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From Flashcardlet > Unit 9 > Flashcards

Unit 9 Flashcards

1
Q

USA Model States Securities Legislation

A

Uniform Securities Act enacted in 1956
Used by the North American Securities Administrators Association (NASAA)
Securities administrator in each state has the power to deny, suspend, or revoke registrations

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2
Q

Cease and Desist Order

A

Used by the Administrator whenever it appears that any registered person has engaged or is about to engage in any act or practice constituting a violation of any provision of USA
This applies to registered persons, not securities

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3
Q

Stop order

A

Used to deny effectiveness to, or suspend or revoke the effectiveness of, any registration statement
This applies to securities, not professionals

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4
Q

Summary order (Acting Summarily)

A

Summarily means without prior notice
• Postponing or suspending the registration of any securities professional pending a final determination of a proceeding related to a problem
• Postponing or suspending the registration of any security pending a final determination of a proceeding related to a problem
• Denying or revoking a specific security or transaction exemption

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5
Q

Notification

A

Administrator must promptly notify all interested parties that is has been entered, the reasons for the order, and that within 15 days after the receipt of a written request a hearing will be granted

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6
Q

Final orders

A

No final order may be entered without:
• Appropriate prior notice to the interest parties
• Opportunity for hearing
• Written findings of fact and conclusions of law

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7
Q

Blue-sky laws

A

State securities laws

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8
Q

Person

A

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

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9
Q

There are only 3 non-persons

A
  • Minors (anyone unable to enter into contracts under the laws of the state)
  • Deceased individuals
  • Individuals declared mentally incompetent
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10
Q

Broker/dealer

A

Means any person engaged in the business of effecting transactions in securities for the account of others or for his own account
when acting on behalf of others, they are acting as brokers
when acting on behalf of themselves, they are acting as dealers

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11
Q

Agent

A

agent means any individual, other than our broker dealer, who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities
referred to as registered Representatives

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12
Q

Investment advisor

A

the term investment advisor means 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
who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities

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13
Q

National Securities Markets Improvements Act of 1996 (NSMIA)

A

Under the National Securities Markets Improvements Act of 1996 (NSMIA), investment advisers are registered with either the SEC (federal covered advisers) or the state (state covered advisers), but never both

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14
Q

Investment adviser representative (IAR)

A

Any individual who represents a state-registered IA or federal covered IA performing duties related to the giving of or soliciting advisory services

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15
Q

Issuer

A 
Any person who issues or proposes to issue any security
Under USA (there is no issuer with respect to certificates of interest or participation in oil, gas, or mining titles or leases, or in payments out of production under such titles or leases)
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16
Q

Non-issuer

A

Not directly or indirectly for the benefit of the issuer

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17
Q

Security

A

The usual things plus investment contracts, pre-organization certificates, etc.

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18
Q

Exempt security

A

Exempt means excused from certain requirements
Exempt under USA means that it does not have to be registered to be sold and there are no requirements to the advertising about the security with the Administrator

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19
Q

Exempt transaction

A

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

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20
Q

Guaranteed

A

Means guaranteed as to payment of principal, interest, or dividends, but not capital gains
Offer/offer to sell
The terms offer and offer to sell include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value

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21
Q

Sale

A

The term sale or sell includes every contact of sale of, contract to sell, or disposition of, a security or interest in a security for value. In other words, the offer is the attempt. The sale is when it is successful

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22
Q

Fraud

A

The term fraud means an intentional effort to deceive someone for profit; not limited to common law deceit

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23
Q

SROs

A

Self- regulatory organizations
FINRA
MSRB (Municipal Securities Rulemaking Board)
Chicago Board Options exchange
IIRO (Industry Regulatory Organization of Canada)

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24
Q

Solicitor

A

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

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25
Q

Accredited investor

A

Found in Rule 501 of the Act of 1933
A person who is not counted when computing the number of investors purchasing a private placement under Regulation D of Act of 1933
Term includes institutional investors such as banks, insurance companies, investment companies and large EB plans; charitable organizations; corporations; or partnerships

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26
Q

Accredited investor

A

For natural persons (individuals), 3 ways to qualify
• Be a director, executive level officer or general partner of the entity issuing the securities
• Have individual net worth (spouse included) of $not including primary residence
• Having income >$200,000 in each of the 2 most recent years, joint income of $300,000, and expect to earn the same thing in the current year

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27
Q

Registrant

A

Securities professionals (B/Ds, IAs, agents, IARs), or securities issuers, who are in the process of, or who have registered with the Administrator

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28
Q

Institution

A

Banks, trust companies, S&L associations, insurance companies, EB plans with assets >$1 million, government agencies and instrumentalities. The Act generally affords less protection to these investors owing to their greater investment sophistication

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29
Q

Institution

A

The term institution would include banks, trust companies, S&L associations, insurance companies, EB plans with assets >$1 million, and government agencies or instrumentalities

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30
Q

USA

A

USA generally affords less protection to institutional investors owing to their great investment sophistication

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31
Q

Retail client

A

Not an institutional client. Retail clients need far more protection than institutional clients.

