Registration and Licensing Requirements Flashcards
What is the Uniform Securities Act?
State Laws that establish uniform securities registration standards
North American Securities Administrators Association (NASAA)
Creates amendments to the USA, maintains state licensing exams and creates model rules under the USA and issues statements of policy
Blue Sky Laws
State security laws that target stock schemes that were common before federal regulations. Also known as “Blue Skying”
National Securities Markets Improvements Act of 1996
Eliminates duplicate registration for state and federal. If registration is required at federal level, state is not required. States can still charge fees. BD’s, IA’s and IA reps must be registered unless exempt.
State Administrator
Responsible for enforcing a given state’s securities laws and rules. They don’t write laws. Law is created by state legislature. “Commission, “Commissioner,” or “Secretary.”
Person
Legal Entity. Has legal standing to be sued and examples are: Partnerships, Corporations, Associations, Investment Clubs
What are not considered persons and must be represented by a third party?
Minor Children, Mental incompetent Individuals and Deceased Individuals
Issuer
Any person who issues or proposes to issue a security in a primary offering or any person that receives the proceeds from a new issue offering. May be Corporation, US Government or Municipalities
What are some EXCEPTIONS for an issuer?
CD’s for a security, voting trust certificates, collateral trust certificates, or UIT’s refer to the issuer as the manager or depositor
When dealing with Equipment Trust Certificates, who is the issuer?
The Issuer is the entity to whom the equipment is being leased
Who is responsible for leasing the equipment to a corporation?
Trustee. When the Corporation has completed making payments, the title will go to the Corporation, the Issuer.
Why is there no issuer in a fractional interest or participations in oil, gas, or mining titles or leases, or in payments out of production under such titles or leases?
Mainly because of fraud. They are forced to go through the most rigorous registration available
What are Issuer Transactions?
Occurs when the issuer sells or redeems securities for its own benefit and receives the proceeds. They are conducted in the Primary Market
What is a Non-Issuer Transaction?
Refers to any purchase or sale of a security that does not benefit the issuer. Most common is a Secondary Market Transaction
Issuer Transactions:
Primary Market Transaction, issuer transaction that benefits the issuer
Non-Issuer Transaction:
Secondary market transaction. Transaction which the disposition of a security does not benefit the issuer
Broker Dealer
Firm that buys and sells securities for the accounts of others or for its own account
Agent
Individual who represents a BD or issuer, attempting to effect securities transactions
Consent to Service of Process
Appoints the State Administrator as the representative to be served legal papers on behalf of the registrant
Institutional Buyer
Entities that make security transactions on a large scale for their own accounts or for institutional clients such as insurance or investment companies, trust companies, BD’s, IA’s, banks, savings institutions, employee pensions and profit sharing plans.
- Must be Institution
- Cannot be general public
Qualified Purchaser
Natural person or family owned company with investments worth at least 5 million, a trust fund back by qualified purchaser’s with investments worth at least 5 million, or institution with investments of at least 25 million.
Is state registration required for Qualified Purchasers and Institutional Buyers?
No
Exclusion
Person, entity, or thing doesn’t meet the definition so is therefore excluded
Exemption
They are part of the group, but have been released from the obligations
What capacity do Principals act in?
They charge a mark-up and at as a dealer. Dealer Capacity
What capacity do Broker Dealers act in?
BD’s charge commission and act in “agency” capacity
Excluded and are not Broker Dealers:
Agents, Issuers (except when transacting business in securities other than its own), and bank, savings institutions, or trust companies
Broker Dealer Institutional Exclusion:
BD’s that have no place of business in the state and only effects transactions with other BD’s, institutional investors, or the issuer of the security involved in the transaction is EXCLUDED and does not need to register in that specific state.
Broker Dealer Retail Customer (Snowbird) Exclusion:
Allows BD’s to transact business with their existing customers while they’re on vacation or temporarily in another state. BD is not required to register in the state if they do not solicit new customers.
What are the two conditions required for Broker Dealers to be excluded?
No place of business in the state and customer must be an institution or in state temporarily
What do Canadian Broker Dealers have to do if not exempt from State registration?
They may register with the state by filing an application and consent to service of process with the Admin. Must be in good standing in the jurisdiction of the head office. Must be member of a self regulatory organization in Canada.
How long does State registration take?
It’s effective on the 30th day after the application is filed and must be renewed annually
What are the three things Canadian BD’s and Agents must do to be registered?
1) Maintain provincial or territorial registration in good standing.
