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69 Cards in this Set

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  • Back
PERSONS are defined as?
Business Trusts
Joint Stock/Ventures
Who is excluded from the definition of a person?
Minors, the Administrator or Trusts.
An advisory firm can be formed as a:
Sole Proprietorship
Association of Owners
Can a broker-dealer be formed as an investment advisor?
No. Each must be a separate legal entity.
What is the definition of an issuer?
Any person who issues or proposes to issue a security.
Who is the issuer for fractional interests in oil and gas programs, or mining titles or leases?
There isn't one.
What is an issuer transaction?
When an issuer sells or redeems securities.
Non-Issuer Transaction
Does not directly or indirectly benefit the issuer. Takes place in the secondary market.
Definition of a broker-dealer:
Someone who engages in the business of effecting securities, either for others or for their own account.
Persons not considered to be broker-dealers:
Agents, Banks, Savings institutions, Trust Companies, and Issuers.
What are agents?
Individuals who represent the broker-dealer when performing securities transactions, basically sales representatives.
Excluded from the definition of broker-dealer:
A person with no business within that state and exclusively deal only with: Issuers of the security involved in transaction, other broker-dealers, banks, Insurance companies, pension or profit sharing trusts, and financial institutions.
People not considered to be agents:
Clerical employees, partners, directors, and officers of the broker-dealer.
Definition of Investment Adviser:
A person, who for compensation:
Engages in the business of advising others, directly or indirectly (such as through a newsletter), as to the value of securities or the advisability of investing in, buying, or selling securities; or
Issues or promulgates analyses or reports concerning securities on a regular basis as part of a business: or
Provides investment advisory services to others in a financial planning practice.
A person is not considered to be an Investment Adviser if:
Employees of investment advisers (they register as "investment adviser representatives"
Depository Institutions - Banks, savings and loans, trusts
Professionals - Lawyers, accountants, engineers, teachers, whose performance of these services is solely incidental to their professional practice,
Broker-Dealers - whose performance of these services is incidental to the conduct of the business and who receive no special compensation for these services,
Publishers, employees or columnists of bona fide newspapers, news magazines, business or financial periodicals and owners and employees of cable, radio, or television networks, where the content does NOT consist of rendering advice based upon the specific investment situation of each client
Persons who give advice solely about U.S. Government guaranteed obligations
Federal covered advisers
Any other person designated by the State Administrator
What is a federal covered adviser?
Someone who must register with the SEC; but is not required to register in the State. Manages $25,000,000 or more.
Federal Covered adviser who is excluded from having to register as an IA.
Lawyers, Accountants, or Engineers who don't receive extra compensation for service. Publishers of bona fide newspapers, magazines, or financial publications of a general and regular circulation;
any person who advises solely about U.S. Government guaranteed obligations.
Purpose of The Uniform Securities Act:
To prevent fraud in the sale of securities to the public and to require registration in the state, unless there is an exemption.
Dual Registration of an Agent
Can only be associated with one broker-dealer at a time. May be associated with more than one broker-dealer who are under the same control.
Termination of an agent:
Must be made promptly by agent and broker-dealer.
Excluded from the definition of security:
Life Insurance
Fixed Annuities
Endowment Policies
Retirement Plans
Futures Contracts
What is considered to be a federal covered security?
One that is listed on the New York Stock Exchange, American Stock Exchange or NASDAQ, or is a senior security (preferred stock or bonds) of such an issuer. Or one that is issued by an investment company.
Withdrawal Process of Agents, Broker Dealers, and Investments Advisers:
Withdrawal becomes effective 30 days. If legal proceedings are commenced with 1 year, registration cannot be withdrawn. If B-D loses registration, so does agent.
Offer to Sell
Any attempt or offer to dispose of a security, or a solicitation of an offer to buy a security or an interest in a security, for value.
Offer to purchase
An attempt or offer to obtain a security, or a solicitation of an offer to sell a security or an interest in a security, for value
EXCLUDED from the definition of a "sale" or "offer to sell":
Dividends paid to shareholders, A "security interest," or a corporate reorganization.
Guaranteed Security:
One that is guaranteed as to payment of interest, dividends, or principal by someone other than the issuer.
Three methods of registration:
Registration by Filing
Registration by Coordination
Registration by Qualification
Registration by Filing:
Seasoned companies with substantial trading, have less rigorous registration requirements. Lets established companies use prospectus that is filed w/ SEC as the filing document with the state. Used by officers in non-issuer transactions as well.
Requirements for Registration by Filing:
Been in business for 3 years
Previously registered securities with SEC
400,000 shares outstanding
Filed all required reports
If mutual fund (24 months)
Requirements for Registration by Coordination:
3 copies of Prospectus
Copy of the issuer's by-laws
Copy of Agreement Among Underwriters
Copy of any Indenture governing the issue of the security
Registration by Coordination:
Issuer can coordinate State registration with an SEC registration. Doesn't have to be seasoned.
