Series 65

Federal Covered Security:

"covered by federal law" under the Securities Act of 1933. Means that the security must be registered with the SEC or is exempt from registration with the SEC. Included in the list of securities that must be registered with the SEC are: 1. Securities listed or authorized for listing on a national stock exchange 2. Investment company or pooled investment fund shares 3. Securities sold to "qualified purchasers" which includes wealthy individuals, couples, family businesses, or a trust sponsored by qualified persons.

IA's requiring prepayment of more than $______ in fees per client __ months or more in advance must provide in the brochure an audited balance sheet for the most recent fiscal year

$1,200 and 6 months. The dollar threshold at the Federal Level is $1,200, which differs from the State Level, which is $500 in some states. If the question references the Uniform Securities Act, NASAA Rules, or a specific State registered investment advisory firm, use the $500 Threshold.

3 Types of Investment Companies

1) Face Amount Certificates Companies: issue debt certificates at a discount and pay purchasers a stated "face value" amount at maturity 2) UITs: issue only redeemable units, no investment or portfolio manager (fixed portfolio), therefore no management fees, Pay investors interest, not dividends. Trust is terminated once all the bonds in the trust have matured. 3) Management Companies: Open end, Closed end, Diversified, and non-diversified.

Order of asset distribution if liquidation of a company occurs:

1) Taxes 2) Secured Debt (secured bonds) 3) Unsecured Debt (debentures, general creditors, accounts payable) 4) Preferred Stockholders 5) Common Stockholders

Reasons for a company to repurchase its own stock:

1) to increase Earnings per Share (EPS) 2) to finance future acquisitions 3) to provide stock for employee stock option plans 4) to fight a takeover attempt

Exempt Transactions:

1. A privately held corporation issuing stock to a new stockholder 2. An investment manager for an insurance company negotiating with a financial executive of a publicly held corporation to buy a note that matures in 4 years 3. Broker transactions that are unsolicited 4. Intrastate offerings. An underwriter selling shares of a new issue to the public is NOT an exempt transaction. No security or transaction is exempt from the anti-fraud provisions of the federal securities law

Registration Procedures for Broker-Dealers and Investment Advisers: When initial registration is filed, the following must be included in the filing:

1. An Application for registration 2. The Registration fee 3. Consent to Service of Process 4. A Bond or Surety Bond

To implement an Easy Money policy, the Fed would:

1. Buy Treasuries in the open market 2. Reduce the Discount Rate 3. Lower the reserve requirement of member banks All of these actions would increase excess reserves

When an investor wants to open a new account to trade options, the broker-dealer will generally require the following items:

1. New account Agreement 2. Options Account Agreement, including the customer background and financial information 3. Margin Agreement (if margin account opened)

Regulation BI defines a retail customer as a natural person, or the legal representative of such person who:

1. Receives a recommendation for any securities transaction or investment strategy, and 2. uses the recommendation primarily for personal, family, or household purposes (not for commercial use)

EXCLUDED from the definition of a Federal Covered Security (and therefore the state may or may not require registration) are:

1. Securities issued by non-profits 2. Municipal bonds offered only in the state where the issuer is located. 3. Intrastate offerings 4. A security issued with a guarantee from another entity as to principal, interest, or dividends.

To implement a Tight Money policy, the Fed would:

1. Sell Treasuries in the open market 2. Raise the Discount Rate 3. Raise the reserve requirement of member banks All of these actions would decrease the excess reserves

Two purposes of the Uniform Securities Act:

1. To minimize duplication of federal and state registration requirements 2. To prevent fraud

The 1940 Act requires an Investment company:

1. To obtain majority shareholder approval for: a. any deviation from the fund's investment objective/policy b. using fund assets to pay for the cost of distributing fund shares c. compensation agreements between the fund and the IA d. the renewal of the IA's contract. 2. To get an exemption from the SEC: a. for a merger between two investment companies b. for a purchase of assets from the fund's IA c. to own more than 3% of the shares of another fund. Note: Approval of a contract with an IA of a registered investment company requires approval of a majority of Non-Interested directors. (Meaning directors who are NOT parties to such contract or agreement).

The three core considerations in assessing whether an account has been churned are the:

1. Turnover Ratio = the total value of annual purchases made in an account divided by the account's average monthly balance. A turnover ratio of 2 or higher may be problematic for one account but acceptable for another. 2. Cost-to-equity Ratio = measures how expensive the trading in the account has been. Divide the total annual costs by the account's average balance. There is no set percentage that triggers churning just like above. However 20% is used depending on the account situation. 3. In-and-out Trading = Buying and selling the same security repeatedly within a short period of time

The following are considered Federal Covered Securities because an Exemption exists from registration at the federal level under the 1933 act.

