Unit 1 - Chapter 2 - State Regs Under the Uniform Securities Act Flashcards Preview

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Flashcards in Unit 1 - Chapter 2 - State Regs Under the Uniform Securities Act Deck (118):

What is the name of the office or agency that has complete responsibility for administering the securities laws of states.



What is a Cease and Desist Order?

Whenever it appears that any registered person has engaged in any act or practice constituting a violation of any provision of the USA or any rule. The Administrator may issue a cease and desist order with or without a prior hearing against the person or person engaged in the prohibitive activities.


What is the stop order?

Denies effectiveness to, or suspend or revoke the effectiveness of any registration statement. This applies to securities.


What is a summary order?

Acting without prior notice that allows the administrator to:
1.) postpone or suspend the registration of any securities professional pending a final determination of a proceeding related to a problem
2.) Postponing or suspending the registration of a security pending a final determination of a proceeding relating to a problem
3.) denying or revoking a specific security or transaction exemption


What is a final order?

What ends in litigation, the administrator has rendered a judgment in an action (guilty or innocent). No final order may be rendered without:
1.) appropriate prior notice to the interested parties
2.) opportunity for hearing
3.) written findings of fact and conclusions of law


What are Blue-Sky Laws?

Common term used to refer to state securities laws.


Define a person?

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


Who are the three nonpersons?

1.) minors
2.) deceased individuals
3.) individuals declared mentally incompetent


Define a broker-dealer?

Any person engaged in the business of effecting transactions in securities for the account of others or for its own account. When acting on behalf of others, they are acting as brokers; when acting on behalf of themselves, they are acting dealers.
-Excludes: Agent, Issuer, Banks or Trust companies,


Define Agent?

Any individual, other than B/D, who represents a B/D or issuer in effecting or attempting to effect purchases or sales of securities. Agents are always individuals (natural persons) and their function is to be involved in securities sales or supervising those who do. Aka as registered reps
Excluded: Clerical or administrative, board members, LPs
Agents can only register in state where their B/D is registered


Define investment adviser?

Any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.


Define Investment adviser representative?

Any individual who represents a state-registered investment adviser or federal covered investment adviser performing duties related to giving of or soliciting for advisory services. These can only be individuals (natural persons).


Define Issuer?

Any person who issues or proposes to issue any security. Issuers primarily include corporations and governments. Know that under the USA with respect to certificates of interest or participation in oil, gas or mining titles or leases, or in payment out of production under such titles of leases, there is not considered to be any "issuer."


Define Noninssuer.

Not directly or indirectly for the benefit of the issuer, it is a secondary transaction. I.e. a nonissuer transaction is one where the issuer does not receive money because the seller of the security is someone other than the issuer. Such as your basic trading on the stock markets.


Define Security?

Includes items such as stocks bonds debentures, mutual funds, variable annuities, investment contracts, preorganization certificates
Howie Decision - Four Prongs:
1.) Investment of money is made
2.) common enterprise
3.) a profit is anticipated
4.) through efforts of third-party management


What is an exempt security?

The security does not have to registered in order to be sold and there is no requirements to file advertising about the security with the Administrator.


What is an exempt transaction?

The nature of the sale is such that registration with the Administrator and filing of advertising material is not required in order for that transaction to take place.


What does it mean to be Guaranteed?

Guarantee payment of principal, interest or dividends, but not capital gains.


Explain offer/offer to sell?

Include attempt or offer to dispose of or solicitation of an offer to buy a security or interest in a security for value.


Define Fraud?

An intentional effort to deceive someone for profit; not limited to common-law deceit.



Self-Regulatory Organization such as FINRA, Municipal Securities Rulemaking Board (MSRB), Chicago Board Options Exchange (CBOE) and the Investment Industry Regulatory Organization (IIRO)


Define Solicitor?

Any individual who, for compensation, acts as an agent of an investment adviser in referring potential clients.


Define Accredited Investor

Found in Rule 501 of the federal Securities Act of 1933, refers to a person who is not counted when computer the number of investors purchasing a private placement under Reg D. This is a federal term and not one found in the USA on the exam. The term is meant to confuse when discussing the USA


Define Registrant?

