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Wiley FINRA Series 57 Exam Review 2017: The Securities Trader Examination

ISBN: 978-1-119-40322-7
624 pages
March 2017
Wiley FINRA Series 57 Exam Review 2017: The Securities Trader Examination (1119403227) cover image

Description

The go-to guide to acing the Series 57 Exam!

Passing The Securities Trader Examination (Series 57) qualifies an individual to engage in NASDAQ and OTC Equity trading and to act as a proprietary trader. The exam covers Market Overview and Products, Engaging in Professional Conduct and Adhering to Regulatory Requirements, Trading Activities, Maintaining Books and Records and Trade Reporting. There are no prerequisites to taking the series 57 exam other than being sponsored by a FINRA member firm.

Created by the experts at The Securities Institute of America, Inc., Wiley Series 57 Exam Review 2017 arms you with everything you need to pass this challenging 125-question test. Designed to help you build and fine-tune your knowledge of all areas covered in the exam and to guarantee that you're prepared mentally and strategically to take the test, it provides:

  • Dozens of examples
  • Assorted practice questions for each subject area covered in the exam
  • Priceless test-taking tips and strategies
  • Helpful hints on how to study for the test, manage stress, and stay focused

Wiley Series 57 Exam Review 2017 is your ticket to passing the Series 57 test on the first try—with flying colors!

Visit www.efficientlearning.com/finra for more information.

The Securities Institute of America, Inc. helps thousands of securities and insurance professionals build successful careers in the financial services industry every year. Our securities training options include:

  • Onsite classes
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  • State-of-the-art exam preparation software
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As a result, you can choose a securities training solution that matches your skill level, learning style, and schedule. Regardless of the format you choose, you can be sure that our securities training courses are relevant, tested, and designed to help you succeed. It is the experience of our instructors and the quality of our materials that make our courses requested by name at some of the largest financial services firms in the world.

To contact The Securities Institute of America, visit us on the web at www.SecuritiesCE.com or call 877-218-1776.

