Investment Professionals, Guidelines & Regulations Flashcards
Who’s a Natural Person?
An Individual (a living human being)
Who’s not a Person?
Legal Person
An Individual Age 18- (Minor)
Deceased Individuals
Individuals Declared Legally Incompetent
Who’s an Accredited Investor?
A Person under Regulation D Rule 501 of the 1933 Act who can trade UnRegistered Securities
What are the 5 Requirements to be an Individual Accredited Investor?
A General Partner, Executive Officer, or Director for the Issuer of the UnRegistered Security
A Registered Broker or IA
An Individual who’s a ‘Knowledgeable Employee’ of a Private Fund
An Individual w/ Income of $200K+ or $300K+ Joint for the past 2 yrs & Future
An Individual w/ Net Worth of $1M+
What are the Requirements for an Entity to be an Accredited Investor?
A Firm w/ Equity Investors who are already Accredited Investors
A Firm w/ $5M+ Assets
A Private Business Development Firm
What’s an Investment Adviser (IA)?
A Person who provides Securities Advice as part of a Regular, Ongoing Business and Receives Compensation for such Services
Who are the 4 Individuals that Qualify as IA’s?
Investment Adviser
Financial Planners
Pension Consultants
State-Registered & Federally Covered Advisors
Sport & Entertainment Representatives
What are the 2 types of Registered Investment Advisers (RIA)?
State RIA
Federal Covered Adviser
What are the 3 Requirements for an IA to Register w/ a State?
Investment Adviser
$100- AUM
A Physical Office in the State
Solicits business from 5+ Retail Clients in the State in the past 12 Mths (De Minimis Exemption)
When is a BD, Agent, IA, or IAR State Registration Active?
Noon on the 30th Day after the Application is Filed
Expires Dec 31st at Midnight of each Year
When must an IA Register as a Federal Covered Adviser?
Investment Adviser
$110+ AUM
When is a Federal Covered Adviser Registration Active?
45 Days after the Application is Filed, unless Proceedings commence about Denial of Application
No Expiration, unless Withdrawn, Canceled, Revoked or Suspended by the SEC
What are the 3 Requirements for an IA to be Exempt from Federal (SEC) Registration?
Investment Adviser
Only Client’s are Insurance Firms
All Clients are located in the same State as your Principal Business Office & you don’t give Securities advice
15- Clients in the past 12 Mths & you don’t as an IA or hold yourself out the Public as an IA
When must a Private Fund IA Register as a Federal Covered Adviser?
Investment Adviser
$150+ M AUM
Servicing 100+ Accredited Investors
Issue an IPO for the Fund
Are Venture Capital IA’s required to Register w/ the SEC?
Investment Adviser
No
Where does an IA Register if their AUM is $100-110M?
Investment Adviser
Either w/ a State or as a Federal Covered Adviser
What did the National Securities Market Improvement Act (NSMIA) of 1996 do?
Eliminated the Dual Registration (State & Federal) of IA’s & assigned SEC (Federal) Jurisdiction over all Covered Securities
What’s an RIA Notice Filing?
The Fee that RIA’s must pay to conduct business in a State, if required by the State
What’s Form ADV?
Uniform Application for IA Registration
What are the 4 sections of Form ADV Part 1?
Registration Info
Name
Address
Business Type
Records of any Breaches of Laws
What’s Form ADV Part 2A?
Brochure Rule, Disclosure Statement, or Investment Brochure
An Investment Brochure of the Investment Firm
What are the 4 sections of Form ADV Part 2A?
Client Balance Sheet
Business Practices
Conflicts of Interest
Fees
What are the 2 sections of the Client Balance Sheet within Form ADV Part 2A?
- Custody of Client Funds & Securities
- Collection of Pre-Payment of Fees
$500+ 6- Mths in Advance if State Registered
$1,200+ 6- Mths in Advance if Federally Registered
When must Form ADV Part 2 be provided to a new Client?
2 Days (48 hrs) prior to signing an Investment Advisory Contract
Concurrent w/ signing an Investment Advisory Contract so long as the Client has 5 Business Days to nullify the Contract
Either or
Does Form ADV Part 2 need to be provided to a Client Annually?
Yes if Changes are made
Which 3 Clients don’t need to receive Form ADV Part 2 Annually?
Investment Firm Clients
Clients for Impersonal Advisory Services
Clients charged a Fee of $200-
Who’s an Investment Adviser Representative (IAR)?
An Individual who provides Investment Advice or Manages Client Profiles, incl. Individuals who Supervise IAR’s
Where do IAR’s need to be Registered?
Investment Adviser Representative
Always w/ the State
Covered under the Registration of the Firm
Are Investment Firm Employees who perform Clerical or Administrative Duties considered IAR’s or Agents?
Investment Adviser Representative
No
What’s Form ADV Part 2B?
A Detailed Description of each of a Firm’s IAR’s
What’s Form U2?
Uniform Consent to Service of Process
What does Form U2 grant State Administrators?
Appoints each State Administrator as the Registrant’s Attorney for Noncriminal Legal Proceedings
What’s Form U4?
Uniform Application for Securities Industry Registration or Transfer
What’s Form U5?
Uniform Termination Notice for Securities Industry Regulation
Who needs to notify the State Administrator when an IAR or Agent Terminates Employment w/ a BD, Issuer, or IA Firm?
