Ch. 6 - Federal Acts

According to the Securities Exchange Act of 1934, which of the follow items would be required on an order ticket for a securities transaction? I The account number II The designation of the IA, if the order is enter by an IA on behalf of a client III The price of the security at the time the order is entered IV The terms and conditions of the order

(I, II, IV) : All choices offered would be required on an order ticket except that you would NOT need the price of the security at the time the order is entered.

Under the Securities Exchange Act of 1934 when a customer confirmations require the following information to be disclosed to customers at or before completion of a transaction:

* Date of the transaction * Identity of the Security * Price of the security * Number of shares traded * Principal amount traded if it is a bond or debt security * Whether the broker/dealer acted in the capacity of an agent or principal * Yield to Maturity * Yield at which the trade was effected Note: The bond's rating would not be required on the confirmation

Qualified Purchasers

- 2 or more natural persons with over $5M in investments (family company) - A person (such as an institutional investor) who owns and invests at east $25M in investments - A trust not formed for the specific purpose of acquiring securities

Under the Investment Advisors Act of 1940, disclosure is required to be made to customers about what 4 things?

- Compensation paid to the advisor by the issuer for recommending their security. - Compensation paid to the advisor by a broker/dealer. - Compensation paid to the advisor by an insurance company. - The ability of the customer to use any broker/dealer to execute recommended portfolio transactions.

Exclusions to the definition of security:

- Fixed life policies - Endowment policies - Fixed annuities - Commodity futures contracts - Precious metals - Real Estate - Pension and profit sharing plans

Exclusions from the definition of an IA under the Investment act of 1940

- US Banks and holding companies - LATE professions w incidental advice - BDs w incidental advice - Publishers of bona fide newspapers or financial publications for general circulations - Any person who only advises about US GOVT securities (Note, remember that this differs from the USA, where an advisor must be registered to give advice regardless of the type of securities)

Exempt Securities Under the IA act of 1933:

- US Govt Securities - Muni Securities - Reg D and Reg A securities - Commercial Paper - Promissory Notes (50k or greater within 9 months) - Securities issued by SBIC - Banks / Savings & Loans - Motor carriers (regulated) Note: Insurance companies and investment companies are not exempt

Exempt Securities under the USA

- US Govt Securities - Muni Securities - Securities issued by Canada and its proviences - Banks/Savings &Loans - Credit Unions - US Insurance Companies - Listed on an exchange (federally covered) - Non-Profit issues - Promissory Notes and Commercial Paper (50k or greater within 9 months) - Public utility and common carrier - Investment contracts with employee stock purchase

USA record keeping requirements (2)

1. Admin may prohibit custody of client funds and securities 2. Notice must be given to the Admin if an IA has custody of client funds or securities

3 federal statues relevant to IAs and IARs

1. The securities act of 1933- 'paper act', new issues, full and fair disclosure. Requires all paperwork and gets securities in the hands of the public. 'primary market' 2. The securities exchange act of 1934 - 'securities exchange' 'people act' 'secondary market' 3. The investment COMPANY act of 1940- regulated all investment companies and mutual funds

Investment Advisors Act of 1940 record keeping requirements (4)

3. The IA must maintain separate bank accounts for each client under the client's name or the IAs name 4. Prompt Notice must be given by the IA to each client in writing of the location and manner in which funds and securities will be maintained and if there are any changes to this information 5. Account statements must be sent at least quarterly 6. An independent CPA must verify client funds and securities by an unannounced exam 1x per year (independent CPA, not certified like NASAA)

What is the penalty for trading on material non public information?

3x the gain or loss

North American Securities Administration Association Definition and 6 record keeping requirements

A voluntary organization, established in 1919, of securities regulators whose aim is to protect investors who buy securities or investment advice by educating the public, investigating violations of state and provincial law and filing enforcement actions. All record keeping rules apply under the NASAA: 1. Admin may prohibit custody of client funds and securities 2. Notice must be given to the Admin if an IA has custody of client funds or securities 3. The IA must maintain separate bank accounts for each client under the client's name or the IAs name 4. Prompt Notice must be given by the IA to each client in writing of the location and manner in which funds and securities will be maintained and if there are any changes to this information 5. Account statements must be sent at least quarterly 6. An independent CPA must verify client funds and securities by an unannounced exam 1x per year ("certified independent CPA)

According to the Investment Advisors Act of 1940, which of the following are excluded from the definition of "investment advisor"? I. an insurance company formed under the laws of the state II. a bank which is not an investment company III. a person whose investment advice relates solely to securities issued by the U.S. Government

According to the Investment Advisors Act of 1940, an investment advisor is an individual who receives compensation for investment advice. The exclusions from this definition include any bank or bank holding company and any person whose advice or services is related only to U.S. Government securities. When looking at the exclusions from the definition of an Investment Advisor, according to the Investment Advisors Act of 1940, choices II and III are specifically listed. There is not an exclusion listed for an insurance company formed under the laws of a state.

Willful violations of the Investment Advisors Act of 1940 are punishable by: I. a fine up to $10,000 II. imprisonment for up to 5 years III. a bar from associating with any investment advisor

According to the Investment Advisors Act of 1940, willful violations of the act can be punished by a fine of up to $10,000 and imprisonment for up to 5 years or both. The Act does not address the barring of an investment advisor. (statute is 3 yrs)

When does registration become effective in the 1933 act?

