Series 65 wk 5 Flashcards
What does the Securities Act of 1933 regulate? What does it require of issuers?
The primary market. It requires issuers to file a registration statement with the SEC (Securities Exchange Commission
What does the primary market consist of? Who receives the proceeds from sale of securities?
Primarily of transactions between issuers of securities and investors. In a primary market transaction, the issuer of the securities receives the proceeds from the sale of the securities
How long does SEC take to review registration statement? How can this get extended?
For a minimum of 20 days (known as cooling-off period). If SEC issues a deficiency letter or a stop order, the cooling-off period will get extended beyond original 20 days and continues until all information is has requested is received
What can’t happen during cooling off-period?
No sales of securities may take place
What is the registration statement? What is it also known as?
Also known as S1 – is the issuer’s full disclosure document for the registration of the securities with the SEC
What is a preliminary prospectus and how is it used? What is it also known as?
The only thing a registered representative may do during cooling-off period is obtain indications of interest from clients by providing them with a preliminary prospectus (also known as a red herring) – this contains most of the same information that will be in the final prospectus, except for the offering price and the proceeds to the issuer.
What is an indication of interest?
An investor’s or broker dealer’s statement that they may be interested in purchasing the securities being offered.
What is a final prospectus, what must it include (13), when is it given?
All purchasers of new issues must be given a final prospectus before any sales may be allowed, the final prospectus serves as the issuer’s full-disclosure document for the purchaser of the securities. It must include:
- Type and description of the securities
- Price of security
- Use of the proceeds
- Underwriter’s discount
- Date of offering
- Type and description of underwriting
- Business history of issuer
- Biographical data for company officers and directors
- Information regarding large stockholders
- Company financial data
- Risks to purchaser
- Legal matters concerning the company
- SEC disclaimer
What is the SEC disclaimer?
The SEC does not guarantee accuracy or adequacy of information in SEC, so all prospectuses must state: “These securities have not been approved or disapproved by the SEC nor have any representations been made about the accuracy or the adequacy of the information.
Financial relief for misrepresentations made under the Securities Act of 1933 is available for purchasers of a security that is sold under a prospectus that is found to have false or misleading statements. Who can they seek financial relief from (5)?
- Issuer
- Underwriters
- Officers and directors
- All parties who signed the registration statement
- Accountants and attorneys who helped prepare the registration statement
What does the Securities Exchange Act of 1934 regulate?
Second major piece of legislation that resulted from market crash of 1929. This regulates the secondary market.
What is included in the secondary market?
Investor-to-investor transactions (all transactions between two investors that are executed on any of the exchanges or in the over-the-counter market)
Who receives money in the secondary market transaction?
The selling security holder receives the money, not the issuing corporation
What is the Securities Exchange Act of 1934 responsible for? (10)
- Created the SEC
- Requires registration of broker dealers and agents
- Regulates the exchanges and FINRA
- Requires net capital for broker dealers
- Regulates short sales
- Regulates insider transactions
- Requires public companies to solicit proxies
- Requires segregation of customer and firm assets
- Authorized the Federal Reserve Board to regulate the extension of credit for securities purchases under Regulation T
- Regulates the handling of client accounts
Who works for the Securities Exchange Commission (SEC)?
Five commissioners are appointed to 5-year terms by the president and each must be approved by the Senate. No more than 3 commissioners may be from any one political party.
Is the SEC a SRO or DEA?
SRO – self-regulating organization
DEA – designated examining authority
SEC is not a SRO or DEA (like NYSE or FINRA – these can regulate its own members)
Who must register with the SEC (4)?
Broker dealers, exchanges, agents and securities
When exchanges file a registration statement with the SEC, what is required to include (3)?
Articles of incorporation, bylaws, and constitution
When do issuers of securities need to register with the SEC and what do they need to do after registering (2)?
Issuers of securities with more than 500 shareholders and with assets exceeding $5M must register with the SEC. They need to file quarterly and annual reports and must solicit proxies from stockholders
What are requirements of broker dealers who register with the SEC (2)?
All broker dealers are required to forward a financial statement to all customers of the firm.
