Review

Use of Material Inside Information

1. May not make recommendations on basis of any inside information until its made public 2. May not repeat inside information except to report to supervisor or compliance officer 3. No criminal liability unless transaction actually takes place

Public Communications - Sales of securities of premises of financial institutions

1. Must display: not FDIC insured, no bank guarantee, may lose value 2. Not required for radio broadcasts of 30 seconds or less

Wrap fee brochure

1. charge a fixed fee for portfolio management, advice, and execution 2. Wrap fee brochure based on Appendix 1 of Form ADV Part 2A 3. Must be provided in lieu of standard brochure and must disclose that wrap fee may cost more than purchasing services separately 4. Must identify whether any of its related persons is a portfolio manager in the wrap fee program and, if so, describe the associated conflicts

4 broad powers administrator has to enforce and administrator that act in his state are to:

1. make, amend, or rescind rules and orders and require the use of specific forms 2. conduct investigations and issue subpoenas 3. issue cease and desist orders and seek injunctions 4. deny, suspend, cancel, or revoke registrations and licenses

Agent also does not include

1. no place of business in a state 2. sell to existing customers not residents of the state 3. Client moves to another state, agent has 30 days to register

Financial requirements for IA's w/ discretionary authority

10K

Financial requirements for IA's taking custody

35K, if both 35k is ok

Uniform Prudent Investors Act of 1994 - What conduct demonstrates prudence?

5 step process encompasses all requirements: - analyze current position - design optimal investment portfolio structure - Formalize investment policy - implement investment policy - monitor and supervise

Penalties and Sanctions for Violation include:

1. Administrative proceedings (e.g. suspensions and revocations) - Administrator 2. Judicial injunctions - courts 3. Criminal and civil prosecutions - courts

Brochure rule

1. Brochure is Form ADV Part 2A (describes the firm) and Supplement, Form ADV Part 2B (personnel) *updated annually at time of updating amendment 2. Deliver to a client or prospective client the current brochure and supplement before or at the time of entry into an investment advisory contract with that client *if not delivered 48 hours in advance, client has 5 business days to rescind w/o penalty

Advertising

1. Can't de deceptive or misleading 2. BD's website is advertising 3. Highlighting or excerpting a prospectus

Unsuitable Recommendations

1. Failure to make reasonable inquiry into customers' financial situations, needs, and investment objectives 2. Recommending security transactions without reasonable grounds

Misleading of Untrue Statements

1. Inaccurate or fictitious market quotations 2. Incorrect statements of an issuer's earnings or projected earnings

If there is a change to any material information in the Form U4,

an amendment must be filed within 30 days

Not included in disclosure of fees (all of these belong in other documents)

- commission - mark ups and mark downs - advisory fees

IAR Exemptions

- de minimus - snowbird - if employed by a federal covered advisor (IAR must register in states only where IAR maintains a place of business)

Disclosure of Capacity by Investment Advisers - Acting as agent or principal with advisory client

- disclosure of which capacity - client consent required - prior to completion of transaction

Security

- efforts of third-party management - an investment of money - common enterprise - profit is anticipated

Authority of the administrator

- written findings of fact and conclusions of law - prior notice - opportunity for hearing

Typical fees include

-issuance of stock certificate - account transfer - wiring funds - margin interest - annual acct fee - safekeeping of certificates

Coordination required documentation

- copies of the latest prospectus - copies of any other documents filed with the SEC - copies of an article of incorporation, underwriting agreement - specimen of the security being offered

IAR Exclusions

- clerical and administrative personnel - providing impersonal investment advice - research analysts - if no advisory clients

Coordination

- A public offering at the state level that is coordinated with an SEC registration - Effective date is simultaneous with federal registration provided that no stop orders issued and no proceeding pending against issuer - 10 to 20 days - on file for 2 business days

