Glossary of Industry Terms & Supporting Information

ICON Securities Lending (R)

Rate of return: In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage rather than a fraction.

Real Estate Investment Trust (REIT): A Real Estate Investment Trust or REIT is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income, which may be taxable, into the hands of the investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms.

REITs can be classified as equity, mortgage or hybrid.

The key statistics to look at in a REIT are its net asset value (NAV), adjusted funds from operations (AFFO) and cash available for distribution (CAD). REITs face challenges from both a slowing economy and the global financial crisis, depressing share values by 40 to 70 percent in some cases.
Record date: The ex-dividend date (abbrev xd or ex-div) is the first date when buying a stock does not entitle the new buyer to the declared dividend, as the transfer of stock ownership cannot be completed before the company initiates dividend payment. Before this date, the stock trades cum-dividend.

With every dividend declaration, the company also announces an associated record date and a payment date. The record date is when the company initiates the payments to shareholders of record; the payment date is when the company expects the payment process to complete. Sometimes the difference between the two dates can be substantial.

Different countries and their stock depositories have different processing cycles for transfer of stock ownership. In the US, the standard process takes three business days (T+3) unless negotiated otherwise between the buyer and the seller. Thus, the ex-dividend date is set at two business days prior to the record date.

As an example, consider the following announcement from Du Pont on July 29, 2009: “DuPont declared a third quarter common stock dividend of 41 cents per share, payable September 11, to stockholders of record August 14. …”. The ex-div date for this dividend was set to August 12.

Usually the stock’s price will drop by the amount of the dividend on the ex-dividend day (ceteris paribus) since that much wealth has already been transferred by the company to its owners. The quote is always adjusted by the amount of the dividend. For example, if the dividend is 10 cents per share and the stock closes at the same level as the closing price the day before, it would be quoted as having risen by 10 cents for the day.
Recourse loan: Recourse debt is a debt that is not backed by collateral from the borrower. Also known as a recourse loan, this type of debt allows the lender to collect from the debtor and the debtor’s assets in the case of default as opposed to foreclosing on a particular property or asset as with a home loan or auto loan. Nonpayment of recourse debt allows the lender the right to collect assets or pursue legal action. While mortgages in the US are typically nonrecourse debt, a foreclosure or bankruptcy can trigger the loan to become recourse debt at the request of the lending institution.

Classification

Recourse debt can either be full or limited recourse debt. A full recourse debt gives the granter the right to take any and all assets of the debtor, up to the full amount of the debts. The lender will sell the seized assets, including the asset acquired through the original loan. Limited, or partial recourse debt, relies on the original loan contract, where named assets are the extent to which a lender may take action.

In a limited partnership, a loan for which the limited partners are personally liable.

Regulation S: Regulation S is a “safe harbor” that defines when an offering of securities will be deemed to come to rest abroad and therefore not be subject to the registration obligations imposed under Section 5 of the 1933 Act. The regulation includes two safe harbor provisions: an issuer safe harbour and a resale safe harbor. In each case, the regulation demands that offers and sales of the securities be made outside the United States and that no offering participant (which includes the issuer, the banks assisting with the offer and their respective affiliates) engage in “directed selling efforts”. In the case of issuers for whose securities there is substantial U.S. market interest, the regulation also requires that no offers and sales be made to U.S. persons (including U.S. persons physically located outside the United States).

Section 5 of the 1933 Act is meant primarily as protection for United States investors. As such, the U.S. Securities and Exchange Commission had only previously, weakly enforced registration of foreign transactions, and only had limited constitutional authority to do so.
Regulation T: Federal Reserve Board Regulation T (also referred to as Reg T) is 12 CFR §220 – Code of Federal Regulations, Title 12, Chapter II, Subchapter A, Part 220 (Credit by Brokers and Dealers).

Regulation T governs the extension of credit by securities brokers and dealers in the United States.  Its best-known function is the control of margin requirements for stocks bought on margin. The initial margin requirement for such margin stock purchases is currently 50%,^[2] and has been since 1974, but Regulation T gives the Federal Reserve the authority to change that percentage. Raising the margin requirement would reduce risk in the financial system by reducing the potential leverage and total buying power of investors. Lowering the margin requirement, conversely, would allow an increase in risk by expanding the buying power and leverage available to investors. Since 1974 the Federal Reserve has not deemed it necessary to adjust the margin requirement, despite numerous financial crises.
Regulation U: The federal regulation of bank loans collateralized by securities, including broker/dealer hypothecation of stock.

