Trending Topics Flashcards
Regulation A+
Allows an issuer to raise capital of up to $50 million. Since some Regulation A+ offerings may be subject to both state and federal registration, they are not federal covered securities.
Broker-Dealers
Broker-dealers are generally prohibited from altering or summarizing any document that is filed with the SEC.
A broker-dealer must be registered with the SEC, as well as with any state in which it has resident retail clients.
A broker-dealer is permitted to provide a client’s confidential information to another person if it is required to do so by law or if it has received the client’s approval.
Form U5
If an agent leaves on broker-dealer to begin employment with another broker-dealer, the original broker dealer must file Form U5 to notify the Administrator that the agent is no longer associated with the firm.
Ethical Practices
If an agent will be receiving extraordinary compensation (i.e., a bonus) on the sale of a security, it is considered a conflict of interest and must be disclosed in advance.
It is unacceptable and prohibited to withhold material information from either written or verbal presentations and seminars.
The fundamental benefit of purchasing municipal securities is the receipt of interest income which is tax-exempt; however, they are not risk-free.
Stating that an investment will not lose value is a violation since it is considered a performance guarantee.
An agent is not permitted to lend personal funds to a customer who has a deficiency in a margin account.
Although a commodity pool is not considered a security, an agent’s involvement with the pool is considered an outside business activity and she must notify her employing broker-dealer.
If the chief executive officer of a publicly traded company reports a loss in one quarter in order to inflate earnings for the next quarter, it is considered market manipulation.
Social Media
As a general rule, if a customer posts a positive tweet, it is not permitted to be retweeted.
Charts and quotes from customers cannot be posted on social media.
Custodial Accounts
The securities in a UTMA account are the property of the minor. The custodian, who is typically a family member, makes the investment decisions.
Fees
If an agent is initially registered with Broker-Dealer A, but changes to Broker-Dealer B within the same calendar year, he may be required to pay another registration fee. This fee will NOT be prorated.
Laws, Regulations, and Guidelines - Overview
NASAA members include all states, the District of Columbia, U.S. territories, Canada, and Mexico.
The definition of a state includes the 50 states, D.C., U.S. territories, but DOES NOT include the British V.I., Mexico, or any province of Canada.
The Administrator may also be referred to as the commission, commissioner, or secretary.
NSMIA is the National Securities Markets Improvement Act.
NSMIA prohibits states from requiring the registration of federal covered securities and federal covered advisers.
NASAA is the North American Securities Administrators Association and is responsible for updating the Uniform Securities Act.
A solicitor for an IA may be required to register with the Administrator.
The definition of person does not include minors.
State Registration of Securities
Universal life insurance is not considered a security.
When a term life policy is extended beyond the term period, the premium will increase.
Fixed annuities are not subject to the USA since they are not securities.
Viatical investments are securities.
A certificate of interest in a mining lease is a security.
Federal covered securities are exempt from state registration.
Futures and commodities are not considered securities; however, options on these items are considered securities.
An endowment policy is not a security.
Notice filing is required for issuers of investment company shares and private placements conducted under Rule 506 of Reg. D.
Registration by Filing is not used for an IPO and is not available for use in all states.
Registration by Coordination is used for interstate offerings.
Registration by Qualification is used for intrastate offerings and requires the most documentation.
State Registration of Securities Part 2
Securities that are issued by an insurance company are exempt form registration, but this does not include variable annuities or variable life insurance.
Church bonds are exempt from registration.
If an agent sells exempt securities in a state, he must be registered in the state.
Selling units in a Canadian limited partnership is NOT an exempt transaction.
Secondary market (non-issuer) transactions are exempt transactions.
A correcting amendment is filed with the Administrator if information in a registration statement becomes inaccurate.
Under Rule 147, securities sold only in one state are exempt from federal registration.
Securities issued by a Canadian municipality are exempt from registration, but not the securities issued by a Canadian corporation.
State Registration of Securities Part 3
A non-issuer transaction in a security listed on the Toronto Stock Exchange is exempt.
Transactions between a B/D and issuer are exempt.
Transactions between an underwriter and issuer are exempt transactions.
Do not confuse Notice Filing with registration by filing. Notice filing is NOT a method of registration; instead, it is a process that is required for investment company securities and securities that are issued under Rule 506.
State Registration of Securities Part 4
According to the USA, a private placement is exempt from registration in a state if it is offered to no more than 10 non-institutional investors within a 12-month period.
The anti-fraud rules DO NOT apply to fixed annuities since they are not considered securities.
When registering securities, the amount to be offered in the state must be disclosed, but not the aggregate amount being offered.
Under Reg. D, accredited investors include individuals who have a net worth of over $1 million or annual income of $200,000 ($300,000 with spouse).
