SS 66 Unit 1: Chpts 1-4
Retail communication generally requires ____________ _____________.
Principal approval
Types of Disclosure Reporting Page (DRP) filing:
Reportable events include felonies and investment related misdemeanors, regulatory disciplinary actions, court judgements related to violations of investment-related statues and regulations by the investment advisor and its affiliated persons. - Criminal Action DRP: IAs subject to any felonies or misdemeanor charges or convictions - Regulatory Action DRP: IAs that are subject to any actions by the SEC, state, or a foreign financial regulatory authority - Civil Judicial Action DRP: proceedings against IAs that are initiated by a civil court for investment-related activities
True or False: All original partners, officers, and directors of a broker-dealer who are involved in effecting securities transactions are automatically registered as agents when the broker-dealer initially registers with the state.
TRUE Managers who join the firm after registration become effective will need to register and follow the same procedure as any other agent.
Net Capital requirements of the USA
The Administrator may require broker-dealers to maintain a specified minimum amount of net capital (a broker-dealers liquid net worth). *State Administrators may not set a level that exceeds the requirement established by the SEC.
When does state registration become effective?
At noon on the 30th day after filing an application, provided there are no proceedings pending
True or False: A partner, officer, or director of a B/D is always considered an agent of the B/D.
False. A partner, officer, or director is deemed an agent of a B/D if she is involved in the purchase/sale of securities
True or False: Under the USA, a Canadian BD may solicit a Canadian client to open up an account while he's in the U.S.
False. Canadian BDs may service existing accounts of Canadians who are in the U.S., but cannot open new accounts.
True or False: Exchange-listed futures contracts are securities.
False. Futures and forward contracts are not securities.
True or False: Under the Uniform Securities Act, municipal bonds are federal covered securities.
False. Municipal bonds are exempt securities. Feder covered securities include listed stocks and mutual fund shares.
True or False: A state may require a registration fee from the issuer of a NASDAQ security.
False. Nasdaq securities are federal covered securities Notice Filing Fee...
True or False: A state Administrator may require notice filing by an issuer of an NYSE security.
False. Notice filing is required for mutual funds and Reg D (Rule 506) offerings, but not exchanged listed securities.
Investment Adviser Public Disclosure (IAPD) Website
Although the information found in Part 1 of Form ADV is generally not required to be disclosed to the public, the SEC makes the information available through the Investment Adviser Public Disclosure (IAPD) Web site.
Special Examination under the USA
All required records of a broker-dealer, whether located within or outside the state, are subject to periodic or special examination as determined by the Administrator. Administrators will work with other agencies to prevent a duplicate inspection of records.
True or False: Paperwork related to coordination is filed with the Administrator at the same time as the SEC filing
False. Registration will become effective simultaneously with SEC registration, but need not be filed at the same time.
True or False: According to the USA, debt issued by a fraternal organization would NOT be considered exempt.
False. Securities issued by non-profit organizations are exempt from state registration.
Securities Sold to Qualified Purchasers is an example of a _______________ ____________ _______________.
Federal Covered Security ** These are not required to register with the state or Notice File
The Investment Advisers Act of 1940 (IA '40 Act)
Federal law governing investment adviser registration. The USA & NASAA model a lot of their IA regulations off the IA '40 Act.
ADV Part 1 provides specific disclosure information for SEC and state use, including: (5)
- IA name, number of employees, nature of business - Name, address, education, and 10-year business history of each partner, officer or director - How firm maintains custody of client assets - If principal business consists of investment supervisory service - Number and size of discretionary and non-discretionary accounts
Describe the Exempt Transaction: Private Placements
- Limited to no more than 10 non-institutional investors - Purchases must be made for investment purposes only - No commission paid for soliciting non-institutional investors * Written prior to Reg D
To identify whether an exemption applies remember these terms and phrases: (9)
- non-issuer - fiduciary - isolated - private - unsolicited - Trades between issuer and underwriter - Trades with institutional investors - Directed to no more than 10 retail clients - Not involving the public
4 persons who are NOT broker-dealers and excluded from registration are:
1. Agents 2. Issuers 3. Banks, savings institutions, trust companies 4. A person with no place of business in a state and only transacts business there with: - Issuers involved in the transaction - Other broker-dealers - Financial institutions, or - Existing clients who are not residents of the state (e.g., students, vacationers)
To identify whether an investment is defined as a security, state and federal authorities often use a four-part test described in the U.S. Supreme Court decision of SEC versus W.J. Howey Co. The four required elements are:
1. An investment of money 2. In a common enterprise 3. With the expectation of profits 4. Solely from the efforts of others
What are four state registration procedures found in the application process for B/Ds?
1. Becomes effective 30 days after filing 2. Expires annually on December 31st 3. Updated annually at time of renewal 4. Amendments for material changes are filed promptly (usually within 30 days)
In which two scenarios can an Agent engage in securities transactions in a state in which they are not registered?
1. Existing customer is temporarily visiting another state (e.g., students, vacationers) 2. Existing customer moves to a new state and: - Agent's registration is pending in new state - Agent is registered in at least one other state - Agent is registered with a national securities association, such as FINRA - Agent's B/D is registered in the new state
What are two state registration procedures found in the Consent to Service of Process for B/Ds?
