Series 6: Regulations (Securities Act of 1933)

The Securities and Exchange Commission has no comments on a registration statement filed under the Securities Act of 1933. Once registration becomes effective, this means that the:

20-day "cooling off" period has elapsed without further information demands by the SEC The SEC does not approve, nor does it disapprove of new issues. Registration simply means that the issuer has filed the required disclosures with the SEC, and must give these disclosures to each potential purchaser at or prior to confirmation of sale. The issuer does this by giving the prospective purchaser a prospectus. Once the issuer files a registration statement with the SEC, the issue enters into the 20-day cooling off period. During this period, the SEC reviews the filing for full and fair disclosure. There can be no offer or sale of the securities during this time. If the SEC finds no deficiencies in the filing, registration becomes effective at the end of the 20-day period, and sale of the issue may commence at that time. On the other hand, if the SEC requires further disclosure, it will send a deficiency letter to the issuer, and sale of the issue cannot commence until the issuer cures these deficiencies.

Which statement is TRUE regarding "church" bonds?

A "church" bond is an exempt security under the Securities Act of 1933 Bonds issued by religious or charitable institutions are exempt from registration under the Securities Act of 1933. There are no exemptions, however, from the anti-fraud rules. Fraud is fraud, whether the securities involved are exempt or non-exempt.

Which statements concerning mutual fund tombstone advertisements and generic advertisements are correct?

A tombstone advertisement must include information on where to obtain a prospectus but a generic advertisement does not The differences between mutual fund generic advertising and tombstone advertising are: Generic advertisements may name only the principal underwriter and cannot name a specific fund company, but they can refer to mutual funds in general terms; Tombstone advertisements will name the fund company, a specific type of fund, the fund underwriter, and can include the offering price; Tombstone advertisements give information on where to obtain a prospectus, but generic advertisements do not because they do not identify a specific investment company; Neither generic nor tombstone advertisements are considered to be "offers to sell a security" because their content is so limited and they are non-promotional.

Which of the following actions may a representative perform during the "20 day cooling off" period?

Accept a customer's indication of interest for part of the issue During the "cooling off" period, the representative can send a preliminary prospectus (red herring). The red herring usually does not have the Public Offering Price and has a red disclaimer on it that "this is not an offer to sell" because offers and sales of the issue cannot be made during the 20-day cooling off period. The red herring is used to collect non-binding indications of interest from customers, but these are not sales of the issue. The representative may not offer or sell the issue. Accepting an order, confirming a certain amount of the issue, or accepting a customer's check for the issue, are all "sales" or "offers" of the security. The 1933 Act prohibits these until the issue's registration becomes effective.

Which statement about the prospectus is FALSE?

Any purchaser of the new issue must deliver a copy of the prospectus to a subsequent buyer if the issue is sold in the secondary market The prospectus is the disclosure document for a new issue that has been registered with the SEC. It consists of information included in the registration statement and must be delivered to purchasers of the new issue, at, or prior to, confirmation of sale. Any offer or advertisement of the security must be accompanied with, or preceded by, a prospectus. Note that "tombstone" advertisements are exempt from this requirement because their content is severely limited to the point where they are "non-promotional." They also must state where a prospectus may be obtained. Once the issue is trading in the secondary market, there is no longer a prospectus delivery requirement.

Which of the following is NOT a security?

Fixed annuity A fixed annuity is an insurance product. The insurance company invests the fixed annuity premiums in its general account and assumes the investment risk. All variable annuities are securities because the premiums are invested in a separate account - and the performance of the securities held in the separate account determines the annuity payment. With variable products, the purchaser assumes the investment risk, hence these are defined as securities.

Which of the following statements concerning a mutual fund prospectus is (are) correct? I A prospectus must have the SEC "No Approval" statement on the front page II A prospectus is really only a summary statement of what the fund's registration statement contained III The fund may not provide the prospectus to customers until the SEC approves it

I and II The prospectus is a summary statement the registration statement filed with the SEC. The SEC "No Approval" statement must appear on the front page of a prospectus. The "No Approval" clause emphasizes that the SEC neither approves nor disapproves any security offered by the prospectus. The SEC never approves any part of a prospectus; it only reviews the information filed in the registration statement to insure that there is "full and fair disclosure."