After a minimum 20 day waiting period or 'cooling off period'

Are BDs considered underwriters?

By basic definition, broker-dealers are included in the definition of underwriter because they underwrite new issues. Issuers are issuers, and do not underwrite their own issues. Investment advisers are registered to give investment advice. Agents work for broker-dealers, but are not included in the definition of underwriter.

Exempt Reporting Advisor

Certain investment advisers qualify for an exemption from full registration, but must still file paperwork with the SEC. These investment advisers are referred to as exempt reporting advisers. Advisers who provide advice solely to one or more venture capital firms are defined as exempt reporting advisers. As well, advisers who solely provide advice to private funds and have assets under management in the US of less than $150,000,000 are considered exempt reporting advisers. An adviser to a registered investment company would be considered a federal covered adviser. An adviser servicing accredited investors with less than $100,000,000 in assets under management would be considered an investment adviser and would have to register at the State level with the Administrator.

According to the Investment Company Act of 1940, which two of the following are prohibited unless the investment company files an application for an exemption with the SEC? I. a change in the investment policy of a diversified open-end fund II. a merger between two registered investment companies III. a purchase by the investment company of property from the fund's investment advisor IV. a loan from the fund to its principal underwriter

Choice II and III are prohibited by the Investment Company Act of 1940 unless an exemption from the SEC is obtained. Choice I is allowed if a majority of voting shareholders approve. Choice IV is not directly addressed in the Act.

Investment ADVISORS act of 1940

Designed to regulate advice, publications, and reports prepared and distributed by IAs. It is a federal statute that is the primary source of all the rules and regulations governing IAs at the federal level.

Exclusions and exemptions to the definition of an IA under IA act of 1940

Exclusions: - IAs who give advise on US govt securities only - Banks and Bank Holding companies - BDs and Agents not acting in advisory capacity - LATE professions w incidental advice - Publishers who give general advice Exemptions: 1. An IA whose clients are all residents of the state within which the IA maintains its principal office and place of business and does not furnish advice about securities listed on a national securities exchange 2. An IA whose only clients are insurance companies 3. Exempt reporting advisors per the provisions of Dodd Frank - Advisers who provide advice solely to one or more venture capital firms are defined as exempt reporting advisers. - As well, advisers who solely provide advice to private funds and have assets under management in the US of less than $150,000,000 are considered exempt reporting advisers.

Exclusions and exemptions to definition of a BD under USA

Exclusions: 1. Agent 2. Issuer 3. Banks, Savings Institutions, and loan companies 4. A person who has no place of business in the state and only effects transactions with: -Institutional investors - individual investors who are not residents of the state and are only in the state temporarily Exemptions: None

Exclusions and exemptions to definition of an IA under USA

Exclusions: 1. IAR 2. BANKS, SAVINGS, LOANS, and TRUST COMPANIES 3. LATE professions w incidental advice 4. BDs and Agents not acting in advisory capacity 5. Publishers who give general advice 6. Federal Covered Advisers 7. Employee Benefit Plans Exemptions: 1. Their only clients in the state are not members of the public 2. During any 12 month period they do not direct business with more than 5 retail clients

Definition of an IA

IA - a person who receives compensation for advising others about securities.

Under the Securities Exchange Act of 1934, reports filed by issuers with the SEC must be made available to the public:

Immediately. EXPLANATION Reports required by the SEC are made public immediately. One of the main purposes of the SEC is to attempt to see that full and fair disclosure is made to the public.

Accredited Investor

Individuals with a net worth of $2M or assets under management of $1M

Federal Covered Security

Securities that are covered under federal law under the securities act of 1933 including: SEC registered securities - Listed Securities on a national stock exchange - Investment companies - Securities sold to qualified purchasers Securities Exempt from Registration - US Govt Scurities - Interstate Muni Securities - Reg D Securities **Most securities are federal covered securities, meaning they will only need to be registered w the SEC

According to the Investment Advisers Act of 1940, what is an SEC-registered adviser is required to deliver or offer to deliver to their advisory clients?

The Brochure Rule of the Investment Advisers Act of 1940 requires investment advisers to deliver or offer to deliver the written disclosure document (brochure) at least annually.

The Investment Company Act of 1940 regulates which of the following? I. Investments by one investment company in another II. Who may or may not have custody of investment company assets III. The return to its clients an investment company must achieve in order to remain registered

The Investment Company Act of 1940 does regulate restrictions on one investment company into another investment company and does regulate who may or may not have custody of investment company assets. However, the Act does NOT regulate returns to clients. That is determined by the market performance of the securities in the funds portfolio.

Registration as a Federal Covered Advisor

Uses 'Form ADV' SEC generally approves registration within 45 days of filing of form ADV Registration is denied to anyone who spent 1+years in prison

When must one file form 13-D with the SEC?

Whenever an investor, be it an individual or an investment advisor, owns 5% or more of the outstanding securities of one company, they must file (Form 13-D) with the SEC. Must file within 10 days

Federal Covered Advisor

any IA who must register with the SEC. Includes an advisor to a registered investment company and advisors who manages 110m or more (must register) (if they manage 100m or more, they may register)