All employees of broker dealer who are involved in securities sales, have access to cash and securities or who supervise employees must be fingerprinted.
What are the regulations that give the Federal Reserve Board the authority to govern activities of different lenders through extension of credit?
- Regulation T: broker dealers
- Regulation U: banks
- Regulation G: all other financial institutions
What is the Public Utilities Holding Company Act of 1935? What are their securities exempt from?
Regulates all companies that are in business to provide retail distribution of gas and electric power. These are exempt from state registration requirements
What are the Financial Industry Regulatory Authority (FINRA)’s 4 bylaws?
- Rules of fair practice
- Uniform practice code
- Code of procedure
- Code of arbitration
What is the Trust Indenture Act of 1939?
Requires the corporate bond issues in excess of $5M that are to be repaid during a term in excess of 1 year issue a trust indenture for the issue (only applies to corporate issuers, federal and municipal issuers are exempt).
What is Investment Advisers Act of 1940, who do they regulate? What do they set out requirements about (6)?
Regulates industry professionals who charge a fee for the advice they offer to clients.
Set forth registration requirements for advisers as well as disclosure requirements relating to the adviser’s:
1. Methods of recommendations
2. Type of securities recommended
3. Professional background and qualifications
4. Fees to be charged
5. Method for computing and charging fees
6. Types of clients
What is the Investment Company Act of 1940? Who does it regulate? Who does it set forth registration requirements for (3)?
Regulates companies that are in business to invest or reinvest money for the benefit of its investors
Sets forth requirements for the 3 types of investment companies including:
1. Management investment company
2. Unit investment trust (UIT)
3. Face amount company (FAC)
What are the 3 categories of member communication with the public regulated by FINRA Rule 2210?
- Retail communication
- Institutional communication
- Correspondence
What is retail communication defined as? Who does this need to be approved by?
Any written communication distributed or made available to 25 or more retail investors in a 30-day period (hard copy or electronic). A retail investor is any investor who does not meet the definition of an institutional investor.
All retail communications must be approved by a registered principal prior to first use (if communications does not promote the business of the member firm or provide investment advice, does not need to be approved by principal).
How long must retail communication be maintained by the member?
3 years
What is required for retail communication if the member firm has been in existence for less than 12 months? More than 12 months?
Less than 12 months – must file all retail communications with FINRA 10 days prior to its first use unless communications has been previously filed and contains no material changes or has been filed by another members such as an investment company or ETF sponsor.
More than 12 months – May file retail communications with FINRA 10 days after the communication is first used.
What 3 things must be filed 10 days with FINRA before prior first use?
Investment companies, ETF sponsors, and retail communications
What is institutional communications?
Defined as any written communication distributed or made available exclusively to institutional investors (hard or electronic copy)
Institutional communications do not have to be approved by a principal prior to first use as long as what?
As long as the member has established policies and procedures regarding the use of institutional communications and has trained its employees on the proper use of institutional communication
How long do institutional communication need to be maintained by a member?
3 years
What is an institutional investor?
A person or firm that trades securities for his or her own account or for the account of others. There is no minimum size for an institutional account.
Institutional investors include (10)?
- Broker dealers
- Investment advisers
- Investment companies
- Insurance companies
- Banks
- Trusts
- Savings and loans
- Government agencies
- Employment benefit plans with more than 100 participants
- Any non-natural person with more than $50M in assets
What is correspondence?
Consists of electronic and written communications between the member and up to 25 retail investors in a 30 calendar-day period. Doesn’t need to review all correspondence, just needs to review a sample. Member should, where practical, review all incoming hardy copy correspondence (could contain cash, checks, securities or complaints).
What are 3 rules for corporate websites?
- Website clearly states that firm may only conduct business in states where it is properly registered to do so
- Website only provides general information about the firm and does not provide specific investment advice
- The firm or its agent may not respond to internet inquiries with the intent to solicit business without first meeting the registration requirements in the state of the prospective customer
When content of any website will be first used or updated, what needs to happen?
Prior to first use – must be filed with FINRA within 10 days of use
Material changes – updates must be reapproved by principal and refiled with FINRA
What are the only form of advertising that does not require member’s name to appear in the ad?
