Investment Professionals, Guidelines & Regulations Flashcards
1
Q
Who’s a Natural Person?
A
An Individual (a living human being)
2
Q
Who’s not a Person?
Legal Person
A
An Individual Age 18- (Minor)
Deceased Individuals
Individuals Declared Legally Incompetent
3
Q
Who’s an Accredited Investor?
A
A Person under Regulation D Rule 501 of the 1933 Act who can trade UnRegistered Securities
4
Q
What are the 5 Requirements to be an Individual Accredited Investor?
A
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+
5
Q
What are the Requirements for an Entity to be an Accredited Investor?
A
A Firm w/ Equity Investors who are already Accredited Investors
A Firm w/ $5M+ Assets
A Private Business Development Firm
6
Q
What’s an Investment Adviser (IA)?
A
A Person who provides Securities Advice as part of a Regular, Ongoing Business and Receives Compensation for such Services
7
Q
Who are the 4 Individuals that Qualify as IA’s?
Investment Adviser
A
Financial Planners
Pension Consultants
State-Registered & Federally Covered Advisors
Sport & Entertainment Representatives
8
Q
What are the 2 types of Registered Investment Advisers (RIA)?
A
State RIA
Federal Covered Adviser
9
Q
What are the 3 Requirements for an IA to Register w/ a State?
Investment Adviser
A
$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)
10
Q
When is a BD, Agent, IA, or IAR State Registration Active?
A
Noon on the 30th Day after the Application is Filed
Expires Dec 31st at Midnight of each Year
11
Q
When must an IA Register as a Federal Covered Adviser?
Investment Adviser
A
$110+ AUM
12
Q
When is a Federal Covered Adviser Registration Active?
A
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No Expiration, unless Withdrawn, Canceled, Revoked or Suspended by the SEC
13
Q
What are the 3 Requirements for an IA to be Exempt from Federal (SEC) Registration?
Investment Adviser
A
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
14
Q
When must a Private Fund IA Register as a Federal Covered Adviser?
Investment Adviser
A
$150+ M AUM
Servicing 100+ Accredited Investors
Issue an IPO for the Fund
15
Q
Are Venture Capital IA’s required to Register w/ the SEC?
Investment Adviser
A
No
16
Q
Where does an IA Register if their AUM is $100-110M?
Investment Adviser
A
Either w/ a State or as a Federal Covered Adviser
17
Q
What did the National Securities Market Improvement Act (NSMIA) of 1996 do?
A
Eliminated the Dual Registration (State & Federal) of IA’s & assigned SEC (Federal) Jurisdiction over all Covered Securities
18
Q
What’s an RIA Notice Filing?
A
The Fee that RIA’s must pay to conduct business in a State, if required by the State
19
Q
What’s Form ADV?
A
Uniform Application for IA Registration
20
Q
What are the 4 sections of Form ADV Part 1?
Registration Info
A
Name
Address
Business Type
Records of any Breaches of Laws
21
Q
What’s Form ADV Part 2A?
Brochure Rule, Disclosure Statement, or Investment Brochure
A
An Investment Brochure of the Investment Firm
22
Q
What are the 4 sections of Form ADV Part 2A?
A
Client Balance Sheet
Business Practices
Conflicts of Interest
Fees
23
Q
What are the 2 sections of the Client Balance Sheet within Form ADV Part 2A?
A
- 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
24
Q
When must Form ADV Part 2 be provided to a new Client?
A
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
25
Does Form ADV Part 2 need to be provided to a Client Annually?
Yes if Changes are made
26
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-
27
Who's an Investment Adviser Representative (IAR)?
An Individual who provides Investment Advice or Manages Client Profiles, incl. Individuals who Supervise IAR’s
28
Where do IAR's need to be Registered?
| Investment Adviser Representative
Always w/ the State
Covered under the Registration of the Firm
29
Are Investment Firm Employees who perform Clerical or Administrative Duties considered IAR's or Agents?
| Investment Adviser Representative
No
30
What's Form ADV Part 2B?
