Series 66 Unit 1 Fed Sec Reg
Three Point Test that you are an Investment Adviser
1) Provide investment advice, or reports or analysis with respect to securities 2)You are in the business of providing Advice or Analysis 3)You receive compensation directly or indirectly
Monitoring manipulative and deceptive trades
Accurate recording of orders and subsequent trades is on way to the regulators monitor for attempts to manipulate the market
Underwriter
Any person who has purchased from an issuer with a view to selling
All of the following are exempt from registration under the Securities Act of 1933 except: A) an intrastate offering B) Reg A offering C) US Gov't security D) An interstate offering of preferred stock
D) An interstate offering of preferred stock
Short Swing Profit
Defined as gains made when both the purchase and sale take place within a 6 months period.
Prospectus
'33 Act requires the preparation of a shorter document from the registration statement. Purpose is to provide the investor with adequate info to analyze the investment merits of the security.
What is on an order ticket?
-the account number -solicited, unsolicited or discretionary -if a sale, whether long or short -if a bond, aggregate par value -TIME STAMP showing the time the order was entered This is the customer's written record of the trade
Investment Discretion
A person exerises this with respect to an account if, directly or indirectly, that person is authorized to determine: -which securities will be purchased or sold by or for the account -the amount of the securities to be bought or sold for the account -whether the transaction will be a purchase or a sale It does not include the decision as to the time or price of a particular transaction
Federal Covered Investment Adviser
A person registered under the Investment Advisers Act of 1940...must be registered with the SEC. Those who are not federally covered must registered in the state in which business is done.
Answer: B Closed-end company shares trading in the secondary market are not new securities, so they are not required to be sold with a prospectus. However, a prospectus must be used in an INITIAL offering of closed-end company shares. All open-end company shares must be sold with a prospectus because they are considered CONTINUOUS PRIMARY OFFERINGS.
All of the following must be sold with prospectus EXCEPT: A) a primary offering of a closed-end fund. B) a closed-end fund in the secondary market. C) an open-end common stock fund. D) an open-end U.S. government bond fund.
Quick Quiz- A man owns 15% of the stock of a company and wife owns 5%. If she wishes to sell some of the stock she owns, which is true?
Both are considered affliates, his 15% ownership is control. Her 5% is not BUT the fact that she is the spouse of an affliate makes her one, causing this to be a sale of a CONTROL stock. All sales of control stock must be accompanied by RULE 144 filing
Prospectus
Is any notice, circular, advertisement, letter or communication, written or broadcast by radio or television that offers a security for sale or confirms the sale of a security
Shareholder Reports
Must be mailed at least semi-annually, including -a balance sheet -an income statement -listing of the amounts and values of securities owned -statement of renumeration paid by the investment company
Federal Reserve Board
The SEC has jurisdiction over all of the following EXCEPT: A) the Federal Reserve System. B) the MSRB. C) the stock exchanges and broker/dealers. D) FINRA.
Breakpoints
This is the quantity level stated in the prospectus at which the investors recieve the reduction in load. Are available to Any family unit may combine purchases in as many accounts as it wishes to reach the breakpoint for reduced sales charges. If an employee of the fund (receptionist) purchases for his own account, the sales charge is usually eliminated altogether. A purchase made for a group such as an investment club or multiple clients with no common purpose other than investment, is not eligible for a reduction.
Example of Sale
Your client exercises his conversion privilege by converting 10 IBM BONDS into 100 shares of IBM common stock. OR A brokerage firm runs a special promotion this month giving 100 shares of HOT SHOT Growth Fund to any client who purchases at least $5000 worth of stock. (EXERCISE OF A RIGHT, WARRANT OR OTHER CONVERTIBLE PRIVILEGE IS CONSIDERED TO BE A SALE AT THAT TIME, AS IS ANY SECURITY GIVEN AS A BONUS FOR THE PURCHASE OF ANOTHER SECURITY.
The Securities Act of 1933 covers which of the following? (multiple) a) The sale of of new issues to the public b) Sending deficiency letters c) Insider Trading d) Trading on national securities exchanges
a) The sale of of new issues to the public b) Sending deficiency letters Insider Trading is covered under the Insider Trading act of 1988 SEC Act of 1934 deals with securities exchanges
Passive Investor
any person who can certify that they did not purchase or do not hold the securities for the purpose of changing or influencing control over the issuer and hold no more than 20% of the issuer's securities. (Schedule G filing)
Investment Company Act of 1940
-An objective is to ensure that the individual investing in an investment company is fully informed as to company affairs and fairly treated by it's management -Also permits a reduction in sales charge when reaching a breakpoint for purchasers meeting the definition of any person (any individual, spouse and dependent children under the age of 21 purchasing in one or more accounts,////any legit entity purchasing for it's own account as long it wasn't formed for the purpose of making this purchase///trustee purchasing on behalf of a qualified employee benefit plan, ie pension or profit sharing
Not considered Investment Companies
-B/D and U/W -Banks and savings and loans -insurance companies -holding companies -issuers whose securities are benefically owned by no more than 100 persons -issuers who trade in investments other than securities
Powers of the SEC
-Can issue a STOP ORDER (Cease and desist order) if reg statement is inadequate or not complete in a material way -make, amend and resecind rules -administer oaths -subpoena witness' and other records for evidence -seek injunctions or restraining orders -turn over evidence to the attorney general of US for possible criminal prosecution.