Custody of funds and securities

- Adviser may not take custody if administrator prohibits custody or in absence of a rule, adviser fails to notify the administrator - segregation of client securities kept reasonably safe from destruction or loss - client funds are deposited to client only bank accounts - quarterly itemized statements to clients (FDIC insured bank) - Immediate notification of change of location of funds/ securities - annual independent surprise audit to verify funds/securities - Generally use a qualified custodian - FDIC insured bank, SEC and state registered bank

Federal Covered Adviser

- Advisers registered under the IA act of 1940 - Advisers meeting the required AUM - Advisers to registered investment companies - Advisers required to register in 15 or more states

Broker dealer does not include

- Agents - Issuers - Banks, savings institutions, and trust companies (bank holding companies or subsidiaries not excluded) - A PERSON that has no place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers - A PERSON that has no place of business in the state AND is licensed where the PERSON maintains its place of business AND sells only to existing clients who are not residents of the state. - Employee benefit plans (at least 1 million) - Insurance companies - Investment companies registered under the 1940 act

Agent does not include

- Exempt transaction under the Uniform Securities Act - Specific issuers: US (any state, political subdivision), Canada (any province and political subdivision), Bank organized under laws of US or state, Promissory note, bankers' acceptance, certain investment contracts - Employees of that issuer: no compensation is received

SEC Release IA-1092

- Financial Planner - Agent for Sports and Entertainment Talent - Pension consultants

IA does not include

- IAR - Banks, savings, institutions, or trust companies - BD or its agent with incidental advisory services - Publisher of a newspaper, column, newsletter

Investment Advisory Contract

- Initial & renewal must be in writing - Discloses services, fees, discretion - Can't waive compliance w/ laws - performance based compensation for IA

Soft-dollar compensation

- Non-cash compensation received from broker dealers in response to directed business - Allowable soft-dollar payments under Safe Harbor provision of Rule 28(e) of Securities Exchange Act of 1934 - Soft-dollar payments not protected by Section 28(e)

Types of exempt transactions

- Preorganization certificate: before incorporation, max. 10 subscribers - Private placement: restricted to 10 offers in 12 months (retail) - Issuer transactions: Transitions between issuer and underwriter - Financial institutions: sophisticated/professional investors - Nonissuer transactions: secondary market transactions - Fiduciary transactions: those by an executor, administrator, etc. - Liquidation of securities: pledged or collateral for a loan - Certain offers: existing employees and shareholders of the issuer (No commissions are paid)

Qualification

- Used for intrastate offerings - Any security is eligible - effective date is determined by administrator

A BD w/ an office in this state must register as an IA if it charges:

- a fee for selling investment research and additional fees in the form of commissions for the sale of securities - fees for investment research sold exclusively to institutions located in this state

Form ADV Part 3:

- a requirement for IA's to prepare a customer relationship survey - solely to IAs registered w/ SEC who deal w/ retail clients

Not a sale

- a stock dividend or stock split - stock received as a result of a merger or consolidation - pledge or loan - gift of non-assessable stock

Agency cross transaction - Representing both sides of a trade involving an advisory client

- cannot recommend the trade of both parties - written disclosure to client before transaction is complete - client executes a written consent prospectively authorizing transactions

The SEC's Marketing Rule for Investment Advisers requires that any advertisement containing an endorsement of the adviser's services must include disclosure of any compensation in the form of

- cash - directed brokerage - retainer fees

Exclusions from definition of Agent for Administrative Personnel

- clerical and administrative employees of a BD are generally not included - cold callers working for a BD would have to register as agents if they did any more than ask if clients wanted to receive information

An administrator can deny, suspend, or revoke the registration of securities professionals

- files false or incomplete application - willfully violates foreign banking or securities law - was convicted of a misdemeanor involving securities or any felony within the last 10 yrs - has been enjoined by any court or prohibited by any SRO within past 10 yrs from engaging in the securities business - is not qualified on the basis of training and knowledge (but not solely lack of experience)

