Unit 1 Session 2: State Regulation Under the Uniform Securities Act (USA)

Summary Order (Acting Summarily)

"summarily" is acting without prior notice one of the powers of the Administrator with regard to registration of both persons and securities 3 specific cases where this power applies in the USA: - postponing or suspending the registration of any securities professional pending a final determination of a proceeding related to a problem - postponing or suspending the registration of a security pending a final determination of a proceeding relating to a problem - denying or revoking a specific security or transaction exemption in each of these cases, upon entry of the order, the Administrator must promptly notify all interested parties that it has been entered, the reasons for the order, and that within 15 days after the receipt of a written request a hearing will be granted

Not Securities under USA

- an insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed sum of money either in a lump sum or periodically (this is basically any product from a life insurance company that does not use the word "variable") - interest in a retirement plan, such as an IRA or Keogh plan - collectibles - commodities such as precious metals and grains, including futures contracts - condominiums used as a personal residence - currency because these items are not securities, their sale is not regulated by state securities laws furthermore, if a registered agent commits fraud in the sale of any of these items, he has not committed a violation of any state securities laws he has violated the anti fraud provisions of another act prohibiting fraudulent commercial transactions annuities with fixed payouts are not securities, but variable annuities are because they are dependent on the investment performance of securities within the annuity

list of securities under the USA:

- notes - stocks - treasury stocks - bonds - debentures - evidence of indebtedness - certificates of interest or participation in a profit - sharing agreement - collateral trust certificates - preorganiztion certificates or subscriptions - transferable shares - investment contracts - voting trust certificates - certificates of deposit for a security - certificate of interest participation in an oil, gas, or mining title or lease - puts, calls,straddles, options, or privileges on a security - any interest or instrument commonly known as a security - certificates of interest or participation in, receipts of, guarantees of, or warrants or rights to subscribe to or purchase, any of the above

persons subject to state registration

1. broker - dealers: generally legal persons such as corporations or partnerships 2. agents: always individuals (natural persons) 3. investment advisors: generally legal persons, such as corporations or partnerships 4. investment advisor representatives: always individuals (natural persons)

under the USA, it is unlawful for any person to offer or sell an unregistered security in a state unless:

1. it is registered under the Act 2. the security or transaction is exempted from registration under the Act 3. it is a federal covered security if the security or transaction is not exempt or is not a federal covered security as defined by the National Securities Markets Improvement Act, it must be registered in the state or it cannot be lawfully sold in the state

under the USA you are a broker - dealer if:

1. you have a place of business in the state regardless of the nature of your clients 2. you have even 1 retail client in the state

under the USA, you are not a broker - dealer if:

1. you have no place of business in the state 2. your only clients are: other BDs, institutions, and issuers of the security involved in the transaction 3. you are registered in a state where you do maintain a place of business and only do business in this state with existing clients who are not residents of this state (snowbirds)

primary offering

An issuer transaction involving new securities

National Securities Markets Improvements Act of 1966 (NSMIA)

Congress enacted this to promote efficiency in capital formation in the financial markets in effect, the act generally preempts states' blue - sky laws, eliminating the dual system of state and federal registration of certain securities and investment advisors

Gramm-Leach-Bliley Act of 1999

Modernization Act with the adoption of this federal securities law adopted a functional approach to the regulation of financial institutions under the functional approach, those financial institutions that engage in brokerage - related securities activities are subject to SEC registration as broker - dealers as well as to applicable provisions of state securities law - the USA - that relate to broker - dealers

advertising

NASAA considers it to be an unethical business practice to use any advertising or sales presentation in such a fashion as to be deceptive or misleading examples would be: - a distribution of any nonfactual data - any material or presentation based on conjecture - unfounded unrealistic claims in any brochure, flyer, or display by words, pictures, or graphs - anything otherwise designed to supplement, detract from, supersede, or defeat the purpose or effect of any prospectus or disclosure leaving out risk factors and other potentially deal - killing information is prohibited highlighting or making any other marks on a prospectus to draw attention to key points is also prohibited the Administrator may by rule or order require the filing or approval of advertisement and sales literature unless the security or transaction is exempted or is a federal covered security

Issuer Transaction

One in which the proceeds of the sale go to the issuer all newly issued securities are these when a company raises money by selling (issuing) securities to investors, the proceeds of the sale go to the company itself all primary offerings, IPOs, and SPOs, are this because the issuer (the company) receives the proceeds from the investor investing in the company when investors purchase shares of an open - end investment company (mutual fund), that is always this because the fund is continuously offering new shares. However, when the investment company sells the shares out of its portfolio, that is a nonissuer transaction in the secondary markets.

