SEC Certified Investment Solicitor (CIS) cheat sheet

Securities regulation typically rests on two pillars: mandatory disclosure (registration and prospectus rules) and antifraud liability for false or misleading statements and omissions.

Registration of a public offering does not mean the regulator approves the merits of the security; it confirms disclosure adequacy, so 'approved by the regulator' is a false comfort claim.

Exempt offerings (private placement, limited investor counts, accredited or qualified investor thresholds) avoid registration but still carry antifraud and resale-restriction obligations.

Insider trading prohibitions attach to material non-public information obtained through a duty of trust or confidence; tipper and tippee liability both flow from that breach.

Market manipulation categories include wash trades, marking the close, spoofing (orders placed without intent to execute), and pump-and-dump schemes.

Licensing regimes separate dealing, advising, and managing investments; a firm must hold the permission matching each activity it actually performs.

Record-keeping and reporting duties usually require retention of client orders, communications, and suitability records for a defined statutory period.

Cross-border offerings trigger host-state notification or passporting requirements; selling into a jurisdiction without local authorization is a common enforcement target.

Priority order in most conduct codes: integrity of the market, then client interests, then firm interests; conflicts must be disclosed and managed, not merely noted.

Suitability assessment needs three inputs: client objectives and constraints, risk tolerance evidenced by behavior and capacity, and the specific product's risk-return profile.

Know-your-client data must be refreshed at defined intervals or on trigger events (change of employment, marital status, income, or investment objective).

Execution-only channels are only defensible where the product is non-complex and the client initiated the transaction; otherwise suitability applies.

Inducements rules distinguish minor non-monetary benefits (acceptable if disclosed) from fees or research that could impair objectivity.

Best-execution obligation considers price, cost, speed, likelihood of execution and settlement, size, and nature of the order, not price alone.

Conflicts of interest register should record the conflict, the control applied, the owner, and the review date; disclosure is a last resort, not a control.

Vulnerable-client indicators (cognitive decline, bereavement, coercion, limited literacy) require enhanced documentation and, where appropriate, escalation.

Common shareholders rank last in liquidation after creditors and preference shareholders but typically hold voting rights and residual earnings claims.

Preference shares carry a fixed dividend and priority over common dividends but usually limited voting rights; cumulative versus non-cumulative and participating versus non-participating are key distinctions.

Convertible bond value = straight bond value + conversion option value; conversion value = share price x conversion ratio.

Warrants are issued by the company (dilutive) while call options are written by third parties (non-dilutive); this distinction drives exam questions.

Rights issues price new shares at a discount to market; theoretical ex-rights price = (market value before + subscription proceeds) / total shares after.

Dividend metrics: dividend yield = annual DPS / price; payout ratio = DPS / EPS; a payout ratio above 100% signals distribution from reserves or unsustainable earnings.

Stock splits and scrip issues change share count without changing shareholder wealth; bonus issue accounting moves reserves to share capital.

Depositary receipts (ADRs/GDRs) represent underlying shares held by a custodian and carry currency, political, and depositary-bank credit risk in addition to equity risk.

Bond price and yield move inversely; the relationship is convex, so price gains from a yield fall exceed price losses from an equal yield rise.

Macaulay duration = weighted average time to cash flows; modified duration = Macaulay duration / (1 + y/m), and percentage price change approx -modified duration x yield change.

Convexity adjustment adds 0.5 x convexity x (yield change)^2 to the duration estimate, improving accuracy for large yield moves.

Accrued interest uses the day-count convention (actual/actual, 30/360, actual/365); dirty price = clean price + accrued interest.

Yield to maturity assumes reinvestment of coupons at the YTM rate; realized compound yield differs when the curve is steep or flat.

Credit spread = bond yield minus benchmark yield of matching maturity; spread widening signals deteriorating credit or rising risk aversion.

Money market instruments (T-bills, commercial paper, CDs, repos) typically quote on a discount basis: price = face x (1 - discount rate x days/360).

Callable bonds cap price appreciation near the call price (negative convexity); putable bonds give the holder yield protection and floor the price.

Forwards and futures obligations are symmetric; options give the buyer a right and the writer an obligation, so the buyer pays a premium and has limited loss.

Futures are standardized, exchange-cleared, and marked to market daily with margin; forwards are bespoke, bilateral, and carry counterparty credit risk.

Put-call parity for European options: C + PV(strike) = P + S; violations imply arbitrage until transaction costs close the gap.

Delta measures change in option price per unit change in underlying; gamma is the rate of change of delta; theta is time decay; vega is sensitivity to implied volatility; rho to interest rates.

