securities exposed for sale. If, however, the quantity of bids is insufficient to meet the quantity that is exposed for sale, the auction is deemed to fail. In that case, the interest rate will be reset in accordance with the terms of the issue. VRDO similar to an ARS, except it is putable to the issuer/third party. Reset rate is set by the dealer at a rate that allows the security to be sold at par value. AMBAC, MBIA, FGIC and FSA largest insurers of munis Bond selling at a discount will always be priced to maturity Bond selling at a premium, which is callable at par, will always be priced to the call Bonds selling at a premium, which is callable at a premium, will be priced either way that gives the lower yield Accrued interest is calculated on a 360/30 basis. T+3 settlement

Underwriting Securities Firm-Commitment underwriter takes the entire issue and absorbs any securities that are not sold acting as principals Standby Agreement syndicate will purchase any unsubscribed stock under a preemptive rights offering, for a fee Best-Efforts underwriters act as agents and return any unsold shares to the issuer. All-or-None underwriters act as agents, partial sale will be cancelled. Also, mini-maxi = requires a certain dollar amount (70% of total offering) or the offering will be cancelled. Syndicate Factors that affect he public offering price: *corp earnings; dividend payouts; price of similar cos currently trading; indications of interest; current market conditions Underwriting Spread = Total spread received by the underwriter Managers fee managing underwriter (usually the smallest piece of the spread) Underwriting fee shared by the syndicate Concession paid to the B/Ds selling the shares (usually the largest piece of the spread) The underwriter fee and concession are the Takedown/Total Takedown Managing underwriter would earn the full spread; a syndicate member would earn the underwriting fee and concession Western Account each syndicate member is responsible only for its share Eastern Account each syndicate member is responsible for a percentage of the unsold balance New issues include ALL IPOs of equity securities that are sold under a registration. These may not be sold to restricted persons. A member firm that sells new issues must re-verify eligibility every 12 months and retain copies of all info for 3 years Member firm or person associated may not purchase a new issue unless exemptions apply. Restricted person Member firms; employees of firm; immediate family (does NOT include aunts, uncles or cousins) Immediate family member is restricted if the employee gives/receives material support (25%+ of persons income) or living in the same household. OR if the employee is employed by the selling member firm. OR the employee has the ability to control the allocation of the new issue Also restricted are finders and fiduciaries (e.g. attorneys and accountants), portfolio managers, persons who own a B/D (i.e. they hold 10%+ of the firm). General Exemptions Investment Cos (mutual funds), insurance co account, common trust fund, restricted persons beneficial interest <10%, publicly traded entities (other than a B/D or its affiliates), foreign investment cos, ERISA accts, benefit plans

