Ch 1: Registration and Licensing Flashcards
What is The Act
The Uniform Securities Act of 1956
The Uniform Securities Act
- Defines the persons and securities to be registered with the State
- Defines activities that are prohibited by the State
- Details the enforcement powers of the State
NASAA
North American Securities Administrators Association
NSMIA
The National Securities Markets Improvement Act of 1996
Who does the Act require to be registered in the state?
Broker-dealers, agents, investment advisers, and investment adviser representatives
The National Securities Markets Improvement Act
Enacted to eliminate duplicate regulations that required registration at both Federal and State level
NSMIA - Mandate
States can only require registration if it is not required at the Federal level
NSMIA - Federal Law vs State Law
If any State law impedes the Federal legislation, Federal law prevails
NSMIA - Laws
Federal Law Supersedes State Law for:
* Net capital rules
* Custody rules
* Margin rules
* Financial responsibility rules
* Recordkeeping rules
(all set by the SEC or FRB)
Person
A human or non human who can issue securities or can trade securities
Persons are defined as
- Individuals (human beings)
- Corporations (non-human persons)
- Partnerships (including general partners who can contractually bind the partnership)
- Business Trusts
- Estates
- Trusts (where the interest of the beneficiaries of the Trust are evidenced by a a security
- Associations
- Joint Stock Companies or Joint Ventures
- Governments and Political Subdivisions of Governments (ex: a township)
- Unincorporated Organizations, and any other legal or commercial entity
Issuer
Any person who issues or proposes to issue a security
Issuer for Trusts
The person performing the functions of manager or depositor under the Trust agreement
* The structure is such that there is no BOD, including:
* Collateral Trust Certificates
* Voting Trust Certificates
* Certificates of Deposit for a Security
* Unit Investment Trusts
Issuer for Equipment Trusts
The person to whom the equipment is to be leased or conditionally sold
Equipment Trust Trustee
Holds the title and “leases” the equipment to the issuer (corporation) until repaid
Issuer for Fractional Interest in Oil and GAs Programs
There is no issuer - the Act makes this distinction to force anyone who wants to register these securities to in the state to use Registration by Qualification (the most difficult method)
Issuer Transaction
When and issuer sells or redeems securities
Primary Transaction
An issuer transaction that involves a sale of securities
Non-Issuer
A person who is not defined as an issuer under the Act
Non-Issuer Transaction
A transaction not directly or indirectly for the benefit of the issuer.
* (the proceeds from the sale of the securities go to someone other than the issuer)
Secondary Transaction
Another name for non-issuer transactions, since they take place in the secondary or trading market
Institutional Buyers Include
- Banks
- Savings and Loans
- Trust Companies
- Insurance Companies
- Investment Companies
- Pension and Profit Sharing Plans
- Other financial institutions
- Anyone Else so Designated by the State Administrator
Firms Not Required to Register
Broker-Dealers or Investment Advisers MUST:
* Not have a physical office in the State
* Only institutional buyers are solicited in the State
Broker-Dealer
A person who either:
* Engages in the business of effecting securities transactions for the account of others, OR
* Engages in the business of trading for his own account
Proprietary Trading
The business of trading for your own account
Agency Capacity
- A firm is acting in an “agency” capacity when it effects trades for the account of others (it is a middleman)
- The firm is considered to be as acting as a broker
Principal Capacity
- A firm is acting in a “principal” capacity when it trades out of its own account
- The firm is considered to be acting as a dealer
Broker-Dealer Registration
These firms are required under the Act to register in any state in which they solicit or conduct business
M&A Advisers, Finders
- Mergers and Acquisitions advisers and Finders can be defined as being in the business of engaging in securities transactions, IF
- One company buys the securities of the other in the deal, and compensation is paid based on closing the deal
Persons NOT Considered to be Broker-Dealers
- Agents
- Depository Institutions (Banks, Trust Companies, and Savings Institutions)
- Issuers who only effect transactions with respect to its own securities
BD Customer on Vacation
- Most states say that if an individual spends more than 30 days in that state they are a resident
- The Act does not specify a time frame for when a vacation becomes a temporary residence
Canadian BD EXEMPTION
- When existing Canadian customers are temporarily residing in the US for 1/2 year or less, and intends to return to Canada
BD De Minimis EXEMPTION
- When a BD has no office in a state and only a “few” clients in that state (only doing “minimal business”)
- Only some states have it
Agent Definition
- An individual who effects trades for a BD or Issuer
- Also known as Sales Representatives for a BD
Federal Covered Securities
Securities registered with the SEC that cannot be required to be registered with the State
* The State can require a “notice” filing
* Essentially exchange and Nasdaq listed issues
Federal Covered Advisers
Investment advisers registered with the SEC, EXCLUDED from the IA definition for the State (the State can require a “notice filing” and State filing fee)
* Investment advisers to registered investment companies, OR
* Advisers with $100,000,000 or more of assets under management
* OR any person NOT an IA under the Investment Advisers Act of 1940
State Registration Rights
- To require notice filings
- To require registration of BD and their agents
- To require registration of advisers with less than $100,000,000 of assets under management
- To require registration of All investment adviser representatives
State Enforcement Rights
State is empowered to investigate and bring enforcement actions with respect to fraud or deceit; or any unlawful conduct by a broker or dealer or investment adviser; in connection with securities or securities transactions.
