1. What is a person?
i. Basically anything except for a minor
b. An individual
c. A corporation
d. A partnership
e. An association
f. An unincorporated association
g. A government
h. A political subdivision of a government
i. Certain Trusts
Agents:
1. Registered Representatives + agents of issuers = Agents
a. Anyone that enacts transactions on behalf of a client
b. When you’re not an agent (doesn’t have to register in a state):
i. If your client takes a trip to another state for 30 days or less
ii. If your client moves to another state, you have 60 days to register from the longer of
1. 10 business days after your last transaction with a client
2. 10 business days after learning of the change in residence
iii. To qualify for any of these exemptions, you have to:
1. Be eligible to register
2. Be registered with an registered securities association in at least 1 state
3. Your BD must be registered in the new state
2. When you’re not an agent:
a. When you’re representing an exempt security:
i. US Gov’t bonds
ii. Municipal services
iii. Issues by recognized foreign governments
iv. Securities issued by domestic banks, savings institutions, and trust companies
v. Investment-grade promissory notes if mature in less than 9 months, and > $500k denomination
vi. Any investment contract related to employees or their retirement (expt if you receive a comish)
vii. Any exempt transaction
viii. It it’s a private placement (different rules for qualification from fed private placement)
3. An agent may only sell securities that are in compliance with USA anti-fraud rules
a. May not employ any device, scheme or artifice to defraud
b. May not make any untrue statement, or omit any fact necessary to make any statement true
c. May not engage in any act, practice or course of business that defrauds or deceives
d. Only case law exists to show what to do
i. You can’t guarantee anything
ii. You can’t omit anything
iii. You can’t imply that registration implies approval
iv. You must provide all documents material to a security
v. Advertisements containing the following are illegal
1. Non-factual data
2. Material based on conjecture
3. Unfounded or unrealistic claims or assertions
4. Material that is designed to detract from any prospectus or disclosure
4. When dealing with a client
a. You must make sure all recommendations are suitable
i. Their investment objectives
ii. Risk tolerance
iii. JAWT
b. The same activities unauthorized under SEC are unauthorized under USA
i. Churning
ii. Unauthorized trading
1. Any unauthorized action
2. Spouses can’t put in an order for an account
c. Need a signed agreement to trading on margin
1. Hypothecation agreement to use stock as collateral to trade on margin
d. You must provide the customer any requested information
e. You must respond to a written complaint from a customer
A BD:
1. A BD is someone / something that is in the business of effecting transactions for the accounts of others
a. Broker = matching clients and investments
b. Dealer = effects transactions for it’s own account (principal)
2. Who is not a BD?
a. A bank
b. An Issuer
c. An Agent
d. A person who has no place of business in the state and only deals with institutional investors or the issuer of the security involved in the transactions
3. Must keep books and records
a. Available for inspection at any time
4. A BD has certain obligations to a customer while in possession of their funds
a. A BD may not unreasonably delay any payment or refund to a customer
b. Even if held in “street name”, the funds must be held separate form the firms funds
c. An RR may not borrow or lend $ to a client
d. An RR may only share in profits or losses with a client with express written consent
i. Client and BD and only in proportion to the RR’s contribution
e. An RR or a BD may only enter into a contract with a customer at a price reasonably related to current market conditions
i. You may charge separate fees for transactions, but these fees must be reasonable and equitable
ii. An RR may not share commissions with anyone not registered and not employed with either the brokerage or an affiliated brokerage
iii. An RR must inform a client if a BD is charging a higher than average fee
iv. The RR must inform a client of any additional fees collected by the agent
v. Discounting fees is acceptable
f. A BD must disclose any conflicts of interest to the client
i. Any affiliation with the issuer
ii. If acting as a principal, the BD may not act as an agent and collect a fee. (either fee or mark-up)
5. A BD has certain obligations to their clients when it comes to trades
a. A BD must be accurately quote the security
i. This quote must be honored
1. Any conditions placed on the quote must be disclosed
2. Any security with low trading volume shouldn’t be quoted “at the market” and its low volume should be disclosed
b. Prohibited trading
i. A BD may not wash a sale so that no beneficial change in ownership occurs
1. Gives the illusion of volume
2. Different from arbitrage (buying a stock, and immediately reselling the stock on a different market)
ii. No Matched sales
1. Where two parties just trade stock back and forth to create volume
iii. No painting the tape
1. This is with regard to a series or purchases, not paired trades
iv. A BD may not falsify any transaction reports
v. A BD may not trade on any inside information, or allude to having inside info
vi. An RR may not engage in “off the books” trading
vii. A BD is required to make a bona fide offering (not keep shares)
1. An RR may not attempt to park (sell to someone, but really for RR)
2. An RR may not attempt to put securities into a false account to circumvent this rule either
c. Acceptable trades
i. Arbitrage
ii. Short selling- as long as industry rules and regulations are adhered to
iii. Overcoming objections
iv. Not paying in full for a transaction – Margin accounts
v. Recommending speculative trading – if it’s suitable for the customer
The Administrator:
1. The person who’s in charge of enforcing the states security laws and regulations
a. Can’t make law, only certain rules and regulations
2. Advertising
a. The administrator may require the filing of any documents or materials intended for distribution to the public
i. Any exempt security or transaction doesn’t require filing
b.
