State Regulation Under The USA Unit Test p.127 to 135

1. Which of the following would be an agent under the terms of the USA? (A)

• a sales representative of a licensed broker/dealer who sells secondary securities to the general public
• an assistant to the president of a broker/dealer who, for administrative purposes accepts orders on behalf of the senior partners

2. A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee (D)

• must register as an agent if he will receive commissions or remuneration, either directly or indirectly

3. Which of the following persons is defined as an agent by the Uniform Securities Act? (C)

• clerk at a broker/dealer who is authorized to take orders

4. Under the Uniform Securities Act, an agent is (C)

• an individual representing a broker/dealer who sells federal covered securities exempt from registration under the act

*5. According to the Uniform Securities Act, which of the following is(are) considered a broker/dealer? (D)

• a corporation that specializes in the sale of registered oil and gas limited partnerships

6. GEMCO Securities, a registered broker/dealer, has a policy of hiring unpaid interns from top business schools. GEMCO is currently the lead underwriter on a new issue and has assigned three of its interns to specific tasks. One is doing entering the data as indications of interest are received, the second is calling clients to offer to deliver their prospectus via email instead of mail, and the third is  calling clients to offer the new issue and accept indications of interest. Which of the interns would need to register as agents. (Third-C)

• only the third intern would have to register

7. Under the USA, which of the following is considered a broker/dealer in a state? (B)

• XYZ broker/dealer with an office in the state whose only clients are insurance companies

8. Which of the following must register as an agent? (A)

• An individual representing a broker/dealer who sells commercial paper

9. Which of the following is defined as a security under the Uniform Securities Act? (D)

• an investment contract

10. Under the Uniform Securities Act, which of the following persons is responsible for proving that a securities issue is exempt from registration? (B)

• the person requesting the exemption 

11. Registration is effective when ordered by the Administrator in the case of registration by. (D)

• qualification 

12. The US Supreme Court in the Howey decision, ruled that an instrument that represents the investment of money in a common enterprise with an expectation of profit solely through the managerial efforts of others is a security. In following the Howey decision, the USA would consider which of the following a security? (C)

• investment in options to acquire a security 

13. Under the Uniform Securities Act, which of the following would be considered an exempt transaction? (A)

• an existing client calls you to purchase 1,000 shares of a common stock that is not registered in this state
• shares of a bank's IPO are sold to an institutional client

14. Which of the following securities is(are) exempt from the registration provisions of the USA? (D)

• issue of a savings and loan association authorized to conduct business in the state
• general obligation municipal bond
• bond issued by a company that has common stock listed on the New York Stock Exchange

15. A transactional exemption would be available under the USA when an agent for a broker/dealer: (B)

• sells a large block of an unregistered nonexempt security to an insurance company that is not authorized to do business in this state

16. All of the following describe exempt transactions EXCEPT (D)

• Joe Smith, an employee of Amalgamated National Bank, buys securities from ABC Brokerage Corporation

17. Under the USA, all of the following are exempt securities EXCEPT (C)

• unsolicited transactions
• transactions between issuers and underwriters

18. In general, registration statements for securities under the Uniform Securities Act are effective for (B)

• 1 year from the effective date 

19. Under the Uniform Securities Act, an issuer is any person who issues, or proposes to issue, a security for sale to the public. According to the USA, which of the following is NOT an issuer? (B)

• a partner in the AAA Oil and Gas Partnership sells his interest in the investment

20. Which of the following transactions are exempt from registration under the USA? (A)

• a trustee of a corporation in bankruptcy liquidates securities to satisfy debt holders
• an offer of a securities investment is directed to 10 individuals in the state during a 12-month consecutive period

21. Which of the following is(are) issuer transactions? (C)

• John's father, a founder of XYZ corporation, purchased shares of XYZ directly from the corporation subsequent to its founding 

22. XYZ Corporation has been in business for over 20 years. They need additional capital for expansion, and determine that a public offering in their home state and neighboring states is appropriate. Which method of securities registration would most likely be used to register this initial public offering? (A)

• coordination

23. Which of the following meet the USA's definition of an exempt transaction? (B)

• transactions by an executor of an estate
• transactions with an investment company registered under the Investment Company Act of 1940
• an unsolicited sale of a Bulletin Board stock 

24. Market manipulation is one of the prohibited practices under the USA. Which of the following is an example of  a broker engaging in market manipulation? (C)

• wash trades
• matched orders

25. Section 402 of the USA contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the Act. Included in that listing would be (C)

• bonds issued by a Canadian province
• bonds issued by the District of Columbia
• securities issued by a credit union authorized to do business in the state 

26. All of the following are prohibited practices under the USA EXCEPT (D)

• selling rights instead of exercising them 

27. A customer is upset with her agent for not servicing her account properly and sends him a complaint letter about his actions. Under the USA, the agent should (D)

• bring the customer complaint to his employer immediately 

28. Under the USA, the Administrator may deny or revoke a registration if the agent (D)

• borrows money from his wealthy clients' accounts
• solicits orders for nonexempt unregistered securities
• buys and sells securities in accounts to generate a high level of commissions
• alters market quotations to induce a client to invest in an attractive growth stock 

29. According to the USA, which of the following is an example of market manipulation? (A)

• creating the illusion of active trading 

30. Registration as an investment adviser under the USA would be required for any firm in the business of giving advice on the purchase of (A)

• convertible bonds

31. Which of the following practices is prohibited under the USA? (B)

• offering services that an agent cannot realistically perform of his broker/dealer's limitations 

32. An agent hears a rumor concerning  a security and uses the rumor to convince a client to purchase the security. Under the USA, the agent may (D)

• not recommend the security 

33. If an agent thought that a technology stock was undervalued and actively solicited all customers, the agent (C)

• committed an unethical business practice

34. Which of the following transactions are prohibited? (D)

• borrowing money or securities from a high net worth customer
• selling speculative issues to a retired couple of modest means on a fixed income
• failing to follow a customer's orders so as to prevent investment in a security not adequately covered by well-known securities analysts
• backdating confirmations for the benefit of the client's tax reporting

35. It is legal under the USA for an individual licensed as an agent in the state to tell a client that (A)

• a registered security may lawfully be sold in that state 

36. Fearing loss of a potential sale, an agent omits facts that a prudent investor requires to make informed decisions. Under the USA, this action is (C)

• fraudulent for both exempt and nonexempt securities 

37. Which of the following actions is NOT a prohibited practice under the USA? (B)

• a specialist buys and sells stock as principal 

38. Which of the following is(are) prohibited under the USA? (D)

• recommending tax shelters to low-income retirees
• stating that a state Administrator has approved an offering on the basis of the quality of information found in the prospectus
• soliciting orders for unregistered, nonexempt securities
• employing any device to defraud

39. According to the USA, which of the following is a prohibited activity? (A)

• the agent enters into an agreement to share in the profit/losses of a customer's account without written consent of the employing broker/dealer

40. Under the Uniform Securities Act, broker/dealers are required to prepare and maintain certain records. Which of the following statements reflects the position of the act? (B)

• a firm registered in more than one state must meet the recordkeeping requirements of the state where its principal office is located, even if those are less comprehensive than those of some of the other states where it is registered
• a broker/dealer's website is considered advertising 

41. If convicted of a willful violation of the Uniform Securities Act, an agent is subject to (B)

• a fine of $5000 and/or imprisonment for 3 years 

42. To protect the public, the Administrator may (B)

• consider that an applicant for registration as an investment adviser is not necessarily qualified solely on the basis of experience as a broker/dealer or agent and, therefore, when he finds that an applicant for initial or renewal registration as a broker/dealer is not qualified as an investment adviser, he may by other condition the applicant's registration as a broker/dealer upon his not transacting business in this state as an investment adviser
• take into consideration that the registrant will work under the supervision of a registered investment adviser or broker/dealer in approving a registration 

43. Aaron is a client of XYZ Financial Services. Over the past several years, Aaron has been suspicious of possible churning of his account, but has taken no action because account performance has been outstanding. After reviewing his most recent statement, Aaron suspects that excessive transactions have occurred. He consults his attorney who informs him that under the USA, any lawsuit for recovery of damages under the USA must be started within (C)

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

44. Which of the following accurately describes a cease and desist order as authorized by the USA? (B)

• an Administrator's order to refrain from a practice of business believed by that Administrator to be unfair 

45. A resident of Albany, NY, is visiting relatives in Albany, GA. While there, she receives a phone call from her agent in the Troy, NY, office of Capital City Investments who offers a security that the client immediately agrees to purchase. The next day, she sends her payment from Georgia. The agent sends the trade confirmation to the purchaser's residence in New York. This agent is registered in 12 states, including New York and Georgia. The security is not exempt and was not registered. Which Administrator has the authority to pursue action against the agent? (C)

• both Georgia and New York

46. The Administrator may, by rule (A)

• forbid investment advisers registered in his state from taking custody of client funds 

47. If it is in the public interest, the Uniform Securities Act provides that the state Administrator may deny the registration of a person for all of the following reasons EXCEPT (A)

• the applicant is not qualified owing to a lack of experience 

48. If an agent chooses to appeal an Administrator's order, when must the agent file for review of the order with the appropriate court? (C)

• within 60 days after the entry of the order

49. An Administrator may summarily suspend a registration pending final determination of proceedings under the USA. However, the Administrator may not enter a final order without (C)

• appropriate prior notice to the applicant as well as the employer or prospective employer of the applicant
• opportunity for a hearing
• findings of fact and conclusions of law 

50. The Administrator has authority to (A)

• issue a cease and desist order without a hearing 

p. 122-126

Rights of recovery from improper sale of securities-client may recover

• the original purchase price of the securities "made whole" +
• interest at Administrator's rate
• all reasonable attorney's fees and court costs -
• any income received while client had securities

Rights of Recovery from Improper Investment Advice

• cost of the advice +
• loss as a result of the advice + 
• interest at Administrator's rate +
• any reasonable attorney's fees
• improper sale: buyer can recover original purchase price + other losses
• improper investment advice: buyer can recover cost of advice + losses NOT original purchase price

Notes

• every cause of action survives the death of plaintiff/defendant
• civil liabilities imposed on seller, not buyer
• fraud is the deliberate  or willful concealment, misrepresentation, or omission of material information/truth to deceive or manipulate another person for unlawful or unfair gain
• 5-5-3. 5 year statute of limitations, $5000 maximum fine, imprisonment of < 3 year. 2 years from discovery of offense or 3 years after act happened
• Not just seller is liable, supervisors can be too 

right of rescission

• seller realizes sale made in violation of USA
• seller may offer to buy back securities from buyer
• letter of rescission, seller can avoid lawsuit, buyer has 30 days to respond, if buyer doesn't respond within 30 days, the buyer loses the right to a lawsuit

claims against the surety bond

• a proper surety bond allows a customer who can prove a violation to collect against the bond

Criminal penalties

• max fine of $5000, prison of 3 years
• cannot do prison if person proves no knowledge of rule or order 
• Administrator does not have the power to arrest anyone
• State Attorney General may decide to bring a criminal action under the USA

Statute of limitations

• 5 years from the date of the offense

Case Study

• registered sales agent intentionally didn't tell client shares  of company he sold were downgraded to speculative grade and their bonds were placed on credit watch by one of the major credit rating agencies, a month later the shares became worthless
• Verdict: agent sold securities in violation of USA, intentionally didn't mention material information needed to make an informed decision. Client has the right to recover the financial losses that result from the sale. 