Exempt Securities

US and Canadian government and municipal securities* foreign government securities* depository institutions* insurance company securities public utility securities federal covered securities securities issued by nonprofit organizations securities issued by cooperatives securities of employee benefit plans* certain money markets the 5 listed with an * are the only cases where an individual representing the issuer in the sale of its securities is excluded from the definition of an agent

agent

USA defines this as any individual who represents a broker - dealer (legal entity) or an issuer (legal entity) in effecting (or attempting to effect) transactions in securities individuals in a sales capacity who represent broker - dealers or issuers of securities they act, usually on commission basis, on behalf of others often referred to as registered representatives, whether they sell registered securities or securities exempt from registration only an individual, or a natural person, can be this individuals employed by brokers/dealers to handle their customer orders to buy or sell securities separate function from an IAR (although many large firms wear both hats)

National Conference of Commissioners on Uniform State Laws (NCCUSL)

a national organization of lawyers devoted to unifying state laws, drafted the original Uniform Securities Act (USA) as model legislation for the separate states to adopt

jurisdiction

a person or security is covered or subject to the law

exempt security

a security in which under the USA, does not have to be registered in order to be sold, and there are no requirements to file advertising about the security with the Administrator

nonexempt security

a security subject to the registration provisions mandated by the USA not subject to registration unless this is registered, it may not be sold in a state unless it is sold in an exempt transaction a registered one of these is most likely a common stock properly registered for sale in a state

federal covered securities

a security that was exempt from registration on the state level cannot be registered at the state level remember the distinction between federal covered securities and SEC - registered securities. Under NSMIA, federal covered securities are a narrowly defined group of securities that either trade on certain exchanges or are exempt from SEC registration. There are thousands of SEC - registered securities that do not meet the required standard, including those on the OTC Bulletin Board and the OTC Link of the OTC Markets Group Inc., formerly known as the Pink Sheets. before the initial offer of any federal covered security in this state, the Administrator, by rule or order, may require the filing of all documents that are part of a deferal registration statement filed with the US Securities and Exchange Commission under the Securities Act of 1933, together with the consent to service of process signed by the issuer. However, unless their is an appearance of fraud, the Administrator does not have the power (because of lack of jurisdiction) to prevent the sale of a federal covered security in his state

exclusions from the definition of broker - dealer

agents (state term for registered representative) issuers banks, saving institutions, and trust companies person with no office in state who limits clients to issuers of the security, other broker - dealers, or institutional investors person with no office in state who directs offers to existing clients who are not residents of the state

submitting an application

all persons must complete and submit an initial application (as well as renewals) to the state securities Administrator application must contain whatever information the Administrator may require by rule, and may include: - form and place of business (broker - dealers and investment advisors) - proposed method of doing business - a list of all jurisdictions in which the applicant is registering (or already registered) - qualifications and business history (broker - dealers and investment advisors must include the qualifications and history of partners, officers, directors, and other persons with controlling influence over the organization) - court - issued injunctions and administrative orders - adjudications by the SEC or any securities SRO within the past 10 years - convictions of misdemeanors involving a security or any aspect of the securities business - felony convictions, whether securities related or not - financial condition and history (broker - dealers and investment advisors only, but only of the firm - no credit reports on the officers) - any current unsatisfied liens and judgement must be shown as well as any declaration of bankruptcy within the past 10 years - any information to be furnished or disseminated to any client or prospective client, if the applicant is an investment advisor - in the case of an individual registrant (agent or investment advisor representative), citizenship information Administrator may also require that an applicant publish an announcement of the registration in one or more newspapers in the state unlike FINRA registration requirements, fingerprints do not have to be submitted

Effecting Exempt Transactions

an employee of an issuer is not an agent when representing an issuer in exempt transactions transactions exempt from registration are called exempt transactions some examples are: - unsolicited brokerage transactions - transactions between the issuer and underwriters - transactions with financial institutions - private placements

common enterprise

an enterprise in which the fortunes of the investor are interwoven with those of either the person offering the investment, a third party, or other investments

exemption from registration

an exempt security retains its exemption when initially issued and in subsequent trading. However, justification as an exempt transaction must be established before each transaction securities that are nonexempt must register unless sold in exempt transactions federal covered securities do not register with the Administrator but may, especially in the case of investment companies, have to Notice file with the Administrator exempt security retains its exemption at its initial issue and in subsequent trading an exemption of a transaction must be established with each transaction provided it is in the public interest, the state Administrator can deny, suspend, or revoke any securities transaction exemption other than that of a federal covered security a security is exempt because of the nature of the issuer, not the purchaser an exempt transaction is exempt from regulatory control of the state Administrator because of the manner in which a sale is made or because of the person to whom the sale is made a transaction is an action and must be judged by the merits of each instance it is unlawful for any person to offer or sell any security in this state unless: - it is registered under the act - the security or transaction is exempted under the act - it is a federal covered security

multiple registration of agents

an individual may not act at any one time as an agent for more than one broker - dealer or for more than one issuer, unless the broker - dealer or issuers for whom the agent acts are affiliated by direct or indirect common control or the Administrator grants an exception

fraud

an intentional effort to deceive someone for profit not limited to common - law deceit

