USA, Broker-Dealers and Agents

Question 1

Who is a “person” under the Uniform Securities Act?

Answer 1

Under the Uniform Securities Act a “Person” means an individual, a corporation, a partnership, an association, a joint-stock company, a trust where the interests of the beneficiaries are evidenced by a security, an unincorporated organization, a government, or a political subdivision of a government. A person is defined very broadly.

Question 2

Who is a NOT a “person” under the Uniform Securities Act?

Answer 2

The only nonpersons are:

minors (those under 18),
deceased individuals, and
individuals declared legally incompetent.

Question 3

What is the relationship between a broker dealer and an agent?

Answer 3

Broker dealers (any legal person) employ agents (individuals) to represent them in effecting securities transactions.

Question 4

When does the registration of broker dealers, agents, investment advisers, and investment adviser representatives expire?

Answer 4

December 31st of each year. All registrations come up for renewal on December 31st. A registration is renewed by paying a fee.

Question 5

Define broker dealer

Answer 5

Any person engaged in the business of effecting transactions in securities for the account of others or for his own account.

Question 6

What is an issuer?

Answer 6

An issuer is any person who issues or proposes to issue a security, such as companies or governments.

Question 7

agent

Answer 7

Any individual other than a broker dealer who represents a broker dealer or issuer in effecting or attempting to effect purchases or sales of securities.

Question 8

legal person

Answer 8

Legal person means an individual, a corporation, a partnership, an association, a joint-stock company, a trust where the interests of the beneficiaries are evidenced by a security, an unincorporated organization, a government, or a political subdivision of a government.

Question 9

natural person

Answer 9

Natural person means an individual. A living human being.

Question 10

A broker dealer has an office in the state. Does it have to register in the state?

Answer 10

Yes. A broker dealer with a physical office in a state must register in that state. No further analysis is required.

Question 11

A broker dealer has a single retail client in the state. Does it have to register in the state?

Answer 11

Yes. A broker dealer with a single retail client in a state must register in that state.

Question 12

Who is an agent of an issuer?

Answer 12

An agent of an issuer is an employee of an issuer who sells the issuers securities in the marketplace.

Question 13

When is an issuer’s agent exempt from registration?

Answer 13

An issuer’s agent is exempt from registering if the agent:

1. sells exempt securities,
2. sells securities in an exempt transaction, or
3. sells the securities to existing directors, officers, or employees of the issuer and receives no additional compensation for such sales.

Question 14

Are there financial requirements to register as an agent?

Answer 14

No.

Question 15

What four characteristics define a security?

Answer 15

1. An investment of money;
2. in a common enterprise;
3. with the expectation of profits;
4. to be derived primarily from the efforts of a person other than the investor.

Question 16

Six categories of items that are not securities under the Uniform Securities Act.

Answer 16

1. Insurance, endowments or annuities with fixed payouts;
2. Interests in a retirement plan;
3. Collectibles;
4. Commodities or futures contracts for commodities;
5. Condominiums used for personal residences; and
6. Currency

Question 17

What is the difference between an exempt security and an exempt transaction?

Answer 17

An exempt security is exempt from registration based on the nature of the issuer or the type of security. An exempt transaction is exempt from registration based on the manner in which the sale is made or the nature of the purchaser.

Question 18

What are the two methods for registration of securities in a state?

Answer 18

1. Coordination (issuer supplies state securities administrators with the federal registration statement filed under the Securities Act of 1933. This is the most frequently used method of registration); and
2. Qualification (issuer supplies all information directly to the state securities administrator).

Question 19

What is the effective date of state registration of a security by coordination?

Answer 19

Registration is effective at the same time the federal registration becomes effective, provided:

1. there are no issued stop orders or pending proceedings against the issuer;
2. the registration has been on file for the minimum number of days specified by the Administrator (10-20, depending on the state); and
3. a statement of the minimum and maximum proposed offering prices and maximum underwriting discounts and commissions have been on file for two business days.

Question 20

What types of annuities are securities and what types are not?

Answer 20

Annuities with fixed payouts are not securities, but annuities with variable payouts are securities, because the amount of the payouts depends on the performance of securities within the annuity.

Question 21

What is an issuer transaction?

Answer 21

An issuer transaction is one in which the proceeds of the sale go to the issuer. All newly issued securities transactions are issuer transactions.

Question 22

What is the difference between a primary offering and an initial public offering (IPO)?

Answer 22

A primary offering is an issuer transactions involving new securities. An initial public offering is the first time an issuer distributes securities to the public.

Question 23

What is a non-issuer transaction?

Answer 23

A non-issuer transaction (also called a secondary transaction, or a transaction between investors) is one in which the proceeds of the sale do not go to the issuer. Non-issuer transactions are exempt transactions.