Judicial review of orders appeal

• an person under Administrator's order may obtain a review of the order in an appropriate court by filing a written petition within 50 days
• order will go into effect unless court rules otherwise

Quiz 2N

1. Which of the following statements relating to penalties under the USA is TRUE?

2. When making an offer of a new issue that is in registration to a prospective client, an agent claims that his registration with the Administrator is proof of his qualifications. Under the USA.

Sales of securities at financial institutions

• Model rules
• no B/D shall do B/D services where retail deposits are unless 1. separate areas for b/d and deposit

Customer disclosure and written acknowledgment

• oral acknowledgment
• securities are not insured by the Federal Deposit Insurance Corporation
• are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution
• are subject to investment risks and are not guaranteed
• make reasonable efforts to obtain from each customer written acknowledgment of the disclosures

Communications with the public

• not FDIC insured
• no bank guarantee
• may lose value

NOT required

• radio broadcasts <30 seconds
• electronic signs or ATMS
• signs-banners and posters when used only as location indicators 

p. 120-121

Nonpunitive terminations of registration

• withdrawal, effective in 30 days if no revocation/suspension proceedings
• cancellation, administrator realizes applicant no longer exist

Notes

• once registration is withdrawn, Administrator has jurisdiction over you for 1 year
• if mailings are returned with no forwarding address, Administrator can cancel registration
• administrator can cancel registration of person declared mentally incompetent
• cancellation, result of death, dissolution, mental incompetency 
• if IA is under suspension, IAR is under suspension 

Quiz 2M

1. Which of the following statements relating to the termination of registration is TRUE?

Penalties for violations of the Uniform Securities Act

Civil liabilities

• sell securities, give investment advice in violation of the USA

purchaser may sue for recovery WHEN:

• a sale was made of an unregistered nonexempt security in violation of the registration provisions of USA
  the securities professional omits or makes an untrue statement of material fact during a sales presentation
• the agent was named along with the broker/dealer for a civil infraction
• the securities were sold by an agent who should have been but was not registered under the act
• the securities were sold in violation of a rule or order of the securities Administrator

Statute of limitations

• 3 years from date of sale
• 2 years after discovering the violation
• whichever comes first 

p. 115-119

Contumacy

• refusal to obey subpoena from Administrator 
• can lead to contempt of court 

Issue cease and desist orders

• Administrator may issue a cease and desist order without a hearing
• enjoined, person who is the subject of an injunction 
• cease and desist orders ARE NOT stop orders

Case study

• agent is registered in Illinois and plans to sell security
• Administrator considers security ineligible for sale
• Administrator orders agent to stop sales of ineligible security immediately
• Verdict: Administrator issued cease and desist because security was ineligible for sale

formal order requirements

1. give appropriate notice to people it will affect

2. grant opportunity for a hearing

3. provide findings of fact and conclusions of law 

Deny, suspend, cancel, or revoke registration

• administrator can revoke registration of B/3, IA's, IARs

Denial, revocation, suspension

• has filed an incomplete, false, or misleading registration application
• has willfully violated the USA
• has been convicted of a securities-related misdemeanor within the last 10 years
• has been convicted of any felony within the last 10 years
• has been enjoined by law from securities business
• is subject to another Administrator's denial, revocation, or suspension
• engaged in dishonest or unethical securities practices
• is insolvent
• subject to adjudication that the B/D has willfully violated the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, or the Commodities Exchange Act
• has failed to reasonably supervise his agents or employees
• has failed to pay application filing fees
• is not qualified on the basis of training, lack of experience, and knowledge of the securities business

Note

• misdemeanor in one state is a felony
• administrator must consider crime in state where it occurred

to enter order to deny, suspend or revoke

• prior notice to applicant
• opportunity for a hearing
• written findings of fact and conclusions of law

Lack of qualification

• administrator may not base a denial of a person's registration solely on his lack of experience
• administrator may say B/D is not qualified on experience

Summary powers

• acting summarily, administrator suspends registration without a hearing process

Quiz 2L

1. With regard to the powers of the Administrator, which of the following statements are NOT true?

• The Administrator MUST seek an injunction to issue a cease and desist order
• the USA REQUIRES an Administrator to conduct a full hearing, public or private, before issuing a cease and desist order
• The USA grants the Administrator the power to issue injunctions to force compliance with the provisions of the act. 

2. Although the Administrator has great power, the USA does place some limitations on the office. Which of the following statements regarding those powers are TRUE? 

• In conducting an investigation, an Administrator can compel the testimony of witnesses
• An administrator may deny the registration of a securities professional who has been convicted of any felony within the past 10 years, but must provide a hearing, if requested in writing, within 15 days.

Securities Issues

Can deny, suspend, or revoke

• the applicant files a false or incomplete statement
• the applicant is in violation of the USA
• the applicant is engaged in a method of business that is illegal
• the applicant has prepared a fraudulent registration
• the underwriter charges unreasonable fees
• the issue is subject to a court injunction
• the registrant is subject to an administrative stop order of any other state

no stop order WITHOUT

• appropriate prior notice to the applicant or registrant, the issuer, and the person on whose behalf the securities are to be or have been offered
• opportunity for hearing
• written findings of fact and conclusions of law

vacated, the lifting of a stop order

P. 114 (132 PDF)

-can challenge Administrator order in court within 60 days 

-Administrator CAN make and amend state blue sky rules

-state legislators not administrators make state securities laws

Case Study

-Iowa Administrator says companies that register their securities in Iowa must publish financial statements in a specific form 

-Administrator did not publish because too long 

Verdict: 

-USA lets Administrator issue rules and orders 

-Iowa Administrator was good to design form and content for financial statements

-Iowa Administrator broke USA by not publishing ALL rules and orders

Administrator Authority

-conduct investigations

-issue subpoenas 

-investigation under public scrutiny 

-1. Require statements in writing, under oath as to all matters relating to the issue under investigation 

-2. Publish and make public facts and circumstances of investigated issue 

-3. Subpoena witnesses, make them testify

-4. Take evidence and require books, paper, correspondence to be made

Jurisdiction

-If State A Administrator wants to investigate b/d registered in state A with main office in state B, he can go within normal business hours. No appointment. 

P. 113.(PDF pg 131)

Quiz 2K (2/2 first try, 100%)

1. A state's securities Administrator has jurisdiction over a securities offer it it was: 1)directed to residents of that state, originated in that state, accepted in that state, all of the above

2. An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published within the state with no more than 2/3 of its circulation outside the state in the last year

administrator actions:

-1. Make, mend, or rescind rules and orders

-2. Conduct investigations and issue subpoenas

-3. Issue cease and desist orders and seek injunctions 

-4. Deny, suspend, cancel or revoke registrations and licenses

-act on behalf of the public 

-all rules MUST be published

-MAY require all agents to pay a registration fee of $250

-can order a 30 day suspension of agent when rule is violated 

P. 112 (PDF pg 130)

-Administrator can cooperate with admins in other states 

No jurisdiction

-broadcast originated outside state

-newspaper published outside state

-New York Times is general interest 

-broadcast originates in state where camera is located

NO EXCEPTION 

-private investment advisery letter

Case Study

-B/D has office in NY and IL

-sell shares in NY shoe chain

-ad in WNY radio station, 55% of listeners in PA

-Verdict: NY administrator has jurisdiction, IL is not relevant 

p. 111

Case study: offer originates in administrator's state

• client Bixby refers agent Thompson  to call Bixby's friend
• Thompson is registered in Illinois and Indiana
• Agent sells security to Bixby's friend
• Verdict: Administrators of Illinois and Indiana have jurisdiction

Case study: offer is directed to administrator's state

• agent mails sails materials to client's home state
• client discards materials
• Verdict: offer was directed to Indiana, Administrator of Indiana has jurisdiction

Offer accepted in an Administrator's State

• Agent sends additional offers to client in Indiana who is on vacation in Florida
• Client's mail is forwarded to Florida
• Client receives mail in Florida, she decides to purchase
• Verdict: offer is accepted in Florida, Administrator of Florida has jurisdiction

Note

• Administrator's authority does not stop at the state line

108-109

Splitting commissions

• agent can't split commissions with non-agent

Quiz 2K (9/9 100%) 

1. An agent guarantees a client that funds invested in mutual funds made up of government securities cannot lost principal. Unlawful
2. A nondiscretionary customer calls his agent and places a buy order for 1,000 shares of any hot internet company. Later in the day the agent enters an order for 1,000 shares of Global Internet Services.Unlawful
3. An agent receives a call from his client's spouse, advising him to sell her husband's securities. Her husband is out of the country and requested that his wife call the agent. The agent refuses because the wife does not have trading authorization, and she complains vigorously to his manager. Lawful.
4. A client writes a letter of complaint to his agent regarding securities that the agent has recommended. The agent calls the client to apologize and then disposes of the letter because the client seemed satisfied. Unlawful
5. A registered agent borrows $10,000 from a credit union that is one of her best customers. Lawful
6. An agent is convinced that Internet Resources will rise significantly over the next 3 months. She offers to buy the stock back from her customers at 10% higher than its current price during the next 3 months. Unlawful
7. An agent receives an order for the purpose of an obscure foreign security. The agent informs the client that the commissions and charges on this purchase will be much higher than those of domestic securities. Lawful
8. An agent who works for a small broker dealer that employs no securities analysts assures her clients that she can analyze any publicly traded security better than any analyst and that she will do it personally for each security purchased by a client, regardless of the industry. Unlawful
9. An agent recommends that her client buy 1,000 shares of Internet Consultants Inc, an unregistered nonexempt security with a bright future. Unlawful

Jurisdiction and powers of the state administrator

• Administrator has jurisdiction over securities transactions in state

Sale or sell

• contract to sell 

offer or offer to sell

• attempt or offer to dispose of security/interest for value
• any security given with purchase of something was offered
• gift of assessable stock-involves offer and sale
• sale/offer of right or warrant

Ex. if car dealer offers $1000 in corporate bonds, that is a securities sale under the jurisdiction of the Administrator and car-dealer must register with state as a B/D

p. 105-107

Sales Load Communications

• a front-end load
• a contingent deferred sales load (CDSC)
• a Rule 12b-1 fee or a service fee if such fees > .25% of average net fund assets per year

Breakpoints

• sales charge discount on the  purchase of shares in dollar amounts at or above a breakpoint
• letter of intent feature which will reduce the sales charges

Selling Dividends

• the purchase of such shares shortly before an ex-dividend date is better for some customers unless there are 1.) tax advantages, 2) specific advantages
• a distribution of long-term capital gains by an investment company is part of the income yield from an investment in such shares

Share Classes

• recommend a specific class of investment company shares in connection with a multi-class sales charge or fee arrangement without 1) investment objectives, 2) financial situation, 3) knowledge of other securities holdings

Switching Funds

• recommend the redemption of investment company shares to buy shares in a different investment company portfolio with similar objectives
• need to invest in something with different objectives to justify?

