I . Volume Weighted Average Price (VWAP)

The Volume Weighted Average Price of a stock differs from the average price as higher volume trades have a greater impact on the average price. For example, assume there are two trades in XYZ stock: 100 shares at 20 and 300 shares at 21. The average price is $20.50, but the VWAP is $20.75, calculated as follows: 100 shares at 20 represents $2,000 in value while 300 shares at 21 represents $6,300 in value. The total value traded is $8,300. Dividing the total value traded ($8,300) by the number of shares traded (400) results in a VWAP of $20.75.

Trading firms are often evaluated on how their executions compare with the VWAP. If the average price of an order to buy is less than the VWAP, the trading desk did a good job. If the average price per share is greater than the VWAP, the firm may lose some or all of the future business of that client. The problem is that the VWAP for the day is calculated after the close but the trader executes during the day, not knowing for certain what the VWAP will be.

FINRA rules require that members, once in receipt of a VWAP order, refrain from engaging in any activity that compromises the customer's interest in favor of the member's proprietary trading interest. Members must also have information barriers in place to prevent the internal disclosure of the VWAP order received. If a representative was to become aware of a large, potentially market-moving VWAP order, the representative cannot solicit orders in that stock. Only unsolicited orders are acceptable.

II. Pegged Orders

A pegged order is a limit order that is automatically adjusted to follow the inside market. The price of a pegged buy order would always equal the highest bid, while the price of a pegged sell order would always equal the lowest offer.

By entering a pegged order, market participants provide liquidity at the inside price set by other firms.

III. Short Interest Reporting

Short positions in both customer and proprietary accounts must be reported to FINRA twice a month as of the 15th and the last business day of that month. Reports are made on those positions that have settled as of the reporting dates.

Introducing firms as well as executing brokers in a prime brokerage relationship are exempt from reporting. Rather, it is the firm carrying the position that reports.

IV. SEC Rule 15c3-1

The minimum net capital requirement for firms acting as prime brokers is $1.5 million while that for executing brokers, in a prime brokerage relationship, is $1 million.

Firms engaged in block positioning also have a requirement of $1 million.

V. SEC Rule 3a4-1

In private placements, an issuer may use its employee to help sell the issue as long as the employee is not subject to a statutory disqualification, is not compensated based on sales, and is not an associated person of a broker-dealer.

VI. Types of Issuers

Most corporate issuers are C corporations, which means income is taxed at both the corporate level and the shareholder level. Shareholders are taxed on dividends received that are paid out of income already taxed. S corporations, on the other hand, are taxed like partnerships: income from the corporation flows through to the shareholders who are responsible for any taxes due. Unlike a C corporation, an S corporation can have only one class of stock and is limited to 100 shareholders.

A Limited Liability Corporation (LLC) is taxed like a partnership, but unlike a partnership, the owners are not personally liable for the company's debts.

VII. MSRB Rule G-37 Revisited

Once an election is over, an incumbent may well solicit contributions in order to extinguish campaign debt. If the incumbent loses the election and is out of office, that person is no longer an issuer official. Therefore, G-37 does not apply. An MFP, in this case, may contribute an unlimited amount.

VIII. Section 4(6) of the Act of 1933

Securities purchased from an issuer under Section 4(6) are exempt from registration under the Act of 1933. This exemption is available for offerings that do not exceed $5 million, are made only to accredited investors, do not involve any advertising or solicitation, and for which a Form D has been filed. This exemption is different from Regulation D where a limited number of non-accredited investors may participate.

IX. Private Investment in Public Equity (PIPES)

In a PIPE transaction, investors purchase securities directly from a publicly traded issuer in a private placement. The securities purchased are restricted and cannot be immediately resold. After the closing of the transaction, the issuer prepares and files a registration statement with the SEC for the securities issued in the PIPE. Once the registration is effective, public resale of the PIPE securities may begin.

X. Electronic Road Shows

Road shows have been used for years to acquaint investors and broker-dealers with information on a prospective public offering. An electronic road show is one transmitted by electronic means such as over the Internet. If it is transmitted live, it is considered a form of oral communication. Recorded road shows are considered to be a written communication.

Road show presentations that are recorded do not have to be filed with the SEC except in the case of road shows for an IPO of equity securities. An issuer could avoid the filing if it makes at least one version of a "bona fide electronic road show" easily available electronically to any potential investor at the same time it first uses a recorded electronic road show.

XI. Gun Jumping

Jumping the gun relates to soliciting orders or conditioning the market for an upcoming offering before the effective date of the offering. Before the securities offering reforms were approved by the SEC in late 2005, the only acceptable communication before the effective date for an IPO was a red herring. For follow-on offerings, an issuer could take advantage of SEC rules 137-139.

As a result of the reforms, there are now two additional safe harbors to protect issuers from a gun jumping violation. Rule 168 allows a reporting issuer to publish or disseminate regularly released factual business and forward-looking information at any time. Rule 169 allows a non-reporting issuer to publish or disseminate regularly released factual business information that is meant for use outside of the scope of a potential investor.

Factual business information includes information about business or financial affairs about the issuer, information regarding the issuer's products, dividend notices, and any information included in reports filed with the SEC.

Forward looking information includes earnings forecasts, future business plans, and statements about future business performance.

XII. Soft Dollars

Soft dollars is a term used to describe payments made by institutional investors such as mutual funds to broker-dealers in return for services such as research. The difference between soft dollars and hard dollars is that instead of paying the broker-dealer with cash (hard dollars), the investor will pay in-kind with brokerage business (soft dollars).

