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

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