Refers to those securities professionals (BDs, IAs, agents, IARs) or securities issuers, who are in the process of, or who have registered with the Administrator.


Define Institution?

Includes banks, trust companies, savings and loans associations, insurance companies, investment companies, employee benefit plans with assets or not less than $1MM and governmental agencies or instrumentalities. Institutions are included in the term persons


Define Retail Client?

those that need more protection than institutional investor and those who meet the standard of accredited investors


National Securities Markets Improvements Act of 1996 (NSMIA)

Enacted in '96 to promote efficiency in capital formation in the financial markets. In effect, the act generally preempts states' blue-sky laws, eliminating the dual system of state and federal registration of certain securities and investment advisers.


What are online red flags for investors from social media con artist?

1.) Promises of high returns with no risk
2.) offshore operations
3.) e-currency sites
4.) recruit friends
5.) professional websites with little to no information
6.) No written information
7.) Testimonials from other group members


What is the legal definition of a security?

A security must constitute the following:
1.) an investment of money
2.) in a common enterprise
3.) with the expectation of profits
4.) to be derived primarily from efforts of a person other than the investor
*Note: The USA does not define the term security, but provides a list of securities


What is a common enterprise?

An enterprise in which the fortune of the investor are interwoven with those of either the person offering the investment, third party, or other investors.


Name 6 of the common investments that are NOT securities?

1.) Annuity contract
2.) IRAs or other retirement plans
3.) collectibles
4.) commodities such as precious metals or grains
5.) Condominiums used as a personal resident
6.) currency


What is a nonexempt security?

A security subject to the registration provisions mandated by the USA. The sale of unregistered nonexempt securities is prohibited practice under the USA.


What is an issuer?

Any person who issues (distributes) or proposes to issue a security. The most common issuers of securities are companies or governments. If an issuer is nonexempt, it must generally register its securities in the states where they will be sold.


What is an issuer transaction?

One in which the proceeds of the sale go to the issuer. When a company raises money be selling securities to investors, the proceeds from the sale go to the company itself.


What is a nonissuer transaction?

When the sale of the proceeds of the sales do not go, directly or indirectly, to the entity that originally offered the securities to the public. The most common instance is everyday trading on exchanges such as the NYSE. The proceeds of the sale go to the investor who sold the shares. These transactions are also known as secondary transactions.


What is an initial public offering?

The first time an issuer distributes securities to the public.


What is a subsequent public offering?

When any subsequent issuance of new share are distributed to the public after the IPO.


What are the lawful requirements of a security?

1.) It is registered under the USA
2.) the security or transaction is exempted from registration under the USA
3.) it is a federal covered security
4.) If none of the first 3, must be registered in the state of cannot not be sold


What does it mean to be federally covered?

A security that is exempt from registration on the state level.


Name the categories of federally covered securities?

1.) securities issued by open-end or closed-end investment companies, unite investment trusts, or face amount certificate company covered by the Investment company Act of 1940
2.) securities listed on most US stock exchanges
3.) securities offered pursuant to the provisions of Reg D under the Securities Act of 1933
4.) most securities exempt from registration under the Securities Act of 1933. If the federal gov says the security does not have to register, no state can overstep that


What are the methods for registering a security in a state?

1.) notice filing
2.) coordination
3.) qualification
Note: this can also be a special method for certain federal covered securities


Under NSMIA, what happens to a security when a municipal issuer is located in the state in which the security is being offered?

The security is not considered a federal covered security


What are the two items that a person do who sells federal covered securities?

1.) be licensed as b/d
2.) comply with anti-fraud provisions of state laws


What are notice filings?

The opportunity for states to collect revenue in the form of filing fees


What may a state administrator require for federal covered securities sold in their state?

