Chapter 2 Sections 1-6- state Regulation under The uniform securities Act- 23 questions Flashcards
Uniform Securities Act of 1956
Developed by National Conference of Commissioners on Uniform State Laws
Model legislation that most states follow closely
Model rules are passed to modify the 1956 laws
Not actual law
Used by the North American Securities Administrators Association. (NASAA)
North American Securities Administration Association
Advisory body of state securities registration
Administrator
Administrators state security law
Jurisdiction over registration of securities professionals and securities
May deny suspend or revoke registrations
Cease and desist orders
Registered persons only
May issue without a hearing and is an order to stop all illegal activities
Used if it appears that any registered person may be breaking the law
Stop orders
Either denies or halts effectiveness of any registration statement
Only applies to securities
Summary Order (acting summarily)
Regards to registration of securities and persons
Three cases:
1. Postponing/suspending the registration of a securities professional pending a final determination
- Postponing/suspending registration of a security
- Denying or revoking a specific security or transaction exemption
Administrator must notify parties of reasoning and that an appeal can be made 15 days after written request
Final order if not appealed
Final order
Ends litigation with a final decision
Administrator or a court rendering a judgement
Other than a summary order no final order may be entered without:
Appropriate notice
Opportunity for hearing
Written findings of fact and conclusions of law
Person defined
Individuals, corporations, partnerships, associations, joint stock company, or trust
Interest of beneficiaries evidenced by a security, unincorporated org, gov or political sub of gov.
Does not include:
Minors
Deceased individuals
Individuals legally declared mentally incompetent
Broker dealer defined
Doing business for own account or for account of others
Sometimes abbreviated BD
Register with both states and SEC
Acting for self = dealer
Acting for others = Broker
Register with both state and SEC
Agents
Represent a broker-dealer or issuer in effecting purchases or sales of securities
Always persons, not the broker-dealer itself
Registered representatives
Investment advisers
Engage in advising as to the value of securities
Must be compensated
Issues reports and analyses regarding securities
Under the National Securities Markets Improvement Act, they are registered with either the SEC (covered) or the state(state registered adviser) not both
Investment adviser reps aid the IA
Issuer
Certificates of participation or interest in oil or mining titles/ leases there are NO issuers
Issuers are usually corporations
Non issuer
Guarenteed
Exempt security
Exempt Transaction
- Transaction not involving original issuer
- Guaranteed as to payment of principal, interest or dividends, not capital gains
- No requirement to file advertising and are exempt from registration
- No requirement to be registered to sell security
Fraud
SRO
Solicitor
Intentional effort to deceive someone for profit
- Include FINRA, MSRB, CBOE
- Refers potential client to IAs
Registrant
Institution
Used by legal counsel to refer to securities professionals or issuers who have or are in process of registering with state
- Banks, insurance companies, investment companies, employee benefit plans over 1MM
Less protection comparatively due to greater sophistication
Retail client
Need more protection than institutions, includes accredited investors
State
Exclusion
Exemption
Includes territories and possession of the US, District of Columbia and Puerto Rico
Excluded completely from the definition
Exemption- normally covered but not subject to a specific provision
Four classes of individuals who fall under state securities law
Broker-dealers- legal persons (corps and partnerships)
Agents- always individuals
Investment advisers- generally legal persons such as corps and partnerships
Investment adviser reps- always individuals
Broker dealer state law defined
Any person (organization) with an established place of business in a state must register with the state
Agents work for broker-dealers
When broker-dealers trade for their customers (Broker), they are acting as an Agency
When they buy for own account (Dealer), they act in a principal capacity
Individuals trading for own account are individual investors not broker dealers
Broker dealers register with state they do business in and SEC
Persons not included in broker dealer definition
Agents
Issuers and
Banks, saving institutions and trust companies
Domestic commercial banks
Financial modernization act or
Grammy Leach-Bliley act of 1999
Financial institutions engaged in brokerage related securities activities are subject to SEC registration and applicable state law
Most banks participate through broker-dealer subsidiaries which are subject to state law when engaged in security transactions
The broker-dealer subsidiary is subject to registration
No place of business in state
Those who have no place of business in a state and deal exclusively with other securities firms, broker-dealers
And
Those with no place of business in state, but licensed to sell in other states that are selling to existing customers who are not residents in the state
Exempt from state registration
Usually get 30 days after a client changes state of residence to do business without registering
No retail client or place of business= no registration requires
As long as client does not change state of residence, broker dealer does not have to register
Internet responses