B/D may purchase shares if the new issue is undersubscribed. Also, restricted person may buy if they already own shares to prevent equity interest dilution, but they must have owned the shares for at least one year. Green Shoe Clause allows underwriters to buy addl shares form the issuer (max of 15%) if issue is oversubscribed. Stabilization managing underwriter bids for the issue in the secondary market at or below the public offering price. Must end when all of the new issue is sold. Tender Offer a customer may NOT tender borrowed (short) shares. Prospectus Requirements If to be listed on a natl exchange or NASDAQ, then 25 days from effective date If OTC but not NASDAQ, then 90 days for first time issuer and 40 days if previous issuer Rule 144 sale of restricted stock and affiliate (control) stock. Not registered, usually acquired thru private placement Purchaser of restricted stock must hold for 6 months before selling. Control stock has NO holding period requirement Must notify SEC at the time he places order to sell with broker. NOT required if does not exceed 5,000shs AND $50K If not sold within 90 days of the original notice to SEC, then an amended notice must be filed. For exchange listed/NASDAQ stock, maximum sold over any 90 day period is the greater of 1% of total share outstanding or average weekly trading volume of the past 4 weeks. If not listed on the NASDAQ, then max of 1%. For private placement stock held for more than one year, there is no volume restriction for non-affiliates. Still applies to insiders and affiliates of the issuer. B/D may solicit a Rule 144 if the customer indicated an unsolicited interest in the preceding 10 business days OR may inquiry of another B/D that indicated interest in the preceding 60 days. Rule 144A exemption for the purchase of restricted stock by a qualified institution ($100mm invested in securities). Shelf registration permitted periodic sale of a new issue within 3 years. Rule 145 reclassification defined as a sale *Reclassification of the securities of an issuer that involves the substitution of one security for another *A merger or consolidation in which the securities of a corp are exchanged for the securities of another corp *Transfer of assets from one corp to another DOES NOT include stock splits, reverse splits or change in par value Negotiated Sale issuer brings its issue to market by working with an underwriter Competitive Sale issuer invites bids and best bid wins. Underwrite is committed to the bid and its risks *Issuer will submit Notice of Sale to attract the bids (in finl newspapers or Bond Buyer). Must include specific bidding requirements and the dated date. It will describe the structure (term/serial offer). Include legal opinion as well. Syndicate Letter Sent by managing firm to invite other firms, will include obligations, settlement, type and priority Net Interest Cost (NIC) total interest cost to the issuer, need # of bonds, maturities, coupon rates, dated date and price True Interest Cost (TIC) the Canadian method that takes into account the time value of money. Reoffering yield must be calculated to submit the bid, but this not used in determining who wins the bid, rather it represents the yield to a customer.

Syndicate manager is responsible for allocating the offer to the syndicate. Priority of Orders it to give maximum benefit to the syndicate and not one particular member. Usually: presale orders, group net orders, designated orders, member orders (syndicate manager may change the order if beneficial to the syndicate) Priority of Orders is not shown on any official statement, but must be presented to customer upon request. New bonds that do not have a settlement date will trade When Issued and the buyer does NOT pay accrued interest MSRB composed of 15 members from 3 groups: securities firm reps, bank dealer reps, and public members SEC has control of the MSRB, which has no enforcement powers. Other regulatory bodies enforce MSRB rules. *For B/Ds enforced by SEC and FINRA *For bank dealers: Comptroller of the Currency for natl banks; FRB for non natl banks that are FRB members; and FDIC for non natl banks that are nonFRB members Settlement Date Treasuries and Option settle in T+1 Stock, bonds, etc settle in T+3 Payment Date Corps in cash or margin account Munis US Govt Options

5 business days Reg T Exempt from Reg T; payment generally due at settlement Exempt from Reg T; payment generally due at settlement 5 Business days

SEC Regulation FD (Fair Disclosure) - Material non public information *If intentionally released by comp, then must simultaneously disclose to the public *If unintentional, then make public within 24 hours or until the next trading day opens on the NYSE/NASDAQ May accomplish by filing Form 8-K with SEC Stopping Stock specialist guarantees a price for a floor broker. May only do for public orders, not a firms account Specialist may NOT compete with public orders. He may only bid higher or ask lower to reduce the spread. Order Ticket Components *Account Type (cash/margin), Security Name/Symbol, Terms and conditions of order (limit, GTC), discretionary?, solicited/unsolicited, special directions, buy/sell Order Dept (Wire Room) Purchase/Sales Dept Margin Dept Cashiering Dept Highest Bid/Lowest Ask Timing (first in line) Size (larger orders first) Specialist may NOT accept a Not-Held (NH) order which gives floor broker discretion Rule 80B if DJIA declines 10% then 1 hour halt; 20% then 2 hour halt; 30% closed for remainder of the day