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32
Q

Accredited investors

A

Individuals who meet the standard of accredited investor are still considered retail clients rather than institutional clients

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33
Q

National Securities Markets Improvements Act of 1996

A

Enacted by Congress to promote efficiency in capital formation in the financial markets
Generally preempts states’ blue-sky laws, eliminating the dual system of state and federal registration of certain securities and investment advisers

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34
Q

State

A

State means any of the 50 states, any territory of the US (e.g. DC, PR, Samoa, Guam, etc.)

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35
Q

Exclusion

A

Exclusion means excluded from, or not included in, a definition. For the purpose of the USA, if a person is excluded from the definition of an agent, that person is not subject to provisions of state law that referred to agents.

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36
Q

4 classes of persons who fall under the jurisdiction of state securities laws

A
  • Broker/dealers – generally legal persons, such as corporations or partnerships
  • Agents – always individuals (natural persons)
  • Investment advisers – generally legal persons, such as corporations or partnerships
  • Investment adviser representatives – always individuals (natural persons
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37
Q

Persons

A

Always keep in mind which of the 4 categories of persons is the subject of the question. Rules that apply to agents, for example, are not the same as those that apply to B/Ds.

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38
Q

B/D

A

Defined in the USA as any person engaged in the business of each effecting transactions in securities for the accounts of others or for its own account
Firms for which registered reps (agents) work

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39
Q

B/D

A

Any person within established place of business in the state (office) that is in the business of buying and selling securities for the accounts of others (customers) and/or for its own proprietary account is a broker/dealer and must register in the state as such

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40
Q

Broker capacity

A

When acting on behalf of their customers - that is, buying and selling securities for their clients’ accounts - broker/dealers act in an agency capacity

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41
Q

Dealer capacity

A

When buying and selling securities for their own accounts, called proprietary accounts, they act in a principal capacity as dealers

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42
Q

Underwriting (distributing) shares of new securities for issuers

A

When B/Ds do this, they generally earn the spread (the difference between the public offering price and what they pay the issuer) or receive a commission on the sales, which they then used to pay their agents who actually made the sales to the clients

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43
Q

Exclusions from the definition of broker/dealer

A

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)

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44
Q

Gramm-Leach-Bliley Act in 1999 (Financial Modernization Act)

A

Federal securities law adopted a functional approach to the regulation of financial institutions
Financial institutions that engage in brokerage-related activities are subject to SEC registration as B/Ds as well to applicable provisions of state securities laws – that relate to B/Ds
B/D subsidiaries of banks are not excluded although the bank holding company may be excluded

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45
Q

B/D definition exclusion

A

States exclude from the definition of B/D those B/Ds that:
• Have no place of business in the state and deal exclusively with issuers, other B/Ds, and other financial institutions (banks, S&Ls, trust companies, insurance companies, investment companies, and pension or profit-sharing trusts
• have no place of business in the state, that are licensed in the state where they have a place of business, and offer and sell securities in the state only with persons in the state who are existing customers and who are not residents of the state. This is sometimes referred to as the Snowbird exemption and applies as well to agents, investment advisors, and investment advisor Representatives

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46
Q

USA B/D exclusions

A
  • the USA house broker/dealers to do business with existing customers who were temporarily state to avoid unnecessary multiple registrations
  • in most states, when an existing client lead changes residence to another state in which the broker/dealer in parentheses and/or the agent) is not registered, the firm (and/or agent) has 30 days during which it may continue to do business with that on without registration and the new state
  • should it wish to continue to maintain that client, the B/D (and/or agent) would have to register in that state
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47
Q

Person not registered in a state if:

A

Communication clearly states that the person may only do business in this state if properly registered or exempt from registration
Any follow-up individualized responses won’t be made without compliance state B/D, IA, agent, or IA requirements, or applicable exemption or exclusion
Site makes only general info available, not specific advice or recommendations
In case of IAR-
Affiliation with B/D or IA of the agent is prominently disclosed
B/D or IA with whom the agent or IAR is associated retains reviewing & approval responsibility
B/D of the agent or IAR authorizes the distribution of the info through the Internet Communication
Agent or IAR acts within scope of authority granted by the B/D in disseminating info through Internet Communication

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48
Q

State registration

A

If any material information on the Form B/D becomes inaccurate, PROMPT notice must be given to the Administrator

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49
Q

B/D net capital requirements

A

Net capital requirements is the B/D’s liquid net worth
Requirement may not exceed those required by federal law (Sec. Exc. Act of 1934)
State may require that B/Ds who have custody of or discretionary authority over clients’ funds to post surety bonds.
Surety bond requirement cannot exceed that of the Sec. Exc. Act of 1934)
In lieu of a surety bond, the Administrator will accept deposits of cash or securities

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50
Q

Agent

A

USA defines agent as any individual who represents a B/D (legal entity) or issuer (legal entity) in effecting (or attempting to effect) transactions in securities
Act in a sales capacity and represent B/Ds or issuers of securities
Also called sales representatives or registered representatives
Only an individual (natural person) can be an agent
Corporations like brokerage firms are legal entities and are represented by agents

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51
Q

Who is NOT an agent (exclusions)?