Investment Advisor Representative

any individual who represents a state - registered investment advisor or federal covered investment advisor performing duties related to the giving of or soliciting for advisory services individuals employed by investment advisors to give advice to their client after an IAR advises a client about a specific security, the next step is to contact the broker - dealer where that client maintains a brokerage account to give the buy/sell order to an agent

investment advisor representative

any individual who represents a state - registered investment advisor or federal covered investment advisor performing duties related to the giving of or soliciting for advisory services these can only be individuals (natural persons) IAR is abbreviation

solicitor

any individual who, for compensation, acts as an agent of an investment advisor in referring potential clients

agent

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 these are always individuals (natural persons) and their function is to be involved in securities sales or supervising those who do registered representatives almost always, these individuals work for broker - dealers, but, there can be instances when the individual is selling securities on behalf of the issuer of those securities

state

any of the 50 states, any territory or possession of the United States (such as American Samoa, Guam, and the Virgin Islands), the District of Columbia, and Puerto Rico

broker - dealer

any person engaged in the business of effecting transactions in securities for the account of others or for its own account when acting on behalf of others, they are acting as brokers and act in an agency capacity when acting on behalf of themselves (proprietary accounts), they are acting as dealers and act in a principal capacity the primary function of this person is making securities transactions in almost all cases they register with both the SEC and the state(s) any person (a securities firm, even one organized as a sole proprietorship) with an established place of business (an office) in the state that is in the business of buying or selling securities for the accounts of others (customers) and/or for its own proprietary account is this and must register with the state firms for which agents (registered representatives) work firms that engage in securities transactions, such as sales and trading one of the roles of this person is underwriting (distributing) shares of new securities for issuers - when they do that, they generally earn a spread (the difference between the public offering price and what they pay the issuer) or receive a commission on the sales, which they then use to pay their agents who actually made the sales to the clients primary business function is executing transactions and securities compensation is earned in the form of commissions and markups (markdowns)

issuer

any person who issues (distributes) or proposes to issue a security most common are companies or governments (federal, state, and municipal governments and their agencies and subdivisions) under the USA, with respect to certificates of interest; participation in oil, gas, or mining titles or leases; or in payments out of production under such titles or leases, there is not considered to be one of these

issuer

any person who issues or proposes to issue any security primarily include corporations or governments under the USA, with respect to certificates of interest or participation in oil, gas, or mining titles or leases, or in payments out of production under such titles or leases, there is not to be considered any "issuer"

General Registration Procedures (5)

any person who meets the definition of broker - dealer, agent, investment advisor, or investment advisor representative must register with the state to register with the state securities Administrator, a person must: 1. submit an application 2. provide a consent to service of process 3. pay filing fees 4. post a bond (if required by the Administrator) 5. take and pass an examination if required by the Administrator. the exam may be written, oral, or both if an agent terminates employment with a broker - dealer, both parties must notify the Administrator if an agent terminates employment with one broker - dealer to join another broker - dealer, all three parties must notify the Administrator

investment advisor

any person who, for compensation and as part of a regular business, engages in the business of advising others as to the value of securities or as to the advisability of investing or in selling them the advice can be delivered in person, through publications or writings, or through research reports concerning securities to be this under both state and federal securities law, a person must: - provide advice about securities (not about jewelry, rare coins, or real estate) - provide that advice as part of an ongoing business (hang out a shingle and have an office for conducting business) - receive compensation (actually get paid for the advice) in most cases they are legal persons - that is, partnerships or corporations that provide investment advice or portfolio management services on an ongoing basis an individual can be this if he operates as a sole proprietorship and is registered as both an investment advisor and the only investment representative of the business primary business function is giving advice compensation is earned in the form of fees or other charges, generally based on the amount of assets managed

investment advisor

any person: - who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as the advisability of investing in, purchasing, or selling securities - who, for compensation and as part of the regular business, issues or promulgates analyses or reports concerning securities under the National Securities Markets Improvement Act of 1996 (NSMIA), they are registered with either the SEC (covered advisors) or the state (state registered advisor), but never both IA is abbreviation

federal covered securities

any security of that issuer equal to or senior to it this would include rights, warrants, preferred stock, and any debt security