An administrator can deny, suspend, or revoke the registration of a security

- files misleading or incompetent registration statement - is engaged in an offering that is fraudulent or made on unfair, unjust, or inequitable terms - charges offering fees that are excessive or unreasonable - has a control person (officer, director) convicted of a securities related crime - is subject to a court injunction - is engaged in a method of business that is illegal - is subject to an administrative stop order of any other state - fails to pay the filing fee

Security does not include

- fixed insurance or annuity contracts - retirement plans, IRA or 401(k) - Collectibles, commodities, commodity futures, condominiums used as personal residence, and currency - Nonnegotiable bank CD and confirmation of securities trades

Notice filing

- for federal covered securities (not a registration method) - Primarily used with investment companies registered under IA Act of 1940 - opportunity for the states to collect revenue

If there are material changes in the brochure since last annual updating amendment, deliver the following to each client annually with 120 days after the end of the fiscal yr:

- free current brochure; or - a summary of material changes to the brochure including an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure - may be delivered electronically - if no material changes, no brochure or summary

No final order may be issued w/o administrators:

- giving appropriate prior notice to the affected persons - granting an opportunity for a hearing - providing findings of fact and conclusions of law

Administrators can issue cease and desist orders

- in anticipation of violation w/ or w/o a prior hearing - bring an action in the appropriate court Note: courts issue injunctions

Exclusions from the Definition of Agent for Personnel Representing Issuers

- in certain exempt securities - exempt from registration (exempt transactions) - w/ existing employees, partners, or directors of the issuer, if no commission or other renumeration is paid or given directly or indirectly for soliciting any person in their state

Disclose personal trades if

- inconsistent with advice given to client - investment adviser benefits from client acting on recommendation

Federally imposed exemption from state securities registration

- listed on a recognized exchange or quoted on Nasdaq - Investment companies registered under ICA of 1940 - Transaction exempt under Securities Act of 1933: private placements under Regulation D & Municipals outside the state of issuance

Criminal penalties under the USA

- most commonly involving fraudulent activity - Fines up to $5,000, imprisonment for up to 3 yrs, or both - Statute of limitations/no indictment after 5 yrs from alleged violation - No person may be imprisoned if he proves no knowledge of rule or order

Option Accounts

- must be approved by supervisor w/ knowledge about options - account agreement must be received within 15 days of account approval

Updating Form ADV

- must be updated every yr by filing an annual updating amendment within 90 days after end of adviser's fiscal yr - verification of assets under management to determine if adviser is eligible to register w/ SEC or must remain state registered

IA does not include a person who has no place of business in the state and only gives advice to:

- other investment advisors - Broker-dealers - Financial institutions - Snowbirds - Employee benefit plans - at least 1 million - Maximum of 5 persons (retail clients) during a 12-month period

Disclosure of Investment Advisor Conflicts of Interest

- ownership in recommended securities - gifts or incentives associated with recommended product - that client may execute through other BDs - If recommending products of only the BD or insurance company with whom they are associated

Custody of funds and securities does not include:

- receipt of checks drawn by clients and made payable to unrelated third parties if forwarded to the third party within 3 business days of receipt - Having investment discretion over the clients account

Exempt securities under the USA

- short term notes/debt obligations - securities issued by certain issuers - financial institution securities - Insurance companies - Public utility companies and common carriers - charitable, religions, and nonprofit organizations

If offer is made by newspaper or magazine

- the state where it is published provided at least 1/3 of the circulation remains in the state - No state if more than 2/3 of the circulation is outside of the publishing state within a 12 month period

Disclose amount of compensation when

- the transaction is through a BD with whom the adviser is associated - compensation is received from an issuer - compensation is received for the sale of non-securities products

Disclosure of fees

- typically disclosed when a customer account is opened - must be up to date - Fee changes typically at least 30 days in advance - methods used include email, postal mail, or website

Disclose of conflicts of interest

- underwriter affiliated w/ BD, proprietary products - Incentives from program sponsors (trips, etc.) - Financial interest in recommended security (sister is CEO) - Favorable research report after bringing company public *any doubt of transparency disclose

