2 - State Regulation Under the Uniform Securities Act Flashcards Preview

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Flashcards in 2 - State Regulation Under the Uniform Securities Act Deck (52):
1

Administrator

refer to the office or agency that has the complete responsibility for administering the securities laws of the state

2

Broker-Dealer

any person engaged in the business of effecting transactions in securities for the account of others or for his own. When acting on behalf of others - broker
when acting on behalf of themselves - dealer

- primary business function is executing transactions in securities
- compensation earning in the form of commissions and markups

Under the USA, you are a broker-dealer if:
- you have a place of business in the state
- you have even 1 retail client in the state

A corporation that sells interests in an oil and gas limited partnership to investors with the proceeds going to the issuer.

3

Agent

any individual (natural person) other than a broker-dealer who represents a broker-dealer or issuer in effecting transactions in securities. whether that security is exempt or nonexempt.

An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if that individual takes securities orders from the public. Corporate entities, broker-dealers, and issuers are all excluded from the definition of an agent.

- Individual employed by BD to handle their customer orders to buy or sell securities
- Seperate function from an IAR

4

Investment Advisers

generally legal persons, such as corporations or partnership

- Primary business function is giving advice
- Compensation is earned in the form of fees or other charges, generally based on the amount of assets under management

The definition of investment adviser includes any person who for compensation engages in the business of advising others as to the value of securities or the advisability of buying, selling, or investing in securities or who, as a part of a regular business, publishes securities analyses or securities reports for individual investors on a paid subscription basis.

5

Investment Adviser Representatives

always individuals (natural person)

- Individuals employed by investment advisers to give advice to their clients
- After an IAR advises a client about a specific security, the next step is to contact the BD where that client maintains a brokerage account to give the buy/sell order to an agent

6

Exclusions from the Definition of Broker-Dealer

Persons not included in the definition of broker-dealer are:
- agents;
- issuers and
- banks, savings institutions, and trust companies (not engaged in broker-dealer activities)

7

Under the USA, you are NOT a broker-dealer if

- you have no place of business in the state
AND
- your only clients are other BDs, institutions and issuers of the security involved in the transaction

8

If XYZ is a registered broker-dealer with its lone office located in Texas, under which of the following circumstances must it also register in Louisiana? (choose two)
1) XYZ's only dealings in Louisiana are directly with issuers of securities in Louisiana.
2) XYZ engages in extensive transactions with the largest insurance company in Louisiana.
3) XYZ routinely sells nonexempt securities to extremely high net-worth residents of Louisiana.
4) XYZ purchases exempt securities from extremely high net-worth residents of Louisiana for resale to residents of Texas.

III and IV

Under the Uniform Securities Act, broker-dealers must register in any state that they engage in securities transactions with individual investors. The net worth of the individual is irrelevant.

Broker-dealers with no offices in the state who engage in transactions in the state with certain institutional investors, such as insurance companies or investment companies, need not register in that state. Transactions between the issuer and a broker-dealer are exempt transactions.

9

One of the terms defined in the Uniform Securities Act is "broker-dealer". Which of the following is NOT included in that definition?
1) An individual employed by a corporate entity to open new customer accounts for the purpose of trading securities.
2) A business entity seeking to raise additional capital using the regulated securities markets.
3) A person whose primary function is buying securities for his own account and for the accounts of others.
4) A person whose primary function is providing advice on what assets belong in clients' investment portfolios

I, II and IV.

A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the account of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.

10

If Wallace resigned his position as an agent with Rockland Securities to work for Gibraltar securities, which of the following parties must notify the Administrator of Wallace's move?

Rockland, Gibraltar, and Wallace.

When an agent with one broker-dealer resigns and affiliates with another, both broker-dealers and the agent must notify the Administrator of the change in registration. Notification is accomplished by filing Forms U-5 and U-4 with FINRA's CRD.

11

Surety Bond

Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of:

A surety bond is defined as a contract among at least three parties: the obligee: the party who is the recipient of an obligation. the principal: the primary party who will perform the contractual obligation. the surety: who assures the obligee that the principal can perform the task.

Unlike investment advisers where the USA specifies posting a surety bond in the amount of $35,000, the Uniform Securities Act does not specify an amount for broker-dealers. However, the NSMIA states that the Administrator may not require a broker-dealer be bonded in an amount above that set by the SEC. Furthermore, bonds will not be required of broker-dealers that maintain a specified net capital.

