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5 PERCENT TEST.  Transactions by a BROKER or DEALER whose commissions, mark-ups, and mark-downs from PENNY STOCKS did not exceed five percent of its total commissions, mark-ups, or mark-downs from transactions in SECURITIES. Rule 15g-1(a)(1).

30 PERCENT AVERAGE DAILY TRADING VOLUME (ADTV) LIMITATION. Thirty percent of a market maker's ADTV in a COVERED SECURITY during the reference period. The 30 percent ADTV limitation is obtained from NASD.

50-PERCENT OWNED PERSON. A person that has 50 percent of its voting shares owned by a specified person.

ACCESS PROVIDERS. The term the SECURITIES AND EXCHANGE COMMISSION (SEC) uses to refer to foreign entities that provide U.S. investors with the ability to trade directly on foreign markets. The SEC believes that access providers fall into two categories:

1.         foreign entities that distribute or publish information regarding transactions on a foreign market; or

2.         U.S. and FOREIGN BROKER-DEALERS that provide U.S. PERSONS who are not members of a foreign market with the technological capability to trade directly on foreign markets. Release No. 34-38672, p. 183.

ACCREDITED INVESTOR. The term ACCREDITED INVESTOR is defined in Rule 501(a) and is only significant to offerings made in reliance on Rules 505 or 506. It includes offerings eight categories of purchasers, such as BANKS, INSURANCE COMPANIES, EMPLOYEE BENEFIT PLANS, INVESTMENT COMPANIES, and registered BROKERS and DEALERS. Many of the purchaser specified in Rule 501(a) are also included in the definition of qualified institutional investors under Rule 144A. There are, however, two significant differences, as follows:

1 .        There is no threshold requirement that an accredited investor owns and invests at least $100 million in securities.

2.         The term ACCREDITED INVESTOR includes noninstitutional investors, such as the following:

a) any of the issuer's DIRECTORS, executive officers, or general partners;

b) any NATURAL PERSON whose individual NET WORTH, or joint net worth with their spouse, is greater than $1,000,000 at the time of the purchase; and

c) any natural person who had individual income greater than $200,000 in each of the two most recent years, or joint income with their spouse greater than $300,000 in each of those years, and has a reasonable expectation of achieving the same income in the current year. See Rule 501(a)(1) - (8) for a complete description of ACCREDITED INVESTOR.

ACCREDITED INVESTOR TRANSACTIONS. Transactions in which an ISSUER offers or sells securities only to an ACCREDITED INVESTOR. Essentially, these are offers or sales to institutional investors, such as banks, insurance companies, investment companies, and employee benefit plans.

ACCREDITED INSTITUTIONAL INVESTOR. See definition in Rule 501(a)(1), (2), (3), (7), or (8) of the 1933 ACT.

ACTIVE PRICE DISCOVERY. A high volume of trading.

ACTIVELY TRADED SECURITIES. Securities that have an AVERAGE DAILY TRADING VOLUME (ADTV) of at least $1,000,000 and are issued by an ISSUER that has a PUBLIC FLOAT VALUE for common equity securities of at least $150,000,000.

ADEQUATE PUBLICATION. Rule 14d-4 states that ADEQUATE PUBLICATION depends on the facts and circumstances of each TENDER OFFER. Publication may be adequate if made only in a city or regional newspaper or it may need to be made in a national newspaper or some combination of newspapers. Rule 14d-4(b). Publication in every edition of a daily newspaper with a national circulation is deemed to be adequate publication.

ADMINISTRATIVE PROCEDURE ACT OF 1946. Federal law enacted in 1946 that governs practice and proceedings before federal administrative agencies. This Act (and the relevant sections of the 1933 and 1934 ACTS that authorize SEC administrative proceedings) also governs SEC administrative proceedings.

AFFILIATE. The term AFFILIATE is defined in Rule 405. It means any person that either directly or indirectly controls or is controlled by or is somehow in common control with the REGISTRANT.

AFFILIATE OF THE ISSUER. Includes any person that either directly or indirectly controls or is controlled by the issuer. CONTROL, however, does not necessarily mean equity ownership. The SEC will view a transaction or arrangement as a whole. Rule 13e-3(a)(1).

AFFILIATED PURCHASER. An AFFILIATED PURCHASER includes persons acting in concert with a DISTRIBUTION PARTICIPANT, ISSUER, or selling security holder in connection with the acquisition or distribution of a COVERED SECURITY; or a distribution participant's, issuer's, or selling security holder's AFFILIATE (such as a department or division) that controls the purchases of any COVERED SECURITY by a distribution participant, issuer, or selling security holder, whose purchases are controlled by any such person, or whose purchases are under common control with any such person; or a distribution participant's, issuer's. or selling security holder's affiliate (such as a department or division) that regularly purchases securities for its own account or the accounts of others, or that recommends or exercises investment discretion for the sale or purchase of securities.

AGGREGATE DEBIT ITEMS. Contained in the Formula for Determination of Reserve Requirements for Brokers and Dealers (see Exhibit A to Rule 15c3-3, Rule 150-3a).

AGGREGATE INDEBTEDNESS. Defined in Rule 15c3-1(c)(1), AGGREGATE INDEBTEDNESS is a BROKER'S or DEALER'S total money liabilities pertaining to any transaction. It includes borrowed money, money payable against securities loaned and securities failed to receive, the market value of securities borrowed, customer and noncustomer free credit balances, credit balances in customer and noncustomer short position accounts, equities in customer and noncustomer future commodities accounts, and credit balances in customer and noncustomer commodities accounts.

AGGREGATE INDEBTEDNESS STANDARD. A BROKER's or DEALER's AGGREGATE INDEBTEDNESS to all other persons; it cannot exceed 1500 percent of its net capital. Rule 156-1(a)(1)(i). For the 12-month period after beginning business as a broker or dealer, the aggregate indebtedness cannot exceed 800 percent of its NET CAPITAL. Aggregate indebtedness is not reduced by uncollected items. Furthermore, related guaranteed and guarantor accounts are treated as a single account, and balances in accounts with long and short positions are adjusted by treating market value required to cover the short positions as if the market value were a debit. Rule 15c2-1(b)(3). Aggregate indebtedness does not include indebtedness pertaining to securities subject to a lien or claim exempted by Rule 15c2-1(d).

AGGREGATE OFFERING PRICE. The total of all cash and other consideration does not exceed $5,000,000. Regulation A.

AGGREGATE REPORTED TRADING VOLUME. To determine the AGGREGATE REPORTED TRADING VOLUME, the trading volume of depositary shares that represent the security are included. The depositary shares are multiplied by the multiple of fraction of the security represented by the depositary share.


AGREEMENT-IN-PRINCIPLE TEST. The so-called "agreement-in-principle test," which has been used in preliminary merger situations, stated that discussions preliminary to a merger are not material until an agreement in principle about price and structure has been reached. The Supreme Court has rejected this test for determining if a statement or omission is material.

AIDING AND ABETTING LIABILITY. In general, aiding and abetting liability requires violation of a federal securities law by a third party (a primary violation), knowledge of that violation by the aider and abettor, and substantial assistance in committing the violation rendered by the aider and abettor.

ALL HOLDERS RULE. Unless a bidder receives a determination from the SEC to the contrary, TENDER OFFERS must treat security holders equally; that is, tender offers must be open to all security holders of the class of securities sought by the bidder, and the consideration paid to any one security holder must be the highest consideration paid to any other security holder. Rule 14d10(a)(1) and (2). Thus, the ALL HOLDERS RULE prohibits discriminatory tender offers; SEC staff believe it also prevents BACK-END PLANS.

ALTERNATIVE STANDARD. Requires that a broker or dealer not allow its NET CAPITAL to be less than the greater of $250,000 or two percent of the AGGREGATE DEBIT ITEMS.

ALTERNATIVE TRADING SYSTEMS. A term used by the SEC to describe trading systems that are not registered as EXCHANGES with the SEC or operated by a registered national securities association. In the past, the SEC referred to these trading systems as proprietary trading systems, broker-dealer trading systems, and electronic communications networks. Many alternative trading systems are the functional equivalent of traditional exchange and nasd markets, yet they are regulated as BROKERS-DEALERS because the SEC has attempted to encourage the development of innovative trading mechanisms. Presently, the SEC determines whether an alternative trading system PARTICIPANT should be regulated as an exchange or as a broker-dealer on a case-by-case basis. See also MATCHING SYSTEM, CROSSING SYSTEM, and SINGLE-PRICE AUCTION SYSTEM.

AMERICAN DEPOSITARY RECEIPTS (ADRS). ADRS merely represent SHARES in a corporation that is incorporated outside the U.S. A U.S. bank holds the underlying foreign security, known as Depositary Shares, in one of its branches abroad. A negotiable receipt covering the foreign Depositary Shares is then issued and traded in the U.S. (The Morgan Guaranty Trust Company and the Bank of New York are large issuers of ADRS.) The ADR holders retain almost all of the rights that shareholders of the underlying securities do, but dividends and share pricing are in U.S. dollars. In the past, ADR trading was done almost exclusively on the OVER-THE-COUNTER (OTC) market, but both NASDAQ and the NYSE now have numerous ADR listings.

AMICUS CURIAE. Literally, a friend of the court. A person with strong interest in or views on the subject matter of an action, but not a party to the action, may petition the court for permission to file a brief, ostensibly on behalf of a party but actually to suggest a rationale consistent with its own views. In private securities litigation, the SEC's Office of General Counsel may file AMICUS CURIk briefs on the SEC's behalf

ANNUAL FINANCIAL INFORMATION. Under Rule 15c2-12(f)(9), financial information or operating data of a type included in the FINAL OFFICIAL STATEMENT for an OBLIGATED PERSON that is provided at least annually. If no financial information or operating data was included in the final official statement for an obligated person, the annual financial information is of a type included in the final official statement with respect to those obligated persons meeting the objective criteria applied to select the persons for which financial information and operating data will be provided on an annual basis. Rule 15c2-12(f)(9).

ANNUAL REPORT. A report filed by a REGISTERED COMPANY annually that updates the information contained in the company's REGISTRATION STATEMENT.

ARBITRAGE TRANSACTIONS. The simultaneous purchase in one market and sale in another of a SECURITY or COMMODITY in the hope of making a profit on price differences in the different markets.

ASKED QUOTE. The lowest price a seller is willing to sell for.

ASSET. Securities, installment sales, accounts receivables, notes, leases, or other contracts, and any other type of asset that converts into cash over a finite time period.

ASSET-BACKED SECURITIES. Securities that are serviced primarily by the cash flow of a pool of receivables or other financial assets into cash within a finite period of time. Asset-backed securities include securities that represent an ownership interest in a pool of discrete assets or certificates of interest or participation in these assets, provided the assets are not generated or originated between the ISSUER of the securities and its AFFILIATES; and securities that are secured by one or more assets or certificates of interest or participation in which the terms of the securities provide for payments of principal and interest, if any, in relation to payments or reasonable projections of payments on the assets, or certificates of interest/participation. Rule 903(c)(4)(ii)(B).

ASSET TEST. The ASSET TEST is determined by using the BOOK VALUE before the MERGER or consolidation. Rule 16b-7(a).

ASSOCIATE. The term ASSOCIATE is defined in Rule 14a-1(a). It includes any corporation or organization (other than a registrant or a majority-owned subsidiary of the registrant) in which such person is an OFFICER or partner or is the beneficial owner of 10 percent or more of any class of equity securities; or any trust or other estate in which a person has a substantial beneficial interest or in which a person serves as a fiduciary; or any relative, spouse, or relative of that spouse who has the same home or who is a director or officer of the registrant or its parents or subsidiaries.

ASSOCIATED PERSON. Any NATURAL PERSON that is a partner, OFFICER, DIRECTOR, or employee of a LIMITED PARTNERSHIP that is the issuer; a corporate general partner of a limited partnership that is the issuer; a company or partnership that controls or is controlled by or is under common control with the issuer; or an investment advisor that is registered under the INVESTMENT ADVISORS ACT OF 1940 and that is an advisor to an INVESTMENT COMPANY registered under the INVESTMENT COMPANY ACT. Rule 3a4-1(c)(1)(i)-(iv).

Under Rule 15c3-3(a)(13), it includes persons that directly or indirectly CONTROL a BROKER or DEALER or persons that are directly or indirectly controlled by or under common control with a broker or dealer. Ownership of 10 percent or more of an entity's common stock is deemed to be control of an entity.

 Under Rule 17a-3(a)(12)(ii), an ASSOCIATED PERSON is defined as a partner, OFFICER, DIRECTOR, salesman, trader, manager, or any employee handling FUNDS, SECURITIES, or soliciting transactions or accounts for the BROKERDEALER.

ASSOCIATED PERSON OF A BROKER OR DEALER. Defined in Rule 3a4-1(c)(2), this means: a partner, OFFICER, DIRECTOR, or branch manager of a BROKER or dealer; persons having similar positions or functions; persons that directly or indirectly control, are controlled by, or are under common control with the broker or dealer; and employees of a broker or dealer. Persons that are, in fact, "associated with a broker or dealer but only perform ministerial or clerical functions are not deemed to be 'associated persons of a broker or dealer."' Neither are persons that are required by state law to register as a BROKER or DEALER merely because they are an issuer of securities or are ASSOCIATED PERSONS OF AN ISSUER.

AT-THE-MARKET. Order to a BROKER to buy or sell a STOCK at the current market price, rather than at a specified price. See MARKET ORDER

AT-THE-MARKET OFFERING. A securities offering that is made at other than a fixed price. Rule 100(b).

AUTHORIZED DENOMINATIONS OF $100,000 OR MORE. Means that MUNICIPAL SECURITIES have a principal amount of $100,000 or more and have restrictions that prevent their sale or transfer in principal amounts less than $100,000 in any manner other than a PRIMARY OFFERING. Rule 15c2-12(f)(1). If, however, the municipal securities have an original issue discount of 10 percent or more, AUTHORIZED DENOMINATIONS OF $100,000 OR MORE means municipal securities that have a minimum purchase price of $100,000 or more with restrictions preventing their sale and transfer in principal amounts less than the original principal amount (at the time of the PRIMARY OFFERING) in any manner other than a primary offering.

AVERAGE DAILY TRADING VOLUME (ADTV). The ADTV is determined based on the worldwide average daily trading volume during the two full calendar months (or any 60 consecutive calendar days ending within the 10 calendar days) before the REGISTRATION STATEMENT is filed. Rule 100(b). If no registration statement is filed or if the DISTRIBUTION involves the sale of SECURITIES on a delayed basis pursuant to Rule 415 of the 1933 ACT, ADTV is based on the period that is two full calendar months (or any 60 consecutive calendar days ending within the 10 calendar days before) the offering price is determined.

BACK-END PLAN. A BACK-END PLAN allows SHAREHOLDERS (other than the bidder) to exchange their existing SHARES for a package of SECURITIES that effectively requires the acquiring company to buy out the shareholders at a price established by the TARGET COMPANY'S management.

BACK-END SECURITIES TRANSACTION. A transaction after a tender offer in which the bidder acquires the remaining securities

BANK (UNDER THE 1934 ACT). See definition in Section 3(a)(6). It includes banking institutions organized under U.S. laws; member banks of the Federal Reserve System; and any other type of banking institution that conducts business under U.S. law if it performs functions of a national bank under Public Law 87-722 and is supervised and examined by a state or federal regulator.

BANK (UNDER THE INVESTMENT COMPANY ACT OF 1940). Any national bank, or any banking institution organized under the laws of any State, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official.

BANK HOLDING COMPANY ACT OF 1956. Federal law that governs any company that directly or indirectly owns or controls, with power to vote, more than 25Epercent of voting shares of each of two or more banks.

BANKER'S ACCEPTANCE. Short-term credit instruments most commonly used by persons or firms engaged in international trade.

BASKET TRANSACTIONS. Includes two types of transactions: bids or purchases made in the ordinary course of business in connection with a "basket" of 20 or more securities, as long as a COVERED SECURITY does not comprise more than five percent of the basket's value; or adjustments made to the basket in the ordinary course of business because of a change in the composition of a standardized index. Rule 101(b)(6)(i) and (ii).

BENEFICIAL OWNER. A person that, directly or indirectly, has or shares either voting power or investment power with respect to a SECURITY. Rule 13d-3(a). This direct or indirect ownership can be in the form of any type of arrangement or relationship. A person may also be deemed to be a beneficial owner if that person has the right to acquire beneficial ownership of a security by the exercise of an OPTION, the conversion of a security, the revocation of a trust, or the automatic termination of a trust. Rule 13d-3(d)(1)(i).

The general rule states that a BENEFICIAL OWNERSHIP means any person that has or shares a direct or indirect pecuniary interest in the EQUITY SECURITIES through any contract, arrangement, understanding, or relationship. This broad definition encompasses both direct and indirect arrangements. The definition of PECUNIARY INTEREST and INDIRECT PECUNIARY INTEREST are key issues in this rule. Rule 16a-1 (a)(2).

BENEFICIAL OWNERSHIP. The general rule states that BENEFICIAL OWNERSHIP means any person that has or shares a direct or indirect pecuniary interest in the EQUITY SECURITIES through any contract, arrangement, understanding, or relationship. The SEC has defined the term broadly to encompass not only common stock or other classes of stock but also derivative securities that can be exercised to acquire stock. Because the definition encompasses both direct and indirect arrangements, the definitions of PECUNIARY INTEREST and INDIRECT PECUNIARY INTEREST are key issues to this rule.



BESPEAKS CAUTION DOCTRINE. Judicially created, the BESPEAKS CAUTION DOCTRINE is another defense to the materiality element. It is available in situations where an optimistic FORWARD-LOOKING STATEMENT (such as a financial projection or forecast) has been made and the statement is accompanied by cautionary language. The cautionary language must be aimed directly at the forwardlooking statements and must provide a substantive explanation. Blanket disclaimers are not sufficient. The BESPEAKS CAUTION DOCTRINE is highly factspecific and is applied on a case-by-case basis.

BEST-EFFORT BASIS. With respect to a new securities issue, a commitment by the investment banker or group handling the new issue to sell the securities as an agent of the issuing party, rather than as an underwriting of the entire issue.


BEST-EFFORTS UNDERWRITING. The UNDERWRITER acts as the issuer's agent. It only agrees to use its best efforts to sell the issue to the public; it does not purchase any of the securities. BEST EFFORTS DEALS are most often used with respect to IPOs involving small and lesser-known start-up companies.

BID AND ASKED. Price quotation for SECURITIES that are not frequently traded or that are traded on the OVER-THE-COUNTER MARKET. The BID QUOTATION is the highest price a prospective buyer is willing to pay at a particular time; the ASKED QUOTATION is the lowest price the seller is willing to sell for. Together, the two prices constitute a quotation; the difference between the two prices is the SPREAD.

BID PRICE. Represents the price at which the DEALER is willing to purchase one or more ROUND LOTS of PENNY STOCK. Neither the OFFER PRICE nor the BID PRICE includes mere indications of interest to buy or sell. Rule 15g-3(c)(1).

BID QUOTE. The highest price a prospective buyer is willing to pay at a particular time.

BIRNBAUM RULE. Commonly refers to a narrow class of plaintiffs who are sellers and purchasers of a SECURITY and are protected under Section 10(b) and Rule 10b-5.

BLANK-CHECK COMPANY. A development stage company issuing PENNY STOCK that either has no specific business plan or purpose, or whose business plan is to merge with an unidentified company or companies.

BLUE SKY LAWS. A popular name for state securities laws, the first of which was enacted in Kansas in 1911. Predating federal securities regulation, state securities laws provided for the regulation and supervision of securities offerings and sales in order to protect citizen-investors from investing in fraudulent companies. These state laws became known as BLUE SKY LAWS when a judge of the period stated that certain speculative securities schemes had no more substance than so many feet of "blue sky." Most blue sky laws require the registration of new issues of securities with a state agency that reviews selling documents for accuracy and completeness. As well, blue sky laws often regulate securities brokers and salesmen.

BOARD OF TRADE. Any organized exchange or other trading facility.

BONA FIDE ITEMS OF TRANSFER. SECURITIES are not "bona fide items of transfer" if the BROKER or DEALER has not received new certificates conforming to its instructions, a written statement by the ISSUER or its transfer agent acknowledging the transfer instructions and the possession of the securities, or a revalidation of a WINDOW TICKET from a transfer agent pertaining to the certificate delivered for transfer. One of these items must be received or obtained within 40 calendar days after the securities have been transmitted for transfer to the issuer or its transfer agent. Rule 15c3-3(c)(3).

BONA FIDE OFFER. The date of offer is described as a bona fide offer to the public. This has been interpreted as the effective date of the REGISTRATION STATEMENT.

BOND. A security for which registration may be required, a bond is a long-term debt instrument that promises to pay the lender a series of periodic interest payments in addition to returning the principal at maturity. In every case, a bond represents debt-its holder is a creditor of the corporation and not a part owner as is the SHAREHOLDER.

BOND INDENTURE. Contract between an ISSUER of bonds and the bondholders. An instrument of secured indebtedness issued by a CORPORATION.

BOOK VALUE. The value at which an asset is carried on the balance sheet. Book value is the cost less accumulated depreciation or the valuation allowance. Book value is based on the historical cost of an asset and may vary significantly from the fair market value. The value before a merger or consolidation, based on the most recently available financial statements for the 12-month period before the corporate reorganization. Rule 16b-7(a).

BOUGHT DEAL. Some SECURITIES offerings are not arranged as either FIRM COMMITMENT UNDERWRITINGS or BEST EFFORTS UNDERWRITINGS. The BOUGHT DEAL is a variation used for the underwriting of BONDS.

BRIGHT LINE TEST. Jargon used to describe a black and white situation in which a requirement either is satisfied or is not satisfied. There are not supposed to be "gray areas."

BROKER. Any persons that are engaged in the business of effecting transactions in SECURITIES for the account of others, but does not include a bank. Section 3(a)(4). Generally speaking, a BROKER is a market PARTICIPANT that acts solely as an investor's agent, takes no position in securities being traded, and, in return for these services, receives a fee or commission.

BROKERAGE. The wages or commissions of a broker; also, his business or occupation.

BROKERAGE AGREEMENT. These investments will be held to be SECURITIES if the interdependence of fortunes between the investors and the BROKERS constitute a COMMON ENTERPRISE with profits to come SOLELY FROM THE EFFORTS OF OTHERS.

BROKER-DEALER. A securities brokerage firm, usually registered with the SEC and with the state in which it does business, engaging in the business of buying and selling securities to or for customers.

BROKER-DEALER TRADING SYSTEM. A facility that provides a fully or partially automated system for collecting, disseminating, or displaying SYSTEM ORDERS and for matching, crossing, or executing system orders. Rule 17a-23(b)(2).

BROKERS' TRANSACTIONS. Transactions that brokers "execute upon customers' orders on any EXCHANGE or in the OVER-THE-COUNTER MARKET but not the solicitation of those orders." Section 4(4). Under Rule 144, BROKER TRANSACTIONS also include transactions where the broker executes an order to sell the securities as agent for the person selling the securities (and receives no more than a customary broker's fee); and transactions where the broker does not solicit customers' orders to buy the securities in anticipation of the sale.

BUILDING AND LOAN ASSOCIATION. An organization formed to accumulate a fund, by the subscriptions and savings of its members, that assists its members in building or purchasing homes or real estate by loaning them the requisite money. See also SAVINGS AND LOAN ASSOCIATION.

