Unit 3

Federal Exemptions from Registration as a BD

-A BD that conducts all of its business in one state is exempt from registration with the SEC -BD can't participate in any transaction executed on a national securities exchange -Intrastate BD register with the state in which they are located

Exclusions from the Definition of Broker-Dealer under the Uniform Securities Act.

-Agents (individuals who represent broker-dealers) -Issuers (those entities, such as corporations and governments who raise money by issuing securities) -Bank, Savings Institutions, and Trust companies.

Agent (Registered Representative)

-Any individual, other than a BD who represents a BD or issuer in effecting or attempting to effect purchases or sales of securities -Only an individual (a natural person) can be an agent -Agent is the term used under state law

Broker Dealers & Banks

-Most banks and other financial institutions engage in securities activities through broker dealer subsidiaries of the bank holding company. These broker-dealer subsidiaries of banks are not excluded from the definition of a broker-dealer

An employee of an issuer is not an agent when:

-Representing an issuer if the issue is exempt from registration -The employee represents an issuer in exempt transactions

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 -If an application is withdrawn or denied, the Administrator is entitled to retain a portion of the fee.

Which of the following people would not meet the definition of a person associated with an investment adviser? A) The typist responsible for operating the desktop publishing system that prepares the investment adviser's weekly research bulletins B) A brokerage firm that is considered to be the parent of a registered investment adviser C) A vice president of a registered investment adviser D) An individual who solicits potential clients to open advisory accounts

A) People in strictly clerical or administrative positions are not considered to be associated persons of an investment adviser. Expect to see several variations of this theme on the exam.

Statutory Disqualification

Because the Exchange Act deals with the registration of persons and exchanges (the "people and places" act), the SEC sets forth certain actions that a person disqualified under statute (law) from becoming registered or associated with a broker-dealer or investment adviser.

Broker Dealer

Defined in the Securities Exchange Act of 1934 (the federal law regulating broker-dealers and their representatives) and in the USA as any person, (think back to the broad definition we gave you at the beginning of Unit 1), engaged in the business of effecting transactions in securities for the accounts of others or for its own account.

Is a loss of a civil lawsuit, even involving securities, a cause for statutory disqualification?

No

Is there a de minimis exemption for Agents?

No

Is there a de minimis exemption for BDs?

No, even if the BD does not maintain a place of business in the state, a single retail client means registration is required.

BD NASSAA Website Requirements: Affiliation with Agent or IAR

-Affiliation with the broker-dealer or investment adviser of the agent or IAR is prominently disclosed within the communication -The BD or IA with whom the agent/IAR is associated retains responsibility for reviewing and approving the content of any internet communication by an agent or IAR -The broker-dealer or investment adviser with whom the agent or IAR is associated first authorizes the distribution of information on the particular products and services through the internet communication, and -in disseminating information through the internet communication, the agent or IAR acts within the scope of the authority granted by the broker-dealer or investment adviser.

Associated Person

-Any partner, officer, or director of the BD or any person directly or indirectly controller or controlled by BD, including any employees of the BD, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of the term. -Even outside directors or partners whose only connection to the firm is the contribution of capital are considered associated persons of the broker-dealer

BD NASSAA website requirements

-The communication clearly states that the person may only do business in this state if properly registered or exempt from registration. - Any follow-up individualized responses with prospects in this state that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as may be, will not be made without compliance with state broker-dealer, investment adviser, agent or IA representative registration requirements, or an applicable exemption or exclusion. -The site may only make available general information, not specific advice or recommendations

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 United States, 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 United States has diplomatic relation- ships 3. Any security issued by, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state. 4. Commercial paper rated in the top three categories by the major rating agencies with denominations of $50,000 or more with maturities of nine months or less 5. Investment contracts issued in connection with employee's stock purchase, savings, pensions, or profit-sharing plans

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 one retail client in the state

Under the USA, you are not a BD 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 only do business in this state with existing clients who are not residents of this state (snowbirds)

Under the Uniform Securities Act, the definition of a broker-dealer includes A) a person in the business of making trades in his own account or for the accounts of others B) a trust company when executing transactions in accounts in which it does not act in a fiduciary capacity C) an agent handling principal transactions with major institutional clients D) an authorized representative of the issuer who receives a commission

A A broker-dealer is defined as any person in the business of making trades in its own account or for the accounts of others. Agents and banks, including trust companies, are specifically excluded from the definition of broker-dealer.

