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Flashcards in 1 - Federal Securities Regulations Deck (32):
1

Four conditions of investment contract as a security

The investment of money
in a common enterprise (pooling)
with an expectation of profits and
that results solely from the efforts of others

2

Based on Howey Case what qualifies as a security

Stock
Bond
Debenture
Right or warrant
Note
Put,call or other option
Limited partnership interest
Certificate of interest in a profit-sharing arrangement

3

The Securities Act of 1933

The legislation addressed the need for better disclosure by requiring companies to register with the Securities and Exchange Commission. Registration ensures companies provide the SEC and potential investors with all relevant information by means of the prospectus and registration statement.

The other main point of the Securities Act of 1933 was to prohibit deceit and misrepresentations. The act aimed to eliminate fraud that happens during the sales of securities.

Prior to this legislation, the sales of securities were primarily governed by state laws.

4

Rule 147

The Rule 147 is a rule that can be used by a company to raise funds without actually registering with the Securities and Exchange Commission (SEC).

More specifically, this rule applies to Section 3(a)11 of the Securities Act of 1933, or the intrastate offering exemption. To qualify for this exemption, the company must meet requirements such as:

- The company must be incorporated in the state in which it is offering the securities.
- The company must carry out a significant portion of its business in that state, which is defined as at least 80% of its operations.
- The company must only sell the securities to individuals residing in the state of incorporation.

5

Cooling Off Period

20-days but usually longer. No one can solicit sales during the cooling-off period / take orders / distribute sales literature or advertising material, but indications of interest can be solicited with red herring / distribute prelim prospectus, publish tombstone advertisements.

Issuer files registration statement with SEC - Cooling off period - Effective date - offering period may begin

Broker Dealer or agents can not accept money or orders prior to the effective date.

6

What can the Red Herring NOT be used for

- as a confirmation of sale
- in place of a registration statement; or
- declare the final pubic offering price

7

SEC Reg D Rule 506

506(b) - A company seeking to raise capital through Rule 506(b) can sell the offering to an unlimited number of accredited investors and up to 35 non-accredited investors

506(c) - permits the offering to be advertised if the issuer believes that all investors are accredited, and the issuer takes reasonable steps to verify that all purchasers are accredited investors

8

SEC Rule 501 Accredited Investors

- a bank, insurance company or registered investment company
- an employee benefit plan if a bank, insurance company or RIA makes the investment decisions, or if the plan has total assets in excess of $5Mil
- a charitable organization, corp, or partnership with assets exceeding $5Mil
- directors executive offers, and general partners of the issuer
- any natural person whose individual net worth or joint net worth with that person's spouse, excluding the net equity in his primary residence exceeds $1Mil at the time of purchase
- any natural person who has income in excess of $200K in each of the two most recent years or joint income with that person's spouse in excess of $300K in each of those years and has reasonable expectation of reaching the same income level in the current year
- entities made up of accredited investors

Term only applies to private placements

9

Can assets in an account or property held jointly with another person who is not the purchaser spouse be included in determining whether the purchaser satisfies the net worth test in Rule 501

Yes, assets in an account or property held jointly with a person who is not the purchaser's spouse may be included in the calculation for the net worth test, but only to the extent of his or her % ownership of the account or property

10

Form D

Under rule 503 of Reg D an issuer that is issuing securities in reliance on Reg D must file Form D with the SEC no later than 15 days

11

Restricted Securities

unregistered securities purchased by an investor in a private placement and are generally restricted from resale for a stated period of time

12

Control Person

A corporate director, officer, greater than 10% voting stockholder or the spouse of any of the preceding is a control person

13

SEC Rule 144

certain resales of already existing securities could be made without having to file a complete registration statement with the SEC

14

Broker

any person engaged in the business of effecting transactions in securities for the account of others

15

Dealer

any person regularly engaged in the business of buying and selling securities for his own account

16

Self-Regulatory Organization

SRO is a national securities exchange or a registered securities association such as FINRA

17

Discretionary Account

Discretion:
- which security
- the number of shares or units
- whether to buy or sell

Discretion does not apply to decisions regarding the timing of an investment or the price at which it is acquired

The securities professional's ability to determine the time and/or price at which a specific customer order will be executed does not constitute discretionary power and, therefore, does not require written authorization.

18

Insiders

every person who is directly or indirectly the benficial owner of more than 10% of any class of equity seurity (other than exempt securites) registered on a national securities exhcang

- Offers or directors of the issuers of such securities

19

Schedule 13D Filings

If an individual accumulates a holding of more than five percent in the voting stock of a publicly traded company, notification must be made to all of the following

5% Beneficial owners of more than 5% of a class of equity securities registered under the securities Exchange Act of 1934

When an individual accumulates a holding of more than 5% in the voting stock of a publicly traded company, notification must be made on Schedule 13D within 10 business days to the SEC, the exchange where the issue is listed, and the issuer's board of directors. Notification to the state securities Administrator is not required.

20

In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by:

a majority vote of the fund's board of directors or of the outstanding voting shares as well as a majority vote of the noninterested members of the board.

