Series 65 Class - 63 Material Flashcards Preview

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Flashcards in Series 65 Class - 63 Material Deck (70):

Broker-Dealer Registration Requirement

Location: if a Broker Dealer


Exemption for Canadian Broker-Dealer
Canadian broker-dealer are exempt if:
Can do business with

it is registered under Canadian securities laws
has no office in the state &
submits a limited registration to the state

Canadians temporarily in the state (e.g. on vacation) or state residents but only in their Canadian retirement plans


Agent of Broker-Dealer

a natural person who represents a broker-dealer in effecting securities transactions (individuals)

- if you accept customer orders you have to register as an agent


Agent Registration Requirements

An agent must register in any state where an offer: originates or is directed.

Agents may only register in states where their B/D is registered


Registration of an Agent

Effectiveness of Registration when granted by Admin

Expiration of Registration every Dec 31st (has to pay fee to renew it)

Leaving a Firm: The agent, the old firm and new firm all have to notify the admin


Registration Forms

Form U4: Filed to register a person with a regulator at state or federal level

Form U5: Filed to terminate a person's registration

Form U6: Filed by state and federal regulators to report disciplinary actions against agents and broker dealers


Agent of an Issuer

An Agent of an issuer is exempt from registration if the agent:

This exemption DOES NOT apply to:

Instead of working for BD you work for Issuer.

An Agent of an issuer is exempt from registration if the agent:
- sells exempt securities
- sell in exempt transaction
- sell to only fellow employees of the issuer without commissions

This exemption DOES NOT apply to: agents of Broker Dealers (if you work for BD you have to always register as BD regardless of what you are selling)


What is an Offer?

- Every attempt to dispose of an interest in a security of value
- Every solicitation of an offer to purchase an interest in a security

Offer or Sale of: Right / Warrant / Convertible Security - is also an offer of underlying security

Sale of IBM convertable bond still an offer in underlying IBM stock


What is NOT an offer

- Merger Negotiations
- Business reorganization transactions (bankrupt)
- Sale (represents completed transaction)

- Radio / Television originating outside of the state
- Newspaper ad originating outside of state (only an offer in the state it originates - not considered an offer in cali if NY post)
- Newspaper of general circulation (2/3 of circulation if outside the state of publication, result is advertisements are NOT offers in any state)


What is a Sale

- Conveying ownership of a security for value
- Every disposition of an interest in a security for value
- Securities given as a bonus with a purchase (purchase Ford car throw in Ford bond - considered to be sale)

Dealership and dealer will have to register

- Exercise of a right or warrant
- Convert a convertible security
- Purported gifts of assessable stock - a type of stock where the issuer can demand additional capital from the shareholder

Gift of it is considered a sale


What is NOT a Sale

- Pledge of loan of securities
- Compensation bonus of common stock
- Stock dividends
- Merger transactions
- Transaction part of a plan of reorganization


Registration Summary:

What is a Broker/Dealer
What is an Agent

And when must they register?

Define: a person that effects transaction for its own account or for the account of others

- BD must register in any state with: an offer OR one retail client

AGENT: any individual who represents a borker-dealer or issuer in effecting or attempting to effect purchases of sales of securities

- Agent must register where offers: originate OR are directed
- Agents may only register in states their BD is registered


What is a Security under USA

evidence of indebtedness
- Options are always securities


What is NOT a Security

- Fixed annuities
- Fixed life insurance
- IRAs & Keogh Plans
- Commodities and Futures
- Antiques & Collectables
- Precious Metals & Futures
- Real Estate personal
- Currency & futures


Federal Covered Securities


National traded securities plus
- all securities equal to or senior to the nationally traded security: Rights, Warrants, Debt & fixed income securities
- US Government Securities
- Municipal Bonds
- Investment Companies
- Federal Private Placement

Benefits of a Federal Covered Security: They are EXEMPT from state registration.
- Notice Filing: Investment company securities ONLY
Examples of Securities that are not Federal Covered:


When must securities be registered at the state level

All Securities must be registered at state level unless the security is exempt or transaction is exempted


Registration by Coordination

- do not have to register with each state - SEC registers for all states for you
- procedure - issuer forwards 3 copies of the SEC registration statement to state securities administrator
- effectiveness: simultaneously with SEC registration


Registration by Qaulification

Intrastate registration.

