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FINRA > Series 63 Definitions > Flashcards

Series 63 Definitions Flashcards

1
Q

Person

A

an individual or legal entity that either issues or trades securities

  • an individual (natural person exc minors)
  • a corporation
  • a partnership
  • an association
  • a joint venture
  • an estate
  • a business trust
  • a trust here interests of beneficiaries are evidenced by securities
  • an unincorporated organization
  • a government or governmental body such as a political subdivision
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2
Q

NOT a Person

A
  • deceased individuals
  • an individual who has been declared mentally incompetent or incumbent
  • minors
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3
Q

Broker/Dealer

A

a person (firm) who effects securities transactions for its own account (principal capacity (dealer))or for the accounts of others (agency capacity (broker))

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4
Q

NOT a Broker/Dealer

A
  • agents
  • issuers
  • certain banks (including international institutions), savings institutions and trust companies with limited activities
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5
Q

Broker/Dealer registration requirements

A
  • must register under USA in any state in which it transacts business unless an exemption is available
  • registration of Broker/Dealer constitutes automatic registration of any partners or officer of firm as agents if they were with the firm a the time the registration is filed in the state
  • If Broker/Dealer loses its registration, it’s agents’ registrations are no longer effectivd
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6
Q

Exemptions for Broker/Dealer registration

A
  • they transact business only with other Broker/Dealers, issuers, institutional buyers, or financial institutions
  • they are registered in the state where they maintain their place of business and make offers only to existing customers who are not residents of that state (ie vacationing for 30 days or less)
  • they have a customer who moves to a state where Broker/Dealer is not registered. can only do business with that customer without registration only if they file for registration within 45 days of the customer’s first trade in that state and completes no further trades more than 75 days after application was filed or denied
  • they have a limited number of customers during the previous 12 months (no more than 3 customers)
  • a person who deals solely in US government securities and is supervised as that type of dealer by Board of Governors of the Fed Reserve, Comptroller of the Currency, the FDIC, or the Office of Thrift Supervision
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7
Q

Agent

A

any individual (human being, natural person) who represents a Broker/Dealer or issuer in effecting or attempting to effect purchases or sales of securities in a state

-excludes any employee who perform only clerical functions that do not affect trades

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8
Q

Agent registration requirements

A
  • must be associated with a registered Broker/Dealer
  • cannot register individually with the state administrator
  • if Agent is not associated with any Broker/Dealer for 2 years, registration starts over from beginning by a new application
  • most states only allow dual or multiple registrations if under “common control”
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9
Q

Exemptions for Agent registration

A
  • Agents who act for exempted Broker/Dealers
  • individuals excluded from the definition of Agents
  • individuals who represent an issuer with respect to an offer or sale of issuer’s own securities, and who are not compensated directly or indirectly in connection to those transactions
  • individuals representing an issuer that effects transactions only in federal covered (securities exempt from state registration because they are registered with SEC and traded on an exchange or NASDAQ) securities. this exemption does not apply if the Agent is compensated in connection with those transactions
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10
Q

Exempt securities

A
  • US government securities
  • Canadian government and certain other foreign government securities
  • muni notes and bonds
  • banks, trust companies, savings institutions, or credit union securities such as CDs and passbook savings accounts
  • securities issued for employee savings plans, pension plans, profit sharing, and stock purchase plans
  • commercial paper with a maturity of 270 days or less
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11
Q

De minimis exemption

A
  • Agent’s application is pending in that state; in this situation the Agent may engage transactions for up to 30 days for an existing client who has moved to that state
  • an existing client is temporarily in that state (less than 30 days)

However all must apply:

  • Agent must be eligible to register in that state
  • Agent’s Broker/Dealer must be registered in that state
  • Agent must be registered with FINRA
  • Agent must already be registered in at least one other state
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12
Q

Representing issuers in exempt transactions

A

exempt transactions are trades that do not involve the public

  • between issuer and underwriter
  • with financial or institutional investors such as banks and trust companies
  • affecting employees, officers, partners, and directors of the issuer when no compensation is paid to the individual for his or her solicitation
  • private placements
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13
Q

Investment Adviser

A

a person who is paid to advise others, either directly or indirectly, as to advisability and merit of purchasing or selling securities

also includes any person who, on the regular course of their business, issues reports or analyses concerning securities