Form U5
Everyone
Who needs to notify the SEC when a Federal Covered Advisor Terminates Employment w/ an IA Firm?
Form U5
Only the Federal Covered Advisor
What’s a Schedule H?
Wrap Fee Brochure
An Investment Brochure provided to Clients who are opening a Wrap Account
What’s a Wrap Fee?
Fee + Commission
Who’s a Promoter?
A Person who provides a Testimonial or Endorsement for an Investment Professional
Who’s a Solicitor?
An IAR who’s contracted or employed by an IA to Solicit Business
What are the 4 General Reasons a State Administrator may Cancel an IA’s Registration?
When the IA:
Can’t be Found after a Reasonable Search
Deceased
Failed to Complete Annual CE Requirements
Mentally Incompetent
When may an IA submit a Withdrawal of Registration Claim?
Investment Adviser
When they Cease to Conduct Business as an IA & file Form ADV-W
Investment Adviser
When does an IA Form ADV-W become Active?
Schedule W
30 Days after Filing, unless Disciplinary Actions are Pending
What’s a State Administrators Statute of Limitation to initiate IA Disciplinary Actions after a Withdrawal of Registration?
Investment Adviser
1- Years after Withdrawal
What are the 2 IA Continued Education (CE) Topics?
Investment Adviser
Ethics & Professional Responsibility
Products & Practice
What are the IA CE Requirements for the Ethics & Professional Responsibility Section?
Investment Adviser
Min. 6 Credits
Min. 3 Hrs covering Ethics
What are the IA CE Requirements for the Products & Practice Section?
Investment Adviser
Min. 6 Credits
What’s a Broker-Dealer?
Any Person or Group engaged in the Business of effecting Securities Transactions for Themselves or Others
Can a BD be both a Broker & a Dealer?
Broker-Dealer
No, they can be either a Broker or a Dealer, but not both at the same time
What are the 2 types of BDs?
Broker-Dealer
Clearing (Carrying) BD
Introducing BD
Broker-Dealer
What’s a Clearing BD?
Carrying Broker-Dealer
A BD that executes Client Securities Orders and maintains Custody of Client Securities, Cash & Transaction Records
Broker-Dealer
What’s an Introducing BD?
Broker-Dealer
A BD that accepts Client Securities Orders, but has a Clearing BD to execute Trades and maintain Custody of the Securities & Cash
Broker-Dealer
What are the 2 types of Trades a BD can make?
Broker-Dealer
Agency Trades
Principal Trades
What’s a BD Agency Trade?
Broker-Dealer
When an Agent of a BD is matching a Buyer w/ a Seller & charges a Commission
Broker-Dealer
What’s a BD Principal Trade?
Dealer Trade
When a BD purchases a Security for its Inventory at a Markdown & sells that Security to a Client from its own Inventory at a Markup
Broker-Dealer
Where must a BD Register?
Broker-Dealer
With each State they have:
A Physical Office in
A Retail Client in
What are the 5 Reasons a BD can be Exempt from State Registration?
Broker-Dealer
Execute Unsolicited or Non-Exempt Trades non-occasionally in the State
No Physical Office in the State
Transact Business in the State only w/:
BDs, Issuers, Institutional Buyers, or Financial Institutions
Clients who have temporary Residences (Snowbird Exemption)
Clients who recently moved to the State (limited to 30 Days)
Who’s a BD Agent?
Broker-Dealer
An Individual who’s employed by a BD to represent them in effecting Securities Transactions
Broker-Dealer
Can a BD Agent work for multiple BDs?
Broker-Dealer
Yes, but only if all of the BDs are Owned & Controlled by a Parent BD
Broker-Dealer
What happens to an IAR or Agents Registration, when an IA Firm or BD loses its Registration?
They have 2- Yrs to Re-Register before they have to retake the Securities Exams
What’s an Issuer?
Any Person who Issues or Proposes to Issue a Security
Who’s an Agent of an Issuer?
An Employee of an Issuer who sells Securities
What’s an Issuer Transaction?
A Transaction in which the proceeds of the Sale go to the Issuer
What’s an Issuer Primary Offering?
An Issuer Transaction involving New Securities
What’s Form S1?
Issuer Registration Statement under the 1933 Act
What are the 5 sections of Form S1?
Registration Statement
Amount of Securities Offered
Min. & Max Offering Prices
Max Underwriting Discounts & Commissions
Notice of other States who’ll also receive this Form S1
Adverse Filings
What are the 3 methods of Registration available to Issuers?
Registration By Coordination
Registration By Notification
Registration By Qualification
What’s Registration By Coordination for Issuers?
When an Issuer Registers a Security Offering w/ a State Administrator at the same time as the SEC
What 6 Records accompany an Issuer Registration By Coordination?
Form S1 (Registration Statement)
Form U2 (Consent to Service of Process)
Articles of Incorporation & Bylaws
Issuer Indentures
3 Copies of Security Prospectus
Underwriter Agreement
When is an Issuer Registration By Coordination Active?
Whenever the Federal Registration becomes Effective
So long as:
State Registration has been on File for 10-20 Business Days
Form S1 (Registration Statement) has been on File for 2+ Business Days
What’s Registration By Notification for Issuers?