Qualification required documentation

- used for intrastate offerings - relevant information on issuer as determined by Administrator - Application must contain basic information about the issuer and the issue - any security is eligible

Investment Advisor

A person who meets the "three prong test": is in the business of giving advice or analysis concerning securities and receives compensation directly or indirectly

Treasury bill is an exempt security, not an

exempt transaction

Broker

Agent/agency Broker Commission Disclose

Wash trade

An attempt to manipulate a securities price by creating an appearance in a security that really does not exist

Agent

An individual representing a broker-dealer or an issuer in attempting to sell securities or effecting sales of securities - Meets the definition? Must register - Dual registration OK if under common control or authorized by the administrator

State registered advisors

file both 1 and 2 w/ administrator of each state in which they are registering

IA Representative

Any partner, officer, or other individual employed by or associated with an investment adviser who participates in certain advisory services

Broker-Dealers

Any person, not an agent, who is in the business of effecting transactions in securities for accounts of others or its own account

AUM

Assets Under Management

Investment advisers register at the state or federal level,

never both

BD not obligated to disclose amount of commission on any offer to sell before transaction but is required

on trade confirmation

Jurisdiction under the USA specifically means the legal authority to regulate securities that take place in the state where it

originated, directed, and accepted

Criminal penalties under the USA- review (appeal)

person affected by Administrator's order may obtain review (appeal) by filing position in appropriate court within 60 days

A retail customer of an IA has at least $1.1 million under management with that advisor. That would make this individual a

qualified client

Rights of recovery

Client can recover if proven improper sale: - original purchase price - plus interest at a rate determined by administrator - minus income received while securities were held

A disclosure brochure is not required to be delivered if the client is a

registered investment company or if the advisory service is of an impersonal nature and costs less than $500

NSMIA result

states cannot require registration of securities, transactions, or investment advisors covered by or excluded by federal legislation

Dealer

Dealer Inventory Principal Mark up/Mark down *has to be disclosed

Purpose of NSMIA

Enact to eliminate conflict between federal and state securities laws

Ethical or unethical? Borrowing money from your customer, the XYZ National Bank.

Ethical

Ethical or unethical? Charging fees of $1,000 six or months in advance.

Ethical

Ethical or unethical? Disclosing commissions in addition to advisory fees earned as agent of BD through whom trades are placed.

Ethical

Ethical or unethical? Disclosing that the CEO of a company whose stock you are recommending is your sister.

Ethical

Ethical or unethical? Exercising discretion with oral authorization for 10 business days after the initial discretionary trade.

Ethical

Ethical or unethical? Splitting commissions with another agent of the BD without consent of the customer.

Ethical

NSMIA covers

Federal covered securities and federal covered investment advisors

Form BD

How BDs register. Register on a federal and state level

Form ADV

How IA's register

Administrator may summarily suspend pending registration

the hearing must be granted within 15 days of written request by the applicant

Brochure rule exemptions

IA does not have to deliver brochure if the advisory clients are limited to the investment companies and impersonal advice (subscriptions)

Solicitors must be registered as

IAR

Interactive content

Input from both the creator and the viewer

1. Gives advice 2. Regular part of business 3. For compensation

Investment Adviser 3 prong test

Form ADV Part 2A

Investment advisers brochure and tends to focus on customer related information

Secondary transaction

Investor to investor transactions

Wrap Fee Program

Is a program under which any client is charged a specified fee or fees, not based directly on transactions in the clients accounts, for investment advisory services and exclusion of client transactions

Person

Means any individual, or a legal person. Only 3 nonpersons: minors, deceased individuals, and individuals legally declared mentally incompetent

Guaranteed Security

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

Sole proprietor of a retirement planning business that exclusively provides advice on fixed-income annuity contracts

Need no register under any security laws

Record keeping requirements for IA's

No less than 5 yrs from the end of the fiscal yr during which the last entry was made on that record (w/ first 2 easily accessible)

An investment adviser need not register in a state if the adviser has

No place of business in the state and only advises 13 trust companies located in the state (trust companies don't count)

An agent would be acting illegally if he sold

Nonexempt securities registered in a neighboring state but not registered in his home state in a nonexempt transaction

National Securities Markets Improvement Act of 1996

Promotes efficiency in capital formation in the financial markets. Registered federally w/ SEC or just states.