The Securities Act of 1933 deals only with primary issues. The Act requires issuers to provide complete and accurate information to prospective buyers. This is accomplished by delivering a prospectus to prospective purchasers of a new issue offering. The Securities Exchange Act of 1934 was enacted to prevent manipulation and fraud in the secondary market. The Securities Investor Protection Act of 1970 established SIPC coverage for customer accounts if a broker-dealer fails. The Investment Company Act of 1940 defines the different types of investment companies and sets the rules under which they must operate.

I and IV An issuer is the entity that receives the proceeds from an offering of securities. In addition to corporations, issuers include the federal government, states, municipalities and agencies. A broker-dealer that acts as an underwriter for an issuer does not receive the proceeds from the offering. Rather, the underwriter earns a fee (the spread) for handling the offering for the issuer.

Sales literature for investment company products is misleading if it: I represents that future gains are based on past performance II reports information that is out of context III incompletely explains comparisons to other investments IV lacks information about general economic conditions

I, II, III and IV Generally, sales literature is misleading when it contains false statements or omits material information. Among misleading statements are: Representing that future gains are based on past performance; Reporting information that is out of context; Incompletely explaining comparisons to other investments; and Omitting information about general economic conditions covering the time period over which performance is being shown.

Which of the following requires registration as a non-exempt security under the Securities Act of 1933? I A separate account II A variable life insurance contract III A variable annuity contract IV A fixed annuity contract

II and III Variable life insurance and variable annuity contracts are defined as non-exempt securities that must be registered under the Securities Act of 1933. This is the case because the premiums are invested in a separate account and the performance of the investments held in the separate account determines the amount of insurance or annuity to be paid. The separate account itself is defined as an investment company and must register with the SEC as such. However, the separate account is not a "security." A fixed annuity is not a security because the premiums are invested in the insurance company's general account and the performance of the investments does not affect the amount of the annuity to be paid. The insurance company bears the investment risk, so this is an insurance product.

Which of the following must be offered under a prospectus? I Whole life policy II Variable life policy III Universal life policy IV Variable universal life policy

II and IV only The Securities Act of 1933 defines any insurance funded from a separate account as a non-exempt security, since the policyholder bears the investment risk. Thus, variable life policies and variable universal life policies are securities whose sale requires delivery of a prospectus. Remember, if the product has "variable" in its name, it is a non-exempt security under the 1933 Act. Insurance companies fund whole life and universal life policies by general account investments and provide an interest rate guarantee. They are insurance, not securities, since the policyholder does not bear the investment risk.

Which of the following statements are TRUE regarding the SEC review of prospectus information? I The SEC approves the information in the prospectus II The SEC guarantees the accuracy of prospectus information III The SEC reviews the information for omissions or inadequacy IV The SEC requires that a prospectus carry a disclaimer regarding the scope of its review

III and IV only The SEC reviews prospectus information for adequacy and omissions. The review does not approve or guarantee any information. The SEC "No Approval" statement must appear on the front page of a prospectus. The "No Approval" clause emphasizes that the SEC neither approves nor disapproves any security offered by the prospectus. The SEC never approves any part of a prospectus; it only reviews the information filed in the registration statement to insure that there is "full and fair disclosure."

The Atlantis Bond fund has prepared a piece of sales literature to send to prospective customers, showing the fund's yield. How is the fund required to calculate the yield for this purpose?

It must use the standard 30-day current yield If a mutual fund shows a yield in advertising or sales literature, the fund must show current yield computed over 30 days according to a standard basis. If a fund includes quotations of average annual total return, the fund must provide information for 1-, 5-, and 10-year periods or for as long as the fund has operated (if that is less than these periods).

Which of the following statements describes the importance of the registration statement filed with the SEC for a new issue?

It provides full disclosure of important information about the issuer A registration statement is important because it provides full disclosure of important information about the issuer. For example, the registration statement includes information about the company's officers and directors, its capitalization, the nature of its business and how it intends to use the proceeds of the securities offering.

Which of the following securities is non-exempt under the Securities Act of 1933?

Mayflower Water and Gas Public Utility shares, listed on NYSE Shares of a public utility are non-exempt - they must be registered with the SEC. Utilities are "public" only in the sense that their rates must be approved by the State. They are corporations that exist to make a profit; and their securities offerings are subject to the Act of 1933's registration and prospectus delivery rules. U.S. Government and municipal issues (such as the City of Boston bonds and the Rhode Island Industrial Development Authority bonds) are exempt under the Act of 1933. There is no registration statement filed with the SEC and no prospectus.

