Laws, Regulations, and Guidelines Flashcards
When asked about what are securities. It is easier to remember what are NOT securities. What are not Securities?
- Commodities (Futures, including their calls and puts, Gold and precious metals)
- Fixed Insurance (life, fixed annuities)
- Retirement Plans
If something IS a security what must it do?
- register
- SA 1933 - requires registration with the SEC
- USA 1956 - requires registration with the states
What are the two methods of state registration? What is the most common?
- coordination (states registration is coordinated with federal registration)
- Qualification (security is issued in one state)
Coordination Method (90% of time)
- states registration is coordinated with federal (example IPO)
- effective when cleared by the SEC
Qualification Method
- intrastate securities (issued in only one state)
- effective when cleared by administrator
NSMIA (National Securities Market Improvement Act)
- created federally covered advisors and federally covered securities
- for federal coverage of additional securities if listed on exchange or investment companies (ie. Mutual Fund)
- registers ONLY with SEC not the state
Notice Filing
- method for paying filing fees for federal covered securities ONLY
USA Exemptions for Security Registrations
- US government
- municipal
- banks/insurance companies
- non-profits (religious orgs)
- Canadian governments (all levels)
- other foreign governments - federal only (normal diplomatic relations)
- commercial paper (maturity is less than 270 days and value is greater than $500k
Nonexempt Securities
- all nonexempt securities are required to register with the state.
- legal term for corporation
- illegal to sell unregistered corporate securities
- EXCEPTIONS: exempt transactions
Exempt Transactions from Registration
- if unsolicited
- between financial institutions (public not involved)
- private placements (to accredited investors and institutions)
- sheriff/bankruptcy (trustee)
Powers of the Administrator: Jurisdiction of the Administrator over offer/sale of Securities
- has jurisdiction if originates, directed to, or accepted in their state.
- EXAMPLE: advisor from WA contacts a client from OR in CA at the time of contact for sale, which administrator has jurisdiction? Both WA and CA but not OR
- its about solicitation, NOTHING ABOUT AGENT REGISTRATION
Powers of the Administrator: Could Administrator Subpoena someone from another state?
- has subpoenas power in all states
- subpoenas compels testimony
Powers of the Administrator: Can they deny, revoke, or suspend?
- ANY felony conviction
- ANY misdemeanor involving securities
Criminal Penalties
- 3 years in jail or;
- $5k fine
Civil Penalties (Sued)
- statute of limitations: 3 years from when trade occurred or 2 years of discovery (which ever occurs first)
Right to Recession
- right to be made whole again
- all principal + commissions + interest + court costs - (Divs and Int earned on investments)
- or keep stock and go on your way
- 30 days to make decision
Major Federal Securities Laws
- Securities Act of 1933
- Securities Exchange Act of 1934
- Uniform Securities Act of 1956
- Insider Trading Act of 1986
- Investment Advisory Act of 1940
- Investment Company Act of 1940
Securities Act of 1933
- full and fair disclosure (ie Form U4)
- new issues
- use of a prospectus
- primary market
20 day cooling off period (Securities Act of 1933)
- prohibited from soliciting for 20 days (allows SEC to look over registration)
- can send out preliminary prospectus (red herring)
- can publish tombstone ad (generic notice of sale) not advertising just notice sale
- use to take indications of interest (no commitment upon customer or BD)
- after 20 days it is cleared.
- then, can offer a final prospectus which states offering price)
Securities Exchange Act of 1934
- secondary market
- main objective is to protect Scams or lying, cheating, stealing (created the SEC on June 8th 1934)
- federal reserve board oversees extension of credit in the securities industry (FRB) or Reg. T
- Antifraud provisions
Antifraud Provision
- even if exempt from securities act, never exempt from fraud
Insider Trading Act of 1986
- knowingly using material nonpublic information (established in SEA of 1934)
- extended to punish those who provide the information
- civil penalties: greater of $1m or 3x profits or losses avoided
- Chinese wall divides different sides of a corporation (Cannot provide information inside same corporation ie passing the wall)
Broker/Dealer
- paid for transactions
- effects security transactions for the benefit of others or themselves
- broker/agency transactions - brings buyer and seller together (middle man) compensated via commission
- dealer - when brokerage firm buys and sell securities to customer directly from their own inventory (dealer or principal transaction via mark up)
*think ABC - agencies, broker, commissions
USA requires Broker Dealer to register in State if:
- office or ANY retail client located in a state
- de mininis rule for IA’s doesn’t apply to broker dealers
- not required to register if no office or client in a state nor if clients are institutions or issuers
Agent
Individual who accepts or places orders for securities (solicits)
- if working for Broker Dealer and accept orders MUST register
- clerical or administrative duties are exempt from registering
- any acceptance of an order for a security will require registration
(remember Futures are not securities)
Non-exempt Issuers
- companies/corporations
- if not B/D, file Form U-10
- if working for an exempt issuer, the agent doesn’t have to register, otherwise they MUST register
Investment Adviser
- in the business of financial advise
- holds themselves out as an investment adviser (advertise)
- receive economic benefit (compensated)
- person but not necessarily an individual
- charges fees on AUM
- legally considered fiduciaries (not IAR)
Exclusions to Investment Advisors
L - lawyers
A - accountants
T - teachers
E - engineers
- must be incidental, if charging separate fee will have to register
NSMIA separation of advisors
- register with federal or state. NEVER BOTH
- federal advisor ($110m< in assets), still pay filing fees and enforce antifraud in state
- state advisor (<$100m in assets)
- if a federal advisor drops below $90m must register with state
What authority do Administrators have over Federally covered advisors?