Non-Person
- Anyone who cannot issue or trade a security, including:
- Minors - no legal capacity
- Administrator - the State securities commissioner who enforces the Uniform Securities Act
- Trusts - where the interests of the beneficiaries of the trust are not evidenced by a security
Statutory Broker-Dealer
An An agent who effects securities trades that the BD does not know about and are not recorded by the BD
Non-Broker-Dealer
Persons who have NO place of business in the State AND only transact business with:
* Issuers of the involved securities involved in the transaction
* Other broker-dealers
* Banks, Trust Companies, Savings Institutions
* Insurance Companies
*Investment Companies
* Institutional Buyers
* Pension or Profit Sharing Trusts, OR
* Other Financial Institutions
Agent as a Broker-Dealer
Any person who offers or sells securities for a commission or fee in a State
Merger and Acquisition (M&A)
All of the equity securities of one company are being “purchased” by another company
M&A Firm
A firm that assist in mergers and acquisitions, as long as compensation is being paid
Finders
Individuals or firms that are paid to “find” companies for sale that could be acquired.
* If they receive a retainer fee or flat compensation they are NOT BDs.
* If they receive transaction-based compensation (ex: contingent upon closing a deal) they can be considered statutory BDs
Bank Loophole
- When a bank offers securities on its premises it is a BD under State law
- Therefore, banks only offer securities in a designated area of the office that is registered as its own BD in the State, and only the relevant employees will be registered as agents in the State
BD Vacation EXCLUSION
A firm is EXEMPT from registering in the State IF the firm offers and sells a security to a person who is an Existing customer, AND the firm’s does NOT have an office in the State (customer is on vacation, or traveling through another state)
BD and IA Entity
A BD can set up an investment adviser entity (or vice-versa_ and each must be separately registered in the State
BD Established As
BDs can be established as corporations, partnerships, or sole proprietorships
NOT Defined as Broker-Dealers
- Banks
- Investment Advisors
- Investment Companies
- Insurance Companies
Registered Representative
Agent for Broker- Dealer
* Not defined in the Act
Agent Pay
May be compensated on either a salary or commission basis
Non-Registered Employees
Since they do not effect trades with the public, the following are not agents and do not have to register:
* Clerical Employees
* Managerial Employees
Partners, Directors, and Officers of a BD
- Only considered to be sales representatives if they represent the BD or an issuer in effecting securities transactions
- Otherwise, NOT agents
BD Application Agents
When a BD application to register in a State is filed, the persons who were named as officers with (or supervising) a sales function are automatically registered as agents
* As long as they have passed the Series 63/65/66
“Agent” EXCLUSIONS for Individuals Who Represent Issuers
The Act EXCLUDED individuals from the definition of an agent who represent issuers in:
* Sales of specified exempt securities
* Exempt transactions
* Sales of specified covered securities
*Sales of securities to employees of that issuer if no remuneration is paid
Specified Exempt Securities (“Agent” exclusion for Individuals who represent Issuers)
Issued by (the):
* US Government
* Foreign Governments
* Municipal Governments
* Canadian Government
* Bank and Savings Institutions (ex: Bank CDs)
* Trust Companies
Also exempt are:
* Promissory Notes that will mature in 9 months or less, that are rated in one of the 3 highest rating categories, issued in amounts of at least $50,000 (ex: corporate commercial paper)
* Securities issued in connection with Savings, Pension, Profit Sharing Plans, and Employee Stock Option Plans
Most Important Exempt Transactions (“Agent” exclusion for Individuals who represent Issuers)
Generally trades that do not involve the public
* Isolated non-issuer transactions (occasional or casual sale by an individual)
* Transactions between issuers and underwriters
* Transactions with financial or institutional investors
Specified Covered Securities Transactions
(“Agent” exclusion for Individuals who represent Issuers)
- Federal Private Placement - conducted under Rule 506 of Reg D
- Sales to Qualified Purchasers, such as:
- Natural persons (humans) or family owned companies who own investments of at least $5,000,000
- Pre-existing trusts for the persons listed above as qualified purchasers
- Any other person, acting for its own account or for other qualified purchasers, who owns and invests on a discretionary basis at least $25,000,000
Employees of an Issuer (“Agent” exclusion for Individuals who represent Issuers)
Individuals who represent issuers effecting trades with employees, partners, officers, and directors of the issuer are EXCLUDED from the definition of an agent
* As long as no commissions or compensation is given to the sales representative for soliciting these persons
Permitted Actions of Unregistered Persons/Trainees
- Trainees can perform clerical or ministerial duties and can deal with other industry professionals