Three Exemptions under Uniformed Securities Act vs Securities Act of '33
-Foreign gov't securities are not exempt under '33 Act but are exempt under the Uniform Securities Act -Federal covered securities listed on a national exchange or Nasdaq are not exempt under the '33 Act but are exempt under the US Act (blue-chip exemption) -Securities issued by insurance companies are not exempt under the '33 Act but are exempt under the US Act
Registration Statement
-Must be filed in TRIPLICATE -must be signed by Prinicpal Financial Officer, Principal Executive Officer and Majority of BOD The information required: -Purpose of issue -POP (anticipated range) -U/W commission or discounts -Promotion exepense -Use of proceeds -Balance Sheet -Earning Statements for the last THREE years -Names and BIO's of 10% of owning outstanding stock (control persons) -Copy of U/W agreements -Copies of articles of incorporation
Equity Security as defined in the Act of '33 and Uniformed Securities Act
-security convertible into stock (converitible bond) -any security with a warrant or right attached to subscribe to or buy stock (a bond with warrants attached) -any warrant or right to purchase stock
12b-1 statements
-the plan must be initially approved by a majority of the fund's shareholders -the plan must be renewed by a majority of the fund's director's -The plan may be terminated by a vote of the majority of shareholders or a majority of the BOD WHO ARE NON-INTERESTED directors of the fund -the rule only applies to open-end investment companies
Rule 144 (Restricted and Control Securities)
1) An employee benefit plan with assets in excess of $2 million---($5 MILLION) 2)Purchases of securities by accredited investors do not count toward the 35-investor limitation found in Rule 506 of REG D (yup) 3)An officer, director or greater than 10% shareholder of ANY company listed on the NYSE would be considered an accredited investor for purposes of acquiring a private placement your firm is selling. (Not ANY company but the issuer's security being offered)
Management companies are subclassified into Diversified and Nondiversified
A Diversified Company -any mgmt company for which at least 75% of the value of it's TOTAL assets is invested so that the securities of any one issuer are not greater than 5% of the total assets and no more than 10% of the outstanding VOTING securities of any issuer. The other 25% can be invested in any other fashion Nondiversified company is a company not diversified
Control Person, Insider or Affiliate
A corp director, officer, or owner of more than 10% voting stock of the company OR the immediate family (SPOUSE) of any of these persons. Loosely referred to as INSIDERS or AFFLIATES. Control stock is held by a control person.
Securities Amendments Act of 1975
Act amended some parts of SEC Act of 1934 and Securities Act of 1933. Main purpose of the act was to remove any barriers to competition in the securities industry. As amended by the act of 1975, registration with the SEC would be required of: - a B/D whose business is strictly municipal securities - a B/D whose business is strictly in non-Nasdaq over the counter securities
Answer: C Securities sold under Regulation D of the Securities Act of 1933 are private placements and, under the NSMIA, are considered federal covered securities.
An issuer properly files Form D in accordance with Rule 503 of Regulation D of the Securities Act of 1933. As such, the securities that are the subject of any transaction are: A) available only to institutional purchasers. B) required to register with the SEC. C) federal covered securities. D) required to register with the state(s) in which they are sold.
Which of the following would be a considered INVESTMENT COMPANIES under the Act of 1940. a) Face-amount certificate company b)Unit investment trust c)Managment company d)Holding company e)Insurance Company
Answer is : a) Face-amount certificate company b)Unit investment trust (Municipal bond trust) an investment company that does not have a BOD, unmanaged porfolio and issues redeemable securities, each of which represents an undivided interest in a unit of specified securities c)Managment company- (managed by advisers with a fee generally based on the amount of assets under management Holding companies and insurance companies are specficially excluded from the definition of an investment company.
Contemporaneous Trading
Any person who purchased or sold a security while in possession of material, nonpublic information shall be liable in an action in any court. -Limitations of liability---total amount of damages will not exceed the profit gained or loss avoided in the transactions -Statute of limitations--No action maybe brought under this section more than 5 years after the date of the last transaction of the violation
Sale or Sell
Any security given or delivered with, or as a bonus on account of, any purchase of securities is presumed to constitute a part of that purchase and to have been offered and sold for value. pg 5
Security - Fundamental definition set by the Howey Case
Defined an investment contract as a security if it met these four conditions: -The investment of money; -in a common enterprise (pooling); -with an exception of profits; and -that results solely from the efforts of others.
