Part 2: Chapter 6 - Federal Acts Flashcards by Ryan Lorei

What are the FOUR Federal Acts the govern the securities industry?

Securities Act of 1933
Securities Exchange Act of 1934
Investment Advisers Act of 1940
Investment Company Act of 1940

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What are the TWO main things the Securities Act of 1933 outlines?

When does the Securites Act of 1933 stop regulating new issues?

New issues to the public
Full and fair disclosure

Once in the hands of the public.

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What does the Securites Exchange Act of 1934 govern?

The people and organizations involved in the exchange of securities.

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The 1933 and 1934 Acts are sometimes referred to as ..

1933: The Paper Act

1934: The People Act

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What does the Investment Company Act of 1940 mostly regulate?

Mutual Funds

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Which Markets do the 1933 and 1934 Acts regulate?

1933: Primary

1934: Secondary

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What does the Investment Advisers Act of 1940 regulate?

Investment Advisers, their advice and reports.

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What are the ABCs of an Investment Adviser?

Provides Advice about investments …

as a Business …

for Compensation.

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What are the AUM numbers that determine if an IA registers with the State or SEC?

<$90MM State (required)
<$100MM State
$100MM - $100MM State or SEC
>$110MM SEC

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What form does an IA file to register?

What’s the standard timeline for registration approval?

Form ADV

45 days

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What are some exclusiosn to registration as an IA?

Banks and Bank holding Companies
LATE
Incidental advice
Publications
Advice limited to US Gov’t Securities

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What length of time in prison can preclude eligibility as an IA?

1 Year

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If ALL an IAs customers are located within the state of their principal office AND the IA doesn’t provide advice on securities listed on a national stock exchange, must they register as an IA?

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What does Reg D refer to?

Private Placement

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What are the TWO types of Private Funds and their requirements?

What are THREE examples of Private Funds?

Are they required to register as an Investment Company?

1) No more than 100 Accredited Investors
2) 100 - 499 Qualified Purchasers

Hedge Funds
Venture Capital
Private Equity Funds

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Requirements for each:
- Accredited Investor
- Qualified Purchaser

Accredited (Natural persons)
- $200k in income for 2 years and expecting this to continue
- $1MM investments

Qualified
- Natural person with $5MM in investments
- Legal person who invests $25MM

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Is it ok for a person to use the initials RIA or the term Registered Investment Adviser?

Why?

Registered Investment Adviser

Because most people wouldn’t know what RIA means and it could convey a certain amount of competence.

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What TWO stipulations allow a person to use the term Investment Council?

If investment advising is the primary business AND source of income.

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How and by when must an IA file their Annual Updating Ammendment?

No more than 90 days after the end of their fiscal year.

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How long does an IAs registration remain in effect?

Until revoked by the SEC or withdrawn by the IA.

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What are the fines and prison time for:
- USA
- SEC

Fines | Prison

SEC | $10k | 5yrs

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What are TWO things on which you can provide advice and not be registered as an IA?

Insurance
Non-securities

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What do Pay-to-Play rules refer to?

What does the prohibition period refer to and its timeframe.

What are the two exceptions to this rule?

Political Contributions

2yr Prohibition on providing investment advice to a government entity after contributing

$350 or less per associate who CAN vote

$150 or less per associate who CAN’T vote

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What are the CE and hours requirements for IAs?

6 hours ethics
6 hours products
Every year

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Would individuals who advise entertainers or athletes on investments be required to register as an IA?

Yes

Would an individual who advises on employee benefit plans and / or assists a client in selecting an investment manager need to register as an IA?

Yes

SEC IA-1092 requires IAs to report compensation derived from where?

Anywhere

Does an IA need to disclose to a customer if they will also take on positions recommend to a client OR positions inconsistent with those recommended?

Both In other words, an IA needs to disclose to a client if they will BUY or SELL securities recommended to a client.

Does the Investment Advisors Act of 1940 require customer contracts be in writing?

For what clients are performance-based fees allowed for IAs? What are the parameters for this customer? Can the primary residence equity be used in the calculation?

Qualified clients $1.1MM invested OR $2.2MM net worth No

What effect could performance-based fees have on an IAs investment recommendations?