A Detailed Description of each of a Firm’s IAR’s
31
What's Form U2?
Uniform Consent to Service of Process
32
What does Form U2 grant State Administrators?
Appoints each State Administrator as the Registrant’s Attorney for Noncriminal Legal Proceedings
33
What's Form U4?
Uniform Application for Securities Industry Registration or Transfer
34
What's Form U5?
Uniform Termination Notice for Securities Industry Regulation
35
Who needs to notify the State Administrator when an IAR or Agent Terminates Employment w/ a BD, Issuer, or IA Firm?
| Form U5
Everyone
36
Who needs to notify the SEC when a Federal Covered Advisor Terminates Employment w/ an IA Firm?
| Form U5
Only the Federal Covered Advisor
37
What's a Schedule H?
| Wrap Fee Brochure
An Investment Brochure provided to Clients who are opening a Wrap Account
38
What's a Wrap Fee?
Fee + Commission
39
Who's a Promoter?
A Person who provides a Testimonial or Endorsement for an Investment Professional
40
Who's a Solicitor?
An IAR who’s contracted or employed by an IA to Solicit Business
41
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
42
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
43
When does an IA Form ADV-W become Active?
| Schedule W
30 Days after Filing, unless Disciplinary Actions are Pending
44
What's a State Administrators Statute of Limitation to initiate IA Disciplinary Actions after a Withdrawal of Registration?
| Investment Adviser
1- Years after Withdrawal
45
What are the 2 IA Continued Education (CE) Topics?
| Investment Adviser
Ethics & Professional Responsibility
Products & Practice
46
What are the IA CE Requirements for the Ethics & Professional Responsibility Section?
| Investment Adviser
Min. 6 Credits
Min. 3 Hrs covering Ethics
47
What are the IA CE Requirements for the Products & Practice Section?
| Investment Adviser
Min. 6 Credits
48
What's a Broker-Dealer?
Any Person or Group engaged in the Business of effecting Securities Transactions for Themselves or Others
49
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
50
What are the 2 types of BDs?
| Broker-Dealer
Clearing (Carrying) BD
Introducing BD
| Broker-Dealer
51
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
52
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
53
What are the 2 types of Trades a BD can make?
| Broker-Dealer
Agency Trades
Principal Trades
54
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
55
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
56
Where must a BD Register?
| Broker-Dealer
With each State they have:
A Physical Office in
A Retail Client in
57
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)
58
Who's a BD Agent?
| Broker-Dealer
An Individual who's employed by a BD to represent them in effecting Securities Transactions
| Broker-Dealer
59
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
60
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
61
What's an Issuer?
Any Person who Issues or Proposes to Issue a Security
62
Who's an Agent of an Issuer?
An Employee of an Issuer who sells Securities
63
What's an Issuer Transaction?
A Transaction in which the proceeds of the Sale go to the Issuer
64
What's an Issuer Primary Offering?
An Issuer Transaction involving New Securities
65
What's Form S1?
Issuer Registration Statement under the 1933 Act
66
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
67
What are the 3 methods of Registration available to Issuers?
Registration By Coordination
Registration By Notification
Registration By Qualification
68
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
69
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
70
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
71
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
72
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
73
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
74
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
75
When is an Issuer Registration By Qualification Active?
30 Days after the Filing Date
76
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
77
Rank the Issuer Registration Methods from Most Difficult to Least Difficult.
Registration By Qualification
Registration By Coordination
Registration By Notification
78
What's an Issuer Stop Order?
When a State Administrator or Federal Court halts an Issuers Registration
79
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
80
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
81
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
82
What's an Exempt Security?
A Security Exempt from Federal, State, and/or Local Registrations
83
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
84
What's an Exempt Transaction?
Transactions Exempt from Federal, State, and/or Local Registrations that generally don’t involve the Public
85
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
86
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
87
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
88
When's a Private Placement Exempt from State & Federal Registration?
