Series 63 Flash Cards

3: Limitations on an Administrator's powers.

1. An Administrator can compel the testimony of witnesses when conducting an investigation. 2. Investigation of serious violations need not be held in public. An Administrator in Illinois may enforce subpoenas from South Carolina whether the violation occurred in Illinois or not. 3. Conviction for any felony within the past 10 years is one of a number of reasons the Administrator has for denying a license. However, upon notice of the denial, a written request may be made for a hearing. That request must be honored within 15 days.

1.3.2: Excluded from the definition of an Investment Adviser

1. Federal covered firms 2. Banks 3. BDs and their agents

3: Administrator's discretion in considering applications for registration.

1. The Administrator may determine that an applicant, in his initial application for registration as an investment adviser, is not qualified to act as an adviser and thus may limit the registration to that of a broker-dealer. 2. The Administrator can also take into consideration whether the registrant will work under the supervision of a registered investment adviser or broker- dealer when approving an application. 3. The Administrator can deny, suspend, or revoke a registration for many reasons, but they must be in the interest of the public. 4. The Administrator may not deny the registration simply because it is prudent. 5. Lack of experience in itself is insufficient reason for denial.

3: Administrator powers

1. The Administrator may issue a cease and desist order without a hearing. 2. Does not have the authority to sentence violators of the USA. 3. The Administrator may not suspend a security's registration upon discovering, in subsequent years, that an officer of the firm has been convicted of a nonsecurities-related crime, as long as it is a misdemeanor. Had it been any felony, then suspension of the issue's registration is a possibility.

3: An Administrator may summarily suspend a regis- tration pending final determination of proceedings under the USA. However, the Administrator may not enter a final order without:

1. appropriate prior notice to the applicant as well as the employer or prospective employer of the applicant; 2. opportunity for a hearing; 3. findings of fact and conclusions of law.

3.3: A client who purchased a security in violation of the USA may recover:

1. the original purchase price; 2. costs involved in filing a lawsuit; 3. interest at a rate stated by the Administrator; 4. less any earnings already received on the investment.

1.6: How quickly must a BD file notice of changes of info on file?

A broker-dealer must promptly file a notice of any changes to the registration information on file with the Administrator. (there is no current USA definition of promptly)

1.6: Consent to service of process - when filed?

A consent to service of process is filed with the initial application and permanently remains on file with the Administrator.

1.3.3: A person who conducts business exclusively with banks and savings institutions is...

A person who conducts business exclusively with banks and savings institutions is a broker-dealer under the USA if he has a place of business in the state.

2: Primary transactions.

A primary transaction is one in which the issuer of the securities receives the proceeds of the sale. Other transactions are called nonissuer transactions.

3: A registered person has up to X days to appeal any order issued against him by the state Administrator.

A registered person has up to 60 days to appeal any order issued against him by the state Administrator.

2.3.2: Fiduciary transactions - exempt?

Among the list of exempt transactions are those made by fiduciaries, including trustees in bankruptcy, but not other trustees. Therefore, this is a nonexempt transaction. The fact that this is an IAR who is the trustee has no bearing on the question

4: Can an adviser sell securities to clients from its own account?

An adviser may sell securities to clients from its own account provided disclosure is made as well as receipt of consent from the client before completion of the trade.

3.3.3: Rights of an agent subject to an Administrator's final order.

An agent subject to a final order of an Administrator has the right to have the order reviewed by an appropriate court in the state. If the court finds that the circumstances warrant such action, additional evidence may be submitted by any party to the case. An agent subject to an order must file for a judicial review of the Administrator's final order within 60 days.

4: Investment Adviser compensation may be based on...

An investment adviser may not be compensated on the basis of capital gains in the client's account. Compensation may be based on a percentage rate of the average assets taken over a certain period.

3.1.1: The offer to sell a security - examples.

An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell.

2.3.1: Exempt issuers

Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign national governments with which the U.S. has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-registered investment companies are issuers of federal covered securities, not required to register, but are not included in the USA's listing of exempt issuers.

1.6: Net worth requirement for an investment adviser maintaining custody of customer funds or securities.

At least $35,000 regardless of whether or not the firm exercises discretion.

2.3.2: An executor of an estate sells 1,000 shares of RMBN stock through a broker-dealer registered in this state. Although the issuer of the stock is required to register the security with the Administrator, it has not yet completed the registration process. The transaction above is best described as a(n)...

Because the security is sold by an executor acting in a fiduciary capacity, an exempt transaction occurred. However, the corporate security is ultimately required to be registered. The security is an unregistered, nonexempt security in the process of registration.

2: Method of state registration in an offering of a security in more than one state.

Because this offering is being made in more than one state, SEC registration is necessary; the state registration method would be coordination, which is the simultaneous registration of a security with both the SEC and the states.

1.2: Commercial bank.

Commercial banks are included in that group of issuers of exempt securities whose individuals representing them in the sale of their securities are excluded.