Proper yield disclosures

• need to disclose most recent average annual return for 1, 5, and 10 years

Lending or borrowing

• lending or borrowing money/securities from a customer
• need to be in the business of lending money/securities

Case study:

• agent borrows cash from discretionary account. Customer gave agent latitude because of high returns. Agent always repays. Don't borrow from bank because of high interest rates
• Analysis: agent broke rule and violated USA. He is allowed to trade securities not take his money for personal use
• You cannot borrow money from a client unless it is from a lending institution

Selling away

• effecting securities transactions not recorded on the regular books/records of the broker/dealer which the agents represents. Need transactions to be authorized 

Case study:

• agent is a part owner of privately held Computer Inc. Agent is friends with Aircraft Parts Inc. chairman. Agent sells shares in Computer Resources to client, shares are not publicly traded, does not log transactions on the books. 
• Verdict: an agent may NOT make transactions that are not recorded on the books without written consent of B/D

Fictitious accounts

• prohibited
• used to make client's net worth look larger, make him appear to have more investment experience

p. 102-104

• guaranteed, guaranteed as to payment of principal, interest, or dividends

Disseminating false trading information

• need to believe quote is bona fide to publish

Deceptive advertising practices

• can't use 1. nonfactual data, 2) unfounded/unrealistic claims, 3) assertions to supplement/detract from prospectus/disclosure 4) sales brochure with only positive information, 5. highlighting-making other marks on prospectus to draw more attention to key points 

Failing To Disclose Conflicts Of Interest

• house-fund, mutual fund with underwriter/advisor is affiliated with broker dealer
• if your sister was a control person, you would need to disclose that as a conflict of interest

Withholding shares of a public offering

• need to allocate IPO shares in an equitable manner and not keep any

Responding to complaints

• need to give customer information they are entitled to
• written complaint, action must be taken, kept in firm's complaint file
• if complaint is withdrawn, firm must make a copy and return original to client

Reporting errors

• trades/operational errors must be reported to supervisor

front running 

• unethical business practice of placing a personal order ahead of customer's order received earlier, firm can profit on movement

Case study p. 103

• Thompson recommends ABC Shoe Co, a thinly traded chain store that First Securities analysts have recommended highly before IPO. Agent bought 200 shares for himself. Client found out agent bought securities ahead of time and wrote complaint letter. Agent ignored complaint. 
• Verdict: 1) inappropriate to enter personal order before client order, 2) must bring all written complaints to employer's attention 

Spreading rumors

• agent must report rumors to supervisor

Backdating records

• all records and documents must reflect their actual dates

Waivers

• any condition, stipulation or provision to waive compliance is prohibited

Investment company sales

NASA Statement of Policy Dishonest of Unethical Business Practices by Broker-Dealers and Agents in Connection with Investment Company Shares

1. grounds for denial/suspension/revocation of registration 

p.99-101

Case study, p.99 

• Mr. Thompson, agent. Mr. Bixby, client. Bixby gave Thompson oral authorization for him to do trades for him. Bixby promised to give Thompson written trading authorization in the next day or two to give Thompson discretion over the account. Thompson immediately executed trades in First Tech for Mr. Bixby to take advantage of. Thompson gets Bixby's written authorization a week later. Bixby's lawyer said Bixby wanted GE shares
• Analysis: Thompson 1)was not authorized without written consent, 2) Bixby's lawyer needs written consent to make investment decisions

Margin documents

• margin agreement must be in place

Commingling of customer and firm assets

• need to keep customer free and customer safekeeping assets separate
• can not put customer shares in firm's proprietary account
• hypothecation, pledging of margin securities

Improper Hypothecation

• lien or written consent must be in place

Timely Prospectus Delivery

• need to give customer a final prospectus or preliminary prospectus no later than the due date of the confirmation of the transaction
• Administrator may make a prospectus be sent to each person no later than the confirmation of the trade as a condition of registration under Coordination
• Administrator may require a prospectus be sent to each person before sale of security as a condition of registration under Qualification 

Unreasonable servicing fees

• charging unreasonable and inequitable fees
• CAN charge reasonable fees for 1. collection of monies due for principal, 2. dividends or interest, 3. exchange or transfer of securities, 4. appraisals, 5. safekeeping, 6. custody of securities and other services related to the securities business

Higher than normal commissions

• not all B/D have same level of services
• large array of services, may charge more NOT unethical
• thinly traded security, higher expense for B/D, can justify larger fee
• charges must be clearly disclosed to clients

Dishonoring quotes

• offering to buy from or sell to any person at a states price-be ready to sell at minimum trading unit (100 shares) at his ask/offering price or buy from a client at his bid price

Market manipulation

• manipulative, deceptive, fraudulent
• securities legislation-keep markets honest for securities transactions
• matched orders, market players agree to buy and sell securities among themselves to create the appearance of activity or trading in a security, bids up price. Then sell at a profit. 
• wash trade, attempt to manipulate a security's price by creating fake-interest. Buy in one account and sell at the same time in another account. No real change in ownership. Seems like volume/price is increasing
• arbitrage is OK, buy and sell one security in different markets to take advantage of different prices 

Guaranteeing against loss

• no performance guarantee
• no loss guarantee 

p. 94-p.98

Case study, p.94

• Registered securities agent informs client that largest holding will be listed on NYSE and over-states earnings by $1/share to make her more comfortable to buy more shares
• Verdict: Agent violated the USA by deliberately misrepresenting the earnings of First Tech Internet Services

Failure to state material facts

• full disclosure NEED account ID, description of security, # of shares, for bond: total par value, terms and conditions of order (market/limit), time of order entry and execution, identity of agent who accepted order

Case study

• when NYSE accepts listing application, there is an announcement that First Tech Internet Services will publish its financial statements in a newspaper advertisement. Agent intentionally did not mention this advertisement to client. Research department prepare negative report-found out how a change in accounting will hurt earnings. Agent continues to recommend stock because it will have greater exposure from the Exchange listing which will outweigh the future decline in earnings
• Verdict: The agent violated the USA. Did not make misleading statements. Did not disclose the advertisement. He failed to mention the accounting change would lead to extreme loss in earnings 

material inside information, information about a company that has not been communicated to the general public and would likely affect the value of a security

• violation when information is used for trading. Agent violates as does person acting on inside information

Case study, p. 95

Friend and neighbor of president and owner of >1/2 of First Tech's securities. Mr. Cage discloses to friend that company has discovered a new technology that will double their earnings. Neighbor buys additional shares.
Verdict: Neighbor violated USA by acting on inside information

Security Delivery Delays

• it is your money and must be sent to you upon request

Churning 

• what is excessive for an 80-year old pensioner is different than 40-year old law-firm partner
• trading that is excessive in size or frequency

Unsuitable recommendations

• need reasonable grounds to recommend a security

PROHIBITED

• recommend securities transactions without regard to the customer's financial situation, needs, investment objectives
• induce transactions just to get commissions (churning)
• recommend a security without reasonable grounds
• make blanket recommendations
• fail to sufficiently describe the important facts and risks concerning a transaction or security

Case study, p. 97

• Thompson has a wide variety of client and likes First Tech, a growth stock that pays no dividends. He recommends to all clients without telling them about the volatility of the stock and how the firm's  research department downgraded earnings.
• Verdict: Thompson violated USA 1) made recommendation without regard to different financial conditions, needs, and objectives of his varied client base-not right for clients with fixed incomes and limited financial resources 2) unsuitable should have revealed earnings volatility and the downgrade in earnings 

Situation:

You made an appropriate recommendation, client is unhappy with it.

• Try to educate your client
• Your client makes the final decision

Free Lunch Seminars, p. 98

• prohibited business practice

Unauthorized transactions

• need authorization to execute a transaction for a customer

Exercising discretion

• need written discretion unless power is about time/price to execute and order
• decide 1) asset (security), 2) action (buy or sell), 3.) amount-how many shares

\

book p. 87-93

• exempt transaction (action) is a verb
• security is a noun 

accredited investor, an investor who meets the accredited investor standards of Regulation D 

• net worth of > $1 million on date of purchase to meet definition
• individual with income of >$200,000/year or $300,000/year with spouse 

institutional investor

• manages large amounts of money 
• ex. mutual fund, insurance company, bank, pension fund 

net worth

• only joint assets with spouse are counted

Administrator's Powers Over Exemptions

• Administrator can revoke exemption for:
• 1. any security for religious, educational, benevolent, charitable, fraternal, social, athletic, reformatory purposes
• 2. any investment contract issued in connection with an employee's stock purchase, savings, pension, profit sharing, or similar benefit plan

Administrator may deny any exempt transaction

• can consider a not federal covered transaction with an insurance company as non-exempt

Burden of proof for exemption

• person claiming exemption must provide proof
• Administrator will provide a hearing within 15 days of the receipt of a written request

Revoke categories

• ONLY two securities Administrator can revoke
• all EXEMPT transactions MAY be revoked NOT federal securities

Summary 

• government security can be sold without registration
• person who sells it must be registered
• B/D with no office who sell to institutional investors-not considered a B/D
• Ex. B/D with no place of business, transact with banks, can sell government securities without registering, not considered a B/D
• if sell government bonds to individuals in another state, agents must register
• client purchases non-exempt security unsolicited-exempt
• an agent can only do business with a state if the agent is properly licensed in that state

Quiz 2H (first try 3/5)

*1. Mr. Thompson an agent with First Securities Inc (A B/D) receives an unsolicited request to purchase a security for a high net worth individual. Y

2. The sale of an unregistered security in a private, nonpublicly advertised transaction, offered to 10 or fewer retail investors over the last 12 months. Y

3. The sale of unclaimed securities by sheriff of Santa Fe,  New Mexico. Y

4. Sale of stock of a privately held company to the public in an initial public offering N

Which are exempt transaction?