They could influence them to make riskier recommendations.

What is Part 2 of Form ADV also known as?

Brochure

What form is used for IA registration? Who is this filed with? What are this forms TWO parts?

Form ADV SEC Part 1: Owners, officers, and advertising Part 2: Disclosures about the IA for existing and prospective customers.

What TWO parts does Form ADV Part 2 consist of?

Part 2A: Brochure - business practices Part 2B: Brochure Supplement - resume of the people who provide management and compensation.

According to the SEC: - When MUST ADV Part 2A be delivered to new clients? - When MUST ADV Part 2A be delivered to existing clients? What about NASAA rules?

- Before or upon entering into a contract. - Within 120 days after the end of an IAs fiscal year end. No less than 48 hours before entering into an IA contract OR at the time of contract giving the client the right to rescind within 5 days.

IAs who request prepaid fees 6-months or more in advance must provide what TWO things to a customer? What are the Federal and State dollar thresholds for this requirement?

Brochure Audited Balance sheet $1200 $500

In what manner MUST IAs file their brochure? What parts of Form ADV and when must they be filed?

Electronically Parts 1 and 2A within 90 days of the end of the IAs fiscal year.

What form is used for an IA to withdraw registration?

Form ADV-W

What is SEC BI? What form of BI relates to IAs and which to BDs? To whom must IAs and BDs deliver these forms? For IAs what else is this form know as?

Best Interest AND Customer Relationship Summary BI = IA CRS = BD Retail customers, new and existing ADV Part 3

When must IAs disclose to customers that they are ALSO acting as a BD in a transaction? What they must obtain? What is an exemption to the above?

BEFORE completion of the transaction Customer written consent Public distribution and / or advice not directed to a particular account or security

What is an agency cross transaction? Is this allowed? When is a cross-transaction prohibited?

When an IA acts on behalf of both parties (buyer and seller). Yes, with written consent. When the IA recommends the transaction to both parties.

What is REQURED of an IA with respect to the use of non-public information?

An IA MUST have written procedures in place forbidding the use of non-public information that are reviewed ANNUALLY.

What's a rule of thumb for IA fees? What's the industry standard for AUM? For performance-based fees? What fee would require a specific disclosure? On what timeframe are these fees based?

Not higher than similar IAs 2% 20% 3% or more Annual

When Wrap Fees are charged, what must the client receive?

Written Schedule H of Form ADV

Performance-based fees are ONLY for what kind of client?

Qualified

What's the primary difference between Testimonials and Endorsements? What must an advertisement do if it utilizes testimonials or endorsements? When an IA uses testimonials or endorsements, do they have to obtain acknowledgment of receipt of disclosure by customers?

Testimonial is from a current client Endorsements are non-clients Disclose whether or not the provider of the statement is a client and if they are being compensated. No

When must disclosures associated with testimonials or endorsements be disseminated?

At the time of dissemination.

With respect to IA Record Keeping, what must be recorded?

Journals - cash receipts and disbursements Ledgers - assets and liabilities

With respect to Record keeping, what is the timeframe under Federal law? USA?

Federal: 5 years USA (State): Determined by Administrator

After termination of an IA, how long must they maintain the records?

3 years

The Securities Act of 1933 is also known as the ______________ Act OR the ______________ in Securities Law. What is the '33 Act's primary objectives? Under the '33 Act what must security do in order to be sold interstate?

Paper Truth Primary market (new issues) Prevent Fraud Registered with the SEC OR exempt

What FOUR individuals' names and what category of people must appear on registration document for a new issue?

CEO, CFO, CAO and Underwriter Anyone who owns 10% or more of the stock.

After registration how many days does it take for a security's registration to become effective? What is this period of time known as? After the security becomes effective, what can be done with it?

20 Days Cooling Off period It can be sold

An information barrier imposed between a BDs departments of investment banking, research, and trading is known as what? Why does this exist?

Chinese Wall To prevent dissemination of insider info and promote trust with the public

Is real estate or the option to buy real estate considered a security? What about Futures contracts? What about fractional interest in oil, gas and mineral rights?

No No YES

What allows Commercial Paper and Promissory notes to be exempt securities?

