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Series 66 Self Study > Chapter 2 Sections 1-6- state Regulation under The uniform securities Act- 23 questions > Flashcards

Chapter 2 Sections 1-6- state Regulation under The uniform securities Act- 23 questions Flashcards

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Series 66 flashcards
1
Q

Uniform Securities Act of 1956

A

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)

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2
Q

North American Securities Administration Association

A

Advisory body of state securities registration

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3
Q

Administrator

A

Administrators state security law

Jurisdiction over registration of securities professionals and securities

May deny suspend or revoke registrations

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4
Q

Cease and desist orders

A

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

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5
Q

Stop orders

A

Either denies or halts effectiveness of any registration statement

Only applies to securities

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6
Q

Summary Order (acting summarily)

A

Regards to registration of securities and persons

Three cases:
1. Postponing/suspending the registration of a securities professional pending a final determination

  1. Postponing/suspending registration of a security
  2. 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

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7
Q

Final order

A

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

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8
Q

Person defined

A

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

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9
Q

Broker dealer defined

A

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

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10
Q

Agents

A

Represent a broker-dealer or issuer in effecting purchases or sales of securities

Always persons, not the broker-dealer itself

Registered representatives

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11
Q

Investment advisers

A

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

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12
Q

Issuer

A

Certificates of participation or interest in oil or mining titles/ leases there are NO issuers

Issuers are usually corporations

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13
Q

Non issuer

Guarenteed

Exempt security

Exempt Transaction

A
  1. Transaction not involving original issuer
  2. Guaranteed as to payment of principal, interest or dividends, not capital gains
  3. No requirement to file advertising and are exempt from registration
  4. No requirement to be registered to sell security
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14
Q

Fraud

SRO

Solicitor

A

Intentional effort to deceive someone for profit

  1. Include FINRA, MSRB, CBOE
  2. Refers potential client to IAs
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15
Q

Registrant

Institution

A

Used by legal counsel to refer to securities professionals or issuers who have or are in process of registering with state

  1. Banks, insurance companies, investment companies, employee benefit plans over 1MM

Less protection comparatively due to greater sophistication

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16
Q

Retail client

A

Need more protection than institutions, includes accredited investors

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17
Q

State

Exclusion

Exemption

A

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

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18
Q

Four classes of individuals who fall under state securities law

A

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

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19
Q

Broker dealer state law defined

A

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

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20
Q

Persons not included in broker dealer definition

A

Agents
Issuers and
Banks, saving institutions and trust companies

Domestic commercial banks

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21
Q

Financial modernization act or

Grammy Leach-Bliley act of 1999

A

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

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22
Q

No place of business in state

A

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

23
Q

Internet responses

A

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

24
Q

Agent or IARs for internet

A

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

25
Q

Broker Dealer Registration requirement

A

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

26
Q

Net capital requirements

A

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

27
Q

Trade confirmation

A

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

28
Q

Agent under USA

A

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

29
Q

Exclusions from definition of Agent for Personnel reping issuers

A
  1. 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
  2. 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
  3. With existing employees, partners or directors as long as not compensated for the trade
30
Q

National Securities Market Improvements act of 1996

A

Usually preempts blue sky laws

31
Q

Contra Party

A

The other party in a transaction

BD is contra party when acting as principal

32
Q

Agent registration requirements

A

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

33
Q

Limited registration of Canadian broker dealers and agents

A

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

34
Q

Books and Records

A

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

35
Q

Social networking red flags for investors

A

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

36
Q

FINRA rules on online communication

A

Should be same as face-to-face communication

37
Q

Advertising

A

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

38
Q

Not a recommendation under the USA

A
  • 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
39
Q

Recommendation under the USA

A
  • 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
40
Q

Social media tools covered by usa

A
  • 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
41
Q

Howey Supreme Court decision definition of security

A
  1. Investment of Money
  2. Common Enterprise- fortune is shared by investors
  3. Expectation of profits
  4. Derived primarily from efforts outside of investor
42
Q

List of securities included in USA

A
  • 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
43
Q

Not securities

A
  • Insurance products outside of variable annuities
  • Retirement plan interest
  • collectibles
  • commodities and future contracts
  • condos used as personal residence
  • currency
44
Q

Nonexempt security

A

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

45
Q

Issuer

Issuer transaction

Nonissuer transaction

Primary offering

A

Under the USA, certificates of interest, participating in oil, gas, or mining titles/leases there is NOT an issuer

  1. Proceeds go to issuer
  2. Secondary trading
  3. Transaction involving new securities, SPO’s are offerings after the IPO
46
Q

Unlawful to sell unregistered securities unless

A
  1. Registered under the USA
  2. The security or transaction is exempted from registration
  3. Federal covered security
47
Q

National Securities Markets Improvement Act of 1996

A

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

48
Q

Categories of federally covered securities

A
  • 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)
49
Q

Broker Dealer under USA

A

If you meet one of the following criteria:

  1. Have a place of business in the state
  2. Just a single retail client in the state
50
Q

Investment Adviser, can they be individuals?

A

Yes, if the business is a sole proprietorship and the individual is the only investment adviser representative

51
Q

Becoming registered

A

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

52
Q

Consent to service of process

A

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

53
Q

Payment of initial and renewal filing fees

A

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

54
Q

Effective date of registration

A

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

Series 66 Self Study (22 decks)

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