A faster Registration method where a Blue-Chip Firm that’s Federally Registered provides Records & Pays a Fee to the State Administrator to Sell a Security in a new State
What 4 Records accompany an Issuer Registration by Notification?
Form S1 (Registration Statement)
Form U2 (Consent to Service of Process)
Statement of Eligibility for Filing
Security Prospectus
What’s Registration By Qualification for Issuers?
When an Issuer plans to Sell a Security (that isn’t an IPO) in a single State & they aren’t Eligible for Registration By Notification
What are the 10 Records that accompany an Issuer Registration By Qualification?
Form S1 (Registration Statement)
Articles of Incorporation & Bylaws
$$$ Paid to Promoters & Non-Issuers (over the past 3 yrs & Future)
Issuer Balance Sheet & Income Statement
Issuer Description of their Capitalization & Long-Term Debt
Issuer Indentures (over the past 2 yrs)
Security Prospectus
Issuer Info about Officers, Directors & their History of Earnings
Issuer Info on Shareholders w/ 10%+ Ownership
Utilization of Issuer Proceeds
When is an Issuer Registration By Qualification Active?
30 Days after the Filing Date
What happens if someone other than the Issuer will Benefit from a new Security Offering?
Additional Records must be provided:
Person’s Name & Address
Amount of Securities being Offered
Reason for the Security Offer
Rank the Issuer Registration Methods from Most Difficult to Least Difficult.
Registration By Qualification
Registration By Coordination
Registration By Notification
What’s an Issuer Stop Order?
When a State Administrator or Federal Court halts an Issuers Registration
What are the 5 Reasons a State Administrator can issue a Stop Order?
Willfully violating the Uniform Securities Act (USA)
Failing to pay Application Fees
Filing a Materially Incomplete, False, or Misleading Application
The Issuer is Unqualified for the chosen Registration Type
The Security has a Stop Order in effect from another State Administrator or Federal Court
When is it Not Acceptable for a State Administrator to issue a Stop Order?
30 Days after a Registration Effective Date using Info known by the Administrator during the Registration Filing
What are the 3 Reasons an Agent of an Issuer can be Exempt from Registration?
Sell Exempt Securities
Sell Securities in an Exempt Transaction
Sell the Securities to Existing Directors, Officers, or Employees of the Issuer and receives no additional compensation
What’s an Exempt Security?
A Security Exempt from Federal, State, and/or Local Registrations
What are the 10 types of Exempt Securities?
Bank, Trust, or Credit Union Securities
Commercial Paper
Federal Covered Securities
Gov. Securities
Insurance Firm Contracts (excl. Variable Contracts)
Municipal Notes & Bonds
Non-Profit & Charitable Firm Securities
Public Utility Firm Securities
Railroad & Common Carrier Securities
Retirement Plan Securities
What’s an Exempt Transaction?
Transactions Exempt from Federal, State, and/or Local Registrations that generally don’t involve the Public
What are the 6 types of Exempt Transcations?
A Sale of a Pre-Organization Subscription (w/ 10- Subscribers & no Commission)
Non-Issuer Transaction
Private Placements (to 10- persons within 12- mths)
Rights Sale
Some Transactions w/ Financial Institutions, Fiduciaries, & Insurance Underwriters
Unsolicited Non-Issuer Orders
What’s a Non-Issuer Transaction?
Secondary Transaction or Transaction between Investors
An Exempt Transaction in which the proceeds of the Sale don’t go to the Issuer
What’s a Private Placement?
A Transaction that may qualify as Exempt & is governed by Regulation D of the 1933 Act that’s sold Privately
When’s a Private Placement Exempt from State & Federal Registration?
State Exemption: 10- Accredited Investors Annually
Federal Exemption: 35- Non-Accredited (Sophisticated) Investors Annually
Who’s a Non-Accredited (Sophisticted) Investor?
A Non-Accredited Investor who has substantial knowledge of Finance who signs an Investment Letter denoting this
What’s a Rights Sale?
An Exempt Transaction that permits an Investor to maintain a proportional Share in a Firm when the Firm issues new Shares
What’s an Unsolicited Order?
An Exempt Transaction in which a Client contacts an Investment Professional and requests to buy/sell Securities
What’s a Surety Bond?
A Bond that an Investment Professional must hold as a source of Funds to cover future Legal Fees from Lawsuits pertaining to Discretionary Accounts
What are Books & Records related to Investment Professionals or Firms?
The NASAA Model Rules about the Records that an Investment Professional must Maintain, Store, and immediately Produce
What Format can Books & Records for Investment Professionals be stored in?
Electronic Storage
Micrographic Media (Microfiche or Microfilm)
Paper or Hard-Copy
What are the 3 Cybersecurity measures that Investment Professionals must ensure for Electronic Storage of Books & Records
Limit Access to an Administrator (its Examiners & Representatives) & Authorized Personnel
Maintain & Preserve from Loss, Alteration, or Destruction
Reasonably ensure that any Non-Electronic Original Record stored on Electronic Media is Complete, True, & Legible
What are the 5 types of Investment Professional Books & Records?
Customer Accounts
Correspondence (Excl. Emails unrelated to Advisory Activities)
Financial Books
Partnership Papers
Trade Memoranda
How many Years of Books & Records must Investment Professionals Store?