1. Filed once, not renewed; irreversible 2. Grants the Administrator power of attorney to receive and process non-criminal legal complaints
In order to tell if a firm is considered a broker-dealer and whether it needs to register with the state or not explore these two items:
1. Identify the activity in which the firm is involved (a B/D is any person in the business of effecting securities transactions for the accounts of others or for its own account) 2. Determine if the firm has an office in the state - If YES, the firm must register - If NO, identify the type of client ---If all clients are institutional clients, the firm is NOT required to register ---If one or more clients are retail clients who are residents of the state, then the firm MUST register
Name six types of persons who are NOT Investment Advisers:
1. Investment Adviser Representatives (IARs) 2. Banks, savings institutions, trust companies 3. Lawyers, Accountants, Teachers, Engineers (LATE) 4. Broker-dealers and their agents 5. Publishers (e.g., newspapers and magazines) 6. Federal Covered Advisers (under NSMIA)
What are 5 specific "persons" per the Uniform Securities Act (USA)?
1. Issuer 2. Broker-Dealer 3. Agent ( Agent of B/D or Agent of an Issuer) 4. Investment Adviser 5. Investment Adviser Representative
What are the three methods of state registration?
1. Notification (filing) 2. Coordination 3. Qualification
What are two features of the Filing Fee for B/Ds during the state registration process?
1. Paid annually 2. For successor firms (firm ownership changes): - New application must be filed - No additional filing fee for remainder of year
What are some of the requirements of Registration by Filing (Notification)?
1. Registration statement previously filed under '33 Act 2. In business at least 36 calendar months 3. Issuer is registered with the SEC securities that are held by 500+ investors 4. At least 4 market makers 5. Total underwriting commissions may not exceed 10% 6. Offering price is at least $5/share
What are 5 types of Federal Covered Securities
1. Securities listed on a national securities exchange 2. Securities equal to or higher in seniority to a listed security 3. Securities offered or sold to qualified purchasers 4. Investment Company Securities 5. Securities issued pursuant to Rule 506 (private placements exceeding $5 million)
What are the three general pieces of information that State Administrators require of securities being offered?
1. The amount of securities to be offered in the state 2. Any adverse ruling entered in connection with the offering by a state regulatory authority, a court, or the SEC 3. Other states in which a registration statement has been or will be filed. (You do not have to say how many shares are being offered in the other states though)
In which four scenarios is a Canadian broker-dealer and its agents allowed limited registration under the USA?
1. They only transact business with a Canadian person who is temporarily in the state 2. They don't solicit new clients in the state 3. They file an application with the Administrator along with a consent to service of process 4. The broker-dealer is a member of an SRO or Canadian stock exchange *For B/D's with no place of business within a state **Renewal applications are filed prior to December 1 each year
Under the USA, private placements are exempt if securities are offered to ____ or fewer retail clients over ____ months.
10 or fewer retail clients over 12 months. *This is no longer a valid rule as it is more restrictive than the Federal Reg D rulings. However, as not all states have updated their USA model, the exam may still test your knowledge.
A B/D must maintain its books and records for a minimum of ____ years.
3 years
Describe Registration by Filing (Notification).
Also called "filing", is used by well-established corporations that meet stringent financial requirements. *All mention of this form of registration has been eliminated in the revised Uniform Securities Act of 2002 This is rarely used because most securities that qualify are now considered federal covered securities and simply complete a notice filing.
What is a consent to service of process?
A document that appoints the Administrator as attorney for any non-criminal legal complaints issued against a registrant
The Uniform Securities Act (USA)
A model law, which means that it's not the actual law of any one state, but rather a blueprint or template that each state may customize to suit its own needs. *Also known as Blue-Sky Laws
Describe the person: BROKER-DEALER
A person in the business of effecting transactions in securities for the accounts of others or for its own account
What is an exempt security?
A security that is not required to be registered with a regulator.
Define Surety Bond.
A surety bond is insurance issued by a bonding company that agrees to pay the sum of money awarded by a court up to a certain amount. The need for a surety bond would arise as a result of a registrant's violations of the USA requiring them to maintain the bond as long as they are in business and for three years thereafter.
What's an issuer transaction?
A transaction in which the issuer receives the proceeds.
Define Agent
An individual who represents a B/D in effecting securities transactions is always an agent and subject to registration - Included: all officers, partners, or directors of a B/D who are involved in the sale of securities - Excluded: those whose jobs are clerical (file paperwork or answer phones)
An agent who hold full discretionary authority over a customer's account may: I. Buy or sell securities in the account without consulting the customer II. Receive a fee for using his discretion in trading the account III. Withdraw money from the account IV. Borrow assets from the customer's account A. I and III only B. II and IV only C. I and II only D. I only
A. I and III only An agent who has been granted full discretionary authority over a customer's account may buy or sell securities in the account without consulting the customer and may withdraw money from the customer's account. However, even if an agent has been granted discretionary authority, he may not receive a fee for using his discretion in trading the customer's account and may not borrow the client's assets.