BURIED FACTS DOCTRINE. Under this doctrine, disclosure in a PROXY STATEMENT is adequate only if there is some conceivable danger that a reasonable SHAREHOLDER would fail to realize the correlation and overall import of various facts interspersed throughout the PROXY.

BUSINESS DAYS. Defined in Rule 13e-4(a)(3) as from 12:01 A.M. through 12:00 MIDNIGHT F-T., excluding Saturdays, Sundays, and federal holidays.

BUSINESS JUDGMENT RULE. A presumption that, in making a business decision, directors of a corporation act on an informed basis, in good faith, and in the honest belief that their actions are in the best interests of the corporation.


"BUT FOR" TEST. Used in determining tort liability by applying the causative criterion as to whether the plaintiff would not have suffered the wrong "but for" the action of the defendant. This test is now largely discredited because of the many modifications necessary in applying it.

CALL. Included in the definition of a SECURITY, a CALL is an OPTION or contract that gives the holder the right to purchase a stated number of shares of STOCK at a specified price on or before a certain fixed date. See also CALL OPTION and OPTIONS.

CALL EQUIVALENT POSITION. A position in a DERIVATIVE SECURITY (such as a LONG CONVERTIBLE SECURITY, a LONG CALL OPTION, or a SHORT PUT OPTION.) whose value increases as the value of the underlying equity security increases.

CALL OPTION. A contract that gives the holder the right to buy a specified number of shares of a certain stock or stock index at a predetermined price (referred to as the "strike price") on or before the option's expiration date. To obtain this right, the holder (buyer) pays the writer (seller) a premium. The holder profits from the contract if the stock's price rises. If the holder decides to exercise the option (as opposed to selling it), the seller gives up ownership of the security.

CALL OPTION PRICE. The price at which a BOND may be retired or called prior to its maturity.

CALL PREMIUM. The difference between a bond's CALL PRICE and its PAR VALUE.

CALL PRICE. The price at which a BOND may be retired, or called, prior to its maturity. See also REDEMPTION.

CAPITAL STOCK. Shares of stock that represent ownership of a business including PREFERRED STOCK and COMMON STOCK.

CARRIED FOR THE ACCOUNT OF ANY CUSTOMER. Defined in Rule 15c2-1(b)(2), this term means SECURITIES received by a BROKER or DEALER for a customer's account; securities sold and appropriated by a broker or dealer to a customer; or securities sold, but not appropriated, by a broker or dealer to a customer who has paid for them to the extent that the broker or dealer owns the securities and has received delivery of similar securities. If the securities were subject to a lien, they are not carried for a customer's account until they are released from the lien.

CAUSE EXAMINATIONS. These examinations are conducted if the Office of Compliance Inspections and Examinations believes that something is wrong; they focus on a transaction(s) or an event(s) that creates the concern.

CAUSE OF ACTION ACCRUES. A Section 18(a) action "accrues" when the purchase or sale of securities for which damages are sought takes place.

CEASE-AND-DESIST ORDER. An order of an administrative agency or court prohibiting a person or business firm from continuing a particular course of conduct.

CENTRAL INDEX KEY (CIK). A number assigned by the SEC to uniquely identify an electronic filer. It is the only publicly available access code.

CENTRAL REGISTRATION DEPOSITORY (CRD). A computer database (created in 1981) that maintains current registration information for members of the NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD). The CRD, while operated and maintained by NASD, is also used by the SEC, SROs, and state securities regulators in connection with registering and licensing BROKER-DEALERS and their registered personnel. NASD REGULATION, INC. (NASDR) is the regulatory subsidiary of NASD responsible for the operation of the CRD system. See also WEB CRD.

CERTIFICATE OF DEPOSIT. A less common device that Section 2(2) specifically provides is a SECURITY.

CERTIFICATE OF INDEBTEDNESS. An obligation sometimes issued by corporations that has practically the same force and effect as a bond, although not usually secured on any specific property.

CERTIFICATE OF INTEREST (IN A PROFIT-SHARING ARRANGEMENT). A less common device that Section 2(2) specifically provides is a SECURITY.

CERTIFICATED SECURITY. A certificated security is a share, participation, or other interest in a property or an enterprise of the ISSUER or an obligation of the issuer that is represented by an instrument issued in bearer or registered form.

CERTIORARI. To be informed of A writ of common law origin, issued by a superior to an inferior court, that requires the inferior court to produce a certified record of a particular case tried. The writ is issued in order that the court issuing the writ may inspect the proceedings and determine whether there have been any irregularities. It is most commonly used to refer to the Supreme Court of the United States, which uses the writ of certiorari as a discretionary device to choose the cases it wishes to hear. The Supreme Court denies most writs of certiorari (i.e., "cert. den."). The trend in state practice has been to abolish such writ.

CHANNEL STUFFING. A practice in which a corporation lumps sales and orders into the final weeks of a fiscal quarter, thereby intentionally improving the reported results for that quarter.

CHINESE WALL. Describes the fictional device implemented to screen an attorney or other person involved in an earlier adverse role from other persons, documents, and information in order to prevent a disqualification of the entire firm due to a conflict of interest.

CIK CONFIRMATION CODE (CCC). The CCC consists of eight characters with at least one being a number (0-9) and at least one a special character (such as @, #, or *). The CIK and the corresponding CCC are used to authenticate an electronic filing.

CIVIL PENALTIES. Monetary damages awarded as part of a private lawsuit instituted by aggrieved investors.

CLASS ACTION. The SECURITIES LITIGATION STANDARDS ACT OF 1998 (UNIFORM STANDARDS ACT) defines CLASS ACTION in three alternative ways and, by definition, excludes some cases from the federal venue requirement. A class action, with regards to any single suit, is an action on behalf of 50 or more persons, with a question of law or fact in common, and without inquiry into individual reliance on an alleged misstatement or omission. A class action also exists when one or more persons represent an unnamed group of individuals who share a common question of law or fact that predominates over any questions affecting the individual members. When dealing with a group of lawsuits filed or pending in the same court, a class action evolves when the suits of 50 or more people, which share a common question of law, are joined or consolidated. The purpose of this definition is to make clear that "mass actions" are included in the definition of a class action.


CLEARINGHOUSE. With respect to a stock or commodities EXCHANGE, a facility that provides for the daily clearance of all transactions. With regard to futures transactions, a clearinghouse confirms that trades made each day are acknowledged by both parties; settles amounts owed daily on futures contracts due to changes in contract prices during the trading session; and insures the financial worth of all futures contracts that it has accepted.

CLOSED-END FUNDS. MUTUAL FUNDS that do not repurchase their SHARES from investors; the shares are sold in a secondary market, such as a STOCK EXCHANGE.

CLOSED-END INVESTMENT COMPANY. SHARES in closed-end investment companies are readily transferable in the open market and are bought and sold like other shares.

CODE OF FEDERAL REGULATIONS (CFR). SEC rules and regulations, which provide the SEC's interpretations of the statutes, after initially being published in the FEDERAL REGISTER (FR) first as proposed rules and later as final rules, are codified as parts and sections in Title 17 of the Code of Federal Regulations and are updated annually. SEC rules begin with Section 200 of Title 17; SEC rules concerning the 1933 ACT begin at Section 230. The SEC's Office of the Secretary publishes the official documents and releases in the FEDERAL REGISTER.

COLLATERAL ESTOPPEL DOCTRINE. A legal doctrine recognizing that a court's determination of facts as litigated between two parties is binding on those parties with respect to all future proceedings against each other.

COMFORT LETTER. A letter generally requested by securities UNDERWRITERS to give  �comfort" on the financial information included in an SEC REGISTRATION STATEMENT.

COMMISSION OR OTHER REMUNERATION. See definition in Rule 150. Section 3(a)(9).

COMMODITIES. Staples (such as wool, cotton, etc.) that are traded on a commodity EXCHANGE and on which there is trading in futures.

COMMODITY EXCHANGE ACT. An Act designed to insure fair practices and honest dealing on the commodity futures exchanges and to provide a measure of control over speculative activity. The Act is administered by the COMMODITY FUTURES TRADING COMMISSION (CFTC).

COMMODITY FUTURE. A speculative transaction involving the sale of a staple (e.g., wool or cotton) at a predetermined price for future delivery.

COMMODITY FUTURES MODERNIZATION ACT OF 2000. Provides regulatory relief for domestic futures exchanges, legal certainty for OVER-THE-COUNTER (OTC) products, and allows the trading of single-stock futures. The Act also provides guidelines for the SEC'S role in regulating swaps, as well as guidelines to determine the proper regulator for hybrid products.

COMMODITY FUTURES TRADING COMMISSION (CFTC). An independent federal agency that administers the COMMODITY EXCHANGE ACT, and supervises the trading of commodity futures and commody options.

COMMODITY OPTION. A right purchased by an option holder that entitles him either to buy (CALL OPTION) from or to sell (PUT OPTION) at a stated price and within a stated time an underlying physical commodity or a commodity futures contract relating to that commodity.

COMMON ENTERPRISE. Under securities laws, a venture in which the fortunes of an investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties. See INVESTMENT CONTRACT. See also HORIZONTAL COMMONALITY TEST, VERTICAL COMMONALITY TEST.



COMMON STOCK. Class of corporate stock that is usually associated with the right to receive dividends contingent upon an apportionment of profits, negotiability, the ability to pledge and hypothecate stock, voting rights in proportion to shares owned, and the capacity to appreciate in value.

COMMON TRUST FUND. Under Rule 3a-6, the term includes common trust funds maintained by a bank that is a member of an affiliated group as defined in Section 1504(a) of the Internal Revenue Code. The trust fund must be used solely for investment and reinvestment of funds contributed by members of the affiliated group in some fiduciary capacity, such as trustee, executor, administrator, or guardian.

COMPENSATION. If a BROKER is acting as a customer's agent, COMPENSATION means any remuneration the broker receives or is going to receive from the customer for a PENNY STOCK transaction. If a DEALER receives a customer order to purchase or sell penny stock and then effects the purchase/sale from another person to offset a contemporaneous sale/purchase of the penny stock to the CUSTOMER, COMPENSATION is the difference between the price to the customer and the contemporaneous purchase or sale price. If the dealer is acting as principal for its own account, COMPENSATION means the difference between the price to the customer and the prevailing market price. Rule 15g-4(c).

COMPLETES ITS PARTICIPATION IN THE DISTRIBUTION. A person completes its participation in the distribution in one of several ways:

1.         An ISSUER'S or SELLING SECURITY HOLDER'S participation is completed when the DISTRIBUTION is completed.

2.         An UNDERWRITER'S participation is completed when its PARTICIPATION has been distributed. In order for the participation to be distributed, all other securities of the same class, which are acquired in connection with the distribution, as well as any STABILIZING ARRANGEMENTS and TRADING RESTRICTIONS associated with the distribution, are terminated. An underwriter's participation is not considered completed if a SYNDICATE OVERALLOTMENT OPTION is exercised for an amount in excess of the NET SYNDICATE SHORT POSITION as of the time of the exercise.

3.         All other persons are deemed to have completed their participation in the distribution when that person's participation has been distributed Rule 100(b).

COMPLIANCE EXAMINATIONS. These examinations evaluate investment companies' and advisors' compliance with the INVESTMENT COMPANY ACT OF 1940 and the INVESTMENT ADVISERS ACT OF 1940.

CONCLUSION OF LAW. The final judgment or decree required on the basis of facts found or the verdict.

CONGRESSIONAL INFORMATION SERVICES (CIS). A general reference that provides the text of congressional reports and hearings.

CONSISTENTLY. Under Rule 15g-3(a)(1)(i)(A)(2) and (13)(2), CONSISTENTLY means at least 75 percent of a DEALER'S bona fide interdealer sales or purchase during the previous four-day period. If the dealer has only made three bona fide interdealer sales or purchases during this period, CONSISTENTLY means all three sales or purchases.

CONSTRUCTIVE INSIDER. The term CONSTRUCTIVE INSIDERS includes accountants, lawyers, and consultants. These constructive insiders become temporary fiduciaries of the corporation because of their intimate relationship.

CONTINGENT COMPENSATION. Any compensation based on whether a proposed ROLLUP TRANSACTION itself is approved, disapproved, or completed. See also DIFFERENTIAL COMPENSATION. Rule 14a-15(a)(2).

CONTRACTUAL COMMITMENT. Includes underwriting, WHEN-ISSUED CONTRACTS, WHENDELIVERED CONTRACTS, and DELAYED- DELIVERY CONTRACTS, writing or endorsement of PUTS and CALLS, commitments in foreign currencies, and SPOT-CASH COMMODITIES CONTRACTS. Rule 15c3-1(c)(4). Uncleared REGULARWAY PURCHASES and sales of securities and contracts in commodities futures are not considered contractual commitments.

CONTROL. The term CONTROL is not defined in the 1934 ACT; however, it is meant to be broadly interpreted as direct or indirect possession of power to direct the management and policies of a CONTROLLED PERSON. CONTROL for purposes of Rule 15c3-3(b)(4) only includes SECURITIES controlled as described in Rule 15c3-3(c)(1), (c)(5), or (c)(6).

CONTROL LIABILITY. Liability faced by a corporate player who, through STOCK ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls someone potentially liable under the SECURITIES ACT.

CONTROL LOCATION. A BROKER or DEALER, registered national securities association, or registered NATIONAL SECURITIES EXCHANGE may apply to the SEC for such a designation. Rule 150-3(c)(4).

CONTROL OF AN ENTITY. Ownership of 10 percent or more of an entity's COMMON STOCK is deemed to be CONTROL of an entity.

CONTROL PERSON. A person who has actual power or influence over an ISSUER.

CONTROLLED COMPANY. A company, the majority of whose VOTING STOCK is held by an individual or corporation (e.g., a subsidiary of a parent company). The level of control depends on the amount of stock owned.

CONTROLLED FOREIGN CORPORATION. Any foreign corporation in which more than 50 percent of the total combined voting power of all classes of STOCK entitled to vote or the total value of the stock of the corporation is owned by U.S. shareholders on any day during the taxable year of the foreign corporation. (For purposes of this definition, a U.S. shareholder is any u.s. person who owns, or is considered as owning, 10 percent or more of the total combined voting power of all classes of VOTING STOCK of the foreign corporation.)

CONTROLLED OFFERING. An offering to the public of SECURITIES by selling STOCKHOLDERS or an ISSUER through a BROKER-DEALER acting as an UNDERWRITER for such persons pursuant to a formal underwriting arrangement.

CONVERTIBLE SECURITY. A BOND, DEBENTURE, or PREFERRED SHARE that may be exchanged by the owner for COMMON STOCK or another security, usually of the same company, in accordance with the terms of the issue. The ratio between convertible and CONVERSION SECURITIES is fixed at the time the convertible securities are issued, and is usually protected against dilution.

COOPERATIVE BANK. A financial cooperative, such as a credit union, mutual savings bank, savings and loan association, and production credit association.


CORPORATE STOCK. Term embraces all EQUITY SECURITIES issued by a CORPORATION, but not BONDS and DEBENTURES because these represent debt rather than stock (equity). See STOCK.

CORPORATION. A form of conducting business that is financed by a group of people known as INVESTORS, managed by a group of people known as DIRECTORS and OFFICERS, and yet exists as a completely separate legal entity that limits investors' liability to their investment.

CORRESPONDENT. A securities firm, bank, or other financial organization that regularly performs services for another in a place or market to which the other does not have direct access. Securities firms may have correspondents in foreign countries or on EXCHANGES of which they are not members.

CORRESPONDENT BROKER OR DEALER. One who has a direct line of communication to another BROKER or DEALER located in a different city or geographic area. Rule 15c2-7(c)(3).

COVERED PERSON. A defendant in any private action under the 1934 ACt or a defendant in any private action under Section 11 of the SECURITIES ACT OF 1933 (1933 ACT), who is an OUTSIDE DIRECTOR of the subject security's ISSUER.

New Rule 14e-5 defines covered person as the offeror and its affiliates; the offeror's dealer-manager and its affiliates; any advisor to the offeror, dealermanager, or their affiliates, if such advisor's compensation is dependent on the completion of the offer; and any person acting, directly or indirectly, in concert with any of the other covered persons in connection with any purchase or arrangement to purchase any SUBJECT SECURITIES or any related securities.

COVERED SECURITY. A COVERED SECURITY encompasses nationally traded securities, securities issued by registered investment companies, securities sold to qualified purchasers, and securities that are part of transactions exempt from registration under the 1933 or 1934 ACTS. Under the SECURITIES LITIGATION STANDARDS ACT OF 1998 (UNIFORM STANDARDS ACT), a COVERED SECURITY is defined as a security that qualifies under Section 18(b)(1) or 18(b)(2) of the 1933 ACT. Section 18(b)(1) defines a COVERED SECURITY as a nationally traded security, including securities listed on the NYSE or NASDAQ. Section 18(b)(2) includes as a COVERED SECURITY a security issued by registered investment companies. The term COVERED SECURITY does not include a DEBT SECURITY that is exempt from the 1933 ACT registration requirements under Section 4(2).

CREDIT RISK. The term CREDIT RISK is defined according to "Statement of Financial Accounting Standards No. 105." Rule 17H- 1T(a)(1)(vi).

CROSS-HEDGING. The use of a futures contract on one financial instrument to hedge a position in a different financial instrument.

CROSSING SYSTEM. An ALTERNATIVE TRADING SYSTEM (ATS) that allows participants to enter unpriced orders that are executed with matching interests at a single price normally ascertained from the primary public market. Portfolio System for Institutional Trading (POSIT) and Tradebook are crossing trading systems.

CROWN CORPORATION. A CORPORATION whose entire COMMON SHARES are owned by the Canadian government.

CURRENCY SWAP. A currency swap normally involves an exchange of both interest and principal payments. The motivation for a currency swap is the ability of an issuer to reduce its borrowing cost by borrowing funds that are denominated in a foreign currency and capitalize on the exchange rate risk.

CURRENT REPORT. A report filed by a REGISTERED COMPANY within 15 days after the occurrence of an event significant to the company.

CUSTOMER. Rule 15c2-1(b)(1) defines CUSTOMER to include a BROKER's or DEALER's general or special partners, DIRECTORS, or OFFICERS, or any PARTICIPANT in a joint, group, or syndicate account with the broker or dealer or with its partner, officers, or directors. For purposes of these rules, customer includes a municipal securities dealer concerning transactions in securities other than municipal securities. Rule 15c1-1(a). Under Rule 15c3-2, the term CUSTOMER does not include BROKERS or DEALERS.

As defined in Rule 156-3(a)(1), generally, CUSTOMER means any person that a BROKER or DEALER has received, acquired, or holds funds (i.e., free credit and other credit balances) or SECURITIES for that person's account. A "customer" does include another broker or dealer that maintains an omnibus account pursuant to Regulation T. However, a CUSTOMER does not include brokers or dealers that are registered MUNICIPAL SECURITIES DEALERS, or the broker's or dealer's general partners, directors, or PRINCIPAL OFFICERs (i.e., the president, executive vice-president, treasurer, secretary). Nor does the term CUSTOMER include any person that has a claim for property or funds pursuant to an agreement or operation of law that is part of the broker's or dealer's capital or is subordinated to the claims of the broker's or dealer's creditors. For purposes of Rule 156-3(m), the term CUSTOMER does not include a broker or dealer that maintains a special omnibus account with another broker or dealer under Section 4(b) of Regulation T.

For purposes of Rule 17a-5(c), a CUSTOMER includes any person other than another broker or dealer that is exempt; one of the broker's or dealer's general, special, or limited partners, directors, or officers; or a person that has a claim for property or funds, is part of the broker's or dealer's capital, or is subordinated to the claims of the broker's or dealer's creditors if the broker or dealer has effected a securities transaction with that person in the month preceding the balance sheet date or following the month when the balance sheet statement was sent.

A CUSTOMER also includes persons for whom the broker or dealer is safekeeping securities or holding them as collateral, or for whom the broker or dealer carries a free credit balance during the month when the broker or dealer must determine who its customers are for purposes of furnishing the customer statements.

CUSTOMER FUNDS. See definition in Rule 15c3-3(a)(10).

DE MINIMIS TRANSACTIONS. Purchases made during the RESTRICTED PERIOD, except for purchases made by a PASSIVE MARKET MAKER, that total less than two percent of the AVERAGE DAILY TRADING VOLUME (ADTV) of the security being purchased or unaccepted bids. Rule 101(b)(7). To qualify as DE MINIMIS TRANSACTIONS, the person making the bid or purchase must have maintained and enforced written policies and procedures that are reasonably designed to achieve compliance with Regulation M.

DEALER. The term DEALER is defined in Section 2(12) as any person who is engaged, directly or indirectly, in the business of dealing or trading in SECURITIES that are issued by another person. Under Section 3(a)(5), a DEALER is any person engaged in the business of buying and selling securities for his own account, through a BROKER or otherwise. As used in the 1934 ACT, the term DEALER only encompasses persons that buy and sell securities for their own account as part of a regular business. Although a BANK is not usually considered a dealer, it will be deemed a DEALER if it is a bank as described in Rule 3b-9. A DEALER is a person that is ready and willing to buy a SECURITY for or sell a security from its own account to an investor.

DEBENTURE. A SECURITY for which registration may be required, a DEBENTURE is a long-term unsecured debt instrument that is issued pursuant to an indenture. A PROMISSORY NOTE or BOND that is backed by the general credit and earning history of a corporation and, usually, is not secured by a mortgage or lien on any specific property (e.g., an unsecured bond).

DEBT COLLECTION IMPROVEMENT ACT (DCIA) OF 1996. The DCIA requires, among other things, that all administrative penalties assessed by federal agencies make cost-of-living adjustments. Each federal agency must adopt regulations at least once every four years, that adjust for inflation the maximum amount of civil monetary penalties under the statues administered by the agency. See also SECURITIES ENFORCEMENT REMEDIES AND PENNY STOCK REFORM ACT.

DEBT SECURITY. Any form of corporate security that is reflected as debt on the books of the corporation.

DEBTOR IN POSSESSION. In bankruptcy, refers to the debtor in a Bankruptcy Code Chapter 11 or Chapter 12 case. In a Chapter 11 case, for example, either the debtor will remain in control of its business or assets, or a trustee will be appointed to take control of the business or assets.

DEFEASANCE. An instrument that accompanies a BOND, recognizance, or judgment and contains a condition that, when performed, defeats it.

DEPOSITOR. For purposes of the FEDERAL DEPOSIT INSURANCE ACT, a government securities broker's or dealer's customers are deemed to be depositors under the FEDERAL DEPOSIT INSURANCE ACT.

DEPUTIZATION THEORY. This theory has some impact on the determination of whether or not a person is an OFFICER or DIRECTOR for the purposes of Section 16. Under this theory, the director of an ISSUER may be found to be a "deputy" director of a related corporation.

DERIVATIVE LIABILITY. There are two distinct categories of derivative liability: the action that a plaintiff may institute to redress a wrong done to another; and the action that a plaintiff may institute to redress a wrong done to himself that is proximately caused by a wrong done to another.

DERIVATIVE SECURITY. PUTS, CALLS, STRADDLES, OPTIONS, WARRANTS, CONVERTIBLE SECURITIES, and STOCK APPRECIATION RIGHTS (SARS). Rule 16a-1(c). A derivative security also includes similar rights that have an exercise or conversion privilege at a price that is related to an underlying security. It does not matter if the rights are presently exercisable.


DESIGNATED FOREIGN GOVERNMENT SECURITY. A SECURITY representing a debt obligation of one of several listed foreign governments. The security must not be registered under the 1933 ACt and cannot be part of an AMERICAN DEPOSITARY RECEIPT (ADR). Rule 3a12-8(a). See also QUALIFYING FOREIGN FUTURES CONTRACTS.