1. U.S. Government securities. 2. Municipal bonds but only if offered outside the state of issue. 3. Securities that are unregistered and issued as private placements under SEC rules such as Regulation D offerings.

For new issues, members of the underwriting syndicate:

1. must receive full payment within 35 days of the purchase of the new issue shares. 2. are not permitted to pay by installment payments 3. cannot allow clients to buy on margin

It is unlawful for any person to offer or sell any security in a state unless:

1. the security is registered under the act 2. the security or transaction is exempt from registration 3. the security is a Federal Covered Security

Form ADV-W

A Notice of Withdrawal from Registration as an Investment Adviser. IAs can accomplish a full or partial withdrawal from registration.

Regulation D Offering

A Reg D Offering is intended to make access to the capital markets possible for small companies that could not otherwise bear the costs of registration with the SEC.

Cash Payments for Soliciting Clients: Unaffiliated Solicitors:

A cash fee may be paid to unaffiliated solicitors IF: 1. The solicitor performs his duties in a consistent manner with the IA's instructions. 2. The solicitor delivers a current copy of the IA's disclosure statement and a separate written disclosure document of the solicitor. 3. Not later than the time a written or oral agreement is entered into, the IA must receive a signed and dated acknowledgement from the client stating the client has received both disclosure documents.

Wrap Fee

A form of compensation where a client no longer pays fees for specific services, such as commissions on trades, or fees for specific financial advice. Instead, the client typically pays a set percentage of assets under management for agreed-upon services. Wrap Fees can be: 1. Managed, where investment advice as well as transactions are included in the fee. 2. Non-Managed, where no investment advice is rendered and the client typically pays a set annual fee to perform transactions instead of paying commissions on each trade. Clients must receive a Written statement containing Schedule H of Form ADV when a Wrap Fee is charged.

1933 Act Registration Statement: Who's names must be included and which signatures are required?

A registration statement must be filed with the SEC for review. It must include the names and addresses of: 1. The CEO, CFO, and Chief Accounting Officer 2. The underwriter of the issuer 3. Anyone who owns more than 10% of the issuer's stock. All of the following signatures are required on a registration statement: 1. CEO 2. CFO 3. CAO 4. A majority of the Board of Directors

The term Broker-Dealer does not include:

Agents - as agents are individuals who represent Broker-Dealers. Issuers - entities that offer their securities and receive the proceeds, for example corporations issuing stock to the public. Banks, Savings Institutions, and Trust Companies: they are regulated by other regulatory agencies.

Recordkeeping Rules for Investment Advisers

All books and records shall be maintained and preserved in an easily accessible place for a period of not less than 5 years from the end of the fiscal year during which the last entry was made on record, the first two years in the principal office of the IA. Partnership agreement or incorporation articles, charters, minute books, and stock certificate books of the IA shall be maintained in the principal office of the IA and preserved until at least 3 years after termination of the business.

Record Retention:

All records must be preserved for a period determined by the State Administrator or Federal Law (5 years for IAs). If an IA is registered with the SEC, the Admin does not have control over which books and records the IA must maintain. Books and records of a broker-dealer must include: 1. Order Tickets 2. Ledgers of all assets, liabilities, income and expense accounts 3. Blotters and other records of original entry including records of all purchasers and sales of securities. A Broker-Dealer or IA may store records electronically provided certain criteria is met, including: 1. are stored in a manner in which they can't be altered 2. readily accessible 3. must be able to be copied as needed 4. a duplicate copy must be stored in a separate location. Broker-Dealers must retain blotters and other records of original entry for 6 years.

The Chinese Wall:

Also known as Information Barriers. It is an imaginary barrier between the investment banking department, research department, and trading/market making departments.

Cash Payments for Soliciting Clients

An IA may pay a cash fee (referral fee) to a person soliciting advisory clients only if: 1. The adviser is registered with the SEC 2. The solicitor is not subject to SEC suspensions 3. There is a written agreement btwn the adviser and solicitor (a copy must be kept by the IA). A cash fee may be paid to Affiliated Solicitors such as a partner, officer, director, or employee of the adviser if complete disclosure of the relationship with the IA is made to the client.

Minimum Financial Requirements and Reporting Rules for Investment Advisers

An IA that has custody or discretionary authority over client funds or securities or that requires pre-payment of fees is required to maintain a minimum net worth at all times and to file a balance sheet with the state securities Admin within 90 days following the end of the IA's fiscal year. If the IA has custody of client funds or securities, the min net worth requirement is $35,000 and an Audited Balance sheet must be filed. If the IA requires prepayment of fees 6 months or more in advance, the min net worth requirement is "Positive net worth" and an Audited Balance sheet must be filed. If the IA has discretionary authority over client's funds or securities, the min net worth requirement is $10,000 and a balance sheet must be filed (not audited).