- BD Requirement: Min. 3 Years
1st & 2nd Years in Short-Term (Accessible) Storage
3rd Year in Long-Term Storage - IA Requirement: Min. 5 Years
What’s a Business Continuity Plan (BCP)?
A Plan to ensure that Personnel & Assets are protected and able to function quickly in the event of a Disaster
What are the 4 Priorities of a BCP?
Business Continuity Plan
Define & Mitigate Firm Risks
Determine how Risks affect Operations
Implement Safeguards & Procedures
Initiate Continual Testing & Reviewing of the Plan
What’s a Disaster Recovery Plan (DRP)?
A part of a BCP that details how a Firm can resume IT Operations after Disaster
Business Continuity Plan
What’s a Succession Plan?
Replacement Planning
A part of a BCP that’s overseen by a Board of Directors & CEO to prepare for passing Leadership roles down to Employee(s)
Business Continuity Plan
What’s a Security?
A Fungible or Tradable Financial Instrument managed by a 3rd Party to raise Capital or earn a Profit in Public & Private Markets
What are the 6 Items that aren’t Securities?
Collectibles
Commodity Futures
Condominium used as a Personal Residence
Currency
Fixed Insurance Products
Retirement Plans
What’s a Covered Security?
Federal Covered Security
A Security w/ a Federally imposed Exemption from State Registration that is equal in Seniority or Senior to the Listed Exchange Securities
What’s a Guaranteed Security?
A Security insured by an Entity
What are the 3 types of Insurers for Guaranteed Securities?
Federal, State, and/or Local Gov.
Insurance Company
Parent Company of Issuer
What’s a Security Offer?
A Security Offer for Sale
That can’t be made until the Security has been Registered or is Exempt
What’s a Security Sale?
A Security Contract for Sale
What are the 4 Transactions that aren’t considered a Security Offer or Sale?
Dividend Payments
Exchanges of Securities caused by Firm Bankruptcy, Consolidation, Merger, Reorganization
Gifts of Nonassessible Securities
Securities that are Collateral for a Loan
What’s Regulation A under the 1933 Act?
A Federal Act that allows Small Firms to issue Exempt Securities to the General Public to raise a limited amount of Capital
What’s Regulation A+ under the 1933 Act?
An Amendment to Regulation A that ▲ Total Raised Capital Allowance
How much Capital can a Small Firm issue under Regulation A+ of the 1933 Act?
Tier 1: $20M- in a 12 Mth Period ($6M- from Affiliates)
Tier 2: $75M- in a 12 Mth Period ($22.5M- from Affiliates)
What’s Form ADV Part 8A?
A Registration Statement for Small Firms that Qualify for Regulation A/A+ of the 1933 Act
What does §3A11 Rule 147 of the 1933 Act specify?
IntraState Offering Safe Harbor Rule
The Exemptions that allow an Issuer to sell an Exempt Security
What’s Rule 147A of §3A11 of the 1933 Act?
A 2016 Amendment to Rule 147:
Issuers can be Organized in other States
Out-of-State Residents can purchase an Exempt Offering from another State
What’s the JOBS Act of 2012?
Jumpstart Our Business Startups (JOBS) Act
Crowdfund Act
What’s Title 17 II §227 of the JOBS Act of 2012?
Regulation Crowdfunding or Reg CF
Allows Small Firms to Raise limited Capital using the Internet
What’s §227A100 of Title 17 II §227 of the JOBS Act of 2012?
The Exemptions offered to Issuers of Crowdfunding
What are the 3 Exemptions offered within §227A100 of Title 17 II §227 of the JOBS Act of 2012?
Security Offering of $5M- in the past 12 Mths
Non-Accredited Investor Limits
The Transaction takes place through an SEC Registered Intermediary (BD or Funding Portal)
What are the Non-Accredited Investor Limits within §227A100 of Title 17 II §227 of the JOBS Act of 2012?
- Annual Income or Net Worth of $107K-
Can Invest either $2,200 or 5% their Annual Income or Net Worth - Annual Income or Net Worth of $107K+
Can Invest 10% of their Annual Income or Net Worth up to a Max of $107K
What’s a Funding Portal?
A Crowdfunding Platform operated by a Broker
What 3 things can’t a Broker or Agent of a Broker do related to a Funding Portal?
Offer Investment Advice
Solicit Purchases, Sales or Offers to Buy Securities on the Platform or be Compensated for Soliciting
Manage or have Custody of Client Funds & Securities on the Platform
What 5 Firms don’t Qualify for the Exemptions offered within §227A100 of Title 17 II §227 of the JOBS Act of 2012?
Firms subject to the Reporting Requirements of the 1934 Act
Firms w/ no Business Plan
Firms whose Business Plan involves engaging in M&A w/ an Unidentified Firm
Non-U.S. Firms
Specific Investment Firms
What’s a State Administrator Summary Order?
When a State Administrator Suspends a Registration, Security, or Transaction while Court Proceedings are Pending
What 3 Jurisdictions do State Administrators have over Security Transactions & Offers?
Transactions Effected or Accepted in the State
Offers Originating from the State
Offers Directed into the State
When does a State Administrator Not have Jurisdiction over Offers?
- Newspaper Offers:
Published Out-of-State
Where 2/3rds of the Circulation occurs Out-of-State - TV or Radio Offers:
Broadcasted in State, but Communication of the Broadcast occurs Out-of-State
What are the 8 Reasons a State Administrator can issue Disciplinary Action?