1.) documents filed along with their registration statements filed with the SEC
2.) documents filed as amendments to the initial registration
3.) report of value of such securities
4.) consent to service of process


What is the difference between federally covered securities and SEC covered securities?

federal covered securities are a narrowly defined group of securities that either trade on certain exchanges or are exempt from SEC registration. There are thousands of SEC-registered securities that do not meet the required standard including OTC Bulletin Board aka Pink Sheets


Explain registered by coordination?

a registration statement that has been filed under the Securities Act of 1933 in connection with the same filing


What must an issuer supply when coordinating federal registration with state registration?

1.) latest form of prospectus
2.) Articles of Incorp and bylaws, copy of the underwriting agreement
3.) copies of any other information filed by the issuer under the Securities Act of 1933, if requested by the state
4.) amendments to the federal prospectus


What is registration by the effective date?

When state registration become effective at the same time as federal registration becomes effective assuming:
1.) no stop orders have been issued
2.) registration has been on file for at least a minimum number of days specified by the state (around 10-20, could be more based on the state)
3.) statement of max and min offering prices and underwriting discounts have been on file for two business days


What is registration by qualification?

requires a registrant to supply any information required by the state securities Admin. This where instrastate securities are registered


If registering by qualification, what must the issuer supply?

1.) name, address, form of organization, description of property, and nature of business
2.) info on directors and officers and every owner of 10% or more of the issuers securities, and the remuneration paid to owners in the last 12 months
3.) description of issuer's capitalization and LT debt
4.) estimated proceeds and the use to which the proceeds will be put
5.) type and amount of securities offered
6.) stock options to be created in connection with this offering
7.) copy of any prospectus, phamplet, circular, or sales literature to be used in the offering
8.) specimen copy of the security along with the opinion of counsel as to the legality of the security being offered
9.) audited balance sheet current within 4 months of the offering with an income statement for three year before the balance sheet date


What are two conditions to amend the increase in securities being sold in an issue?

1.) public price offering is not changed from the amount stated in the original registration statement
2.) underwriters' discounts and commissions are not changed from the respective amounts state in the original registration statement


When is the effective date triggered?

Whenever the state administrator orders


How long is each registration effective?

One year


What securities are exempt under the USA, but not the Securities Act of 1933?

1.) Foreign Government Securities
2.) Insurance Company securities
3.) Federal covered securities (those listed on exchanges and registered investment companies)


Explain why banks are exempt from registration under both state and federal law?

Securities issued by bank holding companies are not exempt under federal law. Most major banks are listed on exchanges or the Nasdaq and as federal covered securities are exempt from registration with the states.


What security issues can the Administrator revoke or deny registration exemption from?

1.) securities issued by any person organized and operated not for private profit by exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes or as a chamber of commerce or trade or professional association
2.) any investment contract issued in connection with an employees' stock purchase, savings, pension, profit sharing or similar benefit plan


Who does the burden of providing an exemption or an exception from a definition fall upon?

The person claiming it


What is a registrant?

The person registering the securities with the state Administrator.


What does the state Administrator require every issuer to supply in their applications?

1.) amount of securities to be issued in the state
2.) states in which the security is to be offered
3.) any adverse order to judgment concerning the offering by regulatory authorities, court, or SEC
4.) anticipated effective date
5.) anticipated use of the proceeds (why are they raising the money)


How many years back can an applicant reach to file documents in the state registration application?

5 years


Who can file registrations applications with the state?

1.) issuer
2.) selling stockholders
3.) b/ds


How frequent can reports be required by the Administrator?



Why would a security be placed in escrow?

1.) If the security has been issued within the past three years
2.) If the security is issued to a promoter at a price substantially different than the offering price
3.) If the security is issued to any person for a consideration other than cash


When can a registration statement be withdrawn?

Not until one year after its effective date, if any securities of the same class are outstanding, and may be withdrawn only with the approval of the Administrator


What are the unlawful actions of fraud under the USA?

1.) employ any device, scheme, or artifice to defraud.
2.) make any untrue statement of a material fact or omit to state a material fact necessary to make a statement that is not misleading
3.) engage in any act, practice, or course of business that operates as a fraud or deceit on a person


Explain a material fact in the context of fraud?