DESIGNATED OFFSHORE SECURITIES MARKET. Defined in Rule 902(a), DESIGNATED OFFSHORE SECURITIES MARKET includes the Eurobond market (administered by the International Bond Dealers) and 22 named foreign exchanges. It also includes other foreign securities exchanges that the SEC may designate as an offshore securities market, using specific criteria set forth in Rule 902(a)(2)(i) - (vii).

DIFFERENTIAL COMPENSATION. Any compensation based on whether the solicited proxy, consent, or authorization approves or disapproves the proposed ROLLUP TRANSACTIOn. Rule 14a-15(a)(1). See also CONTINGENT COMPENSATION.

DIRECT PARTICIPATION PROGRAMS. These are programs financed through the sale of certain UNLISTED SECURITIEs that are not traded on EXCHANGES or OVER THE COUNTER. The investors have certain flow-through tax consequences as a result of their participation in these programs.

DIRECT PLACEMENT. With respect to SECURITIES offerings, the negotiation by a borrower (such as an industrial or utility company) directly with the lender (such as a life insurance company or group of investors) for sale of an entire issue of securities. No UNDERWRITER is involved and the transaction is exempt from SEC filing. This is also called a PRIVATE PLACEMENT.

DIRECTED SELLING EFFORTS. Defined in Rule 902(b)(1), DIRECTED SELLING EFFORTS encompass any type of activity undertaken for the purpose of, or that reasonably could be expected to have the effect of conditioning the U.S. market for an offering of securities pursuant to Regulation S. It includes the placing of an advertisement.

DIRECTOR. Defined in Section 3(a)(7), the term director means the director of a corporation or any person performing similar functions for any organization. The organization need not be incorporated.

DISCRETIONARY TRANSACTIONS. Transactions made pursuant to an EMPLOYEE BENEFIT PLAN that are not required by the plan provisions or the Internal Revenue Code. See Rule 16b-3(b)(1).

DISTRIBUTION. In a securities offering, a PUBLIC OFFERING of securities of an ISSUER, whether by an UNDERWRITER, STATUTORY UNDERWRITER, or by the issuer itself. See also CONTROLLED OFFERING, UNCONTROLLED OFFERING.

DISTRIBUTION PARTICIPANT. An UNDERWRITER, PROSPECTIVE UNDERWRITER, BROKER, DEALER, or any other person that has agreed to participate or is participating in the distribution.

DISTRIBUTOR. An UNDERWRITER, a DEALER, or any other person who participates under a contractual arrangement in distributing securities that are offered or sold in reliance on Regulation S. Rule 902(c).

DOCTRINE OF INTEGRATION. In connection with exemptions for purely intrastate securities transactions, the DOCTRINE OF INTEGRATION is a factual determination of whether all OFFERS TO SELL and all SALES are, in fact, part of the same ISSUE. The doctrine is significant because, if an offer is made to a nonresident and that offer is deemed to be a part of the whole intrastate issue, the entire intrastate issue becomes tainted and the exemption will be unavailable. See Rule 502(a).

DOMESTIC CONCERNS (UNDER THE FOREIGN CORRUPT PRACTICES ACT OF 1977). U.S. citizens, nationals, or residents; and U.S. corporations, partnerships, associations, JOINT-STOCK COMPANIES, business trusts, unincorporated organizations, or sole proprietorships. Section 30B(h)(1)(A) and (B).

DUE CARE. That degree of care that a reasonable person can be expected to exercise to avoid harm reasonably foreseeable if such care is not taken. That care that an ordinarily prudent person would have exercised under the same or similar circumstances. "Due care," "reasonable care," and "ordinary care" are often used as convertible terms.

DUE DILIGENCE DEFENSE. This defense requires that a defendant prove it was able to make a REASONABLE INVESTIGATION in which it had reasonable grounds to believe and, in fact, did believe that the statements in the registration were true and that no material facts were omitted. The due diligence defense varies somewhat depending on whether the false statement or omission was made by an expert or nonexpert. Section 11 (b)(3).

DUE DILIGENCE REQUIREMENT. Under a Section I 0(b) or Rule 10b-5 action, the DUE DILIGENCE REQUIREMENT operates as a defense to the reliance element. Basically, the defendant must show that the plaintiff refused to investigate the transaction by disregarding a risk that indicated there was a high probability that fraud could occur. This risk must either have been known or should reasonably have been known to the plaintiff.

DUTCH AUCTION. An auction in which property is offered to the public at a price beyond its value; the price is gradually lowered until someone purchases the property.

DUTY OFFICER. An individual Commissioner (other than the Chairman) to whom the SEC delegates certain functions. A duty officer may not be authorized to exercise general rulemaking functions, make any rule under Section 19(c) of the 1934 ACT, or preside at an evidentiary proceeding under Section 7(a) of the ADMINISTRATIVE PROCEDURE ACT OF 1946. A duty officer may, however, preside at an evidentiary proceeding concerning the issuance of a temporary cease- and-desi st order under Rule of Practice 511(c). The position of duty officer is supposed to be rotated on a weekly basis.

EFFECTING A TRANSACTION. A transaction is "effected" by an INITIATING MEMBER when it performs any function associated with processing the transaction, including transmitting an order for execution, executing the order, clearing and settling the transaction, or arranging the performance of any of these functions.

ELECTRONIC COMMUNICATION NETWORK. Defined in Rule 11Ac1-1 (a)(8) pertaining to securities information processors registration and dissemination of quotations. Basically, an electronic communication network is any electronic system that disseminates orders entered by an EXCHANGE or by OVER-THE-COUNTER (OTC) MARKET MAKERS to third parties and that allows the orders to be executed against.

ELECTRONIC DATA GATHERING, ANALYSIS, AND RETRIEVAL (EDGAR) SYSTEM. A program for the electronic transfer of filings. Launched by the SEC as a pilot program in 1984, EDGAR became fully operational in 1992. EDGAR performs automated collection, validation, indexing, acceptance, and forwarding of submissions by persons who are required to make filings with the SEC. SMALL BUSINESS ISSUERS and all domestic issuers now are required to file most documents electronically. (See SEC Release No. 33-6977, which explains the EDGAR system in general.)

ELECTRONIC ROADSHOW. See ROADSHOW. Among issues that arise in the context of electronic initial public offerings (IPOs) are ROADSHOWS and whether they may be presented electronically. Section 2(10) of the 1933 ACT defines the term PROSPECTUS to include written communications, including television and radio broadcasts. With respect to an ELECTRONIC ROADSHOW, the issue is primarily whether the presentation is deemed to be a prospectus and thus subject to the requirements of Section 10, which includes filing the prospectus with the SEC. Three companies have received favorable NOACTION LETTERS concerning electronic roadshows.

ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT OF 2000. A federal Act that provides a general rule of validity for electronic records and signatures for transactions in or affecting interstate or foreign commerce.

EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA). A federal Act that governs the funding, vesting, administration, and termination of private pension plans. This Act also established the Pension Benefit Guaranty Corporation.

EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). A type of qualified profit-sharing plan that invests in the SECURITIES of the employer. Such plans acquire shares of the employer-corporation for the benefit of employees, usually through contributions of the employer to the plan. In a noncontributory ESOP, the employer usually contributes its SHARES to a trust and receives a deduction for the fair market value of such STOCK. See also PROFIT-SHARING PLAN.

END OF THE UNDERWRITING PERIOD. Under Rule 15c2-12(f)(2), the later of the time when the ISSUER OF MUNICIPAL SECURITIES delivers the securities to the participating underwriter; or the participating underwriter does not retain, directly or as a member of an underwriting syndicate, an unsold balance of the securities for sale to the public.

ENHANCED AUTOMOBILE RECEIVABLES. Car loans purchased from automobile dealers that contain certain enhancements to insure collectability and that are resold on secondary markets. Such instruments were held not to be investment contracts and, thus, are nonsecurities.

ENTITY THAT EXERCISES FIDUCIARY POWER. The phrase does not include a clearing agency registered under Section 17A of the 1934 ACT. Rule 14a-1(c). However, it does include PARTICIPANTS in a registered clearing agency.

EQUAL TREATMENT REQUIREMENT. The procedural terms of a cross-border tender offer (i.e., duration, pro-rationing, and withdrawal rights) must be the same for all security holders.

EQUIPMENT-TRUST CERTIFICATE. A type of SECURITY, generally issued by a railroad, to pay for new equipment. An ISSUER of equipment trust certificates is the person by whom the equipment or property is to be used.

EQUITY SECURITY. An equity security is defined broadly in Section 3(a)(11) to include a STOCK or similar SECURITY; or any security that is convertible, with or without consideration, into such a security or carrying any WARRANT or right to subscribe to or purchase such a security; or any such warrant or right.

EQUITY SECURITY OF THE ISSUER. Any EQUITY SECURITY or DERIVATIVE SECURITY relating to an issuer. Significantly, the term applies to equity securities "relating to the issuer" and applies to such securities whether or not the securities were actually issued by the issuer.


ESTABLISHED CUSTOMER. Any person for whom a BROKER or DEALER, or a CLEARING BROKER on behalf of such broker or dealer, carries an account and has effected a securities transaction or made a deposit of FUNDS or SECURITIES in the account more than one year before; or made three purchases of PENNY STOCKS that occurred on separate days and involved different ISSUERS. Rule 15g-9(d)(2).

EVIDENCES OF INDEBTEDNESS. A less common device that Section 2(2) specifically provides is a SECURITY.

EX PARTE. A judicial proceeding, order, injunction, etc. is said to be EX PARTE when it is taken or granted at the instance and for the benefit of one party only, and without notice to or contestation by any person adversely interested. The SEC almost always makes all hearings public and most usually gives general notice of any public hearings, but it has the authority to order otherwise.

EXCESS BENEFIT PLAN. An EXCESS BENEFIT PLAN is a tax-conditioned plan that is specifically defined in Rule 16b-3. It operates in conjunction with QUALIFIED PLANS and provides benefits or contributions in excess of the qualified plan limitations set by the Internal Revenue Code.

EXCESS MARGIN SECURITIES. SECURITIES carried for a customer's general and special account under Regulation T that are not FULLY PAID SECURITIES. The securities must be identified by the BROKER or DEALER as not being MARGIN SECURITIES and must have a market value that exceeds 140 percent of the total debit balances in the customer's account. Rule 15c-3(a)(4) and (5).

EXCHANGE. The term EXCHANGE is defined in Section 3(a)(1) of the 1934 act. Broadly defined, it includes organizations, associations, or groups of persons, whether incorporated or unincorporated that constitute, maintain, or provide a market place or FACILITIES for bringing together purchasers and sellers of SECURITIES. It also includes market places or facilities that perform functions commonly performed by a stock exchange as that term is generally understood.

EXCHANGE MEMBERS. Exchange members are NATURAL PERSONs allowed to effect transactions on the EXCHANGE FLOOr without another person acting as a broker; registered BROKERS or DEALERS with which such natural persons are associated; registered brokers and dealers that are permitted to designate such natural persons as their representative; and other registered brokers and dealers that agree to be regulated by the EXCHANGE.


EXCHANGE RULES. The exchange's rules include its constitution, articles of incorporation, by-laws, rules or instruments pertaining to these documents, and its stated policies.

EXECUTING MEMBER. An exchange member that is not an associated person of an INITIATING MEMBER.

EXEMPT BANK SECURITIES. Includes interests in common trust funds that are maintained by banks for the investment or reinvestment of assets in the bank's capacity as a trustee, executor, administrator, or guardian.

EXEMPT ISSUE. An issue of SECURITIES that is exempt from the requirement of REGISTRATION with the SEC, (e.g., small and private offerings, transactions with ACCREDITED INVESTORS, and a variety of institutional and secondary transactions).

EXEMPT SECURITIES. Section 3 exempts from the REGISTRATION provisions of the 1933 ACT securities associated with Federal or State governments (such as municipal bonds); securities issued or guaranteed by any domestic bank; certain EMPLOYEE BENEFIT PLANS; certain short-term notes; securities issued by nonprofit organizations; securities issued by SAVINGS AND LOANS (S&LS), cooperative banks, and similar organizations; interests in RAILROAD EQUIPMENT TRUSTS; certificates issued in bankruptcy; certain insurance contracts; certain exchanges of existing securities; purely intrastate securities transactions; and securities issued in connection with certain acquisitions of banks.

See also Section 3(a)(12)(A) of the 1934 ACT for a definition of the term EXEMPTED SECURITIES.

EXEMPT TRANSACTIONS. Section 4 exempts from the registration requirements of the 1933 ACT securities transactions by persons that are not ISSUERS, UNDERWRITERS, or DEALERS; nonpublic offerings by issuers; certain dealer transactions; certain broker transactions; offers or sales of PROMISSORY NOTES secured by real estate liens; and offers or sales by issuers to ACCREDITED INVESTORS.  


FACILITY. The term FACILITY, in relation to an EXCHANGE, is defined broadly in Section 3(2) of the 1934 act. It includes the premises, all tangible and intangible property, any right to use the premises, property, or any service that effects or reports a transaction on the exchange, and any right to the use of any property or service.

FAMILY OF INVESTMENT COMPANIES. Two or more separately registered INVESTMENT COMPANIES sharing the same investment advisor or PRINCIPAL UNDERWRITER and holding themselves out as related companies. Rule 15a-6(b)(1)(i). With respect to insurance company separate accounts, a FAMILY OF INVESTMENT COMPANIES means two or more separately registered investment companies sharing the same investment advisor or principal underwriter and functioning under substantially similar operational or accounting or control systems. Rule 15a-6(b)(1)(ii).

FAMILY RESEMBLANCE TEST. A test set forth by the Second Circuit Court of Appeals that begins with a presumption that all NOTES are SECURITIES. This presumption may be rebutted only upon a showing that the note in question more closely resembles a type of instrument that is not a security, such as consumer financing notes, notes secured by a home mortgage, short-term notes secured by a lien on a small business or an assignment of accounts receivable, notes formalizing open account debts incurred in the ordinary course of business, and notes evidencing commercial bank loans for current operations.

FEDERAL DEPOSIT INSURANCE ACT. For purposes of this act, a GOVERNMENT SECURITIES BROKER'S OR DEALER'S customers are deemed to be "depositors." Section 15C(c)(2)(C).

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC). An independent agency within the executive branch of the government that insures, up to the statutory limitation, deposits in qualified banks and savings associations.


FEDERAL REGISTER. The Federal Register, which is published daily, is the medium for making available to the public Federal agency regulations and other legal documents of the executive branch. The Federal Register includes proposed changes (rules, regulations, standards, etc.) of governmental agencies. Each proposed change published carries an invitation for any citizen or group to participate in the consideration of the proposed regulation through the submission of written data, views, or arguments, and sometimes by oral presentations. Such regulations and rules as are finally approved then appear in the CODE OF FEDERAL REGULATIONS (CFR).

SEC rules and regulations, which provide the SEC's interpretations of the statutes, are initially published in the FEDERAL REGISTER (FR), first as proposed rules and later as final rules. They are then codified as parts and sections in Title 17 of the CFR and are updated annually. SEC rules begin with Section 200 of Title 17; SEC rules concerning the 1933 ACT begin at Section 230. Furthermore, certain SEC Rules set forth in the CFR contain headings that identify them as REGULATIONS.

FICTITIOUS QUOTATION. Generally, a BROKER or DEALER will have made a fictitious quotation if it submits or furnishes a quotation for a security (except a MUNICIPAL SECURITY) to an INTERDEALER QUOTATION SYSTEM, such as NASDAQ, unless certain other requirements are satisfied. For purposes of this rule, a QUOTATION means any BID or OFFER, but also includes a broker's or dealer's indication of interest in a bid or offer.

FIDUCIARY. One who has a duty to another by reason of position, special expertise, or some other attribute or agreement. This status may be defined explicitly or may be inferred (or assigned by a court) based on the relationship between the parties.

FIDUCIARY DUTY. The duty owed by fiduciaries to those to whom they are responsible.

FINAL OFFERING CIRCULAR. The Final Offering Circular is a document that contains the narrative and financial information required by Form 1-A. The ISSUER has an obligation to update and revise it whenever there are material developments affecting the issuer or changed circumstances that render the information contained in it false or misleading or whenever there are fundamental changes in the information originally presented. If a CONTINUOUS OFFERING is involved, the Final Offering Circular also must be updated 12 months after the OFFERING STATEMENT was qualified in order to reflect any updated financial statements.

FINAL OFFICIAL STATEMENT. Under Rule 15c2-12(f)(3), the document(s) prepared by an ISSUER OF MUNICIPAL SECURITIES or its representatives that is complete as of the date it is delivered to the PARTICIPATING UNDERWRITERS.

FINAL PROSPECTUS. Includes a Section 10(a) prospectus as used in 17 CFR 234.434(a).

FINDING OF FACT. Determinations from the evidence of a case, either by a court or an administrative agency, concerning facts averred by one party and denied by another. See also CONCLUSION OF LAW.

FINDING OF LAW. Rulings of law made by a court in connection with findings of fact. See also CONCLUSION OF LAW.

FIRM COMMITMENT UNDERWRITING. If the UNDERWRITER buys an entire issue from an ISSUER and guarantees the sale of a certain number of SHARES to investors, it is called a FIRM COMMITMENT UNDERWRITING.


FLIP-IN PLAN. A flip-in plan permits SHAREHOLDERS (other than the bidder) to acquire SHARES in the acquiring company at below market value.

FLIP-OVER PLAN. A flip-over plan provides that SHAREHOLDERS of the TARGET COMPANy may buy SHARES of the acquiring company at below market value.

FLIPPING. FLIPPING occurs when an investor buys an INITIAL PUBLIC OFFERING (IPO) at the OFFERING PRICE and quickly sells it once the IPO starts trading on the open market. LEAD UNDERWRITERS are allowed to impose a PENALTY BID on BROKERS to discourage FLIPPING.

FOREIGN ASSOCIATED PERSON. Any NATURAL PERSON that meets the definition of an associated person in Section 3(a)(18) but that is domiciled outside the United States and participates in soliciting U.S. institutional investors or major U.S. institutional investors. All its securities activities must be conducted outside the United States, although, with certain limitations, visits to U.S. institutional investors and major U.S. institutional investors in the United States are permitted. The foreign associated person must be accompanied on these visits by an associate of a registered BROKER or DEALER who accepts responsibility for the foreign associated person's communications with U.S. investors. Any transactions discussed during these visits must then be effected only by or through a registered broker or dealer, pursuant to Rule 15a-6(a)(3).

FOREIGN BROKER OR DEALER. Any non-U.S. resident that is not an office or branch of, or a NATURAL PERSON associated with, a registered BROKER or DEALER whose activities would meet the definition of a broker or dealer under Sections 3(a)(4) or 3(a)(5) if these activities were conducted in the United States. The term FOREIGN BROKER OR DEALER also includes a U.S. PERSON who is a broker or dealer but whose business is completely outside the United States.

FOREIGN CORRUPT PRACTICES ACT OF 1977 (FCPA). Prohibits U.S. companies from making corrupt payments to FOREIGN OFFICIALS for the purpose of obtaining or retaining business. Section 13(b)(2) contains the provisions of the FCPA that require publicly traded companies to comply with accounting and control standards.

FOREIGN EXCHANGE MARKET. An institution through which foreign currencies are bought and sold.

FOREIGN FINANCIAL REGULATORY AUTHORITY. See definition in Section 3(a)(51) of the 1934 ACT.



FOREIGN ISSUER. Defined in Rule 902(f), FOREIGN ISSUER means foreign governments, nationals of any foreign country, or corporations or other organizations incorporated or organized under a foreign country's laws. Foreign governments include political subdivisions of a foreign country, but they must qualify to register securities under Schedule B. Under certain circumstances a nongovernment issuer will not be deemed a foreign issuer. Rule 902(f)(ii).

FOREIGN OFFICIAL. Any OFFICER or employee of a foreign government or any department, agency, or instrumentality thereof, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality. Section 30A(f)(1).

FOREIGN PRIVATE ISSUER. A foreign private issuer is any person other than a foreign government. The term does not apply if U.S. residents control the issuer in one of the following two ways:

1.         if more than 50 percent of the issuer's outstanding voting securities are held by a U.S. resident, either directly or indirectly, through voting trust certificates or depositary receipts. A security holder's status as a resident is determined by the address that appear on the issuer's records. If that address is located in the U.S., then the security holder is a U.S. resident.

2. if there are major connections between the foreign issuer and the U.S., the issuer will not be classified as a foreign private issuer when, for example:

a)         the majority of the foreign issuer's executive officers or directors are U.S. citizens or residents;

b)         more than half of the foreign issuer's assets are located in the U.S.; or

c)         the foreign issuer's business is administered principally in the U.S. See Rule 405.

FORWARD-LOOKING STATEMENTS. Six types of statements that are in the nature of a prediction about a company's future performance, as follows:

(A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items;

(B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer;

(C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the [SEC];

(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C);

(E) any report issued by an outside reviewer retained by the issuer, to the extent that the report assesses a forward-looking statement made by the issuer; or

(F) a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the [SEC]."

FRACTIONAL SHARE. A unit of STOCK less than a full SHARE.


FRAUD-ON-THE-MARKET THEORY. A Court's presumption that an investor relied on public material misrepresentations and the PURCHASE or SALE took place on a securities market. The presumption must be rebuttable by any evidence that destroys the connection between the misrepresentation and either the purchase or sale price of the SECURITY or the investor's decision to trade.

FREE CREDIT BALANCES. See Rule 15c3-3(a)(8).

FREEDOM OF INFORMATION ACT (FOIA). The FREEDOM OF INFORMATION ACT provides that any person has the right to seek access to the records or information of a federal agency upon written request, unless the records or information are protected by one of the statutory exemptions or exclusions. FOIA requests made to the SEC must be in writing and must cite the FREEDOM OF INFORMATION ACT. The request may, but is not required to, disclose why the records are being sought.

FULLY PAID SECURITIES. SECURITIES carried for a customer's account in a special cash account under Regulation T, promulgated by the Federal Reserve Board. Also includes MARGIN EQUITY SECURITIEs carried in general or special accounts under Regulation T. In both instances, the customer must have made full payment for the securities.

FUNDS. See Rule 15c3-3(a)(10).

FUTURES COMMISSION MERCHANT. An individual, association, partnership, corporation, or trust that is engaged in soliciting or accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility; and in or in connection with such solicitation or acceptance of orders, accepts any money, securities, or property (or extends credit in lieu of) to margin, guarantee, or secure any trades or contracts that result or may result from it.

FUTURES TRADING PRACTICES ACT OF 1992. The COMMODITY FUTURES TRADING COMMISSION (CFTC), which regulates the trading of futures and commodities, adopted a new rule under this Act that regulates HYBRID INSTRUMENTS.

GLOBAL CERTIFICATE SECURITIES ISSUE. An issue of SECURITIES for which a single master certificate representing the entire ISSUE is registered in the nominee name of a registered clearing agency. BENEFICIAL OWNERS must not be able to receive negotiable securities certificates. Rule 17f-1(a)(3).