State Regulations Governing Broker-Dealers and Agents
A person who represents an issuer by selling exempt securities or by engaging in exempt transactions is not considered an agent and is not required to register as such.
Limited registration is granted to Canadian B/Ds and their agents, but is not available to Mexican B/Ds and agents.
A bond rating is not included on a confirmation.
To register, agents and IARs must file Form U4 with FINRA.
QuidProQuoCo has registered as a broker-dealer. Tom, Dick, Harry, and Jane are the partners. Harry is a silent partner. Lulu is the CEO (president and chief executive officer). Ted is the CFO (chief financial officer). Sam is the COO (chief operating officer and head of human resources). QuidProQuoCo has a board of directors made up of some partners, some officers, and some employees. According to the Uniform Securities Act, when the firm registered as a broker-dealer, did all of the partners, officers, directors, and employees automatically become registered as agents?
According to the Uniform Securities Act, only those partners, officers, and directors who qualify by being actively engaged in the business and performing the functions of an agent would automatically become registered as agents. Harry would not automatically become an agent, since he is a silent partner. Probably Sam wouldn’t either, since the COO focuses mostly on internal matters such as human resources. Some of the employees of the broker-dealer also would not need to be registered, as they would be performing clerical functions without soliciting or accepting orders.
Nigel is a successful agent of a Canadian broker-dealer in Manitoba. The firm he works for has no offices in the U.S., and he has no interest in moving to the U.S. One of his biggest clients, Beatrice, is in temporary residence in Minnesota settling her mother’s estate. Nigel wants to keep Beatrice as a client but he is not registered in the U.S. and doesn’t know if he can continue to work with Beatrice under the current situation. What is your advice?
If the Canadian firm does not have offices in the U.S. state (which it does not), and the client is from Canada and is temporarily in that state (which Beatrice is), and had a relationship with the Canadian broker-dealer before entering the state (which Beatrice did), then an agent or broker-dealer may use a limited registration. Nigel has a good many hoops to jump through to get that limited registration, but because Beatrice is a big client, you would advise him to do so.
Wendy likes the idea of “performance-based” compensation. In college she worked in retail sales and liked earning a commission, which increased her paycheck for every sale she made. After graduating a year ago, she took a job as an investment adviser representative and loves the “sales” aspect of this job, too. She lives frugally, other than her clothing budget, and has already saved about $12,000 that she wants to invest. She does not own a house or have any other significant assets. She meets with Priya, another investment adviser representative in her firm who knows her well, to discuss the possibilities. Priya suggests that she (Priya) be compensated 20% of any gains made above an annual 5% return benchmark in Wendy’s account. Is this type of compensation acceptable?
Normally, IAs and IARs are prohibited for receiving performance-based fees. But there are exceptions such as high net worth individuals, qualified purchasers, registered investment companies, business development companies, private investment companies, and key employees of an investment advisory firm, such as officers, directors and investment adviser representatives.
How quickly must agents as well as broker-dealers or issuers notify the Administrator when agents begin or terminate employment?
According to the USA, notification must be accomplished “promptly” when an agent begins or terminates employment with a broker-dealer or issuer. There is no set number of days for such notification.
A company would be required to register under qualification if: I. It is a 10 year old company with a net worth of $15,000,000 and it is planning to raise money for the first time through the sale of securities in its home state. II. It is a 2 year old company selling securities in 11 states simultaneously III. It is a 2 year old company that has previously sold securities in 4 other states and now wants to raise additional cash by selling securities in another state. IV. It is a 2 year old company selling securities to investors for the first time through a private placement.
I & III
Only the company selling securities in its home state for the first time and the two year old company who had sold securities in four other states would be required to register through qualification. Even though the ten year old company meets some of the requirements to register through notification, they are selling securities for the first time in their home state only.
A broker dealer registered to conduct business in 15 states with $200,000 in net capital is subject to all of the following except:
A broker dealer who meets the SEC’s net capital requirement is not subject to the $35,000 surety bond requirement.
A publisher of market letter with a $400 annual subscription price, who basis the letter on market conditions
A publisher of market letter who basis the letter on market conditions is considered an investment adviser.
An agent represents an issuer in the sale of short term commercial paper in sales with the public and receives a fee when it is sold. The commercial paper has a maximum duration of one year or less and is sold in denominations of $100,000 or more. Which of the following are true ? I. The agent need not register II. The commercial paper is exempt III. The commercial paper is given a federally covered exemption IV. They must register
IV only
The commercial paper is only given a federally covered exemption if it is less than 270 and sold in denominations of $50,000 or more. The agent in this case is selling the commercial paper to the public and receives a fee when it is sold and therefore must register.
An agent who has passed their Series 63 but has not yet received notification from the state may do which of the following ?