- Prior to Registration they CANNOT accept customer orders, or be compensated based on commissions from the sales of securities nor on accounts opened
Agent Registration
- Both the BD and the Agent must be registered in the State where the agent resides and the State where the customer resides
- Agent must register Through their BD, they cannot register on their own
- Registration is required regardless of whether securities are exempt or non-exempt, or if a commission is being paid
Permitted Actions of Unregistered Agents
- Unregistered Agents can perform clerical or ministerial duties and can deal with other industry professionals
- They can sell bank products (since these are not securities)
- They can sell insurance products (if they have a State insurance license)
- Prior to Registration they CANNOT accept customer orders, or be compensated based on commissions from the sales of securities nor on accounts opened
Agents are Not
- Clerical and managerial employees who do not effect trades with the public
- Partners, directors, or officers of a broker-dealer - unless otherwise qualified
- Agents of issuers in transactions that do not involve the general public
- An individual representing an issuer selling exempt securities
- An individual representing an issuer in selling securities of that issuer to that issuer’s employees (as long as no commission is paid)
Investment Adviser
A person who renders advice about securities for a fee
* Must register with the State under the Act
Investment Adviser Representative
An individual that solicits advisory business for the investment adviser
Investment Adviser Full Definition
A person, who for compensation:
* Advises others, directly or indirectly, about the value or advisability of buying or selling securities
* Regularly issues or promulgates analyses concerning securities
* Provides investment advisory services to others in a financial planning practice
Investment Advisers are Not
- Investment Adviser Representatives
- Depository Institutions
- Professionals
- Broker-Dealers
- Publishers of Newsletters that do NOT give advice based upon specific investment situations
- Federal Covered Advisers
- Any other person designated by the State Administrator
Depository Institutions
- Banks
- Savings and Loans
- Trusts
Professionals
Individuals whose performance of these services is solely incidental to their professional practice, ex:
* Lawyers
* Accountants
* Engineers
* Teachers
SEC Interpretations of Federal Covered Advisers
- Advisers that have between $100 and $110 mission of assets under management have the choice of registering at either the Federal or State level
- An SEC-registered adviser only has to de-register if its assets under management fall below $90 million
- Thus there is a $90-$110 mission buffer where an IA can be Federal Covered
Mid-Size Adviser Registration
- Mid-Size Advisors have $25 million or more of assets under management
- If a State does not require registration, mid-size advisers in that state must register with the SEC
- A mid-size advisor that is required to be registered in 15 or more States may choose to register with the SEC instead
EXCLUSIONS from the IA Definition
- IA Representatives (they register as IARs not IAs)
- Depository Institutions (banks or bank holding companies, savings and loans, trusts)
- Professionals: Individuals whose performance of these services is incidental to their professional practice (Lawyers, Accountants, Engineers, Teachers)
- BDs and their RRs whose advisory services are solely incidental to the securities business and who receive no special compensation for recommendations
- Publishers of bona fide newspapers, magazines, or financial publications of a general and regular circulation
- Federal Covered Advisers: Any person who advises solely about US Government guaranteed obligations
Investment Adviser Representative (IAR)
Any IA partner, officer, director, or employee who:
* Makes recommendations or renders advice regarding securities
* Manages accounts or portfolios of clients
Determines which recommendations or advice regarding securities should be given
* Solicits, offers, or negotiates for the sale of investment advisory services, OR
* Supervises employees who perform any of the functions listed above
IARs are Not
Individuals who solely perform clerical or ministerial duties
NASAA Interpretation of IARs
- Each State still has jurisdiction to require the registration of the individuals associated with Federal Covered Advisers
The Act Definition of IARs
- Performs any of the defined activities of an IAR
- Has a place of business in the State, AND
- Is employed by a Federal Covered Adviser
Firms EXCLUDED from BD Definition by the Act
- If the firm has no place of business in a State and transacts solely with issuers, other BDs, and institutional investors
- If the firm has no place of business in a State where an existing customer is vacationing or traveling though, and the firm contacts that customer
Firms EXEMPT from BD Definition by the Act
- Canadian BD with no place of business in a State, where existing customers are temporarily residing for less than 1/2 a year and they intend to return to Canada
Agents Associated with EXCLUDED or EXEMPT BDs