Information used by prospective purchaser to make an informed investment decision. i.e. Agents must not conceal a material fact to encourage a client to buy or sell a security, which would constitute deceit for personal gain. It is the on the agent to determine what is a material fact or not.


Explain full disclosure in the context of fraud?

When filling out an order to purchase or sell securities, an order ticket, each ticket must disclose the account ID, description of the security - including the number of shares if a stock and total par value if a bond, the terms and conditions of the order, the time of the order entry and execution, the execution price, and the identify of the agent who accepted the order


What are delivery delays?

unreasonable and unjustifiable delays in the delivery of securities purchase by any of a b/d's customers and/or in the payment upon request of freed credit balances reflecting completed transactions


Explain churning?

inducing trading in a customer's account which is excessive in size or frequency in view of the financial resources, objectives, and character of the account.


What are unsuitable recommendations?

recommending to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that such transaction or recommendation is suitable for the customer based upon reasonable inquiry concerning the customer's investment objectives, financial situation and needs, and any other relevant info known by the b/d


What practices are considered in violation of the suitability requirements under the USA?

1.) recommend securities transactions w/o regard to the customer's financial situation, needs, or investment objectives
2.) induce transactions solely to generate commissions (churning)
3.) recommend a security w/o reasonable ground
4.) make blanket recommendations
5.) fail to sufficiently describe the important facts and risks concerning a transaction or security


Unauthorized transactions

executing a transaction on behalf of a customer without authorization to do so, unless discretionary authorization has been received


Trading Authorization

Discretion given to an agent by the client when the client authorizes (in writing) the agent to act on his own and use his discretion in deciding any or all the following for the client
1.) asset (security)
2.) action (buy or sell)
3.) amount (how many shares)



must segregate customers' free securities or securities held in safekeeping that are free of liens from those securities that are pledged as collateral in a margin account. Mixing shares would give undue borrowing power and could jeopardize the security of the client securities in the even of default



the pledging of margin securities when a b/d extends credit for the purchase of eligible securities


Timely Prospectus delivery

must provide a prospectus or preliminary prospectus to the client purchasing securities no later than the due date of confirmation of the transaction


What are examples of typical b/d fees?

1.) Issuance of a stock certificate
2.) transferring an account from one b/d to another
3.) wiring funds
4.) margin account interest
5.) account maintenance fees
6.) safekeeping of funds/securities - charge made for maintaining custody of client assets
7.) late settlement fee
8.) postage and handling


Market manipulation

effecting any transaction in, or inducing the purchase or sale of, any security by means of any manipulative, deceptive, or fraudulent device, practice, plan, program design or contrivance


matched orders

occur when an order to buy or sell securities is entered with knowledge that a matching order on the opposite side of the transaction has been or will be entered for the purpose of 1.) creating false or misleading appearance of active trading in any publicly traded security 2.) creating a false or misleading appearance with respect to the market for any such security.
This requires two parties pre-arranging entries of equal but opposite buy and sell order in the same security


wash trade

an order to buy or sell securities resulting in no change of beneficial ownership for the purpose of 1.) creating a false or misleading appearance of active trading in any publicly traded security 2.) creating a false or misleading appearance with respect to the market for any such security. In this case, the beneficial owner of the traded securities does not change



is the simultaneous buying and selling of the same security in different markets to take advantage of different prices; it is not a form of market manipulation.


Describe the relevance of highlighting of a prospectus/

It is a prohibited action along with any other marks to draw attention to key points on a prospectus.


What are examples of conflicts of interest?

Conflicts of interest must be disclosed at or before the completion of a transaction. Some include:
1.) An agent offering a proprietary products such as a house fund or a limited partnership offering where the sponsor is an affiliate of the b/d
2.) program sponsors, such as investment companies or insurance companies, providing incentives or rewards to agents for selling the sponsors' products
3.) securities professionals having a financial interest in any security being recommended
4.) a b/d going public and placing shares of it own stock into discretionary accounts
5.) b/d publishing a favorable research report after underwriting the issuer's stock offering


What is front running?