A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee A) must register as an agent if sales-related compensation will be received by the employee, either directly or indirectly B) need not register as an agent of the issuer because the offering is limited to current employees of the issuer C) may receive commissions, but not a salary, without registration D) must register as an agent of the issuer

A Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if sales-related compensation is paid. As a practical matter, the employee would be on straight salary.

If information filed with the Administrator by a broker-dealer as part of its registration changes in a material way, the registrant must A) amend or update the information promptly regardless of the renewal date B) amend the registration statement within 60 days of the material change C) submit an entirely new registration form within 30 days of the material change in information D) update the information on the registration on the next annual renewal date

A When material information changes, the registrant must promptly amend or update the information regardless of the renewal date. The requirement to amend a registration applies to investment advisers, broker-dealers, and securities. However, the Uniform Securities Act does not define the term "promptly."

When would an individual employed by an issuer to sell its stock to the public have to register as an agent? A) When the employer is an insurance company B) When the transaction is exempt C) When the employer is a savings institution D) When the employer is the U.S. Treasury

A. The question is not looking for the exemption - it wants to know when the individual must register. There are two instances where an individual employed by the issuer to sell its securities is not considered an agent. The first is when the issuer is one of 5 specific named cases. That list includes savings institutions (banks), and the federal governments of the United States and Canada, as well as any of their political subdivisions. The list does not include insurance companies. The second case is when the securities are being sold in an exempt transaction. From a practical standpoint, the most common case where this occurs is when the issuer makes a private placement of its shares.

Agent of the Issuer

An Individual employed by a corporation (not a BD) to sell a new IPO would need registration, even if not paid compensation based on sales.

Effecting Exempt Transactions

An employee of an issuer is not an agent when representing an issuer in exempt transactions. Examples of Exempt transactions are: -Unsolicited brokerage transactions -Transaction between the issuer and underwriters -Private placements

FSC is a BD registered in State A, the location of its principal office. They have begun doing business in State B with the First Fidelity Bank and Trust Company and open a small branch office in State B to service the account. Which of the following statements is correct? A. FSC does not need to register in State B because its only client is an institution. B. FSC needs to register in State B because it has a place of business in the state. C. Broker-dealers are only required to register in the state where their principal office is located D. FSC would have to register in State B even if it didn't have a place of business there.

B. We learned that the USA excludes from the definition of broker-dealer, a firm with no place of business in a state whose only clients are, among others, institutions, such as banks. That exclusion only applies when there is no place of business in the state; opening a small branch in State B voids that exclusion. Even if there is no place of business in the state, if they have a single individual (called a retail client on the exam) who resides in the state, then registration is always required.

A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer A) is a member of FINRA B) is a member of the New York Stock Exchange C) does no business in that state other than with institutional clients D) is licensed/registered in its state of residence

C A broker-dealer must be registered in every state where it sells or offers to sell securities, unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required.

Which of the following persons is defined as an agent by the Uniform Securities Act? A) Secretary of a branch office sales manager B) Clerk at a broker-dealer who is authorized to take orders C) Broker-dealer executive who does not solicit or transact business D) Silent partner of a broker-dealer

C Anyone who solicits or receives an order while representing a broker-dealer is an agent. Silent partners, administrative personnel, and executives of broker-dealers with no sales responsibilities are not agents under the terms of the USA because they do not solicit or receive orders.