  • provide advice, analyses or reports concerning securities
  • provide these services as a regular course of their business
  • receive compensation for their services
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14
Q

NOT an Investment Adviser

A
  • banks, savings or trust companies
  • professionals whose investment advice is an incidental portion of their business practice (LATE - lawyers, accountants, teachers, engineers)
  • Broker/Dealers or their Agents whose advice is incidental to their normal business practice and receive no special compensation for this advice
  • employees of investment advisers who are registered as investment adviser representatives
  • publishers, their employees, and columnists of newspapers, magazines, or business periodicals who do not render advice about specific investment situations of individual clients
  • federal covered advisers (advisers registered directly with SEC)
  • any other person so designated by state administrator or exempted by SEC
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15
Q

NOT a Person

A
  • deceased individuals
  • an individual who has been declared mentally incompetent or incumbent
  • minors
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16
Q

Broker/Dealer

A

a person (firm) who effects securities transactions for its own account (principal capacity (dealer))or for the accounts of others (agency capacity (broker))

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17
Q

NOT a Broker/Dealer

A
  • agents
  • issuers
  • certain banks (including international institutions), savings institutions and trust companies with limited activities
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18
Q

Broker/Dealer registration requirements

A
  • must register under USA in any state in which it transacts business unless an exemption is available
  • registration of Broker/Dealer constitutes automatic registration of any partners or officer of firm as agents if they were with the firm a the time the registration is filed in the state
  • If Broker/Dealer loses its registration, it’s agents’ registrations are no longer effectivd
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19
Q

Exemptions for Broker/Dealer registration

A
  • they transact business only with other Broker/Dealers, issuers, institutional buyers, or financial institutions
  • they are registered in the state where they maintain their place of business and make offers only to existing customers who are not residents of that state (ie vacationing for 30 days or less)
  • they have a customer who moves to a state where Broker/Dealer is not registered. can only do business with that customer without registration only if they file for registration within 45 days of the customer’s first trade in that state and completes no further trades more than 75 days after application was filed or denied
  • they have a limited number of customers during the previous 12 months (no more than 3 customers)
  • a person who deals solely in US government securities and is supervised as that type of dealer by Board of Governors of the Fed Reserve, Comptroller of the Currency, the FDIC, or the Office of Thrift Supervision
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20
Q

Agent

A

any individual (human being, natural person) who represents a Broker/Dealer or issuer in effecting or attempting to effect purchases or sales of securities in a state

-excludes any employee who perform only clerical functions that do not affect trades

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21
Q

Agent registration requirements

A
  • must be associated with a registered Broker/Dealer
  • cannot register individually with the state administrator
  • if Agent is not associated with any Broker/Dealer for 2 years, registration starts over from beginning by a new application
  • most states only allow dual or multiple registrations if under “common control”
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22
Q

Exemptions for Agent registration

A
  • Agents who act for exempted Broker/Dealers
  • individuals excluded from the definition of Agents
  • individuals who represent an issuer with respect to an offer or sale of issuer’s own securities, and who are not compensated directly or indirectly in connection to those transactions
  • individuals representing an issuer that effects transactions only in federal covered (securities exempt from state registration because they are registered with SEC and traded on an exchange or NASDAQ) securities. this exemption does not apply if the Agent is compensated in connection with those transactions
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23
Q

Exempt securities

A
  • US government securities
  • Canadian government and certain other foreign government securities
  • muni notes and bonds
  • banks, trust companies, savings institutions, or credit union securities such as CDs and passbook savings accounts
  • securities issued for employee savings plans, pension plans, profit sharing, and stock purchase plans
  • commercial paper with a maturity of 270 days or less
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24
Q

De minimis exemption

A
  • Agent’s application is pending in that state; in this situation the Agent may engage transactions for up to 30 days for an existing client who has moved to that state
  • an existing client is temporarily in that state (less than 30 days)

However all must apply:

  • Agent must be eligible to register in that state
  • Agent’s Broker/Dealer must be registered in that state
  • Agent must be registered with FINRA
  • Agent must already be registered in at least one other state
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25
Q

Representing issuers in exempt transactions

A

exempt transactions are trades that do not involve the public

  • between issuer and underwriter
  • with financial or institutional investors such as banks and trust companies
  • affecting employees, officers, partners, and directors of the issuer when no compensation is paid to the individual for his or her solicitation
  • private placements
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26
Q