Agents who act for excluded or exempt BDs are also EXEMPT and do not have to be registered in the State
Advisers EXEMPT from licensing and registration requirements
No place of business in the State, whose clients solely consist of:
* Other IAs and Federal Covered Advisers
* Broker-Dealers
* Banks, Trust Companies, and Savings and Loans
* Insurance Companies
* Investment Companies
* Employee Benefit Plans with Assets of at least $1,000,000
* Government Agencies
* Anyone so designated by the Administrator
BD vs IA with No Place of Business in the State
- BD are EXCLUDED from the definition of a BD
- IA are EXEMPTED from the definition of an IA
Adviser De Minimis EXEMPTION
No place of business in the State AND no more than 5 clients in the state (other than financial or institutional investors) within a 12 month period
* Adopted by almost every state, but the number of clients isn’t always 5
Canadian Adviser EXEMPTION
Canadian Advisers with no place of business in a State, where existing customers are temporarily residing for less than 1/2 a year and they intend to return to Canada
The Act Registration Requirements for IAs
ALL IARs must be registered in the State, whether they are associated with a state registered IA or a Federal Covered Adviser (Unless an exemption or exclusion is available)
IARs employed by Federal Covered Advisers
Must register in the State (and the IA must file notice) if:
* The IAR is physically present in that State
* If the IAR is not physically in the State but solicits business there
Solicitors for IAs
- Solicitors refer clients
- They are required to be registered in the State, even if they are not employees of that Adviser
IAR, Employee of IA, Termination
The IA must promptly notify the Administrator
Agent, Employee of BD, Termination
Both the agent and the BD must notify the Administrator
IAR, Employee of Federal Covered Adviser, Termination
The IAR is required to give the Administrator prompt notice
* Since the Advisory firm is not registered in the State, the Administrator cannot require them to give notice
IAs Cannot Employ Certain Persons
IAs are prohibited from employing, directly or indirectly, any person who has been suspended or barred by the Administrator from association with a BD or IA
Registration of BDs, Agents, IAs, and IARs
- Fill out a Registration Application with the State Administrator, AND
- Fill out a Consent to Service of Process form along with it (only needed for initial applications, not for renewals)
Consent to Service of Process
Appoints the State Administrator to be the “attorney” for the registrant
* This allows the State Administrator to receive orders for any lawful process or proceedings against a person arising in a non-criminal suit (if sued, the Administrator would receive the summons and notify the person)
Registration Application Includes
- Form of business organization (corporation, partnership, sole proprietorship)
- Place of business and proposed method of doing business
- Qualifications and business history of applicant (including that of any partners, officers or directors of BDs and IAs)
- Fingerprints of partners, directors, officers of BDs and IAs, and their representative (unless FINRA already has on file)
- Listing of any injunctions, administrative orders, or convictions for misdemeanors or felonies in the securities business
- Applicant’s financial condition and history
- Only for IAs, any info required to be furnished to any client or prospective client
Federal Covered Advisers Filing
- Required to file notice with the State
- File the same documents that as filed with the SEC for Federal registration (Form ADV)
- A Consent to Service of Process must be filed
- Initial notice fee required, not pro-rated if filed mid year
- Filing is “complete” when the State has received both the documents and fee
- Annual notice renewal fee required
Expiring Registration or Notice
Every registration or notice filing expires on Dec 31st of that year unless renewed
* There may be some states that don’t follow this and have a bi-annual renewal
Registering via FINRA Gateway
If an individual is registered with the SEC via FINRA Gateway, the info required in the State application is satisfied
* Only requirement is the State Administrator is notified of the registration, and appropriate filing fees are paid
IARD
Investment Adviser Registration Depository
IARD System
IAs and IARs register or give notice via the IARD system (instead of FINRA). It handles:
* Registration of State registered advisers and Federal covered advisers
* Notice requirements for Federal covered advisers
* Registration of all IARs (using Form ADV plus fee)
Form ADV Updates
- By SEC and NASAA rules, ALL IAs must file an annual updating amendment to Form ADV in IARD within 90 days of fiscal year end
U4 Updates
- Annual registration in State renewed and fee paid by updating Agent’s or IA’s U4 within 30 day of calendar end-of-year renewal date
U5 Updates
- U5 Industry termination form filed by former employing firm via FINRA Gateway or IARD within 30 days of termination
U6 Reports
- If individual or firm is subject to disciplinary action by a State or Federal regulator, the regulator files a U6 Form via FINRA Gateway or IARD which is publicly viewable on their individual record. Must be filed promptly, max 30 days after action is taken