The unethical business practice of a b/d or one of its representatives placing a personal order ahead of a previously received customer order. By running in front of the order, the firm or rep can profit on that movement.


How must complaints be received?

They must be received in writing (email constitutes in writing). Oral complaints do not require any action.


Explain the role of client waivers?

Any security purchase or investment advice received by a client to waive compliance with any provision of the USA or any rule under it is considered null and void.


Explain the NASAA policy of Unethical Business Practices by B/Ds and Agents in Connection with Investment Company Shares.

Any b/d or agent who engages in one of the following practices shall be deemed to have engaged in dishonest or unethical practices in such securities business in the USA which can be grounds for denial, suspension, or revocation of registration.
1.) Sales Loan Commissions
2.) Breakpoints
3.) Selling Dividends
4.) Share Classes
5.) Switching Funds
6.) Proper Yield Disclosures:


Explain the unethical behavior of Sales Loan Commissions.

Saying their is no commission on the purchase of securities when in reality there is either a.) front-end load; b.) contingent deferred sales load (CDSC); c.) Ruyle 12b-1 fee or a service fees in total exceed .25% of average net fund assets per year


Explain the unethical behavior of Breakpoints.

failing to disclose to any customer any relevant sales charge discount on the purchase of shares in dollar amount at or above a breakpoint or letter of intent feature, which will reduce the sales charge


Explain the unethical behavior of Selling Dividends

the purchase of such shares shortly before an ex-dividend date is advantageous to such customer unless there are specific describe tax advantages to the customer or a distribution of LT capital gains by an investment company is part of the income yield from an investment in such shares


Explain the unethical behavior of Share Classes

recommending to a customer the purchase of a specific class of investment company shares in connection with a multi-class sale charge or fee arrangement w/o reasonable grounds to believe that sales charge or fee arrangement associated with such class of share is suitable and appropriate based on the customer's investment objectives


Explain the unethical behavior of Selling Dividends

Recommending to a customer the liquidation of redemption of investment company shares for the purpose of purchasing share in a different investment company portfolio having similar investment objectives and policies w/o reasonable grounds to believe that such rec is suitable and appropriate based on the customer's investment objectives


Explain the unethical behavior of Proper Yield Disclosures

Stating or implying to a customer the fund's current yield or income w/o disclosing the fund's most recent average annual return, calculated in a manner prescribed in SEC Form N-1A for 1,5,and 10 yr periods and fully explaining the difference between current yield and total return, unless the fund does not have that long of a duration


Explain the lending and borrowing restrictions

Securities professionals may not borrow money or securities from a client unless the client is a b/d, an affiliate of the professional or a fin institution engaged in the business of loaning money.
Securities professionals may not loan money to clients unless the firm is a b/d or financial institution engaged in the business of loaning funds or the client is an affiliate


Selling Away

An agent may not conduct transactions with customers of his employing b/d that are not recorded on the books w/o prior written consent. aka as trade made off books of the b/d


Sharing in Accounts

Agents cannot share in the profits or losses of client accounts unless the client and the b/d supply written approval. Unlike agents, b/ds, IAs, and IAR are never permitted to share in the profits and losses in their client's accounts


Splitting Commissions

splitting the agent's commissions, profits, or other compensation from the purchase or sale of securities with any persons not also registered as an agent for the same b/d, or for a b/d under the direct or indirect common control is permissible, so long as it does not increase transaction cost to the client


What are examples of registration terminations that do not violate the USA?

1.) Request for Withdrawal - effective 30 days after received, however, the Administrator holds jurisdiction over you for 1 yr
2.) lack of qualifications
3.) cancellation - this does not result from failure to follow the provision in the act, it occurs as the result of death, dissolution, or mental incompetency


What happens to an agent or IAR's license when a BD or IA 's employer's registration is suspended or revoked?

The license is placed into suspense and essentially has the same effect of the employer.


When can a purchaser of securities sue for when recovery the investment advice or securities violates the USA?

