63 Flashcards
What is the uniform securities act
Covers blue-sky laws, a model law, not for specific states
who regulates the uniform securities act
State Administrator or Commissionon
Who is responsible for updating the USA through Model Rules and Statements
NASSA
What act reduces duplication of federal and state regulation
National Securities Markets Improvement act NSMIA
What does the term person cover
- Individual, corps, partnerships, unincorporated org, govs etc. Does not include minors, mentally incompetent, or deceased
What does the term state cover
All 50 US states, territories , DC, etc
how does a BD register vs an Investment Advisor
BD = with State, FINRA, and SEC. IA = with State or SEC
how much a BD agent register vs an Investment Advisor rep
BD - register with state admin and FINRA vs IA - register with state admin only
What is the Howey test
Test of a security 1. Investment of money 2. common enterprise 3. derived from efforts of together 4. expectation of profit
Examples of a security
stocks, notes, bonds, debentures rights, bonds, LPs, pre-org certificate, treasury stock, investment company shares, variable contracts, options, oil gas mining lease
what is not a security
Life insurance, endowment policies, fixed annuities, the four Cs - commodities, collectibles, currencies, condominiums as a place of business or residence
The purchase of an interest in an insurance policy covering an individual’s life
Viatical Investment (this is a security)
who are suitable for viaticals
- accredited investors 2. or meet the following test - net worth of 150k and annual income of 100k or min net worth of 250k
what are issuers required to do for state registration
Pay a filing fee, disclose the amount of securities being offered in a state, disclose the other states in which a registration statement has been filed
What is the effective date and who determines it
The effective date is granted by the State Administrator and represents the date on which the securities can be sold publicly
What is a security’s registration expire
One year after its effective date
what are the three methods of securities registration
- filing (larger issuers follow-on interstate, strict requirements and becomes effective at same time as fed registration) 2. coordination (smaller interstate filings, mostly IPOs, becomes effective at time as fed registration coordinated with fed registration under 33 act) 3. qualification (smaller, non IPO, intrastate, requirements determined by individual state and no def registration, become effective when determined by administrator)
the administrator may deny, suspend, or revoke registration statement for the following reasons
- in public interest 2. registration is incomplete or false 3. enterprise is illegal 4. offering is or may be fraudulent 5. issuer, partner, officer, or director of the issuer, or an underwriter has willingly violated any provision of the USA 6. underwriter’s comp is unreasonable (over 10%) 7. proper fee hasn’t been paid
a stop order cannot be issued against an effective registration based on facts the administrator knew when the registration became effective unless proceeds are instituted within how many days
30 days
Types of exemptions under the USA
- exempt securities 2. exempt transactions
Examples of exempt securities
treasury bonds, muni bonds, foreign government bonds, commercial paper, stocks and bonds of banks, and federal covered securities (listed securities), insurance companies (not annuity contacts), and common carriers (UPS, railroads), public utilities, non profits, short term corp debt (9 month or 270 days max and min $50k highly rated)
example of exempt transactons
typically based on limited purchase (non-public) i.e. private placements and trades between institutions
Under NSMIA what securities are given a specific state registration exemption
federal covered
what are federal covered securities
- securities listed on the NYSE, Nasdaq, or regional exchanges, investment company securities, securities issued under reg D rule 506, and sold to qualified purchasers (person who owns at least 5 mil of securities)
Even through exempt from state registration, issuers of investment company shares and private placed under Reg D are subject to notice filing
true
what is notice filing
- file offering doc (prospectus), file a consent to service process, and pay a fee. 2. CANNOT be denied by state administrator
examples of exempt transactions
- non-issuer transaction (34 act secondary market transaction that are isolated, non-recurring, unsolicited) 2. Private placements (no more than 10 non-institutional, purchased for investment purposes only, no commission for soliciting non-institutional investors) 3. institutional transactions 4. Fiduciary Transactions (trustee, admin, executor, or sheriff) 5. Mortgage Backed S
Any person in the business of effecting securities transactions for the accounts of others (agency) or its own account (principal)
Broker-Dealer
An individual who represents a broker dealer in effecting securities transactions and subject to registration
Agent of a BD - include all officers, partners, or directors of a BD who are involved in the sale of securities. exclude clerical work