Commercial Paper - Maturity of 270 days or less Promissory note - Payable within 9mo and at least $50k

The '33Act considers these securities: Fractional Put Call W R I B S

Fractional interests in oil, gas and minerals Puts Calls Warrants Rights Investment Contracts Bonds Stocks

With respect to exempt securities, there are a lot of similarities with respect to USA (U Burn Pie) and the '33 Act, except for what? Why? What's another exception?

Those Registered on a Stock Exchange Because, if they registered on a Stock Exhange, they have to be registered with the SEC and thus are exempt from USA. However, the SEC requires this under the '33 Act, so they have to register in order to be sold. Insurance and Investment companies

What is a Regulation A offering?

An offering to the public of $75MM or less for 12mo or less.

Accredited Investors can participate in what type of investment? What are some Accredited Investors? For individuals, what are the requirements? What's the income for married couples?

Private Placement (Reg D) Banks, Insurance Companies, Investment Companies, wealthy individuals. $1MM net worth OR $200k salary for 2yrs and the upcoming year $300k

Is the act of an issuer negotiating with an underwriter considered an "offer?" Who is considered an Underwriter?

No Any person who purchases from or sells for an issuer for distribution.

Under the '33 Act, how long must records be kept?

5 years from fiscal year end

The Securites Act of 1933 is known as the _____________ Act. What about the Securites Exchange Act of 1934? What does the '34 Act regulate? What did the '34 Act create?

Paper People Act Secondary market (securities exchanges) and the people operating them. SEC

What do Transfer Agents do?

Cancel old stock certificates and issue new ones.

What are SROs and what are TWO?

Self-Regulatory Agencies FINRA and MSRB (Municipal Securities Rulemaking Board)

Who does the SEC regulate?

BDs

Under the '34 Act, what is a person known as if they own 10% or more of an outstanding stock? At what percentage of ownership does reporting to the SEC start? Within how many days?

Principal stockholder (also "insider") 5% 10

What form is used to register a BD?

Form BD

Can the SEC override FINRA or MSRB investigations? Why?

Yes Because they're at the federal level

What's the penalty for trading on Public Information?

3X profit gained or Loss avoided

Can Insiders and Principal stockholders short their stock? What is considered a Principal stockholder?

No A person who own's 10% of a stock.

What is a Market Maker?

AN organization that maintains an inventory of OTC securities and buys and sells from their own account.

What FOUR things must an Order Ticket include? What is NOT on the order?

Account number Order time Agent Order terms Price

What's the purpose of the Investment Company Act of 1940?

To regulate Investment Companies

What are the THREE types of Investment Companies?

Face Amount Certificate Companies Unit Investment Trusts Open-End Investment Companies (Mutual Funds)

At what value do Open End Investment Companies redeem shares?

NAV

If an Investment Company is selling shares at a value less than NAV, you know this is what type of Investment Company (Open or Closed)? Why is this?

Closed Because ONLY Closed End Investment Companies have a secondary market for their shares (i.e NYSE).

Is a Real Estate Investment Trust considered an Investment Company?

Does the Investment Company Act of 1940 regulate the level of return an Invetsment Company must provide it's clients?

Complete this Calculation for an Investment Company share: Offering Price = _______________ + _______________

Offering Price = NAV + Sales Charge

What type of issues does a "Global Fund" include ... Foreign and / or Domestic?

Foreign AND Domestic

To what THREE Acts are Mutual Funds subject? To what Act are they NOT subject?

Securites Act of 1933 Securites Exchange Act of 1934 Investment Company Act of 1940 Glass-Steagall Act of 1933

If an IA holds more than 5% of an equity security, what must they do?

File Beneficial Ownership Form 13-D with the SEC

Can an IA recommend a cross-agency transaction to a buyer and seller?

In what instance does an Access Person of an IA NOT have to report their personal investments?

If they're a limited partner at a hedge fund.

From where is the IAs commission deducted?

From the gross income of the fund, NOT the NAV.

Can the State Administrator require Net Capital requirements that they determine to be necessary if they exceed SEC requirements.?

Is a person who issues general reports about securities considered to be giving securities advice?

Yes

Under the Securities Act of 1934, who sets margin requirements?

Federal Reserve Board