Under the Uniform Securities Act, and institutional investor: A. May be designated as such by rule or order of the Administrator B. Is any financial institution or trust C. Has more than $2.1 million of net worth D. Has a minimum of $1 million under management with an investment adviser
A. May be designated as such by rule or order of the Administrator The best answer to this question is that, by rule or order, the Administrator has the power to designate a person as an institutional investor. A client with net worth of more than $2.1 million or a client with a minimum of $1 million under management with an investment adviser is defined as a qualified client, not necessarily an institutional investor. Both financial institutions and trusts may be considered institutional investors, but there is a financial requirement that must be met.
Which of the following is an example of an exempt transaction under the Securities Act of 1933? A. Reg. D B. Railroad equipment trusts C. Municipal securities D. U.S. Treasury securities
A. Reg. D Since this question is asking about an exempt transaction at the federal level (Act of 1933), the only appropriate answer is Regulation D. A Regulation D offering is also considered private placement and represents a federal exempt transaction. Under the Securities Act of 1933, U.S. Treasuries, municipal securities, and railroad equipment trust are all exempt securities (not transactions).
Are there state registration exemptions for Investment Advisers? If so, what are they?
Adviser with NO PLACE OF BUSINESS in a state and: - All clients there are, are financial institutions, or - Has no more than FIVE non-institutional clients in the state within the last 12 months (de minimis)
List some of the exclusions from the definition of a B/D.
Agent, issuer, bank, or a B/D with no office in the state that only deals with institutions or its existing clients.
Agents must file ________________ with the _________________________________ to complete their state registration.
Agents must file Form U4 with the Central Registration Depository (CRD) to complete their state registration.
Advertising and Sales Literature requirements for B/Ds under the USA
All advertising, sales literature, and other written materials (prospectuses, pamphlets, circulars, form letters, etc.) intended for distribution to current or potential clients must be filed with the Administrator except in instances relating to exempt securities, exempt transactions, or federal covered securities.
Define Agent of Issuer
An individual who represents an ISSUER in the sale of certain securities is NOT required to register as an agent if the sale involves: - An exempt security - An exempt transaction - A federal covered security or - A transaction with existing employees, partners, or directors of the issuer and no commission or remuneration is paid for soliciting a person in the state * Registration MAY BE required
Define an investment contract (according to the Howey Test).
An investment of money, in a common enterprise, with expectation of a profit due to efforts of third-party management.
What is the minimum cooling-off period for registration by notification?
Five days
Broker-dealers must file ________________ with the _________________________________ to complete their state registration.
Broker-dealers must file Form BD with the Central Registration Depository (CRD) to complete their state registration.
Define Broker-Dealer (B/D)
Any person in the business of effecting securities transactions for the accounts of others (agency) or for its own account (principal)
Define Issuer
Any person that issues or proposes to issue any security for the purpose of raising capital (a sale by an issuer is an issuer transaction) * Registration is ALWAYS required
Describe the person: ISSUER
Any person who issues or proposes to issue any security. Includes U.S., state, local or foreign governments, corporations, and partnerships
Is a private placement considered an exempt transaction or an exempt security under the USA?
Exempt transaction
Under the Uniform Securities Act, all of the following individuals meet the definition of an agent, EXCEPT: A. A person who is employed by a broker-dealer and sells stocks that are listed on the NYSE B. A person who advises clients about securities for compensation C. A person who represents an insurance company in the sale of variable annuities D. A person who effects securities transactions, but does not receive commissions
B. A person who advises clients about securities for compensation An agent is an individual who represents a broker-dealer or an issuer in effecting securities transactions. It is important to note that the type or amount of compensation received is not a factor in determining whether a person is an agent. A person who advises clients about securities for compensation is not an agent; instead, she is likely an investment adviser representative.
According to the Securities Act of 1933, which of the following descriptions would meet the definition of a security? I. A contract for the future delivery of 35,000 pounds of pork bellies II. An options contract for the future delivery of 50,000 pounds of copper III. Ownership interest in an endowment life insurance policy, with a cash value of $75,000 IV. An unsecured promissory note issued by a corporation, maturing in 270 days or less V. A money-market mutual fund A. I, II, and III only B. II, IV, and V only C. I, II, III, and IV D. I and III only
B. II, IV, and V only Although futures contracts are not securities, options on futures are defined as securities. Choice (I) is a futures contract. Choice (II) is an option on a futures contract. Insurance products are not securities unless the contract described is variable (variable life, variable annuities). An unsecured promissory note issued by a corporation that matures in 270 days or less is exempt from registration, but is defined as a security. Money-market mutual funds are highly liquid, very safe investments that can be converted into cash, but these instruments are also securities.
When an agent ends her association with a BD, who must notify the Administrator?
Both the agent and the BD
True or False: An Administrator may not require a sales report from the issuer of an OTC security.