Any person who proposes to issue any security for the purpose of raising capital
Issuer
A sale by an issuer
Issuer transaction
An individual who represents an issuer in the sale of certain securities
Agent of an Issuer
when are agents of issuers not required to register
if the sale involves an exempt security, an exempt transaction, a federal covered security, or a transaction with existing employees, partners, or directors of the issuer and no commission or remuneration is paid for soliciting a person in the state
who is excluded from registering as a broker dealer
- agents 2. issuers 3. banks, savings instit, trust companies 4. any person with no place of business in a state and only transacts business there with issuers involved in the transaction, other BDs, financial institutions, or existing clients who are not residents of the state (vacation, students, snowbirds are residents of both states so register for them)
Agent exemptions
Agents may engage in securities transactions in a state in which they are not registered if 1. existing customer is temporarily in another state (students, vacation) 2. existing client that moves to new state and agent is registered in at least one other state or registration is pending in the state, agent is registered with a national securities associate. the Broker dealer needs to be registered in the new state prior to any commissions
The USA allows the limited registration of broker deals and agents that are residents of canada and have no place of business in a state as long as
they only transact business with a Canadian person who is temporality in US. Has to be a member or SRO, and they cannot solicit new clients in the state
renewal applications are filed when
on or prior to December 1
broker dealer registration requirements
Form BD - filed with FINRA with central registration depository (CRD)
agents of broker dealers file what
Form UF and with FINRA at the CRD
what form is filed with an agent is terminated or leaves a BD
form U5
upon termination of employment, who must notify the Admin
the agent, the former BD (Form U5) and new BD (form U4)
what form is used for disciplinary action, and who files
Form U6 and regulators, states, and or jurisdictions
When does the application for registration become effective
30 days after filing, expires annually on Dec 31. Updated annually at time of renewal
what document is filed once, never renewed, and grants the administrator power of attorney to receive and process non-criminal legal complaints
Consent to Service of Process
what is the filing fee
paid annually, for successor firms (mergers or acquisitions) - new application must be filed, no additional filing fee for remainder of year
Bonding requirement
Posted to cover cost of lawsuits - required for BDs, agents, and IA that have custody of or discretionary control over client funds and securities. not required for large BDs. if required -must maintain for as long as BD or IA is in business plus three years. instead of bond sometimes can post securities
Minimum financial requirements of a BD
- SEC determines and no state may impose a higher requirement 2. min cap requirement depends on activity 3. report deficiency within one business day (need to submit statement of financial condition and obtain a surety bond to make up the deficiency_
how long must BDs keep records for
Three years, easily accessible for first two years
What must be filed with the state administrator
any advertising, sales literature, or other communication that disseminated to existing or prospective clients )(unless exempt securities). Also and material changes to financial reports needs to be filed within 30 days. order tickets must reflect customer name / account number, trade details, capacity of firm, and discretion if used
Who is an investment advisor
A person that gives advise, as a regular business, to receive compensation
who is an Investment advisor rep
any individual who provides or determines investment advice, manages accounts, solicits advisory services, manages those who perform these functions (but not accounting or HR).
what investment advisor firms are excluded from registering
Investment advisor reps - banks, savings, trusts, lawyers, accountants, teachers, engineers LATE, broker dealer and their agents, publishers, federal covered advisers (under NSMIA)
when does an investment advisor not need to register with the state
- The advisor has no place of business in a state and 1. all clients are financial institutions or 2. no more than 5 non-institution clients in the state in last 12 months
what are the AUM thresholds for IA registration
- AUM of more than $110m must register with SEC, between $100 and $110 - may chose state or SEC 2. AUM between 25 to 100m - must register with state and less than 25 m - must register with state
Regardless of AUM - the following advisors are required to be registered with the SEC
Advisors to - investment companies, BDCs, pension consultants for assets over 200m, internet advisors, advisors for private funds of 150m, new advisors that believe they will be eligible for the SEC registration within 120 day, multi-state advisors in 15 or more states.