When it comes to management investment companies (open-end or closed-end), renewal of the investment adviser's contract is approved annually by the fund's board of directors or a majority vote of the outstanding voting shares. The initial contract must be approved by both the board of directors and a majority vote of the outstanding shares. In both of these cases, initial and renewal, a majority vote of the noninterested (outside) members of the fund's board of directors is also required.

21

Identify the accredited investors from the list below.
1) An individual with a net worth of $800,000 and an annual salary of $150,000

2) A married couple with a net worth of $2 million consisting of a home worth $500,000 and pension plans and other assets worth $1.5 million

3) An insurance company

4) A corporation with a net worth of $3 million

II and III
Institutional investors such as insurance companies are regarded as accredited investors. An individual with a net worth of $800,000 and a salary of $150,000 does not meet either of the 2 qualification criteria for individuals, while the married couple with a net worth of $2 million, which, after excluding the value of the primary residence is still in excess of $1 million, is accredited. In order for a corporation to meet the definition, it must have a net worth of at least $5 million.

22

Under the provisions of the Securities Exchange Act of 1934, the SEC may suspend trading on a national exchange by notifying the:

The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification to the President of the United States and may summarily suspend securities trading in a registered security that is listed on a stock exchange for up to 10 days if it believes such action to be in the public interest.

23

Which of the following individuals would be considered a noninterested person in a mutual fund?
A) A person who holds a position with the fund's underwriter.
B) A member of the board of directors who is also employed as the investment adviser.
C) A member of the board of directors who does not hold another position within the investment company.
D) A shareholder who owns 10% of the fund's shares.

The Investment Company Act of 1940 defines an interested person as someone employed by or has a material business relationship with the fund, its adviser, or underwriter. Someone who owns 5% or more of the outstanding shares (an affiliated person) is also considered "interested". Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.

24

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $.25 per share and capital gains of $.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50 and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be:

The current yield on mutual funds is calculated by dividing the annualized yield ($.25 × 4 = $1) by the POP. In this case, $1 ÷ $30 = .0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth.

25

A broker-dealer makes a market in XYZ stock and places large orders for it on the open market either at or slightly above its current price with the aim of stabilizing the price. This unethical practice is best described as:
A) matched orders.
B) pegging.
C) straddling.
D) front running.

Pegging involves entering buy orders for the purpose of supporting a stock price (i.e., to keep it from falling). This is a form of market manipulation and is illegal. Front running involves a representative or firm entering orders ahead of client orders. Straddles are an option position that combines a put and a call on the same stock; there is nothing improper with that strategy. Matched orders involves buying and selling a stock from one hand to the other to create the false appearance of trading volume and is another form of market manipulation.

26

FinCEN Form 112, the Currency Transaction Report, is filed with the:

Currency transactions in excess of $10,000 are reported electronically on FinCEN Form 112 to the Department of the Treasury.

27

Under the Securities Act of 1933, which of the following are exempt securities?
- Securities issued by the U.S. government, government agencies, and any state or municipality
- Any security issued by a religious, educational, charitable, or not-for-profit institution
- Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution
- Any interest in a railroad equipment trust

Most of the securities exempt from registration and prospectus delivery requirements in the Securities Act of 1933 are also exempt under the Uniform Securities Act. Securities exempt under the Securities Act of 1933 include government issues, commercial paper, securities issued or guaranteed by financial institutions, regulated common carrier issues, and nonprofit charitable or religious institutions. There are three securities that are exempt under the Uniform Securities Act and not exempt under the Securities Act of 1933. Stocks and bonds issued by insurance companies, securities issued by foreign governments, and securities listed on certain exchanges are not exempt under the Securities Act of 1933.

28

Institutional Investors

banks
employee benefit plans with assets of no less than $1 million.
investment companies.

29

Who is not a Broker-Dealer

- Issuer
- Commercial Banks
- Out of state BDs: No office in state and only does business with institutions, issuers, other BD and existing non-resident clients
- Agents (employees of BD)
- Individual with a personal securities account

30

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of:
A) the majority vote of the board of directors.
B) the majority vote of the outstanding shares and a majority of that portion of the board of directors that are considered noninterested members.
C) the majority vote of the noninterested directors.
D) the majority vote of the outstanding shares.

The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members.

31

The Securities Exchange Act of 1934 regulates or mandates each of the following

A) extension of credit to customers.
C) manipulation of the secondary market.
D) creation of the SEC

The Securities Exchange Act of 1934 created the SEC and regulates the secondary market. The Securities Exchange Act of 1934 does not address full and fair disclosure issues; the Securities Act of 1933 addresses such issues.

32

The Investment Company Act of 1940 allows a majority vote of outstanding shares of a registered investment company to authorize the fund to:
borrow money from a commercial bank.
invest funds in securities consistent with the fund's objectives.
change the objectives of the fund.
change the nature of its business and cease to be an investment company.

which of the following powers does the SEC have at its disposal to enforce the act?

I, III and IV

Under the Investment Company Act of 1940, a vote of the majority of outstanding shares may approve borrowing money from a bank, changing the investment objectives of the fund, and deciding to cease to be an investment company. Shareholder approval is not necessary to authorize the fund to invest consistent with the fund's objectives.


The SEC may conduct investigations.
The SEC may subpoena witnesses and administer oaths.
The SEC may make and issue rules.