Chapter 6-10 flashcards
Under the Uniform Securities Act, all of the following are exempt transactions except
a sale of a primary offering registered with the SEC. In almost every instance, an issuer transaction—that is, one for the benefit of the issuer—will not be considered an exempt transaction.
Exempt transactions include isolated nonissuer transactions; transactions between an issuer and an underwriter; transactions by an executor, Administrator, sheriff, marshal, trustee in bankruptcy, guardian, or conservator; any sale or offer to a bank, savings institution, investment company, or other financial institution; and private placements.
Long-Term Financial Solutions, Inc., (LTFSI) an investment adviser registered in five states, files Form ADV-W indicating the business is closing. It is being acquired by another federal covered adviser, Gold and Sylver Advisers, LLC. Which of the following statements is correct?
When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least three years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Gold and Sylver), the consent for that had to be obtained by LTFSI. A change of this nature requires prompt amendment to Form ADV Part 1.
Under SEC Release IA-1092, who of the following would be considered to be in the business of rendering investment advice?
A financial planner who takes commissions from a broker-dealer on recommended trades is considered to be compensated for giving advice and is therefore in the business of rendering investment advice. Agents and broker-dealers who do not charge separately for advice are excluded from the definition of investment adviser. Lawyers, accountants, teachers, and engineers are not considered to be in the business of rendering investment advice, as long as any advice given is incidental to the practice of the profession.
Net worth is
Owners equity
An investment adviser (IA) has its primary office in State A. It has branches in States B and C, and it advertises in States D, E, and F. What net capital requirements must it meet
Where its principal office is located
What is a covered security
Covered Securities generally means stocks, bonds and options, including warrants and rights.
Stocks are considered noncovered if sold by foreign intermediaries and foreigners (i.e., individuals absent from the country for at least 183 days of the calendar year).
Investment sales are also divided into covered and noncovered securities using Form 8949.
Transactions between issuers and broker-dealers
Transactions between issuers and broker-dealers (but not investment advisers) are exempt transactions.
As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt.
Form 8-k
Form 8-K is known as a “current report” and it is the report that companies must file with the SEC to announce major events that shareholders should know about.
These include: a change in the external CPA firm engaged to perform the annual audit, a change in top management, acquisition of a major asset.
The SEC does not consider relocation of a subsidiary to be of significant magnitude.
Which of the following terms pertains to registration with the Administrator of a mutual fund, closed-end investment company, or unit investment trust that is registered under the Securities Act of 1933 and also registered as an investment company under the Investment Company Act of 1940?
Notice filing
Examples of exempt transaction(s)
The term” exempt transaction” includes sales by fiduciaries, private placements and isolated nonissuer transactions. Any solicited sale to an individual client, even of a properly registered security, is not an exempt transaction.
The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of
It is the CCO who has the ultimate responsibility for ensuring that the firm has, and properly implements, adequate supervisory procedures. The immediate supervisor has the “first-line” responsibility, but the “buck stops” with the CCO.
Cash flow from operations
Cash flow from operations is computed by adding the year’s depreciation deduction to the net income.
A consent to service of process required by an Administrator is
an agreement whereby a registrant will be bound by any legal action or subpoena served on the Administrator as if it had been served on the registrant.
An exemption from state registration is granted under the specific authority of the Uniform Securities Act to securities issued by which of the following entities?
State of Georgia
City of London, Ontario
City of London, England
Kapco Income Fund, an open-end investment company registered with the SEC
Any state, Canadian province, or political subdivision thereof is considered an issuer of exempt securities. The exemption also applies to securities issued by foreign governments with whom the United States has diplomatic relations—but not their political subdivisions, such as the City of London, England. Although securities issued by investment companies registered with the SEC are exempt from state registration, the authority for that exemption is found in the NSMIA of 1996 (federal covered securities) rather than the Uniform Securities Act.
Preorganization certificates are limited
to a maximum of 10 subscribers, whether individuals or institutions.
Fiduciary transactions and unsolicited orders
regardless of the security being purchased or sold, are always exempt transactions under the USA.
Administrator is not empowered to deny an exemption from state registration to which of these?