for a Federally covered IAR, where must they register
Only in the state where they have an office
Can you pay third party solicitors
BDS are never allowed to pay a commission to someone who is unregistered. and IAR can if the IAR is registered and a written contract exists
To register with the SEC or State, an IA must file what form
Form ADV Part 1 and Part 1 through the IARD
what is covered in ADV part 1
Name of firm, number of employees, and nature of business
what is covered in ADV part 2
client brochure, conflicts of interest, services, fees, soft dollar arrangements, securities advise is given on, education and business background, the IA balance sheet if it has prepaid fees over more than $1,200, six months or more in advance, and state level the prepaid fee is $500
What is the brochure rule
an IA’s written disclosure document must be delivered to clients by no later than the signing of the contact and once per year (conflicts of interest) unless client is an investment company or services costing less than $500 per year
timing for the brochure rule
- deliver of brochure is required either 48 hours prior to signing contract, or at time contact is signed, provided the client is allowed to cancel within 5 BDs without penalty.
Under the USA - IA contracts must be what
- in writing 2. no hedge clauses or mandatory arbitration clauses 3. generally prohibit performance fees 4. may only be assigned to another adviser with client consent 5. must state that if the IA is a partnership, all clients will be notified change in partners
if an advisor accidentally gains custody of client securities how many BD must the IA return
within 3 business days, same with 3rd party checks
extra regulations if IA has custody of client funds
- notify admin in writing 2. appoint a custodian to hold client funds in separate account 3. Notify client and provide quarterly statements
Minimum financial requirements
- State Admin where the IA home office is located, min requirement $35,000 for custody and $10,000 for discretion only, and report deficiency within one business day and obtain surety bond
IA record keeping
5 years for IAs, easily maintainable for first 2 years. Financial reports filed monthly, provide full and fair disclosure via brochure rule / form ADV part 2.
Investment Advisors Fiduciary Duty
- broker dealers do not have duty to provide suitable recommendations to their clients but Investment advisors had fiduciary duty to act in the best interest of their clients
what are the fiduciary rules
- reasonable basis for advise being provided 2. ensure it is suitable based on client objectives 3. obtaining best execution 4. disclosing potential conflict of interest 5. consulting with other professional when approcaite
what is the Uniform Prudent Investor Act
it is a guide when implementing financial plans based on Modern Portfolio theory. examines trade off between risk and reward
what are soft dollar arrangements
IA may pay higher commissions for trade execution in return for soft dollars if used to acquire services that will benefit its advisory clientqs
what is acceptable for soft dollars
research reports, analysis, market data, seminars, software used for analysis. unacceptable is hardware, personnel salaries, travel, rent
where must soft dollar arrangements be disclosed
ADV part 2 or brochure
what are the three parts of fraud
- misrep a material fact 2. reliance on the misrep 3. injury of harm occurring as a result
prohibited and unethical practices
- claiming securities are approved by a regulator 2. stating securities are going to IPO without justification 3. inducing purchase based on impending dividends (selling dividends) 4. referring to no load funds if it has over .25 12b-1 fees 5. failing to disclosure sales charges 6. failing to disclosure mutual fund breakpoints and LOI features 7. soliciting orders for unregistered securities non exempt 8. churning 9. exercising discretion without authorization 10. borrowing from or lending to client
additional prohibited practices
- omitting material facts 2. failing to deliver final prospectus when selling a new issue 3. failing to disclosure conflict of interest 4. failing to maintain client confidentiality 5. syndicate members withholding sales of IPO shares 6. unnecessarily delaying payment or delivery of securities 7. splitting commission with another agent (permitted if both are registered within same BD and regisrested in BD state )
additional prohibited practices
commingling client and firm securities (must be segregated for IAs), conversion (misappropriated of client funds), selling away (not record on BD books, painting the tape (collusion), front running, sharing in profit of losses in a client account unless written permission from BS and client and agent shares in direct proportion of contribution, insider trading, cold calling outside allowed time
