Overview Flashcards
List types of securities
- Stocks (including treasury stocks, rights, warrants, transferrable shares, or ADRs)
- Notes, bonds, debentures, collateral trust certificates, or other evidence of indebtedness
- Interest in any profit-sharing agreement
- Variable annuities and variable life insurance contracts
- Voting trust certificates, certificates of interest in an oil, gas, or mining title or lease, preorganization certificates
- Investment contracts
- Stock options or options on commodity futures contracts
Define an Investment Advisor
Any person (usually a firm, rather than an individual) that, for compensation, engages in the business of providing others with securities-related advice, reports, or analysis.
To meet the definition of an investment advisor, a person must satisfy all three parts of the A-B-C test by:
- Providing Advice about securities
- Providing these services as Business
- Receiving Compensation for these services
Define Investment Advisor Representative
Any partner, officer, director, or other individual who is associated with an investment advisor that:
- Makes recommendations or gives advice regarding securities
- Manages accounts or portfolios of clients
- Determines which recommendations or what advice should be given
- Solicits, offers, or negotiates the sale of investment advisory services
- Supervises employees who perform any of these functions
The Uniform Securities Act (USA or blue-sky laws)
Model law (not the actual law for any one state, but rather a blueprint)
NASAA
North American Securities Administrators Association
Responsible for updating the Uniform Securities Act as well as maintaining the content of the series 63 exam
Securities Act of 1933
Regulation of new issues
Requires that certain securities be registered with the SEC in order to be offered or sold to the public
Securities Exchange Act of 1934
Regulation of secondary markets
Established the SEC
Investment Advisors Act of 1940
Federal regulation of investment advisors
The Investment Company Act of 1940
Regulation of mutual funds and other investment companies
UPIA
Uniform Prudent Investor Act
A standard that sets out guidelines for trustees to follow when investing trust assets on behalf of a trustor.
Also applies to financial professionals who make recommendations or place trades on behalf of clients.
Adopts a modern portfolio theory (MPT) and total return approach to exercise of fiduciary investment and discretion.
NSMIA
The National Securities Markets Improvement Act of 1996
Eliminate the duplication of state and federal regulation of securities advisors
Securities exempt from formal state registration (federally covered securities):
- Securities listed on the U.S. exchanges
- Certain Regulation D offerings (private placements)
- Municipal securities issued outside the state
- Securities issued by registered investment companies (e.g., mutual funds)
Viatical Investments
Also referred to as Life Settlements
The purchase of rights to the death benefits from individual life insurance policies
Securities under state law
Not suitable for average retail investor
The following investors are suitable candidates:
1. Min. net worth of $150K and annual income of > $100K or min. net worth of $250K
2. Accredited investors according to reg. D
Exempt Securities
- Securities issued by the US Gov. and municipalities
- Securities issued by the Canadian government and municipalities
- Securities issued by other foreign governments
- Securities issued by banks, savings institutions, or trust companies
- Securities issued by federal credit unions or industrial loan associations
- Securities issued by insurance companies
- Securities issued by common carriers (railroads) and public utility holding companies
- Securities issued by not-for-profit organizations
- Commercial paper
- Any investment contracts issued in connection with an employee’s stock purchase, savings, pension, and profit-sharing plan
- Federal covered securities
Accredited investor under Regulation D
- Financial institution, a large tax-exempt plan, or a private business development company
- Any director, executive officer, or general partner of the issuer
- An individual who meets either one of the following criteria
- A net worth of at least $1M (excl. primary residence)
- A gross income of at least $200K ($300K for a married couple) for each of the past 2 year, with the anticipation that this income level will continue
The USA excludes the following persons from the broker-dealer definition
- Agents (the employees involved in securities transactions)
- Issuers
- Banks, savings & loan companies, savings institutions, and trust companies
- A person that has no place of business in the state AND only transacts business with issuers, other broker-dealers, banks, savings institutions, and trust companies
- A person that has no place of business in the state AND is registered where the person maintains its place of business and only conducts business with existing retail clients who are not residents of the state