Other than in a transaction involving a federal covered security, the Uniform Securities Act gives the power to the Administrator to deny an exemption to any exempt transaction, such as private placements or transactions with professional investors (e.g., insurance companies or bank trust departments). However, when it comes to a security’s exemption, the Administrator may only deny exempt security status to an issue of a nonprofit organization or an investment contract issued in connection with an employee benefit plan, never a U.S. government security or one issued by another state.
Under the SEC’s release, the rendering of advice as an investment advisor
it must be a regular activity, and compensation may be received directly or indirectly.
Overnight loans between banks are made at
Federal funds rate.
Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser?
A)
A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities
Incorrect Answer
B)
A syndicated columnist who gives weekly reports and recommendations on investments
Incorrect Answer
C)
The trust officer of a commercial bank who manages investment accounts for clients
Incorrect Answer
D)
A lawyer who specializes in consulting on investing in securities
A lawyer who specializes in consulting on investing in securities
Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser.
Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies.
The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer’s specialty.
An economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs—at which time, the rate of inflation changes—is known as
This is a definition of inertial inflation. Just like it sometimes takes a shock to get people moving (lack of inertia), it can require a shock to move the economy. It is unlikely that any of the other terms shown here will appear as a correct answer on your exam.
What generally happens to outstanding fixed-income securities when the rate of inflation slows?
Prices go up.
When the rate of inflation slows and is expected to remain stable, coupons on new issue bonds will often decline to offer lower yields. The prices of outstanding bonds will go up to adjust to the lower yields on bonds of similar quality.
Exempt transactions are typically between
Transactions between broker-dealers and issuers, between banks, and between banks and insurance companies are exempt because they occur between financial institutions. Exempt transactions are most often identified by the transaction’s parties, rather than the type of security involved.
I.e. The purchase of securities from a broker-dealer by an employee of a bank is a nonexempt transaction because it is a sale of a security by a broker-dealer to a member of the public
lawyers, accountants, teachers, and engineers (LATE) giving investment advice
that is incidental to their professions are not considered investment advisers. If they receive a fee for the advice, hold themselves out to the public as doing so, or offer excessive advice that is no longer incidental to their practice (as 30% of the practice would indicate), they lose this exclusion and must register as investment advisers.
506b vs 506c
In a Rule 506(b) offering, the issuer may take the investor’s word that he, she, or it is accredited, unless the issuer has reason to believe the investor is lying (up to 35 non accredited investors). In a Rule 506(c) offering, the issuer must take reasonable steps to verify that every investor is accredited.
The Uniform Securities Act is designed to
protect the general public and not restrict investment activities of institutional or professional investors.
Any offer or sale to a bank, savings institution, trust company, insurance company, investment company as defined in the Investment Company Act of 1940, pension or profit-sharing trust, or other financial institution or institutional buyer, or to a broker-dealer, whether the purchaser is acting for itself or in some fiduciary capacity, is considered an exempt transaction.
According to the Investment Advisers Act of 1940, which of the following statements regarding Part 2 of Form ADV are true?
It must be filed with the state Administrator.
A balance sheet must be submitted if the adviser collects prepaid fees of more than $1,200, six or more months in advance.
Certain minimum business and education qualifications must be met before an investment adviser can file.
It may be used to satisfy the brochure requirements of the act.
An investment adviser required to register with the SEC under the Investment Advisers Act of 1940 must submit its Form ADV to the SEC.
In some cases, the Form ADV will also be filed with the state Administrator, but that is state law, not a federal requirement.
A balance sheet must be submitted with Part 2 if the adviser receives “substantial” prepayments of fees.
Part 2 may be used as an investment adviser’s disclosure brochure to clients.
The Investment Advisers Act of 1940 excludes from the definition of “investment adviser” persons whose advice:
relates solely to municipal issues.
relates solely to issues issued by or guaranteed by the U.S. Treasury.
is solely incidental to their professional practice as an aeronautical engineer.
is limited to insurance companies only.
relates solely to issues issued by or guaranteed by the U.S. Treasury.
is solely incidental to their professional practice as an aeronautical engineer.
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Among the exclusions from the definition of” investment adviser “under both state and federal regulations is the case where certain professionals, including engineers, render the advice in a manner solely incidental to the practice of their professions.
Unique to the federal law is the exclusion granted to those persons whose advice deals exclusively with federal government issued or guaranteed issues.