Issuers:
1. Any person who issues a security, except issuing:
a. CD’s
b. Voting trust certificates
c. Collateral trust certificates
i. These are all managed or deposited instead of issued
d. Certificates of interest in:
i. Oil
ii. Gas
iii. Mining titles
iv. Leases
1. These have no issuers…
//Look for the words certificate when deciding if issued or not
e.
IA
1. An IA is anyone who engages, for compensation, in the business of advising others, either directly or through publishings or writings
a. ABC test
i. Provides Advice
ii. As Business
iii. For Compensation
b. The following people aren’t IAs
i. IARs- someone who works for an IA, but doesn’t dispense information
ii. Banks, savings institutions, or trust companies
iii. Lawyers, accountants, teachers, or engineers – only applies to these professions
iv. BD and their agents if the don’t have a separate fee for advice
v. Print publishers
vi. Federally covered advisors
1. If you manage more that $30mil
2. IAs who have custody of client funds must maintain a minimum of $35K.
i. The Administrator may require a firm to post a bond if in possession of client funds
ii. OR administrator may accept an appropriate deposit of cash
b. If IA does not maintain custody of funds, then only $10K
c. IA that have a prepayment amount of $500 or more months in advance, must maintain a positive net worth at all times
d. Filing fee
i. Required of IA’s
ii. Not required if the firm is a successor ( a merger or firm taken over by another firm)
e. Effective within 30 days
f. The Administrator may deny the IA’s application is any partner, officer, director, or a person directly or indirectly controlling the IA, if they commit:
i. Is insolvent either because the firm’s liabilities exceed its assets or it cannot meet its obligations.
ii. Failed to reasonably supervise its agents or employees
iii. Once registered as an IA all of the officers, partners, and directors are registered as IARs
g. Renewal on the 31 of Dec.
h. There are two situations where an IA is exempt from state registration
i. The IA has no place of business in the state and has only institutional clients
ii. If the IA 1) has no place of business in the state and 2) during the preceding 12 months, has had no more than 5 non-institutional clients.
3. Registration as an IAR
a. IARs must file an application that includes
//make a card for what you have
b. There is no provision for the administrator to require a bond of an IAR in the USA
c. They have to take and pass the series 65/66
i. If the IA is a company, then the partners or officers must pass
4. IAR regulation
a. Brochure Rule
i. An IA must provide his clients with a written disclosure document (brochure)
ii. It must contain the same info as part II of the ADV form, in any form, but the info needs to be there.
b. Initial delivery
i. The IA must deliver to each client either A) not less than 48 hours prior to entering into any investment advisory contract with a client, or B) at the time of entering into an advisory contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
1. Doesn’t apply to contracts with ICs or contracts for impersonal advisory service
c. Annual offer to deliver
i. The IA must deliver, without charge, his brochure to his clients
1. Upon request
2. Not required in the case of contracts with ICs or impersonal advisory services requiring a payment of less than $200
d. Contracts
i. USA contracts need to be in writing and should contain:
a. The IA may not charge an unreasonable advisory fee
2. The services to ne provided
3. The term of the contract
4. The advisory fee
5. The formula for computing the fee
6. The amount if any prepaid fee to be returned in the event of contract termination
7. The advisor may not assign the contract to another person with our the client’s consent
e. Performance Fees
i. Usually prohibited
ii. If more that 5mil under management or clients with more that 1mil in net assets.
iii. Must take capitol losses into account as well as cap gains
f. Changes in IA partnerships
i. If structured as a partnership, the contract must state that the IA must make clients aware of any management changes
g. Exculpatory clauses (forgiving, or hedge clauses) may not relieve the IA or the IAR of any violations of the USA or other security law
h. If the administrator prohibits it, the IA may not have custody of client’s securities or funds.