Convicted of a Securities Misdemeanor or Felony within 10- Yrs
Engaging in Dishonest or Unethical Business Practices within 10- Yrs
Violation of Securities or Commodities Laws within 10- Yrs
Failing to ensure Firm Compliance
Failing to Pay Application Fees
Filing a Materially Incomplete, False, or Misleading Application
Insufficient Experience, Training, or Securities Knowledge
Refusing an Administrator Audit or Inspection of Principal Business Offices
What are the 6 Reasons a State Administrator can issue Civil Penalties?
Failure to File required Advertising & Sales Literature w/ State Administrator
Failure to Hold Proper Registration
Failure to provide a Prospectus to a Client (when required)
Making Unintentional False Statements or Omitting Material Facts while Offering or Selling a Security
Soliciting of Unregistered Non-Exempt Securities
Willfully participating in Transactions that Manipulate Securities
What are the 3 Civil Penalties that an Investor can seek in a Civil Lawsuit?
- Cost of Reasonable Attorney Fees
- Reasonable Investment Return
Starting from the Purchase Date
Return=State RoR (~6%)-Current Earnings - Original Purchase Price of the Security
What’s the Statute of Limitation for State Administrators to bring forth a Civil Lawsuit?
3- Yrs after the Alleged Violation
2- Yrs after the Discovery of the Violation
Either Or
What’s the Statute of Limitation for Investors to bring forth a Civil Lawsuit?
3- Yrs after the Alleged Violation
1- Yr after the Discovery of the Violation
When can a State Administrator or Investor sue for Criminal Liability?
Fraud or Intentional Omissions of Material Facts while Offering or Selling Securities
What’s the Statute of Limitation to bring forth a Criminal Lawsuit?
5 Yrs after the Alleged Violation
What are the 2 Federal Criminal Penalties that can be issued for a Criminal Lawsuit?
$10K- Fine
5- Yrs Prison
What are the 2 State Criminal Penalties that can be issued for a Criminal Lawsuit?
$5K- Fine
3- Yrs Prison
What are Investment Professionals granted when they receive a Disciplinary Action Allegation from a State Administrator?
Written Notice detailing the Reasons
15- Days to schedule a Hearing
What happens if an Investment Professional receives a Disciplinary Action Allegation, but doesn’t respond or exercise their privelege to a Court Hearing?
Then the Disciplinary Action becomes Active/Final after 30 Days
Define Contumacy.
Failure to Comply w/ a State Administrator Order
What’s a Letter of Rescission?
When an Investment Professional Offers to Repurchase a Security & Refund Fees paid by a Client if they’ve affected an Illegal Securities Transaction & the Client hasn’t already Sued
What 4 things does a Letter of Recession detail?
A Statement that the Client has 30- Days to Accept the Offer otherwise they forfeit their Right to Sue
An Explanation of the Client’s Liability
Advice to the Client of their Right to Rescission
Repurchase Price (accounting for Refunded Fees)
What are the 8 Prohibited Statements in Investing?
Inaccurately stating a Commission
Inaccurate Market Quotes
Misrepresenting or Overstating the Status of a Client Account
Promising to perform Services w/out the Intention or Ability to do so
Spreading Rumors or False Statements Unintentionally or Intentionally
That the Registration of an Agent or Security means they’re State or SEC approved
That the Regulation of a Security means it’s Safe
Using Inflated or Exaggerated Language
How does the Investment Industry define Advertising?
Direct or Indirect Communications & Solicitations (incl. Testimonials & Endorsements) addressed to 2+ Persons
What are the 2 items that aren’t considered Advertising in the Investment Industry?
Direct Communication w/ a Client that doesn’t pertain to Offering New Advisory Services
Speeches regardless of if they’re Broadcast or take place One-on-One
What are the 3 Required Disclosures for a Promoter?
Conflicts of Interest
Whether the Promoter is a Client
Whether the Promoter is Compensated (incl. Terms of Compensation)
What does an IA need to do if they plan to utilize a Promoter?
Enter into a Written Agreement w/ them
What are the 2 times an IA doesn’t have to enter into a Written Agreement w/ a Promoter in order to utilize them?
When the Promoter is an Affiliate
When the Promoter receives $1K- in the past 12 Mths (De Minimis)
What’s a 3rd Party Rating?
A Rating or Ranking of an Investment Professional used for Advertising that’s provided by a 3rd Party
If an IA plans to use a 3rd Party Rating for Advertising, what 4 things must they Disclose?
3rd Party Identity
Date the Rating was given
Time Frame the Rating was based on
The Fact that Compensation was provided to the 3rd Party (if any)
What’s Performance Advertising?
When an Investment Professional Advertises the Results of an Investment, Portfolio, or Strategy
What 3 things are Required if an Investment Professional plans to Advertise Performance?
If Gross Performance is Advertised, then Net Performance must be Advertised
No Cherry Picking Results
Presented w/ the Time Periods in which the Results were Realized
What 2 things are Required if an Investment Professional wants to Advertise Hypothetical Results?
The Performance must be Relevant to the likely Intended Audiences’ Investment Profiles
Denote that the Results are Hypothetical
If an Investment Professional Advertises Investment Analysis Tool Results, is it considered Hypothetical Performance Advertising?