False
Under the Uniform Securities Act, which of the following statements is/are TRUE of exempt securities? I. Any security that is exempt under the Uniform Securities Act is also exempt under federal regulations II. Any security that is exempt under federal regulations is also exempt under the Uniform Securities Act III. Certain federal covered securities are required to notice file with the state Administrator IV. All Canadian securities are exempt from registration A. II and IV only B. I, II, and IV only C. III only D. I and III only
C. III only Certain federal covered securities are required to notice file with the State Administrator. The notice filing provision applies to investment company securities and securities that are distributed through a Regulation D Rule 506 offering. A security can be exempt under federal law, but not state law, and vice versa. Only securities that are issued by some form of Canadian government are exempt from registration; the exemption does not apply to offerings made by Canadian corporations.
An agent solicits the purchase of MPH, Inc, a nonexempt, unregistered security. The agent requests the client sign a document, acknowledging the security's status. The document also includes an exculpatory provision absolving the agent and the broker-dealer from any liability or wrongdoing. The waiver the client signed is: A. Acceptable B. Acceptable with the Administrator's approval C. Null and void D. Subject to civil liability and criminal penalty
C. Null and void Agents must not solicit, unregistered securities nor should they request a client sign documents absolving the agent or broker-dealer from wrongdoing. Such statements are sometimes called exculpatory clauses and are prohibited. These documents would be null and void under the Uniform Securities Act.
Identify the acronym: CRD
Central Registration Depository
Financial Report requirements for B/Ds under the USA
Certain financial reports must be filed with the Administrator. Could be quarterly, annually, or as frequent as determined by rule or order.
Securities Act of 1934 ('34 Act)
Created the Securities and Exchange Commission (SEC) which acts as the federal regulatory agency with the duty to enforce federal rules and regulations, including the registration of certain financial professions. Also governs the trading (secondary) markets
True or False: Charitable organizations may issue securities.
True. The securities issued by charitable organizations are exempt from registration.
True or False: Two friends, anticipating a rise in value, purchase property. The property is considered a security.
False If they were including the property in a pool of properties to be managed by a third party and not living on the property, then it would be considered a security.
True or False: A Consent to Service of Process must be filed by B/Ds, but not their agents.
False. A Consent to Service of Process is required of all registrants.
Describe Exempt Transactions
Typically based on the limited purchasers (i.e., non-public) ex) Private placements and trades between institutions (e.g., between issuer and underwriter)
Which of the following transactions meets the definition of an exempt transaction under the Uniform Securities Act? A. An issuer transaction of a security filed under the Securities Exchange Act B. An isolated issuer transaction C. Any sale of a security for which a registration statement has been filed with both the Administrator and the Securities and Exchange Commission D. A nonissuer transaction of a security filed under the Investment Company Act
D. A nonissuer transaction of a security filed under the Investment Company Act Any nonissuer transaction of a security registered under the Securities Exchange Act, Investment Company Act, or an isolated nonissuer transaction would be considered exempt transactions. Any offer, but not sale, of a security filed with both the Administrator and SEC would be considered exempt transaction.
The National Securities Market Improvement Act of 1996 (NSMIA)
Eliminates the duplication of state and federal securities regulation by recognizing a specific category of securities as Federal Covered Securities. Further created a specific category of investment advisers called Federal Covered Advisers. *NSMIA prohibits states from enforcing requirements that are more restrictive than existing federal requirements
What is form ADV Part 1?
Form ADV Part 1 requires the disclosure of information about an adviser's business, ownership, clients, employees, business practices, affiliations, and any disciplinary events of the adviser or its employees. If an adviser provides a "yes" response to numerous disciplinary questions, the firm must also complete a Disclosure Reporting Page (DRP) to provide details regarding the event.
What is the Bonding Requirement for state registration?
Posted to cover cost of lawsuits - Required for B/Ds, agents, and IAs that have custody of, or discretionary control over, client funds and securities - Not required if B/D's net capital or IA's net worth exceeds the minimum set by Administrator - Must be maintained for as long as B/D or IA is in business, plus three years thereafter - In lieu of bond, cash or securities may be deposited (amount and type of securities determined by administrator); no other personal property
Which statement(s) is/are TRUE regarding broker-dealers and agents? I. An agent of an issuer who sells exempt securities needs to register with the Administrator II. If a broker-dealer's net capital falls under the minimum, it must notify the Administrator within one business day. III. If a broker-dealer's client moves to a new state, the firm must register in the new state before the client moves. IV. An agent of a broker-dealer who sells exempt securities needs to register with the Administrator
II, III, and IV Agents of broker-dealers who sell any securities, including exempt securities, need to register with the Administrator. However, agents of issuers who sell exempt securities are not defined as agents and don't need to register with the Administrator. Agents don't need to register before a customer moves to a new state, but the broker-dealer is required to register in or already be registered in the state to which the client moves. Broker-dealers need to notify the Administrator within one business day if their net capital falls below the minimum.
If a registrant wishes to withdraw her registration, when does the withdrawal become effective?
If no action is pending, it is effective 30 days after filing the withdrawal request with the Administrator.
Investment Adviser Representatives (IAR) must file ________________ with the _________________________________ to complete their state registration.
Investment Adviser Representatives (IAR) must file Form U4 with the Investment Adviser Registration Depository (IARD) to complete their state registration.
Investment Advisers must file ________________ with the _________________________________ to complete their state registration.
