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Series 65 - March 2024 > Laws, Regulations, and Guidelines > Flashcards

Laws, Regulations, and Guidelines Flashcards

1
Q

When asked about what are securities. It is easier to remember what are NOT securities. What are not Securities?

A
  • Commodities (Futures, including their calls and puts, Gold and precious metals)
  • Fixed Insurance (life, fixed annuities)
  • Retirement Plans
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2
Q

If something IS a security what must it do?

A
  • register
  • SA 1933 - requires registration with the SEC
  • USA 1956 - requires registration with the states
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3
Q

What are the two methods of state registration? What is the most common?

A
  • coordination (states registration is coordinated with federal registration)
  • Qualification (security is issued in one state)
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4
Q

Coordination Method (90% of time)

A
  • states registration is coordinated with federal (example IPO)
  • effective when cleared by the SEC
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5
Q

Qualification Method

A
  • intrastate securities (issued in only one state)
  • effective when cleared by administrator
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6
Q

NSMIA (National Securities Market Improvement Act)

A
  • created federally covered advisors and federally covered securities
  • for federal coverage of additional securities if listed on exchange or investment companies (ie. Mutual Fund)
  • registers ONLY with SEC not the state
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7
Q

Notice Filing

A
  • method for paying filing fees for federal covered securities ONLY
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8
Q

USA Exemptions for Security Registrations

A
  • US government
  • municipal
  • banks/insurance companies
  • non-profits (religious orgs)
  • Canadian governments (all levels)
  • other foreign governments - federal only (normal diplomatic relations)
  • commercial paper (maturity is less than 270 days and value is greater than $500k
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9
Q

Nonexempt Securities

A
  • all nonexempt securities are required to register with the state.
  • legal term for corporation
  • illegal to sell unregistered corporate securities
  • EXCEPTIONS: exempt transactions
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10
Q

Exempt Transactions from Registration

A
  • if unsolicited
  • between financial institutions (public not involved)
  • private placements (to accredited investors and institutions)
  • sheriff/bankruptcy (trustee)
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11
Q

Powers of the Administrator: Jurisdiction of the Administrator over offer/sale of Securities

A
  • has jurisdiction if originates, directed to, or accepted in their state.
  • EXAMPLE: advisor from WA contacts a client from OR in CA at the time of contact for sale, which administrator has jurisdiction? Both WA and CA but not OR
  • its about solicitation, NOTHING ABOUT AGENT REGISTRATION
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12
Q

Powers of the Administrator: Could Administrator Subpoena someone from another state?

A
  • has subpoenas power in all states
  • subpoenas compels testimony
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13
Q

Powers of the Administrator: Can they deny, revoke, or suspend?

A
  • ANY felony conviction
  • ANY misdemeanor involving securities
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14
Q

Criminal Penalties

A
  • 3 years in jail or;
  • $5k fine
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15
Q

Civil Penalties (Sued)

A
  • statute of limitations: 3 years from when trade occurred or 2 years of discovery (which ever occurs first)
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16
Q

Right to Recession

A
  • right to be made whole again
  • all principal + commissions + interest + court costs - (Divs and Int earned on investments)
  • or keep stock and go on your way
  • 30 days to make decision
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17
Q

Major Federal Securities Laws

A
  • Securities Act of 1933
  • Securities Exchange Act of 1934
  • Uniform Securities Act of 1956
  • Insider Trading Act of 1986
  • Investment Advisory Act of 1940
  • Investment Company Act of 1940
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18
Q

Securities Act of 1933

A
  • full and fair disclosure (ie Form U4)
  • new issues
  • use of a prospectus
  • primary market
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19
Q

20 day cooling off period (Securities Act of 1933)

A
  • prohibited from soliciting for 20 days (allows SEC to look over registration)
  • can send out preliminary prospectus (red herring)
  • can publish tombstone ad (generic notice of sale) not advertising just notice sale
  • use to take indications of interest (no commitment upon customer or BD)
  • after 20 days it is cleared.
  • then, can offer a final prospectus which states offering price)
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20
Q

Securities Exchange Act of 1934

A
  • secondary market
  • main objective is to protect Scams or lying, cheating, stealing (created the SEC on June 8th 1934)
  • federal reserve board oversees extension of credit in the securities industry (FRB) or Reg. T
  • Antifraud provisions
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21
Q

Antifraud Provision

A
  • even if exempt from securities act, never exempt from fraud
22
Q

Insider Trading Act of 1986

A
  • knowingly using material nonpublic information (established in SEA of 1934)
  • extended to punish those who provide the information
  • civil penalties: greater of $1m or 3x profits or losses avoided
  • Chinese wall divides different sides of a corporation (Cannot provide information inside same corporation ie passing the wall)
23
Q

Broker/Dealer

A
  • paid for transactions
  • effects security transactions for the benefit of others or themselves
  • broker/agency transactions - brings buyer and seller together (middle man) compensated via commission
  • dealer - when brokerage firm buys and sell securities to customer directly from their own inventory (dealer or principal transaction via mark up)

*think ABC - agencies, broker, commissions

24
Q

USA requires Broker Dealer to register in State if:

A
  • office or ANY retail client located in a state
  • de mininis rule for IA’s doesn’t apply to broker dealers
  • not required to register if no office or client in a state nor if clients are institutions or issuers
25
Q

Agent

A

Individual who accepts or places orders for securities (solicits)

  • if working for Broker Dealer and accept orders MUST register
  • clerical or administrative duties are exempt from registering
  • any acceptance of an order for a security will require registration
    (remember Futures are not securities)
26
Q

Non-exempt Issuers

A
  • companies/corporations
  • if not B/D, file Form U-10
  • if working for an exempt issuer, the agent doesn’t have to register, otherwise they MUST register
27
Q

Investment Adviser

A
  • in the business of financial advise
  • holds themselves out as an investment adviser (advertise)
  • receive economic benefit (compensated)
  • person but not necessarily an individual
  • charges fees on AUM
  • legally considered fiduciaries (not IAR)
28
Q

Exclusions to Investment Advisors

A

L - lawyers
A - accountants
T - teachers
E - engineers

  • must be incidental, if charging separate fee will have to register
29
Q

NSMIA separation of advisors

A
  • register with federal or state. NEVER BOTH
  • federal advisor ($110m< in assets), still pay filing fees and enforce antifraud in state
  • state advisor (<$100m in assets)
  • if a federal advisor drops below $90m must register with state
30
Q

What authority do Administrators have over Federally covered advisors?