When including performance data in mutual fund advertising, industry rules limit the information a fund may provide to all of the following EXCEPT:

Projections of future earnings SEC regulations for mutual fund advertisements allow past performance to be shown, but do not permit the use of projections or estimates of future earnings. The performance measures that can be shown are average annual total return, 30-day current yield, and taxable equivalent yield.

Which of the following requirements was enacted by the Securities Act of 1933?

Registration of newly issued securities with the SEC The Securities Act of 1933 requires registration with the SEC of newly issued securities.

Which of the following permits tombstone announcements?

Securities Act of '33 Tombstone advertisements for new issues are permitted under the Securities Act of 1933. The rules for tombstones limit their content to very basic, non-promotional information about the new issue offering. The tombstone must include a disclaimer that "this is not an advertisement" - since technically, a non-exempt new issue cannot be advertised without delivery of a prospectus. It must also contain a statement that the issue "is only offered through the prospectus."

Which of the following securities laws requires full disclosure for new equity issues offered to the public?

Securities Act of 1933 The Securities Act of 1933 deals only with primary issues. The Act requires issuers to provide complete and accurate information to prospective buyers. This is accomplished by delivering a prospectus to prospective purchasers of a new issue offering. The Securities Exchange Act of 1934 was enacted to prevent manipulation and fraud in the secondary market. The Securities Investor Protection Act of 1970 established SIPC coverage for customer accounts if a broker-dealer fails. The Investment Company Act of 1940 defines the different types of investment companies and sets the rules under which they must operate.

Which of the following documents is made available to mutual fund investors only upon request?

Statement of Additional Info A Statement of Additional Information is a supplement to the prospectus and is made available only upon request to shareholders. The Statement of Additional Information is separate from the prospectus and provides a current look at the fund's financial statements and portfolio composition. It includes a schedule of investments, a statement of assets and liabilities, an income and expense statement, a statement of changes in net assets, and an auditor's report. The prospectus may incorporate this Statement by reference. The prospectus must be given to a prospective customer at, or prior to, the time of a sale of mutual fund shares. The breakpoint schedule must be included in the prospectus. Mutual funds are required to provide shareholders with semi-annual financial statements.

An advertisement in a newspaper states that Bean, Stalk & Co. sells growth funds. Which of the following statements about this advertisement is correct?

This advertisement is a generic ad Generic mutual fund advertisements may include general information about types of securities offered and instructions for obtaining additional information with fund underwriter contact information. Generic advertisements cannot include information about specific securities. An advertisement that provides only the name of the mutual fund underwriter is a generic ad. Consequently, Bean, Stalk & Co. is an underwriter and not an investment company. Generic ads may identify the underwriter, without stating where to obtain a prospectus. Regarding filing of mutual fund advertisements with FINRA, all mutual fund advertisements must be filed with FINRA 10 days after first use (with some minor exceptions).

When may a registered representative mark the charts in a prospectus for a variable annuity during a presentation to a customer?

Under no circumstances A prospectus is a legally prepared document that cannot be altered when it is presented to customers. The information as filed with the SEC must be presented in the same manner to customers. Marking up, highlighting, or summarizing a prospectus are all prohibited.

All of the following information appears in a mutual fund prospectus EXCEPT:

a Statement of Additional Information The fund prospectus provides details of the fund's investment objectives, management, management fees, sales charges, breakpoints, letter of intent provisions, rights of accumulation, etc. The Statement of Additional Information is separate from the prospectus and provides a current look at the fund's financial statements and portfolio composition. It includes a schedule of investments, a statement of assets and liabilities, an income and expense statement, a statement of changes in net assets, and an auditor's report. The prospectus may incorporate this Statement by reference.

Sales literature for the Atlantis Growth and Income fund contains a performance chart showing "Total Return." The chart must cover:

at least 10 years or the life of the fund, whichever is shorter If a fund includes performance data on average annual total return, the computation must be for 1, 5, and 10-year periods, or for as long as the fund has operated, if shorter.

When a new security is offered for sale in interstate commerce with a prospectus containing untrue or deceptive information, the registered representative who uses the prospectus:

can be held liable for damages in a civil action, along with his or her broker-dealer When a security is offered using a prospectus that contains untrue or deceptive information, both the registered representative and his or her company can be held liable for damages in a civil action. This basically means that the customer will get his or her money and legal costs refunded. The representative will not violate a criminal statute (meaning fraud) unless he or she acted knowingly and intentionally. There is no prospectus requirement for exempt issues, such as Government, Agency and Municipal securities.