A

Clerical and administrative (ministerial personnel) EEs of B/Ds

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52
Q

Who has to register as an agent?

A
  • If secretaries or sales assistants accept customer transactions or take orders over the phone, they are engaging in securities transactions and are subject to registration as agents
  • Cold callers working for a B/D have to register as an agent if they do any more than ask if clients want to receive info
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53
Q

Exclusions from definition of Agent for Personnel representing Issuers

A

Individuals are excluded from the definition of agent and, therefore, are exempt from registration in a state when representing issuers in effecting transactions:
In exempt securities;
Exempt from registration; and
With existing EEs, partners, or directors of the issuer if no commission or other remuneration is paid or given directly or indirectly for soliciting any person in this state

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54
Q

Exempt securities

A

Securities exempt from registration are called exempt securities
An EE of an issuer is not an agent when representing an issuer of the following exempt securities:
US government an municipal securities
Securities of governments with which the US has diplomatic relationships
Securities of US commercial banks and savings institutions or trust companies (when not engaged in securities-related B/D activities
Commercial paper rated in the top 3 categories by major ratings agencies with denominations of $50,000 or more with maturities < 9 months

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55
Q

Exempt transactions

A

An EE of an issuer is not an agent when representing an issuer in exempt transactions. Some examples are:
Isolated non-issuer transactions;
Transactions between issuers and underwriters;
Transactions with financial institutions; and
Private placement

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56
Q

Agent registration requirements

A

Must file Form U-4

On Form U-4, applicant must disclose citizenship

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57
Q

Notification

A

When an agent shifts employment from one B/D or issuer to another, all three persons – the agent, the old ER, and the new ER – must promptly notify the Administrator

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58
Q

Agent Financial Requirements

A

There are none

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59
Q

Fee or commission sharing

A

Registered agents of B/Ds may shares fees or split commissions with others from the same B/D or under B/Ds under common ownership or control
They do not have to disclose the split to their clients

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60
Q

Multiple registrations

A

An individual can’t act for > 1 B/D at a time or for > 1 issuer unless the B/Ds are affiliated by common control or the Administrator grants an exception

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61
Q

Limited Registration of Canadian B/Ds

A

If B/D has no office in state, it may effect transactions or solicit if:
A person from Canada is a temporary resident and an existing client of the B/D
A person from Canada who is a resident in the state whose transaction is in a self-directed tax-advantaged Canadian retirement plan of which the person is the holder or contributor
Registered Retirement Savings Plan (RRSP)

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62
Q

Registered Retirement Savings Plan (RRSP)

A

The Canadian equivalent of an IRA

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63
Q

Agents

A

EEs who represent an issuer of exempt securities (e.g. a bank) in selling its securities is not an agent regardless of how they are compensated

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64
Q

Agents

A

Persons must be registered as agents when they effect transactions on behalf of the B/D whether or not the securities are exempt

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65
Q

Agents

A

Any individual taking orders on behalf of a B/D must be registered whether or not they receive a commission

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66
Q

Agents

A

A person who represents an ER in selling securities is not an agent regardless of how they are compensated

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67
Q

Investment adviser

A

Any person who, for compensation and as a part of a regular business, engages in the business of advising others as to the value of securities, or as to the advisability of investing in or selling them

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68
Q

Investment adviser

A

Advice given on investments not defined as securities (rare coins, art, and real estate) is not investment advice covered by the USA or other securities legislation
Persons giving advice on non-USA investments are not investment advisers

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69
Q

Investment adviser

A

To be an investment adviser under both state and federal securities law, a person must:
Provide advice about securities (not about jewelry, rare coins, or real estate);
Provide that advice as a part of an ongoing business (hang out a shingle and have an office for conducting business); and
Receive compensation (actually get paid for the service)

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70
Q

Investment adviser

A

In most cases, IAs are persons (legal entities) that provide advice or portfolio management services on an ongoing basis.
IARs work for IAs, just as RRs work for B/Ds
An individual can be an IA if he operates as a sole proprietorship and is registered as both an investment adviser and the only IAR of the business

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71
Q

Investment Adviser Representative (IAR)

A

Any individual who represents a state-registered IA or federal covered investment adviser performing duties related to the giving of or soliciting for advisory services

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72
Q

B/D

A

Primary business function is executing transactions in securities
Compensation is earned in the form of commissions and markups (or markdowns)

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73
Q

IA

A

Primary business function is giving advice

Compensation is earned in the form of fees or other charges, generally based on the amount of assets managed