Blind recruiting ads
What are generic advertising ads, what do they include (3)?
Generally designed to promote firm awareness and to advertise products and services generally offered through the firm. Generally includes:
- Securities products offered (stocks, bonds, mutual funds)
- Contact name, number and address
- Type of accounts offered (individual, IRA, 401K)
What is a tombstone ad? What can these include (5)? What must they include (4)?
Tombstone ad is an announcement of a new security offering coming to market.
May include:
1. Description of securities
2. Description of business
3. Description of transaction
4. Required disclaimers
5. Time and place of any stockholders meetings regarding the sale of the securities
Must include:
1. A statement that the securities registration has not yet become effective
2. A statement that responding to the ad does not obligate the prospect
3. A statement as to where a prospectus may be obtained
4. A statement that the ad does not constitute an offer to sell the securities and that an offer may only be made by the prospectus
Who must tombstone ads be approved by?
All advertising and sales literature is required to be approved by a principal of the firm prior to its first use.
A general security principal (Series 24) may approve most advertising and sales literature.
Any advertising or sales literature relating to options must be approved by a registered option principal or the compliance registered options principal.
Research reports must be approved by a supervisory analyst.
What must testimonials include (4)?
- Disclaimer that past performance is not indicative of future performance
- If individual giving testimony was compensated in any way
- If person making testimony is an expert, a statement regarding their qualifications as an expert must also be contained in the ad or sales literature
- Research prepared by outside parties must disclose the name of the preparer
What can’t testimonials be used in?
Investment advisers’ communications or advertising
What 5 things are considered to be misleading statements and cannot appear in communications with investors?
- Excessive hedge clauses
- Implying an endorsement by FINRA, NYSE, or SEC
- Printing the FINRA logo in type that is larger than the type of the member’s name
- Implying the member has larger research facilities than they actually have
- Implying an individual has higher qualifications than they actually have
What is the Securities Investor Protection Corporation Act of 1970 (SIPC)?
A government-sponsored corporation that provides protection to customers in the event of a broker dealer’s failure.
Who is required to be registered as an SIPC member?
All broker dealers registered with the SEC. They are also required to pay annual dues to SIPC insurance fund to cover losses due to broker dealer failure. If a broker dealer fails to pay the SIPC assessment, they may not transact business until it is paid.
What are broker dealers required to maintain a certain level of to ensure they are financially solvent? What is the amount depend on?
Net Capital requirement. Depends on type of business the broker dealer conducts (larger and more complex businesses need greater net capital requirements).
What happens if a broker dealer’s net capital requirement is not met?
Broker dealer is deemed insolvent and SIPC will petition in court to have trustee appointed to liquidate the firm and protect the customers.
What is the customer coverage that the SIPC provides?
Covers customer losses that result from broker dealer failure, not for market losses. SIPC covers customers for up to $500K per separate customer (of the $500K, up to $250K may be in cash, customer would not be covered for any amount exceeding $250K in cash and would become a general creditor for the rest)
What is a fidelity bond?
All SIPC members are required to obtain a fidelity bond to protect customers in the event of employee dishonesty. Fidelity bonds can insure against things like forgery and fraudulent trading
What is minimum amount of the fidelity bond?
$25K (large firms are often required to carry a higher amount)
What is the MSRB? What law gave it authority?
MSRB regulates issuance and trading of municipal bonds. The Securities Acts Amendments of 1975
What is the Insider Trading and Securities Fraud Enforcement Act of 1988?
Established guidelines and controls for the use and dissemination of nonpublic material information.
(Nonpublic information is information that is not known by people outside of the company; material information is information regarding a situation or development that will materially affect the company in the present or future).
What are the penalties for violators of the Insider Trading Act (4)?
- A fine of 300% of the amount of the gain or 300% of the amount of the loss avoided for the person who acts on the information
- A civil or criminal fine for the person who divulges the information
- Insider traders may be sued by the affected parties
- Criminal prosecutions: fine of up to $1M and 20 years in prison
Who can be considered an insider (5)?