An amount not in excess of that set by the SEC.

Firms that maintain net capital in excess of minimum requirements may be exempted from the requirement of posting surety bonds. Agents exercising discretion over client accounts may be required to post a surety bond.

12

In the securities industry, when a person is acting in an agency capacity, the form of compensation received is

A) account maintenance charges
B) markup or markdown
C) fees
D) commission

commission

Broker-dealers act in the capacity of brokers (agency); they earn commissions. When acting in the capacity of a dealer (principal), the compensation comes from markup or markdown. Compensation in the form of fees is most common for investment advisers.

13

Which of the following must register as an agent under the Uniform Securities Act?

A) An individual who sells securities of an issuer to the issuer's employees without earning a commission.
B) A sales assistant who takes orders on behalf of agents in a branch office.
C) An administrative assistant who provides securities quotes to clients.
D) A broker-dealer with offices in the state.

A sales assistant who takes orders on behalf of agents in a branch office is required to register under the Uniform Securities Act.

An administrative assistant who provides securities quotes to clients is not functioning as an agent and need not register.

An individual who sells securities of an issuer to the issuer's employees without earning a commission need not register under the terms of the USA.

Remember, a broker-dealer is excluded from the definition of an agent under the USA.

14

It would not be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to divide or otherwise split the agent's commissions, profits or other compensation from the purchase or sale of securities with any person also registered as an agent for the same broker-dealer.

with any person also registered as an agent for a broker-dealer under direct or indirect common control.

as long as the arrangement is in writing.

as long as the client has approved of the sharing arrangement

NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker-dealer or one under common control. There is no requirement for the arrangement to be in writing and the customer has no say so in this matter.

15

Registration statements for securities:

Registration of securities under the USA may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and initial offering prices have not changed. Securities registration statements remain effective for one year from their effective date, and do not expire on December 31 of each year. Registrations of agents, investment advisers, and broker-dealers expire on December 31 and need to be renewed. Registration statements are effective for one year from their effective dates (or longer if the securities are still under distribution by the underwriters).

16

The Uniform Securities Act

The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws.

17

Which of the following are exempt securities under the Uniform Securities Act?

Common stock, not listed on any regulated exchange, purchased by an open-end investment company.

Preferred stock issued by an insurance company authorized to do business in this state.

Municipal bonds issued by Toronto, ON.

Private placements.

II and III

Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies, and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to business in this state is exempt. Private placements are exempt transactions, not exempt securities.

18

A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states and they would like to continue to do business with them while on their holidays.

Under the Uniform Securities Act:

this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states.

The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the BD must be properly licensed in its home province and they're only dealing in the states is with an existing client.

19

Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction?

A) The purchase of an unregistered nonexempt security by an individual client at that client's request.
B) An executor liquidates the estate's portfolio.
C) An agent sells U.S. Treasury notes to an individual client.
D) The sale of ABCD common stock, listed on the Nasdaq Stock Market, to a trust company.

Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, sales by fiduciaries, or unsolicited transactions are all exempt.

20

Not considered a security

- Fixed Insurance, endowment or annuities policies
- Retirement plans
- Commodities or futures contracts
- Condominiums - when used as personal residences

Currencies are not securities, but options on currencies are.

Nonvariable contracts issued by insurance companies are not securities.

retirement plans, nonvariable insurance policies, collectibles, commodities, condominiums, and currencies.

21

Differences between static and interactive content on social media include
- Only static content can be reused by others
- Only static content needs pre-approval
- Only static content can be changed by the person who originated it
- Only interactive content can be commented on by others

II and IV

Static content requires pre-approval. Interactive content can be reused by others and can be commented on by others. Both static and interactive content can be changed by its originator, but static can only be changed by its originator and interactive by the originator or others.

Static content can only be changed by the originator (or someone under that person's control).

One of the characteristics of interactive content, as opposed to static content, is that persons other than the original author may make comments.

22

Registration by:

- Qualification
A prospectus for securities registered by qualification must be given to each offeree:

- Coordination
- Filing/notification

Securities of a nonexempt corporate issuer that do not have a federal registration must be registered with the Administrator by qualifying with the Administrator. This process is called registration by qualification.

Prior to or concurrent with the sale.

Notice: Stocks listed on any of the three tiers of the Nasdaq Stock Market are federal covered securities and, as such, can only be required to notice file.