No, so long as the Tool is Actively used the SEC doesn’t consider it Hypothetical Performance Advertising
What must an Investment Analysis Tool Advertisement Disclose?
The Limitations of the Tool
Can the Abbreviations IA, IAR, or RIA be used by Investment Professionals as their Title?
No, the SEC considers it Misleading
What 4 things must Investment Professionals Disclose when speaking about Performance?
Confirmation that Past Performance doesn’t Guarantee Future Performance
Whether the Past Performance is Hypothetical or not
Which Group of Investors the Performance pertains to
Verifiable Non-Manipulated Historical Performance Data
What Investments can an Investment Professional Guarantee Performance for?
Interest Payments, Dividends, & Principal paid by Insurance & Gov. Firm Investments
Who are the 3 Individuals an Investment Professional can Disclose a Client Profile to?
Parties of a Joint Account
Anyone the Client Consented to
Individuals Requesting the Info as Required by Law
What are the 5 Disclosures within a Client Contract?
- Compensation (How it’s being Calculated)
- Prepaid Compensation ($500K+ 6- Mths in Advance)
How much will be Returned for Non-Performance or Contract Termination - Discretionary Authority
- Services being Rendered
- Term/Time Frame
What’s Discretionary Trading Authority (DTA)?
When an Investment Professional makes Investment Decisions & Trades for a Client
What 3 things are Required for an Investment Professional to have Discretionary Authority?
BD’s need Written Authorization before the 1st Discretionary Trade
IA’s can receive Oral Authorization, then Written Authorization 10- Business Days after the Trade; unless the Trade is based on a Preset Price, Time, or Volume
Investment Professional Net Worth of $10K+
What are Fees?
The amount an Investment Professional charges a Client for Services
How much in Fees can an Investment Professional charge a Client?
An amount that would be considered Reasonable to a ‘Prudent Man’
What are 2 unique Fees that an Investment Professional can charge?
Performance Fee
Wrap Fee
What’s a Performance Fee?
Fees charged to Qualified Clients based on the Performance of their Portfolio
Who are the 3 types of Qualified Clients in which you can charge Performance Fees to?
Registered Investment Firms
Persons w/ $1M+ Invested
Persons w/ $2M+ in Net Worth (excl. Primary Residence)
What’s a Commission?
The amount an Investment Professional charges for executing Securities Transactions
What are the 2 types of Additional Commissions that can be charged?
Hard Dollars
Soft Dollars
What are Hard Dollar Commissions?
Additional Services Paid for by an Investor Directly
What are Soft-Dollar Commissions?
Additional Services Charged to the Client as a part of the Normal Commissions
What are the Additional Services that a Hard-Dollar or Soft-Dollar Commission charges for?
Monthly Account Maintenance
Securities Research
Who’s a Fiduciary?
A Person or Entity responsible for managing a Retirement Plan’s Assets in the Best Interest of the Plan Participants & Beneficiaries
What’s Fiduciary Duty?
The Relationship between a Fiduciary & the Principal/Beneficiary on whose behalf the Fiduciary acts
What are the 6 Duty’s of a Fiduciary?
Duty of Care
Duty of Confidentiality
Duty of Disclosure
Duty of Good Faith
Duty of Loyalty
Duty of Prudence
What’s the Fiduciary Duty of Care?
Exercising sound judgment & performing Due Diligence to protect the Beneficiary’s Interests
What’s the Fiduciary Duty of Confidentiality?
Maintaining the Confidentiality of the Beneficiaries Info
What’s the Fiduciary Duty of Disclosure?
Disclosing all Relevant Info incl. Conflicts of Interest
What’s the Fiduciary Duty of Good Faith?
Acting within the Law
What’s the Fiduciary Duty of Loyalty?
Acting in the Best Interest of the Beneficiary at all times
What’s the Fiduciary Duty of Prudence?
Making Decisions w/ the highest degree of professional Skill, Caution, and critical Awareness of Risk
What’s an Agency Cross Transaction?
When an Investment Professional executes an Unsolicited Trade between 2 of their Clients
What’s Required for an Investment Professional to execute an Agency Cross Transaction?
Written Consent from both Clients prior to Executing the Trade
What’s Custody?
When an Investment Professional Directly or Indirectly Holds, or has Authority to Withdraw, Client Funds or Securities
What 2 things are Required for an Investment Professional to hold Custody of Client Funds or Securities?
Client Funds need to exist in a unique Account
Investment Professional Net Worth of $35K+
Where are Client Funds & Securities held when an Investment Professional has Custody?
They’re held w/ a Qualified Custodian
What’s a Custodian?
A Financial Institution that holds Client Funds & Securities
What 4 Financial Institutions are considered Qualified Custodians?
Banks & Savings Firms
Foreign Financial Institutions
Registered BDs
Registered Futures Commission Merchants
What’s Suitability?
An Ethical, Enforceable Standard regarding Investments that Investment Professionals are held to when dealing w/ Clients
Do BDs have Fiduciary Duty?
Broker-Dealer
No, only Suitability
What are the 4 Breaches of Suitability?
Churning
Failing to Disclose Investment Risks
Recommending a Security w/out Reasoning or Assessment of Client Profile
Switching — Frequently moving Assets to generate Transaction Income
What’s Churning?