Nasdaq Level I: provides subscribers with highest bid/lowest offer for a security where there are at least 2 market makers Level II: provides bids and offers and quotation sizes for all market makers that enter quotes for each security Level III: allows a market maker to enter quotes into the Nasdaq system. 5% Policy a guide not a rule that markups or commissions are around 5% *Markup/down should be based on the current market and not the dealers inventory cost. Also, should consider type of security, availability, price and total transaction amount. *New issues, registered secondaries and mutual funds are exempt from the 5% policy as are munis Interpositioning insertion of a third party b/w the customer and the market maker to the detriment of the customer Nasdaq Global Market (NGM) provides more comprehensive info about OTC socks that are more widely known, etc Nasdaq Capital Market (NCM) for smaller companies that trade OTC, which meet less stringent requirements to list Nasdaq Market Center Execution System (SuperMontage) accepts only market orders or immediately executable limit orders (buy limit orders priced at the offer or higher, or sell limit orders priced at the bid or lower). Orders up to 999,999 shares. Third Market OTC trading of exchange-listed securities Consolidated Quotation Service (CQS) provides bid/ask of stocks that are listed on the Exchange and are also OTC ECNs buy/sell anonymously, execute after-hours. Fourth Market institution-to-institution trading without a B/D Consolidated Tape reports all round-lot executions of securities listed on the exchange. Includes 2nd and 3rd markets OTC Bulletin Board and Pink Sheets non Nasdaq securities are quoted here. Telephone Protection Act of 1991 may solicit from 8 am 9 pm local time of party called. Must disclose name, business entity, telephone number/address, and purpose of the call. If person requests no further calls, must place on do not call list for 5 years. Calling co must have written policy on do not call list. No unsolicited Faxes. Bond Buyer 30-Day Visible Supply total dollar volume of bonds expected to reach the market over the next 30 days (13+ mos mat) Bond Buyer Placement Ratio Demand side of the market Revenue Bond Index average yield on 25 revenue bonds with 30 yr maturities rate A1 or A+ 20 Bond Index average yield on 20 GOs with 20 yr maturities rated Aa2 and AA 11 Bond Index average yield on 11 of the 20 bonds in the 20 Bond Index rate Aa1 to AA+ Blue List provided secondary market info. No longer published MuniFacts wire service used by muni dealers. News articles and secondary market offerings from the Bond Buyer

Margin Accounts Reg T initial margin requirement is 50%. New issues and mutual funds are NOT marginable, but they may be used as collateral after 30 days of being held. Margin requirement must be deposited within 2 business days of the settlement date. (If <$1,000, may ignore and add to the existing account loan). If using securities to meet margin call, then must equal 2x the amount of the call Interest paid in a margin account is generally tax deductible against any investment income. Hypothecation Agreement: pledge of the securities in the account to the firm to secure the loan. Firm may pledge 140% Day traders must be designated as such by the B/D. If he executes 4+ trades per day over any 5 business days, they are a pattern day trader. Thus, the trader must meet a minimum equity requirement of $25,000. This amount must be in the customers account prior to any day-trading activity, and must remain in the account for 2 business days following. Minimum initial requirement of $2,000 or 100% or the purchase price, whichever is less Long Market Value Debit Balance = Equity Maintenance Requirement: For a long position = 25% *Multiply the Debit Balance by 4/3 to determine the minimum market value, Special Memorandum Account (SMA) excess equity is notated in a SMA. It will NOT decrease once established. *Also, cash dividends, interest, voluntary cash deposits, and sales proceeds will generate SMA. SMA is not cash or equity, but a line of credit. Withdrawing the SMA will increase the Debit Balance & decrease equity However, SMA is buying power in that it can purchase 2x its value with current Reg T requirements, which would keep equity the same. Restricted Account when the equity is above 25% minimum but below the 50% initial requirement Addl purchases are okay, if they meet the 50% min, but any sales proceeds in the restricted account are used reduce the debit balance. However, an amount equal to 50% of the sale is credited to SMA and may be withdrawn by the customer. The customer can NOT withdrawal SMA if it reduces his equity below the minimum 25% = phantom SMA Same-day Substitutions are allowed, i.e. purchase and sale of the same amount in a restricted account Credit Balance - Short Market Value = Equity Minimum deposit is $2,000. Minimum maintenance level is 30%. If equity is <$5 per share, the required equity is the greater of the market value or $2.50 per share. If equity is >$5 per share, the required equity is the greater of $5 per share or 30% of the market value. (LMV DR) + (CR SMV) = Combined Equity US Govt Margin Requirments: 1% for less than 1 year maturity to 6% for 20+ year maturities Munis: 7% (both initial and maintenance requirement)