Subsequent Public Offering (SPO) or Additional Public Offering (APO)

any subsequent issuance of new shares to the public

Agent Registration Requirements

application, generally the Form U-4, must be completed - must disclose citizenship an individual may not conduct securities transactions in a state unless that person is properly registered in the state where he conducts business this is true even when receiving unsolicited orders if an agent does business in a state, she must be registered in that state, even if there is only one client the act makes it unlawful for any broker - dealer or issuer to employ an agent unless the agent is registered while registration is pending, permitted activities would be those allowed to any other employee of the broker - dealer who is not required to be registered an agent's registration is not effective during any period when the agent is not associated with a broker - dealer registered in the state if the broker - dealer's registration is terminated, the agent is no longer considered licensed when an agent shifts employment from one broker - dealer or issuer to another, all three persons - the agent, the old employee, and the new employee - must promptly notify the Administrator exemptions from registration as an agent generally apply to representatives of issuers, rather than to representatives of broker - dealers

regulatory concerns about social media

both the SEC and FINRA have established policies, most of which are used as the basis for disciplinary actions when the Administrator's staff conducts an examination of BDs and IAs located in his state the problem with regulated financial institutions is that inappropriate use of email and other social media can mean non - compliance with government and industry regulations, resulting in hefty fines, potential loss of business, and fraud maximum amount of time to be suspended from a BD is 2 years agents are duty bound to follow the rules and regulations surrounding electronic communications, even during their own time, if they are identifiable as a representative of the securities firm when it comes to review and supervision, it is important to note that the terms electronic communications, email, and electronic correspondence may be used interchangeably and can include such forms of electronic communications as instant messaging and text messaging

Disclosure of Capacity

broker - dealers can operate either in a principal or agency capacity when executing transactions for their clients when acting in principal capacity, the BD is the contra party to the trade - they are on the other side of the trade of the client - when the client is buying a security, the broker - dealer is selling out of inventory - in this case, the firm's profit comes from a markup - if the client is selling a security and broker - dealer purchases it for its inventory, once again, the firm is acting as a principal (every trade has 2 principals - the buyer and the seller) and, in this case, the profit comes from a markdown when acting in an agency capacity, the firm is acting like any other broker or agent (real estate broker, insurance agent, employment agent) in that they are simply putting the buyer and seller together - they earn a commission broker - dealers must always indicate their capacity on the trade confirmation, sent no later than completion of the trade (settlement date) they will indicate if they acted as a broker (and always disclose the amount of commission) or if they acted as a principal (and depending on the circumstances - may have to indicate the markup or markdown)

exclusions from definition of an agent:

clerical and administrative personnel - cold callers working for a broker - dealer would have to register as an agent if they did anything more than ask if clients wanted to receive information - if they prequalified clients or suggested ways to receive more money for their stocks or bonds, they would have to register as agents - broker - dealers frequently hire summer interns - if these interns received any selling related compensation, such as $10 for each existing client solicited, they would be considered agents and would have to register board members or capital contribution only (silent partners)

certain money market instruments

commercial paper and banker's acceptances are the 2 most common examples

postregistration requirements: books and records

every registered BD must make and keep such accounts, blotters (records of original entry), correspondence (including emails), memoranda, papers, books, and other records as the state Administrator by rule prescribes all records so required must be preserved for 3 years unless the Administrator specifies otherwise records must be current, complete, and accurate BDs are obligated to promptly file correcting amendments State securities Administrators cannot impose recordkeeping requirements that are in excess of those prescribed by the SEC the records BDs are required to maintain are subject to periodic, special, or other examinations by representatives of the Administrator of that state where the BD's principal office is located or of any other state in which the BD is registered as the Administrator deems necessary or appropriate in the public interest if the information contained in any document filed with the Administrator is or becomes inaccurate or incomplete in any material respect, the registrant must file a correcting amendment promptly included in the recordkeeping requirements are electronic communications, particularly emails - not required to maintain emails of a personal nature sent to non - clients no requirement to keep copies of your customer's tax returns

retail client

exam will use this term instead of non institutional client these need far more protection than institutional ones individuals who meet the standard of accredited investor are still retail rather than institutional clients

exempt

excused from certain requirements

accredited investor

found in Rule 501 of the federal Securities Act of 1933 refers to a person who is not counted when computing the number of investors purchasing a private placement under Regulation D of that Act because it is a federal term, not one found in the Uniform Securities Act, the term is used to confuse you

