Chapter 6: Federal Regulations

married couple accredited investor would need

$300,000 net income combinded

records must be kept for 3 years with first 2 in a ready location

- includes fingerprints. copies or orders, name and address of owners of accounts, employees u4 and u5

3 exceptions to the 2 year time our period

1)contributions of $350 or less per election, per covered associate for any election in which that covered associate is entitles to vote 2) $150 or less in which the covered associate is not entitled to vote 3)new covered associate and made a contribution 6 months prior

act of 1933

1.requires register of new issue with SEC 2. full and fair disclosure by the issuer 3. delivery of prospectus for the sale of new issue

ant fraud provision of act 33

apply to all securities

buyback

company purchases its own outstanding shares of common stock in open market

2 year prohbitation is

engaging in distribution and solicitation activities with the govt entity following a political contribution made to that entity - look back- rule applies to previous 2 years

5 years

monetary instrument sales record

tender offer

offer made directly to shareholder to buy all their shares - offer price is usually higher than market price- ENCOURGES shareholders to sell their shares

acquisition

one company purchases another and both are combinded to make large company

**Which of the following transactions would require the filing of a Suspicious Activity Report by a member firm?--Several wire transfers inconsistent with a customer's normal pattern of activity

FINRA Rule 3310 requires member firms to establish Anti-Money Laundering Programs which require the filing of a Suspicious Activity Report for transaction of $5,000 or more if the member firm knows or suspects a federal criminal violation. Transactions for which there is no reasonable explanation would be considered to be suspicious.

restricted shares

NOT REGISTERED-they are shares that have been aquired through private placement

**Brokerage Firms are required under SEC Rules to maintain books and records for certain periods of time. SEC Rule 17a-4 requires FINRA Member Firms to maintain Order Tickets for which of the following time periods? 3 years

Order Tickets must be kept under SEC Rule 17a-4 for a period of three years. Customer account records must be kept for six years.

**LMN Incorporated is listed on the American Stock Exchange. Jane sits on the board of directors for LMN and wishes to buy some LMN stock. She executes a trade on the floor of the AMEX and purchases the shares. How do the provisions of Rule 144 apply to this scenario?Jane is permitted to sell the stock purchased on AMEX immediately, but certain restrictions may apply.

Rule 144 applies to restricted stock and control persons. In this case, Jane is a control person, so the provisions of Rule 144 will apply to her. Here, she is buying fully registered stock off of the exchange. For this reason, there is no holding period on the stock purchased, but restrictions do apply to how much stock Jane can sell in any 90-day period. Therefore the best answer is that Jane is permitted to sell immediately, but she will be subject to the regulations on how much stock can be sold in any 90-day period.

34 ACT does not require registration of new securities - thats 33 act

SECONDARY MARKET

FINRA would not consider a contribution to include

a donation of time by an individual and charitiable donation that qualified for an exemption of federal taxation

money laundering

acceptance of large amounts of cash from indiv or businesses where money is suspected of being used for illegal purposes(drugs, terrosism, fraud)

**Which of the following would be considered an accredited investor?-A charitable organization with $50,000,000 in assets

accredited

example of pay to play

advisor gives money to a mayors campaign and hopes he will give firm underwriting manadate of a muni

government entity

all state and local govt, agencies, and all public pension plans, governemnt funds

sec rule 144a

allows sale of restricted securities to qualified institional buyers durings the 6 month restircted period--QIBS include insurance companies, banks, trust NOT INDIVIDUAL INVESTORS

covered associate

any general partner, managing member or executive officer of a covered memeber or other individual with similar status of function; any person who engages in distribution or solicitation in govt entity, any political action commitee contorlled by covered associates

contribution

any gift, subscription, loan, advance, or deposit of money made for the purpose of influencing any election , payment of debt incurred in connection with an election. transition or inaugural expenses of successful candiate

covered member or associate:covered

any member that solicits a govt entity for investment advisory services

firms must file suspicious activity report for

any transactions of $5,000 or more where the firm detects any known or suspected federal crinmina violation - must suspect it involves illegal activitym designed to evade regulations, no lawful purpose

sec rule 145

applies to registratopm of transactions where an offer to sell or offer for sale would be considered to have been made as part of a meger, consolidation, or stock reclassification - DOES NOT require registration with SEC for changes in par value or stock spilt

life

articles of incorporation, artclies of partnership, stock certificates

6 years

blotters, ledgers, customer account info, securities records

reg d offerings exempt limitations

cannot exceed $5m, offered to accredited ijnvestors, non accredited investors may particpate if they are provided memorandum(to no more than 35), may use advertising

Money laundering concern goes unreported

consequences could include termination of employment, fines and crinaml prosectuion

covered investment pools

covered memeber engages in distribution or solicitation activities with a government entity on behalf of a covered investment pool

4 years- first 2 in a ready location

customer compliants(maintained at the office of supervisory jurisdiction)

partiot act

detect and prvent terroism - faciliates info sharing among govt agencies, update laws, requires firm to obtain customers social secuirty #, basic info

insiders MAY NOT

distribute an unrealeased press report that contains info-called insider info- they may not act on info they know-

customer protection rule

ensures customer funds helf by a b/d are deployed in safe areas of the business related to servicing servicing the firms customers