Website is considered advertisement
Must state whether properly registered or not in state
Must be in compliance wit state broker-dealer, IA, agent or IA rep registration requirements to give advice for money or effect/attempt a transaction
No specific recommendations are allowed on sight, only give general information
Agent or IARs for internet
Must reveal affiliation to broker-dealer
Broker-dealer or investment advisor must approve communications for agents and IARs
BD or IA must authorize distribution of info on product/services offered
Broker Dealer Registration requirement
Person (legal entity) may not engage in business if not registered
Must register with Administrator
Fill out form BD with SEC
Prompt response to inaccurate info must be taken
Partners, officers, directors who require registration are submitted on BD form. May have to take an exam if not done already
No principal, all agents
Must register if doing business with retail clients
Net capital requirements
Referring to liquidity of a company
Act of 1934 sets maximum needed, BD may not be asked to meet a higher standard by administrator
Administrator may require broker-dealers with custody or discretionary authority to post surety bonds however it is also limited to 1934 act
No bonds required if broker dealer exceeds net capital requirements required by the administrator
Bonds can be cash or securities
BD’s cannot be required to meet higher net capital or bonding requirements than SEC by states
Trade confirmation
Must disclose whether a BD is acting as a principal or an agent
Must be sent no later than settlement date
Will always disclose commission and may or may not have to disclose mark up or down
Agent under USA
Any individual representing a broker dealer (legal entity) or issuer (legal entity) in effecting or attempting a transaction
Often referred to registered reps
Only individuals can be agents, not corporations
Clerical and administrative employees of a broker dealer are not generally included
Year end bonus based on company profits is allowable
Responding to a request for a quote is allowable by a secretary
Cold callers would have to register if they did anything other than ask if someone wanted information
Individual performing a sales function is always a broker dealer
Exclusions from definition of Agent for Personnel reping issuers
- Certain exempt securities only including:
- any security guaranteed by gov or political sub or foreign gov (Us must have relationship)
- any security issued or guaranteed by a bank
- Commercial paper over 50k, lasting less than 9 months, in top three categories
- employee stock purchases, saving pensions or profit share - Employee of an issuer Exempt Transaction
- Unsolicited brokerage transactions
- Transactions between the issuer and underwriters
- Transactions with financial institutions or
- Private placements
- noncompensated employee transactions - With existing employees, partners or directors as long as not compensated for the trade
National Securities Market Improvements act of 1996
Usually preempts blue sky laws
Contra Party
The other party in a transaction
BD is contra party when acting as principal
Agent registration requirements
Must disclose citizenship unlike a broker dealer
May not conduct business in another state unless registered, even if it is an unsolicited order… IA’s have a de minimis exemption
If a broker-dealer’s registration expires, the agent is no longer considered licensed
Must promptly notify the Administrator when beginning or terminating connection with a broker-dealer (the agent, the old employer and the new employer all must notify)
May only act as agent for one broker-dealer or issuer, unless there is direct affiliationor indirect common control
Limited registration of Canadian broker dealers and agents
Must obtain a limited registration to do business
May act as broker dealer with no office in state if:
- A person from Canada who is temporarily a resident in states that was already a client
- Resident of state, Self-directed, tax-advantage retirement plan in Canada of which the person is a holder or contributor (RRSP is equivalent of IRA in Canada)
May act as agent for the transactions if:
- filed application in Canada jurisdiction
- File a consent to service of process
- Provide evidence of registration with good standing
- Be a member of an SRO or stock exchange in Canada
Requirements for agent are the same, except the membership with an SRO
Still no registration requirement if only doing business with issuers, other BD’s and institutions
Renewals filed before December 1st each year
Books and Records
Applies to broker-dealers
Must keep all records on file for past 3 years, first 2 easily accessible
States may not require higher rules
Must file correcting amendments if material to files promptly when found out
Emails are included and so are website designs
No requirement to keep client tax returns
Social networking red flags for investors
Promises of high return with no risk
Offshore operations are hard to shut down
E-currency sites
Recruit friend bonuses
Professional websites with little to no information
No written info (prospectus)
Testimonials from other group members
FINRA rules on online communication
Should be same as face-to-face communication
Advertising
Should not be deceptive or misleading
Ex. Not including risk factors or deal-killing info
Highlighting or other marks are prohibited
Administrator may require filing or approval of advertisements unless exempt transaction
Not a recommendation under the USA
- A website including research reports, news, quotes and charts
- Search engine of securities that does not favor specific companies.