74
Q

Agents

A

Individuals employed by B/Ds to handle their customer orders to buy or sell securities
Separate function from an IAR (although many in large firms wear both hats)

75
Q

IARs

A

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 B/D where that client maintains a brokerage account to give the buy/sell order to an agent

76
Q

B/Ds, agents, IAs, and IARs must register with the state

A

To register with the state securities Administrator, a person must:
Submit an application;
Provide consent to service of process;
Pay filing fees;
Post a bond (if required by the Administrator); and
Take and pass an examination if required by the Administrator. The examination may be written, oral, or both

77
Q

Submitting an application to the Administrator

A

Fingerprints are not required

78
Q

Agent termination

A

If an agent terminates with a B/D, both parties must notify the Administrator promptly
If an agent terminates with one B/D to join another, all 3 parties must notify the Administrator
One way to remember- in the case of an agent, the first letter A, tells us that all the parties involved must notify the administrator

79
Q

Agent registration

A

New applicants for registration must provide the Administrator of every state in which they intend to register with a consent to service of process

80
Q

Consent to service of process

A

Appoints the Administrator as the applicant’s attorney to receive and process noncriminal securities- related complaints against the applicant
All legal documents (subpoenas, warrants, etc.) received by the Administrator have the same legal effect as if they had been served personally on the applicant

81
Q

Consent to service of process

A

Consent to service of process is submitted with the initial application and remains in force permanently.
It does not need to be supplied with each renewal of a registration
If a securities professional is registering in 6 states, the Administrator of each state must receive a consent to service of process

82
Q

Initial and renewal filing fees

A

States require filing fees for initial and renewal applications
If application is withdrawn or denied, the state keeps a portion of the fee
The renewal date for all registrations is 12/31 and there is no proration of fees

83
Q

Effectiveness of registration

A

Unless notified otherwise, registration is effective 30 days after the later of when the application is filed or when the app is amended and complete

84
Q

Registration

A

The Administrator has the power to shorten the normal 30 period

85
Q

Canadian limited registration

A

In order to do business with their Canadian customers who are temporarily in any state(s), Canadian B/Ds must obtain a form of limited registration

86
Q

Post-registration requirements

A
  • Every registered B/D must make and keep accounts, blotters (records of original entry), correspondence (including emails), memoranda, papers, books, and other records ass the state Administrator by rule prescribes
  • All records so required must be preserved for 3 years (2 in the main office) unless the Admin says otherwise
  • State’s recordkeeping requirements cannot be > SEC
87
Q

Website storage requirements

A

Treated as any other advertisement- 3 years

When revisions made, new retention requirements for that piece

88
Q

Security- the most important term in the USA

A

USA only applies to financial instruments that are securities
Primary characteristics of a security:
• An investment of money
• In a common enterprise
• With the expectation of profits
• Derived primarily from a person other than the investor

89
Q

Common enterprise

A

Enterprise in which the fortunes of the investor are interwoven with those of either the person offering the investment, a third party or other investors

90
Q

List of securities under the USA and covered by its provisions

A

Notes; stocks; treasury stocks; bonds; debentures; evidence of indebtedness; CDs or participation in a profit-sharing agreement; collateral trust certificates; pre-organization certificates or subscriptions; transferable shares; investment contracts; voting trust certificates; CDs for a security; fractional undivided shares in oil, gas, or other mineral rights; puts, calls, straddles, options, or privileges on a security; CDs or groups of indexes or securities, puts, calls, straddles, options, privileges entered into on a national securities exchange relating to foreign currency; any interest or instrument commonly known as a security; or CDs or participation in, receipts of, guarantees of, or warrants or rights to subscribe to, or purchase, any of the above

91
Q

What is not a security?

A

Any insurance that does not use the word variable; interest in a retirement plan (ITA, Keogh, etc.); collectibles; commodities; condominiums; currency

92
Q

Non-exempt security

A

Non-exempt means not subject to registration
Exempt means subject to registration
The sale of an unregistered non-exempt security is a prohibited practice under the USA and may be subject to civil and possibly criminal penalties

93
Q

Issuer

A

Any person who issues (distributes) or proposes to issue a security
Most common issuers of securities are companies or governments

94
Q

Securities with no issuer

A

Under the USA, certificates of interest; participation in oil, gas, or mining titles or leases; or in payments out of production under such titles or leases, there is not considered to be any issuer

95
Q

Registration

A

If an issuer is non-exempt, it must generally register its securities in the states where they will be sold under one of the registration methods in Unit 9

96
Q

Issuer transaction

A

The proceeds of the sale go to the issuer
All newly issued securities are issuer transactions. The company raises $ by selling [issuing] securities to investors, the proceeds go to the company itself

97
Q

Non-issuer transaction

A

The proceeds of the sale do not go, directly or indirectly, to the entity that originally offered the securities to the public. (E.g. trading on exchanges like NYSE or NASDAQ. Secondary trading
Non-issuer transactions are also referred to as 2ndary transactions

98
Q

Primary offering

A

Issuer transaction involving new securities

99
Q

Initial public offering (IPO)

A

1st time an issuer distributes securities to the public

100
Q

Subsequent public offering (SPO) or Additional public offering (APO)

A

Any subsequent issuance of new shares to the public
All primary offerings, IPOs and SPOs are issuer transactions because the issuer receives the proceeds from the investor investing in the company

101
Q

Mutual fund company shares

A

When investors purchase open-end investment company shares, it is always issuer transaction because the fund is continuously offering new shares
When the investment company sells shares out of its portfolio, that is a non-issuer in the 2ndary markets

102
Q

What is a security?

