Chapter 2 Continued Flashcards
Three methods of registering in state
- Notice Filing
- Coordination
- Qualification
Notice Filing
Federal Covered Securities
Still must be licensed to sell as broker-dealer or agent (unless otherwise exempt)
Mostly done for Investment Companies
Lower fees than other two methods
Administrator may require:
- Documents filed with SEC
- Documents filed as amendments to initial registration statement
- report of value of securities offered
- consent to service of process
Administrator cannot deny sale of security if there is no presence of fraud
Registration by coordination
Most common Non covered securities registration (usually OTC)
May be done if a registration statement has been filed under 1933 act
Must supply-
Latest prospectus
Copy of articles of incorp, underwriting agreement
Any other information required under 1933 if requested
Amendment to prospectus
Becomes effective at same time as federal as long as:
No stop orders or proceedings pending
On file for 10-20 days depending on state
Max/Min offering prices and underwriting discounts on file for 2 business days
Most frequently used method and most sensible form of underwriting
Registration by qualification
Supply any information required by administrator
Intrastate securities are registered this way
Must supply:
Advertising of offering
Copy of security and opinion of counsel
Audited balance sheet current as of 4 months
Becomes effective whenever administrator says so
Effective Date
Effective for 1 year for all forms of registration, not renewed on December 31st like agents and BDs
May stay in effect longer if some issues remain unsold if still being offered at original public offering price
Amount of shares sold can change after effective date, but POP and underwriter discount/commission cannot (pay an additional late fee and filing fee)
Exemptions for securities
Exemption for transactions must be established before each trade
Retain exemption in subsequent trading unless revoked by administrator (may be taken summarily or without notice)
Exempt transaction based on manner in which it is sold or because of person sale is made to
Exempt Securities
Us/Canadian gov and municipal securities
Foreign Gov securities with which US has diplomatic relations (does not include political subdivisions like US/Canada)
Depository institutions including: Bank debt Federal saving/loan associations debt Credit union debt (Must be authorized if not federally chartered)
Insurance company’s stocks and bonds (not variable contracts)
Public Utilities/Equipment trust certs by railroads
Federal covered securities
Securities issued by non profits
Cooperatives
Employee benefit plans
Certain money market instruments
Exempt securities are not exempt from anti fraud provisions of USA, while Exceptions (think fixed annuities) are
Exempt securities under USA that are not exempt federally
Foreign government securities
Insurance company securities
Federal Covered Securities
Bank holding companies listed on exchanges
Bank holding companies
Not exempt from State and Federal Law
Regulated banks securities however are
Exempt transactions
Isolated nonissuer transactions- One-on-one transaction
Unsolicited brokerage transactions- Administrator may ask client to verify
Underwriter transactions
Transaction by an executor, administrator, sheriff, marshal, receiver, trustee in Bankruptcy, guardian, or conservator transactions- does not include UGMA/UTMA’s
Institutional investor transactions
Limited offering transactions- Private placement to institutional investors and a max 10 non institutional OFFERS in a 12 month period
No commission can be paid for non institutional and no adds
(Fed restricts investors)
Exempt transactions continued
Preorganization certificates (postpones registration, required for corporate charter) is exempt if:
- no commission paid
- number of subscribers under 10
- no payment made by subscriber
Transactions with existing security holders
Nonissuer transactions by pledgees- Bank selling a pledged security
Control Transactions
Accredited investor vs institutional investors
Accredited- under rule 501 of reg d is someone with $1mm excluding net equity in primary residence
May also qualify with 200k in salary in previous 2 years and reasonable expectation in next (300k with spouse)
Only applies to federal law!!!!
Institutional- manages large amounts of money
Administrator’s power over exemptions
The administrator may deny or revoke the registration exemption of:
- Non for Profits
- Any investment contract issued in connection with an employees’ stock purchase, savings, pension, profit share or similar benefit placw.