Federal Covered Advisers $110 million and over assets under management

Regulatory authority: Federal (SEC)

Federal Covered Advisers $100 million up to $110 million assets under management

Regulatory authority: State or Federal

Static Content

Remains posted until changed by the person who established the account on the site

Institutional client is synonymous with

Retail client

Arbitrage

Simultaneous buying and selling of the same security in different markets to take advantage of different prices; it is not a form of market manipulation and is legal

Federal Covered Advisers under $100 million assets under management

State (Administrator)

Which of the following is responsible for the administration of the USA in a state?

The Administrator

Contumacy

The administrator may apply to the appropriate court in her state and ask for help. May enforce subpoenas issued by Administrators in other states on the same basis as if the alleged offense took place in the Administrators state

Not wishing to confuse a client, an agent omits certain details about a new issue during an offer of the security. This omission would probably be considered a fraudulent act if

The information was material and was necessary to make other statements not misleading

Primary transaction

The issuer will receive proceeds from the transaction

Which of the following must be furnished to the client no later than with the opening of a margin account?

The risk disclosure document

Civil liabilities: statute of limitations

The sooner of 3 yrs from the date of alleged violation or 2yrs from the date of discovery of the violation *claims survives death of either party *client who proves loss due to a violation can sue against professional's surety bond

Form ADV Part 1A

contains information about the IA

Churning Customer Accounts

Transactions excessive in size or frequency in view of customer resources, objectives, or character of the account

Ethical or unethical? Disclosing details of a client's personal account to a spouse without the client's consent.

Unethical

Ethical or unethical? Entering into an advisory contract without disclosing conflicts of interest which could impair unbiased and objective advice.

Unethical

Ethical or unethical? Failing to make a bona fide public offering of all of the securities allotted to a broker-dealer during distribution of an IPO.

Unethical

Ethical or unethical? Helping your former college roommate raise funds for a new commercial enterprise by selling stock in the company directly and not through the BD.

Unethical

Ethical or unethical? Indicating, in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of the USA or of the investment Advisers Act of 1940 as long as agreed to by the client.

Unethical

Ethical or unethical? Sharing in the profits and losses in a customer's account without the written consent of the BD.

Unethical

A registration statement has been filed using the process known as qualification. Under normal circumstances, this registration will become effective

When so ordered by the Administrator

Rights of rescission

amount paid back to the buyer must include original purchase price and interest rate determined by administrator. Buyer has 30 days to respond. No response = forfeiting right to pursue a lawsuit at a later date. Rejecting = able to take the case to court

Issuer

a person who issues or proposes to issue a security

An advisor who compensates a non-affiliated third party promoter for edorsing the services of the IA must have

a written agreement with that promoter if the compensation will exceed $1,000 over a 12 month period

Form ADV Part 1B

additional ?'s required by state securities authorities

In order for a surety bond to meet the requirements of the Uniform Securities Act, it must provide that

any customer who can prove a violation is entitled to collect against the bond

An agent with a broker-dealer making a recommendation to a client would have to disclose

any incentives offered by the issuer to the agent

Form ADV 2B

brochure supplement, must contain certain info about "advisory personnel on whom clients rely for investment advice " 1. cover page 2. Ed background and business experience 3. Disciplinary info 4. Other business accounts 5. Additional compensation 6. Supervision

If an offer is made by a television

the state where the camera is located has jurisdiction

If an offer is made by radio

the state where the microphone is located has jurisdiction

Form U4

used for agents and IARs to apply for registration