- Officer, director, 10% stockholder
- Anyone who is in possession of nonpublic material information as well as spouse of any person
- Accountants
- Attorneys
- Investment bankers
Where is a firewall used in a broker dealer firm?
Broker dealers who act as underwriters and investment bankers for corporate clients must ensure that no inside information is passed between its investment banking department and its retail trading department (these need to be physically separated by a firewall).
What is the telephone consumer protection act of 1991? What are the rules (7)?
Regulates how telemarketing calls are made by businesses.
Rules:
1. Call only between 8am-9pm
2. Maintain a do-not call list (cannot be contacted for 5 years)
3. Give the firm’s name, address, and phone number when soliciting
4. Follow adequate policies to maintain a do not call list
5. Train representatives on calling policies and use of do-not-call list
6. Ensure that any fax solicitations have the firm’s name, address, and phone number
7. Ensure the name of the firm and its phone number are displayed on caller ID
Who are exempt from Telephone Consumer Protection Act (3)?
- Calls to existing customers
- Call to a delinquent debtor
- Calls from a religious or nonprofit organization
What is the National Securities Market Improvement Act of 1996? What is it also known as?
Also known as the Coordination Act, eliminated the duplication of effort among state and federal regulators.
What are some key points of the National Securities Market Improvement Act (4)? What did this law ensure that a state could not impose laws or requirements upon a broker dealer relating to (5)?
Key points: 1. Federal law overrides state law 2. Registration requirements for investment advisers 3. Capital requirements 4. Increased industry competition by eliminating collusive behavior What can’t laws impose on: 1. Capital requirements 2. Recordkeeping 3. Financial reporting 4. Margin 5. Custody
What is the Uniform Securities Act?
Laid out model legislation for all states in an effort to make each states rules and regulations more uniform and easier to address. This Act sets minimum qualification standards for each state securities administrator.
Who is the state securities administrator?
The top securities regulator within the state; may be the attorney general of that state or an individual appointed specifically to that post.
What does the Uniform Securities Act prohibit (5)?
- Prohibits the state securities administrator from using the post for personal benefit or from disclosing information
- Gives the state securities administrator authority to enforce the rules of the USA within the state
- Gives the administrator the ability to set certain registration requirements for broker dealers, agents, and investment advisers
- Administrators may set fee and testing requirements
- Administrators may suspend or revoke the state registration of a broker dealer, agent, investment adviser, a security, or a security’s exemption from registration
What are the actions a member firm must take to guard against money laundering?
- Every member must report any currency receipt of $10K or more from any one customer on a single day
- Firm must fill out and submit a currency transaction report also known as Form 4789 to the IRS within 15 days of the receipt of the currency
- Multiple deposits that total $10K or more will also require firm to file a currency transaction report (CTR).
- Firm is required to maintain a record of all international wire transfers of $3K or greater
What must every member report from any one customer on a single day?
Any currency receipt of $10K or more
What is the Patriot ACT?
Requires broker dealers to have written policies and procedures designed to detect suspicious activity. Firm must file a Suspicious Activity Report for any transaction of more than $5K that seems questionable and must be filed within 30 days of identifying any suspicious activity. Looking for money laundering activity and correspondence with terrorists
What are the steps of the money laundering process (4)?
- Begins with placement of funds (when money is deposited in an account with the broker dealer)
- Laundering process known as layering (will consist of multiple deposits in amounts less than $10K – funds will often be drawn from different financial institutions, this is also known as structuring)
- Launderers will then purchase and sell securities in the account
- Integration of the proceeds back into the banking system completes the process
What is the penalty for money laundering?
Subject to prosecution and face up to 20 years in prison and a $500K fine per transaction
What is FinCEN, what do they do?
FinCEN is a bureau of the US Department of Treasury. FinCEN’s mission is to safeguard the financial system and guard against money laundering and promote national security.
FinCEN collects, receives, and maintains financial transactions data, analyzes and disseminates that data for law enforcement purposes and builds global cooperation with counterpart organization win other countries with international bodies.
What is regulation S-P?
Requires that the firm maintain adequate procedures to protect the financial information of its customers. Firms must develop and maintain specific safeguards fort heir computer systems and Wi-Fi access
