Regs Flashcards
Securities Act of 1933, aka Truth in Securities Act
2 objectives:
Require that investors receive significant ingo about securities being offered for sale (through registration with SEC,including prospectus)
Prohibite deceit, misrepresentation, fraud in sale of securities to the public
*Regulates new issue (primary market)
Exempt from SEC registration
-US government securities &
US agency securities
-Municipal bonds
-Nonprofits
-Commercial bank securities (*not investment bank)
-Commercial paper and other short term corporate debt with max maturity of 270 days (9mo)
***note: non-US issue (Eurodollar bonds) are not overseen by SEC
*Also see Reg S- exempt transaction
another source says:
-Government securities
-Foreign government securities
-Bank or FI securities
-Insurance Co issued securities *
-Public utility & railroad securities
-Nonprofit securities
-Employee benefit plans
Also:
Reg D- no more than 35 non-accredited investors
Reg S- overSeas
Reg A- small bz, limited offerings in a 12 mo period
“offering memorandum” instead of prospectus
SEC registration timeline
Pre-registration
-bake off
-mandate
-registration statement (s-1), prospectus, and offering materials are prepared
-due diligence of S-1
NO MARKETING
Filing date
Cooling off period (20 days)
-SEC review for disclosures
-Bankers do road shows and marketing, give out red herring/preliminary prospectus, “tombstone” may be published
-investors give non- binding IOI (indications of interest)
IOIs carry most weight in setting initial offer price
Effective date-SEC declares registration effective, securities can now legally be sold
Post Effective date
- bankers confirm IOIs and allocate shares to investors
-securities begin trading in the secondary market (exchanges)
prospectus must be received no later than settlement/record date
Rule 147- intrastate offerings
To avoid SEC registration-
Company sells securities in its home state with 3 requirements:
Principal place of business in the state
100% of securities sold to state residents
At least one of the following:
-at least 80% of gross revenue from doing business within the state
-at least 80%of assets are located in that state
-at least 80% of net proceeds from the offerings are used in the state
- majority of employees are located in the state
**Residents can sell to other residents immediately.
Residents must wait 6mo before selling out of state.
Exempt transaction
Reg D- private placements (Securities Act of 1933)
506(b) vs. 506(c)
No public offering, just offered directly to a select universe of private buyers or institutional investors.
**No more than 35 NON-accredited investors can participate
Accredited investors-assumed to be sophisticated/knowledgeable about securities industry.
4 groups:
-INDIVIDUALS with net worth $1million+ (excluding primary residence)
-INDIVIDUALS earning $200,000+ annually for 2 most recent years
Or
JOINT income with spouse exceeding $300,000+ for 2 most recent years. Reasonable expectation of same income level in current year
-officers, partners, and directors of issuer
-Institutional investors with $5million in assets
Exempt transaction
* * * * * * * *
Reg D 506(b) vs. 506(c):
B=bourgeois (includes non-accredited investors so no advertising permitted)
C=classy (all Accredited investors, so advertising is permitted)
Rule 144- restricted and control stock
Conditions where securities acquired through an exempt transaction or restricted from resale for other reasons can be sold
Restricted- never registered. Private placements, employee stock benefit plans, compensation for professional services, in exchange for providing seed money
Restricted = 6 mo holding period, must be a public company (IPO happened)
Control stock- held by a corporate insider aka affiliate of the issuer
- officer of the company
- member of BOD
- individual owning >10% of voting shares.
De Minimis exception- rule 144 doesn’t apply if selling <5000 shares or <$50,000 overall values
Volume limits apply. Over a 90 day period, shares sold can’t be more than the higher of:
-1% of outstanding shares of same class being sold
-Avg reported weekly trading volume during 4 weeks leading up to the sake
Note stock can be BOTH!
Exempt transaction
Rule 144A
Allows unregistered securities to be sold to QIBs (qualified institutional buyers) without registration.
Allows QIBs to freely trade unregistered securities among themselves.
QIB is:
-institution that manages portfolio of at least $100million
-broker dealer with portfolio of at least $10million
Exempt transaction
Rule 145- reclassification of securities
Protects shareholders of a company that proposes to reclassify its ownership structure, merge with another company or acquire another business.
Seep. 242
Reg T- margin requirements
exempt?
Reg T- settlements and free riding
Tool of the Federal Reserve (DORM)
Prevents investors from borrowing too much money (over-leveraging)
Investors required to deposit 50% of initial margin transactions (if cash funded. Double this if depositing fully paid securities in place of cash).
All short sales must be executed in a margin account.