Investment Advisers must file Form ADV parts 1 and 2 with the Investment Adviser Registration Depository (IARD) to complete their state registration.
Describe Filing Fees
Issuers are required to pay Filing Fees at both the time of initial registration and annual renewal
What are the exclusions from the definition of an issuer agent?
Issuers use individuals to effect or attempt to effect transactions for their own securities. These individuals are called agents of issuers. Individuals are exempt from this definition when they process : 1. Transactions in securities that are exempt (U.S. or municipal securities, Canadian gov or other foreign gov securities, Bank, trust company, and savings institution securities.) 2. Transactions that are exempt (those that don't involve the public), such as: private placements, sales to qualified purchasers, transactions between issuer and underwriter, transactions with a trust company or savings institution, selling stock to employees in which no compensation is received (stock purchase plans).
Any person who is employed by a broker-dealer and authorized to receive either solicited or unsolicited orders, open customer accounts, or service accounts _______________________.
MUST BE REGISTERED
What is Form ADV Part 2?
Part 2 consists of a series of items that contain disclosure requirements for an investment adviser's brochure as well as other required supplements including: - All actual and potential conflicts of interest and affiliations - Services provided and related fees - Soft dollar arrangements - Types of securities on which advice is given - Types of analyses used - Education and business background of those rendering investment advice (The IA Act of 1940 sets no standards) - The IA's balance sheet if it has custody of clients funds or securities or collects prepaid fees of more than $1,200, six months or more in advance --- At the state level, the prepaid fee trigger is $500
ADV Part 2A
Must be completed by all advisers registering with the SEC or any state securities authority - Requires advisers to create a narrative brochure to provide disclosure to clients regarding the advisory firm (this replaces the previous check-the-box format)
ADV Part 1A
Must be completed by all advisers that are registering with the SEC or any state securities authorities - Inquires about the adviser, its business practices, the firm's ownership or control, and the persons who provide the investment advice
ADV Part 2B
Must be completed by all advisers that are registering with the SEC or any state securities authority (must accompany the adviser's brochure) - Requires advisers to create brochure supplements containing resume-like information about supervised persons who provide investment advice
ADV Part 2A - Appendix 1
Must be completed by any advisers that sponsor, or act as portfolio managers for, wrap fee programs - Serves as a specific disclosure to any wrap fee program clients
ADV Part 1B
Must only be completed by any advisers registering with a state securities authority, not advisers that are applying for SEC registration or that are already SEC-registered - Asks additional questions required by state securities authorities and contains additional disclosure reporting pages (DRPs), including those related to criminal, regulatory, or civil judicial issues
Is an individual who represents an issuer in the sale of municipal bonds considered an agent?
No, since the individual is involved in the sale of exempt securities
May an agent of a B/D located in Mexico do business with a client in the U.S. without registering in the state?
No. B/Ds of Mexico are required to register in the U.S. to effect securities transactions in a state.
Under the USA, is a bank holding company that occasionally executes securities trades excluded from the B/D definition?
No. Under the USA, bank holding companies are not excluded from the B/D definition
If an agent has applied for registration, but has not yet heard back from the Administrator, what may she sell?
The agent is not permitted to sell securities. If she is properly licensed, she may sell life insurance or fixed annuities.
What is the effective date of registration?
The date on which the appropriate regulator releases the security for public distribution. If any securities of the same class are outstanding, a registration statement may not be withdrawn for one year after its effective date, unless the Administrator determines otherwise.
Who must prove that an exemption exists?
The party claiming the exemption
Describe a Real Estate Condominium security
The purchaser of a condominium allows his property to be included in a rental pool that's managed by a third party. Ex) Condominium might be part of a complex near a ski lodge and the buyer purchases the property for investment purposes, rather than for occupancy.
Advertising Maintenance Requirements and their time periods under the USA.
The time periods for recordkeeping the lifetime of the firm, six years, and three years. For the first two years, each of these records must be kept in an easily accessible location. Three Years: Advertising, Customer Complaints, Order Tickets, and Confirmations Six Years: Blotters, General Ledgers, Customer Statements Lifetime: Articles of Incorporation, Partnership Agreements, Stock Certificates Books, Minutes from Board Meetings
True or False: If a BD registers in a state on March 3, it must pay a registration fee for the full year.
True
Define NOTICE FILING
Under NSMIA, while federal covered securities may be exempt from state registration they may still be required to file copies of the documents submitted to the SEC and/or pay a fee to the state. *Mutual funds are the most common securities that fall under Federal Covered Securities but are still required to Notice File
Under the provisions of the USA, how is the institutional investor designation made?
Under the USA, an institutional investor is any person designated by rule or order of the Administrator
Identify the acronym: USA
Uniform Securities Act
Is a limited partnership a security?
Yes
If a B/D is not registered in a state, may an agent of the B/D do business in the state without being registered there?
Yes, if the agent is dealing with an existing client that is temporarily in the state.
