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65 Final Prep > Regulations > Flashcards

Regulations Flashcards

1
Q

When an IA (state or federal) has material changes…

A

A copy or summary of changes must be sent to all clients no later than 120 days after the close of the IA’s fiscal year

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2
Q

What method of registration is used for nonexempt companies that are registering with the SEC?

A

Coordination

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3
Q

An SEC registered advisor who reports AUM under $90 million must…

A

withdraw from the SEC registration using Form ADV-W within 180 days of the adviser’s fiscal year end

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4
Q

Section 102(c)(1) of the USA states that…

A

except as may be permitted by the Admin., it is unlawful for any IA to enter into, extend, or renew any advisory contract unless it provides in writing that the IA shall not be compensated on the basis of a share of capital gains upon capital appreciation of the funds or any portion of the funds of the client.

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5
Q

KAPCO Advisers, an RIA recommends the purchase of 100 shares of Gemco common stock to one of it’s advisory clients. The client accepts the recommendation & the sale is made from KAPCOs inventory. This transaction…

A

requires:

  • written disclosure to the client
  • consent of the client prior to the completion of the transaction
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6
Q

Under the USA, a client who purchased securities from a BD may request the trade be rescinded if…

A

the security was sold in violation of the USA;

the client is then entitled to:

  • compensation for the original purchase price + interest
  • compensation for reasonable attorney’s fees
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7
Q

Under state law, those who are “qualified” are referred to as…

A

institutional investors

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8
Q

Record keeping requirements for BDs?

A

3 years

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9
Q

IAs must keep partnership records for…

A

3 years after the partnership is terminated

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10
Q

State-registered IAs who maintain custody of customer funds & securities must have a minimum net worth of

A

$35,000

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11
Q

On termination of an agent from a firm with which he is registered…

A

both the agent & the firm must promptly notify the Administrator of such termination

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12
Q

A lawsuit against a BD or adviser can be avoided if…

A

restitution, costs & interests are paid to the client

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13
Q

An Administrator may deny or revoke a security’s exemption…

A

without a hearing if the issuer is given an opportunity for a hearing after the revocation

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14
Q

Anti-money laundering…

A

collecting & verifying information provided by a customer at account opening is part of the company’s policies & procedures

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15
Q

The USA defines a guaranteed security as one…

A

where the payment of interest & principal (bond) or dividend (stock) is guaranteed by a party other than the issuer

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16
Q

What business entity files a tax return on the 15th day of the 4th month after the end of the calendar (or fiscal) year?

A

C corporation on Form 1120

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17
Q

4 categories of Federal Covered Securities?

A
  1. Issued by Closed/Open End Investment Companies, UIT, Face Amount Certificate Companies; Registered under the IA Act of 1940
  2. Listed on Federal Exchange or senior to those that are
  3. Qualifies for private placement exemption (Rule 506(b) or 506(c))
  4. Municipal bonds; under NSMIA, if the municipal issuer is located in the state in which the securities are being offered, that security is not federal covered
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18
Q

Form 10K

A
  • domestic public issues
  • comprehensive overview of business/financial condition (includes financial statements that have been audited by an independent accountant)
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19
Q

Which markets are futures markets & do not trade securities?

A
  • NYMEX: NY Mercantile Exchange
  • CBOT: Chicago Board of Trade
  • CME: Chicago Mercantile Exchange
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20
Q

What must a securities registration statement contain?

A
  • identify of more than 10% of the issuers stock
  • an estimate of the proceeds & a description of the use to which they will be put
  • identity of the underwriter
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21
Q

Part 1B Form ADV is used by…

A

state-registered advisers only

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22
Q

9 Exempt Securities?

A
  1. US & Canadian Government Municipal Securities
  2. Foreign Government Securities
  3. Depository Institutions
  4. Insurance Company Securities
  5. Public Utility & Common Carrier Securities
  6. Federal Covered Securities
  7. Securities issued by non-profit organizations
  8. Securities of employee benefit plans
  9. Certain money market instruments
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23
Q

9 Exempt Transactions?

A
  1. Isolated Non-issuer Transactions
  2. Unsolicited Brokerage Transactions
  3. Underwriter Transactions
  4. Bankruptcy, Guardian, or Conservator Transactions
  5. Institutional Investor Transactions
  6. Limited Offering Transactions
  7. Preorganization Certificates
  8. Transactions w/ Existing Security Holders
  9. Nonissuer Transactions by Pledges
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24
Q

An investor would have to pay AMT when…

A

it exceeds the investor’s regular income tax

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25
Q

An Admin may deny the registration of a security when…

A
  • the activity to be conducted in the state is illegal

- the underwriter’s compensation is unreasonable

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26
Q

People who work at IA solicitation firms must…

A

register as IARs

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27
Q

Regarding re-sending brochures, federal advisors…

A

must resent annually (within 120 days of fiscal year-end)

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28
Q

Federal advisors must deliver brochure…

A

at or prior to contract date

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29
Q

State advisors must deliver brochure…

A

48 hours prior to contract date or the customer gets 5 days to rescind the contract (free look period)

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30
Q

Tax filing status is based on

A

marital status as of the last day of the year

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31
Q

When is exemption from registration with the SEC not based on the value of AUM?