A) I, II and IV
For an issue to meet the exemptive requirements of Rule 147 of the Securities Act of 1933: 80% of the assets of the issuer must be within the state of issuance. 80% of the proceeds of the offering will be used within the state of issuance. 80% of the purchasers of the offering must be residents of the state of issuance. 80% of the revenue of the issuer must be derived from operations in the state of issuance. A) I, II and IV. B) II and IV. C) I, II and III. D) I, II, III and IV.
Answer: A An individual is not an accredited investor solely by virtue of being an IAR. If that person had the net worth or income specified in the Rule, OK, but just being in the business does not qualify someone
For purposes of the definition found in Rule 501 of Regulation D of the Securities Act of 1933, the term accredited investor would NOT apply to: A) an investment adviser representative. B) an investment company registered under the Investment Company Act of 1940. C) a large employee benefit plan. D) an officer of the company involved in the underwriting.
Answer: C Registered investment companies are similar to other publicly registered entities in that an annual audited report must be filed with the SEC.
How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940? A) Semiannually. B) Quarterly. C) Annually. D) Monthly.
Copy of the Prospectus must be...
If SEC, finds that adequate information with respect to the issuer is available and it is in the public interest to do so.
60%
In general, the investment companies cannot have a BOD that consists of more than his percentage of persons who meet the definition of interested persons of the investment company.
Prohibited Activities of Investment Companies
Investment Act of 1940 prohibits registered investment companies from engaging in any of the following practices: -selling short or purchasing securities for the company's portfolio on margin -owning more than 3% of the shares of another investment company -opening a joint account with another investment company
Unlawful Transactions of Certain Affiliated Persons and Underwriters
It is unlawful for any affiliated person of, or principal and underwriter for, a registered investment company to: -Knowingly sell any security to that investment company unless it is a sale only of shares issued by that company itself -borrow money or any other property from the fund -Knowingly purchase from that investment company any security other than the fund's shares! A broker/dealer purchase some securities directly from IBM's portfolio (violation!!) However a broker/dealer purchases for it's investment account, 500 shares of IBM Mutual Fund (acceptable)
Form D
Must be filed no later than 15 days after the first sale of securities in the offering. The SEC form requires to be filed when engaging in a Reg D private placement. Requires: -total size of the offering -amount sold to date, -the use of proceeds, -and the names of any persons paid commisions Under Act of '33 securities issued in reliance on REG D are FEDERAL COVERED securities.
Management Companies are divided into Open-End and Close-End companies
Open-End Company -mgmt company that is offering for sale, or has outstanding, any redeemable security of which it is the issuer. -synonymous with mutual fund -The Redemption price is the net asset value, calculated every business day as of the close of the market. -Purchases of mutual funds are ALWAYS at NET ASSET VALUE pluse a SALES CHARGE -Redemeptions are made at the next computed NAV, MINUS the Redemption Charge, and must be made within 7 days of reciept -NO SECONDARY TRADING (no OTC) Just Primary issues. Close End Company -any mgmt company other than an open-end company -generally have one-time offering of shares -DO NOT REDEEM their outstanding shares -Pricing based on Supply and Demand -Selling at a price above the NAV is to be selling at a premium, below is selling at a discount -Trade in the secondary market and OTC
REG D (Private Placements)
SEC adopted REG D aimed at capital formation needs of small businesses. RULE 506 provides an exemption for offers and sales to no more than 35 purchasers, (accredited investors do not count towards that limit) Remember to remain exempt...the law prohibits any general solicitation or general advertising
Covers the sale of new issues to the public and sending deficiency letters
Securities Act of 1933
Answer: B In the federal regulations, the statute of limitations for a civil action is the sooner of one year after discovery or three years after the action. Under the USA, it is the sooner of two years after discovery or three years after the action.
Under federal law, the statute of limitations for civil liability is: A) two years after the action. B) one year after discovery or three years after the action, whichever is sooner. C) two years after discovery or three years after the action, whichever is sooner. D) one year after discovery of the action.
Answer: C A prospectus is a communication made in writing or by radio or TV that offers a security for sale. An oral offer would therefore not be a prospectus. Tombstone advertisements are specifically excluded from the definition of prospectus. If such a letter were not preceded or accompanied by an official prospectus that contained all the required information, the sender of the letter would have violated the Securities Act of 1933.
Under the Securities Act of 1933, the definition of a prospectus includes: an offer of a security made orally. a tombstone advertisement for a security. an offer of a security made in a personal letter. A) I and III. B) I, II and III. C) III only. D) II and III.