2) BD’s must maintain membership in an SRO in good standing and provide the Administrator, upon request, with books and records relating to business in the state
3) Disclose any criminal action taken as a result of regulatory action
When is there an Exemption valid for Canadian Firms?
When doing business with existing retail customers who are temporarily in the US and also for transactions in Canadian self-directed tax advantage retirement accounts for persons residing in state. Agents are also exempt.
Limited Registration for Canadian Broker Dealers
Firm must sign a consent to service and is required to disclose to all U.S. clients that it has limited registration in the state and is not subject to the full regulatory provisions of the USA
In accordance to Mergers and Acquisitions, how are Advisors or Finders defined?
As Broker Dealers under USA
What do advisors for Mergers and Acquisitions do?
Give advice on acquisition of companies, they find companies that may be acquired and if they are being compensated, they qualify as registrants
Under USA, how many exclusions and exemptions are there for a BD?
Several BD Exclusions but only one EXEMPTION
If Broker Dealer loses registration involuntarily, what happens to the agents?
They lose registration until they find other BD’s
If an agent loses registration, what happens to the Broker Dealer?
Nothing
Where are standardized applications filed?
Through a designee such as the Central Registration Depository
What is Net Capital also called?
Net Worth
Are Net Capital Requirements necessary for BD’s?
Yes. The Administrator may establish a net capital requirement but it cannot exceed SEC’s requirement
Agents
Represents or acts on behalf of someone else. Compensation can be salary or commission
Are agents required to register for exempt securities under an Investment Adviser Firm?
No. Agents are excluded from the definition of agent
Examples of exempt securities:
Anything government (bonds or securities)
Municipal securities
Foreign
Does a person representing an Issuer in an exempt transaction have to register?
No. They are excluded from the definition of agent
Examples of exempt transactions:
Institution transactions
Underwriter and Issuer transactions
Private Placement Offerings
Unsolicited brokerage transactions
Does a person representing a BD in an exempt transaction have to register?
Yes. if the agent represents an Issuer, they don’t, as long as they don’t receive compensation or commission form the Issuer
Issuer Agent Exclusions
Persons representing an Issuer in transactions of certain exempt securities
Persons representing an Issuer in exempt transactions
Persons representing an Issuer in transactions with employees of the Issuer in that Issuers securities when no compensation is received
When working for a BD, when is the only time an agent is not required to register?
When NOT working in a sales capacity or when they are an agent of an exempt BD
How long does an agent have when a client moves to another state?
They have 60 days of activity with the client. This gives them time to register in that state.
How does an agent qualify for the 60 day grace period when a customer moves states?
An application to register in the state must be filed within 10 business days of transaction with client in new state, or the discovery by the agent of the clients change in residence, whichever is later
Does an agent have to be registered if the transactions or securities are exempt under a BD?
Yes. They must always be registered in the state where the agents customer lives even if the securities and transactions are exempt
In what circumstance may an agent represent or be employed by more than one BD?
If both are affiliated by common control or authorized by Administrator
What are the requirements for Agents to become registered?
They must pass qualification exam, must file same information as standardized uniform application, and if agent has discretionary authority, Administrator will require agent to post surety bond. No net capital is required.
Side Note: Agent must complete registration process separately and disclose it to each BD
What is an Investment Advisor?
Must pass ABC Test: provides Advice about securities, as a Business for Compensation. They provide advice about securities.
How are Investment Advisors compensated?
They receive compensation for advice, such as a fee. A service such as a landlord giving a rent discount for advice, could be considered compensation.
How is a BD compensated vs. an Investment Advisor?
A BD provides advice on securities as its business and is compensated based on a completed transaction or trade. An IA provides advice on securities as its business and is compensated based only on advice given.
Who may be considered Investment Advisors?
Financial Planners if ABC test is met, pension consultants, sports or entertainment reps. This would be true if rep’s fee did not contain a specific charge for investment advice
What is a Fiduciary?
A person who acts on behalf of, and interests of, another person. Examples: Executors, trustees, guardians or custodians. Investment advisors are fiduciaries.
What are Institutional Exemptions?
Applies to an IA that has no place of business in the state and has only institutional clients in the state. Examples: Registered investment companies, other investment advisors, BD’s, Banks or Trusts, Insurance companies.
If a firm meets the institutional exemption for an IA, is an IA still considered an IA in that state?
Yes but the firm doesn’t have to register in that specific state.
In terms of Exclusion and Exemption with Institutions, how are BD’s and IA’s categorized?