REIT: See Real Estate Investment Trust.

Regulation AB: Regulation AB was introduced in 2004 by the Securities and Exchanges Commission to regulate registration, offering and reporting of public deals of Asset Backed Securities

Background

Regulation AB is a comprehensive set of new rules and amendments that address the registration, disclosure and reporting requirements for asset-backed securities (ABS) under the Securities Act of 1933 and the Securities Exchange Act of 1934. Because the ABS market is a relatively new and fast growing component of the U.S. capital markets, regulators and industry professionals alike sought to bring about transparency and clarity regarding registration, disclosure, and reporting requirements for asset backed securities.

SEC definition of Asset-backed securities for Regulation AB

The SEC’s definition for asset-backed securities is the same basic definition that has existed since 1992, with the addition of a modification with respect to leases. The SEC is also requiring that all registered offerings of asset-backed securities be registered on either Form S-1 or Form S-3. The definition thus consists of the following:

Regulation AB’s definition of an asset-backed security is “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cashed proceeds from the disposition of the physical property underlying such leases.”

The SEC adopted a principles based definition for ABS which allows broad flexibility as to what asset types fall under the regulatory mandates for Regulation AB. To date, the most common affected asset types will typically be residential mortgages, home equity, commercial mortgages, credit card receivables, automobile loans, automobile and equipment leases, along with student loans. This is without question an extraordinary far-reaching scope and will certainly be felt for years to come in regards to Regulation AB compliance.

Regulation AB Item’s 1100 to 1123

The main focus of Regulation AB consists of twenty-four rules, commonly known as “items”, which are numbered items 1100 through 1123. These twenty-four items comprehensively address the four primary regulatory areas affecting asset-backed securities: Securities Act Registration, disclosure, communications during the offering process, and ongoing reporting under the exchange act. In rolling out Regulation AB, the Securities and Exchange Commission (SEC) sought to update and create a higher degree of clarity regarding securities act registration requirements for Asset Backed Securities along with expanding the various types of securities that may be offered. Additionally, a consolidation of existing conditions regarding exchange act reporting and streamlining existing positions for written communication in a registered ABS offering was also sought. Lastly, the remediation of no-action, disjointed servicing standards, such as the USAP, was to be augmented, and ultimately replaced, by a more comprehensive, stringent, and thorough servicing standard.

Item 1100 – In General. This introductory item includes “general provisions” that apply to the rest of Regulation AB. It provides information on how to present historical static pool data and how to present relevant financial information about third parties.

Item 1101 – Definitions. This item establishes definitions for the terms used throughout Regulation AB. Most importantly provided is the definition of the “Asset-Backed Securities” themselves which by its nature defines the scope of Regulation AB. Terms discussed and defined within the transaction and function are Servicers, Sponsors, Originators, Credit Enhancement, delinquency, Depositor, and other terms that can be considered statistical information. The definition of asset-backed securities is the following: “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cashed proceeds from the disposition of the physical property underlying such leases.”

Item 1102 – Forepart of registration statement and outside cover page of the prospectus. This item provides parameters for the representations that can and should be represented on the outside front cover page of the prospectus. Items discussed include the Sponsor, Depositor, Asset Type, Aggregate Principal Amount, Interest Rate or Rate of Return, and Asset distribution frequency.

Item 1103 – Transaction Summary & Risk Factors. This item discusses the means for providing an understanding of the relationships among the parties and the assets of the transaction through diagrams and illustrations.

Item 1104 – Sponsors. This item lists the appropriate disclosure information for the sponsor.

Item 1105 – Static Pool Information. This item provides discussion for the guidelines for sponsor representations on delinquencies, cumulative losses, and prepayments for prior sponsor transactions of the same asset type. Distinctions are made based on the sponsor’s prior years of experience.

Item 1106 – Depositors. When the Depositor differs from the Sponsor, this item requires disclosure items similar to Item 1104 above for the Depositor.

