Federal Securities Regulations

Question 1

Security

Answer 1

An investment contract is a security if it:

• involves the investment of money
• in a common enterprise
• with the expectation of profits
• that results solely from the efforts of others

Question 2

Security examples

Answer 2

Stock
Bond
Debenture
Right or warrant
Note
Option
Limited Partnership interest
Certificate of interest in profit sharing arrangement

Question 3

Issuer

Answer 3

Person who issues or proposes to issue security

Question 4

Underwriter

Answer 4

Person who purchases with a view to sell (does not include brokerage firm earning a commission on a retail sale)

Question 5

Prospectus

Answer 5

Notice, Circular, Letter or communication written or broadcast by radio or TV that offers a security for sale or confirms the purchase of a security

Question 6

Tombstone advertisement

Answer 6

ID's:
Security
Price 
Underwriters
NOT A PROSPECTUS

Question 7

Sale of a security does not include

Answer 7

• preliminary negotiations or agreements between issuer and underwriter
• gift of securities

Question 8

Securities exempt from registration

Answer 8

• US Gov’t issues (Fed, State, Local)
• Bank issues (not bank holding companies)
• Commercial paper (ST <270 days/9 mos)
• Railroad equipment trust
• Regulated public utilities
• Intrastate offerings under Rule 147

Question 9

Rule 147 (80-80-80)

Answer 9

1+47 (states)
80% Revenue generated in state
80% of proceeds used in state
80% of assets must be in state
100% of purchasers must be residents of the state

Question 10

Exempt transaction - Regulation D

Answer 10

Private Placement Exemption
Sold privately - not to public doesn’t have to register
Only to accredited investors and 35 non-accredited
Must file form D within 15 days of sale

Question 11

Rule 501 Accredited Investor

Answer 11

• Institutional investors
• EE benefit plans >5M assets
• Insider of issuer
• Net worth of $1M (not including home)
• Single inc. $200K/Joint inc. $300K for last 2 yrs and expected to cont this year

Question 12

Requirements of non-exempt securities

Answer 12

• File registration stmt. Full Disclosure

- issue prospectus (cannot be highlighted or altered in any way)

Question 13

Preliminary Prospectus (red herring)

Answer 13

• No price
• No effective date
• no orders or deposits before effective date

Question 14

Cooling off period new issue

Answer 14

min of 20 days

can use red herring

Question 15

Rule 482 - omitting prospectus

Answer 15

Allows mutual fund to advertise without prospectus
tombstone ad
Must say that prospectus is available; only for information

Question 16

Securities exempted from SEC registration

Answer 16

• Government issues (Fed, State, local)
• Short-term commercial paper (less than 270 days) if issuer uses proceeds to increase working capital
• Issued by charitable org, religious, not for profit
• Issue by railroad equipment trust
• Issue by a federal or state bank (does not apply to holding co’s)

Question 17

Rule 147 Issue

Answer 17

An exempt security under federal law, but probably has to register with the state:

• Issue offered only to residents of a single state where the issuer resides in that state and is doing business in that state
• Must be only in that state for 9 months

Question 18

Rule 147 80-80-80

Answer 18

80% of issuers gross revenue must be from that state
80% of proceeds must be used for business within the state
80% of issuers assets must be in that state

Question 19

Exempted transactions

Answer 19

• transactions by persons other than issuer/dealer/underwriter
• transactions by an issuer that do not involve a public offering

Question 20

Securities Act of 1934

Answer 20

Created the SEC
People and places act
regulates BD’s and exchanges

Question 21

Credit in Security Industry (Reg T)

Answer 21

Federal reserve sets the margin requirements
(50%)
No credit on new issues and options (mutual funds)

Question 22

Control person of company

Answer 22

Officer
Director
> 10% shareholder
immediate family of above

Question 23

Discretionary account

Answer 23

Client gives BD ability to make decisions about:
-Asset - what security
-Action - buy or sell
-Amount - how much to buy/sell
MUST HAVE WRITTEN DISCRETIONARY ACCOUNT IN HAND
do not need discretionary agreement if ONLY time and price is discretionary.

Question 24

Form 13F

Answer 24

Filed by institutional investment mgrs w/ >$100M in certain equity securities
Quarterly filed
(to make sure no one gets too much of certain security)

Question 25

Transfer agent

Answer 25

Transfers stock from one person to another
Regulated by SEC
Must register

Question 26

Securities Information Processor (SIP)

Answer 26

Process information for trades and make public
Regulated by SEC
Must register

Question 27

Associated person of BD

Answer 27

Anyone associated with BD incl:
silent partners
outside directors
NOT clerical personnel

Question 28

Investment Company Act of 1940

Answer 28

Regulates Investment Companies

Question 29

Types of Investment Company

Answer 29

• Face-Amount certificate company
• Unit Investment Trust (fixed portfolio, passive)
• Management Companies (open-end and closed-end)

Question 30

IC Registration with SEC requirements

Answer 30

• must have initial private capitalization of $100,000
• Clearly defined investment objective
• Annual financial reports to SEC (semi-annual to shareholders)

Question 31

IC shareholders have the right to vote on:

Answer 31

• Changing nature of business (open-end to closed-end, etc)
• Changing investment objectives/policies
• Changing investment advisor (manager)

Question 32

IC Board of Director requirements

Answer 32

• no felonies or securities-related misdemeanor

- Minimum of 40% of board must be outside director (no affiliation other that sitting on the board)

Question 33

IC Investment Adviser

Answer 33

• person, company, etc who manages the fund for a feee

- 2-year initial contract, renewable annually