Investment Grade Debt: 10%

High Yield: 20% of current market value or 7% of principal amount

Convertible Bonds require 50% per FRB Short against the box: (both long and short the same security) = 5% maintenance requirement Straddle Long a Put and Call for the same security on the same expiration at the same strike, speculate on the volatility *Seller of a straddle expects no volatility (i.e. sideways movment) Spreads purchase and sale of either 2 calls or 2 puts on the same security. Expiration and/or strike will be different. Price Spread (Vertical Spread) same expiration but different strike prices Time Spread (Horizontal Spread) same strike but different expirations Diagonal Spread different strike and different expiration Net Credit Spread when an investor buys an option with a lower premium and sells an option with a higher premium. The investor is a net seller and the maximum gain is the net premium received. Wants both options to expire worthless. The trade becomes profitable when the credit spread narrows. Maximum loss is difference in premiums. Breakeven equals the difference in premiums added to the lowest call or subtracted from the highest put. Net Debit Spread when an investor buys an option with a higher premium and sells an option with a lower premium. The investor is a net buyer and the maximum gain is the net premium received. Wants the spread to widen. The maximum loss is the difference in premiums. Breakeven equals the difference in premiums added to the lowest call or subtracted from the highest put. Non-equity Options: Stock indexes, Foreign Currencies, Debt Securities, Yield-based Operate as European exercise. Index value is multiplied by $100. Settlement is in cash. Hedging a portfolio with Index Puts. How many? Portfolio Value / Index value x $100 = Z Z x portfolio beta = # of contracts Capped Index Options: similar to a vertical spread, it trade as a single security that executes both legs of the spread guaranteed when the underlying index reaches a predetermined price (capped price) E.G. capped index option with strike of 400 and capped interval of 30. Investor receives $3,000 if the index closes at or above 430 before expiration. He may also only receive the in-the-money value if above 400, but below 430. This is reversed for a Put Capped Index Option. Options expire at 11:59 pm ET on the Saturday following the third Friday of the expiration month. The option must be exercised by 5:30 pm ET on the last business day prior to expiration. Expiring option will cease to trade at 4 pm ET. T-Bill Contracts expire quarterly in March, June, September and December LEAPs call and put equity options with expirations of up to 39 months. Order Book Official (OBO) assists the board brokers in maintaining the public customer limit order book on options If trading is halted on an underlying security to an option, then that option contract will also halt trading.

Clients broker must settle the options trade with the OCC prior to 10 am ET on the next business day. OCC will randomly assign the exercise notice to a B/D whose account shows a short position in the contract. Options that are in the money by at least 1 cent will automatically be exercised. Customers have 5 business days in which to pay for options purchase in a margin account (100% of premium). House rules may shorten this period though If a long option position matures in 9+ months, then it has a marginable loan value of 25%. Margin of uncovered call or put = the current premium + 20% of the current market value of the underlying any amt that the contract is out of the money Minimum requirement of an uncovered call or put = the current premium + 10% of current mkt value of the underlying Covered Spreads in margin accounts do NOT have a margin requirement. Uncovered Spreads in margin accounts must deposit margin. Buyer of a straddle must pay for the options in full. Position will NOT have a loan value in the account. Short straddles will have margin requirements based on the value of the underlying securities. Stock Splits on Options increase the number of contracts and decrease the strike (reverse stock split is reversed) *For an odd-lot split (3 for 2 OR 5 for 4, etc), the number of shs per contract increases and strike decreases, the number of contracts stays the same Stock Dividend on Options adjusted on the ex-div date. Number of shs / contract increases and strike price decreases NAV/ (100 Breakpoint%) = $$ Offering Price Fund may assess a maximum 8.5% sales charge only if it offers breakpoints and rights of accumulation