Unit 1 Registration of Persons Flashcards
Uniform Securities Act (USA) of 1956
*Model legislation that arose in an attempt to
unify all state securities laws (Blue-Sky Laws).
Each state must adopt the principles of the act to
create the state’s laws for how securities are
issued and sold within each state.
*The USA provides for both criminal and civil
penalties for violations.
The template for all the states to use.
The Securities Act of 1933
Primary Markets
Also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the ‘33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after the stock market crash of 1929.
The Securities Exchange Act of 1934
Secondary Markets
Is a law governing the secondary trading of securities in the United States of America.
A landmark piece of wide-ranging legislation, the Act of ‘34 and related statutes form the basis of regulation of the financial markets and their participants in the United States.
Fraud, SEC
The Trust Indenture Act (TIA) of 1939
For corporate non-exempt bonds
Requires that non-exempt corporate bond issuers create a trust indenture when issuing bonds worth $50 million or more. The TIA is a law that protects bondholders by requiring the issuer to appoint a trustee and create a written agreement that details the bond issue. The Securities and Exchange Commission (SEC) enforces the TIA.
Investment Advisers Act of 1940
A federally covered advisor is an investment advisor that is registered with the (SEC) under the IAA of 1940.
This act regulates investment advisers who provide professional advice about securities investments.
Who is a federally covered advisor? Advisers with at least $100 million in assets under management, Advisers who advise a registered investment company, Certain pension consultants, Internet-based advisors, and Multi-state advisors.
The Investment Company Act of 1940 (ICA)
Is a law that regulates investment companies, including mutual funds. The ICA’s purpose is to protect investors by requiring companies to disclose information about their investments and operations. The ICA is also known as the 40 Act.
Face Amount Certificates
Unit Investment Trust
Management Companies (open end, closed end mutual funds, etc.)
Year Triggers: Whenever you see a year
Whenever you see a year, think federal
State Administrator
The Administrator is the regulator for the state
Each state has their own regulator
They have jurisdiction in their state
They enforce rules their state congress has set up
State Administrator Cont’d
- The securities industry is primarily regulated at the federal level. However, each state has its own securities department known as the Administrator. The Administrator is responsible for administrating the securities laws of the state.
The North American Securities Administrators Association (NASAA)
Agency, and it has no state or federal powers, but it has influence with legislators and regulatory authorities.
NASAA writes the test.
National Securities Markets Improvement Act of 1996 (NSMIA)
Modified and limited the powers of the states with regard to the registration and regulation of some B/D, IA, and securities issuers.
Fed covered Securities
- Exchange Listed Securities
- Reg D (Rule 506)
- Investment company securities
- municipal securities
What is a State?
- A state, commonwealth, any property/territory of the US
Definition of a Person
- Person could be individual human (natural person), or a corporate person.
Anyone with the ability to enter into a contract.
Who is not a person
Dead, Dumb, Don’t Touch
Minors are excluded as they cannot legally enter into a contract. Those deemed mentally incompetent are also excluded.
Examples of Persons
- An individual
- A corporation
- An estate
- A business trust
- A government body
- A political sub-division
Registration Procedures
*The state administrator requires the following
information on the registration application: * Location and type of business
* Proposed method of doing business
* Applicant’s financial history and condition
* Qualifications and business history
Consent to Service of Process
*A form that gives the state administrator
jurisdiction over the registrant to receive and
process any non-criminal legal proceedings
*This appointment is irrevocable and remains in
force as long as a registration is effective
*The consent is not required with renewal
applications
Effective date and expiration
*Registration is effective noon on the 30thcalendar day after the filing date
*If not renewed, all registrations expire on
December 31st
Minimum Net Capital Requirements of
BDs
*BDs who can receive and promptly forward
deposits from customers is $50,000
*BDs who can’t receive any money from
customers is $5,000
Investment Advisor Financial
Requirements
- For Investment Advisers with discretionary and
custody of client funds/securities is $35,000
*Investment Adviser with discretionary, but
without custody is $10,000
Surety Bonds
*B/Ds and IAs who have discretionary authority
over client accounts may be further required (by
the state administrator) to post a surety bondin
the amount of $35,000
When Does the Surety Bond Requirement Not Apply?
The surety bond requirement does not apply if: * The B/D’s net worth exceeds the minimum standards
* The IA meets the minimum financial requirements
Fidelity Bonds
*Not likely to be seen
*Insurance to protect against fraud, theft,
and other unethical or illegal acts by
employees.
Investment Advisor
*A person (firm) who advises for a Fee
Investment Advisor (3 Prongs)
- 3 Prongs: A, B, C
Gives Advice
Business of advice, and
does it for Commission.
When is the IA exempt
*The IA is exempt if they have:
- no place of business
in the state AND
- communicates with no more than 5 clients in the preceding 12 months
Representative vs Investment Adviser
*Representatives are paid for making a RECOMMENDATION
*Advisers are paid for GIVING ADVICE
Federally Covered IA’s (minimum)
*IAs with AUMs of $110 million or more must
register with the SEC
Federally Covered IA Exemptions
- Federally Covered Advisors are exempt from registering with the state, however they may be required to pay state fees
State Registered IAs
- IA managing less than $100-million in assets must register with the state(s)
- IA managing $100-110 million have the option to register with either the state(s) or the SEC
- IA managing in excess of $110-million must register at the federal level
- State registered advisors must register in each state in which they have a place of business
- Once a federal adviser, between $90-100 million they have a choice to go back to the state, less than $90 million must go back to states.