- If a written customer complaint alleges a felony, the same thing happens but it is noted that there has been no proof of the claim made in complaint - if the complaint is cleared without action taken, by reporting this through a U6 amendment the record is cleared
Signatures and Payments
- Any required payment can now be made electronically by credit or debit card
- Any signature requirement for electronic filing systems is simply met by that individual or an officer of the firm typing in the name in the required field
- States are moving towards full electronic filing of documents, and many states will only allow paper forms for reasons of “hardship”
BD Registration Standards
State Administrator can require:
* Minimum Dollar Amounts of Net Capital (liquid net worth)
* Surety Bond Coverage
* The Passing of a Qualification Examination
Surety Bond Coverage
- A deposit of cash, securities (Administrator decides which securities are acceptable) or an insurance “bond”
- Amount set by each Administrator (the old law called for a $10,000 min)
- State gets to seize the assets, deposit, or gets the insurance proceeds if the registrant violates state law
- For IAs, Surety Bond only required if the IA will take custody of a client’s funds
IA Registration Standards
The State Administrator can require:
* Minimum Dollar Amounts of Net Worth
* Surety Bond Coverage
* The Passing of a Qualification Examination
IA Financial Requirements
Administrator can require different minimum financial and bonding requirements for IAs depending on:
* If they do or don’t take custody of customer funds
* If they do or don’t have discretionary authority
Net Worth or Net Capital Computation
- Net Worth or Net Capital = All Assets - All liabilities - Intangibles (goodwill, trademarks, copyrights)
- If the adviser is an individual, value of all personal property is deducted (home, car, furnishings)
- If the adviser is a partnership or corporation, these items used in the business are included and not deducted
- Net Worth Requirement only applies in State where Adviser has principal business
Filing Financial Reports
- To register, State Administrator typically requires a Balance Sheet for the applicant, along with an oath or affirmation that it is true and accurate
- The Act requires every BD and IA file any financial reports required by the Administrator
If BD or IA Fails to Meet Financial Standards
- As soon as a BD or IA has reason to know it is not meeting the net Capital or Net Worth Requirements, they are obligated to promptly (by the next business day) notify the Administrator of its financial condition
- No later than the day after notice is given, a report must be filed with the Administrator detailing the adviser’s financial condition
Agent Registration Standards
The State Administrator can require:
* Surety Bond Coverage (if the agent will have custody of, or discretionary power over, client funds)
* Passing a Qualification Examination (if this is not required, they can require certification that the individual has reviewed the State’s Blue Sky laws and understands their responsibilities)
IAR Registration Standards
The State Administrator can require:
* Passing a Qualification Examination (if this is not required, they can require certification that the individual has reviewed the State’s Blue Sky laws and understands their responsibilities)
Exam Waiver
- If an individual maintains in good standing a CFP or CFA designation, the Series 65 exam requirement is waived (NOT the 63 or 66)
- Individual must still register in the State and pay annual renewal fees
Fingerprint Requirements
- The Act does not require filing of fingerprints for State registration of Agents or IARs, but may States require them anyway
- Generally, if they have been filed via FINRA Gateway, the State does not require them. And if FINRA does not have them, then the State requires a fingerprint filing
For Exams, the Act Empowers the State Administrator To
- Require examinations for officers of IAs and IARs
- Set different passing grades for exams administered to officers of IAs and IARs
- Waive an exam requirement under specified circumstances
- Give either oral or written exams
- (probably empowered to do more also)
Books and Financial Records
- For registered BDs: Securities Exchange Act of 1934 requirements overrule requirements prescribed by the State Administrator
- For registered IAs: Investment Advisers Act of 1940 requirements overrule requirements prescribed by the State Administrator
BD Records Retention Requirements
- Set by Act of 1934
- Customer Emails and Correspondence: 3 yrs
- Customer Trade Confirmations: 3 yrs
- Customer Account Statements: 6 yrs
Federal Covered Advisers Records Retention Requirements
- Set by Act of 1934
- All records must be kept for 5 yrs
State Registered Advisers Records Retention Requirements
- Set by NASAA
- Requires (in detail) for them to keep EVERYTHING including copies of many records
IA Advertising Records
- Set by NASAA
- Defined as Communication to more than one person
- It can include recommendations of the purchase or sale of a specific security - if it does not state the reason, a memo must be retained indicating the reasons for the recommendation