• a non issuer transaction with a bank in a NASDAQ Capital Market Security(I)
• an unsolicited request from an existing client to purchase a nonexempt security 
• the sale of an unregistered security in a privsate, nonpublicly advertised transaction to 10 noninstitutional purchasers (suspicious) over a period not exceeding 12 months NO because 10 offerees not 10 purchasers. 
• the sale of unlisted securities by a trustee in a bankruptcy (IV) 

State Securities Registration Procedures

• securities registrant, person who registers the securities

Filing the registration statement

• 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
• when filing the registration statement w/ the Administrator an applicant may provide documents that have been filed with the Administrator within the last five years if information is accurate

Filing fee

• the issuer must pay a filing fee as determined by the Administrator
• based on a percentage of the total offering price
• if registration is withdrawn OR Administrator issues a stop order before the registration is effective the Administrator may retain a portion of the fee and refund the remainder to the applicant

Ongoing Reports

• the Administrator may require the person who filed the registration statement to file reports so information stays current

Escrow

• any security issued within the past three years or to be issued to a promoter for a consideration very different from the public offering price or to any person for a consideration other than cash be deposited in escrow
• that the proceeds from the sale of the registered security in this state be impounded until issuer gets right amount from the sale for the security in this state or elsewhere

Special subscription form

• Administrator may require the issue be sold only on a form Administrator wants and a copy of form/subscription be filed with Administrator and kept for up to 3 years

Withdrawal of registration statement

• a registration statement may not be withdrawn until 1 year after its effective date

Quiz 2I

• With regard to the registration requirements of the Uniform Securities Act, which of the following are TRUE? 2. application for registration must indicate the amount of securities to be issued in the state 3. The Administrator may require registrants to file quarterly reports

Antifraud Provisions of the USA

• fraud, the deliberate or willful attempt to deceive someone for profit or gain

Fraudulent and prohibited practices

• using devices, schemes, artifices to defraud
• make untrue statements of material fact or omit material facts to make a statement not mislead
• engage in any act, practice or course of business that operates as a fraud or deceit

material, used to make an informed investment decision

• inaccurate market quotations-telling a client a stock is up when it is down. Not fraud if clerical error. Fraud is intentional.
• misstatements of an issuer's earnings or projected earnings or dividends-telling a client that earnings are up or that the dividend will be increased when it won't
• can't state agent has inside information when he doesn't
• tell a customer that a security will be listed on an exchange without concrete information about its status
• informing a client that the registration of a security with the SEC or with the state securities administrator means security has been approved by these regulators-registration is NOT approval
• misrepresenting the status of customer accounts
• promising a customer services without any intent to perform them or without qualifications to perform them
• saying the Administrator approves of B/D's or agent's abilities. Registered NOT approved

book p.85-86 pdf p.103-104

Exempt Transactions

• isolated nonissuer transactions: secondary non issuer transactions, exempt from Administrator's oversight
• issuer in not receiving proceeds
• trading parties don't trade regularly
• ex. selling a house without a real estate agent

Unsolicited brokerage transactions

• transactions initiated by the client
• agent does not solicit
• Administrator may require customer to acknowledge sale was unsolicited

Underwriter transactions

• transactions between the issuer and underwriter ex. firm commitment underwriting and between underwriters as part of a selling syndicate
• bankruptcy, guardian, or conservator transactions: transactions by an executor, administrator, sheriff, marshal, receiver, guardian, or trustee in a bankruptcy are EXEMPT
• NOT EXEMPT: UGMA or UTMA
• institutional investor transactions: mainly transactions w/ banks, insurance companies, investment companies
• limited offering transactions: any offering sold to no more than 10 persons other than institutional investors during last 12 straight months 1. seller believes noninstitutional buyer(s) buy for investment purpose only 2. do not receive commission for soliciting noninstitutional investors 3. no general solicitation or advertising is used 4. not to be re-sold right after

private placement

• restricts the number of purchasers

USA

• restricts the numbers of offers that may be made

preorganization certificates

• EXEMPT when 1. no commission is paid for soliciting, 2. number of subscribers not greater than 10, 3. no payment is made to subscriber

transactions with existing security holders

• EXEMPT 1. no commission is paid for soliciting security holder

nonissuer transactions by pledges

• a nonissuer transaction executed by a bona fide pledgee, the one who received the security as a collateral for a loan. Ex. pledge stock as collateral, default on obligation, lender will sell stock to try to recoup his loss

unit secured transactions

• transactions in a bond backed by a mortgage or deed of trust

control transactions

• mergers, consolidations, reorganization transactions. Issuer and other person or its parent/subsidiary are parties

rescission offers

• offers made to rescind an improper transaction

Series 66 For Dummies, book p. 81-84, pdf page 99-102

Effective date

• Dec 31 is of NO importance
• coordination: registration happens when SEC accepts registration
• qualification: effective when Administrator says so

Registration statement amendment

• public offering price
• underwriters' discounts and commissions are not changed from the respective amounts stated in the original registration statement

Quiz 2F (2/2)

1. ABC has applied for the registration of its securities with the SEC as required by the Securities Act of 1933 and wants to register its securities in the state of Illinois and several neighboring states. ABC would most likely register by coordination. True.
2. Any company may register by qualification whether or not it files a statement with the SEC. True.

Exemptions from registration

• exempt security
• exempt transaction-exempt from regulatory control of the state
• sale to certain financial institutions

Illegal UNLESS

• registered under the act
• security or transaction is exempt under the act
• it is a federal covered security

Exempt securities

• US and Canadian government and municipal securities
• foreign government securities
• depository institutions (1) representing interest in a debt, (2) guaranteed by bank, savings institution, trust company 
• insurance company securities-stocks, bonds issued by insurance companies
• public utility securities or equipment trust certificate issued by a railroad
• federal covered securities: rights, warrants, preferred stock, debt securities
• securities issued by nonprofit organizations: non profits
• securities issued by cooperatives: issued by nonprofit membership cooperative
• securities of employee benefit plans
• certain money market instruments

Facts:

• Commercial paper, draft, bill of exchange, banker's acceptance 1)matures in 9mo, 2)issued in $50k blocks, 3) receives one of 3 of highest ratings by rating agencies

EXEMPT securities

• foreign government securities
• insurance company securities
• federal covered securities (listed on exchanges or Nasdaq and registered investment companies 
• issued by regulated banks

Quiz 2G

1. Which of the following securities is(are) exempt from the registration and advertising requirements under the USA? shares of investment companies, shares sold on the Nasdaq market, promissory notes of 100k that mature in 30 days,shares sold on the New York Stock Exchange

2. Which of the following securities is NOT exempt from the registration and advertising requirements of the USA? Variable annuity contracts

Series 66 For Dummies, p. 96-99

Methods of state registration

• notice filing
• coordination
• qualification

Notice Filing 

• the National Securities Markets Improvement Act of 1966 NSMIA made certain securities federal covered-not subject to states
• to sell federal covered security-1) need to have license as B/D or agent and 2) comply with anti fraud laws
• state can collect revenue as filing fee

Administrator notice filing documents

• 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 of process

Facts

• Administrator may make rule or order to require 1)filing of documents that are part of federal registration statement filed with the US Securities and Exchange Commission under the Securities Act of 1933
• can be EXEMPT from notice filing but still need to represent offer accurately in state

registration by coordination 

• most common form of registration for securities that are not federal covered
• securities traded on OTC Bulletin Board or OTC Link 
• most sensible way to register a multi state offering

Administrator coordination documents

• copies of the latest form of the prospectus filed under the Securities 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 requests, copies of any other information filed by the issuer under the Securities Act of 1933
• Each amendment to the federal prospectus promptly after it is filed with the SEC

Effective date

• registration by coordination is effective at same time federal registration becomes effective
• no stop orders and no proceedings started by Administrator against issuer
• the registration has been on file for min. days between 10-20 days based on state laws
• a statement of the maximum and minimum offering prices and underwriting discounts have been on file for two business days

Registration by qualification

• any security can be registered by qualification
• supply information state Securities Administrator requires
• last resort of registration
• issuer must supply a consent to service of process
• name, address, form of organization, description of property, and nature of business
• information 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
• description of the 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 four months of the offering with an income statement for three years before the balance sheet date
• the Administrator may require additional information by rule or order
• the Administrator may require that a prospectus be sent to purchasers before the sale
• Administrator may require newly established companies register their securities for the first time in the state by qualification

Facts

• if a person filed consent to service of process, don't need a new consent later

Series 66 For Dummies pdf p. 92-96

Nonsecurity investments

• collectibles
• fixed annuities
• precious metals
• grains
• real estate
• currencies

Nonexempt security 

• exempt, no registration
• non exempt, needs registration

issuer 

• issues, distributes, or proposes to issue a security
• companies
• governments-federal, state, and municipal
• if nonexempt, register in states where securities will be sold

issuer transaction 

• proceeds go to the issuer
• when a company raises money by selling securities to investor

non issuer transaction

• trading on exchanges like New York Stock Exchange or Nasdaq
• secondary trading

initial or primary offering

• issuer transaction with new issues
• IPO, initial public offering
• SPO, subsequent public offering-offering shares after initial shares offering
• IPO and SRO are issuer transactions

Quiz 2E
1. Which list of instruments is NOT composed of securities? Commodity futures contracts and fixed payment life insurance contracts are NOT securities. See list of six. 

2. The US Supreme Court defined an investment contract as having four components. Which of the following is NOT part of the four-part test for an investment contract? Management activity. The four parts are: 1)investment of money, 2) common enterprise, 3)expectation of profit, 4) solely from the effort of others
3. Nonexempt securities: usually required to be registered. Not always. Can skip registration if nonexempt security is sold in an exempt transaction 
4. A nonissuer transaction: the company does not receive the proceeds from the transaction

Registration of Securities under the Uniform Securities Act
1. securities must be registered under the Act to be sold
2. can be sold if security is exempt from registration
3. can be sold if it is a federal covered security

National Securities Market Improvement Act of 1996 NSMIA

• created federal covered security term

Categories of Federal Covered Securities

• securities issued by open end or closed end investment companies, unit investment trust, or face amount certificate company that is registered under the Investment Company Act of 1940
• securities offered by a US federal 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 the New York Stock Exchange, the Chicago Stock Exchange, the Nasdaq Stock Market and other US exchanges
• rights, warrants, bonds, preferred stock
• securities under Rule 506(b) or 506(c) of Regulation D
• municipal bonds ex. City of New York bonds due 2020

Case study

• Colombus OH bond is federal covered. In Ohio the state Administrator could ask for certain details about the issue. Other states can't. 