Agency Cross Transaction

An agency cross transaction means that an IA acts as a broker for both the advisory client and for another person on the other side of the transaction. Agency Cross transactions may be permitted if: the adviser is acting in best interest of the client, the adviser receives written consent, the adviser sends both clients (annually) a written statement with all transactions and commissions, and the Client (upon written notice) may revoke consent for such transactions.

Order Ticket Information

An order ticket for a securities transaction must include: 1. The account number 2. The times that the order was received 3. The agent on the account 4. The terms and conditions of the order. The price at the time that the order is received does not need to be on the order ticket. The exchange or name of the market maker who executed the order also does not need to be on the ticket.

Underwriter

An underwriter is defines as any person (such as a broker-dealer) who has purchased from an issuer or sells for an issuer in connection with a distribution of any security. A broker-dealer that is a member of an underwriting syndicate receives compensation from the underwriting spread, not from commissions.

Common Stock Terms: Authorized Stock Issued Stock Treasury Stock Outstanding Shares

Authorized Stock = the maximum number of shares of stock that are allowed to be sold (issued) by a corp, which is regulated by its corporate charter. Issued Stock = the amount of stock taken from authorized stock that is sold (issued) to the public in a Primary Distribution. Treasury Stock = Repurchased stock... when a company decides to repurchase their outstanding shares. Treasury Stock does not vote, does not receive dividends, is not used in the EPS calculation, and appears on the balance sheet as a deduction from issued stock. Outstanding Shares = shares of a corp's stock that are issued and held by stockholders. Outstanding Shares are the only shares that can vote, can receive dividends, and are used to calculate EPS. Issued Stock minus Treasury Stock = Outstanding Stock.

Municipal Bonds

Bonds issued by the state and local government entities such as cities, counties, school districts, and the state. Tax Benefits: Exempt from Federal, MAY be exempt from state and local. General Obligation Bonds, Revenue Bonds, and Industrial Development(Revenue) Bonds

Mutual Fund Sales Considerations

Breakpoints occur when an investor receives a reduced sales charge based on a quantity investment. Breakpoint Sales are prohibited - when an investor is NOT told how to achieve a breakpoint discount. 12b-1 fee is an annual charge against the fund's assets covering the mutual fund's cost of advertising and marketing.

Broker-Dealer vs. Investment Advisor

Broker Dealer -- Agent -- charge a commission for effecting securities transactions. Investment Advisor -- IAR -- Charge a fee for providing securities related advice.

The 1934 Act regulations specify that NO State shall establish:

Capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for Broker-Dealers that differ from, or are in addition to, the requirements of the SEC under the 34 Act.

Taxation of cash and stock dividends

Cash Dividends paid to investors are Fully Taxable at the federal, state, and local level generally at a rate of 15% Stock Dividends generally are not taxed until the time that shares are sold and profits and losses are realized.

Testimonials

Client testimonials are not allowed on any advertisement or social media by an IA

Convertible Bonds

Convert to shares of common stock at the option of the bondholder. They are converted at a specified rate called the conversion price. Par Value / Conversion Price = Common Shares Received

Correspondence and Retail Communication

Correspondence includes any written (including electronic) communications to 25 or fewer retail investors within any 30 calendar day period. Principal approval is NOT required if the correspondence does not make any financial or investment recommendations or promote a product or service. Retail Communication includes any written (including electronic) communications to more than 25 retail investors within any 30 calendar day period. This category includes advertisements, sales literature, and most independently prepared reprints. Principal Approval is required.

Characteristics of Preferred Stock: Cumulative Convertible Participating Callable

Cumulative = All dividends must be paid before common stockholders are paid a dividend... all overdue and current dividends. Convertible = These may be converted into common stock at the option of the stockholder. Conversion will increase the number of common shares outstanding and dilute the EPS. Participating = Dividends are fixed as to a minimum but not a maximum amount. Holders of participating preferred stock are entitled to their minimum dividend but have the right to participate with common shareholders in additional earnings distributions. Callable = These may be redeemed (called) by the issuer at a set premium over the par value, after a specified date. Beneficial to the issuer (the other 3 benefit the shareholder)

Dividend Dates: Declaration Date Ex-Dividend Date Record Date Payable Date

Declaration Date = the date on which a dividend is declared by resolution of the Board Ex-Dividend Date = the date on which the stock begins to trade without the dividend. Therefore a buyer of the stock would not be entitled to the dividend if purchased after the ex-date. (typically the business day before the record date). Record Date = the date on which the corporation closes the updating of the stock record book. Payable Date = the date that the dividend is actually paid. EXCEPTION: The ex-date for "cash" transactions is the business day after the record date. SUMMARY: To be entitled to the dividend, you must own the stock at least one business day before the ex-date.