Item 1107 – Issuing Entities. This item provides for disclosure about the issuing entity such as entity legal form, State of organization, and governing documents. Further, a description of the governing documents including permissible activities and restrictions should be summarized. Additional information presenting discretionary activities, other assets, management, bankruptcy, and capitalization should be presented.

Item 1108 – Servicers. This item provides for disclosure and identification of the servicers involved including a description of roles, responsibilities, and oversight.

Item 1109 – Trustees. This item provides for disclosure and identification of the trustee along with their prior experience in asset-backed securities transactions.

Item 1110 – Originators. This item provides for originator identity disclosure for those providing origination of 10% or more of the pool assets and further detail disclosure requirements for originators of 20% or more of the pool’s assets.

Item 1111 – Pool Assets. This item provides for a description of the specific assets included in a transaction such as loan size, interest rate, amortization period, and loan-to-value ratio. Statistical information is to be presented in appropriate topical information and groups in order to aid in the understanding of the Pool Assets.

The required disclosures cover such items changes in an originator’s underwriting criteria, credit-granting or underwriting and “ranges of standardized credit scores.”

Item 1112 – Significant obligors of Pool Assets. Presumably in the interest of risk assessment, this item provides for disclosure of items determined to be relevant to an obligor if they represent 10% or more of the asset pool. Additional disclosure including financial statement inclusion are required for obligors representing 20% or more of the asset pool.

Item 1113 – Structure of the Transaction. This item requires the description of the financial aspects and terms of the transaction such as interest and principal formulas and calculations, distributions, credit enhancement mechanisms, cash-flows, triggers or events, allocations, distributions, fees, expenses, voting rights, and other factors.

Item 1114 – Credit Enhancement and other support, except for certain derivatives instruments. This item requires disclosure about internal and external credit enhancement factors such that each is designed to affect or ensure timely payment.

Item 1115 – Certain Derivatives instruments. This item requires disclosure about derivatives, such as interest rate swaps and currency swaps, whose primary purpose is not to provide credit enhancement. These items are generally in place to alter payment characteristics.

Item 1116 – Tax Matters. This item requires disclosure about the federal income tax law treatment of an asset-backed security including any areas of expected differences among investor classes and any substantive information from the counsel’s tax opinion.

Item 1117 – Legal Proceedings. This item requires disclosure of material legal proceedings pending against the sponsor, depositor, trustee, issuing entity, services, or originator.

Item 1118 – Reports and Additional Information. This item requires a description of the reporting requirements to investors. The investor requirements are noted in Item 1118, by reference to the instructions to forms 10-K, 10-D, and 8-K. These forms, in turn, will reference back to the respective Items of Regulations AB.

Item 1119 – Affiliations and certain relationships and related transactions. This item requires disclosure about relationships among parties to a transaction under Regulation AB. Parties noted in reference to disclosure are the servicer, trustee, Originator, Significant Obligor, an enhancement provider. Additionally, Item 1119 requires disclosure of non-arm’s length transactions among transaction parties during the past two years.

Item 1120 – Ratings. This item requires disclosure of the credit ratings by each agency with the minimum rating that must be assigned for the securitization transaction along with on-going monitoring arrangements.

Item 1121 – Distribution and Pool Performance information. This item provides for the information that should be reported on an on-going basis in distribution reports with statistical information in tabular or graphical format included if aiding understanding. Most notably, item 1121 requires disclosure of material breaches of pool asset representations or warranties or transaction covenants. Provisions are also provided for disclosure of material changes in the solicitation, credit-granting, underwriting, origination, acquisition or pool selection criteria or procedures, as applicable, used to originate, acquire or select the new pool assets.

Item 1122 – Compliance with applicable servicing criteria. This item requires servicers to assert and assess their compliance within the servicing function and a report on the assessment of compliance setting forth the appropriate criteria. Further, the servicer must obtain an attestation report from a PCAOB registered accounting firm on the servicer’s compliance. Item 1122 thus requires two deliverables from servicers: (1) Assessment of Compliance and (2) Accountant’s Attestation Report.

For deals with multiple servicers, each servicer whose activities represent more than 5% of the pool assets must supply the Auditor’s attestation report. This report must include disclosure of any non-compliance with the servicing criteria.

