Chapter 2 Flashcards
Security issued or guaranteed by the United States; Security issued or guaranteed by any territory or state of the United States; Note, draft, bill of exchange, or banker’s acceptance which arises out of a current transaction with a maximum maturity of 9 months; Security issued by a person organized exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for profits; Security issued by a savings and loan, building and loan, cooperative bank, etc.; Insurance and annuity contracts (not variable contracts!)
Securities that are considered exempt securities not required to register under the Securities Act of 1933
An exempt security is still a security and an offer of exempt securities will often still include:
Offering documents to investors
If it is an exempt security, it is not subject to:
Registration requirements
If it is a security, it is subject to:
Anti-fraud statutes
An investment of money in a common enterprise; With an exception of profits derived through the efforts of other.
An investment contract defined by the Howey Decision
The following investments are not securities:
Fixed annuities; Whole life, term life; Commodities
When the SROs want to change a rule:
It has to be signed off on by the SEC as well
SROs may not allow members to join the association unless:
The members are registered
FINRA, etc., can deny membership to a firm if it lacks financial strength or has engaged in “acts or practices inconsistent with just and equitable principles of trade.”
Statutory Disqualification (Section 15A)
Rule of the Securities Exchange Act of 1934 requires officers and certain employees of member firms to submit fingerprints:
Rule 17f-2 (Fingerprinting)
Is not engaged in the sale of securities; Does not regularly have access to the keeping, handling or processing of: 1. securities, 2. monies, or 3. the original books and records relating to the securities or the monies; and Does not have direct supervisory responsibility over persons engaged in the activities referred to in paragraphs (a)(1)(i)(A) and (B) of this section.
Persons who fit the description of being exempt from the fingerprinting rule
Is engaged exclusively in the sale of shares of registered open-end management investment companies, variable contracts, or interests in limited partnerships, unit investment trusts or real estate investment trusts; Provided, that those securities ordinarily are not evidenced by certificates.
Firms who are exempt from fingerprinting
For the individual who passed out the inside information or war dumb enough to use it, the court can impose a civil penalty of three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication. If that person happened to be “controlled” by somebody else (a boss, the broker-dealer who hired the agent, for example) that “controlling person” could receive a civil penalty of the greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of the controlled person’s violation.
Penalties extracted when the SEC sues an associated person in civil court
A trader who enters an order on the other side of the market at the same time as a trader with inside information enters an order. They can sue traders who act on inside information to recover losses. The maximum penalty is the profit they made or the loss avoided by trading on inside information.
Contemporaneous Trader
Trade their clients’ accounts in exchange for a percentage of the account value. Compensated for providing investment advice. Gets paid more money if the client’s account value rises. Registers either with the SEC or particular states. They use Form ADV and indicate whether they’re registering with the federal regulators or the state regulators. They submit Form U4 applications to the states in which their investment adviser representatives need to be registered, too.
Investment adviser (Portfolio manager)
Hired people to sell the services of the firm or manage customer accounts.
Investment Adviser Representatives
Manage accounts, sell the services of the firm, determine recommendations for clients, make recommendations to clients, supervise those who do any of the above:
Things that consider employees being representatives of an investment advisory firm
Is or holds itself out as being engaged primarily, or proposes to engage primarily in the business of investing, reinvesting, or trading in securities; and if more than 40% of the company’s total assets are tied up in securities investments:
Investment company
A company that is either an open-end or a closed-end fund:
Management company
What are the three types of investment companies:
Management company, Face-amount certificate company, Unit Investment Trust (UIT)
Investment companies submit a registration statement to the SEC. The registration statement has two parts:
Part 1 (N1-A prospectus (Summary prospectus)), Part 2 (Statement of Additional Information (SAI))
Selling securities short (unlimited loss potential), Purchasing securities on margin (high-risk), Selling uncovered options (covered call okay), Participating in joint investment or trading accounts, Acting as a distributor of its own securities (use an underwriter, or a 12b-1 plan), Borrowing or lending money
Must be approved by the SEC. Fund must meet requirements.
If the fund wants to engage in these activities, after meeting requirements and SEC approval, it must disclose the activities and explain the extent to which it plans to engage in them in the prospectus:
Risky activities
An open-end fund can borrow money from a bank but must maintain a:
3-to-1 asset-to-debt coverage
No matter what it says in its registration statement, a fund may never:
Lend money to one of its officers or directors
If they’ve been convicted of any felony or any securities related misdemeanor in the past 10 years:
Statutory disqualification
A representative that can sell anything:
General securities representative (Series 7)
This allows the individual to sell only mutual funds and variable contracts, plus something that seldom gets mentioned: they can also be part of an underwriting for a closed-end fund (done through prospectus.
Limited representative-Investment company and variable contracts (Series 6)
What is the maximum time limit that an individual has to use or renew their license:
2 years
Persons associated with a member who accept unsolicited customer orders for submission for execution by the member. Must pass an examination qualification.
Assistant representative
The individual cannot take or execute trades, send research reports to clients, or accept unsolicited orders from clients:
Things an individual may not do before he becomes a registered representative