The Investment Company Act of 1940

Defines and regulates investment companies. An investment company is a company that: 1. issues its own shares to the public, AND 2. manages a portfolio of other securities for the benefit of its clients. This definition includes the separate accounts of insurance companies, but not real estate investment trusts, Broker-Dealers, fixed insurance companies, or pooled investments in precious metals.

IAR: Definition and exclusions:

Definition = Any individual, partner, officer, director, employee, or associate of an IA who makes recommendations, gives advice about securities, sells, or supervises. The following would NOT be considered an Investment Advisor Representative: 1. Employees who only perform clerical tasks such as a receptionist. 2. Employees who only solicit sales of fixed annuities

Agent: Definition and exclusions:

Definition = any individual who represents a Broker-Dealer or an issuer if effecting or attempting to effect purchases or sales of securities. Commissions are not required. The following would NOT be considered an Agent: 1. if the individual represents an Issuer in effecting: exempt transactions, transactions in certain covered securities, or transactions with investing employees, partners, and/or directors of the issuer if no commission is paid. 2. if the individual represents a Broker-Dealer: in one state and is servicing an existing client who is temporarily in another state.

Diversified vs. Non-Diversified Management Companies (Investment companies)

Diversified = has at least 75% of assets regulated so that not more than 5% of its assets are invested in one corporation, and it does not own more than 10% of the stock of any one company. Non-Diversified = assets are not regulated.

ESG Funds (Environmental, Social, and Governance Funds)

ESG funds investing strategies use a variety of environmental, social, and governance criteria to make investment selections that aim to create both competitive financial return and a positive impact on society. Considerations before investing in an ESG Fund: 1. Know your investment goals and risk tolerance 2. Understand the ESG Fund's investment criteria 3. Stay Diversified 4. Be on the look-out for "green" scams 5. Know and compare fees.

Physical Security and Cybersecurity Policies and Procedures:

Every IA shall establish, implement, update, and enforce written physical security and cybersecurity policies and procedures reasonably designed to ensure the confidentiality, integrity, and availability of physical and electronic records and information. The policies and procedures must: 1. Protect against threats or hazards to the security or integrity of client records and information 2. Ensure that the IA safeguards confidential client records and information 3. Protect any records and info The policies and procedures must cover at least 5 functions: 1. Identity 2. Protect 3. Detect 4. Respond 5. Recover The IA must review, no less frequently than annually, and modify, as needed, these policies and procedures.

Exempt Transactions:

Exempt from the registration and advertising filing requirements include: 1. Isolated Non-Issuer transactions 2. Non-Issuer transactions by registered agents at registered broker-dealers if the issuer of the security being traded is not in the organizational stage or bankrupt 3. Non-Issuer transactions effected by or through a registered broker-dealer pursuant to an unsolicited order or offer to buy 4. Fiduciary Transactions 5. Bona Fide Pledges of securities 6. Underwriter Transactions - new issues between underwriters and issuers or underwriting syndicate 7. Transactions with Financial Institutions 8. Private Placements sold to not more than 10 persons other than Institutional Investors, during a 12-month period 9. Mortgage Bond transactions issued as a unit 10. Pre-organized subscription transactions 11. Rights, Warrants, and Convertible securities transactions "Isolated" = separate or standing alone from other trades. "Non-Issuer" = there is no benefit to the issuer. The stock has been issued and is trading in the secondary market.

Currency Transaction Report (CTR)

Financial firms must file Currency Transaction Reports for transactions involving currency over $10,000 for one person in the aggregate of a single business day.

Suspicious Activity Report (SAR)

Financial firms must file a SAR for any transaction conducted involving funds or assets of $5,000 or more where the financial firm detects any known or suspected Federal Criminal Violation. Suspicious activity would include lack of concern regarding risks and commissions. If a Financial firm becomes aware of a suspicious transaction, the firm must file a SAR within 30 days.

The following investment products are Excluded from the definition of a Security:

Fixed life insurance policies endowment policies fixed annuity contracts commodity futures contracts collectibles, including antiques precious metals real estate

Ginnie Mae, Fannie Mae, and Freddie Mac

Ginnie Mae (GNMA) = a Government agency Fannie Mae (FNMA) and Freddie Mac (FHLMC) = Government sponsored corporations that provide financing for the housing market. They buy mortgages from lenders, put the mortgages into "pools", and then offer "securities" to the public which are backed by the mortgages in the pool.

Money Market Instruments

High Quality, short-term (mature in 12 months or less) debt instruments. They include: Treasury Bills (most liquid) Negotiable Certificates of Deposits (CDs) (issued and guaranteed by banks) Commercial Paper (unsecured promissory note issued at a discount by corporations) (used to finance daily operations, and is repaid from accounts receivable, set maturity date with max of 270 days)

Excluded from the definition of Investment Advisor are:

IARs, banks, trust companies, investment companies, Lawyers, Accountants, Teachers, and Engineers.