Question 24

What are the main categories of federal covered securities?

Answer 24

1. Securities listed on the New York Stock Exchange, the American Stock Exchange, the Chicago Stock Exchange and the Nasdaq Stock Market, and any security equal in seniority or senior to these securities;
2. investment company securities registered under the Investment Company Act of 1940; and
3. offers and sale of certain exempt securities, such as those offered by a municipal/governmental issuer (except in the state the municipal securities are being offered) and private placements under Regulation D of the Securities Act of 1933.

Question 25

What category of federal covered security is always required to engage in Notice Filing, and what does it entail?

Answer 25

Investment companies are required to file a notice with Administrators in states in which their securities will be sold, and to pay specified filing fees.

Notice filings must always include copies of ADV forms, which are documents detailing an advisory firm’s investment style, assets under management (AUM), and key officers.

Question 26

State Administrators may require that an issuer file certain documents under notice filing procedure. What are these documents?

Answer 26

1. Documents filed with registration statements filed with the SEC, and documents filed as amendments thereto;
2. A report on the value of the securities being offered in the state; and
3. consent to service of process.

Question 27

When may a security be registered by coordination?

Answer 27

A security may be registered by coordination if a registration statement has been filed with the SEC under the Securities Act of 1933 in connection with the same offering.

Question 28

What documents must an issuer file with a state Administrator when registering in a state by coordination?

Answer 28

1. Consent to service of process;
2. if the Administrator requires, copies of the latest prospectus filed with the SEC under the Securities Act of 1933;
3. copies of its articles of incorporation and by-laws, a copy of the underwriting agreement or a specimen copy of the security;
4. if the Administrator requires, copies of any other information filed under the Securities Act of 1933; and
5. each amendment to the federal prospectus promptly after it is filed with the SEC.

Question 29

When may a security be registered by qualification?

Answer 29

Any security may be registered by qualification, and any security not eligible for registration by another method must be registered by qualification. Securities that will be sold only in one state must be registered by qualification. Generally, any security that will also be registered with the SEC will be registered by coordination.

Question 30

What is a material fact?

Answer 30

Information used by a prospective purchaser to make an informed investment decision.

Question 31

Are warrants and rights securities?

Answer 31

Yes. Warrants and rights are securities.

Question 32

Are all options securities?

Answer 32

Yes. Options are always securities, even if the underlying asset is not an option. Thus, an option on foreign currency is a security, but the foreign currency itself is not a security.

Question 33

Are all annuities securities?

Answer 33

No. Variable annuities are securities. Fixed annuities are not securities.

Question 34

Are municipal bonds securities?

Answer 34

Yes. Municipal bonds are securities.

Question 35

What is a federal covered security?

Answer 35

Federal covered securities are securities with a federally imposed exemption from state registration. Examples include nationally traded securities, U.S. Government and municipal securities, investment companies and Regulation D private placement securities.

Question 36

When is a futures contract a security?

Answer 36

A futures contract is a security when the underlying asset is a security. Example: futures on commodities are not securities. But, futures on stock indexes, such as a future on the S&P 500, are securities.

Question 37

When is registration by coordination available to an issuer?

Answer 37

Coordination is available to any issuer also registering its securities at the federal level.

Question 38

What is required of an issuer registering by coordination?

Answer 38

An issuer must submit three copies of all federal registration documentation and amendments to the state securities administrator.

Question 39

When is registration by notification available to an issuer?

Answer 39

Registration by notification is available to any issuer that is already registered at the federal level.

Question 40

Who may register by qualification?

Answer 40

Registration by qualification is available to any issuer. This is typically used in an intra-state registration.

Question 41

What is the latest a prospectus may be received by a customer?

Answer 41

With the trade confirmation. If a prospectus is not received prior to or with the trade confirmation the sale is illegal.

Question 42

What securities are exempt from state registration?

Answer 42

1. U.S. government securities,
2. Municipal securities,
3. Securities issued by national or state banks,
4. Securities issued by credit unions,
5. securities issued by nonprofit organizations,
6. Commercial paper meeting specific criteria, and
7. Bankers acceptances.

Question 43

What is a non-issuer transaction?

Answer 43

A transaction where the proceeds of the sale go to someone other than the issuer. These transactions are exempt from state registration. This covers every secondary market transaction.

Question 44

What is an unsolicited order?

Answer 44

An unsolicited order is one where a customer contacts an agent and requests to buy or sell securities. Unsolicited orders are exempt transactions.

Question 45

What is a rights sale and are the sales of rights exempt?

Answer 45

A rights sale permits an investor to maintain a proportional share in a company when the company issues new shares. Rights sales are exempt transactions.

Question 46

Which party has the burden of proof to demonstrate that a transaction is exempt?

Answer 46

The issuer must demonstrate that a particular transaction is exempt.