1.6.3: Unless renewed, registrations of associated persons of a broker-dealer under the Uniform Securities Act expire...

Every December 31t unless they are renewed.

2.3.2: Examples of exempt transactions.

Exempt: Exempt transactions are most often identified by whom the transaction is with rather than by what type of security is involved. 1. A client calling to purchase stock is an unsolicited transaction (even if thinly traded OTC stock), probably the most common of the exempt transactions. 2. Any sale to an institutional client is an exempt transaction while those to individuals, unless unsolicited, generally are not. 3. Transactions between brokers and issuers, transactions between banks, and transactions between banks and insurance companies are exempt because they are transactions between financial institutions. 4. Transactions by fiduciaries, such as a trustee in a bankruptcy reorganization, are exempt from registration. 5. An offer of a securities investment to 10 or fewer individuals (called a private placement) is also exempt from registration Non-exempt: 1. Even though the NYSE listed stock (a federal covered security) is exempt, the transaction is not. 2. Engaging in nonissuer transactions on a regular basis is not exempt from registration. That exemption is granted only in the case of isolated transactions, the opposite of regular. 3. Offers of preorganization certificates are not exempt when commissions are charged.

2.2.2.1: Federal covered securities (securities listed on national stock exchanges, Nasdaq Stock Market or investment companies registered under the Investment Company Act).

Federal covered securities (securities listed on national stock exchanges, Nasdaq Stock Market or investment companies registered under the Investment Company Act) are exempt from state registration. A notice filing may be required along with a payment of fees based on a schedule set forth by the Administrator.

2: federal covered security

Federal covered security specifically applies to any security listed on a major stock exchange or the Nasdaq Stock Market.

1.4: When is state registration required for an IAR employed by a state covered Investment Advisor?

Had this been an IAR with a state registered adviser, registration in all of the states where he/she has retail clients. The de minimis only applies if there is no place of business in a state.

1.6.1: Notification re. termination.

IAR: When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. Agent of a BD: However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required.

1.3.3: De minimis exception.

If an adviser has no more than 5 retail clients who are residents of the state during the year, the adviser does not have to register with the state. This is the de minimis exemption; advisers with no place of business in this state must register if they have more than 5 noninstitutional clients in the state.

4: If the firm is structured as a corporation, pledging a controlling interest in the company's stock

If the firm is structured as a corporation, pledging a controlling interest in the company's stock is viewed as an assignment of the contracts. This may not be done without the approval of the clients.

1.6: Registration requirement for Canadian BDs doing business with Canadian customers who are temporarily in any state(s).

In order to do business with their Canadian customers who are temporarily in any state(s), Canadian broker-dealers (and their agents) must obtain a form of limited registration.

1.4.1: Registration requirements of IARs working for federal covered IAs

Individuals with a place of business in a state, managing client assets while employed by federal covered investment advisers, must register as investment adviser representatives in that state (or any others in which they, the IAR, maintain a place of business). Registration will generally involve paying the registration fees. Because this individual is already registered in State A, it is not necessary to pass another exam to become registered in another state.​ It is the investment adviser who ​may be required to notice file with the Administrator.

1.3.2. IARs are excluded from the definition of

Investment Adviser.

4: Is it permissible to sell unregistered non- exempt securities?

It is permissible to sell unregistered non- exempt securities to an institutional buyer, such as an investment company, because that would be an exempt transaction.

1.6.1: If an investment adviser representative of a federal covered adviser who is registered in a specific state terminates employment with that investment adviser,

It is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered.

4: OK to solicit unregistered nonexempt securities?

It is unlawful to solicit unregistered nonexempt securities.

4.2.6: Margin agreement.

Margin agreements must be obtained promptly after the initial margin trade in the account.

2: Certain security exemptions may never be revoked by the Administrator.

Most important among these exemptions are governments, municipals, insurance companies, and banks. The Administrator can revoke the exemption of a security issued by a specific nonprofit entity. The Administrator can also revoke the exemption of any exempt transaction except one involving a federal covered security.

1.6: Requirements for the registration of a successor firm.

No filing fee is necessary. Not required that the successor firm be in existence at the time of filing. The registration is effective for the unexpired portion of the year and then must be renewed (with a renewal fee) each December 31.

1.2.2.3: Is there a de minimis exception for BDs and agents?

No. Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state that is the domicile of a client placing an order (unless the agent is representing a broker-dealer who is exempt from registering in that state). One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside. Remember, there is no de minimis exemption for BDs and agents as there is for IAs and IARs.

4: is it permissible to borrow money or securities from other than a bank or broker-dealer in the business of lending?

Not permissible to borrow money or securities from other than a bank or broker-dealer in the business of lending.

2.3.1: Canadian corporate security exempt?

Securities issued by Canadian governmental entities, such as the federal government or the provincial governments and their municipalities, are exempt from registration under the USA in the same fashion as US government and municipal securities. However, Canadian corporate issuers do not enjoy an exemption unless qualifying under special conditions, such as being listed on the NYSE or Nasdaq and, therefore, are a federal covered security.