Only 2 security exemptions may be revoked
ALL exempt transactions may be revoked
Selling to individuals
Selling to retail clients in a different state always requires registration though the security and/or transaction may be exempt
Registration Statement Info required
Amount of securities to be issued
States in which the security is to be offered (not amounts)
Adverse order or judgement concerning the offering
Anticipate effective date
Anticipated use of the proceeds
Could also be filed by a selling stockholder such as an insider making a large block sale
Registration statement
- Filing fee
- Ongoing reports
- Escrow
- Special subscription form
- Withdrawal of registration statement
- Usually a % of total offering price. Administrator may keep a portion of fee if registration is withdrawn or a stop order is issued
- Up to Quarterly information update of registration statement
- Applies to Coordination or Qualification. Occurs if:
-issued in past 3 years
-issued at a substantially different offering price
-to any person for a consideration other than cash
Issuer would have to raise a specified figure to receive the amount - Administrator may require that the issue be sold through a form specified by Administrator, and that a copy be kept for 3 years
- May only occur a year after effective date and approved by Administrator
Anti fraud provisions under the USA
Only apply to securities, but applies to all securities (exempt or nonexempt)
Fraud= criminal offense you can go to jail for
Prohibited or unethical- typically a fine
Acts considered fraud:
- employing a device or scheme
- untrue statement or omission of a material fact
- Any act, practice or course of business that operates as fraud
Prevention of fraud is state’s authority
Material facts that would constitute fraud
Information used by a prospective purchaser to make an informed investment decision
May not mislead by omitting downside facts
Company management qualifications would be material
Inaccurate market quotations- only fraud if deliberate
Misstatement of earnings- not fraud if pulled from an article
Commissions must be stated on trade confirmation or if they are higher than normal, otherwise are not required to be disclosed
Promising to provide customer service and not doing so is fraud
Order ticket
Do not need clients name or address on the order ticket
Insider information
Use of a Broker-dealer or investment adviser’s internally generated research report before public release is not considered insider info
Dishonest or unethical business practices (7 questions)
- Delivery Delays- unreasonable or unexplainable delay of delivering securities or money
- Churning- Excessive trading either in size or frequency in regards to a clients account
- Unsuitable recommendations- Must always have reasonable grounds for making a recommendation to a client based on client profile. Making blanket recommendations is illegal. Should only make unsolicited orders if info not available.
- Free lunch seminars- Must tell clients in advance if the seminar will try to sell them on something or is being used as a networking event
- Unauthorized transactions- must have POA or written consent for discretion
- Exercising discretion- Must have prior written authority in regards to the three A’s (asset, action, amount). Best price or time is not considered discretion
- Margin Documents- Must secure documents promptly after first trade
- Commingling shares
- Improper hypothecating- must have a lien or documents (hypothecation is the pledging of securities for a loan)
- Unreasonable commission or markup- must clearly disclose commission charge detail
Unethical or dishonest behavior conntinued
- Timely Prospectus Delivery- Must be issued no later than trade confirmation. May also be required by administrator to be given before if offering is under qualification.
- UNREASONABLE Service fees- should be clear about fees and changes. Postage and handling is normally only charged if overnighting. Commissions, markups, advisory fees disclosed in own documents.
- Dishonoring quotes
14. Market manipulation- Matched orders (creating activity deliberately) Wash trade (buying in one account, selling in other)
- Guaranteeing against loss
- Disseminating false trading info
- Deceptive Advertising- Highlighting the good and not mentioning the bad
- Failing to disclose a conflict of interest- Disclosure of a controlled relationship between a BD and issuer is necessary. Also must disclose bonuses from sales, financial interests in a security being recommended, research reports after underwriting
- Withholding shares of a public offering
- Responding to complaints- not responding to a written complaint (including email), agent may not see complaint. Errors in trading must be reported to supervisors
Unethical or dishonest behavior…continued…
- Front running- placing a personal order before a customer order
- Spreading rumors
23, Backdating records- changed trade confirmation dates
- Waivers- Clients cannot waive right to sue
- Investment company sales- Violation may result in suspension or revocation of registration
- No load if no fee or under .25% 12b-1
- must disclose break points and possibility of Letter of intent
- No buying purposely before ex-dividend date or calling cap gains part of dividend
- Must select best share class
- Switching funds without reasonable grounds
- Proper yield disclosures- disclose yield and fund’s most recent average annual return and difference between the two
Lending or borrowing money from a client- a mortgage broker is not in the business of lending money
Unethical or dishonest behavior (agents only)
- Selling away- Not recording trades in regular books. Can do it if authorized by BD prior to trade
2, Fictitious accounts- beefing up a clients profile to allow him to trade on margin
3, Sharing in accounts- client and BD must supply written approval if allowed (BD, IA, IAR never allowed)
- Splitting commissions- May not split with non-registered, does not have to be disclosed unless it raises fees
- May not solicit a trade in unregistered nonexempt securities
Sale vs offer to sell
Sale- Any disposition of a security in which money or other valuable is exchanged’
Any security or anything else attached with a sale is part of the transaction
Gift of assessable stock is considered a sale (creditors have ability to assess shareholders for unpaid par)
Warrants and rights are included in sale
If trying to sell a security, you must be registered
Exclusions from Sale/Sell and offer/offer to sell
Bona Fide pledge or loans
Gift of non assessable stock (the way all stock is today)
Stock dividend/stock split
Class vote by stockholders
Judicially approved reorganizations
Legal jurisdiction of USA
Includes any offer to buy or sell, if the offer:
- Originated in the administrators state
- Directed to the state
- Accepted in
Does not include paying from a bank in a different state
More than one may have jurisdiction
Administrators may do inspections together
Administrators have jurisdiction to demand an inspection whenever
Publishing and Brodcasting exceptions
Administrator would not have jurisdiction if offer made in:
- A tv or radio broadcast originating out of state
- a bona fide newspaper published out of state
- bona fide newspaper with 2/3rds of circulation out of state
Where the microphone or camera is located for tv and radio
4 broad powers of an Administrator
- Make, amend or resend rules and orders and require use of specific forms.
