Series 63 - Based on Class Book Flashcards
What is the USA (Uniform Securities Act)?
- model act which represents best practices
- each state has to put up its own version
- STATE LEVEL ACT
What do you think of when you see NASAA?
-think STATE LEVEL ACT (state regulation)
What is the Investment Advisers Act of 1940 and what do you think of when you hear it?
- deals with registration and regulation of investment advisors
- “federal covered” meaning subject to federal regulation
- FEDERAL LAW
What do you think of when you hear NSMIA (National Securities Market Improvements Act)?
- divides role of state vs. federal regulation
- tries to make the regulation more efficient
Who is considered a person?
- broadly defined: individuals (natural person/human), corporations, trusts, governments, government agencies, municipalities
- entity!
Who is NOT considered a person?
(1) minors [custodians who act on their behalf can be registered/regulated]
(2) deceased [executors who have control of the will can be registered/regulated]
(3) mentally incompetent [guardians can be registered/regulated]
What is a broker-dealer? Who does it register with?
- any person effecting securities transactions for (1) its own account OR (2) the accounts of others
- must be registered with BOTH the SEC AND the state (subject to federal and state regulation)
What is an agent? Who does he/she register with?
- individual (natural person) who represents broker-dealers
- must be registered at the STATE level; NOT registered at the federal level
What is an investment adviser? Who do they register with?
- sells investment-related advice (state registered or federal covered); provides advice for a fee
- registered at the state level OR the federal level but NOT BOTH
What is an investment adviser representative? Who do they register with?
- individual (natural person) who represents IA firms
- registered at state level NOT federal level
Where/when do broker-dealers need to register?
-needs to register if they (1) have an office in the state OR (2) have at least one resident retail client in the state (NOT institutional client, ONLY retail client)
Who is NOT considered a broker-dealer?
- agents (employees of broker-dealers)
- issuers (customers of broker-dealers)
- individuals trading their personal brokerage accounts
- out-of-state broker-dealers - no retail AND no office in the state
- banks, savings institutions, or trust companies
How does one register as a BD?
- submit application (consent to service of process)
- pay filing fees
- publish an announcement of the registration
- meet minimum financial (net worth/net capital), bonding, and recordkeeping requirements
- each state can have its own requirement for BDs, but NO requirements can be higher than SEC
What is the effectiveness period for a BD?
- by noon, 30 days after filing
- technically it is determined by administrator but no later than this unless they’re in the process of denying it
What is the renewal process for BD?
-by December 31 (then have to pay more fees)
When registering a BD, what do the bonding requirements refer to?
-insurance that protects a firm from theft or loss - bond will cover loss
What is the two-pronged test with regard to broker dealer registration?
(1) office test
(2) retail client
* *doesn’t matter where you have communications**
When/where do AGENTS need to register?
- in any state where they do business, which means:
(1) originating an offer in the state
(2) directing an offer in the state - *registration does not matter if the client is retail or institutional
Remember: AGENT registration is based on _____, not _______vs_______.
based on offers; not retail vs. institutional
Who is EXEMPT for registration as an agent?
- administrative and clerical staff (they do not effect securities transactions) = MINISTERIAL
- Employees representing ISSUERS in connection with:
(1) exempt securities
(2) exempt transactions [private placement]
(3) sales to existing employees without earning commissions
How do AGENTS register?
-submit a FORM U-4 application
-consent to service of process
-pay filing fees
-bonding may be required (but no financial or net worth requirements)
ONLY REGISTER AT STATE LEVEL
What is the effectiveness period for AGENTS?
-by noon, 30 days after filing
What is the renewal period for AGENTS?
-required by December 31
What does an agent do if he wants to terminate?
-ALL parties must notify state administrator (Agent, Old Firm, New Firm)
A consent to service of process is used for/covers:
-securities related CIVIL actions (not criminal)
When would a natural person register as an IA?
-sole proprietor would register as an IA
What are examples of investment advisers?
-financial planners, pension or retirement consultants, and sports and entertainment representatives
Who is EXCLUDED from the definition of an IA under the USA?
- banks, savings institutions, and trusts
- agents
- broker-dealers
- bona fide financial publications
- investment adviser reps (IARs)
- LATE professionals (lawyer, accountant, teacher, engineer) - KEY WORD: incidental
- *these don’t need to register as IAs**
When would a BD dual register as an IA?
-if in a WRAP ACCOUNT, a BD is paid for doing the transaction AND giving advice on investments
Are wrap accounts suitable for buy and hold investors?
-NO
With whom do IAs register?
- either on the federal OR the state level
- State Level: any office in that state or has more than five retail clients
- Federal Level: more than $100M AUM, present in 15 states OR advises only investment companies
Big firm IAs can choose to register
-with SEC and just be subject to ONE regulatory regime instead of with each state (less paperwork)
IAs are subject to a ______ standard, while BDs are subject to ______.
fiduciary; suitability
**BD has lesser standard than IA so IA does not have to register until they have FIVE+ retail clients
When do IAs register?
-IAs register if (1) the investment adviser has an office in the state OR (2) the investment adviser has 6 resident retail clients in the state
How does an IA register at the state level as an investment adviser? (aka - what form is needed?)
- Submit Form ADV [electronically] along with consent to service of process
- pay filing fees
- meet minimum financial, bonding and recordkeeping requirements OF THE HOME STATE (because state registered]
What is the effectiveness period for state registered IAs?
-noon, 30 days after filing
What is the renewal period for state registered IAs?