A

Commodity futures contracts and fixed payment life insurance contracts are included in our list of 6 items that are not securities
Commodity option contracts are securities

103
Q

Non-exempt securities

A

Are usually required to be registered, but not always

If the non-exempt security is sold in an exempt transaction, registration may not be required

104
Q

Registration of securities

A

It is unlawful for any person to sell a security unless:
It is registered under the USA
The security or transaction is exempted from registration under the USA
It is a federal covered security

105
Q

National Securities Markets Improvement Act of 1996 (NSMIA)

A

Divided the responsibility for regulating IAs between the states and the SEC by creating the category of registration known as a federal covered adviser
NSMIA also created the term federal covered security

106
Q

Federal covered security

A

A security that is exempt from registration on a state level
States may still require Notice Filings, consisting of filing fees and copies of documents filed with the SEC, primarily in the case of registered investment companies

107
Q

Categories of federal covered securities

A
  • Securities issued by an open-end or closed-end investment company, UIT, FIC, that are registered under the Investment Act of 1940
  • Private placements (securities pursuant to Rule 506 of Regulation D under Act of 1933)
  • Securities offered by a US government issuer or a municipal issuer, unless the municipal issuer is located in the state in which the securities are being offered.
  • Securities listed on NYSE, ASE, Nasdaq, and several other US exchanges
108
Q

Federal covered securities

A

Registering a security with the SEC does not automatically make it federal covered
Investment companies and securities listed on exchanges and Nasdaq are automatically federal covered
Thousands of stocks registered with the SEC that trade on the OTC Bulletin Board or the Pink Sheets and they are not federal covered

109
Q

Federal covered securities

A

Status as a federal covered security is not a preemption of the state licensing or anti-fraud laws
Any person who sells a federal covered security must be licensed as a B/D or agent (unless otherwise exempted) and must also comply with the anti-fraud provisions of state laws

110
Q

State registration of securities

A

The USA provides 2 methods for securities issuers to register their securities in a state, plus a special method for certain federal covered securities:
Notice filing;
Coordination; and
Qualification

111
Q

Notice filing

A

The Administrator may require the issuer of certain federal covered securities to file the following documents as a condition for sale of their securities in the state:
• Documents filed along with their registration statements filed with the SEC
• Documents filed as amendments to the initial federal registration statement
• A report as to the value of such securities offered in the state
Consent to service in the process

112
Q

Registration by coordination

A

The most common form of registration for securities that are not federal covered (typically OTC bulletin board & Pink Sheets securities) is coordination
A security may be registered by coordination if a registration statement has been filed under the Act of 1933 in connection with the same offering

113
Q

Registration by coordination

A

In coordinating a federal registration with state registration, issuers must supply the following records in addition to the consent to service of process:
• Copies of the latest form of prospectus filed under the Act of 1933, if the Administrator requires it
• Copy of articles of incorporation and bylaws, a copy of the underwriting agreement, or a specimen copy of the security
• If the Administrator request, copies of any other information filed by the issuer under the Act of 1933
• Each amendment to the federal prospectus promptly after it is filed with the SEC

114
Q

Effective date

A

Registration by coordination becomes effective at the same time the federal registration becomes effective, provided:
• No stop orders have been issued by the Administrator and no proceedings are pending against the issuer;
• The registration has been on file for at least the minimum number of days specified by the Administrator, a number that currently ranges from 10 to 20 days, depending on the state; and
• A statement of the maximum and minimum offering prices and underwriting discounts have been on file for 2 business days

115
Q

Registration by coordination

A

Is by far the most frequently used method and, from a practical standpoint, is the only sensible way to register a multi-state offering

116
Q

Registration by qualification

A

Any security can be registered by qualification, which requires a registrant to supply any information required by the state securities Administrator
Securities not eligible for registration by another must be registered by qualification
In addition, securities that will be sold in one state (intrastate) will be registered by qualification

117
Q

Registration by qualification

A

To register by qualification, an issuer must supply a consent to service of process and the following information:
• Name, address, form of organization, description of property, and nature of business
• Information on directors and officers and every owner of >10% of the securities, and the remuneration paid to the owners in the last 12 months
• Description of issuers’ capitalization and long-term debt
• Estimated proceeds and the use to which the proceeds will be put
• Type and amount of securities offered, offering price, and selling and underwriting costs
• Stock options to be created in connection with the offering
• Copy of any prospectus, pamphlet, circular, or sales literature to be used in the offering
• Specimen copy of the security along with opinion of counsel as to the legality of the security being offered
• Audited balance sheet current within 4 months of the offering with an income statement for 3 years before the balance sheet date

