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Series 66 Self Study > Chapter 1- Federal Securities Regulations-5 Questions > Flashcards

Chapter 1- Federal Securities Regulations-5 Questions Flashcards

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1
Q

Securities Act of 1933 (Paper Act, Truth in securities act, and prospectus act)

A

Regulates IPOs and Subsequent Offerings (SPOs)

Full disclosure of information to the SEC in a registration statement and prospectus

Both Civil and Criminal penalties for rule violators

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2
Q

Definitions Begin
1. Security
2. Issuer
3 Underwriter

A 
1. Howey Case defined an investment contract a security if it met 4 conditions:
Investment of money
Common enterprise of assets
Expectation of profit
Results solely from efforts of others

Does not include annuities, life insurance, real estate direct ownership or commodities

  1. Any person who issues or proposes to issue a security
  2. Underwriter- purchased from an issuer with view of selling, not including a brokerage firm earning a commission on a retail sale
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3
Q
  1. Person
  2. Prospectus
  3. Sale
A
  1. An individual, corporation partnership, association, joint stock company, trust, unincorporated organization, or a gov/political subdivision
  2. Notice, circular, letter or communication that offers sale or confirms sale of a security. Does not include oral communications or tombstone advertisements
  3. Contract for sale or disposition of a security, does not include gifts or negotiations
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4
Q

Examples of securities

A 
Stock
Bond
Debenture
Right/warrant
Note
Put, call or other option
LP
Certificate of interests in profit sharing
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5
Q

SEC Review

A

SEC attempts to make certain all pertinent information is present and disclosed by requiring:

The issuer file a registration statement

A prospectus be provided to those interested

Penalties be imposed

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6
Q

Exempt securities from the 1933 act

A

Any security guarenteed by the US government, state, or political sub

Commercial paper issued with less than 270 days to maturity used to increase working capital

Orgs run exclusively for religion, education, benevolent, fraternal or charitable purposes

Any interest in a railroad equipment trust

Any fed/state bank or loan association except bank holding companies

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7
Q

Rule 147 and the 80-80-80 rule

A

Exempt from the 1933 act but will have to be registered under uniform Securities act

Rule 147 securities are issued/sold in a single territory or state

The buyer must live in the state and have primary residence there

If any sale to a non resident occurs, exemption is eliminated

9 months after last sale by issuer, purchasers can begin selling shares

80% of gross revenue, 80% of proceeds and 80% of issuers assets must be in state in order to claim the exemption

No waivers may be accepted by the buyer as substitute

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8
Q

Exempt transaction of the 1933

A

Transactions by any person other than the underwriter, issued, or dealer

Transactions by an issuer that do not involve public offering like Reg D

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9
Q

Requirements of Securities Act of 1933

A

Registration of new issues distributed interstate

Full and fair disclosure about itself and offering

Issuer disclose all information necessary for issuer to judge merit

Regulation of primary and secondary issues

Criminal penalties for fraud

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10
Q

Registration Statement

A

Signed by principal executive office CEO, principal financial officer CFO, majority of board of directors

Penalties for willful omissions or misstatement of material facts

Info required:
Purpose of issue
POP
Underwriter commission or discount
Promotion expense
Expected use of proceeds
Balance sheet
Earnings statement for past 3 years
Names, addresses, bios of officers, directors, underwriters and owners (10%+)
Copy of underwriting agreement
Copy of article of incorp
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11
Q

Cooling off period

A

At least 20 calendar day period where SEC reviews registration statement

Deficiency letter sent back if information is misstated or missing

Stop Order may be issued if SEC suspects fraud, which requires all underwriting activity to stop

SEC may subpoena issuing corps records to determine if stop order is necessary

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12
Q

Red herring

A

Must be made available to prospective buyers who express interest from filing date to the effective date

Cannot be used as a confirmation of sale, in place of a registration statement or to declare final public offering price

Bona fide price range must be included and amount of shares

May solicit a non binding indication of interest but no orders prior to effective date

In red ink on the front page of a red herring, a company makes note that the SEC is reviewing the material, no sales can be made, and info is subject to change