State Exemption: 10- Accredited Investors Annually
Federal Exemption: 35- Non-Accredited (Sophisticated) Investors Annually
89
Who's a Non-Accredited (Sophisticted) Investor?
A Non-Accredited Investor who has substantial knowledge of Finance who signs an Investment Letter denoting this
90
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
91
What's an Unsolicited Order?
An Exempt Transaction in which a Client contacts an Investment Professional and requests to buy/sell Securities
92
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
93
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
94
What Format can Books & Records for Investment Professionals be stored in?
Electronic Storage
Micrographic Media (Microfiche or Microfilm)
Paper or Hard-Copy
95
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
96
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
97
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
98
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
99
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
100
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
101
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
102
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
103
What are the 6 Items that aren’t Securities?
Collectibles
Commodity Futures
Condominium used as a Personal Residence
Currency
Fixed Insurance Products
Retirement Plans
104
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
105
What's a Guaranteed Security?
A Security insured by an Entity
106
What are the 3 types of Insurers for Guaranteed Securities?
Federal, State, and/or Local Gov.
Insurance Company
Parent Company of Issuer
107
What's a Security Offer?
A Security Offer for Sale
That can’t be made until the Security has been Registered or is Exempt
108
What's a Security Sale?
A Security Contract for Sale
109
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
110
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
111
What's Regulation A+ under the 1933 Act?
An Amendment to Regulation A that ▲ Total Raised Capital Allowance
112
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)
113
What's Form ADV Part 8A?
A Registration Statement for Small Firms that Qualify for Regulation A/A+ of the 1933 Act
114
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
115
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
116
What's the JOBS Act of 2012?
Jumpstart Our Business Startups (JOBS) Act
| Crowdfund Act
117
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
118
What's §227A100 of Title 17 II §227 of the JOBS Act of 2012?
The Exemptions offered to Issuers of Crowdfunding
119
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)
120
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
121
What's a Funding Portal?
A Crowdfunding Platform operated by a Broker
122
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
123
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
124
What's a State Administrator Summary Order?
When a State Administrator Suspends a Registration, Security, or Transaction while Court Proceedings are Pending
125
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
126
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
127
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
128
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
129
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
130
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
131
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
132
When can a State Administrator or Investor sue for Criminal Liability?
Fraud or Intentional Omissions of Material Facts while Offering or Selling Securities
133
What's the Statute of Limitation to bring forth a Criminal Lawsuit?
5 Yrs after the Alleged Violation
134
What are the 2 Federal Criminal Penalties that can be issued for a Criminal Lawsuit?
$10K- Fine
5- Yrs Prison
135
What are the 2 State Criminal Penalties that can be issued for a Criminal Lawsuit?
$5K- Fine
3- Yrs Prison
136
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
137
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
138
Define Contumacy.
Failure to Comply w/ a State Administrator Order
139
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
140
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)
141
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
142
How does the Investment Industry define Advertising?
Direct or Indirect Communications & Solicitations (incl. Testimonials & Endorsements) addressed to 2+ Persons
143
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
144
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)
145
What does an IA need to do if they plan to utilize a Promoter?
Enter into a Written Agreement w/ them
146
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)
147
What's a 3rd Party Rating?
A Rating or Ranking of an Investment Professional used for Advertising that’s provided by a 3rd Party
148
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)
149
What's Performance Advertising?
When an Investment Professional Advertises the Results of an Investment, Portfolio, or Strategy
150
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
151
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
152
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
153
What must an Investment Analysis Tool Advertisement Disclose?
The Limitations of the Tool
154
Can the Abbreviations IA, IAR, or RIA be used by Investment Professionals as their Title?
No, the SEC considers it Misleading
155
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
156
What Investments can an Investment Professional Guarantee Performance for?
Interest Payments, Dividends, & Principal paid by Insurance & Gov. Firm Investments
157
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
158
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
159
What's Discretionary Trading Authority (DTA)?