Facts

• register with SEC NOT AUTOMATICALLY federal covered

Series 66 for dummies, pdf page 81 to 91

Exempt securities

• no need to register these securities
• securities for friendly governments to USA
• securities issued by bank, savings institution, trust company
• commercial paper in top 3 rating categories by major agencies, must be $50,000 or more, mature in 9mo or less

exempt transactions

• isolated nonissuer transactions 
• transactions between the issuer and underwriters
• transactions with financial institutions
• private placements

agent registration requirements

• registration requirements for non-exempt agent are similar to those for B/d
• individual must be properly registered in a state to conduct securities transactions
• must be registered to receive unsolicited orders
• if an agent does business in a state, agent must be registered in state 
• if B/D registration ends, agent cannot continue activities
• if agent quits, B/D must notify Administrator 
• no net worth requirements

exempt

• clerical
• administrative-assist with research
• posting trade details to client accounts
• must not involve selling/offering securities and opening accounts
  

Case study take away

• City of Chicago is an issuer of exempt securities
• an employee of City of Chicago who helps sell exempt securities is not an agent
• a representative from First Securities Corporation of Chicago would need to register because he represents a B/D in effecting securities transactions

Commission sharing

• registered agents of B/D can share fees/split commissions with agents at same B/D

Multiple registrations

• individual cannot act as an agent for more than one B/D unless Administrator grants exception

Limited registration of Canadian broker/dealers and agents

• cannot sell to Canada citizen who is a temporary resident of state
• cannot handle Canadian Registered Retirement Savings Plan

for an agent who represents Canadian B/D

• file an application in the form jurisdiction's principal office in Canada wants
• file a consent to service of process
• provide evidence that it is registered in good standing in its home jurisdiction
• be a member of an SRO or stock exchange in Canada
• requirements for agents are the same

Quiz 2C (firs try 5/7) 

1. Under the USA, the term agent would include an individual who represents an issuer in effecting non-exempt transactions in: non-exempt securities (D)

2. Under the USA, the term agent would include (pdf p. 85) an individual who represents a B/D in a transaction in an exempt security.  (B)

3. Person who effects transactions in municipal securities on behalf of B/D. Yes. (A)

4. An agent's salaries secretary who takes orders. Yes. (A)

*5. An employee of a bank that is issuing shares who receives a commission for selling the bank's securities. NOT (B)

6. Individual who represents her nonexempt employer in the sale of its securities to existing employees for a commission. Yes. (A)

*7. Person who represents an issuer in effecting transactions with underwriters. NOT (B)

investment adviser

• any person who advises others about value of securities-to buy or sell for compensation
• can be in writing, in person, through research reports
• provide advice about securities NOT jewelry, rare coins, real estate
• provide that advice as part of an ongoing business
• receive compensation-get paid for the advice

investment adviser representative

• individual who represents a state-registered investment adviser or federal covered investment adviser 

Broker dealer

• primary business function is executing transactions in securities
• compensation is earned in the form of commissions and markups (markdowns)

agent

• individuals employed by broker/dealers to handle their customer orders to buy or sell securities
• separate function from an IAR 

investment adviser

• primary business function is giving advice
• compensation is earned in the form of fees of other charges generally based on the amount of assets managed

investment adviser representative

• 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 broker/dealer where the client has the account to give the buy/sell order to an agent

general registration procedures

• submit an application
• provide a consent to service of process
• pay a filing fee
• post a bond if required by the Administrator
• take and pass an exam if required by the Administrator

submitting an application

• initial application and renewals
• form and place of business for B/D and IA
• proposed method of doing business
• qualifications and business history (B/D) and IA must include the qualifications and history of partners, directors, and other persons with controlling influence over the organization
• court issued injunctions and administrative orders
• adjudications by the SEC or any securities SRO within the past 10 years
• convictions of misdemeanors involving a security or any aspect of the securities business
• felony convictions whether securities related or not
• financial condition and history of the firm not credit reports of the officers
• any information to be furnished or disseminated to client if applicant is an investment adviser
• for individual registrant, citizenship information
• may require an announcement of registration in one or more newspapers

provide a consent to service of process

• appoints Administrator as attorney for applicant to receive and process noncriminal securities related complaints against the applicant

payment of initial and renewal filing fees

• states require filing fee for initial and renewal application
• if application is withdrawn or denied, Administrator can keep a portion of the fee
• no filing or registration fee until renewal of firm's license w/ successor firm

effectiveness of registration

• license becomes effective at noon, 30 days after application is filed
• complete when applicant has furnished information responsive to each applicable item of the application
• if withdrawal, Administrator has jurisdiction of former registrant for one year

Quiz D

1, A consent to service of process must be submitted with each renewal application. False.

2. A Canadian B/D properly registered w. the Administrator of the province in which he is headquartered and with no office in the state, may do business with his customers who are on a skiing vacation in Vail without registered with the Colorado Administrator. True.

3. When a securities professional registers in a state he must provide the state Administrator with a list of all the states where he intends to register. False.

Postregistration requirements

• once registered, B/Ds are subject to numerous administrative requirements to keep their registrations current and in good order

Books and records

• B?D must keep 
• accounts,
•  records of original entry, 
• correspondence w/ emails, 
• memoranda
• papers
• books
• preserved for 3 years
• periodic, special, other examination by state Administrator
• website design is kept for 3 years, new copy is maintained

What is a security

• investment of money
• in a common enterprise
• with expectation of profits
• to be derived from the efforts other than the investor

List of Securities Under The Uniform Securities Act

• notes
• stocks
• treasury stocks
• bonds
• debentures
• evidence of indebtedness
• certificates of interest or participation in a  profit-sharing agreement
• collateral trust certificates
• preorganization certificates or subscriptions
• transferable shares
• investment contracts
• voting trust certificates
• certificates of deposit for a security
• certificate of interest or participation in an oil, gas, or mining title or lease
• puts, calls, straddles, options, or privileges on a security
• options on futures
• any interest or instrument commonly known as a security

Not securities

• an insurance contact
• annuity contract
• endowment policy
• interest in a retirement plan such as an IRA or Keogh plan
• collectibles
• commodities such as precious metals and grains
• condominiums used as a personal residence
• currency 

Series 66 for Dummies, pdf p. 74 to 80

Persons subject to state registration:

• Broker/dealers-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 persons

Broker dealer

• any person who effects transactions
• registered representatives work for B/D's 

Exclusions from B/D

• agents
• issuers
• banks, savings institutions, and trust companies
• since banks use subsidiaries to do securities activities, banks DO NOT need to register as B/D's
• commercial banks EXEMPT
• no place of business in state + deal ONLY with issuers/broker dealers/banks/savings loans associations/trust companies/insurance companies, insurance companies, investment companies, pension or profit sharing trusts
• no place of business in state + licensed in a state where they have a place of business

Internet presence

• disclaimer: person will ONLY do business in state if registered or EXEMPT
• site can NOT make specific recommendations
• if you follow up with advice or offer securities register or use exemption

Broker dealer registration requirements

• if B/D, must register
• register with SEC form B/D with state-specific information

Omitted: 2 case studies

Financial requirements

• net capital requirements for broker/dealers 
• those with custody of client funds have to post surety bonds
• states determine amount of bonds
• SEC enforces most broker/dealer infractions. Administrator enforces anti-fraud laws

Questions:

1. A person who effects transactions in securities for itself or for the account of others in the course of business must register in the state as a broker/dealer
2. Under the Uniform Securities Act, an out-of-state firm that transacts business with an established customer who is on vacation is not considered a broker/dealer in the state in which the customer is on vacation
3. A person is not defined as a broker/dealer in the state under the USA need not register as such
4. A broker/dealer registered with the SEC and several states must meet the net capital standard of the state with the most stringent requirements

Agent:

• a person who represents a broker/dealer or an issuer
• agents a.k.a registered representatives
• only an individual can be an agent

Exclusions from Definition of Agent for Administrative Personnel

• clerical/administrative/ministerial employees are not agents
• if personnel take on securities related functions, they must register
• if secretaries or sales agents accept customer transactions or take orders over the phone they must register as agents

Series 66 For Dummies, pdf p.72-74

National Securities Markets Improvements Act of 1966

• eliminates duplication with state and federal laws for the registration of securities and investment advisers

state

• any 50 states
• any territory/possession of the United States which includes American Samoa and Guam
• includes District of Columbia
• includes Puerto Rico

definition

• important
• creates jurisdiction

NOT an agent

• when buying and selling EXEMPT securities 
• EXEMPT transactions

Registration exemption

• federal covered adviser-a investment adviser CAN be EXEMPT from state registration 

Questions (first attempt 3/4):

• 1. A final order may be entered only after opportunity for a hearing has been granted. TRUE. 
• *2. If an administrator determines that a registration statement for a security is incomplete, he may issue a cease and desist order. FALSE, cease and desist is for people, stop orders are for securities. 
• 3. Under the Uniform Securities Act, the city of Atlanta would be included in the definition of the term person.TRUE
• 4. The GEMCO Employees Retirement Plan currently has assets of $750,000. Under the USA, the plan would be considered an investment adviser. FALSE

Persons subject to state registration:

• Broker/dealers-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 persons

broker dealer

• any person engaged in the business of effecting transactions in securities for the accounts of others or for its own account
• person with office in state who buys and sells securities for the accounts of others
• firms where registered representatives work w. sales and trading
• agency: buy and sell client's securities
• proprietary: buy and sell for own accounts 

Series 66 For Dummies, ch. 2 pdf p. 71-p. 72

Accredited investor

• from Rule 501 of the federal Securities Act of 1933
• institutional investors: banks, insurance companies, investment companies, large employee benefit plans, charitable organizations, corporations, partnerships (total assets > $5 million)
• Not counted under Regulation D
• 1. be  a director, executive officer or general partner of company who issues securities
• 2. have an individual net worth or joint net worth w/ your spouse >$1 million without worth of primary house
• 3. individual income of $200,000 in 2 of recent years, joint income w/ spouse >$300,000 and expect the same moving forward

Registrant

• broker dealers, investment advisers, investment adviser representatives that have registered w/ the Administrator

Institution

• $1,000,000 of assets
• banks
• trust companies
• savings and loan associations
• insurance companies
• employee benefit plans
• get less protection under Act because they are more sophisticated

Retail client

• non-institutional client
• need more protection than institution clients
• accredited investors can be retail clients 

Series 66 For Dummies Chapter 2: pdf p. 70-71

Series 66 For Dummies Ch. 2

Exempt security

• no registration needed to sell it

Exempt transaction

• can do transaction without registration w/ Administer, don't need to file advertising material

Guaranteed:

• principal, interest, dividends will be paid. NOT capital gains

Offer/Offer to sell

• attempt to sell or offer to buy security for money

Sale

• contract to sell or dispose of a security for value
• offer is attempt
• sale, successful offer

Fraud

• intentional effort to deceive someone for profit

Self Regulatory Organization

• most powerful: FINRA
• MSRB, Muncipal Securities Rulemaking Board
• Chicago Board Options Exchange (CBOE)
• Investment Industry Regulatory Organization (IIRO)