Available to any issuer, in one state only

Procedure: issuer submits registration statement to the administrator

Effectiveness: when granted by the administrator


Exempt Securities

- US Government Securities
- Municipal Securities
- Securities issued by National or State Banks
- Credit Unions
- Commercial Paper
- Bankers Acceptances
- Public Utilities
- Debt securities issued by a railroad or other common carrier
- Securities issued by insurance companies
- Farmers Cooperation Association
- Securities issued by non-profits

- National foreign government securities are exempt (does not apply to municipals - France is exempt but Paris is NOT)
- One exception is Canadian municipality only
- Employee Benefit Plans


Exempt Transactions

- Isolated non-issuer transactions: the issuer does not receive the proceeds (secondary market transactions are usually exempt)
- Unsolicited orders the transaction is initiated by the client (un-solicited order)
- All Fiduciary transactions are exempt (one exception - custodians acting on behalf of minor)
- State Private Placement (offers to 10 or fewer retail clients in 12 month period)
- Institutional Sales


Denial or Revocation of State Registration Exemptions

Revocable exempt securities:
- non-profit securities
- employee benefit plan securities
Revocable Exempt Transactions:
- ALL exempt transaction are revocable
EXCEPT: Transactions in Federal Covered Securities


Investment Adviser

- Provides securities related ADVICE
- in the course of normal BUSINESS


Investment Adviser Registration Requirements

Location - if an investment adviser has any office in the state, it must register in the state
Clientele: If an investment adviser has 6 or more resident clients in the state, it must register in the state


What is NOT an Investment Advisers? What is the exception?

Broker Dealers are not IA but if they offer wrap accounts they have to register as IA

Wrap accounts (Managed Accounts):
Charging a single fee for both brokerage services and investment advice

- Commercial Bank, Thrifts, Trust Companies
- Advisers to Family Offices (if one family)
- Publishers of Bona Fide Financial Publications
- Lawyers, Accountants, Teachers, Engineers


Investment Adviser Representative (when must you register)

- provide advice
- solicitation of new customers
- supervisors of IARs

Because under the USA, the definition of an IAR includes those who are supervise - that's what the rule says

Always register at state level regardless of who they work for, expires Dec 31st unless renewed

When rep leaves dependent on what kind of firm they are leaving:
- Leaving a Federal coverage adviser (SEC) - individual will notify
- Leaving state registered investment adviser - advisory Firm notifies


Registration of Investment Adviser

Go State OR SEC. Registration is based on assets under management.

Assets above $110 go SEC
Assets below $90 go State
In-between: can choose

Usually will go SEC regardless of assets
- Advisers to registered investment companies
- Advisers required to register in 15 or more states


Certain Investment Adviser that do NOT need to register

The IA must qualify to register with the SEC than the IA must:
- Render no advice to any exchange-listed securities and all of their clients reside in one state
- All of their clients are insurance companies
- Foreign Private Advisers (adviser that has no US office and fewer than 15 US clients) or
- Venture Capital Advisers (adviser to venture capital / private equity fund)


State Covered Adviser Registration

File form ADV and pay a fee
File a Consent to Service of Process
- grants the administrator legal authority to accept non-criminal, securities-related legal documents on behalf of the applicant


Additional State Investment Adviser Registration Requirements

the administrator may require investment advisers meet certain financial requirements

IAs may be required to post a bond of $36k if the IA has custody $10k if the IA has discretion if you have both still post bond of $35k.


