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What was the primary goal of the Securities Act of 1933?

It regulates the issuing of corporate securities sold to the public (IPOs) and through subsequent public offerings of US securities.

Issuer information is disclosed to SEC and published in a prospectus. Prohibits fraudulent activity in connection with sale, underwriting, and distribution of securities


What is not included in the definition of a sale of securities?

- Preliminary negotiations or agreements between issuer and underwriter
- A gift of securities


What securities are exempted under the Securities Act of 1933?

- Any security issued or guaranteed by the US, any state, or political subdivision
- Commercial paper w/ maturity of <= 270 days (9 months) with the stipulation that proceeds are used to increase working capital and not purchase fixed assets (no min. denomination or rating requirement)
- Any security issued by a person organized and operated for religious, educational, benevolent, fraternal, or charitable purposes.
- Any interest in a railroad trust
- Any security issued by a federal or state bank, S&, building and loan association, or similar institution


What is a deficiency letter?

A letter sent by the SEC because something in a registration is incomplete


What is a stop order?

Issued by SEC - demands that all underwriting activities cease


What is the timeline for when orders can be taken for a SEC registered security

- Before issuer files registration with SEC - no sales solicited and no prospectus can circulate
- 20-day cooling off period after registration - no sales solicited, but indications of interest can be gathered through a red herring
- Effective date - sales can be solicited, but final prospectus must be used


What is the SEC definition of an accredited investor?

- A bank, insurance company, or registered investment company
- An employee benefit plan if a bank, insurance company or registered investment advisor makes investment decision, or if plan has assets > $5M
- Charitable organization, corporation, or partnership > $5M
- Directors, executive officers, and general partners of issuer
- Natural person with income > $200k or $300k w/ spouse
- Natural person net worth (excluding residence) > $1M
- Entities made up of accredited investors


What is the primary purpose of the Securities Exchange Act of 1934?

It created the SEC and grants the SEC authority of all aspects of the securities industry, including the power to register, regulate, and oversee brokerage firms, transfer agents, and cleaning agencies


What is the timeframe for person to be subject to statutory disqualification for a crime?

Convicted within the last 10 year (120 months) of a security violation or misdemeanor, or any felony


What are the requirements under both the SEC and USA for commercial paper to be exempt from registration?

- SEC: <= 9 months, used only for current operational needs
- USA: Rated in top 3 categories by major rating services, denominations of $50,000 or more, maturities of 9 months or less


Who is eligible for a "breakpoint" (AKA reduction in sales charge) for mutual funds?

Any eligible person, including spouse & children under 21, any legitimate entity purchasing for its own account, or trustee purchasing on behalf of a qualified benefit plan.

NOT included:
- purchases for the account of an investment club
- purchases on behalf of any entity or group that does not have a common purpose


Who is eligible to purchase mutual funds at no cost?

- Sales to related persons of the fund
- Shares purchased through DRIPs & capital gains distributions.


What is the Securities Exchange Act of 1934's definition of a municipal security?

Securities that are a direct obligation of, or obligations guaranteed as to principal or interest by, a state or political subdivision thereof.


An agent who has been granted discretionary power is allowed to pick what?

-The specific security and/or
- the specific amount and/or
- the specific action (buy/sell).

Does NOT include time or price


What is the USA definition of "agent"?

The USA defines an agent as β€œany individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities.”


Who is excluded from the definition of an agent under the USA?

Individuals who represent an issuer in exempt transactions, selling certain exempt securities, and transactions with issuer's employees when no commission is paid.

There is virtually no case in which a salesperson representing a broker-dealer is not an agent.


Under the USA, when are you a broker-dealer?

- If you have a place of business in the state, regardless of the nature of your clients, OR
- You have even 1 retail client in the state


Under the USA, when are you NOT a broker-dealer?

- 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, AND
- You are registered in a state where you do maintain a place of business and only do business with existing clients who are not residents of this state (snowbirds)


When may a security be registered by coordination?

When a registration statement has been filed under the Securities Act of 1933 in connection with the same offering.

Registration by coordination becomes effective at the same time the federal registration becomes effective


What does registration by qualification require?

Any security can be registered by qualification. It requires a registrants to supply any information required by the state securities Administrator.

The registration then becomes effective whenever the state Administrator so orders


What securities are exempt under the USA?

- US & Canadian government and municipal securities
- Foreign government securities
- Depository institution (bank, S&L, federal credit union)
- Insurance company securities
- Public utility securities
- Federal covered securities
- Securities issued by non-profits
- Securities issued by cooperatives
- Securities of employee benefit plans
- Certain money market instruments (commercial paper and banner's acceptances)


What transactions are exempt under the USA?

- Isolated nonissue transactions (very few per year)
- Unsolicited brokerage transactions
- Underwriter transactions (transactions between issuer and BDs, as well as between underwriters themselves)
- Bankruptcy, guardian, or conservator transactions
- Institutional investor transactions (banks, insurance companies, and investment companies)
- Limited offering transactions (private placement, OFFERED to no more than 10 people during previous 12 months, provided that seller believes purchase is for investment purposes, no commissions, and no solicitation or adversitement)


For how long is a registration statement effective under the USA?

1 year from effective date


Who/what is an issuer under the USA?

any person who issues or proposes to issue a security


What complaints must be reported to an agent's employing principal?

All written complaints. Oral complaints are not required to be reported.


Under the USA, what is the statute of limitations for recovery fo damages?

3 years of occurrence or 2 years of discovery, whichever comes first


What is a "cease and desist" order?