i. If the Admin doesn’t prohibit it, they may take possession, but must still inform the admin
i. Records must be kept for at least 5 years, and generally for the first 2 in the primary office
j. Discretionary accounts
i. IAs must receive written authorization for a discretionary account within 10 business after placing the first order
1. Price/time exception applies
k. Cross agency transactions
i. A transaction that takes place btwn two clients of the same IA
ii. Usually the IA would have to disclose this potential conflict of interest, but can obtain blanket authorization
1. The IA must disclose any potential conflicts (in writing)
2. All compensation the IA may gain must be disclosed
3. The client must be sent an annual report of all agency cross transactions
4. The client must be notified that he may revoke the blanket authorization at any time
5. The advisor may not advise both sides to take the trade
l. Principal transactions
i. These require authorization
5. IA acting ethically
a. IAs must adhere to suitability requirements
i. Can’t churn
b. An IA must disclose, in writing, any potential conflicts of interest that could impair the rendering of unbiased and objective advice, including:
i. Any additional compensation agreements
ii. Charging an advisory fee when a commission will be received
c. Communications
i. No guarantees
ii. Advertising
1. IA advertising may not
a. Contain a testimonial of any kind
b. Represent that any chart or graph, or formula used, can in and of itself be used to may investment decisions
c. State that any report or service is free of charge, unless it really is free of charge
d. Contain any untrue statement of material fact or be false in anyway
e. Refer, directly or indirectly, to any recommendations of the IA that were, or would have been, profitable
i. You can list all recommendations in the last 12 mo.
1. Must list name
2. Date
3. Nature of the recommendation
4. The market price at the time
5. The price at which the recommendation was to be acted on
6. And the current market price of the security
f. Misleading statements
i. It is improper to misrepresent the nature of the services being offered or fees charged
ii. Or to omit a material fact
iii. In reports, it is illegal to misrepresent someone else’s recommendations or reports as your own
1. Not applicable for “research”
d. Have to keep customer’s information confidential
i. Extends to handling customer funds
ii. It is unethical to borrow or loan funds to a client, unless your client is a broker-dealer, an affiliate of the IA, or a financial institution engaged in loaning funds
6. The administrator cares about every security that changes hands
a. Even in the case of a right, option, or warrant.
b. Not an offer of sale:
i. Gifts, generally aren’t an offer or a sale (except where value can be demanded in addition to the gift)
ii. A bona fide pledge or loan
iii. A stock dividend
iv. Exchanges of security in mergers, reclassifications, or consolidations
v. Exchanges of securities in connection with bankruptcies]
7. Jurisdiction
a. The administrator has jurisdiction over a person who sells or offers to sell a security when:
i. An offer to sell is made and accepted in the state
ii. An offer to buy is made and accepted in the state
b. An offer to buy or sell:
i. If it originates in the state
ii. Or is directed by the offeror to the state
c. Acceptance
i. Is communicated in the state to the person making the offer and
ii. Has not previously been communicated to the offeror, orally or on writing, outside the state
/*for both acceptance and offers, interstate the offering or accepting parties have to reasonably believe the other party is located in a specific state, or the state is defaulted to the offeror’s home state * /
8. Published offers
a. An offer to by or sell is NOT made in a state when:
i. The offer is published in a magazine or newspaper that is not published in the state
ii. When the offer is published in a magazine or newspaper that is published in the that, but has 2/3 of it’s readership outside of the state
b. Radio or television broadcasts are considered offers only in the state in which the broadcast originates.
9. Administrator tools
a. Investigations
i. the administrator has the ability to initiate investigations, either inside or outside of the state to determine if any person has or is about to violate any rules or reg.
1. may require written statements or publish information concerning violations of the USA
ii. during an investigation, an Administrator may:
a. may only act in another state on the approval of the other state’s Administrator
2. administer oaths and affirmations
3. subpoena witnessed and compel their attendance
a. may apply to a court to compel a subpoena, and threaten jail time
4. take evidence
5. require the production of documents
b. If it appears that someone is about to commit a crime the Admin may issue:
i. cease and desist order.
