Chapter 16- US Government and State Rules And Regulations 15-20 Qs Flashcards
The securities act of 1933
First government response to crash of 1929
Requires full and fair disclosure of new issues of securities
MajorAspects of the act:
Issuers of nonexempt securities must file registration statements with a regulation body. SEC was created to do this in Act of 1934
Prospectus must be provided to all purchasers of new, non exempt issues
Fraudulent activity in connection with underwriting and issuing of all securities is prohibited
Securities Exchange Act of 1934
Peoples act
Addresses secondary market and regulates all people involved, and all securities
Created the SEC
Registration requirement of all persons and firms that trade securities OTC and on exchanges for public
Regulation of Exchanges and OTC market
Regulation of credit by Federal Reserve Board
Regulation of trading activities
Regulation of insider transactions, short sales and proxies
Regulation of client accounts
Customer protection rule
Net capital rule and financial responsibility for broker/dealers
Reporting requirements for issuers
Tender offers
Act of 1934
If a company makes an offer for another company, shareholders can only tender their net long positions
500 long 200 short= 300 allowed to be tendered
Maloney Act of 1938
Amended act of 1934
Enabled the SEC to create SROs or Designated examine authorities for monitoring brokers and dealers not affiliated with exchange
FINRA and MSRB are two most prominent
Trust indenture Act of 1939
Applies to corporate bonds (nonexempt) with following characteristics:
Issue size of more than 50 million within 12 months
Maturity of nine months of more
Offered interstate
Requires a trustee be appointed to ensure the trust indenture isn’t broken
The investment company act of 1940
Defined and regulates investment companies. Requires invest companies to:
Register with SEC before selling shares publicly
Clearly state investment objectives
Have net worth over 100k before offering shares to public
Be owned by 100 shareholders minimum
Comply with standards on pricing, public sale and reporting
Includes face amount certificate companies, Unit invest trusts and management companies
Investment Advisers act of 1940
Requires anyone giving investment advice to register as as investment advisers
Must register and pass series 65 or 66 (those who passed 7).
Advice that is not charged for does not require registration
Charging is outside of normal commissions
Securities investor protection act and the SIPC
Passed in 1970 to protect investors from broker/dealer failure or insolvency
SIPC is gov sponsored but not a gov agency. Collects annual assessments to be used for customer claims from broker dealers
Must be registered with SIPC unless handling only: Mutual funds, unit trusts or variable annuities/insurance
Investment advisers are not SIPC members
Firms cannot participate in brokerage business if not paying SIPC assessments
Violation of SIPC net capital requirements
SEC or SRO notified SIPC
SIPC investigates
Petitions for liquidation trustee and firm ceases business
Liquidation proceeding follows guideline:
Securities in customer name are delivered
Cash and street name securities are distributed pro rata
SIPC funds are distributed to meet difference to max amount (500,000, cash claims up to 250,000 of the 500k)
Excess claims become general creditors
Broker/dealers must include SIPC membership on all advertising and must notify customers that they can receive info on SIPC once a year
SIPC cannot be bigger than own name on advertising
Blanket Fidelity Bond
Minimum coverage is 25k and coverage must be reviewed once a year
Protects against employee theft
Cash and margin are combined for SIPC purposes
Securities Acts Amendments of 1975
Established Municipal Securities Rule making Board
Insider Trading and Securities Fraud Enforcement Act of 1988
Insider- anyone with non public info about a company
Both the Tipper and Tipee are liable. Key questions of liability:
Is info material and no public?
Does tipper owe a fiduciary duty to company?
Does tipper meet personal benefits test?
Does the tipee know or should it know the info was confidential?
A broker/dealer is responsible for keeping sensitive info within department (information barrier)
Penalty of insider trading
SEC can investigate any person suspected of violation
3x profits made or losses avoided
Registered rep could be fined $1 million or 3x profit whichever is greater
Violators may face up to $5 million dollar fine and 20 years in jail
Firm could be fined treble (3x damages) or 25 million which ever is greater
Contemporaneous trades
Persons who entered trades at same time may sue persons who violated up to five years later
Informer bounty
10-30% of amount recovered on information receivers
SIPC coverage of accounts
500,000 (250 in cash) covered per separate customer account
So a joint account and a cash account are separate and each able to secure 500k
Value is calculated from date of federal court trustee appointment
Penny stock cold calling rules (SEC rule)
Prevent abusive sales practices involving high risk securities sold to unsophisticated investors
Solicitation of non-Nasdaq securities traded in OTC for under $5 per share (bulletin board/otc pink)
Reps must determine suitability and have a suitability statement signed by customer before trade can occur
Must disclose: Name of penny stock Number of shares Current Quotation Amount of commission received
Must also provide monthly statement to customer
Established customers (held account for 1 yr, made at least three different penny stock purchases) are exempt from suitability statement
Rules only apply to solicited transactions
Bank Secrecy Act
Established US treasury as lead agency for developing regulations in connection with anti money laundering programs
Before September 11, 2001, more concerned with origin of cash, now concerned with where it’s going
Three types:
Placement: Moved into laundering System
Layering: Goal is to conceal source of funds through numerous transactions
Integration: Commingling funds in viable business accounts
Current regulations require broker/dealers to file Suspicous Activity Reporting (SARs) if over $5000 in activity is suspicious
Red flags of Money laundering
Lack of concern in transactions
Frequent or large deposits of currency
Large number of wire transfers to unrelated third parties
Excessive journal entries between unrelated accounts
A customer who designs deposits between unrelated accounts
Deposits of 10000 or less
Sarbanes Oxley Act of 2002
Response to a number of corporate and accounting scandals
Enhanced standards for all US public company boards, management and public accounting firms
Created Public Company accounting oversight board (PCAOB)
Regulation National Market System (NMS)
Trading and reporting uniformity
Enacted the following rules:
1. The Order Protection Rule: prohibits trade throughs (not getting best available price)
- Limit Up/Limit Down- designed to address sudden severe price movements, % price per perimeters, doubled at stock openings and closings. Pricing above or below bands cannot be displayed.
- Minimum increment pricing rule- sub penny only allowed for stocks under $1.00, penny otherwise
Blue Sky Laws
State security regulation laws
Uniform Securities Act (USA)
Legal framework for the state registration of securities
Can be adopted and adapted
State security administrators can revoke a registration if a violation occurs
Must register in a state if doing business in state, registration must be renewed annually
Isolated transactions are allowed
Registering Securities (state, 3 ways)
Coordination- files with state and SEC at same time. Effective once fed is effective. Only at IPO
Filing (notification)- if an issuer has met criteria and sold previously, it may notify and proceed if it doesn’t hear from the date by the 5th business day
Qualification- Must respond to any requirement the state specified, most difficult
What accounts are NOT SIPC insured
Commodities accounts or any accounts not holding securities
SIPC coverage for separate accounts
Pays coverage for each separate customer
A client with a cash and margin account is one customer
A client with a cash and a JTWROS with another customer is two customers
Only 250k is payable for losses of cash
Money Market funds
Considered a security and not cash, therefore SIPC covers it as a security