Delivery of Form ADV-Part 3

IAs must deliver the Form ADV-Part 3 to new and existing retail customers. For new customers, it must be delivered before or at the time the investment adviser enters into contract w/ the retail investor. If any info in Form ADV-Part 3 becomes materially inaccurate, the IA must file an amended Form with the SEC within 30 days and existing customers must be notified within 90 days.

Cash Account

In a cash account, the customer must pay in full for securities purchased and may: 1. Buy stocks and bonds 2. Buy calls and buy puts 3. Sell/write covered calls and write covered puts

NASAA Brochure Delivery rule:

Initial Delivery: An IA shall deliver the Part 2A brochure and any brochure supplements required to a prospective advisory client: Not less than 48 hours prior to entering into any advisory contract or At the time of entering into any such contract (if the client has the right to terminate contract without penalty within 5 business days after entering. Annual Delivery: An IA must: deliver, within 120 days of the end of its fiscal year, a free updated brochure and related brochure supplements which include or are accompanied by a summary of material changes; or Deliver a summary of material changes

Intrastate vs. Interstate

Intrastate = Securities from one state only offered to that one state. Interstate = Securities from one state offered to other states

Borrowing and Lending for IAs, BDs, and Agents 1. Borrowing 2. Loaning

Investment Advisor: 1. Cannot borrow, unless the client is either: a B/D, an affiliate of the IA, or Financial Institutions engaged in the business of loaning funds. 2. Cannot loan, unless the client is a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA. Broker-Dealer: 1. The statute is silent? 2. Can only loan in a Margin Account Agent: 1. Not allowed 2. Not allowed

Open End Investment Company (Mutual Funds)

Issue and redeem shares every business day. All shareholders share proportionately in the fund's gains/losses/income. issues only redeemable shares. The Net Asset Value (NAV) per share equals the total assets of the fund less the total liabilities, divided by the total number of shares outstanding. NAV reflects the closing market value of all securities in the fund's portfolio plus any interest or dividend income received. Bid = NAV = Redemption Price Ask = NAV + Maximum Sales Load = Offering Price Forward pricing is required. A no-load fund is a mutual fund with no sales load charge, therefore the Bid and Ask would be the same. Maximum sales load is 9% under Act of 1940 Maximum sales load is 8.5% under FINRA Dividends, whether reinvested or not, are fully taxable to the investor each year at the investor's full tax rate.

When an investor wants to open a new account and trade options, the broker-dealer will generally approve the account for options trading based on the suitability level of the investor. Each broker-dealer sets the levels for its own firm and those levels will range from 3 to 5 possible levels including:

Level 1: Covered call writing of equity options Level 2: Level 1, plus buying calls and puts, writing of cash covered puts, and purchases of straddles or combinations. Level 3: Levels 1 and 2, plus spreads and covered put writing Level 4: Levels 1, 2, and 3, plus uncovered writing of equity options, uncovered writing of straddles or combinations on equities, and convertible hedging. Level 5: Levels 1, 2, 3, 4, plus uncovered writing of index options, uncovered writing of straddles or combinations on indexes, covered index options, and collars and conversions of index options.

Market-Makers

Market Makers are dealers that maintain an inventory of OTC Securities and are willing to buy and sell for their own accounts on a regular and continuous basis.

An Associated Person of a Broker-Dealer

Means any partner, officer, director, or branch manager of a Broker-Dealer, any person directly or indirectly controlled by or under common control of a Broker-Dealer, and any employee of the B/D except any person whose functions are solely clerical.

Margin Account

Minimum Deposit to open a Margin Account is $2,000. In a margin account, an investor is generally required to deposit 50% of the purchase price when buying stock. In a margin account, an investor can: 1. Buy Stocks - generally 50% deposit required on purchases 2. Buy bonds - margin requirements differ based on the type of bond (corp, muni, gov) 3. Buy Calls and Buy Puts - 100% of premium is always required on the purchase of Standard or Traditional Options. 4. Sell/Write covered calls and puts 5. Put on Spread and Straddle Option positions 6. Sell/Write uncovered calls and puts with a margin deposit

Taxable Equivalent Yields (Formulas)

Municipal Yield to Corporate Yield: Municipal Yield / (100% - Investor's Tax Rate) = Corporate/Taxable Equivalent Yield Corporate Yield to Municipal Yield: Corporate Yield x (100% - Investor's Tax Rate) = Municipal Equivalent Yield

Books and Records of IAs

Must be kept for 5 years from the end of the fiscal year in which the last entry was made. Records are subject to SEC examination at ANY time. Records kept include financial records, client account records, and personal securities transactions of the adviser. Email communications related to the IA's business are required to be retained as correspondence.

