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Series 63 > Overview of Registration and Licensing > Flashcards

Overview of Registration and Licensing Flashcards

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Series 63 flashcards
1
Q

What is the “Act”?

A

Uniform Securities Act

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2
Q

Unless an exemption is available, what does the Act require?

A

Broker-dealers, agents, investment advisers, and investment adviser representatives to be registered in the State.

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3
Q

What does NSMIA stand for?

A

National Securities Markets Improvement Act

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4
Q

What is NSMIA enacted to do?

A

To eliminate duplicate regulations that required registrations at both the Federal and State level.

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5
Q

Under NSMIA, when does Federal law supersede State law?

A

When the law concerns net capital rules, custody rules, margin rules, financial responsibility rules, and recordkeeping rules.

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6
Q

Under the Act, Persons are defined as:

A
  • Individuals (human beings)
  • Corporations
  • Partnerships
  • Business Trusts
  • Estates
  • Trusts (where the interests of the beneficiaries of the Trust are evidenced by a security)
  • Associations
  • Joint Stock Companies or Joint Ventures
  • Governments and Political Subdivisions of Governments (for example, a township)
  • Unincorporated Organizations and any other legal or commercial entity
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7
Q

Define “Issuer”

A

Any ‘person’ who issues or proposes to issue a security.

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8
Q

Define “Issuer” for Trusts

A

For securities where there is no Board of Directors (i.e., Collateral Trust Certificates, Voting Trust Certificates, Certificates of Deposit for a Security, and Unit Investment Trusts), the “issuer” is the person performing the functions of manager or depositor under the Trust agreement.

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9
Q

Define “Issuer” for Equipment Trusts

A

The person to whom the equipment is to be leased or conditionally sold - which is the corporation.

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10
Q

How do Equipment Trusts work?

A

The trustee holds the title to the equipment until the loan is fully repaid - similar to a bank holding the title when an automobile is purchased with a car loan. In effect the trustee “leases” the equipment to the corporation. When the corporation completes all payments, the title reverts to the issuer.

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11
Q

Define “issuer” for Fractional Interest in Oil and Gas Programs?

A

There is no “issuer.”

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12
Q

Define “Issuer Transaction”

A

Where an issuer sells or redeems securities for the benefit of the issuer.

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13
Q

Define “Primary Transaction”

A

An issuer transaction that involves a sale of securities is also known as a “primary transaction,” since it takes place in the primary or new issue market.

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14
Q

Define “Non-Issuer”

A

A person who is not defined as an issuer under the Act.

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15
Q

Define “Non-Issuer Transaction”

A

Where the proceeds go to someone other than the issuer. It is a transaction not directly or indirectly for the benefit of the issuer.

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16
Q

Define “Secondary Transaction”

A

Non-issuer transactions are known as secondary transactions since they take place in the secondary or trading market.

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17
Q

Are firms with no office in the State that only deal with institutions required to register?

A

No.

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18
Q

What happens if the general public is solicited or if the firm has an office in the State?

A

It must generally register.

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19
Q

Examples of Institutional Buyers

A

These are the “big boys,” including:

  • Banks
  • Savings and Loans
  • Trust Companies
  • Insurance Companies
  • Investment Companies
  • Pension and Profit Sharing Plans
  • Anyone else so designated by the State Administrator
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20
Q

Define “Broker-Dealer” (BD)

A

A BD is a person who:

  • engages in the business of effecting securities transactions for the account of others; or
  • engages in the business of trading for his own account (“proprietary trading”)
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21
Q

Are BDs required to register in the State under the Act?

A

Yes, unless an exemption applies.

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22
Q

Agency Capacity

A

When a firm effects trades for the account of others;

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23
Q

When a firm is acting in agency capacity, it is acting as a ______.

A

Broker

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24
Q

Principal Capacity

A

When a firm trades out of its own account.

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25
Q

When acting in a “principal” capacity, the firm is considered to be a _____.

A

dealer

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26
Q

Where must BDs register?

A

The State where they solicit or conduct business.

27
Q

Rule regarding M&A Advisers/Finders

A

State regulators have interpreted that anyone that gives advice on mergers and acquisitions, and finders that “find” companies to be acquired, can be defined as being in the business of engaging in securities transactions if one company buys the securities of the other in the deal and compensation is paid based on closing the deal.