Advice to solely insurance companies qualifies one for an exemption from registration, but does not exclude the person from the definition of IA.
Under SEC Release IA-1092, the test of providing advice or analysis concerning securities is met by which of these?
A stockbroker calls a client and recommends the purchase of a certain stock.
A lawyer recommends against purchasing shares of a mutual fund in favor of another investment.
A publisher of an investment newsletter provides general information and recommendations concerning specific securities.
All 3
Any person who gives advice (positive or negative, specific or general) or issues reports or analyses concerning specific securities meets the criterion of providing advice.
This does not mean that these examples qualify for the definition of investment adviser. They only qualify for the first criterion. For example, a lawyer may be exempt from the definition if she provides advice incidental to the profession and does not receive compensation, but she may still meet the first criterion.
Likewise, if the stockbroker’s only compensation is commissions from securities transactions, the exclusion is in effect.
Under the Securities Act of 1933, a registration statement for a security generally becomes effective how many days after it is filed?
A registration statement for a security becomes effective 20 days after it is filed, unless the SEC orders a delay.
When, if ever, would a broker-dealer be required to register as an investment adviser?
Although broker-dealers are generally exempt from having to register as investment advisers, the exemption is not available if the broker-dealer imposes a separate fee for account management or advice.
Difference between a broker dealer & investment advisor
broker-dealer is a firm or individual licensed to sell individual securities. Typically, a broker-dealer also files a notice of which securities it will sell. An investment adviser cannot sell securities but acts more like a consultant, giving advice on what securities a person should invest in.
In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the release, which of the following would be included in the definition?
Commercial banks offering comprehensive financial planning for their high-net-worth clients
Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client’s royalties into investment-grade bonds or large-cap stocks as market conditions dictate
Persons who receive a nominal fee for assisting employee benefit plan administrators with selecting investment managers for the plan’s assets
Lawyers who prepare trust agreements for clients with large securities holdings with a goal of minimizing estate taxes
2 & 3
Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent now comes under the IA-1092 definition of investment adviser.
Similarly, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant and is required to register under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work.
One method of securities registration under the Uniform Securities Act is qualification. The effective date of a security registered using this method is
when so ordered by the Administrator.
Registration by qualification becomes effective on the date set by the Administrator. It is the registration of a security by coordination, where the effective date is contingent upon SEC effectiveness.
Coordination has the requirement of submitting the maximum and minimum offering prices at least two business days before the effective date.
Transactions meeting certain conditions are exempt from the Uniform Securities Act’s registration and advertising filing requirements. Which of the following transactions does not meet those conditions to qualify as an exempt transaction?
A)
A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid
Incorrect Answer
B)
An offer of a security for which a registration statement has been filed but has not yet become effective
Incorrect Answer
C)
The sale of U.S. government securities to a retail client’s IRA by a registered government securities dealer
Correct Answer
D)
A sale of securities by the executor of an estate
C
In the sale of U.S. government securities to a retail client, the security is exempt, but the transaction is not. Had the sale been to an institutional client, it would have been exempt. An offer is not a transaction.
Form PF must be filed by
SEC-registered advisers with at least $150 million in private fund assets under management. Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don’t report on the form because, among other things, if they reached the $150 million mark, they’d have to register with the SEC.
Section 403 of the Uniform Securities Act states that the Administrator may, by rule or order, require the filing of any sales and advertising literature addressed or intended for distribution to prospective investors, including clients or prospective clients of an investment adviser unless the security or transaction is exempted by Section 402 or is a federal covered security. This would include which of these?
Circulars
Form letters
Investment adviser’s website
Prospectus
All 4
If a federal covered adviser’s fiscal year ends on November 30, 2022, it must file its annual updating amendment to its Form ADV no later than
FEb 28th, The annual updating amendment to Form ADV must be filed within 90 days of the adviser’s fiscal year-end.
The Uniform Securities Act provides that registration of an investment adviser automatically constitutes registration of
any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions
XYZ Aircraft Manufacturing Corporation, based in the United States, announces a multibillion-dollar order for its new jumbo jet from Fly Airlines, a Japanese-based carrier. When the sale is completed, there will be
a credit to the current account of the United States.
Whenever money from a foreign source enters the United States, it becomes a credit item in the U.S. balance of payments.