What agreements are included in a margin agreement
- Credit agreement
- Hypothecation agreement
- Loan consent agreement
ROP
Registered Options Principal
According to the Uniform Securities Act, the following persons are excluded from the investment advisor definition
- Investment adviser representatives (IARs)
- Banks, savings institutions, and trust companies
- Professionals whose investment advice is incidental to the practice of their professions (LATE)
- Lawyers
- Accountants
- Teachers
- Engineers
- All other persons designated by the Administrator
- Broker-dealer and their agents
- Publishers
- Federal covered advisors
Federal Covered Advisers (FCAs)
Only required to register with the SEC. FCAs include the following:
- IAs with $110M or more in AUM (those with between $100M - $110M can choose to register with the SEC or one or more states)
- Advisers to registered investment companies (e.g., mutual funds)
- Advisers that do business in 15 or more states
- Advisers that are not regulated or required to be regulated as investment advisors in the state in which they have their principal office and place of business (Wyoming)
- Pension consultants that provide advice to employee benefit plans with assets of at least $200M
- Affiliates of federal-registered IAs, if their principal office and place of business is the same as that of the SEC-registered advisor
- Newly formed advisers that reasonably believe that they will become eligible for federal registration within 120 days of formation
UPIA
Uniform Prudent Investor Act
Criteria for prudent investing:
- The standard of prudence applies to the entire portfolio, not on an investment-by-investment basis
- A central consideration for a fiduciary is the trade-off between risk and reward
- Categorical restrictions on specific types of investments have been removed. Therefore, any investment may be appropriate as part of a portfolio designed to achieve specific goals
- The recognition of the explicit need for diversification in a portfolio
According to the UPIA, all fiduciaries should:
- Pay close attention to their clients goals
- Determine their clients’ risk tolerance
- Develop an appropriate investment policy / strategy
- Focus on the management of risk, not the complete avoidance of risk
- Diversify appropriately
SEC views of fiduciary duty
- Being loyal to clients
- Having a reasonable and objective basis for the investment advice being provided
- Ensuring that investment advice is suitable based on the client’s objectives, needs, and circumstances
- Obtaining the best execution for its clients’ securities transactions when in a position to direct brokerage transactions
The USA states that it’s unlawful for any person, in conjunction with the direct or indirect offer, sale, or purchase of any security, to directly or indirectly:
- Employ any device, scheme, or artifice to defraud
- Make an untrue statement of material fact or omit any material fact that’s needed to make a statement not misleading
- Engage in any act, practice, or course of business that operates, or would operate, as a fraud or deceit upon any person
Timeframe for prospectuses
- For a non-listed IPO - 90 days
- For a non-listed follow-on offering - 40 days
- For an IPO of a security to be listed on the NYSE or Nasdaq - 25 days
- For an NYSE or Nasdaq-listed follow-on offering - no requirement
Define a Not-Held order
An order in which a client determines the action, asset, and mount, but leaves the decision as to the price and / or time of execution to an agent
Letter of Intent
Allows clients to qualify for a breakpoint without immediately depositing the required funds. Once the letter is signed, investors are given 13 months to meet their investment target.
Define Assessable Stock
A class of stock in which the issuing company is allowed to demand additional funds from existing stockholders
Define Letter of Rescission
A firm realizes that it has effected an illegal sale and the letter represents an offer to buy back the security, plus interest, minus any income received on the security. If the client doesn’t act in 30 days of receipt of the letter, the client is generally not permitted to bring action in court.
According to NASAA’s Minimum Financial Requirements for Investment Advisors Model Rule, and adviser’s minimum financial requirement (net worth) is based on its level of control, which are:
- Custody of clients assets - $35K at all times
- Limited discretionary authority of client accounts (but not custody) - $10K
- Prepaid fees of more than $500, six months or more in advance - Positive net worth at all times
All order tickets must contain:
- The terms and conditions of the order (e.g., limit order, market order, etc.)
- Whether the order is solicited or unsolicited
- The account name or designation for which the order is entered
- The identity of any else who accepted or entered the order for the client
- Whether the order involved the exercise of discretionary authority
- The time at which the firm received the order
- The time and price at which the order was executed, modified, or cancelled