GOING PRIVATE. The process by which a PUBLICLY OWNED COMPANY becomes a PRIVATELY HELD COMPANY. Causing a class of EQUITY SECURITIES to be delisted from a NATIONAL SECURITIES EXCHANGE, or causing a class of equity securities that is authorized to be quoted in an INTERDEALER QUOTATION SYSTEM of a registered national securities exchange to cease to be so authorized. Most attempts to go private utilize a limited number of basic techniques, such as a cash tender offer to purchase all outstanding publicly held shares by the ISSUER, its management, or an affiliated entity; a merger or consolidation of the issuer with, or the sale of its assets to, another corporation controlled by manacrement of the issuer; an exchange offer (usually involving a debt security) by the issuer, its management, or an affiliated entity; and a reverse stock split.

GOLDEN PARACHUTE. A term for a generous severance package provided by a corporation, usually to executives.

GOVERNMENT SECURITY. A GOVERNMENT SECURITY includes securities that are cruaranteed by or are direct obligations of the U.S.; securities that are issued or guaranteed by corporations in which the U.S. has a direct or indirect interest and which are designated by the Secretary of the Treasury as exempted securities; and securities issued or guaranteed by a corporation and designated as exempt securities by statute. It also includes certain PUTS, CALLS, OPTIONS, STRADDLEs, or PRIVILEGES on any of the foregoing securities. The term GOVERNMENT SECURITY is defined in Section 3(a)(42) of the 1934 act.

GRANDFATHERED. Common term for provisions under many laws or agreements, under which practices or employees in place at the time a new provision takes effect are exempt from its requirements, or allowed a transition time to achieve conformity to those requirements. This term rarely appears explicitly in the provision providing the exemption or transition.

GREENMAIL. In corporate takeovers, the term refers to payment by a TARGET COMPANY to buy back shares owned by the potential acquirer at a premium over market. The acquirer in the exchange agrees not to pursue its hostile TAKEOVER BID. A special tax is imposed on greenmail payments.

GROUP (OF SHAREHOLDERS). Section 13(d) of the 1934 ACT defines a GROUP as persons who have agreed to act together "for the purpose of acquiring, holding, voting, or disposing" of equity securities.

GROWTH FUNDS. GROWTH FUNDS are MUTUAL FUNDS that are composed of STOCKS of companies that are still experiencing growth; the objective is to generate an increase in investment value, with less concern about the provision of steady income.

GROWTH STOCK. A type of SECURITY characterized by the prospect of an increase in market value, but not necessarily with a good DIVIDEND return.

GUN JUMPING. Soliciting buy orders in an underwriting before an SEC registration statement is effective.


HARMLESS ERROR STANDARD. Rule 230(h) sets forth a HARMLESS ERROR STANDARD. A proceeding may not be reheard unless the challenging party can show that the SEC's failure to produce the document was not a harmless error.

HEADER. In electronic filing, a HEADER identifies the basic information required to precede each electronic submission and documents sent via EDGAR. For example, a "submission header" provides identifying information about the filing, such as form type, filing entity, and fee; a "document header" precedes each document in an electronic submission and identifies the document.

HEARING OFFICER. An administrative law judge, a panel of the SEC Commissioners that is less than a quorum, an individual Commissioner, or any other person that is authorized to preside at a hearing. 17 CFR 101.201(a)(5). In practice, the hearing officer will most usually be an administrative law judge. The hearing officer possesses discretionary sanction powers over contemptuous conduct, deficient filings, and the failure to make required filings or cure deficient filings.

HEDGE CLAUSE (IN BROKER-DEALER LITERATURE). The use of a legend to the effect that the information contained in the literature is obtained from specified sources that are believed to be reliable, but that no assurances can be given concerning the accuracy of the information. Such a clause is permissible. The representation, however, cannot be made to a prospective investor to the effect that the legend is designed to relive the BROKER-DEALER from antifraud liability. See SEC Release No. 34-4593.

HOLDERS OF RECORD. Persons are deemed to be equity security HOLDERS OF RECORD if they are identified as the owner of the securities in records maintained by or on behalf of the ISSUER. Rule 12g5-1 provides some specific guidance.

HOME OWNERS LOAN ACT OF 1933. For purposes of this act, a GOVERNMENT SECURITIES BROKER'S or DEALER'S customers are deemed to be "savings account holders." Section 15C(c)(2)(C).

HORIZONTAL COMMONALITY TEST. One of two tests developed by lower Federal courts to determine whether or not the COMMON ENTERPRISE element of the howey test has been satisfied. The HORIZONTAL COMMONALITY TEST focuses on the relationship that exists among the pool of investors. Such a relationship exists when each of the investor's fortunes in an investment is tied to the success of the venture as a whole. Horizontal commonality has existed in every Supreme Court case involving an INVESTMENT CONTRACT. See also VERTICAL COMMONALITY TEST.

HOSTILE TAKEOVER. Usually, a TENDER OFFER by an outside bidder is an attempt at a HOSTILE TAKEOVERS of a TARGET COMPANY. The law concerning hostile takeover attempts is very complex and involves both state corporate law and federal tender offer laws and rules contained in the 1934 ACT. State laws govern the validity of anti-takeover measures, such as LOCK-UP OPTIONS and POISON PILLS. Federal tender offer rules govern the manner in which a third-party bidder may make a hostile TAKEOVER BID.

HOUSEHOLD GROUP. The term HOUSEHOLD GROUP refers to situations where a proxy or information statement is sent to security holders as a group (e.g., XYZ Corporation Security Holders), or to each of more than one security holder sharing the same address (e.g., Jane S. Holders and Jack S. Holder).

HOUSEHOLDING. Amendments proposed by the SEC to the proxy rules (specifically to Rules 14a-3, 14b-1, 14b-2, and 14c-3 of the 1934 act),which will permit companies and other persons to fulfill the proxy and information statement delivery requirements with respect to two or more shareholders sharing the same address by sending or forwarding a single proxy or information statement to these shareholders. This is referred to as HOUSEHOLDING.

HOWEY TEST. A test used by the Supreme Court to analyze whether a particular document is an INVESTMENT CONTRACT.

HYBRID INSTRUMENTS. Hybrid instruments that are predominantly COMMODITY OPTIONS or FUTURES INSTRUMENTS are subject to the COMMODITY EXCHANGE ACT's exchange trading provisions. Part 34 of the FUTURES TRADING PRACTICES ACT OF 1992.

HYPOTHECATION. Pledging something as security for a demand or debt without giving up that thing.

ILLIQUID MARKET. A term frequently used to describe a market where it is difficult to buy or sell securities quickly.

IMMEDIATE FAMILY MEMBER. Includes spouses, children, parents, siblings, grandparents, grandchildren, parents-in-law, brothers- and sisters-in-law, and sons- and daughters-in-law.

IN CAMERA INSPECTION. Under certain circumstances, a trial judge may inspect a document, which counsel wishes to use at trial, in his chambers before ruling on its admissibility or its use.

INACTIVE MARGIN ACCOUNTS. Accounts having no activity through purchase or sale, receipt or delivery, or similar transactions at least once a week. Rule 15c3-3(d).

INCOME FUND. An INCOME FUND is a MUTUAL FUND consisting of SECURITIES that provide periodic DIVIDENDS or coupon payments; usually consisting of COUPON BONDS, they are designed to provide investors with a stable income. Compare with GROWTH FUNDS.

INCORPORATED BY REFERENCE. A way of making one document of any kind become part of another separate document by referring to the former in the latter, and declaring that the former shall be taken and considered as part of the latter, just as if it were fully included there. See also INTEGRATED DISCLOSURE SYSTEM.

INDENTURE. In business financing, a written agreement under which BONDS and debentures are issued, setting forth the form of bond, maturity date, amount of issue, description of pledged assets, interest rate, and other terms. Typically, the contract is entered into between the corporation and an indenture trustee whose responsibility is to protect the bondholders. The indenture often constitutes a mortgage on specified corporate property to secure the bonds. See also DEBENTURE, TRUST INDENTURE, and TRUST INDENTURE ACT.


INDIRECT PECUNIARY INTEREST. Includes SECURITIES held by IMMEDIATE FAMILY MEMBERS that share the same household; a general partner's PROPORTIONATE INTEREST in any PORTFOLIO SECURITIES held by a general or LIMITED PARTNERSHIP; performance-related fees; a right to dividends that is separated or may be separated from the UNDERLYING SECURITIES; interests in securities that are held by a trust according to Rule 16a-8(b); and the right to acquire EQUITY SECURITIES by exercising or converting any DERIVATIVE SECURITIES. See also PECUNIARY INTEREST. Rule 16a-1(a)(2)(ii).

INDUSTRIAL DEVELOPMENT BONDS. Bonds issued by a municipality as a means of attracting private businesses.

INITIATING MEMBER. A member of a NATIONAL SECURITIES EXCHANGE. Rule 11a2-2(T). An INITIATING MEMBER is prohibited from effecting a transaction on a national securities exchange for its own account, the account of an associated person, or an account over which the initiating member or an associated person exercises investment discretion, unless certain requirements are satisfied. Rule 11a2-2(T)(a)(1) and (2).

INSIDE BID QUOTATION. The highest bid quotation for the SECURITY as displayed by a MARKET MAKER on a QUALIFYING ELECTRONIC QUOTATION SYSTEM. At least two market makers must be displaying the BID AND OFFER QUOTATIONS for a security contemporaneously and at specified prices. See Rule 15g-3(c)(3).

INSIDE OFFER QUOTATION. The lowest offer quotation on a QUALIFYING ELECTRONIC QUOTATION SYSTEM. At least two MARKET MAKERS must be displaying the BID AND OFFER QUOTATIONS for a SECURITY contemporaneously and at specified prices. See Rule 15g-3(c)(4).


INSIDER. The term INSIDER includes not only TRUE INSIDERS (such as officers and directors) but also CONSTRUCTIVE INSIDERS (such as accountants, lawyers, and consultants). Constructive insiders become temporary fiduciaries of a corporation because of their intimate relationship. The term insider also includes TIPPEES (those persons that receive a tip from an insider when the insider discloses material nonpublic information. See also INSIDER INFORMATION, INSIDER REPORTS, INSIDER TRADING, SHORT SWING PROFITS, TIPPEES.

INSIDER INFORMATION. Information about a company's financial situation that is obtained by insiders (OFFICERS, DIRECTORS, employees, etc.), before the public obtains it. True inside information is usually known only by corporate officials or other "insiders." SEC rules and court decisions restrict stock trading by insiders on the basis of such information. See also INSIDER; INSIDER TRADING; and TIPPEES.

INSIDER REPORTS. Monthly reports required by the SEC from DIRECTORS, OFFICERS, and STOCKHOLDERS of their transactions in STOCK of which they own more than 10 percent of such shares.

INSIDER TRADING. The term refers to transactions in shares of PUBLICLY HELD CORPORATIONS by persons with inside or advance information on which the trading is based. Usually the trader himself is an INSIDER with an employment or other relation of trust and confidence with the corporation. Such transactions must be reported monthly to the SEC (see INSIDER REPORTS).

INSIDER TRADING LIABILITY. There are two basic theories upon which insider trading liability has been imposed under Section 10(b) and Rule 10b-5:

1.            CLASSICAL THEORY - Imposes liability when an insider trades in its own corporation's securities, using material inside information that was not intended to be used for personal profit.

2.            MISAPPROPRIATION THEORY - Applies when a person misappropriates confidential information and breaches a duty owed to the information's source.

INSTITUTIONAL INVESTMENT MANAGER. Any person, other than a natural person, that invests in or buys and sells securities for its own account. Examples include investment advisors that manaue private accounts, mutual fund or pension plan assets, and bank trust departments.

INSTITUTIONAL INVESTORS. Large investors (such as mutual funds, pension funds, insurance companies) who largely invest other people's money.

INSTRUCTION. Under Rule 17a-3(a)(6), the term INSTRUCTION includes instructions between partners and employees of a BROKER-DEALER.

INSURED MEMBERS. For purposes of the FEDERAL DEPOSIT INSURANCE ACT, a GOVERNMENT SECURITIES broker's or dealer's customers are deemed to be SAVINGS ACCOUNT HOLDERS under the HOME OWNERS' LOAN ACT OF 1933.

INTEGRATED DISCLOSURE SYSTEM. Permissible ways in which certain information can be INCORPORATED BY REFERENCE so that filing can be somewhat simplified and streamlined.

INTERDEALER QUOTATION SYSTEM. Any system of general circulation to BROKERS and DEALERS that regularly distributes quotations for identified brokers or dealers. This term does not include a quotation sheet, prepared by a particular broker or dealer as part of their business, that contains only their quotations. Rule 15c-7(c)(1).

INTEREST RATE SWAP. An agreement between two parties to exchange interest payments during a period of time in order to protect a party from interest rate fluctuations. The amount of interest payments that is exchanged is based on a predetermined principal amount (called the notional principal amount). The actual amount exchanged by the parties is an agreed upon periodic interest rate multiplied by the notional principal amount. Typically, one party pays the other a fixed interest payment over the life of the agreement while the other party makes payments that float with an index, such as Treasury bills, the London Interbank Offered Rate (LIBOR), federal funds rate, or the prime rate.

INTERESTED PERSON OF THE ISSUER. See definition in Section 2(a)(19) of the INVESTMENT COMPANY ACT OF 1940.

INTERLOCUTORY. Provisional; interim; temporary.

INTERMARKET TRADING SYSTEM. A communications linkage operated jointly by SROS under a plan filed with the SEC pursuant to Rule 11 Aa3-2.

INTERNATIONAL DEVELOPMENT ORGANIZATIONS. Such organizations include the African Development Bank, Asian Development Bank, Inter-American Development Bank, International Bank for Reconstruction and Development, the International Monetary Fund, and the United Nations.

INTERSTATE COMMERCE. Both the 1933 and 1934 ACTS define INTERSTATE COMMERCE to include SECURITIES transactions between any State and any foreign country.

INTRODUCTING BROKER. Any person (except an individual who elects to be and is registered as an ASSOCIATED PERSON of a FUTURES COMMISSION MERCHANT) engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility who does not accept any money, securities, or property (or extend credit in lieu of) to margin, guarantee, or secure any trades or contracts that result or may result.

INVESTMENT ADVISORS ACT OF 1940 (INVESTMENT ADVISORS ACT). Federal statute that regulates securities professionals (such as BROKERS and DEALERS). The SEC's Division of Investment Management is responsible for administering this Act.

INVESTMENT COMPANY ACT OF 1940 (INVESTMENT COMPANY ACT). Federal statute that regulates INVESTMENT COMPANIES and contains various REGISTRATION and PROSPECTUS requirements. The SEC's Division of Investment Management is responsible for administering this Act.

INVESTMENT CONTRACT. Section 2(2) of the 1933 ACT states that an arrangement such as an INVESTMENT CONTRACT is a SECURITY. However, problems have arisen in defining the term. The Supreme Court's HOWEY TEST, used to analyze whether a particular document is an investment contract, states that an investment contract is a contract if it meets the following criteria: a PERSON invests money; the money is invested in a COMMON ENTERPRISE; the person is led to expect profits from the investment; and the profits are generated SOLELY FROM THE EFFORTS OF OTHERS.

INVESTMENT DISCRETION. Section 3(a)(35) of the 1934 ACT defines the term investment discretion. A manager will be deemed to have investment discretion with respect to an account if the manager is authorized, directly or indirectly, to determine what SECURITIES will be bought or sold; if the manager decides what securities will be bought or sold, even though another person may have responsibility for investment decisions; or the manager will be deemed to have investment discretion with respect to all accounts over which any person under the control of the manager exercises investment discretion. Rule 13f-(b).

INVESTMENT GRADE SECURITY. A security that has received a rating of investment grade from at least one NATIONALLY RECOGNIZED STATISTICAL RATING ORGANtZATION.

INVESTMENT TRUST. A company that sells its own STOCK and invests the money in stocks, real estate, and other investments.

ISSUER. The term ISSUER is broadly defined in Section 2(4) to include any PERSON who issues or plans to issue any SECURITY. With respect to EQUIPMENT TRUST CERTIFICATES, the term ISSUER means the person by whom the equipment or property is to be used. With respect to MINERAL INTERESTS, the term ISSUER means the owner of the mineral right who creates FRACTIONAL INTERESTS in the right for PUBLIC OFFERING. With respect to an AMERICAN DEPOSITARY RECEIPT (ADR), the term ISSUER means the issuer of the deposited shares that are represented by the ADRS. (Rule 15c-211(e)(4)).

ISSUER OF MUNICIPAL SECURITIES. The governmental issuer referred to in Section 3(a)(29) of the 1934 ACT (e.g., a State, political subdivision, agency or instrumentality of a State or political subdivision, or municipal corporate instrumentality) as well as the issuer of any separate security, including a separate security as defined in Rule 3b-5(a) of the 1934 ACt. Rule 15c2-12(f)(4).

JENCKS ACT (OR RULE). This Act provides that a criminal defendant in a Federal court is entitled to access to (yovernment documents for assistance in crossexamination of witnesses in order to impeach for prior inconsistent statements.

JOINT AND SEVERAL LIABILITY. A liability is said to be joint and several when the creditor may demand payment or sue one or more of the parties to such liability separately, or all of them together. Section 15 also imposes joint and several liability on CONTROLLING PERSONS. Persons who control a person that is liable under Section 11 (through stock ownership, agency, in connection with an agreement or otherwise) are JOINTLY AND SEVERALLY LIABLE to the same extent as the CONTROLLED PERSON.

KICK-OFF MEETING. Once an ISSUER has chosen its UNDERWRITER, the parties hold a kick-off meeting to discuss numerous issues associated with the underwriting, such as a review of the issuer's financial statements, a determination of which government or corporate governance consents must be obtained, and a review of the EXCHANGE listing requirements.

KNOWING (STATE OF MIND). Persons have the requisite "knowing" state of mind if they are aware that they are engaging in a prohibited conduct, that a particular circumstance exists, or that a particular result is substantially certain to occur or they have a firm belief that a particular circumstance exists or that a particular result is substantially certain to occur. Section 30A(f)(2)(A)(i) and (ii). If knowledge of a particular circumstance is required for an offense, knowledge exists if the person is aware of a high probability of the circumstance's existence, unless the person actually believes that the circumstance does not exist. Section 30A(f)(2)(B).

LEAD UNDERWRITER. The INVESTMENT BANK that actually operates the books for and heads up an offering for an UNDERWRITING GROUP, and that is primarily responsible for ensuring the smooth trading of the issuer's securities during the crucial first days of trading.

LEVERAGED BUYOUT. Method of purchasing outstanding STOCK of a publicly held corporation by management or outside investors, with financing consisting primarily of funds borrowed from investment bankers or brokers. See also GOING PRIVATE.

LIMITED LIABILITY COMPANY (LLC). A hybrid entity, the LLC gives its members limited liability and pass-through federal income taxation. Most states have held that LLC interests are SECURITIES for purposes of state registration. Using the HOWEY TEST, the crucial fact would appear to be whether the LLC members expect to derive profits SOLELY FROM THE EFFORTS OF OTHERS. In an LLC: managed solely by a manager, the Howey test would appear to be satisfied. In a member-managed LLC, the Howey test would not be satisfied and the LLC interests would not be securities under the 1933 ACT.

LIMITED PARTNERSHIP (LP). A type of partnership comprised of one or more general partners who manage the business and who are personally liable for partnership debts, and one or more limited partners who contribute capital and share in profits but who take no part in running the business and incur no liability with respect to partnership obligations beyond contribution.

LIMITED PARTNERSHIP ROLL-UP TRANSACTION. A transaction in which one or more LIMITED PARTNERSHIPS are combined or reorganized and investors in the limited partnerships receive either new securities or securities in another entity. The investors, however, are subjected to significant adverse changes in voting rights, management compensation, or investment objectives, and they do not receive options to receive or retain a security under terms similar to the original issue. Section 14(h)(4) and (5). See also definition in Item 901(c) of Regulation S-K.



LOAN NOTES. Short-term notes that may be redeemed, in whole or in part, for cash at par on any interest date in the future. Such notes, which are most common in the United Kingdom, are used to defer the recognition of income and capital gain on the sale of securities under foreign tax laws.

LOCK-UP OPTION. Devised in the early 1980s as another anti-takeover defense, the lock-up option was a means by which a buyer (referred to as a WHITE KNIGHT) friendly to the company's manager tried to obtain OPTIONS on blocks of shares owned by the TARGET COMPANY'S large SHAREHOLDERS to assure the success of the bid. If the bid failed, the lock-up option would allow the white knight to buy a large block of the target company's stock at a very favorable price or to purchase its CROWN JEWEL ASSETs.

LONG POSITION. The amount of SECURITIES that the person or its agent has title to or would have title to but for having loaned the securities; has bought or has entered into an unconditional contract to buy but has not yet received the securities; has exercised a standard CALL OPTIOn; has converted, exchanged, or exercised an equivalent security; or is entitled to receive upon conversion, exchange, or exercise of an equivalent security. Rule 14e4(a)(1)(i).

LOOK-THROUGH PROVISION. Under the definition of "securities held of record" in Rule 12g5-1, issuers are required to "look through" the record ownership of brokers, dealers, banks, or nominees holding securities for the accounts of their customers to determine the residency of those customers. The application of this look-through provision is limited to voting securities held of record in the U.S. in the issuer's home jurisdiction and in the primary trading market for the issuer's securities if different from the issuer's home jurisdiction.

LOWEST PRICE INMIGHEST PRICE OUT ANALYSIS. Section 16(b) provides a private cause of action in favor of the issuer to recover SHORT-SWING PROFITS made by certain INSIDERS. Section 16(b) is sometimes confusing to apply because the statute uses the term "profit." However, a basic profit computation formula, known as the "lowest price in/highest price out" analysis, was set forth in Smolowe v. Deludo Corp. whereby sales and purchases made during a six month period are matched and the insider is liable for the difference between the highest sale price and the lowest purchase price, regardless of when each transaction occurred. See SHORT-SWING PROFITS.

MAJOR U.S. INSTITUTIONAL INVESTOR. Includes U.S. investment companies registered under Section 8 of the INVESTMENT COMPANY ACT OF 1940, BANKS, SAVINGS AND LOAN institutions, insurance companies, business development companies, EMPLOYEE BENEFIT PLANS, and TRUSTS that have or have under management assets totaling over $ 100 million. Rule 15a-6(b)(4)(i) and (b)(7). MAJOR U.S. INSTITUTIONAL INVESTOR also includes an INVESTMENT ADVISOR that is registered under Section 203 of the INVESTMENT ADVISORS ACT OF 1940 and that has total assets over $ 100 million under management. Ruic 15a-6(b)(4)(ii).

MANAGER. Under Rule 17a-2(b)(1), a MANAGER is the person STABILIZING, effectina SYNDICATE COVERING TRANSACTIONS, or imposing PENALTY BIDS for their sole account or for the account of a syndicate in which it is a PARTICIPANT. A mana-er must have a contractual or other arranuement in which it deals with the ISSUER, organizes the selling effort, receives some benefit from the underwriting that is not shared with any other underwriters, or represents any other underwriters in maintaining the distribution records and arranging for allotments of SECURITIES offered.

MANDAMUS. Literally, "we command." Name of a writ that issues from a court of superior jurisdiction and is directed to a private or municipal corporation or any of its OFFICERS; or to an executive, administrative, or judicial officer; or to an inferior court. The writ commands the performance of a specified act that belongs to their public, official, or ministerial duty, or directs the restoration of a complainant to rights or privileges of which it has been illegally deprived.

MANIPULATION. A series of transactions that involve the buying or selling of a SECURITY for the purpose of creating a false or misleading appearance of active trading or to raise or depress the price to induce the purchase or sale by others.


