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