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Series 7 > Chapter 6- Federal Regulations > Flashcards

Chapter 6- Federal Regulations Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Securities Act of 1933

A

Regulate New Issues

Regulates the primary market

Requires registration of New Issues with the SEC
Calls for full and fair disclosure
Requires delivery of a prospectus
Prohibits fraud in the sale of new issues

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2
Q

Securities Exchange Act of 1934

A

Once new securities are sold they are now regulated under this act

Regulates the secondary Market

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3
Q

Defined as Securities under the 1933 act

A

Equities Securities
Debt Securities
Mutual Funds
Unit Trust Investments
Real Estate Limited Partnerships
Variable Annuity Contracts

NOT SECURITIES:
Insurance, endowment policy, annuity contract, or optional annuity contact

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4
Q

Penalty for fraud under 1933 act

A

Original Purchase price plus interest if still owned
damages if no longer owned

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5
Q

Important notes from the act of 1933

A

The Prospectus can not include opinions of counsel or underwriting contracts

The act does not authorize or mandate that SEC determine which securities may or may not be sold publicly

The SEC “no approval” clause must appear on the cover or first page of the prospectus

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6
Q

Securities that are EXEMPT from registration under the 1933 act

A

US government Securities
Municipal Securities
Intrastate offerings (offering within one state only
Regulation A+ offerings
Small Business investment companies
Reg D Offerings (private placement
Building and loan associations
Bank and Savings & Loans
Commercial Paper (270 days or less)
Bankers Acceptance (180 days or less)

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7
Q

Regulation A+ Offering

A

Short Form registration

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8
Q

Reg A Offering Characteristic

A

Limited size $75M for tier 2 and $20M for tier 1 (in any consecutive 12 months
Does not require full form registration
Prospectus not required
Can be purchased by individuals and institutions, not restricted, no holding period

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9
Q

1933 Anti fraud provisions exceptions

A

There are none. These provisions apply to all securities

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10
Q

Shelf Registration

A

Using a single registration a corporation can register all securities it intends to sell in the next 3 years and then issue those shares later without having to re-register

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11
Q

American Depository Receipts (ADRs) Registrations

A

SEC requires ADRs register new issues

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12
Q

Securities Exchange Act of 1934 requirements

A

Required the establishment of the SEC
All securities on national exchanges be registered
Disclosure of information about all listed securities (annual shareholder report)
Stock exchange to be registered with the SEC
Requires credit regulations for securities
Regulates insider trading
and Prohibits Wash sales, matched orders and misleading statements

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13
Q

SEC regulates

A

Broker-Dealers
Exchanges
Insiders
and themselves and other Self-Regulatory organizations

DOES NOT regulate commodities or commodities futures

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14
Q

1934 act key provisions

A

-Insider provision
-Solicitation by proxy - corporations must solicit proxy votes from all share holders
-Annual Reports - corporations must provide an annual shareholders report
-Free Credit Balances- broker dealer must information clients of cash in account at least quarterly

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15
Q

What is an insider

A

AKA control persons and affiliated persons

Officer, director, principal stock holder (more then 10%), and spouses of any of those people

NOT an insider if you own 10% of the outstanding bonds of a company

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16
Q

Insiders may not…

A

Sell their own stock short or short against the box
Prohibited from doing short swings
distribute unreleased press report that contains material information

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17
Q

Insiders must…

A

Report their holdings and changes in holding to the SEC

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18
Q

Short swing

A

Selling your own companies stock within 6 months of purchasing it

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19
Q

SRO disciplinary actions

A

The SEC can review any disciplinary actions taken by other SROs

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20
Q

Executive compensation

A

Law requires clear disclosure about compensation to CEOs, CFOs, and certain high ranking executives
Can be found of the 10-K, annual proxy statement
and the companies registration statement on file with the SEC

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21
Q

Regulation M

A

Ensures securities should not be distributed in a market manipulated by the activities of persons having an interest in the distribution.

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22
Q

Reg M Rules

A

101- covers activities of underwriters, broker-dealers and other distributors
102 - governs activities of issuers and selling security holders
103- deals with NASDAQ passive market making
104- governs stabilization transaction and post offering activities of underwriters
105- governs short selling in anticipation of a public offering

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23
Q

Regulation D Offering (private placement rules or) 504 rules

A

Can not exceed $10million
Offered to accredited investors

24
Q

Regulation D Offering (private placement rules or) 506 (b) rules - traditional private placement

A

Can conduct a “quiet” private placement offering, without solicitation, with up to 35 non-accredited and an unlimited number of accredited invests. The non-accredited investors but be sophisticated invests and have been provided with a disclosure, usually in the Private Placement Memorandum

These stocks are restricted from resale for the first 6 months after purchase

25
Q

Regulation D Offering (private placement rules or) 506 (c) rules

A

Issuer may use general solicitation
All purchasers must be accredited
Issuer must take reasonable steps to verify that the investor is accredited

26
Q

Reg C (crowdfunding) under the JOBS act

A

Allows for a start up to offer up to $5,000,000 worth of common shares in a 12-month period without being required to register with the SEC