MANIPULATIVE, DECEPTIVE, OR FRAUDULENT ACT. This term applies to BROKERS or DEALERS effecting securities transactions through the mail or interstate commerce in the OTC market; it includes making an untrue statement and omitting to state a material fact, with knowledge that the statement or omission is untrue or misleading. Rule 15c1-2.

MANNER OF SALE REQUIREMENTS. Securities sold pursuant to Rule 144 can only be sold as BROKER TRANSACTIONS or as MARKET-MAKER TRANSACTIONS. The rule prohibits the person selling the securities from soliciting orders to buy the securities in anticipation of or in connection with the sale. Also, any payments connected with the offer or sale must be made only to the broker. There are, however, some exceptions.

MARGIN ACCOUNT. A method of extending credit to customers. Margin account requirements are specified by regulations of the FEDERAL RESERVE BOARD. See also MARGIN TRANSACTION.

MARGIN CALL. A demand by a BROKER to put up money or SECURITIES upon the purchase of a STOCK, or, if the stock is already owned on margin, to increase the money or securities in the event the price of stock has or is likely to fall since purchase. The last process (of maintaining the minimum required margin) is remargining.

MARGIN EQUITY SECURITIES. These are FULLY PAID SECURITIES only when Section 8 of Regulation T specifies that margin equity securities have no loan value in a General account or special convertible debt security account. Rule 15c3-3(a)(3).


MARGIN TRANSACTION. The purchase of a STOCK or COMMODITY with payment in part in cash (called the margin) and in part by a loan. Usually the loan is made by the BROKER effecting the purchase. See also MARGIN ACCOUNT.

MARKET MAKER. A securities dealer in a specific OVER-THE-COUNTER (OTC) stock who makes a market; that is, the dealer maintains firm BID AND ASKED prices in a given SECURITY by standing ready to buy or sell ROUND LOTS of that security.

MARKET MAKING. Regarding SECURITIES in OVER-THE-COUNTER TRADING, the process consists of BID AND ASK QUOTATIONS, which result in the establishment of a market for such securities.

MARKET ORDER. An order to buy or sell on a STOCK or COMMODITY EXCHANGE at the current (best) price when the order reaches the floor of the exchange. Requests by customers to purchase or sell SECURITIES at the market price existing when the order reaches the EXCHANGE FLOOR. A STOP ORDER becomes a MARKET ORDER when the stock sells at or beyond the specified price and, thus, may not necessarily be executed at that price.

MATCHING SYSTEM. An ALTERNATIVE TRADING SYSTEM that allows PARTICIPANTS to display firm price orders to other participants and to execute against other orders in the system. Real-Time Trading Service and The Island System are matching trading systems.

MATERIAL ASSOCIATED PERSONS. See definition in Rule 17h-1T(a)(2). There is no threshold test. The determination is based on the following: the legal relationship between the BROKER or DEALER and the ASSOCIATED PERSON; the overall financing requirements of the broker or dealer and the associated person and the degree, if any, to which the broker or dealer and associated person are financially dependent on each other; the degree, if any, to which the broker or dealer or its customers rely on the associated person for operational support or services in connection with the broker's or dealer's business; the level of risk in the broker's or dealer's and associated person's activities; and the extent to which the associated person has the authority or ability to cause a withdrawal of capital from the broker or dealer.

MATERIAL FACT. In REGISTRATION of securities, a fact to which there is a substantial likelihood that an investor would attach importance in determining whether to purchase the SECURITY registered. In PROXIES for securities, a fact to which there is a substantial likelihood that a reasonable shareholder would attach importance when deciding how to vote.

MATERIAL NONPUBLIC INFORMATION. Information that is not available to the general public and that would be important to a reasonable investor and might affect the price of the STOCK.

MATERIAL STATEMENT. The Supreme Court has applied the Section 14(a) definition of materiality to Section 10(b) and Rule 10b-5. To satisfy this materiality requirement, there must be a substantial likelihood that the statement or omission would have altered the total mix of trading information significantly.

MATERIAL TRANSACTION. A transaction that involves at least one percent of a class of SECURITIES or a smaller transaction that qualifies as material due to facts and circumstances.

MATERIALITY TEST. The MATERIALITY TEST is both an objective and a subjective test. Materiality depends on the significance that a reasonable investor would place on the statement or omission. To the extent that such an analysis depends on determining how a reasonable investor would view the information, it requires an objective analysis. The ultimate determination of materiality, however, will depend on the particular facts and circumstances surrounding the statement or omission and, in this regard, it is a subjective analysis.

MATERIALITY THRESHOLD. The greater of $100 million; or 10 percent of the BROKER'S or DEALER'S tentative NET CAPITAL, based on the most recently filed Form X-17A-5, or 10 percent of the MATERIAL ASSOCIATED PERSON's tangible NET WORTH, whichever is greater. Rule 17h-1T(a)(4).

MEAN TRADING PRICE. An average of a security's daily trading price as of the close of the market each day during the 90-day period, beginning on the date an information correcting a misstatement or omission was disseminated to the market. 1934 ACT, Section 211D(e)(3).

MEMBERSHIP INTEREST. Includes full membership, allied membership, associated membership, floor privileges, and any other interest that allows a BROKERDEALER to exercise a privilege on an exchange or with an association. Rule 17a-5(b)(3).

MERGER. Under Rule 16b-7, MERGER includes the sale or purchase of substantially all of a company's assets by another in exchange for EQUITY SECURITIES that are distributed to the selling company's SHAREHOLDERS. These transactions must be between CONTROLLED COMPANIES.

MICROCAP. Companies characterized by their capitalization, low share prices, limited public information, and little or no analyst coverage. See also PUMP AND DUMP.


MINERAL RIGHT. An interest in minerals in land, with or without ownership of the surface of the land. The owner of the mineral right who creates FRACTIONAL INTERESTS in the right for PUBLIC OFFERING is deemed the ISSUER.


MORTGAGE SECURITY. Includes whole loan mortgages, aggregated whole loan mortgages, participation interests, or commitments.

MULTIJURISDICTIONAL DISCLOSURE SYSTEM (MJDS). This disclosure system allows certain companies in the U.S. and Canada to offer SECURITIES and file reports in the U.S. and Canada subject to regulation by the company's home country. U.S. and Canadian securities' regulators established the MJDS in the summer of 1991 to facilitate securities transactions between the two countries. The system reduces the disclosure requirements by allowing each jurisdiction to rely on the disclosure requirements of the other. Thus, a Canadian foreign private issuer could make a public offering in the U.S. by conforming to Canadian requirements.

MUNICIPAL BONDS. MUNICIPAL BONDS are evidences of indebtedness (debt obligations) issued by State or local government entities that are negotiable in form, payable at a designated future time, and intended for sale in the market. The objective is to raise money for a municipal expense that is beyond the immediate resources of reasonable taxation, (as distinguished from temporary evidences of debt, such as vouchers, certificates of indebtedness, orders, or drafts drawn by one OFFICER on another and similar devices for liquidating current obligations in anticipation of collection of taxes). Because interest on such bonds is generally exempt from both federal income taxes and some state income taxes, they are sometimes referred to as "tax exempts.�

MUNICIPAL SECURITY. A security that is guaranteed by or is a direct obligation of a State, State agency, municipality, or political subdivision of these entities. A municipal security also includes certain tax exempt industrial development bonds. The term MUNICIPAL SECURITY is defined in Section 3(a)(29) of the 1934 ACT.

MUNICIPAL SECURITIES RULEMAKING BOARD (MSRB). This board was established pursuant to Section 15B(b)(1) of the 1934 act. Composed of 15 individuals appointed by the SEC. they propose and adopt rules pertaining to transactions in MUNICIPAL SECURITIES that are effected by BROKERS, DEALERS, and MUNICIPAL SECURITIES DEALERS. These rules regulate and/or prevent, among other things, such areas as standards of operational capability, training, and competence; fraudulent, manipulative, and deceptive practices; periodic examination of municipal securities brokers and dealers; form and content of municipal securities quotations; and recordkeeping requirements. The SEC's Division of Market Regulation has oversight of the MSRB.

NASDAQ SECURITY. A security that is authorized for quotation on NASDAQ and is not suspended, terminated, or prohibited. Rule 100(b).

NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD). An association of BROKERS and DEALERS empowered to regulate the OVER-THE-COUNTER (OTC) securities business.

NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATIONS (NASDAQ). An automated information system that gives price quotations on securities traded OVER-THE-COUNTER to BROKERS and DEALERS.

NATIONAL HOUSING ACT. For purposes of this act, a GOVERNMENT SECURITIES BROKER'S or DEALER'S customers are deemed to be "insured members." Section 15C(c)(2)(C).

NATIONAL MARKET SYSTEM SECURITY. An EQUITY SECURITY listed and registered or having unlisted trading privileges on a NATIONAL SECURITIES EXCHANGE. Rules 11Aa2-1 and 11Aa3-1(4).

NATIONAL SECURITIES EXCHANGES. Section 6(a) of the 1934 ACT permits a securities exchange to register as a NATIONAL SECURITIES EXCHANGE by filing an application with the SEC. The two major registered national securities exchanges are the NEW YORK STOCK EXCHANGE (NYSE) and the AMERICAN STOCK EXCHANGE (AMEX). In addition, several regional stock exchanges are also registered under Section 6: the Midwest Stock Exchange, the Pacific Stock Exchange, the Philadelphia Stock Exchange, the Boston Stock Exchange, and the Cincinnati Stock Exchange. Application for or exemption from registration as a NATIONAL SECURITIES EXCHANGE can be made. Presently there is only one exempted exchange, the Arizona Stock Exchange (AZX), formerly known as the Wunsch Auction System.

NATIONAL SECURITIES MARKETS IMPROVEMENT ACT OF 1996. This Act, which added Section 28 to the 1933 ACT, substantially changed the relationship between federal and state securities laws by reallocating the regulatory responsibilities for securities offerings between federal and state governments, according to the nature of the security or the offering.

NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION. An organization such as Standard & Poors or Moody's. See definition in Rule 15c3-1 of the 1934 ACT.

NET CAPITAL. The BROKER'S or DEALER'S adjusted NET WORTH. Certain items are added to net worth, such as unrealized profits in a BROKER's or DEALER's accounts, certain deferred income tax liabilities, future income tax benefits resulting from unrealized losses, and actual tax liabilities related to income accrued that is directly related to assets that are deducted from net worth. Rule 15c3-1(c)(2)(i) - (xiii).

NET LONG POSITION. A person's NET LONG POSITION in a security is the excess of that person's LONG POSITION over their SHORT POSITION. Rule 14e-4(a)(1).

NET PURCHASES. The amount by which purchases exceed sales.

NET WORTH. Includes the net value of investments in real and personal property, including personal residences. Section 2113(e)(4)(A)(iii).

NEW YORK STOCK EXCHANGE (NYSE). The oldest and largest STOCK EXCHANGE in the U.S., the NYSE is an unincorporated association of member firms that handle the purchase and sale of SECURITIES for themselves and their customers.

NO-ACTION LETTER. A letter that provides a prospective REGISTRANT with an SEC staff member's informal opinion regarding a transaction.

NOLO CONTENDERE. Means "I will not contest it." It has a similar legal effect as pleading guilty in a criminal case. The principal difference between a plea of guilty and a plea of NOLO CONTENDERE is that the latter may not be used against the defendant in a civil action based on the same acts. This plea is particularly popular in antitrust actions (e.g., price fixing) where civil actions are likely to follow in the wake of antitrust prosecution.

NONEMPLOYEE DIRECTOR. Rule 16b-3(b)(3) defines NONEMPLOYEE DIRECTOR as a DIRECTOR that is not an OFFICER of the ISSUER, its parent, or subsidiary nor employed by these persons; that does not receive compensation from these persons in any capacity except director, unless it does not exceed the amount for mandatory disclosure under 17 CFR 229.404(a); that does not have an interest in any other transaction that would have to be disclosed under 17 CFR 229.404(a); and that does not have a business relationship that would need to be disclosed under 17 CFR 229.404(a).

The term NONEMPLOYEE DIRECTOR has an additional meaning with respect to a CLOSED-END INVESTMENT COMPANY. In this case, it means a director who is not an INTERESTED PERSON OF THE ISSUER, as defined in Section 2(a)(19) of the INVESTMENT COMPANY ACT OF 1940. Rule 16b-3(b)(3)(ii).

NONEXCHANGE MEMBERS. Persons that are effecting transactions on the EXCHANGE without the services of someone acting as a BROKER, and any BROKER OR DEALER effecting transactions on the exchange on a regular basis. Section 6(f).

NONMARKETABLE SECURITIES. These are securities for which there is no READY MARKET. Rule 150-1(c)(2)(vii).

NONPARTICIPATING PREFERRED STOCK. NONPARTICIPATING PREFERRED STOCK is nonconvertible CAPITAL STOCK whose holders are entitled to receive a preferential dividend payment and liquidation distribution, but who are not entitled to share in the issuer's residual earnings or assets.

NONRESIDENT BROKER OR DEALER. An individual residing or having a principal place of business in any place not subject to U.S. jurisdiction; a corporation incorporated in or having its principal place of business in any place not subject to U.S. jurisdiction; or a partnership or other unincorporated association having its principal place of business in any place not subject to U.S. jurisdiction. Rule 15b1-5(d)(4).

NONRESIDENT GOVERNMENT SECURITIES BROKER OR DEALER. An individual domiciled in or having its principal place of business in any place that is not subject to U.S. jurisdiction. Rule 15Ca2-5(d)(1).

NONVOTING STOCK. NONVOTING STOCK simply entities the holder to dividends, if any. See VOTING STOCK.

NOTE. Under the 1933 ACT, any note is a SECURITY. Section 3(a)(10), however, specifically exempts notes with a maturity of nine months or less. Despite this seemingly clear legislative intent, the Supreme Court has stated that not all notes involve an investment and that an economic reality analysis is required to determine whether or not a note is a security. See also FAMILY RESEMBLANCE TEST.

OBLIGATED PERSON. Any person, including the ISSUER OF MUNICIPAL SECURITIES, who is either generally or through an enterprise or account of a person committed by contract to support payment of all or a part of the obligations on the MUNICIPAL SECURITIES that will be sold in the offering. Rule 15c2-12(f)(10). The term OBLIGATED PERSON does not include providers of municipal bond insurance, letters of credit, or other liquidity facilities.

ODD LOT. An amount of STOCK less than the established I00-share unit or 10-share unit of trading: from one to 99 SHARES for the great majority of issues; one to 9 for so-called inactive stocks. Compare with ROUND LOT.

OFF-BALANCE-SHEET RISK. The term OFF-BALANCE-SHEET RISK is defined according to "Statement of Financial Accounting Standards No. 105." Rule 17h-1T(a)(1)(vii).


OFFER PRICE. The price that has been most recently communicated by the DEALER to another BROKER or dealer, representing the price at which the dealer is willing to sell one or more round lots of PENNY STOCK. Rule 15-3(c)(2).

OFFER TO SELLIOFFER FOR SALE. These terms are defined broadly and are not restricted to "offer" in the contract law sense of the term. They include every attempt or offer to dispose of, or SOLICITATION OF AN OFFER to buy, a SECURITY or interest in a security, for value. However, preliminary negotiations are not considered an OFFER FOR SALE or an OFFER TO SELL; nor are agreements between an ISSUER and an UNDERWRITER, provided that the underwriter is in PRIVITY OF CONTRACT with the issuer.

OFFERING. An issue of SECURITIES offered for sale to the public or a private group. Generally, securities offerings are either primary (the proceeds to the company for some lawful purpose) or secondary (the proceeds to a person other than the company, i.e., selling stockholders). PRIMARY OFFERINGS are also termed "new issues" because they involve the issuance of securities not previously offered and sold.

OFFERING CIRCULAR. An offering circular must be filed with the SEC and distributed with any SECURITIES offerings. The content is similar to the PROSPECTUS and is governed by SEC rules and regulations.

OFFERING DATE. Means the later of the REGISTRATION STATEMENT'S effective date or the first date on which the SECURITY was offered to the public. Rule 174(d).

OFFERING DOCUMENT. This term is defined in Section 18(d) and means a PROSPECTUS as that term is defined in Section 2(10). It also includes a communication that is not deemed to be a SECURITY under any SEC rule.

OFFERING PRICE. In an initial public offering (IPO), the price that investors who have been allocated shares in the IPO must pay. Usually, the average retail investor will have a difficult time getting an allocation at the offering price.

OFFERING RESTRICTIONS. Written agreements by each distributor that all offers and sales before a 40-day period (the RESTRICTED PERIOD) will not be made to a U.S. PERSON or for the account or benefit of a U.S. person (other than the distributor), but will be made pursuant to registration under the 1933 ACT or pursuant to an applicable exemption.


OFFICER. The term OFFICER is broadly defined to include the ISSUER's president, principal financial officer, principal accounting officer (or the controller if there is no principal accounting officer), and any vice president that heads a business unit, division, or function (such as sales, marketing, and administration). Rule 16a-1(f). A person will also be considered an officer for purposes of Section 16 if they perform a policy-making function. While the term OFFICER is not defined in the rules, it only includes persons having significant policy-making functions. Persons that are officers of the issuer's parent or subsidiaries are deemed to be officers of the issuer provided they have policy-making functions with respect to the issuer. Titles are ignored. If a person performs executive tasks and is exposed to confidential information, this indicates that that person if functioning as an officer.

OFFSHORE TRANSACTION. Defined in Rule 902(i), an OFFSHORE TRANSACTION is an offer or sale of securities in which the offer is not made to a person in the U.S. One of the following two alternative conditions must also exist:

1.         at the time the buy order is originated, the buyer is located outside the U.S., or the seller (or person acting on the seller's behalf) must reasonably believe that the buyer is located outside the U.S.; or

2.         if the issuer-distributor safe harbor in Rule 903 is being relied on, the transaction must be executed on the physical trading floor of an established foreign securities exchange located outside the U.S.; if the resale safe harbor in Rule 904 is being relied on, the transaction must be executed on a DESIGNATED OFFSHORE SECURITIES MARKET. The seller (and any person acting on its behalf) must not know that the transaction has been prearranged with a U.S. buyer.

OPEN-END INVESTMENT COMPANY. A MUTUAL FUND that will buy back its SHARES at net asset value and that is continuously offering to sell new shares to the public.


OPENING PRICE. The price at which the new STOCK starts trading. Ideally, the opening price will be above the OFFERING PRICE, thus giving investors a premium. Because FLIPPING is discouraged, the investors who received allocations do not ordinarily sell their shares because they do not wish to damage their relationship with their BROKERS, who may be forced to pay PENALTY BIDS.

OPTION. A privilege held and paid for by one person that gives him the right to buy certain COMMODITIES or certain specified SECURITIES from another person, if he chooses, at any time within an agreed period and at a fixed price, or to sell such commodities or securities to such other person at an agreed price and time. An option that gives the choice of buying or not buying is referred to as a CALL. An option that gives the choice of selling or not selling is referred to as a PUT. If the option is a combination of both these and also gives the privilege of buying or selling or not, it is called a STRADDLE or a "spread eagle."

ORDINARY BUSINESS EXCLUSION. An exclusion that is meant to relieve management of the necessity of including in its proxy material shareholder proposals relating to matters falling within the scope of management's discretion. Rule 14a-8(c)(7).

ORDINARY COURSE OF BUSINESS. In general, any matter that transpires as a matter of normal and incidental daily customs and practices in business.

OTHER CREDIT BALANCES. See Rule 15c3-3(a)(9).

OUTSIDE DIRECTOR. The term OUTSIDE DIRECTOR is not defined in the PRIVATE SECURITIES LITIGATION REFORM ACT; however, it is to be defined in an SEC rule or regulation.

OVERSEAS DIRECTED OFFERING. The definition of an overseas directed offering depends on whether a foreign or domestic issuer is making the offering. If the offering consists of a foreign issuer's securities, the OVESEAS DIRECTED OFFERING must be directed to the residents of a single foreign country in accordance with local law and practice. Rule 902(j)(1).

OVERSIGHT EXAMINATIONS (OF BROKER-DEALERS). These examinations, conducted by the SEC'S Office of Compliance Inspections and Examinations, seek to determine the quality of examination oversight conducted by broker-dealer SELF-REGULATORY ORGANIZATIONS (SROs).

OVER-THE-COUNTER (OTC) MARKET. Primarily a market for unlisted securities, OTC MARKET refers to the broad securities market that consists of BROKERS who purchase or sell SECURITIES by computer hook-up or telephone rather than through the facilities of a securities EXCHANGE.

OVER-THE-COUNTER (OTC) MARKET MAKING. The process consisting of BID AND ASK QUOTATIONS that results in the establishment of a market for SECURITIES in OVER-THE-COUNTER TRADING.



PAR VALUE. The face or stated value of a share of STOCK or BOND. In the case of a common share, par means an arbitrary or nominal dollar amount assigned to the share by the issuing company. Par value may also be used to compute the dollar amount of the common shares on the balance sheet. Par value has little significance so far as the market value of COMMON STOCK is concerned. In the case of PREFERRED SHARES AND BONDs, however, par is important. It often signifies the dollar value upon which DIVIDENDS on preferred stocks and interest on bonds are figured. In the case of bonds and stock, the face value appearing on the certificate is the par value. Stocks that do not contain such a statement have no par value.

PARTICIPANT. Rule 17a-23(b)(5) defines PARTICIPANT to mean a person that has been given access to a trading system by a system SPONSOR in order to effect a sale or purchase of securities on the system. See also definition in Instruction 3 to Item 4 of Schedule 14A.

PARTICIPATING PREFERRED SHARES. These are PREFERRED SHARES that are entitled to share in excess distributions with COMMON SHAREHOLDERS on some defined basis. These shares also may be called class A common, or some similar designation to reflect their open-ended rights.


PARTICIPATION PROGRAM SECURITIES. Direct participation programs are programs financed through the sale of certain unlisted securities that are not traded on EXCHANGES or OTC. The investors have certain flow-through tax consequences as a result of their participation in these programs.

PASSIVE MARKET MAKER. A MARKET MAKER that effects bids or purchases according to Rule 103. See also DE MINIMIS TRANSACTIONS.

PASSIVE PRICING STRUCTURE. A low volume of trading.

PASSWORD (PW). In electronic filing, an eight-character code having at least one number (0 to 9) and at least one special character (such as @, #, or *). In conjunction with the CENTRAL INDEX KEY (CIK), the Pw identifies an entity making an electronic submission. Unlike the CIK, the PW is a confidential code.

PASSWORD MODIFICATION AUTHORIZATION CODE (PMAC). The PMAC is an eight-character code like the CIK CONFIRMATION CODE (CCC) and PASSWORD (PW) except that the number range is 2 to 9. A filer needs a PMAC to change the PW. It should be known by only one or two persons.

PECUNIARY INTEREST. The opportunity to profit or to share in any profit that results from a transaction involving EQUITY SECURITIES that are the subject of a beneficial ownership statement. See also INDIRECT PECUNIARY INTERESt. Rule 16a-1(a)(2)(i).

PENALTY BID. An arrangements that allows the MANAGING UNDERWRITER to reclaim a selling concession from a syndicate member in connection with an offering. The securities originally sold by the syndicate member are purchased in a SYNDICATE COVERING TRANSACTION. Rule 100, Regulation M.

PENNY STOCK. PENNY STOCKS are low-priced SECURITIES that are traded in the OTC market. They are very susceptible to market manipulation because of their low price and the general lack of reliable investment information. See also definition in Section 3(a)(51) and Rule 3a51-1.