Registration by Qualification
Most difficult method. Can be used by any company. Usually effective after 30 days, but the Administrator can decide.
Securities that are EXEMPT from registration requirements in the State, as well as from advertising filing requirements:
Government and Municipal issuers.
Issuers already regulated under other laws (e.g. banks, savings and loans, insurance companies)
Non profit institutions
Large established companies who are following federal laws.
Government and Municipal issues include:
U.S. Government and Agency securities.
Canadian Government securities.
Other Foreign Government securities.
Exempt Transactions: Isolated Non-Issuer Transactions:
Benefit someone other than the issuer. if MORE than 5 trades within 12 months are effected in another State, the exemption does not apply.
State Private Placement Exemption: Definition:
An offer to no more than 10 persons during any 12 month period.
Qualification for a private placement exemption:
No commissions may be paid for soliciting prospective buyers, other than financial or institutional investors.
Pre-Organization Certificate Exemption:
An offering of pre-organization certificates (that is, ownership in a business that is "starting-up", and can not be made to more than 10 investors and no commissions may be paid. Advertising is permitted unlike a private placement.
Regulation SP
Must send initial and annual privacy notices to customers outlining the firm’s policies and practices on the collection and disclosure of non-public personal information to any other person. Firm must provide an “opt out” notice along with the initial notice, explaining how a customer can be excluded from any disclosures that the firm makes to others.
Promissory note
Agent and note must be registered in state. Only exempt if maturity is 9 months or less, investment grade, and sold for at least $50,000.
Tell-tale signs of fraud in promissory note offerings:
Statements that the notes are guaranteed. Promises of above-market return. Statements that the notes are risk-free. The labeling of a start up company as prime.
Selling away
Trading "privately" with a customer. If approved in writing, and the Broker Dealer included transaction on books, then it is permitted.
Conflicts of Interest that must be disclosed:
IA receiving advisory fee from customer, and in addition, receiving a commission on each trade executed for the customer OR the adviser receives a “referral fee” for each trade, OR the IA receives receives so-called “soft dollar” compensation.
Administrator can conduct investigations:
Administrator can if any person has violated, or is about to violate the Act. Does not have to have proof.
Administrator may publish information about violations:
Administrator can "broadcast" to the world, any violations committed by a person, thus deterring any potential offenders.
Administrator can subpoena persons and records:
Administrator can subpoena persons to testify and to produce records for these investigations.
Administrator can compel testimony that incriminates
Administrator can compel any individual to testify, even if the testimony might tend to incriminate that person. However, that individual can always rely on his or her 5th Amendment right against self-incrimination.
Judicial review by Administrator
Any person who wishes to petition must do so within 60 days.
Civil liability
Customer must be paid back if a person violates the Act without intending to defraud.
If person violates the Act willfully:
It is a felony and they are punishable by making restitution to customer, a fine of $5,000, or imprisonment.
If person accidentley violates the Act:
Cannot be imprisoned, but can be fined.
Proceedings seeking criminal penalties:
Proceedings seeking criminal penalties cannot start later than 5 years after the date of the alleged violation.
Civil suits:
Must be completed within 3 years.
Securities Act of 1933:
Passed to regulate the new issues market, or the primary market.
Securities and Exchange Act of 1934:
Regulates secondary trading.
Investment Company Act of 1940:
Regulate the activities of investment companies and to safeguard the purchasers of investment company securities. Regulates people who give financial advice.
Investment Advisers Act of 1940:
Established to require the registration of investment advisers with the Securities and Exchange Commission; and to regulate the actions of investment advisers at the Federal level.
Definition of an Investment Adviser under the Investment Advisers Act of 1940:
A person who receives compensation for advising others about securities, or about the advisability of investing in securities.
National Securities Markets Improvement Act of 1996:
Limits the duplicate registration of investment advisers that occurred previously at both the Federal and State level.
Initial registration:
Adviser must file a Form ADV (ADV = Adviser) with the SEC. The form consists of 2 parts.
Adviser withdrawel form.
Investor Brochure
Disclosure document that must be provided to all customers. Can be either Part II of the ADV Form or a separate printed brochure with the same information.
2 day free look
Investment brochure is required to be delivered to clients no less than 48 hours prior to entering into a written or verbal contract to provide advisory services.
Fulcrum Fee
Basic fee to be charged by the investment adviser.
Violations of the Investment Advisers Act of 1940:
Fines of up to $10,000; and imprisonment for up to 5 years; or both.
Exempt from registering with SEC under Investment Act of 1940:
An IA whose clients are only Insurance Companies.
De minimis exemption for registering with State:
Maximum of 5 people within 12 month period.
De minimis exemption for registering with SEC:
Maximum of 15 clients within 12 month period.