Federal Securities Acts Flashcards
What are the three steps in the Federal Registration Process?
- The Pre-Registration Process
- The Cooling-Off Period
- The Post-Effective Period
What happens in the Pre-Registration Process?
The issuer and underwriters prepare the registration statement, but cannot discuss the new issue with customers.
What happens in the Cooling-Off Period?
The SEC reviews the registration statement to determine if its complete, but does not rule on the investment merits or appropriateness of the issue’s price.
What is the SEC no approval clause?
A statement found on the cover of a prospectus indicating that the SEC does not approve or disapprove of the securities being offered.
What is a deficiency letter?
A letter sent by the SEC letting the issuer know that the registration statement is incomplete or misleading.
What happens when a deficiency letter is received?
The issuer must refile an amended registration statement.
What is a Red Herring?
An abbreviated form of the registration statement sent to potential buyers during the cooling off period, also known as the preliminary prospectus.
What does it mean to blue-sky an issue?
The issuer will register the issue in any states in which the securities are being sold
What is a due diligence meeting?
A meeting held before the effective date in which the underwriters, syndicate members, officers, attorneys, and accountants review the planned underwriting which involves certifying that the issuer and underwriters have satisfied state and federal laws.
What is the Post-Effective Period?
It is the period when the SEC determines the registration’s effective date and the Public Offering Price is set by the underwriters. Sales of the offering can begin and money may be accepted.
When must the final prospectus be delivered to purchasers?
It must be delivered no later than the time their sale is confirmed.
When is the Registration statement filed?
After the pre-registration period and before the cooling-off period.
What type of securities are exempt?
- Government
- Non Profit
- Banks
- Trust Companies
- Small Business Investment Companies
- Railroads
- Religious or educational
- Short Term debt with max maturity of 270 days (commercial paper)
What does Regulation D Rule 506 do?
Allows issuers to sell securities in non-public offerings, or private placements, which exempts the issuer from the registration requirements of the Securities Act of 1933
What are the conditions of Reg D Rule 506 that allow an issuer to sell in a private placement?
- Buyers are sophisticated investors
- Buyers have access to same information available in prospectus through Offering Memorandum
- Buyer does not intend to make quick sale and purchaser signs investment letter
- No more than 35 non-accredited investors
What is an accredited investor?
- Financial institution
- Director, officer, general partner
- Individual worth at least $1 mil, or gross income of $200k for past two years, $300k if married
What is a purchaser representative?
Person with knowledge and experience in the financial industry who must be designated by non-accredited investors
How is a purchaser representative designated?
A non-accredited investor must designate one in writing
What is Rule 147?
It is an intrastate exemption that allows issuers to avoid registration if securities are being sold within one state
What are the requirements for filing under Rule 147?
- 80% assets within state
- 80% gross revenues generated within state
- 80% proceeds used to operate business within state
- 100% purchasers are residents in state
What is Regulation A?
Exemption from SEC registration if it limits amount of capital raised to no more than $5 million during a 12 month period
What is an Offering Circular?
Disclosure document offered to purchasers of Reg A offerings
What is a tombstone ad?
Advertisement for new issues that is neither an offer to sell nor a solicitation of an offer to buy the securities
What must an investment company advertisement state?
It must tell investors from whom they can get a prospectus and that an investor must read it carefully
What happens if an investment company advertisement contains performance data?
Ad must include legend disclosing that data represents past performance, and that an investor’s return and principal value will fluctuate and may be worth less than original cost
What happens to a person who makes an untrue statement or omits a material fact in a registration statement?
They create a civil liability issue and are subject to SEC penalties and may be sued by the purchaser
Who can be sued?
- Registration statement signers
- Directors or partners
- Certifiers of the registration statement
- Underwriters
How is the amount of damages calculated in a lawsuit?
Full purchase price + Interest - Income Received = Recovery Amount
When must action be taken for civil liability issues?
-Within one year from the discovery, but not more than three years
What is the punishment for someone who violates the Securities Act of 1933
This a criminal liability issue and they will be subject to a fine of up to $10,000, imprisonment for up to five years, or both.
What does the Securities Exchange Act of 1934 do?
It regulates the secondary trading of securities, exchanges and broker-dealers and requires certain issuers to file periodic reports with the SEC
What is the Securities Exchange Commission?
An SRO that enforces federal securities laws and regulates broker-dealers, transfer agents, clearing agencies, SROs and stock exchanges
How are commissioners of the SEC appointed?
The president with the advice of the senate appoints 5 commissioners, with no more than 3 of 5 being from the same political party.
How long do commissioners serve?
Five year terms
What are SEC commissioners prohibited from doing during their term?
Engaging in personal securities transactions
What are the enforcement powers of the SEC?
- Administer Oaths
- Subpoeana witnesses
- Gather evidence
- Require production of records if federal securities law has been violated
What happens if a persons refuses to comply with a subpoena?
The SEC may obtain a court order compelling evidence.
What can the SEC investigate?
Violations of rules of any national exchange and SRO
What is the purposes of SROs such as FINRA and the MSRB?
Promote fair and equitable business practices in the securities industry
How long can the SEC suspend trading in a specific security?
10 days
How long can the SEC suspend all trading on an exchange?
90 days with prior notification to the US president
How does an exchange register with the SEC to become a national securities exchange?
They must file an application with the SEC which contains the rules of the exchange and other information required by the SEC.
How does the SEC determine whether it will grant registration?
The SEC examines the rules to confirm that they
- enforce compliance
- prevent fraud and manipulation
- promote fair and equitable trade practices
Who must be denied membership by national securities exchanges?