23

Examples of Exempt Transactions

The term "exempt transaction" means that a determination of whether the security is registered or is exempt from registration is not necessary to do the transaction. Exempt transactions avoid the necessity of registration and prospectus delivery.

A) the executor of an estate liquidates 1,000 shares of IBM held by the estate.

B) broker-dealer A has put together a syndicate of 15 insurance companies and pension funds to purchase the entire issue of XYZ Corporation's preferred stock.

D) Mammoth Mutual Fund purchased 250,000 shares of common stock in a nonissuer transaction.

The sale of an unregistered nonexempt security to an individual client at that client's request.

The sale of ABCD common stock, traded on the OTC Link, to an insurance company.

Transactions by executors, the sheriff, marshals, receivers, trustees in bankruptcy, guardians, or conservators are exempt. Sales to financial institutions, such as mutual funds and insurance companies, are also exempt.

An exempt security or transaction is exempt from the registration requirements and the requirements for filing of advertising and sales literature. It is not exempt from the antifraud provisions of the act.

the sale of securities to financial institutions is an exempt transaction.

24

Examples of Exempt Securities

Several types of securities are specifically exempt under the act, including equipment trust certificates issued by a state-regulated or federally regulated railroad.

High-quality (receives a rating in one of the three highest rating categories from a nationally recognized statistical rating organization) commercial paper is exempt if the term is nine months or less and it is issued in denominations of $50,000 or more.

Preferred stock issued by an insurance company authorized to do business in this state.

Municipal bonds issued by Toronto, ON. Bonds issued by the Province of Alberta.

Securities issued by insurance companies, and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to business in this state is exempt.

Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state.

An exempt security or transaction is exempt from the registration requirements and the requirements for filing of advertising and sales literature. It is not exempt from the antifraud provisions of the act.

25

Under the National Securities Markets Improvement Act of 1996 (NSMIA), investment companies registered under the Investment Company Act of 1940 are required to register:

As securities at the federal level only.

The purpose of the NSMIA is to eliminate dual registration, not to require identical laws.

The NSMIA requires that the SEC, rather than individual states, assume responsibility for the registration and regulation of federal registered mutual funds and other investment companies.

Thus, these federal registered investment companies are no longer required to register at the state level; however, they will likely have to pay state filing fees by going through the notice filing procedure.

26

According to the Uniform Securities Act, which of the following would be considered exempt transactions?
- The sale of a unlisted corporate bond by an executor of an estate.
- The gift of 100 shares of a NYSE-listed stock from a father to his minor child.
- Preorganization certificates subscribed to by 14 institutional investors during a 12-month period for which no payment has been made.
- An unsolicited order from an individual client to purchase a nonexempt, unregistered security

I and IV

Fiduciary transactions and unsolicited orders, regardless of the security being purchased or sold, are always exempt transactions under the USA. Preorganization certificates are limited to a maximum of 10 subscribers, whether individuals or institutions. A gift of securities is not a sale, so no transaction has taken place.

27

Which of the following would not be an issuer?

A) a corporation selling certificates of interest in a mining lease.
B) a partnership selling partnership interests.
C) a governmental agency borrowing money for short-term needs.
D) an investment company.

A

An issuer is any person who issues or proposes to issue any security. Issuers primarily include corporations and governments

Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note.

28

What makes a private placement an exempt transaction under USA

For a private placement to remain an exempt transaction under the Uniform Securities Act, the offer may be directed to no more than 10 individuals during any 12-month period.

Additionally, no commissions may be paid to agents of the offering broker on sales to noninstitutional buyers, and there must be reasonable belief that the purpose in buying the securities by noninsitutional clients is for investment rather than resale purposes.

However, just as with any other securities purchase, payment must be made in accordance with industry standards.

29

Person

What are the three non-persons

any individual, corporation, partnership, association, joint stock company, or trust where the interest of the beneficiaries are evidenced by a security, an unincorporated organization, a government or a political subdivision of a government

- minors
- deceased individuals
- individuals legally declared mentally incompetent

30

Principal

every business transaction has two principals - the buyer and the seller. When a BD trades for its own account, it is acting in the capacity of a principal

31

Under the USA, which of the following types of transactions can be entered into legally with unregistered, nonexempt securities?

A) Rights offering to existing shareholders with underwriting compensation of $.05 per share to the soliciting broker-dealers.
B) Solicited transactions with individual clients located within the state.
C) Public offering of stock in a new corporation.
D) Private placement offered to more than 50 institutional purchasers in the state.