PENNY STOCK REFORM ACT OF 1990. This act amended the 1934 ACT by requiring, among other things, that BROKERS and DEALERS disseminate risk disclosure documents to customers and provide certain market information to buyers of penny stocks. It also required the establishment of an automated quotation system for trading penny stocks.

PENSION PLAN. Under ERISA, a plan, fund, or program to the extent that, by its express terms or as a result of surrounding circumstances, it provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.

PERIODIC REPURCHASE OFFERS. See Rule 23c-3 of the 1934 ACT.

PERSON. The term PERSON is defined broadly in Section 2(2) of the 1933 ACT and includes not only individuals but also entities, such as corporations, partnerships, associations, and trusts. The term PERSON also includes governments and their political subdivisions.

PERSON ACTING ON BEHALF OF THE ISSUER. Means the issuer's OFFICERS, DIRECTORS, or employees. 1933 ACT, Section 27A(i)(4); 1934 ACT, Section 21E(i)(4).

PERSON ASSOCIATED WITH A BROKER OR DEALER. Includes several categories of individuals and entities, such as partners, OFFICERS, DIRECTORS, or branch managers of the BROKER OR DEALER. The term also includes any person that directly or indirectly controls, or is controlled by, the broker or dealer. Employees of brokers and dealers are also deemed to be associated with them. However, if a person performs functions that are solely clerical or ministerial in nature, that person will not be deemed to be associated with a broker or dealer. Section 3(18).

PERSON THAT PARTICIPATED IN AN OFFERING OF PENNY STOCK. Defined in Section 15(b)(6)(C), this phrase includes promoters, finders, consultants, agents, and other persons working with a BROKER, DEALER, OR ISSUER to issue or trade in PENNY STOCK or to induce the buying or selling of penny stock.

PLAIN ENGLISH RULES. New requirements adopted by the SEC that PROSPECTUSES and other disclosure documents that inform potential investors about securities must be written in "plain English." (See SEC Releases 33-7497 and 34-39593, January 28, 1998) Issuers that first file a registration statement on or after October 1, 1998, must comply with the PLAIN ENGLISH RULE. An electronic version of the SEC's manual, A Plain English Handbook-How to Create Clean SEC Disclosure Documents, is available on their Internet site,

PLAN. The term PLAN is defined in Rule 100(b) and includes bonus, profitsharing, pension, retirement, savings, STOCK PURCHASE, STOCK OPTION, and dividend reinvestment and similar plans. The term PLAN also includes employee benefit plans as defined in Rule 405 of the 1933 ACT.

POISON PILL. A defensive measure that a board can initiate to repel a HOSTILE TAKEOVER bid. There are several types of poison pills: FLIP-OVER PLANS, FLIPIN PLANS, and BACK-END PLANS. See also LOCKUP OPTION, WHITE KNIGHT.

PORTAL. PORTAL stands for Private Offering, Resale and Trading through Automated Linkages, the NATIONAL ASSOCIATION OF SECURITIES DEALERS9 (NASD'S) electronic trading facility through which resales of securities pursuant to the exemption in Rule 144A of Regulation S may be transacted. PORTAL was approved by the SEC in 1990. Section 4(11/2) exemption.

PORTFOLIO SECURITIES. Any securities that are owned by a partnership, except any securities that it has issued. Rule 16a-1(g).

POST-FILING PERIOD. The third period of the REGISTRATION process, which encompasses the final day or so of the WAITING PERIOD and during which the issuer files a price statement with the SEC.

POTENTIAL CUSTOMER. Under Rule 15c2-12(f)(5), a potential customer includes any person the PARTICIPATING UNDERWRITER contacted regarding the purchase of MUNICIPAL SECURITIES that are going to be offered, any person having expressed an interest to the participating underwriter in possibly buying such municipal securities, and any person having a customer account with the participating underwriter.

PRACTICING BEFORE THE SEC. Includes transacting any business with the SEC. With respect to attorneys, accountants, or other professionals or experts, it also includes preparing statements, opinions, or other papers that are filed with the SEC and with the professional's consent, as part of a REGISTRATION STATEMENT, notification, application, report, or other document.

PRECEDED BY A PROSPECTUS. See Rule 153, which defines this phrase in respect of any requirement to deliver a PROSPECTUS to a member of a NATIONAL SECURITIES EXCHANGE because of a transaction involving a security traded on the exchange. Rule 153a defines the phrase pertaining to certain transactions that require SHAREHOLDER approval. Rule 153b defines the phrase in connection with certain transactions involving standardized OPTIONS.

PREDICATE OFFENSES. Under RICO, these are offenses that, when they occur in a pattern of racketeering, trigger the provisions of RICO, including acts or threats that involve state law charges (such as bribery and extortion) and more than 30 named federal offenses (including securities fraud).

PREEMPTIVE RIGHT. A STOCKHOLDER'S privilege of maintaining a proportionate share of ownership by purchasing a proportionate share of any new stock issues.



PREFERRED STOCK. The term for stock SHARES that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Usually, preferred shares are entitled to receive only specified limited amounts as dividends or on liquidation. See also PARTICIPATING PREFERRED SHARES.

PREFERRED STOCK RIGHTS DIVIDENDS. Dividends that are distributed to common shareholders in the form of rights to purchase PREFERRED SHARES, usually at a bargain price, that entitle the holder to "super-majority" voting rights (i.e., instead of 1 share/1 vote, they may allow 1 share/10 or 15 votes). Apart from voting rights, these shares usually do not carry with them any of the other substantive rights of preferred shares.


PREFILING PERIOD. The first period of the REGISTRATION process, during which the issuer assembles the offering, including information that will be disclosed in the REGISTRATION STATEMENT and accompanying PROSPECTUS.

PRELIMINARY OFFERING CIRCULAR. A particular form of written offer that satisfies certain prescribed criteria. It will contain the same basic information required in the OFFERING STATEMENT. However, certain information may be omitted from the PRELIMINARY OFFERING CIRCULAR, such as information regarding the offering price, underwriting discounts or commissions, dealer discounts or commissions, amount of proceeds, conversion rates, call prices, or other information that depends on the offering price. Forty-eight hours prior to the mailing of confirmation of the sale, a revised Preliminary Offering Circular or a complete Offering Circular must be furnished to all persons to whom SECURITIES are to be sold.

PRELIMINARY OFFERING STATEMENT. An official document prepared by or for an ISSUER OF MUNICIPAL SECURITIES for distribution to POTENTIAL CUSTOMERS before the FINAL OFFICIAL STATEMENT is available. Rule 15c2-12(f)(6).

PRELIMINARY OFFICIAL STATEMENT. Under Rule 15c2-12(f)(6), an official document prepared by or for an ISSUER OF MUNICIPAL SECURITIES for distribution to POTENTIAL CUSTOMERS before the FINAL OFFICIAL STATEMENT is available.

PRELIMINARY PROSPECTUS. A PROSPECTUS that is filed with the SECURITIES AND EXCHANGE COMMISSION (SEC), usually with the REGISTRATION STATEMENT, and that is distributed to investors, and that does not contain the offering price of the SECURITY. It includes a "prospectus subject to completion" as used in 17 CFR 230.434(a). A PRELIMINARY PROSPECTUS is also known as a RED HERRING.

PRE-ORGANIZATION CERTIFICATE OR SUBSCRIPTION. A less common device that Section 2(2) specifically provides is a SECURITY.

PREPARED BY OR ON THE ISSUER's BEHALF. The phrase is intended to cover only OFFERING DOCUMENTS prepared with the ISSUER's knowledge and consent. According to Rule 146(a), an offering document is prepared by or on the issuer's behalf if the issuer or its agent or representative authorizes the document's production; and approves the document before its use.

PRIMARY OFFERING. A first-time securities offering in which no outstanding securities exist. An offering of MUNICIPAL SECURITIES that is made directly or indirectly by or on behalf of an ISSUER OF MUNICIPAL SECURITIES and includes the remarketing of municipal securities. Rule 15c2-12.

PRINCIPAL MARKET. As defined in Rule 100(b), PRINCIPAL MARKET means the single securities market that has the largest aggregate reported trading volume for the class of securities during the 12-calendar-month period immediately preceding the REGISTRATION STATEMENT's filing. If no registration statement was filed, or the securities are sold on a delayed basis under Rule 415 of the SECURITIES ACT OF 1933, the period for determining the principal market is the 12-calendar-month period immediately preceding the determination of the offering price.

PRINCIPAL OFFICER. See Rule 15c3-3(a)(11).

PRINCIPAL UNDERWRITER. Under Rule 491, these are underwriters who are in PRIVITY OF CONTRACT with the foreign government and are named as principal underwriters.

PRIVACY ACT OF 1974. THE PRIVACY ACT requires every Federal agency to make known to the public the existence and characteristics of all personal information systems that the agency keeps. Under the Act, individuals are permitted to access all records that contain personal information on themselves and allows those individuals to control the transfer of that information to other Federal agencies for nonroutine uses. Also, under the Act all Federal agencies are required to keep an accurate accounting of transfers of personal records to other agencies and outsiders, and they must make the accounting available to the individual. The Act further provides for civil remedies for an individual whose records are kept or used in contravention of the requirements of the Act.

PRIVATE OFFERING. An offering that is made to a limited number of persons, who are very well-informed regarding the affairs of a company and have access to information that would be found in a REGISTRATION STATEMENT; thus, they do not require the protection afforded by the disclosure provisions of the SECURITIES ACT OF 1933. This term also refers to the sale of unregistered STOCK, which is exempt from securities laws.

PRIVATE OFFERING EXEMPTION. Section 4(2), which exempts private securities offerings from the 1933 act registration requirements, provides no guidance or criteria for determining what constitutes a private offering. Not until the SEC promulgated Regulation D in 1982 were objective criteria for the private offering exemption set forth. Regulation D provides three exemptions under Section 3(b) or Section 4(2) offerings to ACCREDITED INVESTORS. Rule 501 defines terms used in Regulation D; Rule 502 sets forth general conditions that all offerings in reliance on Regulation D must satisfy; Rule 503 sets forth the filing requirements for a Regulation D offering; and Rules 504, 505, and 506 contain the three types of exempt offerings pursuant to Regulation D.

PRIVATE PLACEMENT. The sale of a STOCK or BOND issued directly to private persons, institutional investors, and so on, outside of a public offering. 1933 ACT, Section 4(2). See also DIRECT PLACEMENT.

PRIVATE SECURITIES LITIGATION REFORM ACT (PSLRA OR REFORM ACT) OF 1995. Both the 1933 and 1934 ACTS were amended by the PSLRA to curb perceived abuses of the litigation process by plaintiffs' securities lawyers. The purpose of this statute was to reduce the number of federal class action securities litigations by imposing higher pleading requirements, eliminating JOINT AND SEVERAL LIABILITY, and providing SAFE HARBORS for certain statements made by PUBLIC COMPANIES about future performance.

The PSLRA reduces the exposure of many securities defendants who lack actual knowledge of alleged federal securities violations, and it contains procedural changes designed to reduce the number of meritless actions brought by plaintiffs' attorneys. PSLRA amendments are designed to reduce the use of professional plaintiffs by increasing the role of large INSTITUTIONAL INVESTORS.

PRIVITY. A mutual relationship or interest based on joint ownership or interest in some property or relationship, such as a contract or involvement in a company. For example, a DIRECTOR or OFFICER may be in PRIVITY OF CONTRACT with a corporation as owner or FIDUCIARY. Privity between a plaintiff and defendant (directly or because both are in privity with a third party, such as a corporation) often is required to support a lawsuit.

PRIVITY OF CONTRACT. The connection or relationship that exists between two or more contracting parties.

PRO RATA. Proportionately.

PROFIT-SHARING PLAN/ARRANGEMENT. Included in the definition of a security, a profit-sharing plan is a plan that has been established and maintained by an employer in order that employees or their beneficiaries may participate in the profits of the company. PROFIT SHARING PLANS are regulated by the federal EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA). See also EMPLOYEE STOCK OWNERSHIP PLAN (ESOP).

PROFITS. Capital appreciation resulting from the development of the initial investment; or a participation in earnings resulting from the use of the investor's funds.

PROMISSORY NOTE. A security for which registration may be required, a PROMISSORY NOTE is a written promise to pay a specified sum at a specified time, or on demand, or at sight, to a person named in the note, or to his order, or bearer.

PROPORTIONATE INTEREST. The greater of the general partner's share of profits or share of the capital account, determined by referring to the partnership agreement that is in effect at the time of the transaction and the partnership's most recent financial statements.


PROSPECTIVE UNDERWRITER. As defined in Rule 100(b), it includes any person that has submitted a bid to the ISSUER or SELLING SECURITY HOLDER, and knows or is reasonably certain that the bid will be accepted; or has reached, or is reasonably certain to reach, an understanding with the issuer or selling security holder or MANAGING UNDERWRITER, that it will be become an underwriter. In either case, it does not matter whether the terms and conditions of the underwriting agreement have been reached.

PROSPECTUS. The PROSPECTUS is Part I of the two-part REGISTRATION STATEMENT and, although it is required by the 1933 ACT, it is also relied on by the issuer as the offering or selling document since it will be the only OFFERING DOCUMENT allowed to be publicly distributed before the offering commences. Section 2(10) of the 1933 act defines the term PROSPECTUS to include written communications, including television and radio broadcasts. With respect to an ELECTRONIC ROADSHOW, the issue is primarily whether the presentation is deemed to be a prospectus and thus subject to the requirements of Section 10, which include filing the prospectus with the SEC. See also SUMMARY PROSPECTUS.

PROXY. Broadly defined in Rule 14a-1(f), generally, a PROXY is a document that grants one person the authority to act for another; most commonly, it is used to delegate authority to vote shares of STOCK. However, a proxy also includes any form of consent or authorization, going so far as to include the failure to object or dissent. Normally, PROXY means the card accompanying a PROXY STATEMENT that is used to grant one person the authority to vote on behalf of another. Rule 14a-4 and Rule 14a-5 provide the basic requirements for the form of the proxy, the authority it may confer, and the information it must contain.

PROXY SOLICITATION. A proxy solicitation exists with respect to any request for a proxy or any request to execute, not execute, or revoke a proxy regardless of whether the request is included in a form.

PROXY STATEMENT. The disclosure document filed with the SEC (usually Schedule 14A) and sent to security holders whose proxies are solicited.

PUBLIC ANNOUNCEMENT. New Rule 165(f)3 adopts a definition of "public announcement" that encompasses all communications that put the market on notice of a proposed transaction. The term PUBLIC ANNOUNCEMENT means any communication by a party to the transaction, or any person authorized to act on a party's behalf, that is reasonably designed to, or has the effect of, informing the public, or security holders in general, about the transaction.

PUBLIC FLOAT. The PUBLIC FLOAT is the AGGREGATE MARKET VALUE of outstanding securities held by NONAFFILIATES. It is determined by using the price at which the security was last sold or the average of the BID-AND-ASKED PRICE on a date that is within 60 days before the close of the fiscal year. If the issuer is filing its initial REGISTRATION STATEMENT, the average is determined as of a date within 60 days of filing the registration statement. Rule 12b-2.

PUBLIC FLOAT VALUE. See definition of PUBLIC FLOAT VALUE in Rule 100(b).

PUBLIC OFFERING. The offering of SECURITIES at random and in general to anyone who will buy, whether solicited or unsolicited. Sale of STOCK to the public in contrast to a PRIVATE OFFERING or placement. Generally, public offerings are regulated by federal and state laws and regulations. See also UNDERWRITE.

PUBLIC UTILITY HOLDING COMPANY ACT OF 1935. Federal statute that grants the SEC the authority to regulate gas and electric public utility holding companies. The SEC's Division of Investment Management is responsible for administering this Act.


PUMP AND DUMP. A scheme to make prearranged "sales" of SECURITIES under Rule 504 of Regulation D. The sales are made to nominees in states that do not have REGISTRATION or PROSPECTUS delivery requirements. The securities are placed with BROKER-DEALERS who use cold-calling techniques to sell the securities at ever-increasing prices to unsuspecting investors. When the inventory of securities is depleted, the broker-dealers permit the artificial market demand to collapse. See also MICROCAP.

PURCHASE. This term is defined in Section 3(a)(13); the definition includes contracts to buy or sell.

PURCHASE LIMITATION. The broker's or dealer's 30 PERCENT AVERAGE DAILY TRADING VOLUME LIMITATION (ADTV), or 200 shares, whichever is greater.

PUT. Included in the definition of a SECURITY, a PUT is an OPTION that permits its holder to sell a certain STOCK or COMMODITY at a fixed price for a stated quantity and within a stated period. Such a right is purchased for a fee paid to the one who agrees to accept the stock or goods if they are offered. The buyer of this right to sell expects the price of the stock or commodity to fall so that he can deliver the stock or commodity (the PUT) at a profit. If the price rises, the option need not be exercised. The reverse transaction is a CALL. See PUT OPTION; PUTS AND CALLS.

PUT EQUIVALENT POSITION. Similar to a CALL EQUIVALENT POSITION, except that the value of the DERIVATIVE SECURITY increases as the UNDERLYING SECURITY'S value decreases. It includes such positions as LONG PUT OPTIONS and short call options.

PUT OPTION. An instrument under which the buyer of the option may demand payment by the writer of a fixed price (the STRIKING PRICE) upon delivery by the buyer of a specified number of shares of stock.

PUTS AND CALLS. A PUT in the language of the COMMODITY or STOCK market is a privilege of delivering or not delivering the subject matter of the sale; a CALL is a privilege of calling or not calling at all. See PUT; PUT OPTION.


QUALIFIED INSTITUTIONAL INVESTOR OR BUYER. An entity (such as an insurance company, EMPLOYEE BENEFIT PLAN, and INVESTMENT COMPANY) that owns and invests on a discretionary basis at least $100 million in SECURITIES of NONAFFILIATED ISSUERS. BANKS must satisfy this $100 million threshold test and also satisfy a $25 million NET WORTH requirement. The term QUALIFIED INSTITUTIONAL BUYER also includes certain DEALERS that are registered under the 1934 ACT. Dealers, however, need only own and invest on a discretionary basis at least $10 million in securities, or act in a RISKLESS PRINCIPAL TRANSACTION on behalf of a qualified institutional buyer.

QUALIFIED PLAN. A QUALIFIED PLAN is an EMPLOYEE BENEFIT PLAN that meets certain requirements under the Internal Revenue Code. Specifically defined in Rule 16b-3, it must meet the coverage and participation requirements of Sections 410 and 401(1)(26).

QUALIFIED PURCHASER. A term to be determined by SEC rules, which have not yet been promulgated.

Rule 1001 provides an exemption from the registration requirements of the 1933 ACT, for offerings up to $5,000,000, that satisfies Section 25102(h) of the California Corporations Code. This section exempts from California state law offerings made to qualified purchasers.

A QUALIFIED PURCHASER is similar to an ACCREDITED INVESTOR under Regulation D. Some forms of general solicitation are permitted, but the securities are restricted and may not be resold without first being registered.

QUALIFYING ELECTRONIC QUOTATION SYSTEM. An automated INTERDEALER QUOTATION SYSTEM with characteristics set forth in Section 17B(b)(2), or any other interdealer quotation system designated by the SEC.

QUALIFYING FOREIGN FUTURES CONTRACTS. Agreements for the purchase or sale of designated FOREIGN GOVERNMENT SECURITIES that are traded on a board of trade and are to be delivered at a future date. Delivery must take place outside the U.S.

QUALIFYING PURCHASES. Bona fide purchases by a BROKER or DEALER of a PENNY STOCK for its own account, each involving at least 100 shares, excluding any block purchases involving more than one percent of the outstanding shares or units. Rule 15g-6(g)(4).

QUOTATION. For purposes of Rule 15c2-7, a quotation means any bid or offer, but it also includes a broker's or dealer's indication of interest in a bid or offer.

QUOTATION MEDIUM. Includes not only an INTERDEALER QUOTATION SYSTEM but also any publication or electronic network or other device used by BROKERS or DEALERS to indicate offers to buy or sell at a stated price. Rule 15c211(e)(1).

RACKETEER INFLUENCED AND CORRUPT ORGANIZATION (RICO) ACT. Federal and state laws that are designed to investigate, control, and prosecute organized crime. These laws prohibit a person from engaging in activities that affect interstate or foreign commerce, including using income received from a pattern of racketeering to acquire an interest in an enterprise; acquiring or maintaining an interest in an enterprise through a pattern of racketeering; conducting or participating in the affairs of an enterprise through a pattern of racketeering; or conspiring to commit any of the above offenses.

RAIDER. An individual or corporation that attempts to take control of a TARGET COMPANY by buying a controlling interest in its STOCK and installing new management.

RAILROAD EQUIPMENT TRUST. A railroad equipment trust is a form of borrowing used by railroad and other transportation companies to finance equipment purchases. The bond proceeds are used to purchase rolling stock, but a trustee takes title to the stock. The issuing company does not acquire title until all the loan payments are made. See EQUIPMENT TRUST.

READY MARKET. Includes a recognized and established SECURITIES market where independent BONA FIDE offers to buy and sell are made so that prices or quotations can be determined almost instantaneously and settlement can be made in a relatively short time. Rule 15c3-1(11)(i) A ready market also includes situations where securities have been accepted as collateral for a bank loan and where the BROKER or DEALER demonstrates to its examining authority that the securities secure the loan adequately. Rule 156-1(c)(11)(ii).

REASONABLE ASSURANCES. A degree of assurance that would satisfy prudent 13(a)(7).

REASONABLE CARE DEFENSE. Such care as an ordinarily prudent person would exercise under existing conditions. Section 12(2) contains a reasonable care defense that requires only that the defendant exercise reasonable care to discover the untruth or omission; Section 11, however, requires a REASONABLE INVESTIGATION. Whether Section 12(2) also requires a reasonable investic,ation remains unresolved.

REASONABLE DILIGENCE. Such diligence, care, or attention as might be expected from a man of ordinary prudence and activity.

REASONABLE INVESTIGATION. The statute and rules offer only limited guidance as to what constitutes a reasonable investigation. Section 11(c) merely states that a reasonable investigation is based on a standard of reasonableness required of a "prudent man in the management of his own property." But see Rule 176 for some general factors that may be used to determine whether an investi uation is reasonable within Section 11(c)'s definition.

REASONABLE STEP. Includes receiving an undertaking by the managing UNDERWRITER to send the latest copies of the PRELIMINARY PROSPECTUS (as filed with the SEC) to those that request them. Rule 15c2-8.

REASONABLY CURRENT INFORMATION. Information concerning the ISSUER is reasonably current if the balance sheet is dated less than six months before the quotation is published or submitted; and statements of profit/loss and retained earnings are for the 12-month period before the date of the balance sheet.

RECEIVER IN A BANKRUPTCY PROCEEDING. Formerly, a person empowered to take charge of the assets of an insolvent person or business and to preserve them for sale and distribution to creditors. This function is now performed by a bankruptcy trustee. See TRUSTEE, under BANKRUPTCY.

RECORD OWNER. The PERSON whose name appears in a company's records as the owner of a stock.

RED HERRING PROSPECTUS. In securities law, a PRELIMINARY PROSPECTUS that has not yet been approved by the SEC or state securities commissioners. A red border on its front notifies interested parties that the securities offering is not yet approved for final distribution. It is also used as a type of advertising device to encourage securities sales. See also PRELIMINARY PROSPECTUS. (The red ink requirement was eliminated by the SEC in 1996. See SEC Release No. 33-7300.)

REFERENCE SECURITY. A SECURITY into which a security that is the subject of a distribution may be converted, exchanged, exercised, or may determine the value of the security that is subject to the distribution. Rule 100(b).