Ability to enforce antifraud provisions
Federally Covered Advisor
Must register:
- over $110m in assets
- register with SEC ONLY
Not required to register:
- private advisor
- foreign advisor
- venture capital advisor
State Covered Advisor
Must register:
- office in that state
- clients in that state
Not required to register:
- no office
- no more than 5 clients (de minimus)
- de minimus ONLY applies to state advisors
Investment Adviser Representative
- important to know if IA the IAR works for is a federal or state registered advisor.
- if state, IAR registers with administrator.
- must register in every state OFFICES are in states NOT CLIENT. If no office, no need to register
Registration Procedures USA (BD’s and IA’s)
- application
- must keep books and records
- must meet Financial conditions (Net Capital Req)
- felony convictions (last 10 years)
- misdemeanors regarding securities only (last 10 years)
- filing fees
- consent to service of process (at time of application ONLY)
- cleared by administrator
- effective noon of 30th day of application (expires every Dec 31)
No fingerprints or tests
Registration Procedures USA (Agents/IAR’s)
- application
- fingerprints
- felony convictions (last 10 years)
- misdemeanors regarding securities only (last 10 years)
- filing fees
- consent to service of process (at time of application ONLY)
- pass test
- cleared by administrator
- effective noon of 30th day of application (expires every Dec 31)
Withdrawal an application as an Agent or IAR
Agent:
- Form U5 - BOTH agent and broker dealer are required to notify admin. New brokerage firm would also be required to notify (if applicable)
IAR:
- state - IA/Firm go to Admin
- federal - IAR go Admin (not the SEC)
- NEVER register with SEC
Net Capital Required
IA’s = $10k or $35k, if custody its $35k,
BD = no greater than SEC requirement
Surety Bonds
- like a life insurance policy against theft and fraud
- can put up cash or securities if they get denied
Successor Firms
- if one firm acquires another
- requires refiling application
- no need to pay refiling fees
Books and Records for Companies
IA’s - 5/2 - five years up to end of fiscal year
BD’s - 3/2 - three years up to end of fiscal year
- IA goes out of business must maintain records for an additional 3 years
- if IA falls under net capital, must notify admin within 1 day and must submit a plan within an additional day (2 total days)
Investment Advisors Act of 1940: Registration
- Form ADV (name, form of business, affiliates, names of officers, directors, and partners)
- officers, directors, and partners are automatically registered as IARs
- effective in 45 days
- if withdrawal in 60 days
** remember all states are 30 days, when not 30 days must be federal regulations **
Investment Advisors Act of 1940: Brochure Rule
- Form ADV part 2
- state - 48 hours prior to contract, can allow delivery at time of contract if given 5 days to revoke contract (free-look)
- federal - at or prior to contract
Resending Brochure Annually:
- state - if material changes or requested
- federal - must resend 120 days from Fiscal Year-End
Investment Advisors Act of 1940: Advisor Contracts
- no assignment clause
- assignment (assigning client contracts to new firm) prohibited without client consent
- notify clients of partnership changes (even in death, which could cause assignment)
Investment Advisors Act of 1940: SEC Release
- Defining Investment Advisors (Financial Planners, Sports and Entertainment Agents, and Pension consultants)
Investment Advisors Act of 1940: IA compensation
- fees, commissions, both and both from different sources as long as disclosed to client.
- can discount fees as long as its disclosed in brochure.
- performance based fees are PROHIBITED with exceptions
- soft dollar compensation
Investment Advisors Act of 1940: Exceptions to Performance Based Fee Prohibition
- individuals with $1m invested and $2.1m net worth
- hedge funds
- has to be % of net gains over specific time compared against a specific benchmark.
Investment Advisors Act of 1940: Soft Dollar Compensation
- software
- seminar fees
- research
Not:
- travel, rent, furniture, etc.
Conflicts
- borrowing from customers (must be normal lending institutions) NOTE: Broker dealers and loan money.
- sharing in customer accounts - if owning or is a family member
- agency cross transactions (on both sides of transaction ie. Customer sells stock and IA has customer who wants to buy it, cannot solicit, must disclose)
Custody of Customer Assets
- partial or full access to customers funds or securities.
- 3rd party checks and Certificates must be forwarded within 3 days.
- ability to deduct adviser fees requires custody.
USA definition of a Person
- a limited partnership
- a political subdivision
- an unincorporated association (investment club)
- the executor of an estate for a deceased individual
NOT:
- minors
- deceased person
- judged mentally incompetent