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13
Q

Preliminary prospectus missing info

A

Public offering price and the effective date

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14
Q

Prospectus

A

Required to be made as a supplemental easier read in comparison to the registration statement

Must be given to Investor even if the investor has no intention to read it

Distributed no later than confirmation of sale

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15
Q 
Rule 482 (Omitting) Prospectus 
(Mutual Fund ads)
A

Must meet following conditions:
1. Any information in the advertisement must be taken from regular prospectus

  1. Must state from whom a prospectus may be obtained
  2. Must urge reading of the prospectus before investing
  3. Any yield or return figures must be accompanied by disclaimer/disclosures of load
  4. Cannot be used to make purchases of shares
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16
Q

Process after effective date

A

Final prospectus must be delivered with trade confirmation if not before

No markings allowed

Securities are neither approved or disapproved by SEC (SEC disclaimer)

Any Ad payments must be disclosed

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17
Q

Sueable parties if misinformation is used in the prospectus under 1933 act

A 
Every person who signed registration
All directors of issuer
Attorneys
Accountants 
Appraisers
Underwriters and
Parent companies

Person is exempt if they can prove accuracy

1 year after discovery or 3 years after date of action

statute of limitations is 2 years after discovery for USA

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18
Q

SEC powers

A

The sec may:
Make, amend and rescind rules

Administer oaths

Subpoena witnesses

Seek injunctions

Turn over evidence to attorney general

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19
Q

Uniform Securities Act

A

State security law act

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20
Q

During the cooling off period, underwriters may take:

A

Indications of interest

Distribute preliminary prospectuses or

Publish tombstone advertisements to provide info about potential availability of the securities

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21
Q

Regulation D (Private Placement Exemption) Rule 506

A

Regulation D placements are exempt from registration with the SEC and state

SEC Rule 506b- May sell securities to an unlimited amount of accredited investors, up to 35 non accredited. No advetising.

506c- Advertising allowed as long as issuer reasonably believes all purchasers are accredited and takes reasonable steps to verify (tax statement, credit reports)

JOBs Act also has a bad boy provision that disallows reg d for certain issuers

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22
Q

Sec rule 501

A

Only need reasonable grounds of belief to determine an accredited investor

Accredited investors include:
1. A bank, insurance company or registered investment company

  1. Employee benefit plan if a bank, insurance company or registered investment adviser makes investment decisions, or if plan exceeds 5MM
  2. Charitable organization, corporation, or a partnership with assets exceeding 5mm in assets
  3. Directors, executive officers and general partners of issuer
  4. $1 million net worth, excluding net equity in home
  5. 200k or more income in past two years or 300k joint income and reasonable expectation of matching
  6. Entities made up of accredited investors

Dodd-Frank excluded home equity

Net worth may include a non spouse but only up to percentage ownership

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23
Q

Counting of non accredited investors under 506(b)

A

Single purchaser for any relative, spouse or relative of the spouse of a purchaser

Corporations, partnerships and other entities are one purchaser

If organized specifically for purchase then all are counted

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24
Q

Rule 503 regulation D

A

Must be filed with SEC no later than 15 days after the first sale of securities relation to a regulation D offering

Requires basic info, amount sold to date, use of proceeds, names of any persons receiving commission

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25
Q

Restricted Securities

A

Unregistered securities purchased in Private Placement and generally restricted

Must sign an investment letter showing understanding of restriction on resale

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26
Q

Control persons

A

Director, officer or 10% shareholder

Called insiders and affiliates

Control stock based on who owns it

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27
Q

Sec Rule 144 (Control and Restricted stock)

A

Allows for selling of securities in some cases without registration

Greater of:
Average weekly trade volume or 1% of outstanding shares

Allowed to do 4 a year, 90 day periods

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28
Q

Securities Act of 1934

A

Created the SEC which has power over registrations, self-regulatory orgs, transfer agents, clearing agencies