A directive from an administrative agency to immediately stop a particular action. It may come from a federal, state, or judicial body. Administrators may issue cease and desist orders with or without a prior hearing


What is a "stop order"?

An order issued by the Administer to halt the sale of a security.


Under the USA, when is an offer to buy or sale made in a state?

Under the Uniform Securities Act, an offer to sell or to buy is made in a state when the offer (1) originates from the state or (2) is directed by the offeror (the agent) to the state and received at the place to which it is directed (or at any post office in the state in the case of a mailed offer). Furthermore, an offer to buy or to sell is accepted in a state when acceptance is communicated to the offeror orally or in writing, inside, or outside the state.


Under the USA, how long does a registered person have to appeal any disciplinary finding by the Administrator?

60 days


What is the statute of limitations for criminal offenses under the USA and what are the maximum penalties?

5 years statute-of-limitations, $5K max fine, 3 years jail


What are the net worth requirements of an investment advisor?

- If the IA maintains custody - $35k
- If the IA has discretionary authority - $10k
- If the IA does not exercise discretion and does not maintain custody, but does accept prepayment of fees of more than $500, 6 or more months in advance, must maintain positive net worth at all times


What is the timeframe for failure to maintain minimum net worth?

- By close of next business day the Administrator must be notified
- By close of the next business day after notification a financial report must be filed

When below minimum requirement the advisor must obtain a bond in the amount of the deficiency, rounded up to nearest $5k


Under the USA, what are the requirements for storage and maintenance of an IA's books/records?

- Must be in easily accessible place for 5 years
- During the first 2 years the records must be maintained in the principal office of the adviser


When must a change in ownership of an IA be communicated to clients?

A change in minority interest in a partnership will be communicated to clients within a reasonable period of time.

A change of majority of the partnership interests or corporation would be considered an assignment. This includes the pledging or stock or using it as collateral for a loan.


When would an advisor be considered to have custody of funds or securities?

Stock or checks made out to the IA - must be returned within 72 hours
Stock or checks made out to a third-party - must be forwarded to third-party within 72 hours

Stock or checks made out to the IA - must be returned within 72 hours
Stock or checks made out to third party - never considered to be custody


What is the maximum amount of AUM in private funds that exempts an IA from registration?

Up to $150M of private funds (regardless of the number of funds).


What is scalping?

The practice whereby an investment advisor, before dissemination of a securities recommendation, trades on the anticipated short-run market activity that may results from the recommendation.


What are the criteria to be able to use the term "investment counsel" to describe an IA's business?

- The IA's principle business must be giving investment advice
- The IA must provide investment supervisory services (continuous and regular supervisory or management services)


Under the USA, when is an IA allowed to have custody of a customer's funds and securities?

- The Administrator has not prohibited it, AND
- The Administrator has been notified


When would state registration be required for IARs working for federal covered IA?

They must register in those states where the individual has a place of business.


When and what type of disclosure must be made to a client when an IA acts as an agent or principal in any transaction?

The IA must get the consent of the client and disclose to the client prior to completion of the transaction (that is, before the settlement date. This comes AFTER the execution of the transaction).


A mutual fund must redeem its tendered shares within how many days after receiving a written request for their redemption?

7 days


If an agent chooses to appeal an Administrator's order, how many days does the agent have to file for review of the order with the appropriate court?

60 days


What is the purpose of the Investment Advisor's Act of 1940?

To provide standards at the Federal level for the regulation of investment advisors


Under the Investment Advisor's Act of 1940, an advisor's registration usually becomes effective how many days after it is filed?

45 days


An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, what assets would be included?

Net worth does not include as assets: goodwill, franchise rights, patents, copyrights, marketing rights, all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership.


What is the timeline for when an IAR can make discretionary trades for a new client?

Oral discretionary authority is permitted to be used for the initial transactions in a customer's account for the first 10 business days after the date of the first transaction.


What is the timeframe for when a new IA must have the $100M to qualify to become a federally covered advisor?

If the IA anticipates having $100M in assets within the first 120 days it can register as a federally covered advisor.


What is "selling away"?

When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution.


For how long must communications be kept for BDs and IAs?

BD - 3 years
IA - 5 years


Under the USA, what are the minimum requirements for an IA to be able to charge performance based fees?

The USA sets minimum standards, the Administrator may waive those requirements.


Under the Investment Advisor Act of 1940, how long does an IA have to provide an advisory client with a brochure or summary of changes?

120 days after end of fiscal year


How much can an IAR of a federally coverer IA contribute without triggering "pay-to-play" restrictions?

$350 for a candidate the IA is eligible to vote for, $150 for a candidate the IA is ineligible to vote for


According to the Securities Exchange Act of 1934, a report of beneficial ownership must be filed with the SEC by interested persons when their ownership of a security registered on a national exchange exceeds what level?



When must a brochure be delivered to a prospective client?

48 hours before signing the contract, or at the time of signing if the client has a right to terminate within 5 days without penalty


When an IAR begins or terminates employment with a state registered IA, who must notify the Administrator

The employing IA


When an IAR begins or terminates employment with a federal covered IA, who must notify the Administrator?



When an agent of a BD begins or terminates employment, who must notify the Administrator?

Both the agent and BD. Notice to SEC is not required.


What are the rules for when an agent and/or an IAR is allowed to share in the profits and losses of a customer account?

An IAR is never allowed to share in the profits and losses. An agent is allowed with permission from the BD and a signed agreement with the customer.


A registration statement may be amended after its effective date so as to change what?

The Uniform Securities Act permits filing an amendment to an existing registration increasing the number of shares to be offered and sold, if the public offering price and underwriter's discounts and commissions remain unchanged.