The Dodd-Frank Act
a law enacted in the aftermath of the financial crisis of 2008-2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage
Define: Agent of a Broker-Dealer
a non-clerical individual who represents a broker-dealer in effecting securities transactions (i.e. salespersons). *Sometimes referred solely as AGENTS
An __________ policy is a type of life insurance that pays face value at the end of a period.
endowment
B/D records must be kept for at least _______ years.
three years
Describe the Federally Covered Security: Exchange-Listed Securities
1. Securities that are, or on completion of the offering will be, listed on any exchange 2. The exemption extends to securities that are equal to or higher in seniority to the listed security as well as rights and warrants to purchase the subject security (aka blue-chip exemption) *** Neither of these are required to register with the state or notice file
What is a non-exempt security?
A security that may be subject to registration. *you're allowed to sell unregistered, exempt securities but you are NOT ALLOWED to solicit unregistered, non-exempt securities. If securities are non-exempt they MUST be registered in ordered to be offered or sold in a state.
Under the Uniform Securities Act, which individual is considered to be an agent? A. A secretary who accepts customers' securities orders B. A principal of a broker-dealer C. A person who solely performs clerical functions D. A silent partner of a broker-dealer
A. A secretary who accepts customers' securities orders An agent is defined as a person who represents either a broker-dealer or an issuer in effecting securities transactions. The definition excludes principals of broker-dealers, clerical employees who do not accept customer orders, and silent partners
Under the Uniform Securities Act, all of the following persons are considered investment adviser representatives, EXCEPT: A. An employee of an advisory firm who provides administrative services that relates to portfolio selection B. A majority partner of an advisory firm established as a partnership C. A minority partner of an advisory firm established as a partnership D. An employee of an advisory firm who performs managerial functions that relates to portfolio selection
A. An employee of an advisory firm who provides administrative services that relates to portfolio selection The Uniform Securities Act defines an investment adviser representative (IAR) as an employee, partner, officer, or director of the adviser, who performs research, makes recommendations, manages portfolios, or solicits advisory services. However, employees who perform administrative, clerical, and/or ministerial functions are excluded from the definition of IAR
Which TWO of the following statements are TRUE regarding the registration of securities under the USA? I. The registration expires one year from the effective date II. The registration expires on December 31 following the effective date. III. The issuer is subject to quarterly state reporting requirements until the registration expires. IV. The issuer is subject to state reporting requirements only until the securities distribution is completed A. I and III B. II and IV C. II and III D. I and II
A. I and III Under the Uniform Securities Act, registration for securities expire one year from the effective date of the registration. Registration of broker-dealers, agents, investment advisers and investment adviser representatives expire on December 31 of each calendar year. In addition, issuers that register securities under the Blue Sky laws must file quarterly reports with the Administrator for as long as the registration is effective (i.e., one year after the effective date).
Describe Viatical Investments
Also referred to as life settlements, represent the purchase of the rights to the death benefit from an individual's life insurance policy. - Considered securities and must be registered with the state they're sold in as well as the broker-dealers and agents who sell them. - Considered risky investments and may only be sold to suitable investors, such as those who have a: (1) min. net worth of at least $150,000 and an annual income of $100,000 or (2) min. liquid net worth of at least $250,000
According to the Uniform Securities Act, all of the following transactions would be considered exempt, EXCEPT: A. A transaction executed by a guardian appointed by a state court B. A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board C. A nonissuer transaction of a security that is quoted on Nasdaq D. A transaction that is executed by a bona fide pledge that is not intended to evade the USA
B. A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board would not qualify as an exempt transaction. The OTCBB does not have specific listing criteria, whereas national exchanges such as the NYSE and Nasdaq have minimum standards to which issuers must adhere. All of the other choices are specifically defined under the USA as exempt transactions.
Sales of viatical investments can only be made to suitable investors. Which TWO of the following are considered suitable? I. An accredited investor under regulation D II. Anyone who has been specifically approved by the state Administrator III. Anyone who is the highest marginal tax bracket and is in need of liquidity IV. Anyone with a minimum net worth of $150,000 and gross income last year of at least $100,000, or a minimum net worth of $250,000 A. II and III B. I and IV C. II and IV D. I and III
B. I and IV A viatical investment involves the purchase of an interest in an insurance policy covering the life of an individual. The purchase may be for a whole or fractional interest in the policy at a price above the cash value. The investors pay the premiums on the policy until the death of the insured at which time the death benefit is paid to the investors. Since it is unknown when the insured will die and the funds are not readily assessable on demand, NASAA has specific suitability requirements as found in choices (I) and (IV).
Over the most recent 18 months, a U.S. computer manufacturer repurchased one million shares of its outstanding common stock. The company will be required to take which of the following actions if it intends to distribute these shares in the form of a stock dividend? A. The distribution of shares qualifies as a private placement offering under Regulation D. B. No special action is required by the company C. The company must register new shares of common stock, since the repurchased shares have been cancelled and are no longer valid for reissue D. The shares must be registered with the SEC
B. No special action is required by the company When a company repurchases its shares in the secondary market, they're referred to as treasury stock. As long as the company remains current on its filings, SEC registration of securities doesn't expire. The distribution of treasury stock to existing shareholders doesn't require the shares to be registered once again with the SEC, since the stock dividend will not constitute the issuance of new shares.