NYSE, Chicago stock exchange (CHX), Nasdaq are SROs

Largest SRO is FINRA

Companies with registered securities must periodically report

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29
Q

Securities and Exchange Committee SEC

A

5 commissioners. 1 is chair appointed by president

Does not regulate extension of credit

Commissioners are appointed for 5 years, terms are staggered so one appointed a year

No more than 3 can belong to same political party

All securities owned by commissioners are put in a blind trust and they may not have any jobs outside of this

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30
Q

Broker

A

Any person engaged in the business of effecting transactions in securities for account of others

Not including banks

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31
Q

Dealer

A

Any persons regularly buying or selling securities for own account

Banks, insurance companies, investment companies or any persons engaged in trading for own account but not for business are excluded from definition

32
Q

Associated persons

A

Partners, officers or directors or persons directly or indirectly controlling or controlled by broker dealer including employees

Clerical workers are not included in definition

Even outside partners, officers, directors are considered associated

33
Q

Market maker

A

Dealer who is willing to buy or sell a particular security for his own account on a continuous basis

34
Q

Securities information processor

A

Any person engaged in business of:
Collecting, processing or preparing for distribution or publication of information in regard to transactions in non exempt securities or

Publishing on a continuing basis information on transactions

Some examples:
Consolidated ticker tape
OPRA (Options pricing reporting authority)
SIAC (securities community auto corp)
OTC Market Group
Does not include:
Newspapers
Any SRO
Any bank or broker dealer supplying quotes/transaction info in regular business
Radio/tv
35
Q

Transfer Agent

A

Counter signs the certificates

Registers transfer of issuer securities

Exchanges or converts issuer securities

Bookkeeping of ownership record without exchanging certificates

Does not include:
Insurance companies performing duties for variable annuities

Clearing agency doing work solely for options

36
Q

Exchange

A

An organization, association or group of persons providing a marketplace for bringing together purchasers and sellers of securities

Include marketplace and facilities

Must be registered, accepted or denied by SEC in 90 days

Must be in public interest

Able to enforce SEC and its own rules

Board of directors with at least one member representing investing public, one reping listed companies

Membership may only be offered to registered broker dealers or associated persons

37
Q

SRO

A

National securities exchange or registered securities association

38
Q

Equity secuirty

A

Stock or similar security

Common or preferred, convertibles, anything with a warrant or right attached, warrants and rights

39
Q

Municipal security

A

Direct obligations of, or obligations guaranteed as to principal or interest by a state of political subdivision

40
Q

Government securities

A

Obligation or guarenteed by us government

Includes securities issued by gov agencies

41
Q

Statutory disqualification

A

Rejected by SRO if:
-expelled or suspended from membership by any SRO, commodities market or futures trading association

  • if subject to a suspension by the SEC or a broker dealer for 12 months or less
  • found to be cause of a suspension or expulsion of a broker or dealer
  • associating with those listed above
  • convicted in past 10 years of a securities violation or misdemeanor in finance or felony
  • subject to an injunction by a court prohibiting engagement in securities business
  • willful violation of any securities law
  • omitting or misleading any SRO
42
Q

SEC jurisdiction

A

No jurisdiction over banks or credit involving securities (Reg t)

43
Q

Discretionary account

A

No need to ask for specific approval

Ability to decide: which security, number of shares, buy or sell

Discretionary if one A is missing:
Activity (buy/sell)
Amount (total amount)
Asset (Specific security)

Must have power of attorney or trading authorization

Oral grant of time/price discretion allowed without discretionary if done in a day, must be reflected on order ticket

44
Q

Discretionary authority

A

May give discretionary power only by filing a written trade authorization or a limited power of attorney with a broker dealer

Must be identified as a discretionary trade

Must be approved by an officer or partner of a firm (does not have to be before, just prompt)

Record must be kept of transactions

No excessive trading

All trading activity must be reviewed frequently and systematically

Orders initiated by a client are unsolicited

45
Q

Registrations under SEC Act of 1934

A

Brokers and dealers operating in interstate commerce, including those operating exchanges and in the OTC file form BD, SEC accepts or denies in 45 days

Securities exchanges (90 day accept or deny)