Effectiveness of Registration

State Registered Advisers: 30th day after the application is filed

Federal Covered Advisers: 45 days after the application is filed, the commission will either grant the registration of institute proceedings to determine whether the application should be denied


Denial, Revocation and Other Actions for State Registrant

Denial - once registered
Revoked Permanently
Restricted permanently
Restricted or limited to certain business activities


Disciplinary Action at the State Level

To deny, revoke, or suspend a registration the Administrator must have two reasons
- Reason one must be that it is in the public's best interest
- has to be second reason


Denial/Revocation of a Registration

Required procedures by the Administrator
- Notice must be given
- Hearing must be held if requested within 15 days of request, written findings must be provided

Appeal can be taken within 60 days of order issuance


Cancellation of State Registration

- No longer in the business
- No longer in existence
- A court finds the person to be legally incompetent


Withdrawal of State Registration

Withdrawal takes effect 30 days after filing with the Administrator, unless disciplinary proceedings are under way

Administrator retains jurisdiction for 1 year after the withdrawal


Investment advisory contracts should

- give notification of any change of the IA's partners (if a partnership)
- change in majority of partners (requires assignment)
- avoid terms that limit an IA's liability under the law (hedge clause) or waives compliance with the law

WHY: provide clients with a written description of the basic terms of their advisory agreement


Performance Fees for "Qualified Clients"

Assets under management $1Mil in the clients account or Client net worth $2Mil or more

Performance fees compensate IAs based on the capital gains or appreciation in the account

Must disclose fee structure may be an incentive to select riskier or more speculative investments


The Brochure Rule

Applies to both state and federal advisers
- Disclosure statement
Initial delivery requirements
- At least 48 hours before the contract is signed, or
- At the same time as the contract is signed, provided customer can cancel without penalty for 5 business days

If material changes, a new brochure must be:
- offered for state IAs
- delivered for Federal Covered IAs

IAs must include a balance sheet if the IA: collect pre-payment of fees.
- State Level: at least $500 at least 6-months in advance
- Federal Level: at least $1200 at least 6-months in advance


Who doesn't need a Brochure

- Investment company clients
- Clients for impersonal advisory services: advice that does not meet the objectives or needs of specific individuals or accounts AND the client is charged less than $500 (investment publication)


Custody of Client Funds and Securities

What is Custody

- holding or possessing, directly or indirectly client funds or securities
- having authority to obtain possession of client funds or securities


What is NOT Custody?

- Discretionary authority
- Pre-payment of fees
- Receipt of customer checks, provided: the check is forwarded / returned in three business days


Requirements for Custody

An IA must give prompt notice to the Administrator when it has or may have custody and...
- securities segregated and identified with a qualified custodian
- each client has separate account
- clients are notified of the location
Quarterly reports are sent to clients by either qualified custodian or by IA
- Surprise audit done by firms own CPA


Agency Cross Transaction

- Requires written client approval (blanket authorizations OK)
- At least one side of the transaction must be unsolicited

When IA acts as principal. Sells from Firms inventory.
- must disclose capacity to client and requires written client approval before each trade


Financial Impairment of Adviser must be Disclosed

If the IA has...
- custody of securities or funds: $35k
- investment discretion: $10k
Requires prepayments of more than $500 in fees, more than 6 months in advance


Required Disclosure to all Clients

Anything that reasonably affect a client's ability to judge the qualification of the Investment Adviser


Ethical Guidelines and Standards for Investment Advisers

Fiduciary Responsibility: must act in client's best interest

Prudent investor rule: have a reasonable basis for investment advice

Avoid conflicts of interest; IAs should disclose:
- ownership in recommended securities
- commission for recommended securities


Ethical Guidelines and Standards for Broker-Dealer

Suitability: recommendations must be consistant with a client's investment objectives, financial situation, & needs
- all recommendation must be suitable
- B/Ds do NOT owe their clients a fiduciary duty

Trading Authority (belongs to account owner by default)
Third-Party Trading Authority (given to non-account owner to enter transactions)


Discretionary Trading Authority - Agent / IAR selects

- security
- quality
- action (buy or sell)

If the agent chooses at least one of these three actions it is discretionary

Time or price does not require discretion



Prohibited activity to excessive trading to generate commissions


When is Sharing Commissions allowed

- agents and IARS may share commissions: with registered persons at the same or affiliated firm
- this does NOT require disclosure unless it increases the transaction cost to the client