Lowering margin loosens the 💰 supply & decreases interest rates
Note: securities exempt from SEC registration (ex. US government securities, gov’t agency securities, Municipal bonds) are also exempt from Reg T.
Instead, must meet margin requirement of self regulatory organization (ex FINRA)
—-
Investors must PIF for all purchases within 2 bz days of REGULAR WAY SETTLEMENT (typically T+2, so reg T usually T+4)
If pmt not received by SETTLEMENT+2:
-Position sold out on AM of 5th day
-Account frozen 90 days*
(If shortage <$1000, firm has discretion to leave acc unfrozen)
Free riding is a violation in which an investor sells securities without ever paying for them
Frozen accounts- permitted activity
- sell orders
- purchases IF customer had sufficient funds in account prior to the transaction
Subchapter M- regulated funds
-Tax regulation for certain securities
-aka conduit rule
-taxable income is passed to investors (so investors pay tax rather than the funds)
- must pass 90%+ of NII (net investment income) on to investors to qualify
NII:
- Cash dividends from equities securities
-interest income from debt securities
-REALIZED cap appreciation (cap gains from settled trades)
NII= div + interest- expenses
(Advertising & sales expenses are excluded)
FINRA rule 5130- restrictions on IPO offerings
Require underwriters to make bona-fide public offerings (IPOs).
Restricted persons cannot purchase during IPO.
They are permitted to purchase when shares begin to trade in secondary market.
Restricted persons:
-FINRA member firms and their employees
-finders & fiduciaries (attorneys, accountants) of the managing underwriter
-portfolio managers (in their personal investment accounts)
-immediate family* of restricted persons
*spouse, parents, in-laws, siblings, children, anyone else receiving material support from restricted persons (material support = providing >25% of a person’s income)
MSRB rule G-11 - Municipal syndicate new-issue practices
Order:
1- pre-sale orders
2-group orders
3-designated orders
4-member orders
SEC rule 15c2-12
Requires broker-dealers (not issuers) to ensure current info about Municipal issuers and their securities is available to investors. Broker dealers do this through written agreements with issuers.
Underwriters obtain, review, and distribute copies of issuers “official statement”. Also file with MSRB.
This must be received by investor no later than settlement date/record date of transaction- similar to prospectus
Annual financial information
Material event notices- must be submitted to MSRB within 10 bz days of the event. Ex: rating changes, defaults, and events affecting tax exempt status of security
MSRB rule G-34- CUSIP requirement for new issues
CUSIP numbers- ID#s assigned to all securities
In negotiated sales, the underwriter is responsible for requesting the CUSIP number by pricing
In competitive sales, Municipal advisor applies no later than 1bz day after sending out notice of sale (document that invites competitive bids).
Reg S-P- information security
What gets provided & when?
SEC regulation, aims to ensure security and confidentiality of customer’s personal info
Firms must provide privacy notices at account opening & annually thereafter
*Must provide opportunity to opt-out of info sharing with non- affiliated parties. Cusomers typically get 30 days to opt-out.
MSRB rule G-39 & FINRA rule 3230- telemarketing
Cold calls or faxes to solicit bz. These activities limited to persons who are NOT existing customers.
Cold calls permitted 8am-9pm.
Scripts must be approved by a principal before first use.
Include:
-Caller & firm name
-Ph# and address where caller can be contacted
-Reason for call (ex: solicit new bz)
FINRA rule 4512- new acc form
FiNRA rule 3250- numbered accounts
See page 330- info that must be documented on each new account app:
Legal name
Legal US address
Ph# (home & work)
Ssn or TIN
DOB
Employment status/occupation- including whether customer is EMPLOYEE of broker dealer
Citizenship status
*Annual income
*Net worth (excluding primary home)
*Tax bracket
*Investment objectives
*Investment experience
*Risk tolerance
If KYC info (*) not provided, can open but only do unsolicited transactions.
[Note: new acc form signed by designated principal (supervisor) prior to or promptly after completion of any transaction. Not signed by customer or registered rep]
_____
At customer request, broker dealer can open accounts identifies by symbol or number (but not an alias)
*Still needs to provide written statement of ownership and proof of ID
SEC rule 17a-4- verification of customer information
Firms are required to ensure customer acc info is accurate and up-to-date
After new acc opened, firm has 30 days to send the new customer a request for verification. Customer makes corrections & returns to broker dealer.
If customer notifies firm of a change, firm must send updated acc record for verification within 30 days of receiving customer notice.
Ongoing basis- must verify every 36 months (verify with ALL owners on acc)