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Table of Contents

About the Series 57 Exam xxi

About This Book xxv

About the Test Bank xxvii

About the Securities Institute of America xxix

Chapter 1 Equity Securities 1

What Is a Security? 1

Equity = Stock 2

Common Stock 2

Corporate Time Line 2

Values of Common Stock 4

Book Value 4

Par Value 5

Rights of Common Stockholders 5

Preemptive Rights 5

Characteristics of a Rights Offering 6

Determining the Value of a Right Cum Rights 7

Determining the Value of a Right Ex Rights 7

Voting 8

Limited Liability 9

Freely Transferable 9

The Transfer Agent 10

The Registrar 10

CUSIP Numbers 11

Inspection of Books and Records 11

Residual Claim to Assets 11

Why Do People Buy Common Stock? 11

Income 11

What Are the Risks of Owning Common Stock? 12

How Does Someone Become a Stockholder? 13

Preferred Stock 14

Features of All Preferred Stock 14

Types of Preferred Stock 16

Callable Preferred 17

Types of Dividends 17

Dividend Distribution 18

Taxation of Dividends 20

Selling Dividends 20

Dividend Disbursement Process 21

Warrants 21

How Do People Get Warrants? 21

American Depositary Receipts (ADRs)/American Depositary Shares (ADSs) 22

Currency Risks 23

Functions of the Custodian Bank Issuing ADRs 23

Real Estate Investment Trusts/REITs 23

Non-Traded REITs 24

Direct Participation Programs and Limited Partnerships 24

Limited Partnerships 24

Tax Reporting for Direct Participation Programs 28

Limited Partnership Analysis 28

Tax Deductions vs. Tax Credits 29

Other Tax Considerations 29

Dissolving a Partnership 30

Pretest 31

Chapter 2 Debt Securities 35

Corporate Bonds 35

Types of Bond Issuance 36

Bond Certificate 37

Bond Pricing 37

Corporate Bond Pricing 38

Bond Yields 38

Yield Spreads 42

The Real Interest Rate 43

Bond Maturities 43

Types of Corporate Bonds 44

Converting Bonds into Common Stock 47

Advantages of Issuing Convertible Bonds 48

Disadvantages of Issuing Convertible Bonds 48

Convertible Bonds and Stock Splits 48

Reverse Convertible Securities 48

Forced Conversion 49

The Trust Indenture Act of 1939 49

Bond Indenture 49

Ratings Considerations 50

Retiring Corporate Bonds 50

Collateralized Mortgage Obligation (CMO) 52

CMOs and Interest Rates 53

Types of CMOs 53

Private-Label CMOs 55

Exchange-Traded Notes (ETNs) 55

Euro and Yankee Bonds 56

Pretest 57

Chapter 3 Government Securities 61

Series EE Bonds 61

Series HH Bonds 62

Treasury Bills, Notes, and Bonds 62

Treasury Bond and Note Pricing 63

Treasury Strips 64

Treasury Receipts 64

Treasury Inflation-Protected Securities (TIPS) 65

Agency Issues 65

Government National Mortgage Association (GNMA) 65

Federal National Mortgage Association (FNMA) 66

Federal Home Loan Mortgage Corporation (FHLMC) 66

Federal Farm Credit System (FFCS) 66

Sallie Mae 67

Pretest 69

Chapter 4 The Money Market 71

Money Market Instruments 71

Corporate Money Market Instruments 71

Government Money Market Instruments 73

Municipal Money Market Instruments 74

International Money Market Instruments 74

Interest Rates 74

Pretest 77

Chapter 5 Economic Fundamentals 79

Gross Domestic Product (GDP) 79

Recession 81

Depression 81

Economic Indicators 81

Schools of Economic Thought 83

Economic Policy 84

Tools of The Federal Reserve Board 84

Fiscal Policy 87

Consumer Price Index (CPI) 88

Inflation/Deflation 88

Real GDP 88

International Monetary Considerations 89

Yield Curve Analysis 89

Pretest 91

Chapter 6 Customer Accounts 95

Holding Securities 97

Mailing Instructions 98

Types of Accounts 99

Commingling Customer’s Pledged Securities 109

Wrap Accounts 110

Regulation S-P 110

Day Trading Accounts 111

Pretest 113

Chapter 7 Variable Annuities and Retirement Plans 117

Annuities 117

Bonus Annuity 119

Equity-Indexed Annuity 120

Recommending Variable annuities 121

Annuity Purchase Options 122

Accumulation Units 123

Annuity Units 123

Annuity Payout Options 124

Factors Affecting the Size of the Annuity Payment 125

The Assumed Interest Rate (AIR) 125

Taxation 126

Types of Withdrawals 126

Annuitizing the Contract 127

Sales Charges 127

Investment Management Fees 127

Variable Annuity vs. Mutual Fund 127

Retirement Plans 128

Individual Plans 128

Individual Retirement Accounts (IRAs) 128

Corporate Plans 137

Types of Plans 138

Rolling Over a Pension Plan 140

Employee Stock Options 140

Employee Retirement Income Security Act of 1974 (ERISA) 141

ERISA 404C Safe Harbor 142

The Department of Labor Fiduciary Rules 143

Life Insurance 143

Tax Implications of Life Insurance 146

Health Savings Accounts 146

Pretest 149

Chapter 8 Margin Accounts 153

Regulation of Credit 153