3.2.3: Consequences of IA being found guilty of fraud.

The Administrator may appoint a receiver over the investment adviser's assets and require the IA to make restitution to the victim. The maximum fine for a violation of the USA is $5,000 and the maximum prison term is 3 years.

2: Under the Uniform Securities Act, the Adminis- trator may require an agent to present the prospectus for a new issue to the offeree

The Administrator may require that a prospectus be sent or given to each person to whom an offer is made before the sale of the security.

1.3.2.1:The National Securities Markets Improvement Act (1996).

The NSMIA defined the term "federal covered adviser" (sometimes just shown as covered adviser on the exam), referring to advisers who must register with the SEC or who are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. Fraud is a legal concept which is prohibited by the Uniform Securities Act. Selling securities in interstate commerce is not fraudulent provided the antifraud provisions securities laws are observed. The roots of a national market system began with the Securities Amendments Act of 1975.

4.2.14: "Guaranteed"

The USA defines the term guaranteed as meaning guaranteed as to payment of principal, interest, or dividend

2.3: Examples of exempt securities.

The USA exempts from registration a number of different issues, including: 1. securities issued by a bank or anything that resembles a bank (a savings and loan or a credit union). 2. Securities issued by a governmental unit are always exempt. 3. Securities listed on the Chicago Stock Exchange are part of a group known as federal covered securities that also includes securities listed on the New York Stock Exchange and Nasdaq Stock Market issues. 4. securities issued by a recognized foreign government (particularly Canadian securities). 5. securities issued by religious and other nonprofit organizations, and federal covered securities.

4: principal or agency transaction

The act prohibits an investment adviser from effecting transactions as a principal with his clients or as an agent for his clients, unless his clients receive full written disclosure as to the capacity in which the adviser proposes to act and consent to do so before the completion (settlement) of the proposed transaction.

1.6.3: BD registration renewals.

The consent to service of process is filed with the initial application for registration and becomes a permanent part of the registrant's file. (Not required for the renewal.) The USA states that all registrations of persons expire on December 31 unless renewed, withdrawn, or canceled.

2.1: Not securities under the USA.

The following six items are not securities under the act: 1. An insurance or endowment policy or annuity contract under which an insurance com- pany 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"). 2. Interest in a retirement plan, such as an IRA or Keogh plan. 3. Collectibles. 4. Commodities such as precious metals and grains or futures contracts for commodities. 5. Condominiums used as personal residences. 6. Currency.

2.3.2: The sale of municipal bonds to retail (another term for "noninstitutional") customers - an exempt transaction?

The sale of muni bonds to retail customers is not an exempt transaction, although the bond itself is an exempt security. Exempt transactions include those between an issuer and an underwriter, transactions with a trust company or savings institution, private placements, and transactions for employees of an issuer where no compensation is paid for solicitation. In an exempt transaction, the exemption generally occurs because of the persons involved in the trade or the way in which it is made, not the type of security involved.

1.6.4: If Brokers, Inc., a broker-dealer registered in this state, refuses to comply with the Administrator's order to retain records for two years longer than required by the Securities Exchange Act of 1934,

The securities Administrator is in violation of the National Securities Markets Improvement Act of 1996 (NSMIA), which prohibits state securities regulators from establishing requirements in excess of those required by the Securities Exchange Act of 1934.

3.1.1.1: Gifts an offer?

The term "offer" includes an attempt to dispose of securities for value, or a solicitation of an offer to buy a security. Gifts, whether legal or not, are not considered an offer.

1.2.2.3: When does an agent need to register in a state if soliciting business?

Typically, an agent, when representing the broker-dealer to solicit securities transactions, must register in every state where business is conducted, even if the securities or the transaction is exempt.

1.6: In which state must an investment advisor meet recordkeeping and net worth requirements?

Under the Uniform Securities Act, a state registered investment adviser is required to meet the net worth and recordkeeping requirements of the state in which its principal office is located regardless of the requirements of any other state where it is also registered.

1.1.4: "Person."

Under the Uniform Securities Act, the term "person" has a specific meaning. "Person" refers to an individual, corporation, association, joint-stock company, trust, unincorporated organization, government, or political subdivision of a government. A minor child, is not a person legally capable of entering into contracts. Adults must open custodial accounts on behalf of minor children.

1.2.2.3.3: An individual may NOT act as an agent for more than one broker-dealer...

Unless the administrator, by rule or by order, authorizes such employment.

1.4: When is state registration required for an IAR employed by a federal covered Investment Advisor?

When employed by a federal covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state.

2.3: Is a solicited sale of a security issued by a foreign government with which we have diplomatic relations an exempt transaction?

While a security issued by a foreign government with which we have diplomatic relations is an exempt security, a solicited sale by an agent to an individual client is not an exempt transaction.

3.3: The right of rescission must be accepted or rejected within...

Within 30 days of receipt of the letter of rescission.

2.3.1: Are securities issued by regulated public utilities exempt securities?

Yes.