A

only in the case of an adviser to venture capital funds

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32
Q

Who is responsible for administration of the Bank Secrecy Act?

A

Financial Crimes Enforcement Network (FINCEN)

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33
Q

Being given investment discretion is only “custody” if the adviser…

A

has full power of attorney over the account; which gives the adviser the ability to withdraw customer funds or securities

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34
Q

Under the USA, an application for registration as an IA will generally become effective…

A

30 days after filing

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35
Q

Administrators have the power to…

A
  • issue cease & desist orders
  • apply to a court for a temporary or permanent injunction
  • apply to a court for restitution to investors or to have the court appoint a receiver for a violator’s assets
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36
Q

The consent to service of process eliminates the need for…

A

any local representation for legal purposes

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37
Q

IAR renewal requires…

A

payment of the annual renewal registration or licensing fee

*all IARs are registered with the states, not the SEC

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38
Q

What is NOT a security?

A
  • all insurance contracts (other than variable ones)

- commodities, including precious metals

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39
Q

The right to maintain a proportionate interest in the company applies to…

A
  • common stock

this is called a pre-emptive right

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40
Q

When a client dies, orders may be accepted from…

A

the trustee in intestacy

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41
Q

3 securities that are exempt under the USA, but not under the Securities Act of 1933…

A
  1. Stocks & bonds issued by insurance companies
  2. Securities issued by foreign governments
  3. Securities listed on certain exchanges
42
Q

For a BCP, all IAs must have a…

A

designated regulatory contact person

43
Q

A performance-based fee must be based on…

A

capital gains minus capital losses;

including both realized & unrealized gains & losses;

must reflect a time period of no less than 12 months

44
Q

A private placement will lose its exemption if…

A

those who sell the offering are paid commissions on sales to non-institutional clients

45
Q

IAs who are partnerships must inform their clients of…

A

any change in the membership of the partnership within a reasonable period

46
Q

506(b) offerings…

A
  • cannot be advertised

- non-accredited investors can participate

47
Q

The executor of an estate subject to federal estate tax is permitted to use an alternative valuation date…

A
  • for securities that have depreciated after the date of death
  • that is 6 months from the date of death
48
Q

Form 1040

A

Personal income tax return

49
Q

Letters of Intent…

A
  • permit investors to qualify for a reduced sales charge on the purchase of MF shares over time
  • are valid for 13 months
  • may be backdated by up to 90 days to include previous purchases
  • the investor is not legally obligated to comply with LIO terms, some shares purchased at the reduced sales charge are held in escrow & liquidated to pay the reduction in sales charge if the contract is not completed
50
Q

A sale is…

A

a contract, oral or otherwise, to dispose of a security for value

51
Q

When an Administrator issues a final order, an agent subject to the order may…

A
  • request that additional evidence be presented to the court

- obtain a review of the order in an appropriate court

52
Q

506(c) offerings…

A
  • can be advertised

- are limited exclusively to accredited investors

53
Q

Form 1041

A

filed annually for trust taxation

54
Q

Prospectus

A

a communication made in writing or by radio/TV that offers to dispose of a security for value (a sale)

55
Q

An LLC is different from an S Corp in that…

A

there is no statutory limit on the number of investors in an LLC

56
Q

A general partner of a limited partnership…

A

is a key executive of the partnership who…

  • makes day-to-day business decisions
  • buys & sells the programs property (DPP)
  • appoints a property manager (DPP)
57
Q

Form 8K

A 
Reports newsworthy events to the SEC & the public:
Examples:
- Change in management
- Change in company's name
- Mergers/Acquisitions
- Bankruptcy filing
- Major new product introductions / sale of product lines
- BOD resigns over disagreements

*Filed within 4 business days after occurrence

58
Q

A sole proprietor

A
  • Can do business as a DBA

- Must file an Individual Form 1040 with a Schedule C attached

59
Q

Record Date

A

announced by the company as the official date you must be an owner on the company’s records in order to participate in the annual meeting & corporate election

60
Q

What is the maximum fine for a violation & maximum prison term under the USA?

A

Max Fine: $5000

Max Prison Term: 3 years

61
Q

How are ETNs registered?

A

Exchange-Traded Notes or “equity-linked notes” are registered under the Securities Act of 1933 as debt instruments

62
Q

What is guaranteed by a variable life policy?