Item 1123 – Sevicer compliance statement. This item requires a statement of compliance be issued by an officer of each servicer stating that a review of the servicer’s activities were conducted under the supervision of the signing officer and that the servicer has fulfilled its obligations.

Repurchase agreement: A Repurchase agreement (also known as a repo or Sale and Repurchase Agreement) allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to sell immediately a security to a lender and also agrees to buy the same security from the lender at a fixed price at some later date. A repo is equivalent to a cash transaction combined with a forward contract.

The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is the interest on the loan while the settlement date of the forward contract is the maturity date of the loan.

Structure and terminology

A repo is economically similar to a secured loan, with the buyer receiving securities as collateral to protect against default. There is little that prevents any security from being employed in a repo; so, Treasury or Government bills, corporate and Treasury/Government bonds, and stocks may all be used as securities involved in a repo. However, the legal title to the securities clearly passes from the seller to the buyer, or “investor”. Coupons (installment payments that are payable to the owner of the securities) which are paid while the repo buyer owns the securities are, in fact, usually passed directly onto the repo seller. This might seem counterintuitive, as the ownership of the collateral technically rests with the buyer during the repo agreement. It is possible to instead pass on the coupon by altering the cash paid at the end of the agreement, though this is more typical of Sell/Buy Backs.

Although the underlying nature of the transaction is that of a loan, the terminology differs from that used when talking of loans because the seller does actually repurchase the legal ownership of the securities from the buyer at the end of the agreement. So, although the actual effect of the whole transaction is identical to a cash loan, in using the “repurchase” terminology, the emphasis is placed upon the current legal ownership of the collateral securities by the respective parties.

The following table summarizes the terminology:

Types of repo and related products

There are three types of repo maturities: overnight, term, and open repo. Overnight refers to a one-day maturity transaction. Term refers to a repo with a specified end date. Open simply has no end date. Although repos are typically short-term, it is not unusual to see repos with a maturity as long as two years.

Repo transactions occur in three forms: specified delivery, tri-party, and held in custody. The third form is quite rare in developing markets primarily due to risks. The first form requires the delivery of a prespecified bond at the onset, and at maturity of the contractual period. Tri-party essentially is a basket form of transaction, and allows for a wider range of instruments in the basket or pool. Tri-party utilizes a tri-party clearing agent or bank and is a more efficient form of repo transaction.

Due bill/hold in-custody repo

In a due bill repo, the collateral pledged by the (cash) borrower is not actually delivered to the cash lender. Rather, it is placed in an internal account (“held in custody”) by the borrower, for the lender, throughout the duration of the trade. This has become less common as the repo market has grown, particularly owing to the creation of centralized counterparties. Due to the high risk to the cash lender, these are generally only transacted with large, financially stable institutions.

Tri-party repo

The distinguishing feature of a tri-party repo is that a custodian bank or international clearing organization acts as an intermediary between the two parties to the repo. The tri-party agent is responsible for the administration of the transaction including collateral allocation, marking to market, and substitution of collateral. Tri-party agents administer US$ trillions of collateral. They therefore have the scale to subscribe to multiple data feeds to maximize the universe of coverage. They are also able to offer sophisticated collateral eligibility filters with which to create eligibility profiles which can systemically generate collateral pools which reflect a Buyer’s risk appetite. Collateral eligibility criteria could include asset type, issuer, currency, domicile, credit rating, maturity, index, issue size, average daily traded volume, etc. Both the lender and borrower of cash enter into these transactions to avoid the administrative burden of bi-lateral repos. In addition, because the collateral is being held by an agent, counterparty risk is reduced. A tri-party repo may be seen as the outgrowth of the due bill repo, in which the collateral is held by a neutral third party. A Nigerian Open Buy Back is a similar transaction, with the Nigerian Central Bank being the custodian.

Whole loan repo

A whole loan repo is a form of repo where the transaction is collateralized by a loan or other form of obligation (e.g. mortgage receivables) rather than a security.

Equity repo

The underlying security for most repo transactions is in the form of government or corporate bonds. Equity repos are simply repos on equity securities such as common (or ordinary) shares. Some complications can arise because of greater complexity in the tax rules for dividends as opposed to coupons.