Regulation T 153

House Rules 156

Establishing a Long Position in a Margin Account 156

An Increase in the Long Market Value 157

Special Memorandum Account (SMA) Long Margin Account 159

A Decrease in the Long Market Value 161

Minimum Equity Requirement Long Margin Accounts 161

Establishing a Short Position in a Margin Account 162

A Decrease in the Short Market Value 163

Special Memorandum Account (SMA) Short Margin Account 164

An Increase in the Short Market Value 165

Minimum Equity Requirement Short Margin Accounts 166

Combined Margin Accounts 167

Portfolio Margin Accounts 167

Securities Backed Lines of Credit 168

Minimum Margin for Leveraged ETFs 168

Pretest 169

Chapter 9 Mutual Funds 173

Investment Company Philosophy 173

Types of Investment Companies 174

Open-End vs. Closed-End Funds 175

Diversified vs. Nondiversified 176

Investment Company Registration 177

Investment Company Components 179

Mutual Fund Distribution 181

Selling Group Member 181

Distribution of No-Load Mutual Fund Shares 182

Distribution of Mutual Fund Shares 182

Mutual Fund Prospectus 182

Characteristics of Open-End Mutual Fund Shares 184

Mutual Fund Investment Objectives 185

Other Types of Funds 186

Alternative Funds 187

Floating Rate Bank Loan Funds 187

Bond Funds 187

Valuing Mutual Fund Shares 189

Changes in the NAV 190

Sales Charges 191

12B-1 Fees 193

Calculating a Mutual Fund’s Sales Charge Percentage 194

Finding the Public Offering Price 194

Sales Charge Reductions 195

Breakpoint Schedule 195

Letter of Intent 196

Backdating a Letter of Intent 196

Breakpoint Sales 196

Rights of Accumulation 197

Automatic Reinvestment of Distributions 197

Other Mutual Fund Features 198

Cost Base of Multiple Purchases 202

Purchasing Mutual Fund Shares 203

Sales Charges 205

45-Day Free Look 206

Withdrawal Plans 206

Recommending Mutual Funds 207

Structured Retail Products/SRPs 208

Pretest 209

Chapter 10 Issuing Corporate Securities 215

The Prospectus 216

The Final Prospectus 217

Providing the Prospectus to Aftermarket Purchasers 218

SEC Disclaimer 218

Misrepresentations 219

Tombstone Ads 219

Free Riding and Withholding/FINRA Rule 5130 220

Underwriting Corporate Securities 221

Types of Underwriting Commitments 222

Types of Offerings 224

Awarding the Issue 225

The Underwriting Syndicate 225

Selling Group 225

Underwriter’s Compensation 226

Underwriting Spread 227

Factors That Determine the Size of the Underwriting Spread 227

Review of Underwriting Agreements by FINRA 227

Underwriter’s Compensation 228

Unreasonable Compensation 228

Offering of Securities by FINRA Members 230

Exempt Securities 230

Exempt Transactions 231

Crowdfunding 237

Rule 137 Nonparticipants 239

Rule 138 Nonequivalent Securities 240

Rule 139 Issuing Research Reports 240

Rule 415 Shelf Registration 241

Securities Offering Reform Rules 241

SEC Rule 405 242

Additional Communication Rules 243

DPP Roll-UP Transactions 244

Pretest 245

Chapter 11 Brokerage Office Procedure 249

Executing an Order 249

Customer Confirmations 251

Clearly Erroneous Reports 252

Execution Errors 252

Corporate and Municipal Securities Settlement Options 252

RVP/DVP/COD 253

When-Issued Securities 253

Government Securities Settlement Options 254

Accrued Interest 254

Calculating Accrued interest 255

Accrued Interest for Government Notes and Bonds 256

Rules for Good Delivery 257

Delivery of Round Lots 258

Delivery of Bond Certificates 258

Rejection of Delivery 259

Don’t Know (DK) Procedures 259

Fail to Deliver/Fail to Receive 259

Due Bills 259

Customer Account Statements 260

Carrying of Customer Accounts 260

Proxies 261

Pretest 263

Chapter 12 Trading Securities 269

Types of Orders 269

The Exchanges 273

Priority of Exchange Orders 274

The Role of the Designated Market Maker 274

Crossing Stock 277

Do Not Reduce (DNR) 277

Adjustments for Stock Splits 278

Stopping Stock 279

Commission House Broker 280

Two-Dollar Broker 280

Registered Traders 280

Super Display Book (SDBK) 280

Short Sales 281

Affirmative Determination 281

Regulation SHO 282

Rule 200 Definitions and Order Marking 282

Rule 203 Security Borrowing and Delivery Requirements 283

Threshold Securities 284

Block Trades 285

Trading Along 286

Circuit Breakers 286

Limit Up Limit Down (Luld ) 287

Listing Requirements for the NYSE 287

Reading the Consolidated Tape 288

Exchange Qualifiers 290

Over-the-Counter/Nasdaq 290

High Frequency and Algorithmic Trading 301

Market Centers 303

SEC Regulation NMS 304

SEC Regulation ATS 305

Direct Market Access 305

Nasdaq International 307

Non-Nasdaq OTCBB 307

Pink OTC Market 308

Third Market 308