National security associations such as FINRA (Created by Maloney Act in 1938) or MSRB (Created by Securities Amendments Act of 1975)

Corporations- must include class of security rights, terms of offerings for past 3 years, control persons, balance sheet for past 3 fiscal years, profit/loss statement for preceding three fiscal years

Security information processors

Transfer agents

46
Q

Insider transactions

A

People owning more than 10% of a class of equity security registered on a national exchange and officers/directors must disclose their positions to the SEC

Prohibited from selling short and engaging in short term transactions (6 months between a buy and sell)

47
Q

13D filings

A

Under 1934 act, a report must be submitted within 10 calendar days in regards to transactions that result in 5% ownership

Requires info on origin of money, background of acquirer, purpose of acquiring

Looking to exercise control

48
Q

13 f filing

A

Securities Act of 1934 requires institutional investment managers with a market value of $100 million (of 13f securities) for any of 12 preceding months to file a quarterly investment holding report within 45 days of quarter end

13 f securities include closed end investment companies, convertible debt, options, warrants stocks, ETFs

Does not include mutual funds

49
Q

Schedule 13G filings

A

Hold more than 5% like schedule D but can certify that they are not holding to control company or influence control

20% plus do not apply

Must file within 10 calendar days of passing 5%

Must report changes within 45 days of year end

50
Q

Section 16a

A

Control persons (exec officers, directors and 10%+ shareholders) must file transaction reports before end of second business day following transaction

51
Q

Regulation T

A

Fed Reserve Board controls

Margin requirement of 50%

Mutual funds and options not allowed, new issues must wait 35 days

May use securities as collateral that have been owned for 30 days

52
Q

1934 act eliminated churning, wash trades, and matched orders

A

Deception
1. Churning- discretionary trades excessive in size or frequency

Manipulation
2. Wash trades- executing a buy and sell order at the same time to make appearance of large trading (NOT A WASH SALE)

  1. Matched orders- knowing a corresponding order at the same time and price is coming
53
Q

Required items on an order ticket by SEC

A

Two items not on ticket: Current market price and client name/address

Account number

Order solicited, non solicited or discretionary

Sale long or short

Terms and conditions of order (market or limit)

Number of shares
Time of entry and execution and I’d of accepting party

54
Q

Insider Trading and Securities Fraud Enforcement Act of 1988

A

Insider is guilty if trading based on material nonpublic information

No charge if no trade

Guilty party could be fined by SEC greater of treble (3x gains or losses avoided) or $1MM

SEC could also pursue criminal action of up to 20 years

Person who lost money could sue for amount lost, no suit can be filed later than 5 years

55
Q

Chinese wall doctrine

A

Information barrier between those with nonpublic info and those without it

56
Q

Powers of SEC

A

May investigate rule violations of SROs

SEC may: administer oaths, subpoena witnesses, compel attendance, require books and records to be produced,

suspend trading for up to 10 days without notice,

suspend trading on entire exchange for 90 days (must give notice to president)

57
Q

Uniform net capital rule (15c3-1)

A

Must maintain a minimum net capital of liquid assets

SEC does not allow operation without net liquidity

Must hold surety bonds as well

Surety bonds are in addition to the net capital required

58
Q

Securities Amendment Act of 1975

A

Amended 1934 and 1933 act

Greater power of SEC came about

Negotiated commissions instead of fixed

Gave rise to MSRB, required munis and those trading munis to be registered with SEC

Gave power to SEC to regulate transfer agents

59
Q

Investment company act of 1940

A

Any issuer that holds itself out as being engaged primarily in the business of investing

Must have at least 100,000 in assets

Does not include:
Broker dealers
Banks savings and loans
Insurance companies
Holding companies
Issuers whose securities are beneficially owned by no more than 100 persons
Issuers who trade in investments other than securities

60
Q

Face amount certificate

A

Obligation to pay a fixed amount at a stated date in the future (24+months)

Cashing in before maturity will lose money

61
Q

Unit investment trust

A

Does not have Board of directors

Issues only redeemable securities

Portfolio stays fixed until maturity

62
Q

Management company

A

Open End- continuous offering like a mutual fund

Sold at net asset value at end of the business day minus a redemption charge

Prospectus must be delivered before or concurrent with the sale

Closed end- do not redeem their shares, sell shares at a one time public offering