Sell/buy backs and buy/sell backs

A sell/buy back is the spot sale and a forward repurchase of a security. It is two distinct outright cash market trades, one for forward settlement. The forward price is set relative to the spot price to yield a market rate of return. The basic motivation of sell/buy backs is generally the same as for a classic repo, i.e. attempting to benefit from the lower financing rates generally available for collateralized as opposed to non-secured borrowing. The economics of the transaction are also similar with the interest on the cash borrowed through the sell/buy back being implicit in the difference between the sale price and the purchase price.

There are a number of differences between the two structures. A repo is technically a single transaction while a sell/buy back is a pair of transactions (a sell and a buy). A sell/buy back does not require any special legal documentation while a repo generally requires a master agreement to be in place between the buyer and seller (typically the SIFMA/ICMA commissioned Global Master Repo Agreement (GMRA)). Typically, sell/buy-backs do not allow for marking to market and margin call, which can result in larger counterparty risks than those of securities lending or repo agreements. Any coupon payment on the underlying security during the life of the sell/buy back will generally be passed back to the seller of the security by adjusting the cash paid at the termination of the sell/buy back. In a repo, the coupon will be passed on immediately to the seller of the security.

A buy/sell back is the equivalent of a “reverse repo”.

Securities lending

The general motivation for repos is the borrowing or lending of cash. In securities lending, the purpose is to temporarily obtain the security for other purposes, such as covering short positions or for use in complex financial structures. Securities are generally lent out for a fee. Securities lending trades are governed by different types of legal agreements than repos.

Reverse Repo

A reverse repo is simply the same repurchase agreement from the buyer’s viewpoint, not the seller’s. Hence, the seller executing the transaction would describe it as a “repo”, while the buyer in the same transaction would describe it a “reverse repo”. So “repo” and “reverse repo” are exactly the same kind of transaction, just described from opposite viewpoints.

Uses

For the buyer, a repo is an opportunity to invest cash for a customized period of time (other investments typically limit tenures). It is short-term and safer as a secured investment since the investor receives collateral. Market liquidity for repos is good, and rates are competitive for investors. Money Funds are large buyers of Repurchase Agreements.

For traders in trading firms, repos are used to finance long positions, obtain access to cheaper funding costs of other speculative investments, and cover short positions in securities.

In addition to using repo as a funding vehicle, repo traders “make markets“. These traders have been traditionally known as “matched-book repo traders”. The concept of a matched-book trade follows closely to that of a broker who takes both sides of an active trade, essentially having no market risk, only credit risk. Elementary matched-book traders engage in both the repo and a reverse repo within a short period of time, capturing the profits from the bid/ask spread between the reverse repo and repo rates. Presently, matched-book repo traders employ other profit strategies, such as non-matched maturities, collateral swaps, and liquidity management.

United States Federal Reserve use of repos

Repurchase agreements when transacted by the Federal Open Market Committee of the Federal Reserve in open market operations adds reserves to the banking system and then after a specified period of time withdraws them; reverse repos initially drain reserves and later add them back.

Under a repurchase agreement (“RP” or “repo”), the Federal Reserve (Fed) buys U.S. Treasury securities, U.S. agency securities, or mortgage-backed securities from a primary dealer who agrees to buy them back, typically within one to seven days; a reverse repo is the opposite. Thus the Fed describes these transactions from the counterparty’s viewpoint rather than from their own viewpoint.

If the Federal Reserve is one of the transacting parties, the RP is called a “system repo”, but if they are trading on behalf of a customer (e.g. a foreign central bank) it is called a “customer repo”. Until 2003 the Fed did not use the term “reverse repo”—which it believed implied that it was borrowing money (counter to its charter)—but used the term “matched sale” instead.

Risks

While classic repos are generally credit-risk mitigated instruments, there are residual credit risks. Though it is essentially a collateralized transaction, the seller may fail to repurchase the securities sold at the maturity date. In other words, the repo seller defaults on his obligation. Consequently, the buyer may keep the security, and liquidate the security in order to recover the cash lent. The security, however, may have lost value since the outset of the transaction as the security is subject to market movements. To mitigate this market risk, repos often are over collateralized as well as being subject to daily mark-to-market margining. Credit risk associated with repo is subject to many factors: term of repo, liquidity of security, the strength of the counterparties involved, etc.