1933 defined as securities

equity, debt, mutual funds, UTI, real estate lps , vairable annuity contract

firms implent a money laundering program that

establishes policies and detect activites, comply with bank secrecy act,

certain returned contribution

exception from the rules for covered memebers if the restriction is due to a contribution made by a contrinution and: the meber discovered the contribution within 4 months of it being made, less than 350 and contribution is returned within 60 days

currency transaction report

file this for transaction involving cash over 10,000 for one person in the aggergate in a single business day

sec rule 147 - intrastate offering

for a period of 6 months from the date of the last sale by the issuer- all sales and resales may be made only to residents of the same state - exempt from the standard reg requirements

customer identification program

identify customer by checking if name is on terroist list which is a key step in the account opening process must verify account info within 5 days --must be kepy got 5 yerars after account is closed

1933 fraud

if issuer is found liable- investor would be entitled to payment of the orginal purchase price plus interest or danages if the investor no longer owns the security

money laundering abatement act

imposes additional customer identification requirements including: verification of indenity of customer opening an account within 5 bu days, maintance of customer identity records- confirmation they are not on terrosit list

regulation s-p privacy rules

imposes privacy rules on financial institions- provides notice to consumers abour privacy policy-b/ds cant share info-

financial crimes enforcement network fin CEN

in in the treasury- used to combat money laundering and promote national security through the collection, analysis and dissemination --exercies functions in regard o bank secrecy act (anti money laundering and counter terroism act)

1933 exempt securities

include any insurance or endowment policy or annuity contract--

instional investorts

include mutual funds, insurance

key provisions of 34 act include

insider provision, solicitation of proxies, provides companies to send annual reports, b/d must inform customers of any free credit balance left with the firm at least quarterly

accredited investors include

institional investors, venture capital firms, tax exempt organizations, individuals with $1m of net worth or $1m of network excludding residence, an individual who has income excess of 200,000 or joint income of 300,000 in each of the last 2 years and expects that, any trust with assets over $5m

political contribution pay to play rules

invested advisors or associates seek to influence advisory business by making or soliciting political contributions to the govt officials charged with such busininess

rule 506 b traditional private placement

issuers can conduct quiet private placements without ads but non accredited investors may particpate if they get a memorandum, -NO MORE THAN 35 sophisacted -restricted- must hold stock for 6 months

suspecious activity includes

lack of concern regarding risk and commisson, frequent trading, strange requests, repeated money movements - MUST FILE WITHIN 30 DAYS

reg A offering

limited size offering where securities cannot exceed$50m in any consecurtive 12 month period - SHORT TERM REGISTRATION - prospectus not required- shares not restircted

3 key prohibitations

look back(cannot for 2 years), prohibation of 3rd party solicators(subject to rule if they arent covered persons) and prohibits bundling

insider provision

may not sell shares of their companys stock or short against the box, must report their holdings and any changes in their holdings to SEC, are prohibted from doing short swings(selling secuirty within 6 months of purchase)

new rule 506c offering

may not use ads, but all purchasers must be accedited investors- and issuer must reasonablly believe that they are accreited by taking steps to verify

finaicial firms that transfer fund, including wire transfers of 3,000 or more

must collect, retain and record certain info -- including name and adress of transmitter- account #, amount, financial instition - verify indentity who is not an establisehd custimer

privacy notice must be delivered to new customers

no later than when the relationship is established with the customer- and you provide an annual privacy notice to all clients

exchange offer

offer by a company to exchange shares or common stock or bonds for other securities offered by the company- happens if companies do not have cash

money laundering occures in 3 states

placement- cash enters fin system, layering- funds are moved into other accounts, integration- funds are reintroduced into the economy to purchase legitimate assets

34 Act

protect the public against unfair and inequitable practices in seconadary market, says- must be registered- must provide annual reports- regulated insider trading - DOES NOT REGULATE COMMODITIES

reg d offering (private placement rules)

provision under 33 act - exempting private companies from filing requirements under certain conditions- provides for an exemption from full registration for security offerings based on limitations

for a security to be sold in a state the security must either be

registered in the state or exempt from registation in that state or a fed covered secuirty listed on exchnage- for RR to sell security in a state they must be registered in that state

RULE 144 summed up

regulates restircted stock sold by anyone--regulated amount of stock that can be sold by control persons in any 90 day period (1% of outstanding or avg trading volumes for previous 3 weeks-whichever is greater)

new issue ADR

require registration with the SEC

federal trade comission red flag rule

requires many businesses and organizations to implement a written identity theft protecion program designed to detect red flags of identity theft - red flags are suspicious document, strange accouny activity, warning fromc credi reporting

rule 144 requires

restricted be own for 6 months, public info must be available, sales in any 90 day period are limited to either !% of outstanding stock or the average trading volume for the previous 4 weeks(whichever is greater)

sec rule 144

sets forth conditions under which a holder of unregistered may make a public sale without registration, covers resale or restricted and control stock

control shares

shares acquired by an affilated person or control person of the company

blue sky laws

state securities laws that prohibit misrepresenation, misleading statements, and sales by persons not registered or licensed in the state

merger

two companies are combinded - ownership of one of the companies is transferred either by cash payment or swap of shares of stcock

securities exempt from registration are

us govt securities, muni securities, intrastate offerings, reg a offering, small bus investment companies, reg d(private placement) offering, building and loan, cormerical paper(270 days or less)

shelf registration

using single registration statement, a corp can register all securities it intends to issue in the upcoming 3 year period- then issue them from the "shelf" without filing