REGISTERED. A SECURITY is deemed registered when the REGISTRATION STATEMENT has become effective under Section 12 of the 1934 act. Rule 12b-6.

REGISTERED COMPANY. A company that is either a PUBLICLY HELD COMPANY or a company that satisfies the 5/5 RULE.

REGISTERED SECURI[TY. A security is deemed registered when the REGISTRATION STATEMENT has become effective under Section 12 of the 1934 ACT.



REGISTRATION STATEMENT. The document and supporting information filed by a registrant to begin the REGISTRATION of a SECURITY.

REGULATIONS. Certain SEC rules set forth in the CODE OF FEDERAL REGULATIONS contain headings that identify them as regulations. A REGULATION is a series of rules that pertains to a common subject matter. For example, Rule 235, which contains certain exemptions from the 1933 Act's registration requirements, appears and is referred to as "Regulation A."

Regulations are issued by various governmental departments to carry out the intent of the law. Agencies issue regulations to guide the activity of those regulated by the agency and of their own employees and to ensure uniform application of the law. Regulations are not the work of the legislature and do not have the effect of law in theory. In practice, however, because of the intricacies of judicial review of administrative action, regulations can have an important effect in determining the outcome of cases involving regulatory activity. United States Government regulations appear first in the FEDERAL REGISTER, published five days a week, and are subsequently arranged by subject in the CODE OF FEDERAL REGULATIONS (CFR).

REHYPOTHECATION. To pledge or transfer to another a note, goods, or other collateral that has already been pledged; for example, a BROKER may pledge SECURITIES pledged to him by a customer (e.g., under a MARGIN ACCOUNT) to finance his borrowings from a bank.

RELATED SECURITIES. New Rule 14e-5(6) defines RELATED SECURITIES as SECURITIES that are "immediately convertible into, exchangeable for, or exercisable for SUBJECT SECURITIES."

RELOAD OPTIONS. Replacement options granted upon the exercise of an earlier granted option.

REMAILER AND ANONYMIZING TOOLS. Used to disguise a user's identity (in electronic securities offerings). Use of electronic technology may make INSIDER TRADING enforcement more difficult because people can use software to hide their true identity or to alter the content of other people's e-mail or other electronic communications.

REPORTING BROKER OR DEALER. One of a group of associated BROKERS and DEALERS that maintains the greatest amount of NET CAPITAL based on its latest Form X-17A-5.

REPORTING INSTITUTION. Defined in Rule 17f-1(a)(1), the term REPORTING INSTITUTION includes BROKERS and DEALERS, NATIONAL SECURITIES EXCHANGES and their members, registered national securities associations, registered transfer agents, registered clearing agencies, members of the Federal Reserve System, and banks whose deposits are insured by the FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC).

REPORTING ISSUER. Defined in Rule 902(1), REPORTING ISSUER means an ISSUER that has a class of SECURITIES registered under Section 12(b) or Section 12(g) of the 1934 ACT or is required to file reports under Section 15(d) of the 1934 ACT; and has filed all material required to be filed under Section 13(a) or Section 15(d) for a period of at least 12 months before the offer and sales under Regulation S.


RESALE SAFE HARBOR (RULE 904). Provides that certain resales (i.e., offers and sales by persons other than the issuer, distributor, or one of their AFFILIATES) are deemed to occur outside the U.S.

RESOLUTION TRUST CORPORATION. A federal agency that succeeds the former federal savings and loan insurance corporation (fslic) as a conservator or receiver of FEDERAL SAVINGS AND LOAN ASSOCIATIONS (S&Ls) that became insolvent while insured by the FSLIC. One of the agency's functions is to dispose of assets of insolvent S&Ls. With the abolition of the FSLIC in 1989, such associations are now insured by the FDIC. See also FEDERAL DEPOSIT INSURANCE CORPORATION.

RESPONDENT. Certain prescribed persons upon whom a CEASE-AND-DESIST ORDER has been served. Section 8A(c)(2).

RESPONDENT BANK. A BANK that holds SECURITIES for BENEFICIAL OWNERS but that has deposited the securities with another bank for safekeeping.

RESPONSIVE PLEADING. A pleading that joins issue and replies to a prior pleading of an opponent, in contrast to a dilatory plea or motion that seeks to dismiss on some ground other than the merits of the action.

RESTRICTED PERIOD. A period during which a DISTRIBUTION PARTICIPANT, or a purchaser affiliated with such a participant, is prohibited from bidding, purchasing, or inducing any person from bidding or purchasing a COVERED SECURITY. Under Rule 101, Regulation M, the restricted period depends on the type of transaction involved.

As defined in Rule 902(m), the RESTRICTED PERIOD is the period that begins on the later of the date the securities were first offered to persons (other than distributors) in reliance on Regulation S; or the date of the offering's closing. The restricted period expires 40 days later.

RESTRICTED SECURITIES. Four types of securities are defined as RESTRICTED SECURITIES in Rule 144: securities acquired from the ISSUER (or its AFFILIATE) in a transaction or a chain of transactions that constitute a PRIVATE OFFERING; securities acquired from the issuer that are subject to the resale limitations of Regulation D; securities subject to the resale limitations of Regulation D that are acquired in a transaction or chain of transactions that constitute a private offering; or securities acquired from the issuer that are subject to the resale limitations of Regulation CE.

REVISED OFFERING CIRCULAR. If a Regulation E offering is not completed within nine months of the date of the offerinc, circular, the issuer must prepare and file a revised offering circular. Rule 605(d). See OFFERING CIRCULAR.

REVISED UNIFORM SECURITIES ACT OF 1985. Many states model their securities statutes after this act or the UNIFORM SECURITIES ACT OF 1956, both of which were drafted by the National Conference of Commissioners on Uniform State Laws. However, state securities laws do not have to match their federal counterparts and some states have enacted their own securities statutes.

RIGHTS. With regard to STOCKS, RIGHTS are SHORT-TERM OPTIONS to purchase SHARES from an ISSUER at a fixed price. Rights are often issued as a substitute for a dividend or as a "sweetener" in connection with the issuance of SENIOR OR DEBT SECURITIES. Rights are often publicly traded. See also RIGHTS OFFERING; STOCK RIGHTS.

RIGHTS OFFERING. The sale of new shares of COMMON STOCK by distributing STOCK PURCHASE RIGHTS to a firm's existing shareholders. This is also termed a privileged subscription. See also RIGHTS, STOCK.

RISK CAPITAL. Money or property invested in a business venture, generally in exchange for COMMON STOCK in a business, or capital in a partnership, as distinguished from loans or bonded indebtedness.

RISK CAPITAL ANALYSIS. Whether a particular transaction involves a SECURITY essentially depends on the economic substance of the transaction. The risk capital analysis identifies exactly what type of economic substance is required to determine whether or not something is a security.

RISKLESS PRINCIPAL TRANSACTION. A transaction in which a DEALER buys a SECURITY from any person and simultaneously makes an offsetting sale of that security to QUALIFIED INSTITUTIONAL BUYER, which may include another dealer acting as a riskless principal for a qualified institutional buyer. Rule 144A(a)(5).

ROADSHOW. Presentations that public companies, or companies that want to go public, present to UNDERWRITERS, INSTITUTIONAL INVESTORS, and security analysts to drum up interest and generate favorable attitudes toward a company's outstanding or to-be-issued securities.

ROLL-UP TRANSACTION. A combination or reorganization of one or more partnerships where investors in the partnerships receive new SECURITIES or receive securities in a different entity. See also definition in Item 901 (c) of Reaulation S-K.

ROUND LOT. A trading order typically of 100 shares of a STOCK or some multiple of 100. Compare with ODD LOT.

ROUTINE GOVERNMENTAL ACTION. Means only actions that are ordinarily and commonly performed by a FOREIGN OFFICIAL, such as obtaining documents to qualify a person to do business in a foreign country; processing governmental papers; providing governmental services; providing utilities; loading and unloading cargo or protecting perishable goods from deterioration; or undertaking similar actions. Section 30A(f)(3)(A)(i) - (v).

SAFE HARBOR RULE. A concept applicable in some laws and agreements under which a party performing some function in a specified way is deemed not to have violated any applicable requirement or provision.

SALE, SELL. The terms SALE and SELL are defined broadly to include every contract of sale or disposition of a SECURITY or interest in a security, for value. Thus, there must be some exchange of value. Section 3(a)(14) defines the term sale; the definition includes contracts to buy and sell.

SAME-STATE RESIDENT REQUIREMENTS. If the offerees and purchasers are individuals, the state of residence is determined by the individual's principal residence as of the date of the OFFER or SALE. If the offerees and purchasers are organizations, the organization is deemed a resident of the state where it has its principal office at the time of the offer or sale. If the organization was organized for the purpose of acquiring part of an ISSUE, the organization will not be deemed a resident of a state unless each BENEFICIAL OWNER of the organization is also a resident of that state.

SATURDAY NIGHT SPECIAL. A surprise tender offer that expires in one week and is designed to capitalize on panic and haste. Such offers may be made Friday afternoon to take advantage of the fact that markets and most offices are closed on Saturday and Sunday. Saturday night specials have now been effectively prohibited by the WILLIAMS ACT.


SAVINGS AND LOAN ASSOCIATIONS (S&Ls). Mutually owned, cooperative, savings associations that were originally established for the primary purpose of making loans to members and others, usually for the purchase of real estate or homes. S&Ls may be chartered by the state or the federal government and deposits are insured by the FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC). THE FINANCIAL INSTITUTION'S REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 changed the capital requirements, loan powers, and regulatory control of S&Ls significantly. See also BUILDING AND LOAN ASSOCIATION.

SCIENTER. The term SCIENTER, as applied to conduct necessary to give rise to an action for civil damages under the SECURITIES EXCHANGE ACT OF 1934 and Rule 10b-5, refers to a mental state embracing intent to deceive, manipulate, or defraud.

SEASONED FOREIGN GOVERNMENTS. Foreign governments that have registered debt securities with the SEC within the past five years and have not defaulted on interest or principal payments.

SEC DOCKET. An officially published SEC weekly newsletter that promulgates various administrative decisions (called releases). The SEC's Office of the Secretary publishes official documents and releases in the SEC DOCKET.

SECONDARY DISTRIBUTION. The new distribution of STOCK after it has been initially sold by the issuing corporation. It is not a new ISSUE, but rather a public sale of stock that has previously been issued and held by large corporations and investors. The sale of a large block of stock after the close of business of the EXCHANGE.

SECONDARY OFFERING. A subsequent securities offering in which outstanding SECURITIES are offered for cash for the account of a person other than the REGISTRANT. This includes securities that were acquired by standby UNDERWRITERS as part of a CALL or redemption of WARRANTS or a class of CONVERTIBLE SECURITIES. See also SECONDARY DISTRIBUTION.

SECURITIES. Securities, in their most common form, are simply shares of STOCK representing an investor's ownership interest in a CORPORATION.

The term SECURITY is defined broadly in Section 2(1) of the 1933 ACT. It encompasses a wide range of financial forms. STOCKS, BONDS, DEBENTURES, and PROMISSORY NOTES are all securities for which registration may be required. The term SECURITY also includes any PUTS, CALLS, or STOCK OPTIONS as well as such less obvious schemes as certain profit-sharing arrangements, FRACTIONAL UNDIVIDED INTERESTS in mineral rights, and INVESTMENT CONTRACTS. The list of examples contained in Section 2(1) is not exclusive. The statute contains a catch-all phrase that includes "any interest or instrument commonly known as a security." Because the statute does not provide a bright-line test that sets forth specific criteria for determining what is and what is not a security, prospective registrants must look to the legislative history, SEC releases, and numerous federal court decisions for guidance. The term SECURITY was meant to be as broad a term as possible in order to include a multitude of financial devices used in the commercial sector.

The term SECURITY is broadly defined in Section 3(a)(10) of the 1934 ACT; it is very similar to the 1933 ACT definition. In addition to STOCKS, BONDS, DEBENTURES, and OPTIONS, the term SECURITY also encompasses less wellknown devices, such as CERTIFICATES OF INTEREST IN PROFIT-SHARING AGREEMENTS; however, it specifically excludes certain commercial paper having maturities of nine months or less.

SECURITIES ACT OF 1933 (1933 ACT). Regulates the offering and sale of securities. The Act provides for the registration of SECURITIES that are to be sold to the public and for complete information as to the ISSUER and the stock offering. The 1933 ACT requires disclosures concerning offers and sales of securities. The SEC's Division of Corporate Finance renders interpretations of the 1933 ACT and regulations.

SECURITIES AND EXCHANGE COMMISSION (SEC). An independent, quasi-judicial federal agency created by Congress to administer all federal securities laws, including the SECURITIES ACT OF 1933 (1933 ACT), the SECURITIES EXCHANGE ACT OF 1934 (1934 ACT), THE TRUST INDENTURE ACT OF 1939, THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, THE INVESTMENT ADVISORS ACT OF 1940, and the INVESTMENT COMPANY ACT OF 1940. The SEC is composed of five Commissioners and a Commission Staff composed of lawyers, accountants, financial analysts, examiners, investigators, economists, and other professionals. The Commissioners are appointed for five-year terms by the President of the United States, with the advice and consent of the U.S. Senate. No more than three Commissioners may be of the same political party. The President designates one of the Commissioners Chairman.

SECURITIES ENFORCEMENT REMEDIES AND PENNY STOCK REFORM ACT OF 1990. This Act, among other things, grants federal courts the power to bar or suspend an individual from serving as a corporation's OFFICER or DIRECTOR. It also established a three-tiered penalty system that is now adjusted at least once every four years for cost-of-living increases. See also DEBT COLLECTION IMPROVEMENT ACT.

SECURITIES EXCHANGE ACT OF 1934 (1934 ACT). Regulates the trading of SECURITIES that are issued and outstanding. The Act also includes rules for periodic disclosures by registered companies, the PROXY process, and INSIDER TRADING.

SECURITIES HAIRCUTS. SEC Rule 15c3-1, the Net Capital Rule, requires BROKERDEALERS to have sufficient liquid capital to protect the assets of customers and to meet their obligations to other broker-dealers. In calculating the amount of NET CAPITAL required, broker-dealers reduce the market value of the SECURITIES they own by certain charges or haircuts as a precaution against adverse market movements or financial and operational risks.

SECURITIES INVESTOR PROTECTION ACT OF 1970. Federal law that established the SECURITIES INVESTOR PROTECTION CORPORATION (SIPC). The SIPC is designed to protect investors from BROKER-DEALER failures.

SECURITIES INVESTOR PROTECTION CORPORATION (SIPC). Established by the SECURITIES INVESTOR PROTECTION ACT OF 1970, the SIPC is designed to protect investors from BROKER-DEALER failures, such as occurred during the late 1960s and early 1970s. The SIPC can liquidate an insolvent broker-dealer and pay its customers up to $500,000. The SEC's Division of Market Regulation has oversight of the sipc.

SECURITIES LITIGATION STANDARDS ACT OF 1998 (UNIFORM STANDARDS ACT OR SLUSA). Desianed to make federal court the exclusive venue for securities fraud class action litigation involving nationally traded securities. The uniform standards act preempts all securities fraud actions under state law and authorizes federal courts to stay discovery proceedings in any private securities action in state court.

SECURITY FUTURES PRODUCT. A SECURITY FUTURE or any PUT, CALL, STRADDLE, OPTION, or privilege on any security future.

SECURITY POSITION LISTING. A list of PARTICIPANTS in a clearing agency, on whose behalf the clearing agency holds the issuer's SECURITIES, and a list of those participant's positions as of a specified date. Rule 14d-1(a)(7).

SELF-REGULATORY ORGANIZATION (SRO). Defined in Section 3(a)(26) of the 1934 ACT, the term SRO means a national securities exchange, registered securities association, or registered clearing agency. The term also includes the MUNICIPAL SECURITIES RULEMAKING BOARD (MSRB), which was established in Section 15B. The SEC's Division of Market Regulation is responsible for the registration and regulation of sros; the Office of Compliance Inspections and Examinations is responsible for examining and inspecting them.


SELLER. One who actually solicits a sale for financial gain. In Pinter v. Dahl, the Supreme Court rejected the notion that persons, such as lawyers and accountants, who remotely participate in a SECURITIES sale could be sellers and therefore subject to AIDING AND ABETTING LIABILITY.

SELLING GROUP. INVESTMENT BANKS that agree only to help sell SECURITIES; that is, they buy no part of the OFFERING.

SELLING SECURITY HOLDER. A person, other than the ISSUER, on whose behalf the distribution is made. Rule 100(b).

SENIOR SECURITY. Any BOND, DEBENTURE, NOTE, or similar obligation or instrument constituting a SECURITY and evidencing indebtedness, and any STOCK of a class having priority over any other class as to distribution of assets or dividend payments. Section 18(d)(4).

SHAREHOLDER COMMUNICATIONS ACT OF 1985. This Act extended the SEC's authority under Section 14(b) to BANKS and similar institutions with fiduciary duties.

SHAREHOLDERS. Owners of a CORPORATION, with the right to elect the board of DIRECTORS and vote on significant actions.

SHELF REGISTRATION. A procedure whereby a company is permitted to register (with the SEC) all the DEBT and EQUITY SECURITIES it plans to sell over the next several years. The company can then sell these securities whenever it chooses (e.g., in the most favorable market) without a registration delay. See SEC Rule 415.

SHORT. Implies only that one has less of a commodity than may be necessary to meet demands and obligations. It does not imply that the commodity cannot or will not be supplied on demand. In finance and COMMODITY FUTURES, a person is short when he has sold SECURITIES or commodities that he does not own at the time of the sale, though he expects to buy them back at a lower price than that at which he sold them. See also SHORT SALE.

SHORT POSITION. A SHORT POSITION is the amount of SECURITIES that a person has sold or entered into an unconditional contract, binding on both parties, to sell; has borrowed; has written a nonstandardized CALL OPTION or granted any other right pursuant to which that person's SHARES may be transferred to another person; or is obligated to deliver upon exercise of a standard call option sold on or after the date the TENDER OFFEr is first publicly announced or made known to security holders. Rule 14e-4(a)(1)(ii).

SHORT SALE. A contract for sale of shares of STOCK that the seller does not own or whose certificates are not within his control, so as to be available for delivery at the time when, under rules of the EXCHANGE, delivery must be made.

SHORT SALE AGAINST THE BOX. A SHORT SALE where the investor owns enough shares of the security involved to cover the borrowed securities, if necessary. The "box" referred to is the hypothetical safe deposit box in which the certificates are kept. A SHORT SALE AGAINST THE BOX is not as risky as a regular short sale.

SHORT-SWING PROFITS. OFFICERS, DIRECTORS, and 10-PERCENT BENEFICIAL OWNERS, as described in Section 16(a), must return to the ISSUER any profit they realize from certain security transactions that take place within a period of less than six months. These profits, known as SHORT-SWING PROFITS, are realized when an INSIDER buys and sells (or sells and buys) the issuer's EQUITY SECURITIES within the prohibited six-month period.

SIGNIFICANT ROLE TEST. Test used by the Ninth Circuit to determine whether primary liability exists. Using this test, a secondary actor must have played a significant role in drafting documents that contain material misstatements or omissions. This approach is fairly broad; indeed, under this approach, it is possible for a secondary actor to be primarily liable even if it did not make a misleading statement or omission.

SILENT TRADING. Trading carried on by an insider without revealing MATERIAL NONPUBLIC INFORMATION.

SINGLE-PRICE AUCTION SYSTEM. An ALTERNATIVE TRADING SYSTEM (ATS) that permits PARTICIPANTS to enter priced orders that are then compared to determine the single price at which the largest volume of orders can be executed. All orders are then matched and executed at that price. The Arizona Stock Exchange (AZX) is a single-price auction system.

SMALL BANK. Rule 3a4-4 defines SMALL BANK to mean a bank that had less than $100 million in assets as of December 31 in both of the prior two calendar years, and that has not been, since December 31 of the third prior calendar year, an affiliate of a bank holding company or financial holding company that, as of December 31 of both of the prior two calendar years, had total assets of $1 billion on more.

SMALL BUSINESS INVESTMENT ACT OF 1958. Federal legislation under which investment companies may be organized for supplying long-term equity capital to small businesses. The Act is implemented by the SMALL BUSINESS ADMINISTRATION.

SMALL BUSINESS ISSUER. The term SMALL BUSINESS ISSUER is defined in Rule 405. A small business issuer is either a U.S. or Canadian noninvestment company issuer with revenues of less than $25,000,000. If the issuer is a majorityowned subsidiary, the parent company may also qualify as a small business issuer. To qualify as a small business issuer, however, the issuer's aggregate market value of outstanding securities held by NONAFFILIATES (the PUBLIC FLOAT) must not equal $25,000,000 or more.

SOLELY FROM THE EFFORTS OF OTHERS. This is the last element of the HOWEY TEST, which requires that the investor expect profits to come SOLELY FROM THE EFFORTS OF OTHERS. Most courts have utilized a broad construction of this phrase; that is, if the efforts of noninvestors are significant, this element will be satisfied. If some effort was required from the investors but that effort was minimal, the "solely from the efforts of others" element will still be met.

SOLICITATION IN OPPOSITION. Generally, any solicitation that opposes a proposal supported by the REGISTRANT. Rule 14a-6(a). The registrant does not need to support the proposal expressly. However, a security holder proposal included in the PROXY material pursuant to Rule 14a-8 is not considered a solicitation in opposition even if the registrant expressly opposes the proposal.

SOLICITATION OF INTEREST MATERIALS. Written documents or scripted radio and television broadcasts used to determine the level of interest among prospective buyers. These materials are subject to the antifraud provisions of securities laws and any solicitation or acceptance of money from a potential investor is prohibited. SOLICITATION OF INTEREST MATERIALS are not considered to be PROSPECTUSES under Section 2(10).

SOLICITATION OF PROXIES. Any request for a PROXY whether or not accompanied by or included in a form of proxy; a request to execute or not to execute, or to revoke a proxy; or the furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy. Rule 14a-1(1)(1).

SPECIAL PURPOSE EXAMINATIONS. A series of limited examinations, conducted by the SEC's Office of Compliance Inspections and Examinations, in carefully chosen areas of regulatory interest to the SEC.

SPECIALIST. Performs the role of MARKET MAKER for a particular stock traded at one of the TRADING POSTS. Rule 11b-1.

SPECIFIED PROPERTY PROGRAMS. Programs where more than 75 percent of the net proceeds from the sale of SECURITIES involves specific purchases or expenditures. Rule 3a12-9(b)(3).

SPONSOR. Rule 17a-23(b)(3) defines SPONSOR as "any entity that organizes, operates, administers, or otherwise directly controls a broker-dealer trading system." If, however, the operator of the trading system is not a registered BROKER or DEALER, then the term SPONSOR means a registered broker or dealer that has a contract or some other type of agreement or arrangement with the system operator to be materially involved on a regular basis with executing transactions pertaining to the trading system, except solely for its own account or as a PARTICIPANT in the BROKER-DEALER TRADING SYSTEM.

SPOOFING. To impersonate another user (in electronic securities offerings). Use of electronic technology may make INSIDER TRADING enforcement more difficult because people can use software to hide their true identity or to alter the content of other people's e-mail or other electronic communications.

SPOT. In COMMODITY TRADING and FOREIGN EXCHANGE, immediate delivery in contrast to a future delivery.