EXCLUSIONS from Registration
- The following persons are EXCLUDED from
registration: - Banks and bank holding companies, savings institutions and trust companies
- Lawyers, Accountants, Teachers and Engineers (L.A.T.E.) as long as the advice given is incidental to their business practice
- Publishers as long as content does not consist of rendering advice on the basis of specific investments
Exemption vs Exclusion
*Exempt: Not bound by a rule, obligation, etc. applying to others
* Exempt security retains exemption at issue and
subsequent trading
* Exempt transaction must be established each time
*Exclusion: not defined as. Pension plan is excluded from definition of security
Grounds for Discipline
*To take disciplinary action, the Administrator must determine that the action is in the public interest and must have grounds for the action:
Grounds for Discipline (Examples)
- Lied on Application
- Willfully violated the act
- Been convicted of a misdemeanor involving securities in
the past 10 years - Convicted of any felony within the past 10 years
Withdrawals
- An Investment Advisor Representative (IAR) may withdraw their registration by submitting a U-5 form (effective in 30 days) after the Administrator receives it, provided no revocation or
supervision proceedings are in process - The Administrator retains jurisdiction for 1 year
after a person’s registration is withdrawn or
terminated
Withdrawals cont…
*Changes in employment * As the RR begins or terminates employment with an
employer, the RR as well as the employer must
promptly notify the Administrator
* When the RR transfers employment from one B/D or
issuer to another, all three persons – the RR, the
old employer, and the new employer must notify the
Administrator
Recordkeeping for Advisers
*IAs 5 years, unless administrator
rules otherwise
Record Retention (3 Years)
Most Things:
Trade Confirmations
U-4
U-5
Fingerprint Cards
Communications w public
Order Tickets
Firm’s Compliance & Procedure Manual
Record Retention (4 Years)
Customer Complaints
Record Retention (5 Years)
Verification “Stuff” (Money & People)
FinCEN documents and Customer Identification Documents
Record Retention (6 Years)
Seriously Important Documents:
- Blotters
- General Ledgers
- Customer Ledgers
- Stock Records
- Customer Account Records
Record Retention Lifetime
“Birth Certificate” type documents
- Partnership Agreements
- Corporate Charter
- Board Members
Financial Reports (who are the filed to?)
- B/Ds and IAs must file financial reports to the administrator, as required
What is a Broker Dealer?
A firm that executes transactions
Broker Dealer Trigger Words
“Executes Transactions”
Broker vs Dealer (Acts for)
Broker Acts for: Others
Dealers Acts for: Self
Broker/Dealers (Acts as)
Broker Acts as: Agent
Dealer Acts as: Principal
Broker/Dealers (Have)
Brokers Have: No Risk
Dealers Have: Significant Risk
Broker/Dealers (Are paid a)
Brokers are paid: a Commission
Dealers are paid: a markup/down
Excluded from the Definition of B/D
*Banks and savings institutions
*Agents
*Issuers
*Trust Companies
B/Ds Exempt from registration
- They only transact business with other B/Ds, Issuers, financial institutions (banks, savings institutions, trust companies, insurance companies, and investment companies), or
- They are licensed in their home state and only make offers to existing clients temporarily in another state where the B/D is not licensed (snowbird)
Agents (Definition)
*Any individual who represents a B/D or
an Issuer in effecting a securities
transaction
Registers with FINRA and State
Clerical & Adminstrative Personnel
Clerical & administrative Personnel are not agents unless they engage in securities transactions
Agents (Licensure)
*Agents must be licensed in all states they solicit business
Representing B/Ds
- Agents that represent B/Ds must be registered regardless of what they are selling (exempt or non-exempt securities or transactions)
Agents Representing Issuers (registration)
Agent of the issuer
*Agents representing Issuers of non-exempt
securities in non-exempt transactions must be
registered
*Agent representing Issuers of exempt securitiesor involved in an exempt transaction – no
registration is required
IAR
Individual that works for the firm, registers only at the state level (in which they do business) if they register at all
Lots of “Exempt”… (What does it mean)
*Exempt means SPECIAL.
* Some how, some way, it is “special”.
*A Non-Exempt security, is then a NOT special
security, a “normal, regular” security.
*A Non-Exempt transaction, is a regular
transaction.
Form ADV
- Form ADV is used by IAs to register with either the SEC or state* Form ADV
- Part 1 – information about IA’s business
- Part 2 – primary disclosure document that IAs provide to their clients
IAs Annual Requirements
- IAs required annually to provide clients summary of material changes to the brochure and either deliver an updated brochure or offer to make available an updated brochure
IA Brochure
- The brochure supplement must be delivered either before or at the time that the IAR begins to provide investment advice to a client
Broker Dealer Supervision
*Principals (S26/S24) oversee Reps (S6/S7)
*OSJ in every location
*Maintain documents for potential audits
SEC 1092
These have to become investment advisors:
- talent and sports agents
- pensions consultants over 200m
- financial planners