118
Q

Consent to service of process

A 
In order to register, even by notice filing, there must be a consent to service of process filed with the Administrator
A person (both individuals and legal entities) who has filed such a consent in connection with a previous registration or notice filing need not file another
119
Q

Effective date for filing by qualification

A

Unlike coordination, where the effective date is triggered by SEC acceptance of the registration, a registration by qualification becomes effective whenever the state Administrator so order

120
Q

Effective date for filing by qualification

A

Regardless of the method used, every registration statement is effective for 1 year from its effective date
Unlike agent & B/D registration, the date 12/31 is of no consequence
Registration may continue in effect past the first anniversary if there are still some unsold shares remaining, as long as they are still being offered at the original public offering price by either the issuer or the underwriter

121
Q

Registering securities by qualification

A

A registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold if two conditions are met:
The public offering price; and
The underwriters’ discounts and commissions are not changed from the respective amounts stated in the original registration statement

122
Q

Registering by qualification

A

A registration statement may be amended after its effective date to change the number of shares to be offered and sold if the public offering price and underwriter’s discounts and commissions are unchanged

123
Q

Registering by qualification

A

Any company may register by qualification

Companies that are not established or that intend to offer their securities in one state register by qualification

124
Q

Exempt transaction

A

Is exempt from the regulatory control of the state Administrator because of the manner in which a sale is made or because of the person to whom the sale is made
A transaction is an action and must be judged by the merits of each instance

125
Q

Exempt security

A

A security is exempt because of the nature of the issuer, not the purchaser

126
Q

USA

A

It is unlawful for any person to offer or sell any security in this state unless
It registered under the USA;
The security or transaction is exempted under the act; or
It is a federal covered security

127
Q

Exempt securities

A

US & Canadian govt & municipal securities, foreign govt securities, depository securities, insurance company securities, public utility securities, federal covered securities, securities issued by nonprofit organizations, securities issued by cooperatives, securities of EB plans, certain money market instruments

128
Q

Exempt security

A

Is not exempt from anti-fraud provisions of the USA

129
Q

Exempt transactions

A

Before a security can be sold in a state, it must be registered unless exempt from registration, or traded in an exempt transaction

130
Q

Types of exempt transactions

A
  • Isolated non-issuer transactions (for sale by owner) – one individual selling stock to another in a one-on-one transaction exempt from the Administrator because the issuer is not receiving any of the proceeds, and the parties involved are not trading as part of a regular practice
  • Unsolicited brokerage transactions – the most common of the exempt transactions. Client calls a registered agent and asks to sell
131
Q

Types of exempt transactions

A
  • Underwriter transactions – transactions between issuer and underwriter; or between underwriters themselves (as part of a syndicate)
  • Bankruptcy, guardian, or conservator transactions – executor, administrator, sheriff, marshal, receiver, guardian, or trustee in bankruptcy are exempt transactions. UGMA & UTMA custodians are not exempt
  • Institutional investor transactions – primarily transactions with financial institutions such as banks, insurance companies, and investment companies, and there is no minimum order to define these trades
132
Q

Types of exempt transactions

A

• Limited offering transactions – called a private placement, directed at ≤ 10 persons (called offerees) other than institutional investors during the previous 12 consecutive months provided that:
o The seller believes that all of the non-institutional buyers are purchasing for investment purposes only
o No commissions or other remuneration is paid for soliciting non-institutional investors
o No general solicitation or advertising is used

133
Q

Differences between federal and state law

A

Federal law – private placement rule restricts the # of purchasers
USA – restricts the number of offers that may be made

134
Q

Accredited investor vs. institutional investor

A

Accredited investor – an investor who meets the accredited investor standards of Regulation D
• Net worth > $1 million (excluding home) Only assets with spouse count, not other relatives
• Income > $200,000 (or $300,000 with spouse) in each of previous 2 years & likely this year
• THIS IS FEDERAL LAW & SHOULD NEVER BE ANSWERED AS A USA QUESTION

135
Q

Institutional investor

A

• An investor who manages large amounts of money for other people (e.g. mutual fund, insurance company, etc.)

136
Q

Administrator’s power over exemptions

A

The Administrator may deny any exempt transaction except:
• Securities of non-profits
• Investment contracts issued in connection with EB plan
Under the USA, the burden of providing an exemption or an exception from a definition falls upon the person claiming it.