SPREAD. In STOCK AND COMMODITY TRADING, the difference between the BID AND ASKED PRICE. In ARBITRAGE, the difference between two markets in the price or value of a currency. In FUTURES trading, the difference between delivery months in the same or different markets. In FIXED-INCOME SECURITIES, the difference between yields on securities of the same quality but different maturities or the difference between yields on securities of the same maturity but different quality.


SRO INSPECTIONS. SRO inspections evaluate how national securities exchanges are performing their regulatory roles.

STABILIZATION. STABILIZATION occurs when a person places a BID or effects a purchase in order to "peg" or maintain a security's price.

STABILIZING ACTIVITIES. Stabilizing activities involve the placing of a bid or the effecting of a purchase in order to peg, fix, or maintain a security's price. Rule 100, Regulation M.

STABILIZING BID. A stabilizing bid occurs when a person places a bid or effects a purchase in order to "peg" or maintain a security's price. The term is defined in Rule 100(b).

STANDARDIZED MARKET BASKET. A group of at least 100 STOCKS that are bought or sold in a single trade at a single trading location where physical delivery and transfer of ownership of each component stock results. Rule 12a-7(b).


STATUTE OF LIMITATIONS. A statute setting a time limit within which plaintiffs must commence their actions to enforce their statutory remedies.

STATUTORY DISQUALIFICATION. Statutory disqualification encompasses a wide range of infractions, including:

I .         persons who have been expelled or suspended from membership or from being associated with a member of an SRO, the foreign equivalent of an SRO, a foreign or international securities exchange; or a contract market pursuant to the COMMODITY EXCHANGE ACT or a foreign equivalent.

2.         sec or other regulatory agency orders denying, suspending, or revoking registration as a BROKER or DEALER or barring or suspending association with a broker or dealer; and COMMODITY FUTURES TRADING COMMISSION orders denying, suspending or revoking registration under the COMMODITY EXCHANGE ACT and similar orders by foreign regulatory authorities.

3.         findings by the SEC or other regulatory authority that a person was a cause of another person's suspension, expulsion, or order;

4.         persons associating with any person falling within one of the previously described categories if those persons had knowledge of the other person's disqualification or should have known through the exercise of reasonable care; and

5.            commission of certain willful violations of Section 15(b) of the 1934 act.

STATUTORY PROSPECTUS. A PROSPECTUS that summarizes the essential investment information in the REGISTRATION STATEMENT and that accompanies or immediately precedes the delivery of the SECURITY to the purchaser. Also known as a FINAL PROSPECTUS.

STAY OF PROCEEDING. The temporary suspension of the regular order or proceedings in a cause, by direction or order of the court.

STOCK. A SECURITY that has the following characteristics: the right to receive dividends contingent upon apportionment of profits; negotiability; ability to be pledged; voting rights conferred in proportion to the number of shares owned; and the capacity to appreciate in value.

STOCK OPTION. Included in the definition of a SECURITY, a STOCK OPTION is the right to buy a designated stock, if the holder of the option chooses, at any time within a specified period, at a determinable price, or to sell a designated stock within an agreed period at a determinable price.

STOCK PURCHASE PLAN. A STOCK PURCHASE PLAN is an employee benefit plan that meets certain requirements under the Internal Revenue Code. Specifically defined in Rule 16b, a stock purchase plan must meet the coverage and participation requirements of Section 423(b)(3) and 423(b)(5).

STOCK REDEMPTION. A partial or complete liquidation of corporate stock by the CORPORATION. It generally consists of the corporation buying back its own stock. A public corporation might redeem its stock for the purpose of GOING PRIVATE or as a defense against a HOSTILE TAKEOVER.

STOCK REPURCHASE PLAN. A program by which a CORPORATION buys back its own SHARES in the open market, usually because it believes its shares are undervalued by the market.

STOCK RIGHTS. The privilege to subscribe to new stock issues or to purchase stock. Usually, rights are contained in SECURITIES called WARRANTS and the warrants can be sold to others. A right to purchase stock issued PRO RATA to existing SHAREHOLDERS. Sometimes issued on a "when, as, and if' basis; that is, the holder can buy the stock when it is issued, on such basis or of such kind as is issued, and if it is issued.

STOCK SPLIT. The issuance of a number of new SHARES in exchange for each old share held by a STOCKHOLDER, resulting in a proportional change in the number of shares owned by each stockholder.

STOCK WARRANT. A certificate that entitles the owner to buy a specified amount of stock at a specified time for a specified price. They differ from STOCK OPTIONS only in that options are generally granted to employees and warrants are sold to the public. Warrants are typically long-period options, are freely transferable, and, if the underlying SHARES are listed on a SECURITIES EXCHANGE, are also publicly traded. See also STOCK RIGHTS.

STOP BUY ORDER. Generally used to limit loss or to protect unrealized profits on a short sale.

STOP ORDER. An order to buy SECURITIES at a price above, or to sell securities at a price below, the current market.

STOP SELL ORDER. Generally used to protect unrealized profits or limit loss on a holding.

STRADDLE. A strategy that consists of combining an equal number of PUT OPTIONS and CALL OPTIONS on the same underlying SHARE, INDEX, or COMMODITY FUTURE. A STRADDLE is a type of HEDGE. In stockbrokers' parlance, the term means the double option position of a PUT and a CALL in the same underlying STOCK, and secures to the holder the right to demand of the seller at a certain price within a certain time a certain number of SHARES of specified stock, or to require him to take, at the same price within the same time, the same shares of stock.

STREET NAME. The term STREET NAME means that, while the name of a BANK, BROKER-DEALER, clearing agency, or another nominee appears as the holder, the SECURITIES are BENEFICIALLY OWNED by another person.

SUBJECT OF AN INITIAL PUBLIC OFFERING (IPO). A SECURITY is the subject of an IPO if the security is offered under the 1933 ACT, and if the ISSUER was not subject to the reporting requirements of Section 13 or 15(d) of the 1934 ACT inunediately before filing the 1933 ACT REGISTRATION STATEMENT. Section 12(f)(1)(G)(i)(1) and (11). See also Section 12(f)(1)(B).

SUBJECT SECURITIES. Securities that are the subject of a WARRANT. Item 1000 of Regulation M-A defines subject securities as "the securities or class of securities that are sought to be acquired in a transaction or that are otherwise the subject of a transaction."

SUBSCRIPTION RIGHTS. Rights of existing STOCKHOLDERS to purchase additional STOCK, generally at a price under market and in an amount proportionate to their existing holdings. Also, the certificates evidencing such rights. See also STOCK.

SUBSTANTIAL U.S. MARKET INTEREST (SUSMI). A Sum has different meanings depending on whether the securities are equity or debt securities:

A Sum, with respect to a class of an issuer's EQUITY SECURITIES, means that either the securities exchanges and interdealer quotation systems in the U.S. constituted the single largest market for the securities (during the previous fiscal year or the period since the issuer's incorporation, whichever is shorter); or 20 percent or more of all trading in the class of equity securities took place through securities exchanges and interdealer quotation systems in the U.S., and less than 55 percent of all trading took place through the securities markets of a single foreign country (during the previous fiscal year or the period since the issuer's incorporation, whichever is shorter). Rule 901(n)(1).

A SUSMI, with respect to a class of the issuer's DEBT SECURITIES, means that the aggregate of an issuer's debt securities and nonparticipating preferred stock are held by 300 or more U.S. PERSONS of record; $1 billion or more of the aggregate of an issuer's principal amount outstanding of debt securities, the greater of liquidation preference or par value of nonparticipating preferred stock, and the principal amount or balance of ASSET-BACKED SECURITIES is held by U.S. persons of record; and 20 percent or more of the aggregate of an issuer's principal amount outstanding of debt securities, the greater of liquidation preference or par value of nonparticipating preferred stock, and the principal amount or balance of asset-backed securities is held by U.S. persons of record. Rule 901(n)(2).

SUMMARY PROSPECTUS. Section 5(b)(2) makes it unlawful for an ISSUER to distribute a SECURITY, either for sale or for delivery to the buyer after a sale unless the security is accompanied or PRECEDED BY A PROSPECTUS. This type of PROSPECTUS is known as a SUMMARY PROSPECTUS because Section 10(b) permits certain information to be summarized or omitted. Whether or not a summary prospectus may be used generally depends on whether the applicable form used to register the securities provides for its use and whether the conditions in Rule 431 are met.

SWEEP EXAMINATION. These examinations are conducted by several examination teams from the SEC's Office of Compliance Inspections and Examinations; they are conducted simultaneously to provide regulatory oversight for particular geographic areas or industry segments.

SYNDICATE COVERING TRANSACTION. A bid is placed or a purchase effected on behalf of the sole distributor or the underwriting syndicate to reduce a SHORT POSITION pertaining to or created with the OFFERING. Rule 100, Regulation M.

SYSTEM ORDERS. An order or other indication that is submitted by a system participant into the BROKER-DEALER TRADING SYSTEM to announce an interest in buying or selling a SECURITY. A SYSTEM ORDER does not include inquiries or mere indications of interest. Rule 17a-23(b)(2).

T+3 SETTLEMENT RULE. A general rule that payment of funds and delivery of SECURITIES must be completed no later than the third business day after the date of the sale or purchase contract, unless expressly agreed to by the parties. Rule 15c6-1.

TAG. In electronic filing, a TAG is a label that identifies specific information to the EDGAR system and that is designated by placing brackets on either side of the term, such as <LOGIN-PASSWORD> or <SHARES>. The end of a tag contains a "/�. Thus the beginning of the shares tag would be signified by <SHARES> and the end of the shares tag would be signified by </SHARES>. Each electronic submission must end with an "end-of-submission" tag </SUBMISSION> or it will be suspended.

TAKEOVER BID. An attempt by an outside corporation or group, usually called the aggressor or "insurgent," to wrest control away from incumbent management of the TARGET COMPANY. A takeover attempt may involve purchase of SHARES, a TENDER OFFER, a sale of assets, or a proposal that the target merge voluntarily into the aggressor. See LEVERAGED BUYOUT, GOLDEN PARACHUTE, GREENMAIL, POISON PILL, TENDER OFFER, TARGET COMPANY, WHITE KNIGHT.

TARGET COMPANY. Company attempted to be taken over in TENDER OFFER, LEVERAGED BUYOUT, or other type of takeover or acquisition attempt. See TAKEOVER BID, TENDER OFFER.

TAX-CONDITIONED PLANS. QUALIFIED PLANS, EXCESS BENEFIT PLANS, or STOCK PURCHASE PLANS. Each of these plans is specifically defined in Rule 16b-3.

TENDER OFFER. An offer or invitation by an outside bidder to buy, for cash and/or other SECURITIES, a class of SECURITIES from the security holders that own them. Tender offers are often used by outside bidders to gain control of a PUBLICLY HELD COMPANY by offering an amount at a premium above the shares' market price. CORPORATIONS may also use tender offers to reduce the amounts of its outstanding COMMON STOCK. Tender offers by outside bidders are usually attempts at HOSTILE TAKEOVERS of a TARGET COMPANY.

The WILLIAMS ACT was adopted in 1968 to regulate TENDER OFFERS and similar significant acquisitions of publicly traded equity securities and added Section 13(d), (e), (f), and (g) and Section 14(d), (e), and (f) to the 1934 ACT. Tender offers by ISSUERS are governed by Section 13(e); tender offers by third parties are regulated by Section 14(d) and 14(e) and Regulation 14D and 14E.

TESTING THE WATER. A method of determinina the level of interest amona prospective buyers through written documents or scripted radio and television broadcasts prior to filing the OFFERING STATEMENT. See also SOLICITATION OF INTEREST MATERIALS.

THIRD-MARKET TRADING. The OVER-THE-COUNTER MARKET (OTC) is primarily a market for UNLISTED SECURITIES, which the NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD) has been empowered to regulate. However, a security listed on a registered NATIONAL SECURITIES EXCHANGE may be traded through NASDAQ; this is referred to as THIRD-MARKET TRADING.


TIP. Refers to advance or inside information passed by one person (a TIPPER) to another (a TIPPEE) as a basis for a decision to buy or sell a SECURITY. Such information is presumed to be of material value and not available to the general public. The SEC prohibits trading on the basis of such information by insiders. See also INSIDER, INSIDER TRADING, TIPPEES, and TIPPER.

TIPPEES. The term INSIDER also includes TIPPEES, those persons that receive a TIP from an insider when the insider discloses material nonpublic information. See also TIPPER.

TIPPEE LIABILITY. TIPPEE LIABILITY may only arise where trading is made in violation of a fiduciary, contractual, or similar obligation that runs to the owner or possessor of the information. For example, if the TIPPER has a fiduciary duty, there could be DERIVATIVE LIABILITY for the tippee if the tippee knows, or reasonably should have known, that the TIPPER breached its fiduciary duty.

TIPPER. A person who possesses MATERIAL INSIDE INFORMATION and who makes selective disclosure of such information for trading or other personal purposes. See also INSIDER, TIP, and TIPPEES.


TOMBSTONE AD. An advertisement for a SECURITY, published during the waiting period of the REGISTRATION. See also RED HERRING.

TOTAL ASSET TEST. An INVESTMENT COMPANY may include the assets of any FAMILY OF INVESTMENT COMPANIES of which it is a part when determining if it meets the total asset test. Rule 15a-6(b)(1)(i).

TOTAL ASSETS. TOTAL ASSETS as reflected on an ISSUER's balance sheet, which has been prepared in accordance with Regulation S-X; it does not mean "net" assets. If the issuer has subsidiaries, TOTAL ASSETS means the larger of total assets on the issuer's balance sheet or the consolidated parent-subsidiary balance sheet. Rule 12g5-2.

TRADER. One who, as a member of a STOCK EXCHANGE, buys and sells on the floor of the exchange either for BROKERS or on his own account. In a commodity market, one who buys and sells COMMODITIES (e.g., grain) and COMMODITY FUTURES for others and for his own account in anticipation of a speculative profit. See also BROKER, DEALER.

TRADING POSTS. On an EXCHANGE, specific locations where stocks are traded.

TRANCHES. Classes of bonds.

TRIER OF FACT. Term includes both the jury and the court when the court is trying an issue of fact other than one relating to the admissibility of evidence. The jury is instructed to answer special interrogatories or, in a bench trial, the judge must make findings.

TRUE INSIDERS. The term TRUE INSIDERS includes such people as OFFICERS and DIRECTORS.

TRUST INDENTURE. The document that contains the terms and conditions that govern the conduct of the trustee and the rights of the beneficiaries. Commonly used when a corporation floats BONDS.

TRUST INDENTURE ACT OF 1939. This Act is intended to protect purchasers of publicly offered DEBT SECURITIES issued under TRUST INDENTURES. It requires that the TRUST INDENTURE be approved by the SEC and include certain protective clauses and exclude certain exculpatory clauses, and that trustees be independent of the issuing company. The SEC's Division of Corporate Finance examines TRUST INDENTURES for compliance with the TRUST INDENTURE ACT.

UNCERTIFICATED SECURITY. Defined in Rule 17f-1(a)(2), an UNCERTIFICATED SECURITY is one that is not represented by an instrument and whose transfer is registered upon books maintained for this purpose by or on behalf of the issuer.

UNCONTROLLED OFFERING. An offering of SECURITIES to the public on a random basis by selling STOCKHOLDERS through any number of BROKERS who are willing to assist such persons.

UNDERLYING SECURITIES. Securities that relate to or are the subject of an OPTION.

UNDERWRITE. To agree to sell BONDS, etc., to the public, or to furnish the necessary money for such SECURITIES, and to buy those that cannot be sold.

UNDERWRITER. As broadly defined in Section 2(11), an UNDERWRITER includes any person that has purchased SECURITIES from an ISSUER with a view to, or offering or selling for an issuer in connection with, the distribution of any security. Traditionally, the interpretation of the term UNDERWRITER focused on the phrase "with a view to." While banking firms clearly can be underwriters within the 1933 ACT, the rules state that an individual investor may also be deemed an underwriter even if the investor is not a professional in the securities industry. Individual investors may be underwriters if they act as a link in a series of transactions in which securities move from an issuer to the public.

In the context of an initial public offering (IPO), an UNDERWRITER is an INVESTMENT BANKER that assumes the risk of bringing a new securities issue to market.

As defined in Rule 100(b), the term UNDERWRITER includes any person that has made an agreement with an ISSUER or SELLING SECURITY HOLDER to buy securities for distribution; distribute securities for or on the issuer's or selling security holder's behalf; or manage or supervise a DISTRIBUTION of securities for or on the issuer's or selling security holder's behalf. Rule 133 also contains three sections that discuss persons who are deemed to be underwriters under Section 2(11).

As used in Rule 15c2-12, the term UNDERWRITER generally means any person that has bought MUNICIPAL SECURITIES from an ISSUER with the purpose of offering the municipal securities for sale or is participating in such an undertaking. An underwriter does not include persons whose interests are limited to a commission or allowance from an underwriter, BROKER, DEALER, or MUNICIPAL SECURITIES DEALER that does not exceed the usual and customary distributors' or sellers' commission or allowance.

UNDERWRITING AGREEMENT. Agreement between a CORPORATION and an UNDERWRITER covering the terms and conditions of a new issue of SECURITIES to be offered to the public. See UNDERWRITER.

UNDERWRITING CONTRACT. An agreement, made before CORPORATE SHARES are brought before the public, that in the event of the public not taking all the shares of the number mentioned in the agreement, the UNDERWRITER will take the shares that the public does not take; UNDERWRITING being a purchase, together with a guaranty of a sale of the BONDS. See also CORPORATE SHARES, OFFERING, PUBLIC OFFERING; PROSPECTUS; UNDERWRITER.

UNDERWRITING GROUP. A syndicate formed by an UNDERWRITER to spread the risk (that the underwriter may not sell all of the SECURITIES it bought from an ISSUER) among several investment firms.

UNDERWRITING SPREAD. The difference between the selling price to the public of a new SECURITY offering and the proceeds received by the offering firm (also termed an "underwriting discount").

UNDIGESTED OFFERING. Newly issued shares and bonds that remain undistributed because there is insufficient public demand at the offer price. See also UNDERWRITE.

UNDUE CONCENTRATION. Money market instruments, SECURITIES of a single class or series of an ISSUER, and securities underwritten that are long or short in a BROKER's or DEALER's proprietary or other accounts that have a market value of more than 10 percent of the broker's or dealer's NET CAPITAL.

UNIFORM SECURITIES ACT OF 1956. Many states model their securities statutes after this act or the REVISED UNIFORM SECURITIES ACT OF 1985, both of which were drafted by the National Conference of Commissioners on Uniform State Laws. However, state securities laws do not have to match their federal counterparts and some states have enacted their own securities statutes.

UNIT INVESTMENT TRUST. An INVESTMENT COMPANY organized under a TRUST INDENTURE, contract of custodianship or agency, or similar instrument. The most common form of organization is the TRUST INDENTURE. The holder of SHARES in this investment vehicle has an undivided interest in a fixed pool of SECURITIES held by the trustee or custodian. See also definition in INVESTMENT COMPANY ACT OF 1940.

UNITED STATES (U.S.) The United States of America, any State, the District of Columbia, and any possession or territory of the United States of America.

UNITED STATES CODE CONGRESSIONAL AND ADMINISTRATIVE NEWS (USCCAN). A general reference that provides the text only of congressional reports.

UNLICENSED BANK PASSBOOKS. Savings passbooks issued to investors by a selfdescribed "bank" are SECURITIES where the "bank" was not licensed and the investors earned dividends from investing in pooled funds.


U.S. ENTITY. An entity that has its principal place of business in the U.S. or is organized under U.S. law.

U.S. PERSON. Includes NATURAL PERSONS residing in the United States; partnerships or corporations organized or incorporated under U.S. law; ESTATES that have U.S. persons as executor or administrator; TRUSTS that have U.S. persons as trustee; agencies or branches of foreign entities located in the U.S.; nondiscretionary accounts (other than estates or trusts) held by a dealer or other fiduciary for the benefit or account of a U.S. person; discretionary accounts (other than estates or trusts) held by a dealer or other fiduciary organized, incorporated, or residing in the U.S.; and partnerships or corporations organized or incorporated under foreign law but formed by a U.S. person primarily for investing in nonregistered securities (unless owned by ACCREDITED INVESTORS as defined in Rule 501(a)).

Defined in Rule 902(o) as natural persons residing in the U.S.; partnerships or corporations organized or incorporated under U.S. law; estates that have U.S. persons as executor or administrator; trusts that have U.S. persons as trustee; agencies or branches of foreign entities located in the U.S.; nondiscretionary accounts (other than estates or trusts) held by a dealer or other fiduciary for the benefit or account of a U.S. person; discretionary accounts (other than estates or trusts) held by a dealer or other fiduciary organized, incorporated, or residing in the U.S.; and partnerships or corporations organized or incorporated under foreign law but formed by a U.S. person primarily for investing in nonregistered securities (unless owned by ACCREDITED INVESTORS as defined in Rule 501(a)).

VERTICAL COMMONALITY TEST. One of two tests developed by lower Federal courts to determine whether or not the COMMON ENTERPRISE element of the HOWEY TEST has been satisfied. The VERTICAL COMMONALITY TEST is satisfied if there is a relationship between the investor and the promoter of an investment. Some courts apply the vertical commonality test strictly; that is, the investor's fortunes are tied to the promoter I s fortunes. Other courts apply the test broadly; that is, the investor's fortunes are linked to the promoter's efforts. See also HORIZONTAL COMMONALITY TEST, INVESTMENT CONTRACT.

VOTING STOCK. In corporations, that type of stock that gives the holder the right to vote for DIRECTORS and other matters in contrast to NONVOTING STOCK that simply entities the holder to dividends, if any. COMMON STOCK is normally voting stock.

VOTING TRUST CERTIFICATES. Certificates issued by voting trustees to the beneficial holders of SHARES held by the voting trust. Such certificates may be as readily transferable as the underlying shares, carrying with them all the incidents of ownership of the underlying shares except the power to vote.

WAITING PERIOD. The second period of the REGISTRATION process, usually 20 days in length, which begins when the ISSUER files the REGISTRATION STATEMENT with the SEC.

WARRANT. Any warrant or certificate evidencing the right to subscribe or acquire another SECURITY, whether issued or unissued. Rule 12a-4(a)(1). See also STOCK WARRANT.

WEB CRD. A new Internet-based CENTRAL REGISTRATION DEPOSITORY (CRD). WEB CRD will replace the current CRD system, originally created in 1981. WEB CRID is designed to facilitate one-stop filing for BROKER-DEALERS and their associated personnel. See also CENTRAL REGISTRATION DEPOSITORY (CRD).

WHILE ON THE FLOOR (OF SUCH EXCHANGE). The trading floor, the rooms, lobbies, other exchange premises adjacent to these areas that are for use by members generally or are made available primarily for use by members generally. It also applies to the telephone and other facilities in any of these exchange areas.

WHITE KNIGHT. In a HOSTILE TAKEOVER bid, the white knight is a buyer friendly to the TARGET COMPANY's management, who will try to obtain OPTIONS on blocks of SHARES owned by the TARGET COMPANY'S shareholders to assure the success of the bid. If the bid fails, the LOCK-UP OPTION would allow the white knight to buy a large block of the target company's stock at a very favorable price or purchase the target's CROWN JEWEL ASSETS.


WILLIAMS ACT. A securities law that regulates, among other things, such corporate takeover techniques as TENDER OFFERS. Adopted in 1968 to regulate tender offers and similar significant acquisitions of publicly traded EQUITY SECURITIES, the WILLIAMS ACT added Sections 13(d), (e), (f), and (g) and 14(d), (e), and (f) to the 1934 ACT.