Closed End Investment Company

No redeemable shares. Once issued, the shares trade on an exchange or OTC at the current market value based on supply/demand. NAV is not related to bid/ask. Whenever the NAV per share of a fund is greater than the Ask... the fund must be a closed-end. No sales load - commissions are charged Fixed Capitalization = means a fixed number of shares are issued.

Yield Curves: Ascending/Normal/Positive Descending/Inverted/Negative Flat

Normal: has short-term yields substantially lower than long-term yields. Long-term bonds will yield the most. Longer term the better for investor Inverted: short-term yields higher than long-term. Indicates periods of tight money and rising interest rates. Short Term money market instruments are the safest. Flat: short-term yields the same as long-term. Indicates economic uncertainty. Bond buyers should consider short and intermediate bond maturities.

Rights Calculation

Outstanding Shares / New Shares = # of Rights needed to purchase each new share. Example: A corp has 1,000,000 shares outstanding and plans to issue 250,000 new shares 1. How many rights would be issued by the corporation? = 1,000,000 (A Right for each outstanding share) 2. How many rights would be required to purchase a new share? = 1,000,000 / 250,000 = 4 Rights needed to purchase each new share 3. How many new shares could a shareholder holding 1,000 shares subscribe for? = 1,000 rights / 4 = 250 new shares that the shareholder could purchase

Private Securities Transactions of an Associated Person

Persons associated with a member who intend to participate (buy or sell) in a Private Securities transaction must: 1. Give written notice to their member firm. 2. Receive written acknowledgement from the member firm of approval or disapproval. 3. If approval is given, the member firm must record the transaction on its books and records and supervise the person's participation. 4. If disapproved, the person associated with the member shall not participate in the transaction in any manner. Note: Engaging in private securities transactions are sometimes referred to as "selling away" (i.e. selling products not approved by the brokerage firm) FINRA approval is NOT required for Private Securities Transactions.

Definitions of key Rates: Prime Rate Federal Funds Rate Discount Rate LIBOR Broker or Call Loan Rate

Prime Rate: The interest rate charged and set by commercial banks on loans to their best customers. It is normally the highest of all the key interest rates. Federal Funds Rate: the rate that banks charge each other for overnight loans. Discount Rate: the rate charged by the Federal Reserves to banks. LIBOR: the rate that international banks charge each other. Broker or Call Loan Rate: the rate at which broker-dealers borrow from banks to cover margin loans to customers.

Accredited Investors

Refers to institutional investors and certain wealthy investors who are eligible to participate in Regulation D Private Placements. Examples would include: 1. Banks 2. Insurance Companies 3. Registered Investment Companies 4. Any trust with total assets of 5,000,000 5. Individuals with $1,000,000 of net worth or $1,000,000 of net worth for the investor and the investor's spouse. (excluding the value of personal residence) 6. An individual who has an income in excess of $200,000 in each of the last two years and who expects an income in excess of 200k in the current year. A Registered IA is NOT an accredited investor under the 33 Act.

Satisfying State Registration: (3 methods)

Registration with a state means that the securities can be lawfully sold in that state after the registration becomes effective. this may be satisfied by one of the following: 1. Filing (Notice Filing): a form of registration generally used by Federal Covered Securities or by an established company which has a registration statement on file with the SEC. 2. Coordination: a form of registration generally used for New Issues whose registration is pending with the SEC. 3. Qualification: a form of registration generally used when the new issue of securities is not going to be registered with the SEC but only in the state of issuance.

The Fed

Regulates the flow of money and credit in the economy. Buys or sells government securities including Treasury bills, notes, and bonds and the Federal Agency Issues. Buys Treasury Securities to stimulate the economy, presumption is that inflation is not a near-term threat. Sells Treasury Securities to slow down the economy and fight high or rising inflation.

Primary Market

Represents securities that are being sold for the first time by a corp. (IPO). Sold through investment banking and underwriting activities of broker-dealers and IB's The funds from the sale of securities go to the issuer of the securities (issuer = company that is selling stocks and bonds to public)

Exempt Securities:

Securities that are exempt from state registration and advertising filing requirements (Generally new issues). They Include: 1. U.S. Government securities 2. Municipal securities 3. Securities issued or guaranteed by the country of Canada or its provinces 4. Securities issued by U.S. Banks, Savings Institutions, or Trust companies organized under state laws 5. Securities issued by a federal savings and loan association 6. Credit Unions 7. Securities issued by insurance companies - U.S. Only 8. Any security listed on a registered stock exchange 9. Non-Profit Issues 10. Promissory Notes, Commercial Paper, or Bills of Exchange issued in denominations of $50,000 or grater. 11. Public Utility and Common Carrier securities - railroad companies 12. Investment contracts in connection with employee stock purchase, savings, pension, or profit-sharing plans.