28
Q

Persons NOT considered to be “broker-dealers”

A

Agents (represent the BD when performing securities transactions, basically sales representatives);

Depository Institutions (Banks, Savings Institutions, and Trust Companies)

Issuers
(except when an issuer effects transactions other than with respect to its own securities)

29
Q

The Act excludes from the definition of broker-dealer any persons who have no place of business in the State, and who transact business exclusively with:

A

Issuers of the securities involved in the transaction;

Other broker-dealers; or

Institutional buyers

*Essentially, an out-of-state BD who is NOT dealing with the public in the State is not considered a BD in the State and does not need to register.

30
Q

What is the rule regarding customers on vacation?

A

The Act excludes from the definition of broker-dealer any firm which is licensed in a State in which the broker-dealer maintains a place of business, and who offers and sells a security to a person who is an existing customer of the broker-dealer and where the firm’s principal place of residence is NOT in the State.

In other words, if a customer of the BD in NY vacations to FL, the BD can contact the customer while he is in Florida with a solicitation to buy a security.

31
Q

When does the “customer on vacation” rule not apply?

A

This does not apply if the BD were soliciting a new customer in a State in which the customer were vacationing or traveling.

32
Q

How many days can a customer vacation before they are considered a resident of the state they are visiting?

A

Typically 30.

33
Q

The Canadian Rule (vacationing clients)

A

As long as a Canadian BD is registered in Canada and does not have a place of business in the U.S., it is exempt from registration (as are its agents) when effecting trades for pre-existing customers who are temporarily residing in the United States (as long as they spend less than 1/2 year in the U.S. and intend to return to Canada

34
Q

Define “Agent”

A

An individual (not a “person”) who represents a broker-dealer OR issuer in effecting securities transactions. Agents are also known as sales representatives and must register in each state in which they wish to perform trades.

35
Q

As a practical matter, registered representatives are what for broker-dealers?

A

Agents.

36
Q

Does an agent need to earn commissions in order to be considered an agent?

A

No.

37
Q

Who are not considered to be agents?

A

Clerical employees and managerial employees who do not effect trades with the public

38
Q

When are partners, directors, or officers of a broker-dealer considered “sales representatives” such that they are required to register as agents?

A

Only when they represent the broker-dealer or an issuer in effecting securities transactions.

39
Q

Where are the names of officers of the company that will act as agents noted?

A

In the broker-dealer application filed to register in the State (Form BD). Automatic registration as agents for these folks once the registration is effective.

40
Q

4 Exclusions from the Definition of Agent (only apply to individuals representing issuers)

A
  • Sales of specified exempt securities (but not all exempt securities)
  • Exempt transactions
  • Sales of specified covered securities (but not all covered securities)
  • Sales of securities to employees of that issuer if no remuneration is paid
41
Q

Are individuals who represent a broker-dealer in selling securities required to register?

A

Yes, unless another exemption is available

42
Q

Exempt securities are those issued by:

A
  • U.S. Government
  • Foreign Governments
  • Municipal Governments
  • Canadian Government
  • Bank and Savings Institutions (such as Bank CDs)
  • Trust Companies
  • Commercial paper (promissory notes that will mature in 9 months or less issued in amounts of at least $50,000)
  • Securities issued in connection with Savings, Pension, Profit Sharing Plans, and Employee Stock Option Plans
43
Q

Is an individual who represents Ford Motor Credit Corp. (the issuer), selling commercial paper (an exempt issue) to the public required to be registered in the State?

A

No.

44
Q

Is an individual who represents Cowen and Co. (a broker dealer), selling commercial paper to the public (an exempt issue) required to be registered in the State?

A

Yes.

45
Q

Which is the true statement:

Individuals who represent ISSUERS in exempt transactions are excluded from the definition of “agent”

or

Individuals who represent BROKER-DEALERS in exempt transactions are excluded from the definition of “agent”

A

ISSUERS

46
Q

Examples of important exempt transactions

A

Isolated transactions with someone other than an issuer - occasional sale is key

Transactions between issuers and underwriters (since the public is not involved)

Transactions with financial or institutional investors (including banks, financial institutions, trusts, insurance companies, investment companies, and pension plans)

47
Q

What is a “covered transaction”

A

also called “federal covered securities,” typically include those traded on national securities exchanges and investment company issues. These do NOT fall under the exclusion.