Nasdaq Market Center for Listed Securities 309

Fourth Market 309

Nasdaq Listing Standards 309

Market Maker Regulations and Responsibilities 310

Times for Entering a Quote 310

Withdrawing Quotes 313

Handling and Displaying Customer Limit Orders 314

The Order Audit Trail System (OATS) 316

The Manning Rule 317

Automated Confirmation System (ACT)/Trade Reporting Facility (TRF) 317

ACT Trade Scan 318

Nasdaq Trade Reporting Facility (TRF) 319

Step Out Trades 322

Market Making During Syndication 323

Regulation M, Rule 101 323

Penalty Bids 324

Regulation M, Rule 102 324

Regulation M, Rule 103 324

Passive Market Makers’ Daily Purchase Limit 325

Regulation M, Rule 104 325

Syndicate Short Positions 327

Regulation M, Rule 105 327

Trade Reporting and Compliance Engine (TRACE) 327

Broker vs. Dealer 330

FINRA 5 Percent Markup Policy 330

Markups/Markdowns When Acting as a Principal 331

Riskless Principal Transactions 332

Proceeds Transactions 333

Dominated and Controlled Markets 333

Net Transactions with Customers 334

Firm Quote Rule 334

The Firm Quote Compliance System (Fqcs ) 335

Trade Complaints Between Members 335

Rogue Trading Prevention 336

Arbitrage 336

Pretest 339

Chapter 13 Options 345

Option Classification 345

Option Classes 346

Option Series 346

Bullish vs. Bearish 346

Possible Outcomes for an Option 347

Characteristics of All Options 348

Managing an Option Position 348

Buying Calls 349

Selling Calls 350

Buying Puts 352

Selling Puts 353

Option Premiums 355

At the Money Options 355

Out of the Money Options 356

Intrinsic Value and Time Value 356

Using Options as a Hedge 357

Long Stock Long Puts/Married Puts 357

Long Stock Short Calls/Covered Calls 359

Maximum Gain Long Stock Short Calls 360

Maximum Loss Long Stock Short Calls 361

Short Stock Long Calls 361

Maximum Gain Short Stock Long Calls 362

Maximum Loss Short Stock Long Call 363

Short Stock Short Puts 363

Maximum Gain Short Stock Short Puts 364

Maximum Loss Short Stock Short Puts 365

Multiple Option Positions and Strategies 366

Long Straddles 366

Short Straddles 368

Spreads 370

Combinations 381

Using a T Chart to Evaluate Option Positions 382

Index Options 386

Interest Rate Options 388

Price-Based Options 388

Rate-Based Options 390

Foreign Currency Options 390

The Option Clearing Corporation 392

The Options Markets 393

The Chicago Board Option Exchange 393

Opening and Closing Option Prices 395

Order Execution 395

Expiration and Exercise 396

American vs. European Exercise 396

Market Volatility Options/VIX 397

Flex Options 397

Weekly Options 398

Mini Options 398

Position and Exercise Limits 399

Stock Splits and Stock Dividends 399

Taxation of Options 400

Closing an Option Position 400

Exercising a Call 400

Exercising a Put 401

Protective Puts 401

Covered Calls 401

Option Compliance 401

Option Agreement 401

Pretest 403

Chapter 14 Securities Industry Rules and Regulations 411

The Securities Exchange Act of 1934 411

The Securities and Exchange Commission (SEC) 412

Extension of Credit 413

The National Association of Securities Dealers (NASD) 413

Becoming a Member of FINRA 415

Hiring New Employees 416

Disciplinary Actions Against a Registered Representative 417

Resignation of a Registered Representative 418

Continuing Education 418

Termination for Cause 420

Retiring Representatives/Continuing Commissions 420

State Registration 420

Registration Exemptions 421

Persons Ineligible to Register 421

Communications with the Public 421

FINRA Rule 2210 Communications with the Public 422

Broker Dealer Websites 425

Blind Recruiting Ads 426

Generic Advertising 426

Tombstone Ads 426

Testimonials 427

Free Services 427

Misleading Communication with the Public 428

Securities Investor Protection Corporation Act of 1970 428

Net Capital Requirement 428

Customer Coverage 429

Fidelity Bond 429

The Securities Acts Amendments of 1975 429

The Insider Trading & Securities Fraud Enforcement Act of 1988 430

Firewall 430

Telemarketing Rules 431

Do Not Call List Exemptions 432

The Penny Stock Cold Call Rule 432

The Role of the Principal 433

Violations and Complaints 433

Resolution of Allegations 433

Minor Rule Violation 434

Code of Arbitration 434

The Arbitration Process 435

Mediation 436

Currency Transactions 437

The Patriot Act 437

U.S. Accounts 439

Foreign Accounts 439

Annual Compliance Review 439

Business Continuity Plan 439

Sarbanes-Oxley Act 440

The Uniform Securities Act 441

Tender Offers 442

Stockholders Owning 5% of an Issuer’s Equity Securities 443

Pretest 445

Answer Keys 451

Appendix 467

Glossary of Exam Terms 501

Index 567

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