1. Can be issued with, or without a formal hearing
ii. Judicial review of orders
1. Any orders may be appealed by the subject of the orders for judicial review for a period of 60 days
iii. Injunction (force compliance in court)
a. A court may appoint a receiver or conservator for the defendants assets
b. May not require the Admin to post a bond
2. Permanent or temp
3. Restraining order
4. Writ of mandamus
5. And order of rescission, restitution, or disgorgement
iv. Criminal proceedings
1. When a case is so willful that it’s remanded to the state’s attorney
2. The max under the USA is a $5,000 fine and/or 3 years in jail
a. A person found guilty of violating the USA has to PROVEN to have knowingly broke the law
3. 5 year statute of limitations
v. Civil proceedings
1. Where the clients can seek justice
2. The plaintiff may sue for:
a. The consideration paid for the security
b. Interest at the state mandated rate from the date of payment
c. Attorneys’ fees and reasonable costs
d. less any income from the security
3. If the broker was unlicensed the client may sue for:
a. Consideration paid for the advice
b. Any loss due to the advice
c. Interest at the state mandated rate from the date the consideration was paid
d. Costs and attorneys’ fees
e. less any income received from the security
4. 3 year statute of limitations
5. Letter of rescission:
a. If any wrong doing is found to have occurred, the party involved, may offer a letter of rescission to the buyer / seller to take back the security + interest less any income received from the security
The receiver has 30 days to respond
Registering:
1. Required to apply:
a. The applicant’s qualifications and business history (required of any partner, officer, director, and other persons performing a similar functions for companies)
b. Any injunctions or administrative orders involving securities
c. Any convictions for misdemeanors involving securities or any felonies (regardless of time)
d. The applicant’s financial condition and history
e. A consent to service of process
i. Makes any legal papers served have the same force of law as if served by the Administrator
1. Prevents party from dragging their feet in legal proceedings
f. Applicant’s proposed method of doing business (required for BD)
g. Place of business (required for a company)
h.
2. When registration takes effect?
a. 30 days after filing at noon
b. Anytime before 30 days have elapsed if the administrator specifies an earlier date
3. Grounds for denying an application
i. These may also be used to disqualify someone currently licensed
b. Filing incomplete / inaccurate information
c. willfully violating or failing to comply with any provisions of the USA
d. being convicted, within the last 10 years, of any securities misdemeanor or any felony
e. having been enjoined (forbidden) by a court from participating in the securities business
f. having been found to have violated any federal securities or commodities law in any state
g. engaging in any unethical or dishonest business practices in the securities business
h. being not qualified on the basis of inexperience, insufficient training, or lack of knowledge
i. inexperience alone cannot disqualify you
i. failure to pay the proper licensing fee
j. being insolvent because of the firm’s current or future liabilities (for companies)
k. Failure to reasonably supervise their Agents (firms)
4. Annual Renewal
a. Must renew 1x / year by Dec. 31
b. Generally just requires a filling fee
5. If an agent leaves a BD or issuer
a. All three parties involved must inform the Administrator:
i. You
ii. The firm you left
iii. The employing firm
6. Registering a security:
a. All of these people must file a registration statement with the Administrator:
i. The issuer
ii. The BD underwriting the offer
iii. A person on whose behalf the offering is made
b. The filing fee it typically a % of the offering price
i. If a security is withdrawn, the administrator will retain part of the fee
c. Called a registration statement
i. Includes:
1. The amount of securities to be offered
2. The states in which a registration statement or similar document has been filed
3. Any adverse order, judgment, or decree by the regulatory authorities of any state, court, or the SEC
4. A consent to service of process
d. Registration by filing (notification)
i. Register merely by filing notice with an administrator
ii. Usually reserved for large, seasoned issuers
iii. Becomes effective when the security becomes federally effective
1. As long as it’s been on file with the Administrator for 5 days
2. The requirement fee has been paid
3. The is no stop order in effect
iv. Must meet following criteria
1. Filed registration statement under Federal Security Act of 1933
2. Must have actively conducted business in the US for 36 consecutive months
3. Issuer must have equities owned by 500 people
4. Must have securities registered under federal security act of ‘34 (SEC)
5. Must meet financial standards
a. A total net worth of $4mil
b. A total net worth of $2mil, and a positive pretax income for 2 of the last 3 preceding years
c. At least 400,000 units held by the public, excluding insiders
6. Issuer’s equities securities must have been held by 4 market makers for at least 30 days during the last 3 months
7. The compensation received by underwriter doesn’t exceed 10%
8. The underwriters are members of FINRA and are engaging in firm commitment underwriting
9. The issuer hasn’t defaulted in it’s preferred stock, bonds or long-term leases since the end of it’s fiscal year
10. If the securities are equities, they are priced at no less than $5/share
v. The registration statement must include
1. A statement proving the issuer’s eligibility to file by notification
2. The issuer’s name, address, and form of organization
3. A description of the security being registered