Investment Adviser

A

a person who is paid to advise others, either directly or indirectly, as to advisability and merit of purchasing or selling securities

also includes any person who, on the regular course of their business, issues reports or analyses concerning securities

  • provide advice, analyses or reports concerning securities
  • provide these services as a regular course of their business
  • receive compensation for their services
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27
Q

NOT an Investment Adviser

A
  • banks, savings or trust companies
  • professionals whose investment advice is an incidental portion of their business practice (LATE - lawyers, accountants, teachers, engineers)
  • Broker/Dealers or their Agents whose advice is incidental to their normal business practice and receive no special compensation for this advice
  • employees of investment advisers who are registered as investment adviser representatives
  • publishers, their employees, and columnists of newspapers, magazines, or business periodicals who do not render advice about specific investment situations of individual clients
  • federal covered advisers (advisers registered directly with SEC)
  • any other person so designated by state administrator or exempted by SEC
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28
Q

NOT a Person

A
  • deceased individuals
  • an individual who has been declared mentally incompetent or incumbent
  • minors
How well did you know this?
1
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2
3
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29
Q

Broker/Dealer

A

a person (firm) who effects securities transactions for its own account (principal capacity (dealer))or for the accounts of others (agency capacity (broker))

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

NOT a Broker/Dealer

A
  • agents
  • issuers
  • certain banks (including international institutions), savings institutions and trust companies with limited activities
31
Q

Broker/Dealer registration requirements

A
  • must register under USA in any state in which it transacts business unless an exemption is available
  • registration of Broker/Dealer constitutes automatic registration of any partners or officer of firm as agents if they were with the firm a the time the registration is filed in the state
  • If Broker/Dealer loses its registration, it’s agents’ registrations are no longer effectivd
32
Q

Exemptions for Broker/Dealer registration

A
  • they transact business only with other Broker/Dealers, issuers, institutional buyers, or financial institutions
  • they are registered in the state where they maintain their place of business and make offers only to existing customers who are not residents of that state (ie vacationing for 30 days or less)
  • they have a customer who moves to a state where Broker/Dealer is not registered. can only do business with that customer without registration only if they file for registration within 45 days of the customer’s first trade in that state and completes no further trades more than 75 days after application was filed or denied
  • they have a limited number of customers during the previous 12 months (no more than 3 customers)
  • a person who deals solely in US government securities and is supervised as that type of dealer by Board of Governors of the Fed Reserve, Comptroller of the Currency, the FDIC, or the Office of Thrift Supervision
33
Q

Agent

A

any individual (human being, natural person) who represents a Broker/Dealer or issuer in effecting or attempting to effect purchases or sales of securities in a state

-excludes any employee who perform only clerical functions that do not affect trades

34
Q

Agent registration requirements

A
  • must be associated with a registered Broker/Dealer
  • cannot register individually with the state administrator
  • if Agent is not associated with any Broker/Dealer for 2 years, registration starts over from beginning by a new application
  • most states only allow dual or multiple registrations if under “common control”
35
Q

Exemptions for Agent registration

A
  • Agents who act for exempted Broker/Dealers
  • individuals excluded from the definition of Agents
  • individuals who represent an issuer with respect to an offer or sale of issuer’s own securities, and who are not compensated directly or indirectly in connection to those transactions
  • individuals representing an issuer that effects transactions only in federal covered (securities exempt from state registration because they are registered with SEC and traded on an exchange or NASDAQ) securities. this exemption does not apply if the Agent is compensated in connection with those transactions
36
Q

Exempt securities

A
  • US government securities
  • Canadian government and certain other foreign government securities
  • muni notes and bonds
  • banks, trust companies, savings institutions, or credit union securities such as CDs and passbook savings accounts
  • securities issued for employee savings plans, pension plans, profit sharing, and stock purchase plans
  • commercial paper with a maturity of 270 days or less
37
Q

De minimis exemption

A
  • Agent’s application is pending in that state; in this situation the Agent may engage transactions for up to 30 days for an existing client who has moved to that state
  • an existing client is temporarily in that state (less than 30 days)

However all must apply:

  • Agent must be eligible to register in that state
  • Agent’s Broker/Dealer must be registered in that state
  • Agent must be registered with FINRA
  • Agent must already be registered in at least one other state
38
Q

Representing issuers in exempt transactions

A

exempt transactions are trades that do not involve the public

  • between issuer and underwriter
  • with financial or institutional investors such as banks and trust companies
  • affecting employees, officers, partners, and directors of the issuer when no compensation is paid to the individual for his or her solicitation
  • private placements
39
Q

Investment Adviser

A

a person who is paid to advise others, either directly or indirectly, as to advisability and merit of purchasing or selling securities

also includes any person who, on the regular course of their business, issues reports or analyses concerning securities

  • provide advice, analyses or reports concerning securities
  • provide these services as a regular course of their business
  • receive compensation for their services
40
Q

NOT an Investment Adviser

A
  • banks, savings or trust companies
  • professionals whose investment advice is an incidental portion of their business practice (LATE - lawyers, accountants, teachers, engineers)
  • Broker/Dealers or their Agents whose advice is incidental to their normal business practice and receive no special compensation for this advice
  • employees of investment advisers who are registered as investment adviser representatives
  • publishers, their employees, and columnists of newspapers, magazines, or business periodicals who do not render advice about specific investment situations of individual clients
  • federal covered advisers (advisers registered directly with SEC)
  • any other person so designated by state administrator or exempted by SEC
41
Q

Investment Adviser registration

A
  • Advisers with AUM less than 25 million register only at state level
  • Advisers with AUM between 25 million and 30 million are permitted, but not required, to register with SEC
  • Advisers with AUM over 30 million must register with SEC, they are known as federally registered advisers

Federal Advisers do my register with the state but may be required to notify each state in which they conduct business ad pay a state filing fee

42
Q

National Securities Market Improvement Act of 1996

A

eliminated the dual registration of Investment Advisers at both federal and state levels

43
Q

Recent changes to Adviser registration requirements

A

The financial reform bill under the Dodd Frank Act raises the thresholds for adviser registration in July 2011

  • Advisers with AUM less than 100 million must register with state regulators
  • Advisers between 25 million and 100 million and are exempt from registration requirements in their home state then they must register with SEC
  • Advisers with AUM between 25 and 100 million and would be required to register in 15 or more stares, they may elect to register with SEC
44
Q

Form ADV

A

SEC registration requires filing Form ADV (2 parts)

Part I pertains to general information about the adviser (name, address, business and prior sanctions for violating securities or any other laws). Also asks questions that allow SEC to determine whether to grant, deny or revoke a registration

Part II, a written brochure, must be delivered to clients prior to issuing a contract and offered annually. Contains information about business practices, fees and conflicts of interest the adviser may have with its clients. Must be written in plain English to be understandable to the inverter.

45
Q

Exemptions for Investment Adviser registration

A

If they have no place of business in the state and

  • their only clients are other investment advisers, broker/dealers, banks, trust companies and other financial institutions, insurance companies, investment companies, employee benefit plans (with assets of at least 1 million), or government agencies; or
  • they communicate with no more than 5 clients (other than this previously listed) in the preceding 12-month period (De Minimis exception)
46
Q

Brochure Rule for Investment Advisers

A
  • must be delivered at least 48 hours prior to entering into an investment advisory contract
  • may be furnished at signing of contract only with 5-day free-look
  • must include all information required in Part II of Form ADV
  • must be delivered or offered once a year and must be done in writing. if accepted, it must be sen without charge within 7 dad of acceptance
  • not required to deliver a brochure if they enter into a contract with an investment company or for impersonal advice (not directed at any specific client situation). Furthermore, if an adviser charges less than 500 a year under a contract, brochure is not required
  • must include wrap free brochure if applicable and must include all information from Part II of ADV
47
Q

Client Contracts

A

An advise must ensure all contracts that are entered into, renewed or extended are made in witting.

