Chapter 6- Federal Regulations Flashcards
Securities Act of 1933
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
Securities Exchange Act of 1934
Once new securities are sold they are now regulated under this act
Regulates the secondary Market
Defined as Securities under the 1933 act
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
Penalty for fraud under 1933 act
Original Purchase price plus interest if still owned
damages if no longer owned
Important notes from the act of 1933
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
Securities that are EXEMPT from registration under the 1933 act
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)
Regulation A+ Offering
Short Form registration
Reg A Offering Characteristic
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
1933 Anti fraud provisions exceptions
There are none. These provisions apply to all securities
Shelf Registration
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
American Depository Receipts (ADRs) Registrations
SEC requires ADRs register new issues
Securities Exchange Act of 1934 requirements
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
SEC regulates
Broker-Dealers
Exchanges
Insiders
and themselves and other Self-Regulatory organizations
DOES NOT regulate commodities or commodities futures
1934 act key provisions
-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
What is an insider
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
Insiders may not…
Sell their own stock short or short against the box
Prohibited from doing short swings
distribute unreleased press report that contains material information
Insiders must…
Report their holdings and changes in holding to the SEC
Short swing
Selling your own companies stock within 6 months of purchasing it
SRO disciplinary actions
The SEC can review any disciplinary actions taken by other SROs
Executive compensation
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
Regulation M
Ensures securities should not be distributed in a market manipulated by the activities of persons having an interest in the distribution.
Reg M Rules
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
Regulation D Offering (private placement rules or) 504 rules
Can not exceed $10million
Offered to accredited investors
Regulation D Offering (private placement rules or) 506 (b) rules - traditional private placement
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
Regulation D Offering (private placement rules or) 506 (c) rules
Issuer may use general solicitation
All purchasers must be accredited
Issuer must take reasonable steps to verify that the investor is accredited
Reg C (crowdfunding) under the JOBS act
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
SEC rule 144, what it does
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
SEC rule 144 requirements
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
Control Shares
Are shares acquired by an affiliated or control person of the company. These shares may or may not be registered
SEC Rule 144(a)
Allows the sale of restricted unregistered securities Qualified institutional Buyers (QIBs) during the 6 month restricted period
SEC rules 145
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
SEC rule 147
Covering intrastate offering
For 6 months after the date of the last sale sales and resales must remain in state sales
Blue Sky Laws
State securities laws that prohibit misrepresentation, misleading statements, and sales by a person not registered or licensed by the state
For a security to be sold in a state…
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
Buy Back
When a company repurchases shares of common stock in the open market
These become treasury stock
Exchange Offer
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
Merger
When two companies combine to form one larger company
Acquisition
When 1 company purchases another company
Tender offer
offer made directly to shareholder to purchase their stocks. Typically the offer price is higher then the current market price
Broker-Dealer book maintenance requirements
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
Record maintenance- 3 Years
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
Record maintenance- 4 Years
Customer Complaints- must be maintained at the Office of Supervisory Jurisdiction (OSJ)
Record maintenance- 5 Years
Monetary Instruments sales records and must be available upon request
Customer Identification information (5-years after account is closed)
Record maintenance- 6 Years
Blotter of Original Entry
Customer and General Ledgers
Customer Account information
Securities Records
Record maintenance- for life
Articles of incorporation
Articles of partnership
supporting entity documents such as minutes and stock certificate books
Customer Protection Rule
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
Regulation S-P - Privacy rules
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
Regulation S-P Privacy rules information delivery requirements
When a new relationship is established
Annually to all customers
Violations of S-P
Distributing customer personal information to a third party (family member not listed on the account, charities and other FINRA member firms)
Customer Identification Program (CIP)
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
Customer Identification in UGMA and UTMA accounts
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
Regulation S
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
Reason for Regulation S
Allows US and foreign company raise capital quickly without having to comply with full blown 1933 registration
US Person under Reg S
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
Buyers of Reg S securities
does not have to be accredited
State Security Laws (blue sky laws) do not apply to…
margin requirements