BD’s have an institutional exclusion and IA’s have an institutional exemption
Retail Customer (De Minimis) Exemption
Applies only to IA’s. During the preceding 12 months, if there are more than 5 non-institutional clients in a separate state, they are NOT exempt.
What are the registration requirements for Investment Advisors for Private Funds?
Not required to register in the state
How to qualify as a Private Fund and how do they register?
Assets under management of 150 million or more. Must register with SEC by filing parts of form ADV and Form PF (Private Funds) and are federal covered advisors.
Where do firms have to register if less than 150 million AUM (Assets Under Management)?
With the state where they’re physically located and any other state where they conduct advisory business. Known as “exempt reporting advisors.”
If an Investment Advisor works for an Investment Company, how do they have to register?
SEC only
What is the “Buffer zone” when pertaining to IA’s?
Permits IA to keep SEC registration if AUM falls below 100 million, even as low as 90 million.
What is so special about those darn Federal Covered Advisors and what is required of them?
They are exempt from state registration and excluded from the definition of IA. They must still file notice (notice filing) and provide administrator with the SEC files and pay annual fee.
What are the registration requirements if an IA has less than 100 million, but more than 25 million AUM?
They need to register in 15 states or they may choose to register with the SEC
How must you register if you’re an IA that works for an investment company?
Federally with the SEC
What are the three things Family Offices must have to qualify for exclusion?
May only provide advice to family members, must be owned and controlled by family members and the office cannot advertise itself to the public as an investment advisor.
Investment Advisor Exclusions
IA representatives, Lawyers, Accountants, Teachers, Engineers (LATE), BD’s and their Agents (advice must be incidental), Depository Institutions, Publishers and Federal Covered Advisors.
Investment Advisor Exemptions
De Minimis (5 or fewer in 12 months, also less than 6) and Institutional Exemption (no office in the state that deal solely with institutional clients).
Investment Advisor Registration
Administrator accepts (Form ADV) which is filed through Investment Registration Depository (IARD)
What is in the Form ADV for Investment Advisor registration?
Part 1 and Part 2; Part 1A/1B and Part 2A/2B.
Part 1A is a checklist which has details about the IA firm and includes: Name and address of IA firm, Address for Principals office, and Business practices
Part 1B (Form ADV)
Specific to info required by state securities Admin. Federal covered IA firm is not required to complete 1B.
Part 2 (Form ADV)
Requires IA to prepare answers written in “plain english”
What is a surety bond used for?
As insurance incase of legal action against the representative.
Part 2A (Form ADV)
Contains firm advisory services, business practices, investment strategies and conflicts of interest. Also contains disclosure requirements.
Part 2B (Form ADV)
Also known as Brochure Supplement, contains info about IA reps educational background, business experience, and details of any legal or disciplinary events.
What does the net worth of an IA have to be if they have custody over clients assets?
Must maintain $35,000 and file an audited Balance Sheet with State Admin
What does an IA net worth have to be when they have discretionary authority over a clients assets?
Must maintain $10,000 and file an unaudited balance sheet with the Admin. Must post a surety bond as well
If the minimum net worth falls below the required amount as an IA, what must they do?
Must notify the Admin by close the next business day and file financial report. May not require a surety bond if net worth exceeds state’s minimum standards
What are the requirements if an IA accepts prepayment?
If more than $500 per client, 6 or more months in advance, must always maintain positive net worth and file audited balance sheet
Investment Advisor Representatives
Associated with investment advisor that is registered under USA. Required to register in office of state they’re in. No federal registration. Does not register based on client location and only registers at state level.
Solicitor
Person who refers potential clients to an IA for compensation
What must a Solicitor do when entering an advisory contract with a client?
Prior to, or at the time of, entering into an advisory contract with the client, must obtain a signed and dated acknowledgement that the client has received both an advisors brochure (ADV part 2) and separate solicitors disclosure.
Does an employee with clerical or ministerial functions have to register?
No. They are excluded from the definition
Are IAR’s required to post a surety bond?
No
If employed by a state registered IA, who must notify the Administrator when terminating an IAR registration?
The Advisor Firm
If employed by a federally registered IA, who must notify the Administrator when terminating registration?
The IAR
If employed as an agent of a BD, Who must notify the Admin when terminating registration?
Both the agent and BD
If employed as an agent of a BD, then subsequently hired by another BD, who is required to notify the Admin when terminating registration?
The former BD and the new BD
What are the procedures for General registration in a state for BD’s, IA’s and IAR’s?
Submit application, provide consent to service of process, Pay filing/license fee, pass qualification exam (if required), and post surety bond (if required).