An agent may not do any of the choices listed until they have received notice of registration.
According to the Uniform Securities Act, an investment adviser is considered to have custody of client’s funds under which of the following circumstances? I. The adviser has full discretion II. The adviser self-clears III. The adviser has limited discretion IV. The adviser accepts client’s securities for deposit
I, II, & IV
An adviser is considered to have custody if they have full discretion to withdraw cash and securities as well as when they accept customer’s securities for deposit. An adviser that self-clears holds all of the customer’s cash and securities.
A regional firm is acquiring a local firm in state. The regional firm is not registered as a broker dealer in the state of the firm that it is acquiring. All of the following are true except:
All of the answers listed are true except that the firm will have to pay new registration fees. The acquiring firm will pay the registration fees at year end for the next year.
A New York agent representing a New Jersey broker dealer has several clients in Pennsylvania and three clients in Florida. Where must the agent be registered ?
The agent must register in their home state, in their state of employment and in the states where they have clients.
A local appliance store is promoting it annual Fourth of July sale. It has significantly marked down large screen TVs. Also, anyone who purchases a large screen TV will receive a $100 US Savings Bond. Which of the following is true?
The US savings bond is an exempt security and the sales person does not need to register. The practice of offering savings bonds during a promotion is not fraudulent or in violation of the USA.
A company would be required to register under qualification if: I. It is a 10 year old company with a net worth of $15,000,000 and it is planning to raise money for the first time through the sale of securities in its home state. II. It is a 2 year old company selling securities in 11 states simultaneously III. It is a 2 year old company that has previously sold securities in 4 other states and now wants to raise additional cash by selling securities in another state. IV. It is a 2 year old company selling securities to investors for the first time through a private placement.
I & III
Only the company selling securities in its home state for the first time and the two year old company who had sold securities in four other states would be required to register through qualification. Even though the ten year old company meets some of the requirements to register through notification, they are selling securities for the first time in their home state only.
The Bank Secrecy Act requires financial institutions to
file a currency transaction report (CTR) for each transaction involving greater than $10,000 in cash
report wire transfers in excess of $3,000
report structured transactions that have been effected in accounts at the financial institution
all of the above
all of the above
The term ‘state’ as used in the USA refers to:
I. The federal District of Columbia
II. The Commonwealth of Puerto Rico
III. Any Canadian Province
I and II
‘State’ includes any state in the United States of America, Washington DC, and the territories and commonwealths which are part of the U.S., including Puerto Rico, Guam, American Samoa, etc.
When a broker-dealer charges a mark-up or mark-down in a transaction, it has acted:
as an underwriter
as a broker or a dealer depending upon the circumstances surrounding the trade
in an agency capacity
as a dealer
When a stock brokerage firm is selling securities out of their inventory, they are acting in the dealer or principal capacity, and add a retail mark-up to the total cost of the trade. If they act only as a middle-man in a transaction, bringing a buying customer together with a selling customer, charging a commission, that is acting as a broker or in an agency capacity.
A bank holding company owns a bank and a broker-dealer. Which of the following entities must register as a broker-dealer under the USA?
only the brokerage firm need register as a B-D
The broker-dealer cannot operate as such without registering as a broker-dealer. The bank holding company is not a broker-dealer.
Certain Fed-covered securities require Notice Filing with Administrators of states in which those securities are going to be sold, including:
NYSE-listed securities
NASDAQ-listed securities
securities being sold under Reg. D Rule 506
all of these require at a minimum, a notice filing
There are only two Fed-covered securities which require ‘Notice Filing:’ Securities being offered under Regulation D Rule 506, and Investment Company securities.
Under the USA, the statute of limitations
Statute of limitations for criminal offenses is 5 years. Statute of limitations for civil infractions is no greater than 3 years. Whereas criminal guilt can result in prison, civil liability results in monetary awards…not jail time.
The private placement exemption available to issuers under the USA places conditions on the distribution which include:
The private placement rule under the USA does not place a limit of 35 non-accredited investors upon the issuer — that number is found in the federal laws, not the state laws. Also, though it’s true that under the USA, non-institutional investors (individuals) must be buying the private placement for investment purposes (long term purposes), institutional investors are under no such limitation.
The USA includes all of the following in the category of exempted securities with the exception of:
bonds issued by the City of London, Ontario, Canada
bonds issued by the City of London, England
bonds issued by the City of Manhattan, Kansas
bonds issued by the Borough of Manhattan, New York City, NY
Though bonds issued by England would be exempt securities under the USA, bonds issued by cities or any other political sub-division within England are not. Therefore, bonds issued by London, England are not exempt. Bonds issued by any Canadian province, city or any other political subdivision are considered exempt under the USA. All municipal bonds issued within the United States are exempt securities.
