SEC Certified Investment Solicitor (CIS) flashcards

34 cards. Read the term and the definition here. The deck at the top of this page is optional.

Registration vs antifraud liability

Registration confirms disclosure adequacy for a public offering, not investment merit. Antifraud provisions apply independently to any material misstatement or omission, including in exempt offerings.

Material non-public information

Information a reasonable investor would consider important to an investment decision and that has not been disseminated to the market. Trading or tipping on it while under a duty of trust breaches securities law.

Spoofing

Placing orders with no intent to execute, to create false impressions of supply or demand, then cancelling. It is a form of market manipulation and prohibited in most jurisdictions.

Licensing by activity

Firms need permission for each regulated activity actually performed: dealing, arranging, advising, or managing investments. Holding one permission does not authorize the others.

Suitability assessment inputs

Three required inputs: the client's objectives and constraints, risk tolerance supported by capacity and behavior, and the product's risk-return profile. All three must align before a recommendation.

Inducements

Payments or benefits to a firm that could impair objectivity. Minor non-monetary benefits may be acceptable if disclosed and unlikely to conflict; larger benefits must be removed or controlled.

Best execution factors

Price, cost, speed, likelihood of execution and settlement, size, and nature of the order. Best execution is not simply the best price at a single moment.

Vulnerable client indicators

Signs such as cognitive decline, bereavement, coercion, or limited financial literacy. They require enhanced documentation, slower processes, and escalation before executing significant transactions.

Preference share characteristics

Fixed dividend with priority over common dividends, usually limited voting rights, and priority in liquidation below creditors. Cumulative, participating, and convertible variants change the payoff materially.

Convertible bond value

Straight bond value plus the value of the embedded conversion option. Conversion value equals share price multiplied by conversion ratio; the bond floor limits downside.

Theoretical ex-rights price

Market value of existing shares plus subscription proceeds, divided by total shares after the rights issue. It shows the price effect of issuing discounted new shares.

Warrants versus call options

Warrants are issued by the company and dilute existing holders when exercised. Call options are written by third parties and do not affect the company's share count.

Modified duration

Macaulay duration divided by one plus the periodic yield. It estimates percentage price change for a small yield change as minus modified duration times the yield change.

Convexity adjustment

Adds half the convexity multiplied by the square of the yield change to the duration estimate. It corrects price estimates for larger yield moves and captures the curve's curvature.

Dirty versus clean price

Dirty price equals clean price plus accrued interest. Settlement pays the dirty price; quoted prices are usually clean, so accrued interest must be calculated using the stated day-count convention.

Treasury bill discount pricing

Price equals face value multiplied by one minus the discount rate times days divided by 360. The discount rate understates the true investment yield because it is applied to face value.

Put-call parity

For European options: call price plus present value of strike equals put price plus underlying price. Deviations create arbitrage opportunities until transaction costs eliminate them.

Option Greeks

Delta is price sensitivity to the underlying, gamma is the change in delta, theta is time decay, vega is sensitivity to implied volatility, and rho is sensitivity to interest rates.

Interest rate swap valuation

The value equals the present value of the fixed leg minus the present value of the floating leg. A payer swap gains value when market interest rates rise.

Barrier option monitoring

Knock-in and knock-out terms specify whether the barrier is monitored continuously or at discrete observation dates. The choice materially changes value and must be documented.

Open versus closed-ended funds

Open-ended funds issue and redeem at net asset value on demand. Closed-ended funds have a fixed share count and trade at market prices that may diverge from NAV.

High-water mark

A performance fee is charged only on gains above the highest prior NAV after fees. It prevents the manager from earning performance fees twice on the same recovered losses.

Tracking difference versus tracking error

Tracking difference is the fund's cumulative return gap versus its index. Tracking error is the volatility of that gap, measuring consistency rather than magnitude.

Liquidity mismatch in funds

Occurs when fund assets take longer to sell than redemption terms allow. Gates, lock-ups, notice periods, and swing pricing are common mitigants that must be disclosed.

Portfolio variance two assets

Variance equals w1 squared times s1 squared plus w2 squared times s2 squared plus two times w1 w2 rho s1 s2. Lower correlation reduces total portfolio risk.

Capital allocation line

Line from the risk-free rate through the tangency portfolio. Its slope is the Sharpe ratio, and the tangency portfolio offers the highest risk-adjusted return available.

Strategic versus tactical allocation

Strategic allocation sets long-term policy weights matching the investor's objectives. Tactical allocation makes short-term deviations within permitted bands and is judged against those bands.

Performance attribution

Decomposes return into allocation, selection, and interaction effects relative to a benchmark. It explains why performance differed, unlike performance measurement which only states the return.

Gordon growth model

Price equals next year's dividend divided by the required return minus growth. Growth must be below the required return, and results are highly sensitive to small input changes.

Weighted average cost of capital

WACC equals equity weight times cost of equity plus debt weight times after-tax cost of debt, using market value weights. It is the discount rate for free cash flow to firm.

Enterprise value

Market capitalization plus debt, minority interest, and preferred stock, minus cash. It is the correct numerator for pre-interest multiples such as EV/EBITDA.

Value at risk limitation

VaR gives a loss threshold over a horizon at a confidence level but says nothing about the severity of losses beyond that threshold. Expected shortfall addresses this tail blindness.

Three lines of defense

Business units own and manage risk first. Risk and compliance functions provide oversight and challenge second. Internal audit gives independent assurance third.

Preventive versus detective controls

Preventive controls such as segregation of duties and access limits stop errors before they occur. Detective controls such as reconciliation and exception reports identify them afterwards.