- Broker-dealers not registered with the SEC
- Persons who are not associated with registered broker-dealers
- Persons subject to statutory disqualifications preventing association with SROs
What events lead to statutory disqualification?
- Certain misdemeanor convictions within 10 years
- All felony convictions within 10 years
- Temporary and permanent injunctions issued by a court
- Being barred, expelled, or suspended by SEC or SRO
- Denial or revocation of SEC registrations
- Finding that member or person made false statements in applications or reports provided to SROs
What happens if member is expelled or suspended by SRO?
National securities exchange can do the same
What happens if a member firm is having financial and operational difficulties?
The exchange may suspend or limit the firm’s activities
What is Form BD?
The application that a broker-dealer must file with the SEC
When may a B/D be censured or suspended, have their registrations revoked, limit activities limited?
Officer or director has
- Willfully made misleading or false statements on registration application
- Willfully violated federal securities act
- Been convicted within past 10 years of misdemeanor or felony
- Been prohibited by court from engaging in securities related activity
- Barred or suspended from B/D association
What conditions would exempt a B/D from federal registration?
- Intrastate operation with no trading through a national securities exchange
- Business limited to certain exempt securities such as commercial paper, bankers’ acceptances, and commercial bills
What is Schedule 13D?
The report required when anyone acquires more than 5% of an issuer’s equity securities
When must Schedule 13D be filed?
Within 10 days after the acquisition to serve as notification to the issuer, exchange, and SEC
What must be included in 13D?
- Security and issuer
- Interest in securities, number of shares, percentage of ownership
- Identity, residence, citizenship and background of filer
- Source of funds
- Intention of purchaser
What is Schedule 13G?
The report required when an institutional investor does not intend to influence or control the issuer
What is Form 10-K?
The annual report of a company’s results over the past year that is filed with the SEC and is made public
What is included in a 10-K?
- Audited financial statements
- The business line and assets of the company
- Any legal proceedings in which the company is involved
- Risk factors
- Footnotes of accounting policies
- Market for company’s equity securities
- List of directors and officers and compensation
What is a Form 10-Q?
The quarterly report of a company with less detail than the 10-K
When must the 10-Q be filed?
Within 35 days of the end of each of its first three quarters
What is Form 8-K?
The form that provides information regarding unscheduled material events that are important to shareholders
When must the Form 8-K be filed?
Within four business days of any material event that may affect a company’s share price or financial condition
What events would be included in an 8-K?
- Change in company control, resignation of CFO, launching of SEC investigation
- Termination of any material agreement, bankruptcy, plant shut down, employee layoffs
- Acquisition or disposition of asset, results of operations and financial condition
- Notice of delisting, unregistered sale of securities
- Change in accountant
- Disclosure of material, non-public information
What happens if an issuer accidentally discloses inside information?
They must publicly disclose the information promptly within 24 hours
What is a proxy statement?
Statement filed when a corporation intends to solicit voting powers of attorney from shareholders regarding issues to be voted on
What is included in a proxy statement?
Information concerning executive compensation, percentage of company owned by executive officers, and names of company directors
What is Form 13F?
Quarterly report filed by institutional investment managers if aggregate market value of securities under control exceeds $100 mil
When must Form 13F be filed?
Within 45 days of the end of each calendar quarter
What defines an insider?
Immediate family, Officer, director, or owner of more than 10% of a company’s stock
What is the maximum civil penalty for insider trading?
Three times the profit gained or loss (treble damages)
What is the maximum criminal penalty for insider trading?
- $5 million, 20 years in prison for an individual
- $25 million for a corporation
What is the MSRB?
The Municipal Securities Rulemaking Board oversees all practices within the muni industry
Who must comply with MSRB rules?
B/Ds, but not issuers
What is the Investment Company Act of 1940?
An act whose purpose is to reduce abuse in the sales of investment company securities
How does the Investment Company Act aim to reduce potential conflicts of interest?
Require company’s board to be majority disinterested
What is an affiliated person?
- Officer, director, partner, or employee of investment company
- Company’s Investment Adviser
- Member of board
- Owner of at least 5% of voting stock
What is an affiliated company?
Company that owns at least 5% of voting stock
What is an Interested Person?
- Affiliated person and immediate family members
- Principal underwriter
- Investment company with same underwriter
- Anyone in past 2 years who acted as legal counsel
What is a promoter?
Person who initiated or directed the organization of the investment company within preceding 12 months
What are affiliated persons and promoters prohibited from doing?
- Purchasing securities or property from registered investment company
- Borrow money or property from registered investment company
When is an issuer exempt from registering with the SEC?
- Max 100 shareholders
- All shareholders are qualified purchasers
What is a qualified purchaser?
Individual with $5 mil in investments
Institution with $25 mil in investments
When can an Investment Company make a public offering?
When it has a minimum net worth of $100,000.
When can an offer be made for investment company shares?
If the offer is preceded or accompanied by a current prospectus
How often must a prospectus be revised to be considered current?
Every 16 months?
What is an omitting prospectus?
Special prospectus offering mutual fund shares for sale with limited information which is distributed prior to delivery of full prospectus
What are 12b-1 fees?
Annual fees levied against fund’s assets to cover distribution expenses
What is the criminal penalty for violating the Investment Company Act?
$10,000 fine, imprisonment up to 5 years, or both
What is the Sarbanes-Oxley Act?
Federal law that requires corporation’s annual and quarterly financial reports to be certified by the CEO and CFO
What is Section 15 of the Securities Exchange Act of 34?
Requires B/Ds to register with SEC
What is SEC Release 1092?
SEC publication to provide guidance to IAs
What is Rule 506(c)?
Allows general advertising, all investors must be accredited
What is Rule 506(b)?
Prohibits general advertising, up to 35 non-accredited investors