Affinity Fraud

fraud aimed at groups of people who share similar interests

Initial Public Offering (IPO)

if it is the first time an issuer distributes securities to the public

broker - dealer advertising

in addition to when a member acts merely as an order - taker regarding a particular transaction (an unsolicited transaction, which we know is an exempt transaction - exempt from the registration and advertising filing requirements under the USA), the policy generally would view the following activity and communication as falling outside the definition of recommendation: - a member creates a website that is available to customers or groups of customers. the website has research pages or electronic libraries that contain research reports (which may include buy - sell recommendations from the author of the report), news, quotes, and charts that customers can obtain FINRA would generally view the following communication as falling within the definition of recommendation: - a member sends a customer - specific electronic communication (email or pop - up screen) to a targeted customer or targeted group of customers, encouraging the particular customer(s) to purchase a security

offer/offer to sell

include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value

securities issued by cooperatives

include securities issued by a nonprofit membership cooperative to members of that cooperative

securities issued by nonprofit organizations

include securities issued by religious, educational, fraternal, charitable, social, athletic, reformatory, or trade associations

securities of employee benefit plans

includes any investment contract issued by an employee stock purchase, saving, pension, or profit - sharing plan

sale

includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value the offer is the attempt, the sale is when it is successful

Uniform Securities Act of 1956 (USA)

is a model legislation that arose in an effort to unify numerous state securities laws, known as blue - sky laws to unify state laws and protect investors under this, the state Administrator has jurisdiction over securities transactions that originate in, are directed into, or are accepted in the Administrator's state - for those persons or transactions that fall within the jurisdiction of the Administrator, the Administrator has power to make rules and orders; conduct investigations and issue subpoenas; issue cease and desist orders; and deny, suspend, cancel, or revoke registrations provides both civil liabilities and criminal penalties for violating the act is not actual legislation - is a template or guide that each state uses in drafting its securities legislation

person

means any individual (sometimes known as natural), corporation, partnership, association, joint stock company, or trust where the interests of the beneficiaries are evidenced by a security, an unincorporated organizations, a government, or a political subdivision of a government

guarentee

means guaranteed as to payment of principal, interest, or dividends, but not capital gains

nonpersons

minors (anyone unable to enter into contracts under the laws of the state) deceased individuals individuals legally declared mentally incompetent

coordination

most common form of registration for those securities that are not federal covered (typically securities traded on the OTC Bulletin Board or the OTC Link) a security may be registered by coordination if a registration statement has been filed under the Securities Act of 1933 in connection with the same offering in doing this with a federal registration with state registration, issuers must supply the following records in addition to the consent to service of process: - copies of the latest form of prospectus filed under the Securities Act of 1933, if the Administrator requires it - copy of articles of incorporation and bylaws, a copy of the underwriting agreement, or a specimen copy of the security - if the Administrator requests, copies of any other information filed by the issuer under the Securities Act of 1933 - each amendment to the federal prospectus promptly after it is filed with the SEC registration by coordination becomes effective at the same time the federal registration becomes effective, provided: - no stop orders have been issued by the Administrator and no proceedings are pending against the issuer - the registration has been on file for at least the minimum number of days specified by the Administrator, a number that currently ranges from 10 to 20 days, depending on the state - a statement of the maximum and minimum offering prices and underwriting discounts have been on file for 2 business days from a practical standpoint, is the only sensible way to register a multi - state offering

Provide Consent to Service of Process

new applicants for registration must provide the Administrator of every state in which they intend to register with this it appoints the Administrator as the applicant's attorney to receive and process non - criminal securities - related complaints against the applicant under this, all legal documents (subpoenas or warrants) received by the Administrator have the same legal effect as if they had been served personally on the applicant it is submitted with the initial application and remains in force permanently it does not need to be supplied with each renewal of registration if a securities professional is registering in 6 states, the Administrator of each state must receive this

nonissuer

not directly or indirectly for the benefit of the issuer nonissuer transaction is one where the issuer does not receive the money because the seller of the security is someone other than the issuer this is your basic everyday trading on the stock markets

USA provides 2 methods for securities issues to register their securities in a state, plus a special method for certain federal covered securities:

notice filings coordination qualification

nonissuer transaction

one in which the proceeds of the sales do not go, directly or indirectly, to the entity that originally offered the securities to the public most common instance of this is everyday trading on exchanges such as the New York Stock Exchange or Nasdaq the proceeds of the sale go to the investor who sold the shares because the shares are not new, we refer to this as secondary trading or transactions between investors

fianl orders

one that ends litigation (usually) under the USA, it is when the Administrator (or a court) renders a judgement in an action (guilty or innocent) regardless of whether referring to persons, exemptions, or registration, other than in the case of a summary order, this may not be entered without: - appropriate prior notice to the interested parties - opportunity for hearing - written findings of fact and conclusions of law

Online Red Flags for Investors

promises of high returns with no risk offshore operations e-currency sites recruit friends professional websites with little to no information no written information testimonials from other group members