Solicitor

• person who refers clients to an adviser for money

Chapter 2: State Regulations Under the Uniform Securities Act (USA) PDF p. 65 to p.70

• The Uniform Securities Act-model legislation 
• Unify blue-sky laws, state securities laws

Administrator

• jurisdiction over securities transactions that 
• a) originate, 
• b) directed, 
• c) accepted in Administrator's state
• d) issue subpoenas
• issue cease and desist orders
• deny, cancel, or revoke registrations

USA

• civil liabilities and criminal penalties for violating act
• civil liabilities: investor can recover attorney's fees, court costs, losses
• criminal penalties: can be issued + civil penalties

The Uniform Securities Act of 1956

• National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted USA
• USA is not legislation
• USA is a template/guide each state uses in drafting its securities legislation
• the North American Securities Administrators Association (NASAA) body that oversees state securities regulators

Administrator

• responsible for the administration of securities laws within the state
• deny, suspend, revoke registrations

Cease and desist order:

• Administrator may issue to a person engaged/will engage in violation
• can be issued without a prior hearing against person, asks them to cease and desist from more illegal activity
• apply to persons

Stop order

• stop, suspend, or revoke the effectiveness of any registration statement
• apply to securities

Summary order

• act without prior notice
• postpone or suspend registration for a person before final proceeding
• deny or revoke a specific security or transaction exemption
• Administrator tells parties reasons for order and 15 days after he receives a written request, he will give a hearing

Final orders

• must give notice before to applicable parties
• opportunity for a hearing
• written findings of fact and conclusions of law

Blue sky laws

• a.k.a. state securities laws 

Person

• any person
• corporation
• partnership
• association
• joint stock company
• trust
• unincorporated organization
• government
• political part of government

Not persons

• minors
• deceased a.k.a. dead
• mentally incompetent

Broker/dealer

• person who effects transactions for their account or for the accounts of others
• act on other's behalf-broker
• act for themselves-dealer
• register with SEC and state

Agent/Registered Representatives

• represents B/D in effecting or attempting to effect purchases or sales of securities
• agents sell or supervise sales people
• work for B/D usually
• can sell securities for issuer 

Investment adviser

• gets money to advise others about the value of securities-worth buying or selling securities
• gets paid to create reports about securities
• register with SEC (federal covered) or state (state covered) NOT BOTH

Investment Adviser Representative

• represents a state-registered investment adviser representative represents an investment adviser which is registered with the state or federal covered investment adviser that gives and/or solicits advice 

Issuer

• any person who issues or proposes to issue any security
• include corporations and governments

Nonissuer

• not direct, not indirect for benefit of issuer

Security

• stocks
• bonds
• debentures
• mutual funds
• variable annuities
• investment contract
• pre organization certificate 

Federal Securities Regulations

• 7 questions on federal regulations and and the issuance of securities and the registration of exchanges and broker/dealers who trade on these exchanges
• Federal laws that govern the issuance of corporate securities to the public and the regulation of exchanges on which they trade

Major legislation

• the Securities Act of 1933
• the Securities Exchange Act of 1934
• the Investment Company Act of 1940
• the Insider Trading and Securities Fraud Enforcement Act of 1988

The Securities Act of 1933

• a.k.a. the Paper Act
• a.k.a. the Truth in Securities Act
• a.k.a. the Prospectus Act
• regulates the issuing of corporate securities sold to the public-initial public offerings (IPOs) and through subsequent public offerings (SPOs)
• securities issuers must make full disclosure of material information in their registration materials in order for investors to make fully informed investment decisions

Security

• meets four conditions according to the Howey Case
• an investment contract is a security IF:
• the investment of money
• in a common enterprise (pooling)
• with the expectation of profits
• results solely from the efforts of others
• stock
• bond
• debenture
• right or warrant
• note
• put, call, or other option
• limited partnership interests
• certificate of interest in a profit-sharing arrangement

issuer:

• any person who issues or proposes to issue any security 
• most are businesses
• government can be an issuer

underwriter

• any person who has purchased from an issuer with a view to selling
• not a brokerage firm earning a commission on a retail sale to the public

person

• an individual,
•  corporation,
•  partnership, 
• association, 
• joint stock company, 
• a trust, 
• any unincorporated organization, 
• governmental subdivision, 
• political subdivision

prospectus

• any notice, circular, letter, communication, written or broadcast by radio or TV that offers any security for sale or confirms the sale of a security
• a tombstone advertisement is not considered a prospectus
• does not include oral communications

sale

• contract for sale or the disposition of a security for value
• refers to any attempt to dispose of a security or an interest in a security for value or a solicitation of any offer to buy a security for value

Which of the follow meets the definition of a sale as described in the Securities Act of 1933?

• your client exercises his conversion privilege by converting 10 ABC bonds into 100 shares of ABC common stock
• a brokerage firm runs a special promotion this month giving 100 shares of Hot Shot Growth Fund to any client who purchases at least $5,000 worth of stock

SEC

• does not approve securities registered with it
• does not pass on the investment merit of any security
• never guarantees the accuracy of statements in the registration statement and prospectus
• in review it attempts to make sure all relevant information is fully disclosed

SEC registration requirements

• issuer files a registration statement with the SEC before securities are offered or sold in interstate commerce
• a prospectus that meets the requirements of the act be provided to prospective buyers
• penalties-criminal, civil, or administrative be imposed for violations of this act

Exempted securities

• issued by US, state or political subdivision-municipal
• commercial paper <9mo/270 days, proceeds must be used to increase working capital not for the purchase of fixed assets. No minimum denomination or rating requirement
• security for religious, educational, benevolent, fraternal, charitable purposes and not for profit
• interest in a railroad equipment trust
• any security issued by a federal or state bank
• rule 147, offered and sold only to persons resident within a single state, for 9mo resales only to state resident, 80% of issuer's gross revenue within state, 80% of proceeds of offering used for business purposes within state, 80% of issuer's assets must be located within state (80-80-80 Rule)

Exempted transactions under the securities act of 1933

• transactions by any person other than an issuer, underwriter, or dealer
• transactions by an issuer that do not involve a public offering

Registration of securities

• Securities Act of 1933 protects investors who buy new issues
• register new issues that are sold interstate
• requires issuer to provide full and fair disclosure of itself and offering
• requires issuer to make available all public information 
• regulates the underwriting and distribution of primary and secondary issues
• provides criminal penalties for fraud in the issuance of new securities

Registration statement

• filed with SEC
• discloses material information about issue
• must be signed by CEO and CFO
• all signers are subject to criminal and civil penalties for willful omissions and misstatements of material facts
• purpose of issue
• public offering price
• underwriter's commissions or discounts
• promotion expenses
• expected use of the net proceeds of the issue to the company
• balance sheet
• earnings statements for the last three years
• names, addresses, and bios of officers, directors, underwriters, and stockholders owning more than 10% of the outstanding stock (control persons)
• copy of underwriting agreements
• copies of articles of incorporation

The Cooling off period

• 20-day cooling off period after issuer files registration statement with the SEC 
• can last several months because of time it takes to make additions and corrections
• SEC can issue a stop order, demands all underwriting activities to cease if fraud is suspected
• SEC takes action if misstatements of material fact or untrue statements
• SEC may subpoena the issuing corporation's records to determine if a stop order is needed 

Preliminary (Red Herring) prospectus 

• may be made available to any prospective purchaser who expresses interest in the security from the time the issue is filed with the SEC until it becomes publicly available for sale, the effective date
• used to acquaint investors with essential facts concerning the new issue
• used to solicit indications of buyer interest
• cannot be used as confirmation of sale
• cannot be used in place of a registration statement
• cannot be used to declare the final public offering price
• a bona fide estimate of price range per share is required to be included
• broker dealer cannot accept money or orders before the effective date
• a registered representative cannot make marks on the preliminary prospectus

during cooling off period underwriters cannot:

• make offers to sell the securities
• take orders
• distribute sales literature or advertising material

during cooling off period underwriters CAN:

• take indications of interest
• distribute preliminary prospectuses
• publish tombstone advertisements to provide information about the potential availability of the securities

Final (effective) prospectus

• shorter document than registration statement
• summarizes the information contained in the registration statement
• must contain all material facts
• given to buyers before or at time of sale confirmation
• provide investor with adequate information to analyze the investment merits of the security

Rule 482 Omitting prospectus

• any info in ad must be from regular prospectus
• for whom a prospectus may be available
• urge investors to read prospectus carefully
• past performance data like yields and return must have disclaimers and tell load
• can't buy shares w/ ad, need to buy shares through prospectus application

Effective date of registration statement

• registration statement effective, shares may be sold to the public
• purchaser must be given final/effective prospectus
• SEC disclaimer
• publisher discloses fact payment was made and amount of payment

Liabilities under Securities Act of 1933

• penalties for false and misleading statements in registration statement or prospectus

can SUE

• every person who signed registration form
• all directors of the issuer
• attorneys
• accountants
• appraisers/experts
• underwriters
• parent companies
• exempt if reasonable grounds to believe statements in registration statement were accurate

SEC can

• make, amend, rescind rules
• administer oaths
• subpoena witnesses and other records for evidence
• seek injunctions or restraining orders in the appropriate court
• turn over evidence to the attorney general of the United States for possible criminal prosecution
• civil penalties: substantial fine, being barred from serving as an officer of a public corporation. criminal: fine, prison term, both

SEC Regulation D (Private Placement Exemption)

• SEC Rule 506: exemption for sales to no more than 35 purchasers
• accredited investors do not count
• prohibits general solicitation or general advertising

SEC Rule 501: Accredited investors

• a bank, insurance company, or registered investment company
• an employee benefit plan if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million
• a charitable organization, corporation, or partnership with assets exceeding $5 million
• directors, executive officers, and general partners of the issuer
• any natural person whose individual net worth or joint net worth with that person's spouse excluding the net equity in his primary residence > $1 million at the time of his purchase
• any natural person who has an individual income > $200,000 in each of the 2 most recent years or joint income with that person's spouse > $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year
• entities made up of accredited investors 
• accredited investor applies ONLY to private placdements
• with Dodd Frank net worth had to exclude the primary residence

Which of the following statements about accredited investors is TRUE?