Exempt Securities

Securities that do not have to be registered with the SEC before they can be sold to the public: 1. U.S. Government Securities (Bills, Notes, Bonds) and Federal Agency Issues. 2. Municipal Securities (Securities issued by state and local governments) 3. Securities issued by non-profit organizations (religious organizations, benevolent associations, etc.) 4. Regulation D Offerings (Private Placements) 5. Intrastate offerings (Securities sold by a locally incorporated company and only offered to residents of a single state) 6. Regulation A+ Offering (The total amount of the offering to the public is $50,000,000 or less in any 12-month period). (It is a short registration statement used instead of a normal registration statement). (An offering circular is distributed to the public instead of a prospectus). 7. Commercial Paper with a maturity of 9 months or less (270 days) and the proceeds must be used for a current transaction of the issuer. 8. A Promissory Note that evidences an obligation to pay cash within 9 months issued in denominations of at least $50,000. 9. Securities issued by Small Business Investment Companies (SBIC). 10. Banks and Savings and Loans 11. Motor Carriers (They are regulated by the Interstate Commerce Commission). 12. Certificates issued by a receiver or by a trustee in bankruptcy with the approval of a court. (Insurance company and Investment company shares are not exempt).

Secondary Market

Securities transactions that do not involve issuers. Trading between two investors - funds from sales are exchanged between investors. either on the floor of a stock exchange (listed transactions) or off the floor of an exchange (over-the-counter). Broker-Dealers are compensated with commissions and mark-up/mark-downs charged on trades, and Agents share in that compensation.

SEC Best Interest (BI) Customer Relationship Summary (Form CRS for Broker-Dealers) (Form ADV Part 3 for Investment Advisers)

Since the enactment of Reg BI, the SEC requires registered IAs and B/Ds to provide retail investors (not institutions) with Form CRS by B/Ds and Form ADV-Part 3 by IAs. Some of the info that must appear in these forms include an explanation or description of the following: Firm's Services Fees and Costs Conflicts of Interest Disciplinary history of its professionals A link to the SEC's investor education website

If a corporation increased the dividend payment to shareholders but the market price of the stock stayed the same....

That would have the effect of increasing the yield on the common stock. Common Stock dividend yield = AnnualDividend/Current Market Price

The Securities Exchange Act of 1934 (The '34 Act)

The '34 Act is also known as "The people act" and regulates the Secondary Market. This Act created the SEC and gave it jurisdiction to regulate: 1. National Securities Exchanges (Markets) 2. The OTC Market 3. Registered Self-Regulatory Organizations (SROs) such as FINRA and the MSRB to maintain a fair and orderly market for investors 4. Transfer Agents (Transfer agents cancel old certificates and issue new ones). Transfer Agents do not include clearing agencies. Clearing agencies handle the processing of settlements of securities trades. 5. Broker-Dealers and their associated persons The SEC does NOT have jurisdiction over national banks.

The Securities Act of 1933 (The '33 Act)

The 33 Act is also known as the "Paper Act" or "Truth in Securities Law" and regulates the Primary Market. The 33 Act has two primary purposes: 1. To provide purchasers of new issues of securities with a full and fair disclosure of the information needed to make an informed investment decision and 2. To prevent fraud in the sale of new issues of securities. The basic requirement of the 33 Act is that it is illegal to sell a new issue of securities on an interstate basis unless: 1. it has been registered with the SEC, or 2. it is exempt from registration.

Filing of sales and advertising literature:

The Admin may require the filing of any prospectus, pamphlet, circular, form letter, advertisement, or other communication addressed or intended for distribution to prospective investors (Unless the security or transaction is exempted). Websites are considered to be advertising - IA's and Broker-Dealer's must keep a record of the current website and past revisions to the website. The Admin has no authority to require the filing of advertising of a Federal Covered Security by the issuer. Unit Investment Trusts must file advertising and sales literature.

Administrative Actions: What can/can't the Administrator do?