Consent to Service of Process
Consent form that must be signed and submitted when a person registers with the Admin. The registrant must agree to appoint the State Admin as their Representative to be served legal paper on behalf of the registrant. Papers can be served to the Admin if the registrant cannot be located. Service to Admin constitutes service to registrant.
In terms of legal proceedings, what is the benefit of Consent to Process?
Prevents delay of legal proceedings if the registrant is avoiding receipt of summons or subpoena. The consent is irrevocable. Remains effective as long as person is registered
Filing Fees
Registration filing fee and annual renewal fee are required of BD’s, IA’s and IARs
What licenses are transferrable between BD’s, IA’s and IARs?
BD agents and IAR’s are not transferrable
Are Federal Covered Advisors required to submit a filing fee to the State?
Yes and they are required to file a notice file with the Admin by filing same records as filed with the SEC
Qualification Exam
Passing a qualification exam does not approve registration. Cannot conduct business in the state unless registration is granted by Admin
When is registration effective?
Effective at noon, 30 days after its filed. Admin may set earlier effective date
If the original application for registration is amended, what may the Administrator do?
May postpone effective date to 30 days following the filing
When does registration expire?
Annually December 31 unless renewed. Requires annual filing fee and renewals are NOT pro rated
Denial, Suspension or Revocation of Registration
No denial, suspension, or revocation may be entered without prior notice to applicant, opportunity for hearing, and written finding of fact and conclusion.
Can the Administrator revoke a license?
Yes without the opportunity for a prior hearing, but if hearing is requested, the Admin must comply within 15 days. The affected party may also apply for judicial review of the Admins actions within 60 days
How long are orders for denial, suspension, and revocation in the U.S.?
Last 10 years. In foreign jurisdiction, it’s 5 years. Misdemeanors and felony’s are 10 years
Can an Admin deny registration based on the lack of experience of an applicant?
No
Why may an Admin postpone or suspend (without advance notice) a registration pending final determination?
An Admin would do this if delaying the action could harm the public
What happens if no hearing is requested from the applicant?
The order will remain in effect until it is changed or vacated by the admin
What are the four things that justify a cancellation of the registration or application?
If the registrant or applicant has ceased to do business, subject to adjudication of mental incompetence, cannot be located, or is deceased.
When is withdrawal from Registration effective?
30 days after filing U5, but may be sooner. When firms withdraw, both the firm and registered individuals remain registered for 30 days
When is termination final?
Not final for up to 1 year after withdrawal becomes effective
Supervision of Agents and IARs
Can have registration suspended or revoked for failing to supervise personnel. Supervisors must be registered in the state and pass FINRA exams.
What is an OSJ and what are the 4 activities that occur?
Office of Supervisory Jurisdiction is a BD office where the following activities occur: order execution, approval of new accounts, approval of retail communications and review of customer orders.
How often are Internal audits?
Annual
How often are branch audits?
Every 3 years
Since there is a designated supervisor for each OSJ and branch office, how must they register and what happens if they don’t abide?
Must be registered in the state as an agent and if they don’t abide for more than 30 days, BDs registration in state can be revoked or suspended/
What must happen if a customer rescinds a complaint?
The original must be kept and the copy returned to the customer
Can statements or correspondence be held by the branch?
No, or held /sent to different addresses. This helps prevent fraud
Record Keeping requirements
Customer correspondence and trade confirmation - 3 years
Order Tickets (Customer name is not recorded) - 3 years
Customer account records - 6 years (CAR)
Customer complaints - 4 years (CC4)
Records must be easily accessible for 2 years at location
BD’s must keep records for life of firm, plus 3 years after termination of business:
Partnership agreements and articles of incorporation
Stock certificate books
Amendments
Investment Advisor Records
Accessible for 5 years and kept in principal office for first 2 years. List of discretionary accounts and powers of attorney
What are order tickets also known as?
Order memoranda. Customers name is not on an order ticket, IA account information is
Where does an IA need to comply with recordkeeping requirements?
In the state where the principal office is located
Records for Life + 3 years for IA:
Partnership Agreements or articles of incorporation, minutes of board meetings, stock certificate books and amendments
Can you keep electronic storage files?
Yes but there must be physical copies as well. Admin may examine these at any time in or out of state
When do Amendments need to be filed?
Promptly. The application could be delayed for 30 days beyond the date of filing the amendment
Do financial reports need to be filed with Admin?
Yes. Advertising, marketing and sales materials will be filed with Admin. EX: Prospectus