D

Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to noninstitutional buyers are limited to a maximum of 10 in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions.

32

Excluded:

Exempt

Jurisdiction

not subject to covered by the law

not required to do something that others are required to do

legal authority to act

33

Under the USA, which party could NOT lawfully enter into a securities transaction?
A) Corporation
B) Municipality
C) Trust
D) Minor

D

minor - not a persons - represented by custodian
deceased person - represented by executor
legally incompetent - represented by guardian

34

According to the USA, under what circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent?
A) The transaction is exempt.
B) The employee is not paid any commission or salary.
C) Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent.
D) The securities are federal covered securities.

C

It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.

35

Which of the following statements (is)are TRUE?
An Administrator can suspend a pending registration on a summary basis.
An Administrator may not issue a stop order without prior notice and opportunity for a hearing.
An Administrator may cancel a registration for the same reasons he revoked or suspended a registration.
A) II and III.
B) I only.
C) III only.
D) I and II.

D

An Administrator can, on a summary basis, suspend a pending registration but may not issue a stop order without a prior notice and an opportunity for a hearing. Cancellation is different from revocation and is not a result of disciplinary action; it occurs when a registrant no longer exists, ceases to do business, is declared mentally incompetent, or cannot be located.

36

An unintentional omission of material facts when offering or selling a security may result in:
- civil liabilities.
- criminal liabilities.
- criminal penalties.

Civil Liabilities Only

An unintentional omission of material facts when offering or selling a security would result in civil, but not criminal, liabilities under the USA. If the omission of material facts is willful, it can result in criminal liabilities and penalties.

37

An agent in this state would be acting illegally if he sold:
A) securities guaranteed by a federal credit union organized under the laws of the state.
B) federal covered securities not registered in the state.
C) revenue bonds of Illinois in Florida that were not registered in Florida.
D) nonexempt securities properly registered in a neighboring state but not registered in this state.

An agent cannot sell securities in a state unless they are registered or exempt from state registration. Federal covered securities, tax-exempt municipal bonds, and securities guaranteed by a federal credit union organized in the state are all exempt from registration.

38

If securities of an issuer registered with the state are outstanding, how long after the effective date of registration must an issuer wait before the registration may be withdrawn?

Registration statements are usually effective for a period of 1 year from the effective date and may not be withdrawn during this period if any of the securities of the issuer of the same class are still outstanding.

39

Under provisions of the Investment Advisers Act of 1940, investment advisers that maintain custody of client securities are required to do all of the following EXCEPT:
A) maintain a separate ledger for each client showing all purchases and sales.
B) send an itemized statement to clients at least monthly.
C) keep copies of all confirmations sent to clients.
D) arrange for a surprise audit by an independent public accounting firm at least annually and subsequently file a report of the examination with the SEC.

B

Investment advisers that maintain custody of customer securities and/or cash are required to send statements to customers on a quarterly basis, not monthly. All of the other choices are correct statements and therefore not exceptions to the requirements.

40

Anyone who represents an issuer in effecting transactions between the underwriter and the issuer:
A) must be registered as an administrator.
B) must be registered as an agent.
C) is excluded from the definition of agent under the Uniform Securities Act.
D) must be registered as an investment adviser.

Under the Uniform Securities Act, a person representing an issuer in securities transactions between an underwriter and an issuer is not deemed an agent and is exempt from the agent registration requirements of the act.

41

A fraudulent transaction was initiated by an agent in Indiana by contacting a client residing in Iowa. After evaluating the offer, the client agreed to purchase the recommended security while vacationing in Florida. Which Administrator(s) has (have) jurisdiction?
The Indiana Administrator.
The Iowa Administrator.
The Florida Administrator.

I, II and III

Activities that originate in a state, are directed into a state, or are accepted in a state, fall under the jurisdiction of the Administrator of each of those states.

42

consent to service of process

Usually, all persons must sign a consent to service of process, which means that legal papers, such as subpoenas, meant to be served to a registered person, may be served to an Administrator, and will have the same legal force as if served to the individual or company in person. In essence, the Administrator has legally been given power of attorney to receive NON-CRIMINAL grievances on behalf of a registered person by the consent to service of process.