Limited Registration of Canadian Broker-Dealers and Agents

provided the limited registration requirements below are met, a broker dealer in Canada that has no office in this state may effect transactions in securities with or for, or attempt to induce the purchase or sale of any security by: - a person from Canada who is temporarily a resident in this state who was already a client of the broker - dealer - a person from Canada who is a resident in this state, whose transaction is in a self - directed, tax - advantaged retirement plan in Canada of which the person is the holder or contributor an agent who will be representing a Canadian broker - dealer who registers under these provisions may effect transactions in securities in this state on the same basis as permitted for the broker - dealer for the Canadian broker - dealer to register it must: - file an application in the form required by jurisdiction where it has its principal office in Canada - file a consent to service of process - provide evidence that it is registered in good standing in its home jurisdiction - be a member of an SRO or stock exchange in Canada renewal applications for Canadian broker - dealers and agents who file for limited registration must be filed before December 1st each year

Administrator

refers to the office or agency that has the complete responsibility for administering the securities laws of the state has jurisdiction over almost all securities activity that emanates from his state as well as that received in his state has jurisdiction over the registration of securities of professionals and securities has the power to make rules and issue orders he can deny, suspend, or revoke registrations

effective date

regardless of the method used, every registration statement is effective for 1 year from its effective date the registration may continue in effect past the first anniversary if there are still some unsold shares remaining, as long as they are still being offered at the original public offering price by either the issuer or the underwriter - this would rarely apply other than in a security registered by qualification a registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold if 2 conditions are met: 1. the public offering price is not changed from the amount stated in the original registration statement 2. the underwriters' discounts and commissions are not changed from the respective amounts stated in the original registration statement every person filing such an amendment shall pay a late registration fee and filing fee, calculated in the manner as the original quantity, levied against the additional securities proposed to be offered a registration statement may be amended after its effective date to change the number of shares to be offered and sold if the public offering price and underwriter's discounts and commissions are unchanged

registration by qualification

requires a registrant to supply any information required by the state securities Administrator Securities not eligible for registration by another must register by this securities that will be sold only in one state (intrastate) will be registered by this to register, an issuer must supply a consent to service of process and the following information: - name, address, form of organization, description of property, and nature of business - information on directors and officers and every owner of 10% or more of the issuers securities, and the remuneration paid to owners in the last 12 months - description of issuers' capitalization and long - term debt - estimated proceeds and the use to which the proceeds will be put - type and amount of securities offered, offering price, and selling and underwriting costs - stock options to be created in connection with the offering - copy of any prospectus, pamphlet, circular, or sales literature to be used in the offering - specimen copy of the security along with the opinion of counsel as to the legality of the security being offered - audited balance sheet current within four months of the offering with an income statement for three years before the balance sheet date Administrator may require additional information by rule or order - may require a prospectus be sent to purchasers before the sale and that newly established companies register their securities for the first time in a state by qualification becomes effective whenever the state Administrator so orders

Effecting Transactions in Exempt Securities

securities exempt from registration are called exempt securities an individual is excluded from the term agent only when that individual represents an issuer in effecting transactions for the following 5 exempt securities: 1. any security issued or guaranteed by the US, any state, any political subdivision of a state, or any agency of one or more of these or any security issued or guaranteed by Canada, any Canadian province, or any political subdivision of any such province 2. securities of foreign governments with which the US has diplomatic relationships 3. any security issued by, or guaranteed by, any bank organized under the laws of the US, or any bank, savings institution, or trust company organized and supervised under the laws of any state 4. commercial paper rated in the top 3 categories by the major rating agencies with denomincations of $50,000 or more with maturities on 9 months or less 5. investment contracts issued in connection with employee's stock purchase, savings, pensions, or profit - sharing plans an employee of an issuer is not an agent when representing an issuer if the issue is exempt from registration, as long as it is one of the five listed above the employee is not an agent when representing an issuer in exempt transactions (transactions between and issuer and an underwriter) salaried employees engaged in distributing their employers' shares as part of an employee benefit plan would not be required to register as agents because they are excluded from the definition if such employees were compensated on the basis of the number of shares sold, they would be defined as agents and therefore would be subject to register individuals representing broker - dealers in a sales capacity must register as agents whether they sell registered securities or securities exempt from registration

Categories of Federal Covered Securities

securities issued by an open - end or closed - end investment company, unit investment trust, or face amount certificate company, that is registered under the Investment Company Act of 1940 securities listed on the New York Stock Exchange, the Chicago Stock Exchange, the Nasdaq Stock Market securities offered pursuant to the provisions of Rule 506(b) or 506( c ) of Regulation D under the Securities Act of 1933 (qualifying under the private placement transaction exemption) most securities exempt from registration under the Securities Act of 1933. if the federal government says the security does not have to register, no state can overstep that important to take note that registering a security within the SEC does not automatically make it federally covered. yes, that is true of investment companies and those securities listed on the exchanges and Nasdaq, but there are thousands of stocks registered with the SEC that trade on the OTC Bulletin Board or the OTC Link, formerly known as the Pink Sheets, and they are not federal covered. furthermore, a security does not have to be registered with the SEC to be included in the definition of federal covered security. for example, US government and municipal securities are federal covered securities and are exempt from registration with the SEC although investment company securities are federal covered securities, the Uniform Securities Act allows states to impose filing fees on them under a process called notice filing

insurance company securities

securities issued, insured, or guaranteed by an insurance company authorized to do business in the state refer to stocks or bonds issued by insurance companies, not the variable life policies and variable annuities sold by the companies