when is code calling allowed
8am to 9pm local time
two options for IA conflicts
- disclosure or 2. abstain (eliminate conflict of interest or close client account)
what are examples of IA conflicts (just need to disclose)
- advisor acting as a BD - agency cross transactions 2. advisor receives comp related to the securities it recommends 3. advisor is paid to solicit for or refer clients to another BD 4. advisor receives rebates from BD (hard or soft dollar)
where do IA disclosure conflicts
ADV part 2 or brochure
selling securities on a financial institution’s premise
NASAA has a model rule which requires agents who sell investment products on the premise of a bank to disclose the are 1. not FDIC insured 2. not bank deposits and not guaranteed by bank 3. subject to investment risks. the BDs and agents should be physically separated
what is an offer
any attempt dispose of a security for value
what is a sale
any agreement to sell a security
the following are both an offer and sale
- warrant (package deal) 2. gift of assessable stock ( right for the issuer to demand additional capital from the holder). gift of non-assessable stock is neither an offer or sale more common)
who had jurisdiction over every offer or sale made or accepted in a state
the state administrator
when is an offer made in a state
- originated in the state or was directed into and received in the state or accepted or transaction in the state
when using mail or phone, who has jurisdiction
two at most - state from which an offer originates and state to which it was directed and received. For mail - if forwarded it does not count.
For television or radio who has jusridiction
one state only - in which the camera or microphone is located. if someone outside the state sees the commercial, no state has jurisdiction, goes to fed
for newspaper or magazine, who has jursidiction
one state or no state - the state in which it is published unless more than 2/3rds of circulation is outside the state.
what are the powers of the admnistrator
In the public interest : 1. deny, suspend, or revoke registration of a firm or employee 2. Bar an employee from associate with any registered firm 3. limit activities of a registrant. MAY NOT levy fines or impose prison
what are statutory disqualifications
- false or misleading information 2. conviction of any felony or misdemeanor involving securities 3. prohibition by any court from engaging in securities 4. willfully violating securities law of foreign jurisdiction in past 5 years 5. insolvency 6. failure to pay filing fee 7. lack of qualification based on training, experience AND knowledge (all 3)
update U4 for what
- outside business activities 2, tax liens 3. bankruptcy
What enforcement does the administrator have
- inspectorial power - subpoena records in any state, require statements under oat from witnesses in and out of state, and initiate criminal liability 2. cease and desist order (orders may be appealed in state court within 60 days, appeals don’t act as a stay of the order, admin may ask court to issue an injunction) 3. confidentiality - client info is confidential and firms only release if required to do so by law or client approval is received
What is due process and the timing
if registration is denied, suspended, or revoked by the admin, the registration must be notified in writing, provided written finding of fact, and given an opportunity for a hearing. if requested a hearing must be held within 15 days. (registrant has 60 days to file appeal then a hearing must be held in 15 days)
Who files civil liabilities
two people (including businesses), not government
If securities are sold in violation of USA or if advise is fraudulent or unethical and client suffered a lost, what can they sue for in civil court
purchase price or any lost, plus interest, plus court costs, less any income received from the security or advice
what is the statue of limitation on civil liabilities
filed three years from occurrence or two years from discovery, whichever comes firms
an attempt by a broker dealer to make someone whole - firm buys back security, plus interest, less income received from divs
Letter of rescission
the unwinding of a transactions to bring both parties to the point of where they were prior to the contract
rescission
how many days does a customer have to respond to letter of rescission
30 days, waive right to sue and letter expires after 30 days
criminals penalties (someone willfully violates provisions in USA) fraudulent and deliberate
three years in prison, 5k, or both. however if agent had no knowledge of the rule violated, they may avoid prison.
what is the statue of limitation on criminal penalties
5 years