43

An agent of a broker-dealer has a client who lost her job but will be starting a new job in three weeks. The client is in need of $900 for the three week gap. Under what circumstances may the agent arrange a loan for the client?
A) If the loan is repaid within 30 days
B) If the loan is less than $1,000
C) If the client has $5,000 in her brokerage account
D) If the client is agent's niece

C

Loans may be made to clients if the person making the loan is in the lending business. Broker-dealers are permitted to lend money against securities held in client’s portfolios. This is known as a margin loan. In fact, with $5,000 in the account, current regulations would permit a loan of up to $2,500.

44

Under the Uniform Securities Act, the Administrator has the power to deny or revoke exemptions for which of the following types of securities?
Stock issued by a bank organized under the laws of another state.
Securities of nonprofit organizations.
Investment contracts issued by employee benefit plans.

A) II and III.
B) II only.
C) I and II.
D)I, II and III.

A)
II and III.

The Administrator may deny or revoke the exemption granted to a nonprofit organization or investment contracts issued by employee benefit plans. Any transaction exemption may be revoked as well. However, there are certain security exemptions that the USA does not grant the Administrator the power to deny. Included in that list is any security issued or guaranteed by any bank organized under the laws of any state.

45

Which of the following would be included in the Uniform Securities Act definition of "sale"?
I) An offer of common stock in a new issue properly registered or exempt from registration in the state.
II) A gift of assessable stock.
III) An investor exercising warrants attached to a convertible bond purchased 5 years ago.
IV) An investor pledging stock she owns to a bank as collateral for a loan.

II and III.

A gift of assessable stock is always considered a sale. Exercise of warrants is a sale of the underlying stock. Pledging stock as collateral is never a sale.

46

Which of the following must register as an agent when representing a broker-dealer?
A) An employee who accepts unsolicited orders from institutional clients.
B) An individual who represents an underwriter only in transactions between an issuer and the underwriter.
C) A partner of a broker-dealer who has no securities sales functions.
D) The telephone switchboard operator who directs orders to the appropriate extension.

A

An employee of a broker-dealer who accepts orders must register as an agent. The fact that it is unsolicited and/or from an institution (making them exempt transactions) has no bearing on the requirement for the individual to register as an agent. A partner of a broker-dealer with no securities sales functions and an individual who represents an underwriter only in transactions between an issuer and the underwriter need not register. Individuals whose function is strictly clerical do not register as agents.

47

The civil liabilities provisions of the Uniform Securities Act provide for a statute of limitations equal to

the sooner of 2 years from the date of discovery or 3 years from the date of the violation.

48

The USA defines the term guaranteed as

meaning guaranteed as to payment of principal, interest, or dividends.

49

Penalties for violations of the Uniform Securities Act include:

fines of up to $5,000 and/or imprisonment for up to 3 years.

Under the Uniform Securities Act, penalties can include fines for up to $5,000 or imprisonment for up to 3 years, or both. No person, however, may be imprisoned for violation if he proves that he had no knowledge of the rule or order, and no indictment can be returned later than 5 years after the alleged violation. Remember the distinction between criminal penalties and civil liability.

50

rights of rescission under the USA

An investor who believes he has been wronged in conjunction with a violation of the USA may be entitled to restore his former financial condition as if the transaction had not occurred.

An investor who believes he has been wronged in conjunction with an investment transaction may have recourse under rights of rescission to restore his original financial condition. Generally, an investor exercising rights of rescission is entitled to recover the amount of the initial investment, a reasonable rate of interest on that amount, and attorney's fees, if any, less any income received on the security. An agent may not be imprisoned for unknowingly violating the USA.

51

Under the Uniform Securities Act, if no denial or proceedings are pending, when does an investment adviser registration become effective?

When the Administrator so orders, but not to exceed 30 days.

Registrations become effective at noon on the 30th calendar day after the date of filing if there are no denial orders or pending proceedings.

52

Under the Uniform Securities Act, it is permissible for an agent to:
I) solicit transactions in unregistered exempt securities.
II) share in the profits in an account with a customer with written permission of the customer and the broker-dealer.
III) split commissions with another agent at an affiliated broker-dealer.
IV) charge larger commissions because of a larger array of services the agent's firm offers.

I, II, III and IV

All of these are permissible actions. Exempt securities are unregistered because they are exempt and solicitations for trades are no problem. Sharing in the profits in an account with a customer is permitted under these conditions, and splitting commissions with agents of the same broker-dealer or different broker-dealers under common control is also permitted. However, two registered agents representing nonaffiliated broker-dealers may never share commissions. The Uniform Securities Act does permit commission charges to reflect the quality and quantity of services provided to the client.