Registration of a security in a state is not required for ALL of the following reasons, EXCEPT: A. The security is exempt B. The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933 C. The instrument does not meet the definition of a security D. The security is offered in an exempt transaction
B. The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933 Under the Uniform Securities Act, a security is not required to be registered if: - The security is exempt; or - The security is non-exempt, but is being offered in an exempt transaction; or - The security is a federal covered security; or - The instrument does not meet the definition of a security Whether a security has been registered with the SEC (under the Securities Act of 1933) has no bearing on the state registration requirement.
_______ issued by insurance companies are exempt from state registration.
Bonds
Which of the following is NOT defined as an IAR? A. A person who gives advice and is employed by an investment adviser B. A person who solicits new business for an investment adviser C. A person that manages portfolios and assets for its clients D. A person who manages IARs at an investment advisory firm
C. A person that manages portfolios and assets for its clients This is a challenging question, but three of the choices listed are clearly considered investment adviser representatives (IARs). A person who provides advice as an employee of an investment adviser, a person who solicits business for an investment adviser, and a person who manages other IARs for an investment adviser each meet the definition of an investment adviser representative. On the other hand, a person managing portfolios could be either an individual or a business. Keep in mind, if the person is a business (firm), it's considered an investment adviser (IA) and not an investment adviser representative (IAR).
According to the Uniform Securities Act, all of the following are considered securities, EXCEPT: A. Prime bank notes B. Voting trust certificates C. Endowment policies D. Preorganization certificates
C. Endowment policies Endowment policies are insurance products and are not considered securities. The Uniform Securities Act often refers to various unregistered securities with odd names that promise unrealistic returns and have been the subject of enforcement actions by the Administrator, such as preorganization certificates and whiskey warehouse receipts.
Which TWO of the following meet the definition of a broker-dealer under the Uniform Securities Act? I. An agent of a broker-dealer who effects securities transactions for the firm II. A person that effects securities transactions for the accounts of others III. A person that effects securities transactions for its own account IV. A representative of an IA who provides securities related advice to customers A. I and II B. I and III C. II and III D. II and IV
C. II and III Under the Uniform Securities Act, a broker-dealer is defined as a person that is in the business of effecting securities transactions either for the accounts of others or for its own account. For that reason, choices (II) (acting as a broker) and (III) (acting as a dealer) are correct. Choice (I) is the individual agent who represents the broker-dealer in effecting securities transactions. Remember, agents are NOT considered to be broker-dealers. Choice (IV) is an individual investment adviser representative who provides advice to the advisory firm's clients and manages accounts/portfolios. Investment adviser representatives are NOT considered to be broker-dealers.
Define: Qualified Purchasers
Defined under the Investment Company Act of 1940, are person who own at least $5 million in investments. Deemed to be capable of evaluating investments and protecting themselves in a manner that renders regulation by state authorities unnecessary.
If a Nasdaq stock trades in the secondary market, does the USA consider it an exempt security or exempt transaction?
Exempt Security
Securities Act of 1933 ('33 Act)
Federal law that requires that certain securities be registered with the SEC in order to be offered or sold to the public. (Primary distributions)
Describe Registration by Qualification
For issuers conducting intrastate offerings (one state only) Requirements are determined by the individual state - No federal registration is required - May be used in any state, for any type of security - Extensive disclosures required by Administrator, with correcting amendments sent for inaccuracies. Becomes effective when determined by the Administrator. Registration statement is effective for at least one year from their effective date.
Describe Registration by Coordination
For smaller issuers conducting interstate offerings (likely IPOs) State registration is coordinated with the federal registration under the '33 act (though it doesn't need to be filed at the same time) - Along with a registration statement, the issuer submits a consent to service of process and a signification amount off additional information (basically copies of everything provided to the SEC for registration) - Issuer must submit a copy of the latest prospectus with the SEC Becomes effective at the same time as the federal registration AS LONG AS all conditions have been met. Registration will become effective once they have been. Good for one year following effective date
List the securities that are exempt from registration.
Government/municipal bonds, commercial paper, bankers' acceptances, bank issues, non-profit and small business issues.
List 8 of the different types of institutional clients.
IAs BDs Investment, insurance, or trust companies Banks, savings and loan associations Pension plans
Which of the following statements is/are TRUE of exempt securities? I. If a security is registered with the SEC, it doesn't need to be registered with the state(s). II. A security that's exempt from federal registration may need to register under the Uniform Securities Act. III. An exempt security is subject to the antifraud provisions of the Uniform Securities Act. IV. Federal regulations always supersede state rules
II and III Registration provisions under federal and state law are different. Being registered or exempt under federal law doesn't effect the state requirements and vice versa. All securities, regardless of whether they are registered or exempt, are subject to the anti-fraud provisions.
Describe the Federally Covered Security: Investment Companies
Investment company securities (e.g., mutual fund shares) are registered under the Investment Company Act of 1940 and are also required to be registered with the SEC under the '33 Act. ** These securities are not required to register with the State but ARE required to Notice File
Describe the Federally Covered Security: Securities issued pursuant to Rule 506
Issuers using the Rule 506 private offering exemption are able to raise an unlimited amount of money. Selling restrictions are imposed on the type of investors involved. **These securities are not required to register with the State but ARE required to Notice File
Identify the acronym: NSMIA
National Securities Markets Improvement Act
Identify the acronym: NASAA
North American Securities Administrators Association
What form of state registration is not available in all states?