A

Ability to enforce antifraud provisions

31
Q

Federally Covered Advisor

A

Must register:
- over $110m in assets
- register with SEC ONLY

Not required to register:
- private advisor
- foreign advisor
- venture capital advisor

32
Q

State Covered Advisor

A

Must register:
- office in that state
- clients in that state

Not required to register:
- no office
- no more than 5 clients (de minimus)

  • de minimus ONLY applies to state advisors
33
Q

Investment Adviser Representative

A
  • important to know if IA the IAR works for is a federal or state registered advisor.
  • if state, IAR registers with administrator.
  • must register in every state OFFICES are in states NOT CLIENT. If no office, no need to register
34
Q

Registration Procedures USA (BD’s and IA’s)

A
  • application
  • must keep books and records
  • must meet Financial conditions (Net Capital Req)
  • felony convictions (last 10 years)
  • misdemeanors regarding securities only (last 10 years)
  • filing fees
  • consent to service of process (at time of application ONLY)
  • cleared by administrator
  • effective noon of 30th day of application (expires every Dec 31)

No fingerprints or tests

35
Q

Registration Procedures USA (Agents/IAR’s)

A
  • application
  • fingerprints
  • felony convictions (last 10 years)
  • misdemeanors regarding securities only (last 10 years)
  • filing fees
  • consent to service of process (at time of application ONLY)
  • pass test
  • cleared by administrator
  • effective noon of 30th day of application (expires every Dec 31)
36
Q

Withdrawal an application as an Agent or IAR

A

Agent:
- Form U5 - BOTH agent and broker dealer are required to notify admin. New brokerage firm would also be required to notify (if applicable)

IAR:
- state - IA/Firm go to Admin
- federal - IAR go Admin (not the SEC)
- NEVER register with SEC

37
Q

Net Capital Required

A

IA’s = $10k or $35k, if custody its $35k,
BD = no greater than SEC requirement

38
Q

Surety Bonds

A
  • like a life insurance policy against theft and fraud
  • can put up cash or securities if they get denied
39
Q

Successor Firms

A
  • if one firm acquires another
  • requires refiling application
  • no need to pay refiling fees
40
Q

Books and Records for Companies

A

IA’s - 5/2 - five years up to end of fiscal year
BD’s - 3/2 - three years up to end of fiscal year
- IA goes out of business must maintain records for an additional 3 years
- if IA falls under net capital, must notify admin within 1 day and must submit a plan within an additional day (2 total days)

41
Q

Investment Advisors Act of 1940: Registration

A
  • Form ADV (name, form of business, affiliates, names of officers, directors, and partners)
  • officers, directors, and partners are automatically registered as IARs
  • effective in 45 days
  • if withdrawal in 60 days

** remember all states are 30 days, when not 30 days must be federal regulations **

42
Q

Investment Advisors Act of 1940: Brochure Rule

A
  • Form ADV part 2
  • state - 48 hours prior to contract, can allow delivery at time of contract if given 5 days to revoke contract (free-look)
  • federal - at or prior to contract

Resending Brochure Annually:
- state - if material changes or requested
- federal - must resend 120 days from Fiscal Year-End

43
Q

Investment Advisors Act of 1940: Advisor Contracts

A
  • no assignment clause
  • assignment (assigning client contracts to new firm) prohibited without client consent
  • notify clients of partnership changes (even in death, which could cause assignment)
44
Q

Investment Advisors Act of 1940: SEC Release

A
  • Defining Investment Advisors (Financial Planners, Sports and Entertainment Agents, and Pension consultants)
45
Q

Investment Advisors Act of 1940: IA compensation

A
  • fees, commissions, both and both from different sources as long as disclosed to client.
  • can discount fees as long as its disclosed in brochure.
  • performance based fees are PROHIBITED with exceptions
  • soft dollar compensation
46
Q

Investment Advisors Act of 1940: Exceptions to Performance Based Fee Prohibition

A
  • individuals with $1m invested and $2.1m net worth
  • hedge funds
  • has to be % of net gains over specific time compared against a specific benchmark.
47
Q

Investment Advisors Act of 1940: Soft Dollar Compensation

A
  • software
  • seminar fees
  • research

Not:
- travel, rent, furniture, etc.

48
Q

Conflicts

A
  • borrowing from customers (must be normal lending institutions) NOTE: Broker dealers and loan money.
  • sharing in customer accounts - if owning or is a family member
  • agency cross transactions (on both sides of transaction ie. Customer sells stock and IA has customer who wants to buy it, cannot solicit, must disclose)
49
Q

Custody of Customer Assets

A
  • partial or full access to customers funds or securities.
  • 3rd party checks and Certificates must be forwarded within 3 days.
  • ability to deduct adviser fees requires custody.
50
Q

USA definition of a Person

A
  • a limited partnership
  • a political subdivision
  • an unincorporated association (investment club)
  • the executor of an estate for a deceased individual

NOT:
- minors
- deceased person
- judged mentally incompetent

Series 65 - March 2024 (8 decks)

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