Must include

  • services being rendered
  • fees being charged
  • how fees for services and advice are computed

Must also have provision for early termination, contract assignment, or discretionary trading authority if applicable and be stated in clear terms

48
Q

Investment Advisory Contracts

A

-48 hours prior or include 5- free-look

Must include these provisions:

  • will not be compensated on basis of capital gains or appreciation of funds in the contract (allowed to be based on total value of AUM averaged over a definite period of time)
  • cannot assign contract without consent of customer
  • will notify customer within reasonable time of any change of members in partnership

State administrator may exempt any IA from provisions if it is deemed to be in public’s bed interest and consistent with intent of USA act

49
Q

Required Disclosures

A

IA or B/D that maintains custody of client’s funds most notify Securities Administrator and also:

On quarterly basis, send statements which list

  • -all securities adviser has custody of
  • -number of shares
  • -value of account
  • -all transactions occurred since last statement

On an annual basis - an independent accountant must facilitate a surprise audit of account and send report to State Securities Administrator

50
Q

Commingling

A

client’s funds may not be commingled with the securities of any other account without expressed written permission

at no time may client’s funds or securities be commingled with either investment adviser’s or broker/dealer proprietary accounts

51
Q

Discretion and Trade Authorization

A

Discretionary authority exists when either registered IA (or rep) or B/D (or agent) has authority to choose any one of the following on client’s behalf:

  • actions (buy or sell)
  • asset (security); or
  • amount (either number of share or dollar amount)

Written approval is required for both B/D and IA. State administrator must be informed. IAs must obtain written discretionary authority from client within 10 business days after first trade based in oral authority unless trade was based on a preset pride, time or volume.

52
Q

Fees

A

IA may not charge a fee that would be considered unreasonably by a prudent man. An adviser must disclose in writing, prior to giving any advice, the advisory fee, formula for computing the fee, an amount of fee that has been prepaid that will be returned if contract is terminated prematurely

53
Q

Commissions

A

Due to inherent conflict of interest, and adviser must disclose to a prospective client, prior to giving any investment advice, any type of compensation plan that includes both an advisory fee and commission generates by sale of securities being recommended. Generally, such fee and commission-type arrangements should be avoided.

54
Q

Performance-base Fees

A

plan that compensates advisers and managers at a higher level when they outperform the benchmark indicator and at a lower level when they underperform. the challenge is developing a calculation model that meets SEC guidelines for rolling performance period

As a general rule, performance-based fees are not allowed except:

  • they may be charged by registered investment companies
  • persons with a minimum 750k invested may choose this fee arrangement, or
  • persons with a net worth of at least 1.5 million may choose this

*fees based on total AUM are not considered performance-based fees

55
Q

Soft Dollars

A

mutual find managers form an alliance with specific B/D who provide research or brokerage services in exchange for potential future transactions with that B/D. however, a possible conflict of interest exists due o the possibility that the manager will exclusively select a B/D with which an alliance exists regardless of the quantity with which the B/D executes the transactions

56
Q

Investment Adviser Representative

A

Include any partner, officer, director, or other individual associated with an investment adviser who does any of the following:

  • manages accounts for clients
  • makes recommendations or gives advice regarding securities
  • determines which recommendations or advice should be given concerning securities
  • solicits, offers, or negotiates the sale of investment advisory services;
  • supervises employees who perform any of the above functions

Does not include anyone who only perform clerical duties

57
Q

Employment of Represetatives

A

It is unlawful under USA act for IA who is required to be registered to employ:

  • an unregistered IA or
  • anyone who has been suspended or barred by administrator from association with an IA or B/D
58
Q

IA Adviser registration

A

registration is only effective while they are employed by an IA

when IA rep begins or terminates an association with an IA, the IA must promptly notify the administrator if the adviser is state-registered. if the adviser is a federally covered adviser only the rep needs to inform the administrator.

B/D and Agents are both required to notify the administrator

59
Q

Registration Application

A

State administrator requires following information on application:

  • location and type of business (ie corporation, partnership, etc)
  • proposed method of doing business
  • qualifications and business history of the applicant, including those of any partners or officers for B/D and IA firms
  • fingerprints may be required for the applicant and for any partners, officers, representatives or agents
  • applicant’s financial history and current condition
  • Consent of Service to Process (a content to service of process allows the state administrator to be served legal documents on behalf of the registrant. Additionally, it enables the administrator to cross state lines and serve the registrant with the legal paperwork)
  • any injunctions, administrative orders or convictions of any misdemeanors in the securities business, and convictions for any type of a felony
60
Q

Federal Covered Advisers

A

Although federal covered advisers (AUM of $100 million or more) are not required to registered with the state, the state may require advisors registered with the SEC to do the following:

  • file with the state with a copy of any documents filed with the SEC
  • file a Consent to Service of Process (Form U-2)
  • pay a date filing fee
61
Q

Effective Date and Expiration

A

Registration is effective 45 days from the filing date or amendment (if applicable) to the application.