Repo transactions came into focus within the financial press due to the technicalities of settlements following the collapse of Refco. Occasionally, a party involved in a repo transaction may not have a specific bond at the end of the repo contract. This may cause a string of failures from one party to the next, for as long as different parties have transacted for the same underlying instrument. The focus of the media attention centers on attempts to mitigate these failures.

Market size

The US Federal Reserve and the European Repo Council (a body of the International Capital Market Association) both try to estimate the size of their respective repo markets. At the end of 2004, the U.S. repo market reached US$5 trillion.

The European repo market has experienced consistent growth over the past five years, from €1.9 billion in 2001 to €6.4 trillion by the end of 2006, and is expected to continue significant growth due to Basel II, according to a 2007 Celent report entitled “The European Repo Market”.

Other countries including India, Japan, Mexico, Hungary, Russia, China, and Taiwan, have their own repo markets, though activity varies by country, and no global survey or report has been compiled.

Restricted Stock: Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.

Another type of restricted stock is a form of compensation granted by a company. Typically, the conditions that allow the shares to be transferred are a period of time, when they vest. However, those restrictions can also be some sort of performance condition, such as the company reaching earnings per share goals or financial targets. Restricted stock is becoming a more prominent form of employee compensation, particularly to executives. It has come to prominence as stock options have fallen out of favor after the perceived excesses of the stock market in the early 21st century.

Valuation of restricted stock

Data from real-world transactions play a key role in valuing illiquid assets, such as restricted stock and warrants. Just as real estate agents use the selling price of other homes in a neighborhood to help determine the asking price of a home that is just going on the market, so too similar sales of illiquid assets are used as a benchmark for valuation of restricted securities.

Several other factors influence the valuation of restricted securities, including:

• The nature and length of the restriction;
• The transferability of the restricted securities;
• The underlying financial strength of the company;
• Certain rights attached to the restricted securities, such as registration rights and liquidated damages;
• The ability to borrow shares of the company for hedging;
• The availability of publicly traded option contracts on the issuer’s stock;

Because they are illiquid, such assets typically sell at a discount from the market price of their unrestricted counterparts. Relevant real-world transactions of restricted stock give the best precedents for determining applicable discounts to apply to particular restricted securities.

USA

Under the securities laws, these conditions are either registration with the U.S. Securities and Exchange Commission (SEC), or fitting into one of the securities exemptions for resale, such as Rule 144.
Reverse split: On a stock exchange, a reverse stock split or reverse split is the opposite of a stock split, i.e. a stock merge – a reduction in the number of shares and an accompanying increase in the share price. The ratio is also reversed: 1-for-2, 1-for-3 and so on.

There is a stigma attached to doing this so it is not initiated without very good reason. Many institutional investors and mutual funds, for example, have rules against purchasing a stock whose price is below some minimum, perhaps $5. An extreme case would be when a share price has dropped so low that it is in danger of being delisted from its stock exchange.

It is also possible that a reverse stock split could be used as a tactic to reduce the number of shareholders. In a hypothetical 1-for-100 reverse split any investor holding less than 100 shares would simply receive a cash payment and no shares of stock. If the resulting number of shareholders has then dropped below some threshold, it may be placed into a different regulatory category; such as an S corporation which is required by law to have less than 100 shareholders.

Typically, the stock will temporarily add a “D” to the end of its ticker during a reverse stock split.

Risk based pricing: Risk-based pricing is a methodology adopted by many lenders in the mortgage and financial services industries. It has been in use for many years as lenders try to measure loan risk in terms of interest rates and other fees. The interest rate on a loan is determined not only by the time value of money, but also by the lender’s estimate of the probability that the borrower will default on the loan.  A borrower who the lender thinks is less likely to default will be offered a better (lower) interest rate. This means that different borrowers will pay different rates.

The lender may consider a variety of factors in assessing the probability of default. These factors might be characteristics of the individual borrower, like the borrower’s credit score or employment status. These factors might also be characteristics of the loan; for example, a mortgage lender might offer different rates to the same borrower, depending on whether that borrower wished to buy a single-family house or a condominium.