When an Investment Professional makes Investment Decisions & Trades for a Client
160
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+
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What are Fees?
The amount an Investment Professional charges a Client for Services
162
How much in Fees can an Investment Professional charge a Client?
An amount that would be considered Reasonable to a 'Prudent Man'
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What are 2 unique Fees that an Investment Professional can charge?
Performance Fee
Wrap Fee
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What's a Performance Fee?
Fees charged to Qualified Clients based on the Performance of their Portfolio
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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)
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What's a Commission?
The amount an Investment Professional charges for executing Securities Transactions
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What are the 2 types of Additional Commissions that can be charged?
Hard Dollars
Soft Dollars
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What are Hard Dollar Commissions?
Additional Services Paid for by an Investor Directly
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What are Soft-Dollar Commissions?
Additional Services Charged to the Client as a part of the Normal Commissions
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What are the Additional Services that a Hard-Dollar or Soft-Dollar Commission charges for?
Monthly Account Maintenance
Securities Research
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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
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What's Fiduciary Duty?
The Relationship between a Fiduciary & the Principal/Beneficiary on whose behalf the Fiduciary acts
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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
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What's the Fiduciary Duty of Care?
Exercising sound judgment & performing Due Diligence to protect the Beneficiary’s Interests
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What's the Fiduciary Duty of Confidentiality?
Maintaining the Confidentiality of the Beneficiaries Info
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What's the Fiduciary Duty of Disclosure?
Disclosing all Relevant Info incl. Conflicts of Interest
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What's the Fiduciary Duty of Good Faith?
Acting within the Law
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What's the Fiduciary Duty of Loyalty?
Acting in the Best Interest of the Beneficiary at all times
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What's the Fiduciary Duty of Prudence?
Making Decisions w/ the highest degree of professional Skill, Caution, and critical Awareness of Risk
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What's an Agency Cross Transaction?
When an Investment Professional executes an Unsolicited Trade between 2 of their Clients
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What's Required for an Investment Professional to execute an Agency Cross Transaction?
Written Consent from both Clients prior to Executing the Trade
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What's Custody?
When an Investment Professional Directly or Indirectly Holds, or has Authority to Withdraw, Client Funds or Securities
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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+
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Where are Client Funds & Securities held when an Investment Professional has Custody?
They're held w/ a Qualified Custodian
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What's a Custodian?
A Financial Institution that holds Client Funds & Securities
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What 4 Financial Institutions are considered Qualified Custodians?
Banks & Savings Firms
Foreign Financial Institutions
Registered BDs
Registered Futures Commission Merchants
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What's Suitability?
An Ethical, Enforceable Standard regarding Investments that Investment Professionals are held to when dealing w/ Clients
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Do BDs have Fiduciary Duty?
| Broker-Dealer
No, only Suitability
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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
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What's Churning?
Excessive Trading (Size or Frequency) of a Client Account to generate Commissions
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What's Switching?
Frequently moving Assets to generate Transaction Income
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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
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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
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What’s the Customer Identification Program (CIP)?
The Min. Required Info Firms need to Identify Clients & do Business w/ them
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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 #
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What's a Suspicious Activity Report (SAR)?
An AML Report of Financial Transactions $5K+ deemed Suspicious for Money Laundering, Terrorist Activity, & Other Illegal Activities
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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
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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
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Who enforces the BSA of 1970?
| Bank Secrecy Act
The Financial Crime Enforcement Network (FinCEN)
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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
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How long do CTRs need to be Stored for Firm Records?
| Currency Transaction Report
5 Years
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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
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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
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What's an Outside Securities Account?
A Client Account opened by an Investment Professional at a Firm other than their Employer
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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
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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
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What's the NASAA Model Act?
The Rules about the Books & Records that an Investment Professional must Maintain, Store, and immediately Produce
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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+
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What are the 3 Key Provisions of the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation?