If not renewed, all registrations expire on December 31 (midnight) of the year for which the application for registration is filed. A registration may be automatically renewed every year if appropriate records are filed, and appropriate filing processing fees are paid.

62
Q

Successor Firms

A

If a B/D or IA want to name a successor firm to fill an unexpired portion of a yearly registration, a new application is required, but no additional fees are due.

It is not required that the successor firm be in existence at the time of the application.

They may need to file their own consent to service of process.

63
Q

Financial Requirements

A

The administrator may require a minimum net worth standards for B/D and registered IA

64
Q

Minimum Capital Requirement

A

May be set by USA for registered B/D and IA.

NASAA Model Rile 202(d) further stipulates the minimum federal requirements for IA:

  • registered IA who has custody of client finds or securities is required to maintain at all times a net worth of 35k
  • Advisors who have discretionary authority over a client’s funds or securities, but do not have custody of client funds, are required to maintain a minimum net worth of 10k
  • IA who accept prepayment over $500 per client at least six months in advance must always maintain a positive net worth

As a condition for transacting business in this day, registered IA must notify the administrator by the end of business on the next business day if their net worth is less than the required minimum

65
Q

Financial Reports

A

Registered B/D and IA must file financial reports with the administrator. If the reports have incomplete or inaccurate information concerning any material fact a correcting amendment must be filed promptly.

If the IA is federally registered the reports that are filed under the federal action may also be filed with the state to satisfy this requirement

66
Q

Consent to Service of Process

A

B/D, agents, IA, and IA reps obtain or renew the registration by filing an application and submitting a Form U-2 with the administrator in each state they will effect transactions.

This is a form that appoints the state administrator as the registrant’s attorney to receive and process any non-criminal legal proceedings.

This appointment is irrevocable and remains in force as long as registration is effective.

67
Q

Filing Fee

A

Every state requires payment of a registration fee for all initial and renewal applications. If registration is denied or withdrawn, the administrator may retain a portion of the fee.

68
Q

Surety Bond

A

Registered B/D, agents and IA who have discretionary authority of a client account may be further required by the administrator to post a surety bond to cover the cost of potential legal the arising from violations of the USA.

A deposit of cash on appropriate amount of securities may be excepted in lieu of the bond.

Does not apply to:

  • B/D whose net worth exceeds minimum standards set by the administrator
  • IA whoever minimum financial requirements
69
Q

Issuer

A

is a person that issues or proposes to issue a security. the issuer is any entity that develops registers an sells securities to investors for the purpose financing its operations.

Issuers include:

  • corporations
  • cooperatives
  • federal, state and local govt
  • foreign govt
  • nonprofits
  • partnerships

And issuer does not include the distribution of certificates of interest in oil and gas programs or mining leases

70
Q

Primary Transactions

A

Also know as Issuer Transactions, it is when the sale of securities is for the benefit of the issuer

(As opposed to a secondary transaction trade on a market)

71
Q

Sale

A

A sale of a security includes every contract of sale, contract to sell, or disposition of, a security or interest in a security for value.

72
Q

Offer to Sell

A

includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value.

An offer to sell a security cannot be made until the security has been properly registered in the state unless an exemption is available.

Also included in definition f both “a sale” and “offer to sell”:

  • any security given as a bonus in conjunction with the purchase of a security
  • the sale or offer of a right, warrant, or convertible security
  • a gift of an assessable stock (meaning that future money is needed to maintain the securities ownership, which is raised by an assessment charged to stockholders)
73
Q

Offer to Purchase

A

includes an attempt or offer to obtain, or solicitation of an offer to sell, a security or interest in a security for value

74
Q

Exclusions from either the definition of a Sale or Offer to Sell

A
  • stock dividends paid to shareholders
  • security interests of borrowers pledged as collateral for loans
  • gifts of non-assessable securities
  • exchanges of securities caused by corporate reorganizations, mergers, consolidations, or bankruptcies

FINRA (3 decks)

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