- may also issue interpretive letters
- rule or order of administrator is on same level as law, but not part of USA itself
- Person may challenge an order within 60 days
- must publish rules and forms - Conduct investigations/issue subpoenas
- If administrator and all parties want a private hearing it is granted
- must publish facts and circumstances to public, secure oaths, subpoena witnesses, take evidence
- administrator does not have to have an appointment if in business hours - Issue cease and desist orders and seek injunctions
- issued without prior hearing
- may be issued in substitute for an injunction
- only injunctions must be followed
- final determination would not be made until the case was heard in court - Deny, suspend, cancel or revoke registrations and licenses
- Must find a person filed false info, willfully violated USA, had a securities misdemeanor or felony in past 10 years, has been enjoined by law, subject to another Admin denial, engaged in dishonest practices, is insolvent, guilty of failure to supervise, failed to pay application fees
- May only use previous state definition for a crime
- Violation of an SRO is cause for denial
- Unless acting summarily, must provide notice, opportunity for hearing, written finding of facts
- May not walk back effective registration if facts known after 90 days
Contumacy
Refusal to obey a subpoena by an administrator
Administrator may request assistance from a court
May be punished by jail time if no response to court
Enjoined
Subject to an injunction issued by a court
Usually done if a cease and desist order is not followed
Acting Summarily
Postponing or suspending a licencse without trial
Must promptly notify applicant and prospective employer if applicable
Hearing may be requested and will commence within 15 days after receipt of written request
Order will stay in effect until modified or vacated
Stop orders
Can only invoke if:
- Applicant files a false or incomplete statement
- Applicant in violation of the USA
- Method of illegal business
- fraudulent registration
- underwriter charges unreasonable fees
- issue subject to court injunction
- administrative stop order
- fail to pay filing fee (denial removed once paid)
Unless summarily, must provide notice, hearing and wtritten fact
Stop order can be vacated
Nonpunitive terminations of registration
Withdrawals- effective 30 days of receipt
Administrator maintains jurisdiction over you for one year
Suspension or revocation hearing can still occur within a year
Cancellation
- Occurs if applicant no longer is doing business
- Registrant must have a mailing address
- may be due to BD no longer doing business and agent having no affiliation
Have two years after withdrawing your registration to re-affiliate or you will have to retake the exam
Penalties for violating USA
Civil and criminal penalties may apply
Supervisors are usually charged in connection with agents
Civil Liabilities
Sale of security or offering of investment advice in violation of USA
May sue seller for financial loss from:
- Selling securities in violation of USA
- Offering investment advice in violation of USA
- sale of unregistered nonexempt securities
- omission or untrue statements of material fact
- civil infractions
- sold securities though unregistered
- sold in violation of a rule or order of Admin
Statute of limitations is 3 years from sale or 2 years from finding, whichever comes first
Right of recovery from an improper sale
Customer would file complaint with Administrator and then receive if found correct:
=original purchasing price
+interest at rate given by admin (usually legal rate) plus
+attorney fee and court costs minus
-any income received while held
Right of recovery improper investment advice
May recover: =Cost of advice plus \+loss as result of advice \+interest \+attorney fee -income received
May be brought against dead persons
Do not recover original purchase price like with improper sale
Right of rescission (seller and advice)
Avoid lawsuit by offering to correct an error made
Buyer has 30 days to respond to letter or gives up right to a lawsuit later
Right of rescission is the original purchase price plus interest just without legal fees
Right of recession would be same cost as advice without legal
May still bring a lawsuit if the right of recession is rejected
Damages are not treble in any of these rights (only insider trading is treble)
Surety bond
All lawsuits are claimed against surety bond
Criminal penalties (5-5-3)
Guilty of fraudulent securities action, willingly breaking law
May be fined of imprisoned
Max fine $5,000, Jail 3 years.
Administrator may apply for an arrest warrant
Statue of limitations is 5 years
5-5-3 rule = 5 years after offense, 5000 dollars, 3 years jail
Appeal within 60 days, not a stay of penalty
Sale of securities in financial institutions (banks)
Must be conducted in physical location distinct from retail deposit area
Must disclose that all securities sold by BD on premises of a financial institution where retail deposits are taken are:
- not insured by FDIC
- Not guarenteed by the financial institution
- subject to investment risk
Must obtain written acknowledgment of disclosures
Advertising
B
D
B
Must note in public advertisement that BD is:
- Not FDIC insured
- no bank guarantee
- may lose value
Not required in:
- radio broadcasts of 30 seconds or less
- billboard type signs, e-signs
- banners/posters only used as location indicators