Prospectus delivered only at IPO

Diversified- 75-5-10 rule
75% invested
5% max in single company within 75
10%- voting right of a company max within 75

63
Q

Registration of investment companies

A

Must register under the 1933 act and under the investment company act of 1940

Must have net worth of at least 100,000 before offering securities

May not serve as an employee of an investment company if:
-Convicted of any felony or misdemeanor related to securities

-permanently or temporarily disallowed from acting in any phase of the securities business

SEC must grant permission either unconditionally or on appropriate temporary or other conditional basis

No more than 60% of BOD can be interested parties

64
Q

Rule 12 B-1/

A

Allows mutual fund to act as its own distributor

Asset based sales load- direct or indirect financing of sales, advertising or activities related to distribution of shares

May not charge higher than .75%

No load if under .25%

Basically a commission to brokers selling a fund

Plan to use 12b-1 fee must- benefit the company, existing shareholders and future shareholders

Renewed by majority vote of funds directors

May be terminated by majority vote of non interested board of directors or by majority vote of shareholders

65
Q

Prohibited activities of Investment companies

A

Investment companies may not

Purchase on margin

Participate in a joint account

Sell securities short

Acquire 3% of voting shares in another investment company

66
Q

Fundamental changes in investment policy

A

All changes must be approved by majority of outstanding stock

  • change in sub classification (open-closed, diversified-non)
  • deviation from a fundamental policy in the registration statement
  • changing nature of business
67
Q

Investment advisor and underwriter contracts

A

Must describe all compensation to be paid

Approved annually by BOD or semiannually by shareholders

Allows termination by majority of either BOD or shareholders within 60 days of notice

Terms of renewal of contract must be approved by non interested BoD members in the IA or principal underwriter (at least 40%)

68
Q

Underwriter or affiliated person transactions to a mutual fund

A

May not:
Sell securities to investment company unless it is a redemption of shares or IPO

Borrow money from fund

Knowingly purchase underlying securities

69
Q

Affiliated person/control person

A

Any person directly or indirectly owning more than 5% of voting power

Any officer, director partner or employee of investment company

Control person if owning or controlling more than 25% of outstanding shares

Uninterested if not working for company and under 25% of shares owned

70
Q

Custodian banks

A

Does not have to have FDIC insurance to hold investment company assets

May also use BD that is a member firm of a national securities exchange

71
Q

Sales of mutual fund shares

A

Persons entitled to breakpoints are described as:
Anyone under 21

Legit entities purchasing for own account

Trustee purchasing for qualified employee benefit plan

Not entitled:
Investment clubs

No sales charge:
Employees, principal underwriter and adviser

Shares purchased under auto reinvest of dividends and cap gain distributions

72
Q

Are investment advisers allowed to reduce fees because of commissions earned on sale of mutual fund?

A

IA may not rebate or reduce commissions on products offered with a stated offering price

So they may reduce their commission on top of stated market price but not below

73
Q

Shareholder reports for investment companies

A

Semiannually receive:
Balance sheet

Income statement

Listing of amounts and values of securities owned

Statement of purchases and sales

Remuneration paid to officers and directors

74
Q

Larceny and embezzlement in investment companies

A

Max fine of 10,000 and/or imprisonment up to 5 years

Right to appeal within 60 days

Officers and directors may be subject to civil action as well brought by SEC

75
Q

Mutual fund shares return calculation

A

Current yield: investment income from past 12 months/ current offering price

Does not include cap gains

Total Return: includes distributions in calculation

Assumes reinvestment of dividends

76
Q

Currency Transaction report

A

Must be filed on FinCEN for transaction over 10,000

Applies to loan payments, transfers of funds, and purchases of securities

Or wire transfers above $3,000

77
Q

National Securities Markets Improvement Act of 1996

A

Amended 1933, 34, and investment advisers act of 1940

Created the covered adviser and covered securities

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