The Administrator may, at his/her discretion: 1. make public or private investigations within or outside the state at any time. 2. require or permit any person to file a statement in writing, under oath or otherwise, concerning any matter being investigated. 3. Publish information concerning any violation of this act or any rule. The Administrator may: 1. Administer oaths 2. Subpoena witnesses 3. Take Evidence 4. require documents or records which are relevant to any inquiry even if the documents are confidential 5. Issue a cease and desist order with or without a prior hearing The Administrator CANNOT directly arrest, enjoin, or indict individuals, or confiscate property. In any disciplinary proceeding where denial, suspension, or revocation of an Investment adviser or Broker-dealer's registration may occur, the Admin is required to provide: 1. appropriate prior notice 2. opportunity for a hearing, and 3. written findings of fact and conclusions

An IA who has custody or possession of a client's funds or securities for safekeeping must follow certain rules:

The IA must identify, segregate, and place in safe-keeping, by client, each client's securities. Client's funds must be deposited in one or more bank accounts which contain only client funds. The IA must notify each client in writing of the location and manner in which funds and securities will be maintained and give prompt written notice of any change of location. The IA must provide each client with an itemized statement at a minimum of every three months (quarterly). IAs must arrange with an independent public accountant for an unannounced examination to verify clients' funds and securities in custody at least once a year. "Custody" does not include prepayment of advisory fees.

Surety Bonds

The USA provides that a state Administrator may require registered broker-dealer and investment advisor firms and individual agents of broker-dealers (not IARs) to post surety bonds with the state Administrator if they are going to have custody of or discretion over their client's assets. The amount of the bond is left to the discretion of the Administrator, but the amount applied to broker-dealers may not exceed the amount set by federal law. The bond must be kept in force for as long as the registrant is in business and for 3 years thereafter. Minimum Capital applies to broker-dealers and investment advisers, but NOT agents.

Form ADV

The application form for the registration of investment advisers that is filed with the SEC, it has two parts: 1. Provides detailed information about the IA for the SEC, including the direct owners and executive officers of the IA, but does not require a list of the IA's clients. 2. Provides the required disclosures about the IA for prospective clients and existing clients. Part 2 is known as The Brochure Rule

Unaffiliated Solicitors: What must the solicitor's written disclosure include?

The document must disclose: 1. The name of the solicitor and services to be provided 2. The name of the IA 3. The nature of the relationship between the solicitor and adviser 4. A statement that the solicitor will be compensated and such compensation agreement 5. The amount, if any, that the client will be charged in addition to the advisory fee However, the following would NOT have to be disclosed: 1. The name of the broker-dealer that will execute trades 2. The business background of the solicitor

Institutional Investment Managers managing an account with a value of more than $100,000,000 in securities must:

They must file Quarterly reports with the SEC.

If an Investment Adviser's net worth falls below the minimum required, the IA must:

They must notify the State Admin by the close of business on the next business day. The IA shall also file a report with the Admin of its financial condition including: 1. A trial balance of all ledger accounts 2. A statement of all client funds or securities which are not segregated 3. A computation of the aggregate amount of client ledger debit balances 4. A statement as to the number of client accounts

Treasury Bills vs. Notes vs. Bonds

Treasury Bills: Short-term, risk-free obligations of the federal government. Sold at a discount. 1, 3, 6, and 12 month maturities. Issued with a minimum denomination of $100. Do not carry a fixed rate of interest. Not callable Treasury Notes: Fixed rate of interest which is paid semi-annually. Exempt from state and local tax but subject to federal. Maturities of 2 - 10 years. Not issued as callable. Treasury Bonds: Fixed rate of interest which is paid semi-annually. Exempt from state and local but subject to Federal tax. Maturities of 10 - 30 years. May be issued as callable. Regular Way settlement is T+1 in the Secondary Market Regular Way settlement is T+3 in Primary Auction Mkt

Treasury Inflation-Protected Securities (TIPs)

Treasury Notes and Bonds where the interest and redemption payments are indexed to the current inflation rate based on the Consumer Price Index. Interest is paid semi-annually at a fixed rate but the fixed rate is applied to the inflation-adjusted principal value of the bond, not par of $1000. Final payment on TIPs cannot be less than the original principal value. TIPs preserve an investor's capital best among all Treasury securities.

Notification of Termination

When an agent begins or terminates employment, the Administrator must be PROMPTLY notified. Both the Agent AND the Broker-Dealer are responsible for notifying the Administrator when an Agent is terminated. The Broker-Dealer is responsible for seeing to it that agents working for them are registered.

The term Broker-Dealer

any person engaged in the business of effecting transactions in securities for the accounts of others or for the firm's own account. 1. Broker: (Agency Capacity) by buying and selling securities for the accounts of customers and charging commissions. 2. Dealer: (Principal Capacity) by buying and selling securities for or from the firm's own inventory and charging a mark-up to the price on a buy and mark-down to the price on a sell.

Investors seeking capital appreciation should?

consider common stocks

The Uniform Prudent Investor Act

established to protect investors and their interests when involved in a Trust or fiduciary relationship. Practical and prudent approach to investing trust assets.

Investment Advisers must disclose in Writing when they act as a broker-dealer in any capacity before completion of the transaction and must obtain ________ ________ of the client for the transaction.

they must obtain Written Consent

Investment Advisor = ABC

they provide Advice about securities directly or indirectly as a Business for Compensation in any form.