137
Q

Registrant

A

The person registering the securities

138
Q

Filing the registration statement

A

State Administrators require every issuer to supply the following information on their applications:
• Amount of securities to be issued in the state
• States in which the security is to be offered, but not the amounts offered in those other states
• Any adverse order or judgment concerning the offering by regulatory authorities, court, or the SEC

139
Q

Registration statements

A

Although most registration statements are filed by the issuer, the exam may require you to know that they may also be filed by any selling stockholder, such as an insider making a large block sale, or by a B/D

140
Q

Filing fee

A

Issuer on whose behalf the offering is to be made must pay a filing fee, as determined by the Administrator which is often based on a % of the total offering price

141
Q

Ongoing reports

A

Administrator may require the person who filed the registration statement to file reports

142
Q

Escrow

A

As a condition of registration, the Administrator may require that a security be placed in escrow if the security is issued:
• Within the past 3 years
• At a price substantially different than the offering price; or
• To any person for a consideration other than cash

143
Q

Special Subscription Form

A

The Administrator may also require, as a require a condition of employment, that the issue be sold only on a form specified by the Administrator and that a copy of the form or subscription contract be filed with the Administrator or preserved for up to 3 years

144
Q

Withdrawal of registration statement

A

Registration statement cannot be withdrawn

145
Q

Anti-fraud Provisions of the USA

A

Apply only to securities (not to investments that are not considered securities)
If inappropriate activity occurs during the offer and sale relating to something that is not a security, these anti-fraud provisions do not apply

146
Q

Material facts that constitute fraud if misstated

A
  • Inaccurate market quotations
  • Misstatements of an issuer’s earnings or projected earnings or dividends
  • Inaccurate statements regarding the amount of commissions, markup, or markdown
147
Q

Commissions

A

Other than when commissions are higher than normal, a B/D is not obligated to disclose the amount of commission on any offer to sell before the transaction. Commissions are always required to be disclosed on the trade confirmation

148
Q

Offer (or offer to sell)

A

Every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value
• Any security given or delivered with, or as a bonus on account of, a purchase of securities or anything else (a car, jewelry, and so forth) is considered to constitute part of the subject of the purchase and to have been offered and sold for value
• A purported gift of assessable stock (stock issued below par) is considered to involve an offer and sale
• A sale or offer of a warrant or right to purchase or subscribe to another security

149
Q

Assessable stock

A

When assessable stock is given as a gift, the Administrator has jurisdiction over the transaction because there is a potential future obligation in that either the issuer or, more likely creditors can demand payment for the balance of the par value

150
Q

Assessable stock

A

If an individual owned assessable stock and felt that the issuer was on the verge of bank

151
Q

Exclusions from the definition of sale/sell and offer/offer to sell

A

The terms sale or sell and offer or offer to sell do not include any:
• Bona fide pledge or loan
• Gift of non-assessable stock
• Stock dividend (includes stock splits)
• Class vote by stockholders to sell assets
• Act incident to a judicially approved reorganization

152
Q

Legal jurisdiction of the Administrator

A

Jurisdiction means the legal authority to regulate securities activities that take place in the state
This means that the offer:
• Originated in the Administrator’s state
• Is directed to the Administrator’s state
• Is accepted in the Administrator’s state

153
Q

Publishing and broadcast exceptions to jurisdiction

A

The Administrator does not have jurisdiction if the offer was made in:
• A television or radio broadcast that originated outside of the state
• A bona fide newspaper or periodical published outside of the state
• A newspaper or periodical published inside the state, but with > 2/3 of its circulation outside of the state in the last year

154
Q

The Administrator has 4 broad powers to enforce and administer the USA

A
  • Make, amend, or rescind rules and orders;
  • Conduct investigations and issue subpoenas;
  • Issue, cease and desist orders and seek injunctions; and
  • Deny, suspend, cancel, or revoke registrations and licenses
155
Q

Administrator’s powers

A
  • A rule or order of the Administrator has the same authority as a provision of the act itself, but these rules and orders are not part of the USA itself
  • Although the Administrator has the power to make and amend rules for compliance with his state’s blue-sky laws, he does not have the power to alter the law itself
  • The composition or content of state securities law is the responsibility of the state legislature and not its administrative agencies
  • Despite the latitude given him in administering the USA, the Administrator cannot suspend any provision of the USA itself
156
Q

Challenges to an order of the Administrator

A

Must be made within 60 days of order issuance

157
Q

Admin conducting investigations and issuing subpoenas

A
  • May be made in public or in private and may occur within or outside of the Administrator’s state
  • Normally open to the public
  • Can be in private when in the opinion of the Admin and with the consent of the parties, it is felt that a private investigation is more appropriate
158
Q

Admin conducting investigations

A

Admin has the power to
• Require statements in writing, under oath, as to all matters relating to the issue under investigation
• Publish and make public the facts and circumstances concerning the issue to be investigated
• Subpoena witnesses and compel their attendance and testimony
• Take evidence and require the production of books, papers, correspondence, and any other documents deemed relevant

159
Q

Contumacy

A

Refusal to obey a subpoena issued
Admin can then apply to the appropriate court in his state and ask for help
Failure to obey the order of the court can lead to contempt of court and jail time