Under SEC guidelines, soft dollars may be used to pay for research reports, software that provides analyses of securities portfolios, services for the benefit of clients, and seminar registration fees. The SEC does not permit the use of soft dollars for computer hardware, telecommunication lines, office equipment, reimbursement of travel expenses to attend seminars, and other operational overhead such as rent.

XIII. Supervision of Recommendations After a Representative Changes Firms

When a representative changes firms, a major interest of the new firm is retaining that new representative's book of business as much as possible. A number of the customers serviced may own mutual funds and variable products that the prior firm was authorized to sell pursuant to a dealer agreement. These agreements generally require the sponsor to pay the prior firm various servicing fees (trailer commissions) which benefit the representative.

However, there may be impediments to the representative's ability to continue selling or servicing these investments as well as receiving trailer commissions. For example, the product might be held directly with the issuer or it might be proprietary to the prior firm and not transferable. Even in the case of nonproprietary products, the new firm might not have a dealer agreement with the sponsor. In other cases, the new firm may have such an agreement, but the new firm may not be able to receive trailer commissions because these contractually belong to the prior firm.

In these situations, the transferring representative may be tempted to recommend to customers that they replace their existing mutual funds and variable products with other investments without considering the customer's best interests and the suitability of those recommendations for the customer. A recommendation to liquidate an existing investment must be suitable. In making such a recommendation, a firm may consider the fact that the firm lacks a dealer agreement with the product sponsor and, therefore, the representative cannot provide the customer with the service the customer desires with respect to the product.

To deal with these situations, a firm must have written supervisory procedures in place which include the following:

• When conducting due diligence concerning a prospective new representative, the new firm should seek to learn the nature of the representative's business and the extent to which the representative offers investment products for which the new firm would need a dealer agreement in order for the representative to sell and provide service. The new firm should determine whether it would seek such agreements.
• If the new firm is unable or unwilling to service a customer's mutual fund or variable product, the new firm or the representative should advise the customer of this fact as well as the options the customer may have to continue to hold the investment at the prior firm before recommending that the customer liquidate or surrender the investment.
• For a reasonable time period following the hiring of a new representative, the new firm should review replacements recommended by the new representative with a view to identify any recommendations to liquidate that may be inconsistent with the customer's investment needs. Special supervisory consideration should be given to those transactions involving the replacement of a customer's variable annuity with a "bonus" variable annuity offered by the new firm.

XIV. Forward Looking Statements

Any statements that are not based on historical fact are forward-looking statements. A forward looking statement predicts, projects, or uses future events as expectations or possibilities. Although such statements are based on management's estimates and expectations and available competitive, financial, and economic data, they are inherently uncertain. A variety of factors could cause the results to differ significantly from what is contained in any forward looking statement. Put another way, these statements are subject to numerous assumptions, risks, and uncertainties that change over time.

The SEC, under Section 21E of the Act of 1934, allows issuers to use these statements in their annual reports to shareholders as well as in prospectuses and proxy material.

To do so, issuers must identify these statements by the use of certain prescribed words such as "estimate," "anticipate," "predict," "expect," and "potential."

XV. Hart Scott Rodino Act of 1976

This Act is an amendment to the antitrust laws and requires both parties to an intended acquisition or merger to file information on the proposed transaction with the FTC and the Department of Justice. Upon filing, a 30-day waiting period (15 days for all-cash transactions) ensues during which time the FTC will make a determination as to whether the proposed transaction violates antitrust laws.

It is unlawful to close the transaction during the waiting period. Although the waiting period is 30 days, the FTC may request additional time to review the information presented. On the other hand, the filing parties may request that the waiting period be terminated early if there are no obvious impediments to the transaction.

The filing requirement is triggered only if the value of the transaction exceeds certain dollar thresholds, which are adjusted upward over time. As of 2008, a filing is required if the value of the transaction exceeds $63.1 million.

XVI. Nasdaq Market Velocity and Forces

Market Velocity and Forces is a product offered by Nasdaq that measures pre-trade order activity in the Single Book trading system to indicate the intensity and direction of trading interest before that activity results in trades and price movement.

XVII. Electronic Storage Media

In lieu of maintaining paper records, firms may use digital storage media such as CD-ROMs. Such media must have the capability to:

• maintain records in non-rewriteable and non-erasable format;
• maintain records in serial form with date information that documents the required retention period for the information stored;
• confirm the accuracy of the media recording process; and
• download records maintained to any medium accepted by the SEC or FINRA.

Furthermore, firms must maintain file duplicates which must be kept separate from original records. The records, original and duplicates, must be organized and indexed.

XVIII. Portfolio Margin Revisited

Securities that are subject to the portfolio margin rules include marginable equity securities; listed options including LEAPS, warrants, derivatives, futures, exchange traded funds; and so forth. Debt securities are subject to conventional margin rules.

Furthermore, margin maintenance calls must be met within three business days versus five business days for conventional margin accounts.

XIX. Intermarket Trading System (ITS)

ITS allows exchange specialists to send an order for execution on another exchange for those securities that are listed for trading on more than one exchange. It also allows CQS market makers to trade directly with exchange specialists. It is a computerized link between exchange markets and third market makers as well as between different exchange markets.

The Computer Assisted Execution System (CAES) facilitates trades between CQS market makers.