Payment of Initial and Renewal Filing Fees

states require filing fees for initial applications as well as for renewal applications if an application is withdrawn or denied, the Administrator is entitled to retain a portion of the fee the renewal date for all registrations is December 31st, and there is no proration of fees - if someone registers in November, they still have to register on December 31st (the first year is always the shortest)

Financial Requirements of Broker - Dealers

the Administrator may establish net capital requirements for broker - dealers think of net capital as the broker - dealer's liquid net worth net capital requirements of the states may not exceed exceed those required by federal law, in this case, the Securities Exchange Act of 1934 the Administrator of a state may, however, require those broker - dealers that have custody of, or discretionary authority over, clients' funds or securities to post surety bonds the amount of surety bonds required by the states is limited to the amount set by the Securities Exchange Act of 1934 no bond may be required of any broker - dealer whose net capital exceeds the amount required by the Administrator when it comes to broker - dealers, regardless of how many states in which they are registered, other than enforcing anti - fraud statutes, the Administrator has relinquished most control to the SEC broker - dealers who meet the SEC's net capital or bonding requirements cannot be required to meet higher ones in any state in which they do business in lieu of surety bonds, the Administrator will accept deposits of cash or securities

security under the USA

the USA applies only to those financial instruments that are securities The US Supreme Court, in the Howey decision, defined that for an instrument to be a security it must constitute: 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 an investor the Howey decision sounds very much like it is describing a mutual fund or other pooled investment vehicles

notice filing

the USA gives the Administrator the authority to require these with respect to feral covered securities, generally investment companies registered with the SEC under the Investment Company Act of 1940 it is an opportunity for the state to collect revenue in the form of filing fees because the Administrator has limited powers to review and documentation filed with his department the fees are generally lower than for the two forms of registration state Administrators may require the issuer of certain federal covered securities to file the following documents as a condition for sale of their securities in the state: - documents filed along with their registration statements filed with the SEC - documents filed as amendments to the initial federal registration statement - a report as to the value of such securities offered in the state - consent to service of process even though an issuer of a federal covered security (think about a Fortune 500 company listed on the NYSE) may not have to notice file, that does not mean that the company can make misrepresentations during an offer made in any state. To do so would violate the antifraud provisions of the USA

Self - Regulatory Organization (SRO)

the most prominent of these is the Financial Industry Regulatory Authority (FINRA), but there are others such as the Municipal Securities Rulemaking Board (MSRB), the Chicago Board of Options Exchange (CBOE), and the Investment Industry Regulatory Organization (IIRO) of Canada

Blue Sky Laws

the nickname for state regulations governing the securities industry common term used to refer to state securities laws the term was coined in 1911 by a Kansas Supreme Court justice who wanted regulation to protect against "speculative schemes that have no more basis than so many feet of blue sky"

financial requirements of an agent

there are no financial requirements, or net worth requirements, to register as an agent the Administrator may, however, require an agent to be bonded, particularly if the agent has discretion over a client's account

using the internet

there are several requirements to insure that the person is not deemed to be in the state. 1. the communication clearly states that the person may only do business in this state if properly registered or exempt from registration 2. any follow - up individualized responses with prospects in this state that involve either the effecting or attempting to effect transaction securities, or the rendering of personalized investment advice for compensation, as may be, will not be made without compliance with state broker - dealer, investment advisor, agent or IA representative registration requirements, or an applicable exemption or exclusion 3. the site may only make available general information, not specific advice or recommendations 4. in the case of an agent or IAR: - the affiliation with the broker - dealer or investment advisor of teh agent or IAR is prominently disclosed within the communication - the broker - dealer or investment advisor with whom the agent or IAR is associated retains responsibility for reviewing and approving the content of any interest communication by an agent or IAR - the broker - dealer or investment advisor with whom the agent or IAR is associated first authorizes the distribution of information on the particular products and services through the internet communication - in disseminating information through the internet communication, the agent or IAR acts within the scope of authority granted by the broker - dealer or investment advisor what that basically means is that if you just generally advertise on the internet, you don't have to be registered in the state. BUT, if you follow - up with advice (IAR) or offering securities (agent), you either have to register or find some kind of exemption

public utility securities

these include any security issued or guaranteed by a public utility or public utility holding company, or an equipment trust certificate issued by a railroad or other common carrier regulated in respect to rates by federal or state authority; or regulated in respect to issuance or guarantee of the security by a governmental authority of the US, any state, Canada, or any Canadian province

foreign government securities

these include securities issued, insured, or guaranteed by a foreign government with which the United States maintains diplomatic regulations. However, unlike US or Canadian issues, political subdivisions are not included (unless guaranteed by the sovereign government)