• purchases of securities by accredited investors do not count toward the 35-investor limitation found in Rule 506 of Regulation D

Form D

• federal covered securities
• must be filed no later than 15 days after the first sale

Section 506(c)

• all purchasers must be accredited investors or issuer reasonably believes that they are accredited investors
• the issuer takes reasonable steps to verify that all purchasers are accredited investors
• the JOBS Act-if underwriters, directors, officers or significant shareholders have been convicted of securities fraud-offering may not take place
• 506(c) Form D must be filed 15 days in advance
• 503(b) Form D must be filed 15 days after

Restricted Securities

• bought in a private placement
• a.k.a. letter securities/legend securities

Control person:

• corporate director, officer, greater than 10% voting stockholder, or spouse 
• a.k.a. insiders
• a.k.a. affiliates

Control stock

• stock held by a control person

Nonaffiliate:

• investor who is not a control person

SEC Rule 144 Sale of Restricted and Control Securities

• certain resales of existing securities can be made without having to file a complete registration statement with the SEC

A man owns 15% of the stock of a company. His wife owns 5% of the stock of a company. If the wife wishes to sell some of the stock she owns, which of the following statements are TRUE?

• Both the husband and the wife are affiliates
• she must file under Rule 144

The Securities Exchange Act of 1934

• The Securities Exchange Act created the SEC
• the act grants the SEC the authority over all aspects of the securities industry including the power to register, regulate and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self-regulatory organizations (SROs)
• New York Stock Exchange (NYSE), Chicago Stock Exchange (CHX) and Nasdaq are SROs
• the largest SRO is FINRA, most broker/dealers belong to FINRA
• the act identified and prohibits certain types of conduct in the markets
• the act empowers the SEC to require periodic reporting of information by companies with publicly traded securities

The Securities and Exchange Commission (SEC)

• 5 people
• administrates all federal laws regulating the securities industry except extending credit
• commissioners have five year terms 
• new commissioner is appointed each year
• no more than 3 of the 5 may belong to the same political parties
• can not engage in securities transactions except US government issues
• all securities positions they had when appointed are placed in a blind trust

broker

• any person engaged in the business of effecting transactions in securities for the account of others
• excluded: banks

dealer

• any person regularly engaged in the business of buying and selling securities for his own account
• excluded: banks, insurance companies, investment companies, any persons engaged in investing, reinvesting, or trading in securities for their own account 

associated person

• employees of the broker/dealer
• excluded: duties are solely clerical or ministerial

market maker

• dealer who holds himself out as being willing to buy and sell a particular security for his own account on a regular or continuous basis

Securities Information Processor

• collects, processes, or prepares for distribution or publication with respect to transactions in, or quotations for any nonexempt security
• distributes or publishes on a current and continuing basis, information with respect to such transactions or quotations 
• the Consolidated Ticker Tape
• OPRA: Options Price Reporting Authority
• SIAC: Securities Industry Automation Corporation
• OTC Markets Group Inc. owners of OTC Link a.k.a. the Pink Sheets

NOT securities information processor

• bona fide newspaper, news magazine, or business or financial publication of general or regular circulation such as WSJ
• any SRO
• any bank or broker/dealer who supplies quotation and transaction information as part of its customary banking or brokerage business
• any common carrier subject to the jurisdiction of the Federal communications commission or a state commission (radio and television stations)

Transfer agent

• engages on behalf of an issuer of securities 
• countersigns certificates
• registers the transfer of the issuer's securities
• exchanges or converts the issuer's securities
• transfers record ownership of securities by bookkeeping entry without physical issuance of securities certificates

NOT a transfer agent

• any insurance company or separate account that performs these functions solely with respect to variable annuity contracts or variable life policies that it issues
• any registered clearing agency (Options Clearing Corporation) that performs these functions solely with respect to options contracts that it issues

Exchange

• organization, association, or group of persons providing a marketplace or facilities for bringing together purchasers and sellers of securities
• must be registered
• register-file application with the SEC, accepted or denied within 90 days of application
• forming exchange must be in the public interest
• will have compliance enforcement ability-ability to enforce SEC's and its own rules
• the board of directors will be represented by at least one member representing the investing public and at least one member representing listed companies
• membership of the exchange may only be offered to registered broker/dealers or associated persons

Self regulatory organization (SRO)

·         National securities exchange or a registered securities association like FINRA

Security

·         Definition in Securities Act of 1933 and the Uniform Securities Act

Equity security

·         Defined as a stock or similar security

·         Stock, common or preferred stock

·         Similar security: convertible bond, security with a warrant or right attached to subscribe or buy stock, any warrant or right to purchase stock

Municipal securities

·         Securities that are direct obligations of state/political subdivision

·         Most common are municipal bonds

Government securities

·         Direct obligations of, obligations guaranteed as to principal or interest by the US government

·         Includes government agency securities like Federal National Mortgage Association (Fannie Mae)

Statutory Disqualification

·         Has been expelled or suspended from membership or being associated with a member of any SRO, commodities market, or futures trading association

·         Is subject to an order of the SEC or other regulatory agency deny/suspend for <12 months or revoke registration as a broker/dealer or bar/suspend for a period <12 months

·         Conduct has been found to be a cause of suspension, expulsion

·         Convicted within 10 years of a securities violation or misdemeanor w/ finance, dishonesty, embezzlement, forgery, theft

·         Subject to temporary or permanent injunction from a competent court of jurisdiction prohibits-he cannot engage in any phase of the securities business

·         Violates federal securities law

·         Makes false or misleading statement in filing of information that SRO requests

Appropriate Regulatory Authority-SEC

·         National securities exchanges

·         Registered securities associations

·         Members of an exchange or association

·         Persons associated with a member

·         Applicants to become a member or person associated with a member

·         Municipal Securities Rulemaking Board (MSRB)

SEC does NOT have jurisdiction

·         Federal Reserve Board

·         Office of the Controller of the Currency

·         Federal Deposit Insurance Corporation (FDIC)

Investment Discretion-Authorized in writing

·         to determine which securities will be purchased or sold by or for the account

·         the amount of the securities to be bought or sold for the account

·         whether the transaction will be a purchase or sale

·         NOT time/price of a particular transaction

·         Oral grant, for one business day

·         Time and price discretion can be abused

·         Written extension requirement helps to prevent misunderstandings

A client tells his agent to buy 100 shares of KAPCO common stock at what the agent thinks is the best price. Two days later, the agent enters the order. In this case, the agent has:

·         Acted inappropriately

Alice Allison is the president of Podunk University and sits on the board of directors of KAPCO Securities, a broker/dealer registered with the SEC. President Allison

·         Would be considered an associated person of KAPCO

Registration under the Securities Exchange Act of 1934

·         Brokers/dealers in interstate commerce

·         Securities exchanges-SEC has 90 days to accept

·         National securities associations such as FINRA and the MSRB (the Maloney Act of 1938 amended the Securities Exchange Act of 1934 and created the NASD>FINRA)

·         MSRB, created by Securities Exchange Act of 1934

·         Securities Amendment Act created both FINRA and MSRB

·         Corporations with listed securities

Corporate application for listed securities registration

·         Organization, financial structure, and nature of the business

·         The terms, position, rights, and privileges of the different classes of outstanding securities

·         Terms on which their securities are to be and were offered to public within 3 years

·         Directors, officers, underwriters that hold >10% of any class of equity security, people indirectly and directly controlled by issuer

·         Certified balance sheets for last 3 fiscal years by independent public accountants

·         Certified profit and loss statements for the last 3 fiscal years by independent accountants

Insider transactions under the Securities Exchange Act of 1934

·         Insiders own large amounts of their companies' stock

·         Every person directly/indirectly the owner of >10% of any class of equity security

·         Officers or directors of the issuers of such securities

·         SEC must be notified of any changes in the ownership of such securities

·         Prohibited from selling short and engaging in short term transactions-short-swing profits

·         Short-swing profits: purchase and sale happen within a 6mo period, stockholders may sue to recover and short term profits improperly realized by insiders

·         Insiders may exercise stock options

Schedule 13D filings Securities Exchange Act of 1934

·         Section 13(d)-5% Beneficial Owners generally requires a beneficial owner of more than 5% of a class of equity securities registered under the Securities Exchange Act of 1934 to file a report w/ the issuer, SEC, and securities markets within 10 days of transaction that results in beneficial ownership of more than 5%

·         Name and background of any person or entity-partners, executive officers, directors, controlling persons

·         The origin of the money for the acquisition of the securities

·         The purpose of acquiring the securities such as to get control of the business of the issuer and plans/proposals persons have to liquidate the issuer, to sell its assets to or merge it with other persons, or to make any other change to its business or corporate structure

Section 13(f) filings Securities Exchange Act of 1934

·         Any institutional investment manager that uses mail and exercises investment discretion over an equity portfolio over an equity portfolio with a market value on the last trading day in any of the preceding 12 months of $100 million or more in 13(f) securities must file a Form 13F with the SEC quarterly in 45 days of end of each quarter

·         Require institutional investment managers who exercise investment discretion over accounts holding certain levels of securities to make periodic public disclosures of significant portfolio holdings

·         Section 13(f) securities are exchange-traded ex NYSE, CHX or NASDAQ quoted stocks, equity options and warrants, shares of closed-end investment companies, some convertible debt securities

·         NOT mutual funds

·         YES: exchange traded funds (ETFs)

Schedule G Filings

·         Regulation 13G was adopted to ease the beneficial ownership requirements for passive investors

·         Rather than filing a Schedule 13D, a passive investor whose beneficial ownership > 5% of any registered security may file a 13G

·         Passive investor, any person who can certify they did not purchase for the purpose of changing or influencing control over the issuer and hold < 20% of the issuer's securities

·         Passive investors must file Schedule G within 10 days after crossing 5% threshold

·         Passive investors must amend Schedule 13G within 45 days after the end of the calander year to report any changes in the information previously reported

Section 16 Filings

·         Greater than 10% holders to file transaction reports before end of second business day

Credit Requirements

·         Regulation T

·         50% margin requirement

·         Credit can NOT be used on new issue

Regulation on the use of manipulative and deceptive devices

·         Churning, broker/dealer effecting transactions in a discretionary account that are excessive in size or frequency in view of financial resources, objectives, and character of the account

·         Wash trades-involved no change in beneficial ownership of the security. Buy and sell shares through two different brokerage firms to create the appearance of substantial trading activity and that is misleading to other investors

·         Matched orders-the entering of a sell or buy order knowing a corresponding buy (or sell) order of substantially the same and at substantially the same price either has been or will be entered

·         Pegging, fixing, and stabilizing-prohibited. Except when specifically permitted by the SEC rules

Order tickets

·         The account number

·         Whether solicited, unsolicited, discretionary w/ time and price

·         If a sale-long or short

·         Terms and conditions of the order-market or limit

·         Number of shares, if a bond-aggregate par value

·         Time of order entry and execution and execution price

·         Name of broker/dealer and identity of the agent who accepted the order or is responsible for the account

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)

·         An insider or control person is defined as an officer, director, or owner of more than 10% of the voting stock of the company or the immediate family of any of these persons

·         After insider abuses of 1980s, SEC increases enforcement on insider trading

