Regulations Flashcards
When an IA (state or federal) has material changes…
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
What method of registration is used for nonexempt companies that are registering with the SEC?
Coordination
An SEC registered advisor who reports AUM under $90 million must…
withdraw from the SEC registration using Form ADV-W within 180 days of the adviser’s fiscal year end
Section 102(c)(1) of the USA states that…
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.
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…
requires:
- written disclosure to the client
- consent of the client prior to the completion of the transaction
Under the USA, a client who purchased securities from a BD may request the trade be rescinded if…
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
Under state law, those who are “qualified” are referred to as…
institutional investors
Record keeping requirements for BDs?
3 years
IAs must keep partnership records for…
3 years after the partnership is terminated
State-registered IAs who maintain custody of customer funds & securities must have a minimum net worth of
$35,000
On termination of an agent from a firm with which he is registered…
both the agent & the firm must promptly notify the Administrator of such termination
A lawsuit against a BD or adviser can be avoided if…
restitution, costs & interests are paid to the client
An Administrator may deny or revoke a security’s exemption…
without a hearing if the issuer is given an opportunity for a hearing after the revocation
Anti-money laundering…
collecting & verifying information provided by a customer at account opening is part of the company’s policies & procedures
The USA defines a guaranteed security as one…
where the payment of interest & principal (bond) or dividend (stock) is guaranteed by a party other than the issuer
What business entity files a tax return on the 15th day of the 4th month after the end of the calendar (or fiscal) year?
C corporation on Form 1120
4 categories of Federal Covered Securities?
- Issued by Closed/Open End Investment Companies, UIT, Face Amount Certificate Companies; Registered under the IA Act of 1940
- Listed on Federal Exchange or senior to those that are
- Qualifies for private placement exemption (Rule 506(b) or 506(c))
- 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
Form 10K
- domestic public issues
- comprehensive overview of business/financial condition (includes financial statements that have been audited by an independent accountant)
Which markets are futures markets & do not trade securities?
- NYMEX: NY Mercantile Exchange
- CBOT: Chicago Board of Trade
- CME: Chicago Mercantile Exchange
What must a securities registration statement contain?
- 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
Part 1B Form ADV is used by…
state-registered advisers only
9 Exempt Securities?
- US & Canadian Government Municipal Securities
- Foreign Government Securities
- Depository Institutions
- Insurance Company Securities
- Public Utility & Common Carrier Securities
- Federal Covered Securities
- Securities issued by non-profit organizations
- Securities of employee benefit plans
- Certain money market instruments
9 Exempt Transactions?
- Isolated Non-issuer Transactions
- Unsolicited Brokerage Transactions
- Underwriter Transactions
- Bankruptcy, Guardian, or Conservator Transactions
- Institutional Investor Transactions
- Limited Offering Transactions
- Preorganization Certificates
- Transactions w/ Existing Security Holders
- Nonissuer Transactions by Pledges
An investor would have to pay AMT when…
it exceeds the investor’s regular income tax
An Admin may deny the registration of a security when…
- the activity to be conducted in the state is illegal
- the underwriter’s compensation is unreasonable
People who work at IA solicitation firms must…
register as IARs
Regarding re-sending brochures, federal advisors…
must resent annually (within 120 days of fiscal year-end)
Federal advisors must deliver brochure…
at or prior to contract date
State advisors must deliver brochure…
48 hours prior to contract date or the customer gets 5 days to rescind the contract (free look period)
Tax filing status is based on
marital status as of the last day of the year
When is exemption from registration with the SEC not based on the value of AUM?
only in the case of an adviser to venture capital funds
Who is responsible for administration of the Bank Secrecy Act?
Financial Crimes Enforcement Network (FINCEN)
Being given investment discretion is only “custody” if the adviser…
has full power of attorney over the account; which gives the adviser the ability to withdraw customer funds or securities
Under the USA, an application for registration as an IA will generally become effective…
30 days after filing
Administrators have the power to…
- 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
The consent to service of process eliminates the need for…
any local representation for legal purposes
IAR renewal requires…
payment of the annual renewal registration or licensing fee
*all IARs are registered with the states, not the SEC
What is NOT a security?