US and Canadian government and municipal securities

these include securities issued, insured, or guaranteed by the United States or Canada, by a state or province, or by their political subdivisions

Depository Institutions

these include securities that are issued, guaranteed by, or are a direct obligation of a depository institute. the USA divides them into the following categories: 1. any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the US, or any bank, savings institution, or trust company organized and supervised under the laws of any state 2. any security issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this state 3. any security issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state for categories 2 and 3 if the institution is not federally chartered, then it must be authorized to do business in the state

no place of business in the state

this exclusion relates to the location of the broker - dealer's place of business states exclude from the definition of broker - dealer those broker - dealers that: - have no place of business in the state and deal exclusively with the issuers of the security involved in the transactions, other broker - dealers, and other financial institutions, such as banks, savings and loan associations, trust companies, insurance companies, investment companies, or employee benefit plans with assets of not less than $1 million - have no place of business in the state, but are licensed in a state where they have a place of business, and offer and sell securities in the state only with persons in the state who are existing customers and who are not residents of the state. this is sometimes referred to as the snowbird exemption and applies as well to agents, investment advisers, and investment advisor representatives

National Securities Markets Improvement Act of 1996 (NSMIA)

this law effectively divided the responsibility for regulating investment advisors between the states and the SEC by creating the category of registration known as the federal covered advisor also created the term federal covered security

broker - dealer registration requirements

under the USA, if a person is included in the definition of a broker - dealer, that person must register as a broker - dealer in the states where it does business in most jurisdictions, registration is accomplished by filing the SEC's Form BD modified to meet the needs of the state at the time of registration of a broker - dealer, any partner, officer, or director of the broker - dealer whose activities in the broker - dealer's securities business require registration as an agent is automatically registered as an agent of the broker - dealer - means that when a new broker - dealer is organized or an existing broker -dealer registers in a state for the first time, these individuals submit information on the BD's application that enables the Administrator to determine their eligibility for registration so a separate application does not have to be filed unlike FINRA, there is not separate principal registration category for those in supervisory positions - they are all agents

exempt transaction

under the USA, this is one in which the nature of the sale is such that registration with the Administrator and filing of advertising material is net required in order for that transaction to take place

Effectiveness of Registration

unless a legal proceeding is instituted or the applicant is notified that the application is incomplete, the license of a broker - dealer, agent, investment advisor, or investment advisor representative becomes effective at noon, 30 days after the later of the date an application for licensing is filed and is complete or the date an amendment to an application is filed and is complete an application is complete when the applicant has furnished information responsive to each applicable item of the application by rule or by order, the Administrator may authorize an earlier effective date of licensing - a person could be the subject of a rush order a request to withdraw registration also becomes effective on the 30th day after submission - Administrator has the power to shorten that period, in effect permitting a rush order should there be any legal proceedings in progress, the withdrawal will be held up until resolution of the issue once withdrawal has taken place, the Administrator has jurisdiction of the former registrant for a period of one year although successful completion of the Series 65 exam may satisfy a portion of the requirements of a particular state, it does not convey the right to transact business prior to being granted a license or registration by that state while registration as an agent (or IAR) is pending, the individual may not take part in any activity that would require registration - clerical work or assisting internally with research would be permitted

cease and desist order

used by the Administrator whenever it appears that any registered person has engaged or is about to engage in any act or practice constituting a violation of any provision of this act or any rule or order hereunder Administrator may issue this, with or without a prior hearing against the person or persons engaged in the prohibited activities, directing them to stop from further illegal activity this only applies to registered persons, not securities

registrant

used in legal circles to refer to those securities professionals (BDs, IAs, agents, and IARs), or securities issuers, who are in the process of, or who have registered with the Administrator

stop order

used to deny effectiveness to, or suspend or revoke the effectiveness of, any registration statement this applies only to securities, not professionals such as broker - dealers, agents, investment advisors and investment advisor representatives

ponzi scam

when scam artists frequently pay out high returns to early investors using money from later arrivals

institution

would include banks, trust companies, savings and loan associations, insurance companies, investment companies, employee benefit plans with assets of not less than one million dollars, and governmental agencies or instrumentalities included in the term persons Act generally affords less protection to these investors owing to their supposed greater investment sophistication