Delayed Disbursement
Disclosure
Mandatory Reporting
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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
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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
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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
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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
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What's Insider Trading?
Trading of any Insider Information or Material Inside Information
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What's Insider Information?
Non-Public Info
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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
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What's Material Inside Information?
Insider Information that’ll affect the Value of a Security
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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
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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
220
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
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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
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What are the Civil Penalties for Insider Trading?
Treble Damages which are 3x the Profit Gained or Loss Avoided
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What are the Criminal Penalties for Insider Trading?
* Monetary Fines
Individual Fine of $5M-
Corporation Fine of $25M-
* Individual Incarceration of 20- Yrs
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What's a Short-Swing Profit?
Securities Profits originating from the Trading of Securities held by a Company Insider for 6- Mths
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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
226
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
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What's Disgorgement?
The Legally Mandated Repayment of Profits from ill-gotten Gains
228
Define Selling Away.
| Trading Off the Books
The Illegal Execution of Securities Transactions w/out Recording them within the Firm's Books & Records
229
What's Market Manipulation?
Inducing the Purchase or Sale of a Security by circulating False Information (Rumors) that the Security Price will ▲ or ▼
230
What are the 4 types of Market Manipulation?
Capping
Matched Orders
Pegging
Wash Trade
231
What's Capping?
Market Manipulation where Stock is Illegally Sold to keep the Price Low
232
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
233
What's Pegging?
Market Manipulation where Stock is Illegally Purchased to Stabilized the Price
234
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
235
What's a Political Contribution?
A Contribution to a Politician that must be Reported Quarterly (1 Mth after the end of the Calendar Quarter)
236
What's an MFP?
A Municipal Finance Professional
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Who can an MFP make a Political Contribution to?
| Municipal Finance Professional
A Municipal Politician in which they have the Right to Vote for
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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
239
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
240
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
241
What are the 3 Key Provisions of the Code of Ethics?
Fiduciary Obligations
Insider’s Personal Securities Transactions & Holdings
Reporting of Violations
242
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
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Who's Required to Report Code of Ethics Violations?
Supervisers of Investment Professionals to their Chief Compliance Officer
244
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
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What's an Exchange?
An Electronic or Physical Location where Securities are Traded & Executed
246
What are the 2 types of Exchanges?
Primary Market
Secondary Market
247
What's a Primary Market Exchange?
The Trading of Listed Securities on an Exchange via an Auction Market
248
What's an Auction Market?
A floor of Agents or an automated Trading system that executes Trades for themselves & on the behalf of others
249
What are the 5 largest Primary Markets?
* New York Stock Exchange (NYSE)
* Chicago Board Options Exchange (CBOE)
* International Exchanges: Hong Kong, London, & Tokyo
250
What's the NYSE?
| New York Stock Exchange
The World’s Largest Primary Market founded in 1792
251
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
252
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
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What's a Regional Exchange?
Small Exchanges that can’t meet the Listing Requirements of National Exchanges
254
What's a Secondary Market Exchange?
| Over-the-Counter (OTC) or Unlisted Market
A Decentralized, Global, 24/hr Negotiated Market that is Online
255
What's a Negotiated Market?
Trades negotiated between 2 Parties
256
What's the NASDAQ Exchange?
| National Association of Securities Dealers Automated Quotations
A subset of the OTC Exchange w/ its own Listing Requirements
257
What Exchange are the majority of Tech Firms Listed on?
NASDAQ Exchange
258
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
259
What Exchange holds the most Debt Securities?
The Secondary Market Exchange
260
What's a Market Maker?
BDs who buy/sell Principal Trades of OTC Securities
261
What are the 2 types of Public Offerings?
Additional Public Offering (APO)
Initial Public Offering (IPO)
262
What's an IPO?
| Initial Public Offering
The 1st time an Issuer distributes Securities to the Public
263
What's an APO?
| Additional Public Offering, Secondary, Add-On, or Follow-On Offering
Distributing Additional Securities to the Public