A

a minimum death benefit

63
Q

When securities are inherited…

A

the heir receives a cost basis calculated as of the deceased party’s date of death

64
Q

Form 1065

A

Partnership tax return

65
Q

The death benefit may be free of income tax, but may be subject to…

A

estate tax

66
Q

A gift of assessable stock is always considered…

A

an offer & a sale

67
Q

The sale of a security to an institution is considered an…

A

exempt transaction

68
Q

The death benefit (of a variable life policy) must be calculated…

A

annually

69
Q

The cash benefit (of a variable life policy) must be calculated…

A

monthly

70
Q

Revocation of the registration of an agents BD will result in…

A

that agents effective registration being “on hold”

71
Q

In order to qualify as a REIT..

A

at least 75% of the assets must be invested in real-estate related assets, cash, & US Government securities

72
Q

A REIT must distribute __% of its income to investors

A

90%

73
Q

Section 1031 allows…

A

investment real estate that has appreciated to be sold & the proceeds invested in another piece of investment real estate, without capital gains tax being due at that point

known as a “like kind” exchange

74
Q

Tax Preference Items

A

are used for the purpose of computing the AMT include:

  • excess intangible drilling costs
  • certain incentive stock options
  • accelerated depreciation
75
Q

In order to donate appreciated securities at fair market value & have no tax consequences on the gain, the securities must…

A

be held long term (over 1 year)

76
Q

The exercise (but not the receipt) of preemptive rights…

A

is a sale

77
Q

The Securities Exchange Act of 1934 empowered the Federal Reserve Board (FRB) to…

A
  • set margin requirements
  • regulate the use of credit to purchase securities
  • determine what issues may be purchased on margin & what percentage of the purchase price must be deposited by the purchaser
78
Q

When an IA uses an affiliated BD as its qualified custodian, the adviser is considered to be…

A

maintaining custody

79
Q

An individual wishing to register as an agent within a BD may have to…

A
  • pass an exam

- post a bond

80
Q

What business accounts require suitability of the owners & why?

A
  • S Corp
  • Sole Proprietorships
  • General Partnerships

^ Each provide flow through income & loss to the individual owners

81
Q

Regarding re-sending brochures, state advisors…

A

do not need to; only if there are material changes in Form ADV, or upon request

82
Q

Suitability for a C corporation…

A

is based on the company itself because it is an entity separate from its shareholders

83
Q

Form ADV Part 2 contains…

A

(Disclosure Brochure)

  • fees; how & when they are charged
  • about the IARs
84
Q

Under the IA Act of 1940, what must be included in an IAs sales literature regarding their investment system?

A

the difficulties & limitations of using the system

85
Q

Regulation T

A

The Federal Reserve’s regulation that controls the extension of credit on non-exempt securities from brokers to their customers

  • Defines the types of accounts in which transactions may occur
  • Defines the securities that are marginable
  • Defines the initial margin requirements to establish securities positions in accounts; set maximum time periods for the collection of monies due from customers
86
Q

When an agent with one BD resigns & affiliates with another…

A

Both BDs & the agent must notify the Administrator of the change in registration

87
Q

Howey Decision

A

the US Supreme court held that a security must represent an investment of money in a common enterprise with the expectation of profit from the managerial effort of others

88
Q

If an IA registered in a state wished to maintain custody of client funds or securities…

A

prompt notice would have to be given to that state Administrator on Form ADV

89
Q

Officers, directors, owners, partners are…

A

automatically registered as IARs

90
Q

Regulation U

A

Controls the extension of credit on securities by banks

91
Q

Rights & warrants are considered..

A

offers of the underlying stock

92
Q

IA Solicitor

A

a third party firm; not registered with a BD or RIA; is affiliated with an RIA

  • Solicits advisory services on behalf of an IA
  • Must provide ADV Part 2
  • Must provide IA Solicitors brochure to be signed by the customer
93
Q

Form ADV Part 1 contains…

A

(Registration)

  • Principal address
  • Form of business (LLC, S Corp, etc.)
  • Type of business
  • Info about officers, directors, owners, partners
94
Q

If a state-registered IA who maintains custody’s net worth falls below the minimum, they must…

A

obtain a surety bond rounded to the next $5,000 to meet the minimum

95
Q

Accredited Investors

A

Under Federal law, those who are “qualified” (don’t count towards the numerical limit” are referred to as accredited.

96
Q

Under the SEC Act of 1934, who is considered an associated person(s) of a BD?

A

any officer or person in a control position to the BD or any employee of the BD, except for clerical or ministerial employees

97
Q

Exempt transactions are not subject to…

A

the advertising & sales literature filing requirements of the administrator

98
Q

The Securities Act of 1933 regulates…

A

new issues of corporate securities sold to the public & is designed to prevent fraud in the sale of newly issued securities

99
Q

The Securities Act of 1934 regulates…

A

trading & the secondary markets

100
Q

Client referral fees are permitted when…

A

They are fixed & unrelated to advisory fee or size of account

101
Q

Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT

A) principal repayment at maturity on debt securities
B) dividends on equity securities
C) interest on debt securities
D) principal on equity issues

A

D) principal on equity issues

Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee.

65 Final Prep (8 decks)

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