Investment limits for non-accredited investors based on net worth and annual income

27
Q

SEC rule 144, what it does

A

Sets the conditions for which a holder of an unregistered security can sell it on the open market
Cover the resale of both restricted and control stock

28
Q

SEC rule 144 requirements

A

must hold the stock for at least 6 months
Adequate public information on the issuer must be available
sales in a 90-day period are limited to 1% of the outstanding stock or the average trading volume for the previous 4 weeks (whichever is greater)
Form144 notice of offering is effective for 90 days
transactions must be reported to the SEC at the time of sale

29
Q

Control Shares

A

Are shares acquired by an affiliated or control person of the company. These shares may or may not be registered

30
Q

SEC Rule 144(a)

A

Allows the sale of restricted unregistered securities Qualified institutional Buyers (QIBs) during the 6 month restricted period

31
Q

SEC rules 145

A

Requires registration of an unregistered stock wen offer to sell or an offer for sale would be considered as part of a merger consolidation or stock reclassification

32
Q

SEC rule 147

A

Covering intrastate offering

For 6 months after the date of the last sale sales and resales must remain in state sales

33
Q

Blue Sky Laws

A

State securities laws that prohibit misrepresentation, misleading statements, and sales by a person not registered or licensed by the state

34
Q

For a security to be sold in a state…

A

it must be either:
registered in the state
exempt from registration in the state
be a federal covered security listed on a National Securities Exchange

Registered Rep. selling the security must also be registered with the state

35
Q

Buy Back

A

When a company repurchases shares of common stock in the open market
These become treasury stock

36
Q

Exchange Offer

A

Made by a company to exchange outstanding shares outstanding shares of common stock or bonds. usually made because of company doesn’t have cash to pay bondholder

37
Q

Merger

A

When two companies combine to form one larger company

38
Q

Acquisition

A

When 1 company purchases another company

39
Q

Tender offer

A

offer made directly to shareholder to purchase their stocks. Typically the offer price is higher then the current market price

40
Q

Broker-Dealer book maintenance requirements

A

A broker-dealer is required to maintain books and records in accordance with SEC rules 17a-3 and 17a-4 either in electronic or hard copy form (may use external service such as a depository bank as well)

If external service is used SEC must be notified

41
Q

Record maintenance- 3 Years

A

Form U-4 and U-5 for employment
Fingerprints or all persons associated with broker-dealer, transfer agent or clearing firm
Customer confirmations
Copies of orders given or received on behalf of broker dealers or customers
Names and addresses of beneficial owners of all accounts

42
Q

Record maintenance- 4 Years

A

Customer Complaints- must be maintained at the Office of Supervisory Jurisdiction (OSJ)

43
Q

Record maintenance- 5 Years

A

Monetary Instruments sales records and must be available upon request
Customer Identification information (5-years after account is closed)

44
Q

Record maintenance- 6 Years

A

Blotter of Original Entry
Customer and General Ledgers
Customer Account information
Securities Records

45
Q

Record maintenance- for life

A

Articles of incorporation
Articles of partnership
supporting entity documents such as minutes and stock certificate books

46
Q

Customer Protection Rule

A

Ensures customer’s funds held by B/D are deployed in safe areas of the business related to servicing the firm’s customers
or
that the funds are deposited in a reserve bank account

47
Q

Regulation S-P - Privacy rules

A

Provide Notice to consumers about the institution’s privacy policy
Restricts institutions ability to share nonpublic personal information about customers with non affiliated third parties
Allows customers to opt -out of other information sharing
Requires safeguarding of customer information

NOTE: information can be shared with affiliates of B-D

48
Q

Regulation S-P Privacy rules information delivery requirements

A

When a new relationship is established
Annually to all customers

49
Q

Violations of S-P

A

Distributing customer personal information to a third party (family member not listed on the account, charities and other FINRA member firms)

50
Q

Customer Identification Program (CIP)

A

Identify every customer
Check information against terrorist lists and residence against embargoed countries list
Verify new cash accounts with 5 business days
Retain identification records for 5-years after account has closed

51
Q

Customer Identification in UGMA and UTMA accounts

A

The custodians information must be verified
B-D can execute transactions after obtain minimum required information whole still attempting to verify account information
If attempts to verify fail, account should be closed

52
Q

Regulation S

A

Regulates over seas transactions
Provides exemptions from Registration under 1933 act for securities sales occurring outside of the US
Transactions must be off-shore and not made to a US person
Equity Securities - 1-Year holding period before they can be sold to a US person (distribution compliance holding period)
Non-convertible bonds - 40 day holding period

53
Q

Reason for Regulation S

A

Allows US and foreign company raise capital quickly without having to comply with full blown 1933 registration

54
Q

US Person under Reg S

A

Natural person
Partnership or corporation incorporated in the US
Estate with an executor is a US person
Any trust where a trustee is a US person
Any non-discretionary account that benefits a US person

A Non-US person with a US broker dealer is still not a US person

55
Q

Buyers of Reg S securities

A

does not have to be accredited

56
Q

State Security Laws (blue sky laws) do not apply to…

A

margin requirements

57
Q
A

Series 7 (20 decks)

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