Answer: A As under most other securities acts, a person can be almost any entity, including a corporation, partnership, unincorporated association, subdivision of a government, trust that issues shares of ownership (like a unit investment trust), or individual. However a person is not a child, an incompetent adult
Under the Securities Act of 1933, the term "person" could refer to which of the following? A subdivision of a government. An unincorporated amateur athletic club. A nonprofit, charitable corporation
Answer: A Bank holding company securities are not exempt from registration requirements under the Securities Act of 1933. Treasury securities, agency securities (such as GNMA-pass through certificates), and municipal securities (such as revenue bonds) are exempt from registration requirements under the act.
Under the Securities Act of 1933, which of the following securities is required to register with the SEC? A) Debentures of First Newtown Bank Holding Corporation. B) Tupelo Mississippi Bridge revenue bonds. C) 5-year Treasury notes. D) GNMA pass-through certificates
D The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.
What is the purpose of the Securities Exchange Act of 1934? A) It provides requirements relating to new issues. B) It provides policies relating to unethical business practices. C) It provides standards among the states. D) It regulates the persons involved in the secondary market.
C An interested person is defined as someone in a control relationship with the fund or someone who owns 5% or more of the outstanding shares. Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person
Which of the following individuals would be considered a noninterested person in a mutual fund? A) A member of the board of directors who is also employed as the investment adviser. B) A shareholder who owns 10% of the fund's shares. C) A member of the board of directors who does not hold another position within the investment company. D) A person who holds a position with the fund's underwriter.
Answer: C A preliminary prospectus is printed before the final price is established and may include a projected price range that is subject to change.
Which of the following is NOT included in a preliminary prospectus? A) The intended purpose for the funds being raised. B) A written statement in red citing that the prospectus may be subject to change and amendment and that a final prospectus will be issued. C) Final offering price. D) Financial statements and history of the company
Answer: D Discretion indicates that someone other than the owner has authority to buy or sell securities on behalf of the owner without specific direction from the owner for each transaction. One who carries out instructions from the owner does not have discretion. If you have general agreement with a client over investment policy, but carry out transactions based on your own authority without the client's approval, you have discretion.
Which of the following qualifies as discretionary trading under the Securities Exchange Act of 1934? A) Obtaining authorization from a client to purchase a particular security if the price hits a specific level. B) Purchasing securities at the discretion of a client. C) All of these. D) Determining which securities to buy for a client.
Answer: B All the securities listed are exempt from the registration and disclosure provisions of the Securities Act of 1933.
Which of the following securities are exempt from the registration and disclosure provisions of the Securities Act of 1933? Any interest in a railroad equipment trust certificate. Municipal bonds. U.S. government securities. Commercial paper maturing in 270 days or less. A) II and III. B) I, II, III and IV. C) I and III. D) I and II.
Answer: B Under the Securities Act of 1933 and the Uniform Securities Act, a prospectus must be given to any purchaser of a common stock, but not necessarily to those solicited by an agent. In fact, the USA only requires the prospectus to be delivered prior to the sale, not the offer.
XYZ Corporation is registering a new issue of common stock. A final prospectus must be delivered within the statutory time limits to: A) any person who has submitted an indication of interest. B) any person who purchases shares of the issue. C) any person solicited by a registered agent. D) all of the above must receive a final prospectus.
Transfer Agent
any person who engages on behalf of an issuer of securities in: -Countersigning the certificates -Registering the transfer's of the issuer's securities -Exchanging or converting the issuer's securities -transferring record ownership by bookkeeping entry w/o physical issuance of securities certificates
Accredited Investor
applies only to PRIVATE PLACEMENTS!!! -Institutional investors (employee benefit plans with excess of $5 million////banks, insurance companies//broker dealers purchasing for their own accounts -directors, executive officers and general partners of the issuer -any natural person whose individual net worth or joint net worth with that person's spouse exceeds $1 million -individual with income excess of $200,000 in each of last two years and expect an income in excess of $200,0000 in the current year ($300,000 if spousal income included) -entities made up of accredited investors
Restricted Securities
are unregistered securities purchased by an investor in a private placement. (aka letter/legend securities). Refers to the fact that purchasers must sign an investment letter attesting to their understanding of the restriction upon resale and to the legend placed on the certificates indicating restriction upon resale.
Uniform Net Capital Rule
establishes a minimum net (net liquid assets) capital requirements for B/D's. If a firm doesn't have the required net capital, the SEC doesn't allow it to operate. also requires to maintain a fidelity bond to protect against theft, forgery and similar violations fo the firm and it's associated persons. The amount is based on the firm's required net capital with a minimum of $25k.
Tombstone
is an advertisement that one simply identifies the security, the price and the underwriters
Securities Act of 1933 makes it unlawful...
to sell or deliver a security through any instrument of INTERSTATE commerce unless a registration statement is in effect