Risk factors

Credit score and history, property use, property type, loan amount, loan purpose, income, and asset amounts, as well as documentation levels, property location, and others, are common risk based factors currently used. Lenders ‘price’ loans according to these individual factors and their multiple derivatives. Each derivative either positively or negatively affects the cost of an interest rate. For example, lower credit scores equal higher interest rates and vice-versa; typically, those who provide less verifiable income documentation due to self-employment benefits will qualify for a higher interest rate than a someone who fully documents all reported income. Mortgage and other financial service industries value credit score and history most when pricing mortgage interest rates.

Property types

Pertaining to residential mortgages and their risk based pricing methods, the Property Type is sub-categorized as follows:

• Single Family Residence (SFR)
• Multi-Family 2-4 Units (MF)
• Townhome/Condominium (TC)

SFRs are considered to have the highest dollar value per square foot and are thus the most favorably priced of the property types in the eyes of the lending institution. The property is stand alone, or ‘detached’ from other property.

Multi-family and townhome/condominiums are typically ‘negatively priced’, where the lender will assess a .5% to .75% increase in the actual interest rate or the price of an interest rate, due to their relative lower dollar per square foot values.

Criticism

The main criticism among mainstream consumers has been that risk-based pricing can make ‘shopping’ for the best interest rates much more difficult. It is almost impossible to tell at first glance if one can be qualified to get an advertised rate or exactly what interest rate they qualify for at all. Consumer-rights advocates also believe that risk-based pricing in the extreme, especially in the form of predatory lending, hurts financially disadvantaged and vulnerable consumers by cutting them off from reasonably affordable capital and exposing them unwittingly to soaring interest rates and unsustainable financing schemes that erode equity and may lead to default. Risk-based pricing can be manipulated to wield deceptive marketing practices, such as the bait and switch. The fairness of similar lending practices within the mortgage industry is being investigated by Congress.

Rule 144: Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances, the sale of restricted and controlled securities without registration. In addition to restrictions on the minimum length of time for which such securities must be held and the maximum volume permitted to be sold, the issuer must agree to the sale. If certain requirements are met, Form 144 must be filed with the SEC. Often, the issuer requires that a legal opinion be given indicating that the resale complies with the rule. The amount of securities sold during any subsequent 3-month period generally does not exceed any of the following limitations:

• 1% of the stock outstanding,
• The average weekly reported volume of trading in the securities on all national securities exchanges for the preceding 4 weeks, and
• The average weekly volume of trading of the securities reported through the consolidated transactions reporting system (NASDAQ.

Notice of resale is provided to the SEC if the amt of securities sold in reliance on Rule 144 in any 3-month period exceeds 5000 shares or if they have an aggregate sales price in excess of $50,000.After one year, Rule 144(k) allows for the permanent removal of the restriction except as to ‘insiders’.

In cases of mergers, buyouts or takeovers, owners of securities who had previously filed Form 144 and still wish to sell restricted and controlled securities must refile Form 144 once the merger, buyout or takeover has been completed.
Rule 144A: Rule 144A, adopted pursuant to the U.S. Securities Act of 1933, as amended (the “Securities Act”) provides a safe harbor from the registration requirements of the Securities Act of 1933 for certain private resales of restricted securities to QIBs (qualified institutional buyers), which generally are large institutional investors with over $100 million in investable assets. When a broker or dealer is selling securities in reliance on Rule 144A, it is subject to the condition that it may not make offers to persons other than those it reasonably believes to be QIBs.

Since its adoption, Rule 144A has greatly increased the liquidity of the securities affected. This is because the institutions can now trade these formerly restricted securities amongst themselves, thereby eliminating the restrictions that are imposed to protect the public. Rule 144A was implemented in order to induce foreign companies to sell securities in the US capital markets. For firms registered with the SEC or a foreign company providing information to the SEC, financial statements need not be provided to buyers. Rule 144A has become the principal safe harbor on which non-U.S. companies rely when accessing the U.S. capital markets.

Since 1990, the Nasdaq Stock Market offers a compliance review process which grants Depository Trust & Clearing Corporation (DTCC) book-entry access to 144A securities. Nasdaq also hopes to launch an Electronic Trading Platform for 144A securities in late 2007 and has a pending Rule Filing with the SEC.

Not to be confused with rule 144A, rule 144, established by the SEC under the 1933 Act, permits, under limited circumstances, the sale of restricted and controlled securities without registration.