Excessive Trading (Size or Frequency) of a Client Account to generate Commissions
What’s Switching?
Frequently moving Assets to generate Transaction Income
What’s the Anti-Money Laundering (AML) Law?
A Law that requires Investment Professionals to Monitor & Report Suspicious Financial Activity FinCEN via Form 108 within 30 Days of Discovery
What are the 4 things you need to do to Comply w/ the AML Law?
Anti-Money Laundering
Appoint a Qualified AML Compliance Officer
Establish Policies, Procedures, & Internal Controls based on an In-House Risk Assessment
Provide Continual Training
Schedule Independent Testing of the Program regularly
What’s the Customer Identification Program (CIP)?
The Min. Required Info Firms need to Identify Clients & do Business w/ them
What are the 5 pieces of info required as part of CIP to Identify Clients?
Customer Identification Program
Name
Address
Date of Birth
Location of Birth
Social Security #
What’s a Suspicious Activity Report (SAR)?
An AML Report of Financial Transactions $5K+ deemed Suspicious for Money Laundering, Terrorist Activity, & Other Illegal Activities
If an Investment Professional files a SAR to FinCEN, do they need to Disclose this to the Client?
Suspicious Activity Report
No, they aren’t allowed to notify the Client
What’s the Bank Secrecy Act (BSA) of 1970?
Currency & Foreign Transactions Reporting Act
Requires Financial Firms to Maintain Records of Financial Transactions & Report Suspicious Transactions
Who enforces the BSA of 1970?
Bank Secrecy Act
The Financial Crime Enforcement Network (FinCEN)
What’s a Currency Transaction Report (CTR)?
A Report of any Transaction(s) totaling $10K+ required by the BSA of 1970 to be filed w/ FinCEN within 15 Days
How long do CTRs need to be Stored for Firm Records?
Currency Transaction Report
5 Years
Can Investment Professionals Lend or Borrow $$$ from Clients?
Yes, if the Client is an Affiliate, BD, or Financial Firm engaged in the Business of Loans
Can Investment Professionals Share in the Profits & Losses of a Client Account?
Only Agents of BDs can & only when they obtain Written Consent from the Client & BD
What’s an Outside Securities Account?
A Client Account opened by an Investment Professional at a Firm other than their Employer
When’s an Outside Securities Account Permitted?
When the Employing Firm & Executing Firm are Notified and the Employing Firm provides their Written Approval or Rejection
What’s the North American Securities Adminstrators Association (NASAA)?
An International Regulatory Firm founded in 1919 devoted to protecting Investors from Violations of State & Provincial Laws
What’s the NASAA Model Act?
The Rules about the Books & Records that an Investment Professional must Maintain, Store, and immediately Produce
What’s the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation?
An Amendment to the NASAA Model Act to protect Adults Age 65+
What are the 3 Key Provisions of the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation?
Delayed Disbursement
Disclosure
Mandatory Reporting
What’s a Delayed Disbursement as defined within the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation?
When an Investment Professional Suspects Financial Exploitation so they Delay the Disbursing of Client Funds for 15- Days
What 3 people must an Investment Professional Notify if they Delay Disbursements related to the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation?
Adult Protective Services Agency
Customers w/ Authorized Access to the Client Account
State Administrator
What’s a Disclosure as defined within the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation?
Disclosure of Suspected Financial Exploitation to 3rd Parties w/ Authorization from the Client, unless the 3rd Party is the Suspect
What’s Mandatory Reporting as defined within the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation?
The Responsibility of an Investment Professional to Notify their State Securities Administrator when they believe Financial Exploitation has occurred or is being attempted
What’s Insider Trading?
Trading of any Insider Information or Material Inside Information
What’s Insider Information?
Non-Public Info
What are the 3 types of Insider Information?
Client Personally Identifiable Info (PII)
Records obtained through an Administrator Audit or Inspection
Records obtained within a Registration Statement
What’s Material Inside Information?
Insider Information that’ll affect the Value of a Security
What are the 3 Insider Trading Rules?
An Investment Professional can’t:
Effect Securities Transactions
Make Recommendations
Transmit Material Inside Information
To anyone who might use it for a Trade
What are the Chinese Walls of the 1934 Act?
The Rules about the Internal Procedures that a Firm must utilize to Limit & Control the Communication of Insider Information between Firm Departments
What’s the Insider Trading Act of 1988?
Insiders Trading & Securities Fraud Enforcement Act of 1988
The Law that defines the Penalties for Violating Insider Trading Rules
What’s the Private Right of Action within the Insiders Trading Act of 1988?
A Lawsuit filed by an Investor who’s suing another Investor for Insider Trading Violations
What are the Civil Penalties for Insider Trading?
Treble Damages which are 3x the Profit Gained or Loss Avoided
What are the Criminal Penalties for Insider Trading?
- Monetary Fines
Individual Fine of $5M-
Corporation Fine of $25M- - Individual Incarceration of 20- Yrs
What’s a Short-Swing Profit?
Securities Profits originating from the Trading of Securities held by a Company Insider for 6- Mths
Who’s considered a Company Insider under the 1934 Act?
Officers, Directors, & Owners of 10%+ Outstanding Shares of any Class of Securities Offered by a Firm
If a Company Insider makes a Short-Swing Profit, what are they Legally Required to do?