48
Q

Which “covered transactions” fall under the exclusion

A

Covered Transaction - Federal Private Placement

Covered Transaction - Qualified Purchasers

49
Q

Covered Transaction - Federal Private Placement

A

Private placement offerings conducted under the provisions of Rule 506 of Regulation D

50
Q

Covered Transaction - Qualified Purchasers

A

Sales to qualified purchasers, defined as:

  • Natural persons or family owned companies who own investments of at least $5,000,000;
  • Pre-existing trusts for the persons listed above as qualified purchasers (the trust cannot be formed expressly for the purpose of acquiring these securities); and
  • Any other person, acting for its own account or for other qualified purchasers, who owns and invests on a discretionary basis, at least $25,000,000.
51
Q

T/F: A corporation may maintain an employee stock purchase plan, and may use an employee to solicit its employees and officers to participate, without having that individual being considered to be an “agent” that must be registered in the State.

A

True.

52
Q

Investment Adviser

A

Investment Advisers give advice for a fee and must register in the State. Defined as: a person, who for compensation

  • Engages in the business of advising others, directly or indirectly (such as through a newsletter), as to the value of securities or the advisability of investing in, buying, or selling securities;
  • issues or promulgates analyses or reports concerning securities on a regular basis as part of a business; or
  • provides investment advisory services to others in a financial planning practice
53
Q

Persons that are NOT defined as investment advisers include:

A
  • Investment Adviser Representatives
  • Depository Institutions (banks, savings and loans, trusts)
  • professionals (lawyers, accountants, engineers, teachers, whose performance of the these services is solely incidental to their professional practice)
  • broker-dealers
  • publishers of newsletters that do not give advice based upon specific investment situations
  • Federal covered agencies
54
Q

“Federal Covered Adviser”

A

The National Securities Markets Improvement Act of 1996 (Federal Legislation) was enacted to eliminate duplicate regulation of investment advisers at both the Federal and State level.

  • If an adviser is defined as a “federal covered adviser,” then the adviser must register with the SEC; but is not required to register in the State;
  • If an adviser is NOT a “federal covered adviser,” then it must register in the State; but it is not required to register with the SEC.
55
Q

“Federal Covered Advisers” - Defined

A

$100+ million of assets; or
Advise Investment Companies

In addition, any person that is excluded from the definition of Investment Adviser under the Investment Advisers Act of 1940

56
Q

SEC treatment of advisers with between $100-110 million of assets

A

These advisers have a choice of registering either at the state or federal level.

Thus, SEC regulation is truly only required once an adviser has $110 million or more of assets under management

57
Q

When does an adviser that is SEC-registered have to de-register?

A

When its assets under management fall below $90 million

58
Q

Who are considered “mid-size” advisers?

A

Those advisers with $25 million or more of assets under management

59
Q

Rule for mid-size advisers in a State that does not require registration

A

Must register with the SEC

60
Q

Rule for mid-size advisers who are required to be registered in 15 or more States

A

These advisers may choose to register with the SEC rather than having to register separately in 15 or more states.

61
Q

Exclusions from “IA” definition

A

banks or bank-holding companies;

lawyers, accountants, engineers or teachers whose performance of such services is solely incidental to the practice of their profession;

broker-dealers and their registered representatives whose advisory services are solely incidental to the securities business and who receive no special compensation for making recommendations;

publishers of bona fide newspapers, magazines, or financial publications of a general and regular circulation;

any person who advises solely about US Gov guaranteed obligations

62
Q

“Investment Adviser Representative” (IAR)

A

Any partner, officer, director, or other individual employed by an investment adviser, who:

  • Makes recommendations or renders advice regarding securities;
  • Manages accounts or portfolios of clients;
  • Determines which recommendations or advice regarding securities should be given;
  • Solicits, offers, or negotiates for the sale of investment advisory services; or
  • supervises employees who perform any of the functions listed above

In addition, an IAR has a place of business in the State and is employed by a “federal covered adviser”

63
Q

Are individuals who solely perform clerical or ministerial duties considered investment adviser representatives?

A

No.

Series 63 (7 decks)

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