Record Keeping Requirements

Time Length
- Investment Advisers: 5 years
- B/D: 3 years

Most recent two years kept in easily accessible location

Electronic Record keeping Permitted
- non-editable format
- Access only to authorized personell
- Reproduction of original records are legible


Mutual Fund Sales Loads

"No Load" (aka "no sales charge") means:
- no front-end load
- no contingent deferred sales charge (back end load)
- 12b-1 fees less than 25 bps of average annual net assets


Soft-Dollar Agreements

When an adviser receives research or other brokerage services from B/D in exchange for placing securities transaction with that B/D

- Research reports and analyst access
- Portfolio analysis software
- Attendance fees for industry seminars

- Office space / computers
- Advertising
- Travel reimbursement

Only receive services that benefit underlying client


Trust and Trustees

Trustees owe a fiduciary duty to:
- the trust's beneficiaries

The trustee must:
- minimize risk by diversifying the trusts investments

Manage all assets prudently considering the trust's
- Purpose
- Terms
- Goals

If there are multiple beneficiary of the trust - the trustee must treat all beneficiaries the same


Powers of the State Administrator
When do they have jurisdiction

- if an offer originates in the state or (nj)
- if an offer is directed in the state or (connticut)
- if a transaction settles in the state or (ny)
- a securities professional is: registered in the state (doing business alone is not enough)


What can't the administrator do

- can not levy fines
- can not put anyone in jail
- can not change State Securities laws

All administrator can do is to revoke your registration


Penalties under the USA

Civil Liabilities - investors may sue and be made whole

Customer can recover:
- cost of the transaction
- cost of the advice
- cost of the attorney's fees
- Plus interest (calculated from payment date) less income earned from the investment


Investor must bring lawsuit (statute of limitations)

Investor must bring suit by the earlier of:
- 3 years of the violation and 2 years of discovery



An offer to unwind/reverse an improper transaction
The customer is made whole (+ interest)
Remains valid for 30 days


Criminal Penalties Under the USA

Criminal Penalties: $5000 fine and or 3 years in jail


Penalties under the Investment Advisers Act of 1940

Civil Penalties
- investor can be made whole
Criminal Penalties
- $10k fine and or 5 years in jail

Enforced by the Federal Government not the administrator


Cooling Off Period

20 day minimum
- no sales are permitted
- can market the deal to investors (collect indications of interest)


Effective Date

- After cooling off period
- Securities can be sold to investors
- Prospectus delivery required no later than settlement date of the transaction
- Access = Delivery


Act of '33 - Exempt Securities

- US Government & Agency Securities
- Municipal Bonds
- Short-term Corporate Debt
Commercial Bank Securities


Act of '33 - Exempt Transaction
Rule 147

intrastate offerings
qualifying issuers:
- 80% of revenue must come from doing business in state
- 80% of offering proceeds must be used in the state
- 80% of companies assets must be located in the state

permitted purchasers: must be state residents

resale to non-residents: 9-months after the last sale in the offering


Act of '33 - Exempt Transaction
Reg D

- private placement
- accredited investors: officers & directors, institutional investors, individual investors

individuals - must have net worth of $1mil excluding primary residence OR earning $200k in each of the past two years. Married $300 instead of $200

Non-accredited investors: up to 35 non-accredited investors


Rule 144 Sales

Restricted Stock is unregistered securities - from Reg D private placement (never been registered with SEC)

If investors holds restricted stock for 6-months - they are free to resale into public marketplace. assuming the issuer is public company

Insiders are subject to volume limits - greater of:
- 1% of the outstanding share or
- average reported weekly trading volume during the four weeks preceding the sale

Frequency of every 90 days


Securities Exchange Act of 1934

- regulates secondary market
- created SEC
- gives Fed the authority to regulate margin
- requires registration of BD with SEC
- requires financial reports by publicly held corporations
- prohibits fraud


Schedule 13D

filed when an investor acquires a greater than 5% stake in public company


Schedule 13F

Quarterly filing for institutional investors managing over $100Mil in assets
- disclose all long equity positions