Unit 1 - Chapter 1 - Securities Regs Flashcards
Under the the Investment Company Act of 1940 name the three categories of investment companies.
- ) Face Amount Certificate Company - kind of registered investment company
- ) Unit Investment Trust - registered investment companies - package of debt or equity securities that does have a management company. Units are redeemable and no management
- ) Management Companies
Under the Investment Company Act of 1940, what are the two kinds of management companies?
- ) open-end: typically mutual funds
2. ) closed-end
What is the difference between an open-end and closed-end management company?
Open-end is continuously issuing new shares. Closed-end is closed to new people once shares are sold
Under the Investment Company Act of 1940, what are the requirements for investment company registration with the SEC?
- ) Have private capitalization of at least $100,000
- ) Cleary defined investment objective (I.e. growth, income, speculative, etc.)
- ) Must file annual reports to SEC
- ) file semi-annual reports to shareholders
What are the shareholder rights under the Investment Company Act of 1940?
- ) Changing the nature of the business - shareholders can vote to change the business from investment company
- ) Changing the investment objective or policy (Internet fund example)
- ) Changing the investment advisor or manager
What is the structure of investment companies under the Investment Company Act of 1940?
1.) Board of Directors - can’t have a felony or misdemeanor
2.) 40% of the Board have to be “non-interested directors” (have no other role with the fund)
3.) Investment Advisor to manage portfolio for a fee
A.) initial investment advisor contract is 2 years, renewable annually
B.) maximum of 60 days of termination
C.) contract must be in writing between money manager and the fund
What are the general restrictions on investment company management, according to the Investment Company Act of 1940?
- ) Can’t purchase securities on margin - exceptions are hedge funds
- ) Can’t selling short - must be done through a margin account
- ) Can’t do speculative options (can’t do naked calls)
- ) Can’t have a joint trading account
- ) Can’t purchase more than 3% of the voting shares of another investment company
Explain 12b-1 fees.
Under 12b-1 investment companies can charge fees for sales and promotional expenses. Ongoing fee the investment company will take take as a % of investment.
How are 12b-1 fees approved by investment companies?
- ) Initial approval: Whole board, independent board and shareholders
- ) Annual renewal and quarterly review: Whole board and independent
- ) Termination: Independent board or the shareholders
* Note: Nothing can go on with the 12b-1 fee w/o approval of the independent board. - ) If the load wants to be a “no-load” fund the 12b-1 fee can not be higher than 25 bps, if higher the fund can’t sell as a “non-load” fund
What is the definition of the insider trading according the Insider Trading and Securities Fraud Enforcement Act of 1988?
Using information not available to the public to profit or avoid a loss.
What are the civil penalties for being found guilty of the Insider Trading and Securities Fraud Enforcement Act of 1988?
Up to the greater of $1 million or 300% of profit made or loss avoided. 300% aka “trembled damages”
I.e. made $2,000,000 +3x = $6,000,000 fine plus the $2,000,000 made
What is the criminal penalty under the Insider Trading and Securities Fraud Enforcement Act of 1988?
Jail term of as much as 20 years
Explain how the tippper and tippee are liability may be liability Insider Trading and Securities Fraud Enforcement Act of 1988.
Just know that this is a possibility.
Explain the misappropriation theory of the Insider Trading and Securities Fraud Enforcement Act of 1988.
Insiders who violate insider trading rules may be liable to contemporaneous traders who did not have insider information for losses sustained
The buyers of securities that were traded with insider knowledge can bring private litigation against that person. Have 5 years to institute the suit. Damages are profits the other person made or loss the insider avoided. NO PUNITIVE OR TREBLE DAMAGES
What is the NSMIA?
National Securities Markets Improvement Act of 1996
Name the groups and organizations that must register with the SEC?
- ) Brokers and Dealers
- ) Securities Exchanges
- ) Nationals Securities Associations - FINRA & the MSRB (Maloney Act of 1938)
- ) Corporations with listed securities
- ) Securities Information Processors (SIPs)
- ) Transfer Agents
Explain the Insider Transactions under the Securities Exchange Act of 1934.
Regulates securities transactions by insiders who generally own large amount of their companies’ stock.
Who must file a statement with SEC concerning the amount of equity securities owned, according to the Insider Transactions under the Securities Exchange Act of 1934?
- ) Every person who is directly or indirectly the beneficial owner of more than 10% of any class of equity securities registered on a national securities exchange
- ) officers or directors of the issuers of such securities
What is a Schedule 13(d) Filing?
5% Beneficial Owners - requires beneficial owner of more than 5% of the a class of equity securities to register under the Sec Exchange Act of 1934 (meaning publicly traded companies) to file a report with the issuer, SEC, and the securities markets where those securities trade within 10 days of any transaction that results in beneficial ownership of more than 5%.
What are the reporting requirements of Schedule 13(d)?
- ) Name and background of the person or entity
- ) origin of the money for the acquisition
- ) purpose of acquiring the securities
What is a Section 13(f) filing?
Requires that any institutional investment manager that uses the mail or any means of instrumentality of interstate commerce in the course of its business as a institutional money manager, and that exercises investment discretion over an equity portfolio with a market value on the last trading day in any of the preceding 12 months of $100 MM or more must file Form 13F with the SEC quarterly, within 45 fays of the end of each quarter
What are 13(f) Securities?
Exchange-traded or Nasdaq quoted stocks, equity options, warrants, shares of closed-end investment companies, certain convertible debt securities, ETFs
What is a schedule G filing?
A passive investor whose beneficial ownership exceeds 5% of any registered security. Passive investors must file within 10 calendar days after crossing the 5% threshold and must amend their Schedule G within 45 days after the end of the calendar year.
What is a passive investor?
Any person who certify that they did not purchase or do not hold the securities for the purpose of changing or influencing control over the issuer and hold no more than 20% of the issuer’s securities. I.e. investment companies and large pension funds
What is a Section 16(a) filing?
Requires executive officers, directors and great than 10% stockholders (i.e., control persons) to file a transaction reports before the end of the second business day following the day on which a transaction has been executed in any equity security where they are consider an insider.