160
Q

Admin and subpoenas

A

Admin may enforce subpoenas of Admins from other states

161
Q

Front running

A

The unethical practice of a B/D or one of its representatives placing a personal order ahead of a previously received customer order
Occurs more frequently when the firm has received an institutional order of sufficient size to move the market
By running in front of the order, the firm or rep can profit on that movement

162
Q

Sharing in accounts

A

Agents can share directly or indirectly in profits or losses in the account of any customer if they have written authorization of the customer & the B/D
B/Ds, IAs, and IARs are never permitted to share in the profits or losses in their clients’ accounts

163
Q

Cease and desist orders

A

Administrator can issue a “cease and desist” order if they think something is fishy

164
Q

Enjoined

A

A person who is the subject of an injunction

165
Q

Cease and desist order vs. stop orders

A

Cease and desist orders are directed to person, requiring them to cease activities
Stop orders are directed to applications regarding registration of a security

166
Q

Cease and desist orders

A

Administrator cannot issue a formal order to suspend a registration without:
Giving appropriate prior notice to the affected person;
Granting an opportunity for a hearing; and
Providing findings of fact and conclusions of law

167
Q

Reasons for denying, revoking, or suspending the license of a securities professional

A

Filing an incomplete, false, or misleading registration application
Willfully violating the USA
Securities-related misdemeanor within the last 10 years
Any felony within the last 10 years

168
Q

Reasons for denying, revoking, or suspending the license of a securities professional

A

Enjoined by law from engaging in the securities business
Subject to another Administrator’s denial, revocation, or suspension
Engaged in dishonest or unethical securities practices
Is insolvent

169
Q

Reasons for denying, revoking, or suspending the license of a securities professional

A

Subject of an adjudication that the B/D has willfully violated Act of 33, Act of 34, Investment Advisors Act of 40, Investment Company Act of 40, or Commodities Exchange Act
Has failed to reasonably supervise his agents or EEs
Has failed to pay application filing fees
Is not qualified on the basis of training, lack of experience, and knowledge of the securities business

170
Q

Administrator

A

Because of a lack of uniformity in state criminal laws, Admin must consider crime under the statutes of the state where crime occurred, not his own
Admin may only consider what is on the person’s record
If a person is subject to disqualification by any SRO, even FINRA, for something that was not a violation of the USA, that would still be a cause for denial

171
Q

Denying, suspending or revoking a registration

A

The public’s best interest is not reason enough for the denial, suspension, or revocation of a registration. There must be a further reason
Admin must notify the registrant of any reason to deny, suspend, revoke, or cancel a registration &, if asked in writing, must provide a hearing within 15 days
If registrant is an agent or IAR, the employing B/D or IA will receive notice of the final order

172
Q

Acting summarily (or with summary powers)

A

Acting without having to go through the hearing process

173
Q

Securities Issues

A

An administrator may cancel the registration of a registrant that is no longer in existence.
A person may request a withdrawal of a registration
Withdrawals become effective after 30 days if there are no revocation or denial proceedings in process
An Administrator does not revoke the registration of a person who is declared mentally incompetent but instead cancels his regisitration.
This is a non-punitive action

174
Q

Statute of limitations

A

Time limit for violations of civil provisions of USA is:
3 years from date of sale; or
2 years after discovering the violation, which comes first

175
Q

Rights of recover from improper sale of securities under USA

A

If client’s case is proven, at the direction of the Administrator, client may recover:
Cost of the advice; plus
Loss as a result of the investment; plus
Interest at a rate determined by the Administrator: plus
Any reasonable attorney’s fees

176
Q

Right of rescission under USA

A

If seller discovers that an improper sale has been made, he may offer to repurchase the securities from the buyer and avoid a legal costs, etc. through a letter of rescission
Buyer has 30 days after receiving letter to respond by accepting or rejecting
After 30 days, buyer gives up any right to pursue a lawsuit at a later date
No provision here for treble damages (like with some federal laws)

177
Q

Statute of limitations under USA

A

Statute of limitations for criminal offenses under USA is 5 years from date of the offense

178
Q

Fraud

A

The deliberate or willful concealment, misrepresentation, or omission of material information or the truth to deceive or manipulate another person for unlawful or unfair gain.
Under the USA, fraud is not limited to common-law deceit

179
Q

Statute of limitations under USA

A

5-5-3
5 year statute of limitations
$5,000 maximum fine; and/or
3 years maximum imprisonment

180
Q

Liability for violations

A

Actual seller of securities or advice is not the only person liable for violations of the act
Every person who directly or indirectly controls the person who sold the securities or advice or is a material aid to the transaction is liable to same extent unless that person could not have reasonably known

181
Q

Judicial review of orders (Appeal)

A

Any person affected by an order of the Administrator may obtain a review of the order in an appropriate court by filing a written petition within 60 days
Filing an appeal does not automatically act as a stay of the penalty
The order will go into effect as issued unless the court rules otherwise

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