A tombstone advertisement for a new stock offering can include all of the following EXCEPT the:

issuer's earnings growth A tombstone announcement is very limited in its content, because it cannot be promotional. It can include the name of the issuer, type of security being offered, number of shares or bonds being offered (the size of the offering), estimated Public Offering Price and the names of the underwriters. It cannot include detailed information about the issuer such as earnings growth, nor can it include anything that is remotely promotional in nature. The tombstone must include a disclaimer that "this is not an advertisement" - since technically, a non-exempt new issue cannot be advertised without delivery of a prospectus. It must also contain a statement that the issue "is only offered through the prospectus."

If an issuer files a registration statement with the SEC, this means that the issuer intends to:

make an offering of securities to the public An issuer must file a registration statement with the SEC before it can offer a new issue of securities for sale. Sale of the issue is permitted once the registration statement is "effective." The effective date occurs at the end of the 20-day cooling off period.

If a mutual fund advertises performance data and discloses its sales load, the advertisement must disclose the fund's:

maximum sales load If a fund charges a sales load and advertises its performance data, the fund's advertisement must disclose the maximum amount of the load. In the alternative, the fund may state in the advertisement that the data does not reflect deduction of the maximum sales load or fees and that reflecting them would reduce the performance from what the fund presented.

A prospectus must accompany or precede a:

registered representative making the face-to-face sales presentation of mutual funds to a customer Every mutual fund share is technically a "new issue" that is offered or sold with a prospectus. A face-to-face mutual fund sales presentation by a registered representative is an offer of securities and must be preceded by, or accompanied with, a prospectus. An invitation to a seminar is not an offer of securities. A generic brochure is exempt from the prospectus requirement because this brochure does not offer specific securities. Television or other mutual fund advertisements are severely restricted as to their content, so that they are no more than "tombstone" ads that give very general information. They are exempt from the prospectus delivery requirement, but they must disclose where the prospectus can be obtained.

Prior to the filing of a registration statement with the SEC for a new issue, a registered representative CANNOT:

send a "red herring" to customers take an indication of interest accept a customer order Before the issuer files a registration statement, the representative can do nothing. Once the registration statement is filed, the issue enters into the 20-day cooling off period, during which time the SEC reviews the filing. During the 20-day cooling-off period, an underwriter may distribute a preliminary prospectus called a red herring. It usually does not have the Public Offering Price and has a red disclaimer on it that "this is not an offer to sell" because offers and sales of the issue cannot be made during the 20-day cooling off period. The red herring is used to collect non-binding indications of interest from customers, but these are not sales of the issue. The representative may not accept orders until after the registration becomes effective, and then only by using the final prospectus to offer and sell the security.

The Securities Act of 1933 applies to the purchase of:

shares of Dwarf Mutual Fund offered through a broker-dealer and a newly issued corporate bond offered through a broker-dealer The Securities Act of 1933 applies to new issues of non-exempt securities. The shares of The Colossal Fund were purchased on an exchange, so Colossal is a closed-end fund trading in the secondary market and is not a new issue. Thus, the Act of 1933 does not apply. Dwarf Mutual fund is an open-end management company. Open-end funds are a type of investment company that continuously offer and redeem their own shares. Every mutual fund share is a newly-issued security that is non-exempt under the Act of 1933. They must be registered with the SEC and sold with a prospectus. Municipal bonds are exempt securities - as are government and agency issues. New issues of corporate securities, including corporate bonds are non-exempt securities that are subject to the 1933 Act.

Snow White Mutual Fund is planning a tombstone advertisement to market its shares. The advertisement may include all of the following EXCEPT:

testimonials of financial experts A tombstone advertisement for a mutual fund may identify the investment adviser to the fund, the name of the fund underwriter, the investment objective of the fund and the fund's classification or subclassification. It cannot include a testimonial, since this would make the advertisement promotional.

A prospectus must be delivered to the purchaser of all of the following, EXCEPT:

universal life policy Universal life premiums are invested in the insurance company's general account, so it is an insurance product, not a security. In contrast, variable life and variable annuity premiums are invested in a separate account, where the purchaser bears the investment risk. These are defined by the SEC as non-exempt securities that must be sold with a prospectus. Investment company offerings, including open-end funds, initial public offerings of closed-end funds, and unit investment trusts, are all non-exempt securities that must be offered through prospectus under the Securities Act of 1933.