-December 31
Who is a federal-covered adviser?
- firms with $100 million or more in assets under management
- if you have up to $100m in assets, you can go either way (file with state or federally)
- if you get up to $110m, need to file with the SEC
- once you fall below $90m, need to register with the state
If you are going from state registered to SEC registered as an IA, you have to do so in _____
90 days
If you are going from SEC registered to state registered as an IA, you have to do so in ______
180 days
When is notice filing required for federal-covered IAs if the IA has…
if the IA has (1) a place of business in the state and (2) more than 5 retail clients in the state
if IA is registered with the SEC, state may also want a notification
Who do IAR (investment adviser representatives) register with?
-register at the state level only
If the IAR is under a State Registered IA, it must register in the state in which it has…
(1) a place of business
(2) more than five retail clients
If the IAR is under a Federal-Covered IA, it must register in the state in which it has…
(1) a place of business
How does on register as an IAR?
- submit a FORM U-4 application, pay filing fees
- NO FINANCIAL REQUIREMENTS to register as an IAR (different than an agent - no bonding is required)
What is the effectiveness period for IAR registration?
-noon, 30 days after filing
When is the renewal date for IARs?
December 31
If an IAR wants to terminate, who must notify the administrator?
- if the IAR is at a state-registered IA: IA firm gives the notification because they have the relationship
- if the IAR is at a federal-registered IA: the IAR gives the notification
What is NOT considered a security?
- commodities (gold, silver, jewelry)
- personal residence
- currencies
- collectibles
- interest in a retirement plan (IRA, 401K)
- fixed annuity
- FUTURES on options
Securities must be registered in a state for lawful sale unless:
(1) Security is exempt, OR
(2) Transaction is exempt
How are securities registered (three ways)?
(1) Coordination - coordinate with SEC filing; used to register in multiple states
(2) Qualification - file with an individual state; used for intrastate offerings
(3) Notice Filing - provide states with copies of sec-filed document; used for FEDERAL-covered securities [technically no registration occurs but states want to be notified/copies of documents]
The state administrator has jurisdiction if an offer…[think ODA]
- originates in the administrator’s state
- is directed into the administrator’s state, OR
- is accepted in the administrator’s state
What state has jurisdiction for a TV or radio ad?
-originating state only has the jurisdiction [location of camera or microphone]
What state has jurisdiction for a newspaper?
-jurisdiction of the state of publication ONLY
What state has jurisdiction for a newspaper of general circulation?
-no state has jurisdiction (NO OFFERS ARE MADE)
Rules vs Orders
Rules apply to everyone and are general
Orders apply to a specific instance
What is the order of things that occur with the termination of registration for violation of the USA?
(1) Notice - sent to Agent/IAR AND firm
(2) Hearing - not required unless requested; must be requested within 15 days
(3) Findings of Fact - requires TWO findings: public’s best interest AND violation/bad action
(4) Final Order: can appeal but has to be within 60 days
All _____ lead to statutory disqualification, however only securities-related _____ lead to statutory disqualification.
-all felonies; only securities related misdemeanors
A crime is defined by…
the state in which it took place even if the definition is different from another state
Withdrawal of a Registration
termination by request
- effective after 30 days
- administrator jurisdiction remains for one year
- no notice/hearing/findings of fact required
Cancellation of a registration
- registrant no longer exists or ceased doing business
- dissolution of business
- death
- legal incompetency [requires court activity]
- no notice/hearing/findings of fact required
For a civil liability, who files the lawsuit? What is the penalty maximum? What is the statute of limitations?
- Investors file lawsuit
- maximum recovery is that investors are made whole again (restored back to original position)
- statute of limitations it he earlier of: 3 years from violation or 2 years from the date of discovery
For a criminal liability, who files the lawsuit? What is the penalty maximum? What is the statute of limitations?
- State files the lawsuit
- maximum penalty is up to $5,000 fine and/or 3 years in jail
- statute of limitations is up to five years of violation
To avoid lawsuits, an agent can offer _____
rescission
An administrator may require the filing of all advertising or sales literature to prospective investors or advisory clients, unless:
- the security is exempt
- the transaction is exempt
What are examples of account fees that require disclosure?
- physical certificate issuance fees
- account transfer fees
- margin account interest
What are examples of fees that are not subject to disclosure as an account fee but need to be disclosed separately?
- commissions
- mark-ups and mark-downs
- advisory fees
Who may use testimonials?
-broker-dealers, NOT investment advisers
When an agent places trades for a client account that are excessive in frequency, the agent is engaged in _____.
-churning
What are some prohibited/dishonest/unethical business practices?
- unsuitable recommendations
- selling away
- unauthorized transactions
- discretionary trading
Authority is discretionary if it has these things:
time and price
Authority is NOT discretionary if it doesn’t have these things:
asset, action (buy/sell), and amount
An agent solicits investment company shares as having no load. Which load could the shares carry?
12b-1 fees - no load fund with 12b-1 fees cannot exceed 25bps
A client is seeking to lower the costs associated with open-end investment company shares. What would not help him achieve this goal?
selling the dividend…because this is a prohibited sales violation
According to NASAA Model Rules, an agent may lend money to or borrow money from a client that…
is a financial institution engaged in loaning funds
When is the customer’s signed margin agreement required?
promptly after the initial transaction
What is “custody”?
holding (directly or indirectly) client funds or securities, or having the authority to obtain possession of them
What does custody require (2 things)?
(1) notice to administrators (NOT permission), and
(2) quarterly statements to clients