- A research tool that generates a list of stocks fitting a certain criteria given by a client
- A customer watch list that sends news affecting the security
Recommendation under the USA
- Customer specific ecommunication encouraging a purchase
- email urging investment in a certain sector
- Providing a portfolio analysis tool that generates a list of securities sent to a client
- Data-mining driven investment suggestions
Social media tools covered by usa
- Personal devices used to communicate with clients
- Twitter would not need prior approval as it is retail communication, but LinkedIn probably would
- Linking to third part sites
- Content determines whether material needs approval
- If recommendations and testimonials are used on Linked-in, it becomes a responsibility of the firm
- Firms should develop company wide policy
Howey Supreme Court decision definition of security
- Investment of Money
- Common Enterprise- fortune is shared by investors
- Expectation of profits
- Derived primarily from efforts outside of investor
List of securities included in USA
- Notes
- Stocks
- Treasury stocks
- bonds
- debentures
- evidence of indebtedness
- Certificate of interest or participation
- Collateral trust cert
- Pre organization carts
- transferable shares
- investment contract
- Voting trust cert
- CD for a security
- Certificate of interest in oil, gas or mining
- puts, calls, straddles, options
- warrants/rights
Not securities
- Insurance products outside of variable annuities
- Retirement plan interest
- collectibles
- commodities and future contracts
- condos used as personal residence
- currency
Nonexempt security
Subject to the registrations provisions mandated by the USA
May only be sold if in a non exempt transaction
Illegal if a non registered nonexempt security is sold
Could be subject to civil or criminal penalties for agent
Issuer
Issuer transaction
Nonissuer transaction
Primary offering
Under the USA, certificates of interest, participating in oil, gas, or mining titles/leases there is NOT an issuer
- Proceeds go to issuer
- Secondary trading
- Transaction involving new securities, SPO’s are offerings after the IPO
Unlawful to sell unregistered securities unless
- Registered under the USA
- The security or transaction is exempted from registration
- Federal covered security
National Securities Markets Improvement Act of 1996
Divided regulating responsibilities of investment advisers between states and the SEC by. Creating Federal covered adviser
Also created federal covered securities
Federal covered securities may still be subject to providing notice of filling (fees and copy of docs). Usually done for mutual funds
Categories of federally covered securities
- Securities of open-end, closed-end and unit investment trusts register under Investment Company Act of 1940
- Securities listed on the NYSE, Chicago Stock Exchange, NASDAQ
- 506b or c securities (private placements)
- federal gov issues and muni’s that are being offered out of state (If in state, issuer is not federal covered)
Broker Dealer under USA
If you meet one of the following criteria:
- Have a place of business in the state
- Just a single retail client in the state
Investment Adviser, can they be individuals?
Yes, if the business is a sole proprietorship and the individual is the only investment adviser representative
Becoming registered
Administrator may require an announcement be made in local papers of the registration of an applicant
Fingerprints do not have to be submitted
Agent must notify if terminating employment with broker-dealer
Consent to service of process
Administrator is appointed attorney to receive and process non-criminal securities complaints
Must be received by each state’s administrator
Does not have to be submitted each renewal, stays on file
Payment of initial and renewal filing fees
Administrator can keep fees if application withdrawn or declined
All registrations are renewed on December 31, and no proration of fees
First year is always a short one
Effective date of registration
Noon, 30 days after the later of the date filed or date amended
Request to withdraw registration also becomes effective on 30th day
If legal proceedings are taking place, registration withdrawal will be delayed
Admin will still have jurisdiction for 1 year