Notification (filing)
When does a securities registration expire?
One year after its effective date
Define: ABC Test
Providing ADVICE about securities Providing these services as a BUSINESS Receiving COMPENSATION for these services
North American Securities Administrators Association (NASAA)
Responsible for updating the Uniform Securities Act (USA) as well as maintaining the content of the Series 66 Examination. *Made up of 67 state, provincial, and territorial securities Administrators from the 50 U.S. states, D.C., Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.
Describe the Exempt Transaction: Non-Issuer Transactions
Secondary market trades - Key words: isolated, non-recurring, or unsolicited trades - Trades in securities subject to '34 Act (reporting companies) - Trades in securities listed on the Toronto Stock Exchange
Describe Multilevel distributorships and merchandising marketing programs
Structures used to market products to the public and occasionally been used to create Ponzi schemes. Due to the negative history of these types of programs, they're defined as securities and are regulated under the USA
Define ADMINISTRATOR
The state securities regulator, commonly known as the state Administrator, is the person responsible for not only administering and enforcing the securities laws in a state, but educating investors as well. *Mission: to protect the consumers who purchase securities or pay for investment advice within the state.
Describe the Exempt Transaction: Fiduciary Transactions
Those involving a trustee, administrator, executor, or sheriff
Describe the Exempt Transaction: Institutional Transactions
Those with banks, B/Ds, or other financial institutions; insurance, trust, or investment companies; between issuer and underwriter
Describe the Exempt Transaction: Mortgage-Backed
Transactions in bonds that are secured by real estate mortgages (if sold as a unit)
True or False: The sale of securities to a pension plan is considered an exempt transaction under the USA.
True
True or False: Securities issued by the states and municipalities of Mexico are exempt from registration under the USA.
True. An exemption is provided to securities issued by foreign governments with whom the U.S. has diplomatic relations.
Describe Exempt Securities
Typically based on the safety of the investment ex) Treasury bonds, municipal bonds, foreign government bonds, commercial paper, stocks/bonds of banks, and Federal Covered Securities (e.g., listed securities)
According to NSMIA, when is an investment pool considered a federal covered security?
When it registers as an investment company under the Investment Company Act of 1940.
Is a multi-level distributorship considered a security?
Yes
Is a preorganization certificate considered a security?
Yes
Is a voting trust certificate a security?
Yes A voting trust certificate is a document issued by a limited-life trust of a corporation established to give temporary voting control of a corporation to one or a few individuals. Voting trust certificates are exchanged for stock when voting power must be consolidated. Thus, holders of certificates have all the usual rights of stockholders with the exception of voting rights.
Define: Agent of an Issuer
a non-clerical individual who represents an issuer in effecting securities transactions involving the issuer's securities with the public *someone who handles the distribution of shares to employees is NOT an Agent of an Issuer
Define DEALER
a person who effects securities transactions for its own accounts--ready to take the other side of the transaction. Charges a mark-up/mark-down for this service
Define BROKER
a person who effects securities transactions on behalf of its clients by locating the other side of the trade. Charges a commission for this service
Describe the person: INVESTMENT ADVISER
an person (usually a firm, rather than an individual) that, for compensation, engages in the business of providing others with securities-related advice, reports, or analysis. Satisfies all three parts of the ABC test *also referred to as Registered Investment Advisers (RIAs)
How does the Uniform Securities Act (USA) define PERSON?
any legal entity that's not deceased, is not a minor, and is not mentally incompetent. May include individuals, corporations, partnerships, sole proprietorships, issuers and state Administrators (both the office and the individual).
Describe the person: INVESTMENT ADVISER REPRESENTATIVE
any partner, officer, director, or other individual who is associated with an investment adviser and: - Makes recommendations or gives advice - Manages accounts or portfolios - Determines which recommendations/advice should be given - Solicits, offers, or negotiates the sale of investment advisory services - Supervises employees who perform any of these functions *also referred to as Registered Investment Adviser Representatives (RIARs)
Registration by filing becomes effective...
at the same time as the federal registration *provided that all documents were filed at least 5 days before the federal effective date. The state registration will become effective as soon as all the required conditions are met
How does the Uniform Securities Act (USA) define STATE?
includes a state, commonwealth, territory or possession of the United States, including the District of Columbia and the commonwealth of Puerto Rico.
Define SECURITY?
includes, but is not limited to, common stock, bonds, option contracts, and variable annuities
Define Stop Order
order by an Administrator (provided for by Judge) or the SEC that suspends the sale of a security
Describe a Whiskey Warehouse Receipt
represents a share in a quantity of whiskey being aged for future sale--perhaps 10 or 12 years before bottling. Investors can cash out by selling these receipts to other investors. Under state law, the transfer of a whiskey warehouse receipt is equivalent to the delivery of the property it represents, and therefore it constitutes a security.
Describe the person: AGENT
two types of agents -- one who represents a broker-dealer and one who represents an issuer of securities