1.) a sale was made of an unregistered nonexempt security in violation of the registration provisions of the USA
2.) securities professional omits or makes an untrue statement of material fact
3.) the agent was named along with the b/d for a civil infraction
4.) securities were sold by an agent who should have but was not registered under the act
5.) securities were sold in violation of a rule or order of the securities Administrator


What is the statute of limitations for a violation of civil provisions of the USA?

3 years from the date or two years after discovering the violation, whichever comes first


What can a client recover if the claim of civil liability is found true from the improper sale of a security?

1.) original purchase price of the securities "made whole"
2.) interest at a rate determined by the Administrator (generally referred to as the state's legal rate)
3.) all reasonable attorney's fees and court costs
4.) minus and income received while the securities were held


What can a client recover if the claim of civil liability is found true from improper investment advice?

1.) cost of the advice
2.) loss as a result of the advice
3.) interest at a rate determined by the Administrator
4.) any reasonable attorney fees
5.) minus amount of any income received from the advice


Right of Rescission

Occurs when the seller of securities discovers that a sale has been made in violation of the USA, the seller may offer to repurchase the securities from the buyer. To satisfy the buyer's right of rescission, the amount paid back to the buyer must include the original purchase price and interest, as determined by the Administrator. This also applies to investment advice


Letter of Rescission

When a seller offers to buy back the securities that were sold in violation of the act to help in avoiding a law suit. The buyer has 30 days to respond to the letter. If they do not respond, the buyer gives up any right to pursue a lawsuit at a later date. This also applies to investment advice


Are treble damages available under the USA for securities violations?



What must a surety bond include to meet the requirements of the USA?

Provide that any customer who can prove a violation (and does so within the statute of limitations) is entitled to collect against the bond.


What is the maximum criminal penalty under the USA?

Fine of $5,000 and jail sentence of 3 yrs. This can only occur if the person willingly made a violation of the USA. The Administrator does not have the power to arrest anyone they must apply to the appropriate authorities in the state


What is the statute of limitations for criminal offenses under the USA?

5 yrs from the date of the offense


What is 5-5-3?

When applying to criminal penalties there is a 5 year statute of limitations, $5,000 max fine, and 3 yrs of max imprisonment


When can a b/d conduct b/d services on the premises of a financial institution where retail deposits are take?

1.) Setting: When the b/d services are conducted in a distinct area from the area of where institution's retail deposits are take?
2.) Customer Disclosure and Written Acknowledgment: At or prior to the customer's account being opened the b/d must: disclose orally and in writing that securities products purchased or sold in a transaction are not insured by the FDIC, are not deposits or other obligations of the fin institution, are not guaranteed by the fin institution, are subject to investment risk including loss, make reasonable efforts to obtain from each customer a written acknowledgment of this disclosures
3.) communications with the public: format disclosure may be used in communications such as: Not FDIC Insured, No Bank Guarantee, May Lose Value. As long as these omissions of disclosure would not cause the advertisement or sales literature to be misleading.


When are disclosures not required in communications to the public?

1.) If the radio broadcast of 30 seconds or less
2.) electronic signs, including billboard-type signs that are electronic, time, and temperature signs, ticker take signs, but excluding messages contained in such media as TV, online computer services or ATMs
3.) signs such as banners and posters, when use only as location indicators


Importance of Claim

Make sure to understand who has a claim and when they do!


What are examples of non security?

1.) Insurance
2.) Retirement Plans (example of items that can't be sold)
3.) Collectibles
4.) Commodity futures and actual commodities
5.) Condominiums as personal residence
6.) Currency


Assessable Stock

Issued below par value and the creditors could assess the owner or issuer of stock can be assessed the difference in par value. Last assessable stock was sold in 1955. Can potentially be a future obligation where the owner of the stock may have to make of the difference in par value, owed to the creditor of the failed businesses. A gift is considered a "sale"


What is the significance of 12/31 for Agents and IARs in the context of registration?

The license expires ALWAYS on 12/31. If you registrar in Oct, Nov, or Dec, it still expires 12/31/


In M&A, does the successor firm have to pay two filing fees?