Under the USA, an individual would not be considered an agent while representing the issuer in any of the following transactions EXCEPT A) investment contracts issued in connection with an employee's stock purchases, savings, pension, profit-sharing, or similar employee benefit plan B) issuers in exempt transactions C) nonexempt, initial public offerings D) promissory notes, such as commercial paper, with a maturity of nine months or less

C Persons who represent nonexempt issuers of new securities, are agents under the USA unless it is stated that the transaction is exempt. Representing issuers in exempt transactions excludes the person from the definition of agent.

What is the purpose of the Securities Exchange Act of 1934? A) It provides standards among the states. B) It provides requirements relating to new issues. C) It regulates the persons involved in the secondary market. D) It provides policies relating to unethical business practices.

C 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.

Under the USA, which of the following would be considered an agent? A. An individual who is employed by a small community bank for the purpose of selling stock in the bank B. A broker-dealer with a place of business in the state with an extensive retail clientele C. An individual whose broker-dealer is registered in the state, but her only clients are institutions D. An individual with no place of business in the state dealing with more than 5 existing clients who are vacation in the state

C. Even though the individual's only clients are institutions, the fact that her BD is registered in the state means she must register as well. Yes, transactions with institutions are exempt transactions, but that exemption only applies to individuals selling on behalf of the issuer, not when representing a broker-dealer. Individuals selling the securities of certain exempt issuers (like a bank) are excluded from the definition as are broker-dealers. If the individual has no place of business in the state and only deals with existing clients (regardless of the number), who are temporarily in the state, that individual is exempt from registration

Under the USA, which of the following is considered a broker-dealer in a state? A) First Federal Trust Company, specializing in underwriting new municipal issues B) ABC broker-dealer with no place of business in the state who only does business with other broker-dealers in the state C) An agent effecting transactions for a broker-dealer D) XYZ broker-dealer with an office in the state whose only clients are insurance companies

D Any broker-dealer with an office in the state, regardless of the nature of its clients, is defined as a broker-dealer under the USA. If the firm did not have an office in the state and its only clients were institutions such as insurance companies, or other broker-dealers, it would be excluded from the definition. Banks or trust companies and agents are never broker-dealers.

During the application process for registration as an agent, the Administrator may request information about the applicant's A) record involving a non-securities misdemeanor conviction 5 years ago B) financial condition as disclosed on the agent's most recent balance sheet C) marital status D) citizenship

D Individual registrants may be asked about their citizenship, but not their marital status. Non-securities misdemeanors are not relevant and financial condition is only a requirement for broker-dealers and investment advisers.

As defined in​ the Uniform Securities Act, which of the following statements is TRUE regarding an agent? A) An agent may be an individual or a firm. B) If someone meets the definition of an agent, that person is exempt from registration requirements. C) An agent may be a broker-dealer. D) An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities.

D ​The text in Section 401(b) of the Uniform Securities Act reads, "Agent means 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."​ There are cases where an individual representing an issuer would not be considered an agent, such as if the transaction is exempt, but that doesn't change the definition.

Broker-Dealer 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.

Exclusions From the Definition of Agent for Personnel Representing Issuers

Individuals are excluded from the definition of agent and, therefore, are exempt from registration in a state when representing issuers in effecting transactions: -In certain exempt securities -Exempt from registration -With existing employees, partners, or directors of the issuer if no sales-related commission or other remuneration is paid or given directly or indirectly for soliciting any person in this state.

Is a Brokerage firm a natural person?

No, it is a legal entity. The brokerage firm is the legal person (legal entity) that the agent (natural person) represents in securities transactions.

Are salaried employees engaged in distributing their employer's shares as part of an employee benefit plan required to register as agents?

No, they would be not be required to register as agents because they are, by definition, 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 registration.

When a BD has no place of business in a state and deals with an existing client who is temporarily in that state, the USA does...

Not define the entity as a broker-dealer in the state unless the client becomes a permanent resident of that state.

One should assume that a BD is registered with the:

SEC and at least one state

USA BD/Agent R\registration is accomplished by:

SEC's Form BD Modified to meet the needs of the state. If any material information on the BD becomes inaccurate, prompt notice must be give to the administrator.

Broker-dealers with no place of business in the state exclusion

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; or 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.