- all insurance contracts (other than variable ones)
- commodities, including precious metals
The right to maintain a proportionate interest in the company applies to…
- common stock
this is called a pre-emptive right
When a client dies, orders may be accepted from…
the trustee in intestacy
3 securities that are exempt under the USA, but not under the Securities Act of 1933…
- Stocks & bonds issued by insurance companies
- Securities issued by foreign governments
- Securities listed on certain exchanges
For a BCP, all IAs must have a…
designated regulatory contact person
A performance-based fee must be based on…
capital gains minus capital losses;
including both realized & unrealized gains & losses;
must reflect a time period of no less than 12 months
A private placement will lose its exemption if…
those who sell the offering are paid commissions on sales to non-institutional clients
IAs who are partnerships must inform their clients of…
any change in the membership of the partnership within a reasonable period
506(b) offerings…
- cannot be advertised
- non-accredited investors can participate
The executor of an estate subject to federal estate tax is permitted to use an alternative valuation date…
- for securities that have depreciated after the date of death
- that is 6 months from the date of death
Form 1040
Personal income tax return
Letters of Intent…
- 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
A sale is…
a contract, oral or otherwise, to dispose of a security for value
When an Administrator issues a final order, an agent subject to the order may…
- request that additional evidence be presented to the court
- obtain a review of the order in an appropriate court
506(c) offerings…
- can be advertised
- are limited exclusively to accredited investors
Form 1041
filed annually for trust taxation
Prospectus
a communication made in writing or by radio/TV that offers to dispose of a security for value (a sale)
An LLC is different from an S Corp in that…
there is no statutory limit on the number of investors in an LLC
A general partner of a limited partnership…
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)
Form 8K
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
A sole proprietor
- Can do business as a DBA
- Must file an Individual Form 1040 with a Schedule C attached
Record Date
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
What is the maximum fine for a violation & maximum prison term under the USA?
Max Fine: $5000
Max Prison Term: 3 years
How are ETNs registered?
Exchange-Traded Notes or “equity-linked notes” are registered under the Securities Act of 1933 as debt instruments
What is guaranteed by a variable life policy?
a minimum death benefit
When securities are inherited…
the heir receives a cost basis calculated as of the deceased party’s date of death
Form 1065
Partnership tax return
The death benefit may be free of income tax, but may be subject to…
estate tax
A gift of assessable stock is always considered…
an offer & a sale
The sale of a security to an institution is considered an…
exempt transaction
The death benefit (of a variable life policy) must be calculated…
annually
The cash benefit (of a variable life policy) must be calculated…
monthly
Revocation of the registration of an agents BD will result in…
that agents effective registration being “on hold”
In order to qualify as a REIT..
at least 75% of the assets must be invested in real-estate related assets, cash, & US Government securities
A REIT must distribute __% of its income to investors
90%
Section 1031 allows…
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
Tax Preference Items
are used for the purpose of computing the AMT include:
- excess intangible drilling costs
- certain incentive stock options
- accelerated depreciation
In order to donate appreciated securities at fair market value & have no tax consequences on the gain, the securities must…
be held long term (over 1 year)
The exercise (but not the receipt) of preemptive rights…
is a sale
The Securities Exchange Act of 1934 empowered the Federal Reserve Board (FRB) to…
- 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
When an IA uses an affiliated BD as its qualified custodian, the adviser is considered to be…
maintaining custody
An individual wishing to register as an agent within a BD may have to…
- pass an exam
- post a bond
What business accounts require suitability of the owners & why?
- S Corp
- Sole Proprietorships
- General Partnerships
^ Each provide flow through income & loss to the individual owners
Regarding re-sending brochures, state advisors…
do not need to; only if there are material changes in Form ADV, or upon request
Suitability for a C corporation…
is based on the company itself because it is an entity separate from its shareholders
Form ADV Part 2 contains…
(Disclosure Brochure)
- fees; how & when they are charged
- about the IARs
Under the IA Act of 1940, what must be included in an IAs sales literature regarding their investment system?
the difficulties & limitations of using the system
Regulation T
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
When an agent with one BD resigns & affiliates with another…
Both BDs & the agent must notify the Administrator of the change in registration
Howey Decision
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
If an IA registered in a state wished to maintain custody of client funds or securities…
prompt notice would have to be given to that state Administrator on Form ADV
Officers, directors, owners, partners are…
automatically registered as IARs
Regulation U
Controls the extension of credit on securities by banks
Rights & warrants are considered..
offers of the underlying stock
IA Solicitor
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
Form ADV Part 1 contains…
(Registration)
- Principal address
- Form of business (LLC, S Corp, etc.)
- Type of business
- Info about officers, directors, owners, partners
If a state-registered IA who maintains custody’s net worth falls below the minimum, they must…
obtain a surety bond rounded to the next $5,000 to meet the minimum
Accredited Investors
Under Federal law, those who are “qualified” (don’t count towards the numerical limit” are referred to as accredited.
Under the SEC Act of 1934, who is considered an associated person(s) of a BD?
any officer or person in a control position to the BD or any employee of the BD, except for clerical or ministerial employees
Exempt transactions are not subject to…
the advertising & sales literature filing requirements of the administrator
The Securities Act of 1933 regulates…
new issues of corporate securities sold to the public & is designed to prevent fraud in the sale of newly issued securities
The Securities Act of 1934 regulates…
trading & the secondary markets
Client referral fees are permitted when…
They are fixed & unrelated to advisory fee or size of account
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
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.