Swap valuation equals the present value of the difference between the fixed and floating legs; a payer swap gains when rates rise.

Structured note payoff = host bond plus embedded derivative; capital protection is only as good as the issuer's credit standing and the participation cap.

Knock-in and knock-out barriers change option value discontinuously; barrier monitoring (continuous versus discrete) is a documented term that affects pricing.

Counterparty risk mitigation includes collateral agreements (CSA), netting, central clearing, and initial/variation margin requirements.

Open-ended funds issue and redeem at net asset value; closed-ended funds trade at a market price that may be at a premium or discount to NAV.

NAV per share = (total assets - total liabilities) / shares outstanding, with assets valued at the fund's stated valuation policy and pricing point.

UCITS-style regimes impose diversification limits (for example a cap on single-issuer exposure and a limit on control of an issuer) plus liquidity and redemption rules.

Hedge fund fee structures combine a management fee on assets with a performance fee subject to a high-water mark to prevent double charging after losses.

Fund expenses fall into ongoing charges (management, administration, custody) and transaction costs; total expense ratio excludes performance fees in most conventions.

Share classes differ by currency, distribution policy (income versus accumulation), and fee level; currency-hedged classes add hedging cost.

Side letters and gates or lock-up provisions restrict redemptions and must be disclosed; liquidity mismatch between fund assets and redemption terms is a core risk.

Tracking difference versus tracking error: difference is the return gap to the index; error is the volatility of that gap.

Portfolio expected return = sum of weighted asset returns; portfolio variance includes covariance terms, so diversification benefit depends on correlation below 1.

Two-asset variance: w1^2 s1^2 + w2^2 s2^2 + 2 w1 w2 rho s1 s2; with rho = -1 a zero-variance combination may exist.

The efficient frontier plots maximum expected return for each level of risk; the optimal portfolio depends on the investor's risk aversion, not the frontier alone.

Capital allocation line slope equals the Sharpe ratio; the tangency portfolio maximizes Sharpe ratio when a risk-free asset exists.

Strategic asset allocation sets long-term policy weights; tactical allocation makes short-term deviations within policy bands and should be measured against those bands.

Rebalancing rules include calendar-based, threshold-based, and range-based; each trades transaction cost against drift from target weights.

Beta measures systematic risk relative to the market; alpha is the excess return not explained by beta, and both come from regressing portfolio returns on market returns.

Performance attribution decomposes return into allocation, selection, and interaction effects, distinct from performance measurement which only computes the return.

Dividend discount model: P = D1 / (r - g), where g must be below r; the Gordon growth model is highly sensitive to small changes in r or g.

Free cash flow to firm is discounted at WACC; free cash flow to equity is discounted at the cost of equity; mixing the two is a classic valuation error.

WACC = (E/V) x cost of equity + (D/V) x cost of debt x (1 - tax rate), using market values for weights.

CAPM: cost of equity = risk-free rate + beta x equity risk premium; beta should be estimated against a comparable index and adjusted for leverage when comparing firms.

Relative valuation uses P/E, P/B, EV/EBITDA, and dividend yield; each multiple must be applied to a consistent denominator (for example EV with EBITDA, price with earnings).

DuPont decomposition: ROE = net margin x asset turnover x financial leverage; it isolates profitability, efficiency, and gearing drivers.

Enterprise value = market capitalization + debt + minority interest + preferred stock - cash; it is the correct numerator for pre-interest multiples.

Qualitative analysis covers industry structure (Porter's five forces), management capital allocation record, and accounting quality flags such as rising receivables versus sales.

Market risk measures: duration and convexity for rates, beta for equity, and VaR for aggregate exposure; VaR states a loss threshold over a horizon at a confidence level and says nothing about the size of losses beyond it.

Expected shortfall (CVaR) averages losses beyond the VaR threshold and is a coherent risk measure; it addresses VaR's tail blindness.

Stress testing applies historical or hypothetical shocks; scenario analysis explores plausible multi-factor events rather than statistical tails.

Liquidity risk has two forms: funding liquidity (ability to meet obligations) and market liquidity (ability to trade without moving price); both must be monitored separately.

Three lines of defense: business units own risk, risk and compliance functions oversee, and internal audit provides independent assurance.

Compliance monitoring program elements: risk assessment, control testing, issue tracking and remediation, management reporting, and regulatory change management.

Operational risk categories include process failure, people, systems, and external events; control self-assessments and loss-event databases feed the capital and control cycle.

Segregation of duties and least-privilege access are preventive controls; reconciliation and exception reporting are detective controls; both are needed for a defensible control environment.