Disgorge the Profits back to the Firm
Pay Taxes on the Profits
What’s Disgorgement?
The Legally Mandated Repayment of Profits from ill-gotten Gains
Define Selling Away.
Trading Off the Books
The Illegal Execution of Securities Transactions w/out Recording them within the Firm’s Books & Records
What’s Market Manipulation?
Inducing the Purchase or Sale of a Security by circulating False Information (Rumors) that the Security Price will ▲ or ▼
What are the 4 types of Market Manipulation?
Capping
Matched Orders
Pegging
Wash Trade
What’s Capping?
Market Manipulation where Stock is Illegally Sold to keep the Price Low
What are Matched Orders?
Market Manipulation where 2 Investors collude to buy/sell Securities to create a False Impression of Activity to make a Profit
What’s Pegging?
Market Manipulation where Stock is Illegally Purchased to Stabilized the Price
What’s a Wash Trade?
Wash Sale
Market Manipulation where an Investor creates a False Impression of Activity by buying/selling the same Security from different BDs to make a Profit
What’s a Political Contribution?
A Contribution to a Politician that must be Reported Quarterly (1 Mth after the end of the Calendar Quarter)
What’s an MFP?
A Municipal Finance Professional
Who can an MFP make a Political Contribution to?
Municipal Finance Professional
A Municipal Politician in which they have the Right to Vote for
What are the MFP Political Contribution Limits?
Municipal Finance Professional
$250- to a Candidate before the Primaries
$250- Additional to a Candidate who wins the Primary, but before the General Election
What are the Penalties if an MFP makes a Political Contribution of $250+ to a Municipal Politician?
Any BD that the MFP is associated w/ is Prohibited from Underwriting Municipal Securities for 2 Years
What’s a Code of Ethics?
The Standards of Conduct defined in the Investment Advisers Act of 1940 that Investment Professionals are Required to Adopt in Writing when Registered w/ the SEC
What are the 3 Key Provisions of the Code of Ethics?
Fiduciary Obligations
Insider’s Personal Securities Transactions & Holdings
Reporting of Violations
What are the 2 Requirements for Insider Compliance w/ the Code of Ethics?
Gain Pre-Approval from their Chief Compliance Officer when Purchasing IPOs & Private Placements
Report their Personal Securities Transactions & Holdings to their Chief Compliance Officer
Who’s Required to Report Code of Ethics Violations?
Supervisers of Investment Professionals to their Chief Compliance Officer
What Records are Investment Professionals Required to keep in order to Comply w/ the Code of Ethics & for how long?
For 5 Yrs:
A Signed Copy of the Code of Ethics
Code of Ethics Violations & Remediations
Insider’s Personal Securities Transactions & Holdings
What’s an Exchange?
An Electronic or Physical Location where Securities are Traded & Executed
What are the 2 types of Exchanges?
Primary Market
Secondary Market
What’s a Primary Market Exchange?
The Trading of Listed Securities on an Exchange via an Auction Market
What’s an Auction Market?
A floor of Agents or an automated Trading system that executes Trades for themselves & on the behalf of others
What are the 5 largest Primary Markets?
- New York Stock Exchange (NYSE)
- Chicago Board Options Exchange (CBOE)
- International Exchanges: Hong Kong, London, & Tokyo
What’s the NYSE?
New York Stock Exchange
The World’s Largest Primary Market founded in 1792
What’s a Designated Market Maker (DMM)?
Specialist
An Agent of a BD assigned as the head of a single Listed Security who maintains a Fair & Orderly Market and Records Agency Trades in an Electronic Book
What are the Listing Requirements for the NYSE?
New York Stock Exchange
- Option 1:
Aggregate Pretax Earnings of $10M+ over the last 3 yrs
1.1M+ Shares Outstanding
Total Market Value of Shares of $140M+ - Option 2:
$100M+ in Revenue within the last 12 mths
Global Firm Market Capitalization of $500M+ - Firm Board of Directors must be Independent or Outside Directors
- Share Price of $4+ at time of Listing
What’s a Regional Exchange?
Small Exchanges that can’t meet the Listing Requirements of National Exchanges
What’s a Secondary Market Exchange?
Over-the-Counter (OTC) or Unlisted Market
A Decentralized, Global, 24/hr Negotiated Market that is Online
What’s a Negotiated Market?
Trades negotiated between 2 Parties
What’s the NASDAQ Exchange?
National Association of Securities Dealers Automated Quotations
A subset of the OTC Exchange w/ its own Listing Requirements
What Exchange are the majority of Tech Firms Listed on?
NASDAQ Exchange
What are the typical Trading Hours for the NYSE, CBOE, & NASDAQ?
Early Hours: 4:00 to 9:30 AM EST
Normal Hours: 9:30AM to 4:00PM EST
Late Hours: 4:00 to 8:00 PM EST
What Exchange holds the most Debt Securities?
The Secondary Market Exchange
What’s a Market Maker?
BDs who buy/sell Principal Trades of OTC Securities
What are the 2 types of Public Offerings?
Additional Public Offering (APO)
Initial Public Offering (IPO)
What’s an IPO?
Initial Public Offering
The 1st time an Issuer distributes Securities to the Public
What’s an APO?
Additional Public Offering, Secondary, Add-On, or Follow-On Offering
Distributing Additional Securities to the Public