·         Increased penalties

·         Tippee just as guilty as the tipper

·         Trade securities on the basis of material, nonpublic information

·         Use of nonpublic information-liabilities

·         Civil penalties

·         Treble damages, the guilty party could be fined up to 3x any ill gotten games or 3x losses avoided

·         SEC can give bounties to informers

·         Criminal action, up to 20 years in jail

Private rights of action for contemporaneous trading

·         Any person who violates the rules or regulations by purchasing or selling security while having material, nonpublic information is liable in action in court of competent jurisdiction to the person who has purchased or sold securities of the same class

·         Limitations: damages imposed will not > profit gained or loss avoided

·         No action may be brought > 5 years after date of last transaction that is subject to violation

Chinese Wall Doctrine

·         Procedures investment banking firms do to keep research information and retail sales departments separate

Powers of the SEC

·         Authority to investigate possible violations of federal securities laws

·         Investigate a national securities exchange

·         Investigate FINRA

·         Investigate the MSRB

·         Administer oaths

·         Subpoena witnesses

·         Compel attendance

·         Require books and records to be produced

·         Summarily suspend trading in any nonexempt security for up to 10 days without prior notice

·         Suspend trading on an entire exchange for up to 90 days

Financial responsibility rules under the Securities Exchange Act of 1934

·         The SEC adopted SEC Rule 15c3-1 (Uniform Net Capital Rule) establishes minimum net capital requirements for broker/dealers

·         Net liquid assets of firm

·         If a firm does not have required net capital, SEC does not let it operate

·         The SEC requires all broker/dealers to maintain a fidelity bond to protect against misappropriation, forgery and similar violations

·         Minimum fidelity bond of 100,000

·         Major wirehouses have fidelity bonds in million dollar ranges

Securities Amendment Act of 1975

·         Signed into law by President Ford on June 4

·         Amends certain parts of the Securities Exchange Act of 1934 and the Securities Act of 1933

Self regulatory organization (SRO)

·         National securities exchange or a registered securities association like FINRA

Security

·         Definition in Securities Act of 1933 and the Uniform Securities Act

Equity security

·         Defined as a stock or similar security

·         Stock, common or preferred stock

·         Similar security: convertible bond, security with a warrant or right attached to subscribe or buy stock, any warrant or right to purchase stock

Municipal securities

·         Securities that are direct obligations of state/political subdivision

·         Most common are municipal bonds

Government securities

·         Direct obligations of, obligations guaranteed as to principal or interest by the US government

·         Includes government agency securities like Federal National Mortgage Association (Fannie Mae)

Statutory Disqualification

·         Has been expelled or suspended from membership or being associated with a member of any SRO, commodities market, or futures trading association

·         Is subject to an order of the SEC or other regulatory agency deny/suspend for <12 months or revoke registration as a broker/dealer or bar/suspend for a period <12 months

·         Conduct has been found to be a cause of suspension, expulsion

·         Convicted within 10 years of a securities violation or misdemeanor w/ finance, dishonesty, embezzlement, forgery, theft

·         Subject to temporary or permanent injunction from a competent court of jurisdiction prohibits-he cannot engage in any phase of the securities business

·         Violates federal securities law

·         Makes false or misleading statement in filing of information that SRO requests

Appropriate Regulatory Authority-SEC

·         National securities exchanges

·         Registered securities associations

·         Members of an exchange or association

·         Persons associated with a member

·         Applicants to become a member or person associated with a member

·         Municipal Securities Rulemaking Board (MSRB)

SEC does NOT have jurisdiction

·         Federal Reserve Board

·         Office of the Controller of the Currency

·         Federal Deposit Insurance Corporation (FDIC)

Investment Discretion-Authorized in writing

·         to determine which securities will be purchased or sold by or for the account

·         the amount of the securities to be bought or sold for the account

·         whether the transaction will be a purchase or sale

·         NOT time/price of a particular transaction

·         Oral grant, for one business day

·         Time and price discretion can be abused

·         Written extension requirement helps to prevent misunderstandings

A client tells his agent to buy 100 shares of KAPCO common stock at what the agent thinks is the best price. Two days later, the agent enters the order. In this case, the agent has:

·         Acted inappropriately

Alice Allison is the president of Podunk University and sits on the board of directors of KAPCO Securities, a broker/dealer registered with the SEC. President Allison

·         Would be considered an associated person of KAPCO

Registration under the Securities Exchange Act of 1934

·         Brokers/dealers in interstate commerce

·         Securities exchanges-SEC has 90 days to accept

·         National securities associations such as FINRA and the MSRB (the Maloney Act of 1938 amended the Securities Exchange Act of 1934 and created the NASD>FINRA)

·         MSRB, created by Securities Exchange Act of 1934

·         Securities Amendment Act created both FINRA and MSRB

·         Corporations with listed securities

Corporate application for listed securities registration

·         Organization, financial structure, and nature of the business

·         The terms, position, rights, and privileges of the different classes of outstanding securities

·         Terms on which their securities are to be and were offered to public within 3 years

·         Directors, officers, underwriters that hold >10% of any class of equity security, people indirectly and directly controlled by issuer

·         Certified balance sheets for last 3 fiscal years by independent public accountants

·         Certified profit and loss statements for the last 3 fiscal years by independent accountants

Insider transactions under the Securities Exchange Act of 1934

·         Insiders own large amounts of their companies' stock

·         Every person directly/indirectly the owner of >10% of any class of equity security

·         Officers or directors of the issuers of such securities

·         SEC must be notified of any changes in the ownership of such securities

·         Prohibited from selling short and engaging in short term transactions-short-swing profits

·         Short-swing profits: purchase and sale happen within a 6mo period, stockholders may sue to recover and short term profits improperly realized by insiders

·         Insiders may exercise stock options

Schedule 13D filings Securities Exchange Act of 1934

·         Section 13(d)-5% Beneficial Owners generally requires a beneficial owner of more than 5% of a class of equity securities registered under the Securities Exchange Act of 1934 to file a report w/ the issuer, SEC, and securities markets within 10 days of transaction that results in beneficial ownership of more than 5%

·         Name and background of any person or entity-partners, executive officers, directors, controlling persons

·         The origin of the money for the acquisition of the securities

·         The purpose of acquiring the securities such as to get control of the business of the issuer and plans/proposals persons have to liquidate the issuer, to sell its assets to or merge it with other persons, or to make any other change to its business or corporate structure

Section 13(f) filings Securities Exchange Act of 1934

·         Any institutional investment manager that uses mail and exercises investment discretion over an equity portfolio over an equity portfolio with a market value on the last trading day in any of the preceding 12 months of $100 million or more in 13(f) securities must file a Form 13F with the SEC quarterly in 45 days of end of each quarter

·         Require institutional investment managers who exercise investment discretion over accounts holding certain levels of securities to make periodic public disclosures of significant portfolio holdings

·         Section 13(f) securities are exchange-traded ex NYSE, CHX or NASDAQ quoted stocks, equity options and warrants, shares of closed-end investment companies, some convertible debt securities

·         NOT mutual funds

·         YES: exchange traded funds (ETFs)

Schedule G Filings

·         Regulation 13G was adopted to ease the beneficial ownership requirements for passive investors

·         Rather than filing a Schedule 13D, a passive investor whose beneficial ownership > 5% of any registered security may file a 13G

·         Passive investor, any person who can certify they did not purchase for the purpose of changing or influencing control over the issuer and hold < 20% of the issuer's securities

·         Passive investors must file Schedule G within 10 days after crossing 5% threshold

·         Passive investors must amend Schedule 13G within 45 days after the end of the calander year to report any changes in the information previously reported

Section 16 Filings

·         Greater than 10% holders to file transaction reports before end of second business day

Credit Requirements

·         Regulation T

·         50% margin requirement

·         Credit can NOT be used on new issue

Regulation on the use of manipulative and deceptive devices

·         Churning, broker/dealer effecting transactions in a discretionary account that are excessive in size or frequency in view of financial resources, objectives, and character of the account

·         Wash trades-involved no change in beneficial ownership of the security. Buy and sell shares through two different brokerage firms to create the appearance of substantial trading activity and that is misleading to other investors

·         Matched orders-the entering of a sell or buy order knowing a corresponding buy (or sell) order of substantially the same and at substantially the same price either has been or will be entered

·         Pegging, fixing, and stabilizing-prohibited. Except when specifically permitted by the SEC rules

Order tickets

·         The account number

·         Whether solicited, unsolicited, discretionary w/ time and price

·         If a sale-long or short

·         Terms and conditions of the order-market or limit

·         Number of shares, if a bond-aggregate par value

·         Time of order entry and execution and execution price

·         Name of broker/dealer and identity of the agent who accepted the order or is responsible for the account

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)

·         An insider or control person is defined as an officer, director, or owner of more than 10% of the voting stock of the company or the immediate family of any of these persons

·         After insider abuses of 1980s, SEC increases enforcement on insider trading

·         Increased penalties

·         Tippee just as guilty as the tipper

·         Trade securities on the basis of material, nonpublic information

·         Use of nonpublic information-liabilities

·         Civil penalties

·         Treble damages, the guilty party could be fined up to 3x any ill gotten games or 3x losses avoided

·         SEC can give bounties to informers

·         Criminal action, up to 20 years in jail

Private rights of action for contemporaneous trading

·         Any person who violates the rules or regulations by purchasing or selling security while having material, nonpublic information is liable in action in court of competent jurisdiction to the person who has purchased or sold securities of the same class

·         Limitations: damages imposed will not > profit gained or loss avoided

·         No action may be brought > 5 years after date of last transaction that is subject to violation

Chinese Wall Doctrine

·         Procedures investment banking firms do to keep research information and retail sales departments separate

Powers of the SEC

·         Authority to investigate possible violations of federal securities laws

·         Investigate a national securities exchange

·         Investigate FINRA

·         Investigate the MSRB

·         Administer oaths

·         Subpoena witnesses

·         Compel attendance

·         Require books and records to be produced

·         Summarily suspend trading in any nonexempt security for up to 10 days without prior notice

·         Suspend trading on an entire exchange for up to 90 days

Financial responsibility rules under the Securities Exchange Act of 1934

·         The SEC adopted SEC Rule 15c3-1 (Uniform Net Capital Rule) establishes minimum net capital requirements for broker/dealers

·         Net liquid assets of firm

·         If a firm does not have required net capital, SEC does not let it operate

·         The SEC requires all broker/dealers to maintain a fidelity bond to protect against misappropriation, forgery and similar violations

·         Minimum fidelity bond of 100,000

·         Major wirehouses have fidelity bonds in million dollar ranges

Securities Amendment Act of 1975

·         Signed into law by President Ford on June 4

·         Amends certain parts of the Securities Exchange Act of 1934 and the Securities Act of 1933

·         Most significant change to securities laws since 1934

p.26