4. A copy of the prospectus filed with the SEC
e. Registration by coordination
i. For those that might not qualify for notification
ii. Additional required information on the registration statement
1. Three copies of the latest prospectus filed with the SEC
2. Copies of any other documents filed with the SEC under the act or ’33 (if required by the administration)
3. A copy of the articles of incorporation, by-laws, a copy of the Underwriting agreement, a copy of the security and any indenture or similar instrument, if applicable (if required by the administration)
4. A statement that the issuer agrees to forward any future amendments to the federal prospectus to the administrator(within one business day)
iii. Less requirements needed to qualify than with notification
iv. Effective when security becomes federally effective
f. Registration by qualification
i. Least required to qualify
ii. Most detailed information required for registration statement
1. Name, address, form of organization, date organized, and state or foreign jurisdictions in which organized
2. Nature and location of issuer’s business, major assets, competitive conditions of its industry or business
3. Name, address, occupation for the last 5 years, and amount of issuer’s securities owned required for each director and officer
4. Total remuneration paid to all directors
5. For each person owning 10% or more of the issuer’s securities
a. Their name
b. Address
c. Amount owned
d. Capitalization and long term debt of the issuer
e. Kind and amount of securities to be offered, and the proposed offering price
f. Max and min amounts of proposed underwriter’s compensation, any other selling expenses, and copies of any underwriting agreements
g. Estimate of the proceeds to be received from the offering and the purposes for which it will be used
h. A description of any current, material litigation in which the issuer is involved
i. A copy of the prospectus, circular, advertisements, or other sales literature to be used as of the effective date
j. A copy of the articles of incorporation, by-laws, a copy of the Underwriting agreement, a copy of the security and any indenture or similar instrument, if applicable
k. An opinion of counsel as to the legality of the security being registered, stating whether it is a binding obligation of the issuer
l. A non-assessable agreement agreeing to not charge more than the initial amount paid for the security
m. Financial statements for the issuer for the past 4 months including a balance sheet and a profit and loss statement
6. Security doesn’t have to be fully registered with the SEC if using qualification
7. Becomes effective when the Administrator says so
g. Once a registration is filed, the administrator has the option to deny it:
i. Must give two reasons when denying(one must be public interest):
1. He filing statement contains false or misleading statement
2. There was a violation of a “blue sky” law by:
a. The person filing the registration statement
b. The issuer
c. Any partner, officer, or director of the issuer
d. The underwriter
3. Any federal stop order less than 1 yr old
4. The issuer’s business, if performed would be illegal
5. The offering intends to defraud investors
6. To much is being paid to the underwriters
7. The securities do not meet the requirement for how they were filed
8. Failure to pay the proper filing fee
ii. He must act within 30 days
iii. Doesn’t have to provide notice of postponing / stopping the offering, but must allow for a hearing:
1. Hearing must be held within 15 days
2. The interested parties must be given the reasons for a perm stop order
iv. Once effective, the issue remains so for 1 yr after effective date
1. Can be required to submit a report (up to quarterly)
2. Holder of security may only sell when security is effective
a. Holder may sell when any like security of the same issuer is sold
b. …
3.
Securities:
1. What is a security?:
a. A note
b. A stock
c. A bond
d. A debenture
e. Treasury stock
f. Options
g. Evidence of indebtedness
k. Collateral trust
l. Transferable shares
m. Investment contract
n. Voting-trust certificate
o. Certificate of deposit from a security
p. Preorganization certificate or subscription
h. Certificate of interest or participation in any profit sharing agreement
i. Certificate of interest or participation in an oil, gas, mining lease or title, or payments out of production from any of the above
j. In general, any interest or participation in, temporary
2. The Howey test
a. An investment contract = a security
b. To be considered a security
i. Must include an investment of $
ii. Must be in common enterprise
iii. The expectation of profits from efforts of a third party must exist
c. Flexible definition allows Administrator to broadly regulate securities
3. What’s not a security?:
a. Traditional Life Insurance
b. Endowment policies
c. Fixed annuity contracts
d. Commodity futures contracts
e. Collectables (art, antiques, coins, fine wine, etc.)
f. Currency
g. A person’s primary residence
h. IRA or Keogh plans
4. Just because it meets the definition of a security, does that mean it may be sold?
a. No, according to the USA, it’s unlawful to sell or offer to sell any security unless:
i. It is registered under the USA
ii. The security or transaction is exempted under the USA
iii. It is federally covered
5. Exempt securities:
a. US government securities
b. Municipal securities
c. Any foreign government security
d. Securities issued by banks, savings institutions, S&Ls, or trust companies
e. Securities representing interest in, or debt of an insurance company
f. Any security guaranteed by a credit union, regulated public utilities, or railroad or other common carriers
g. Securities listed on the NYSE, ASE, or MSE
i. This is the blue chip exception
h. Securities listed by non-profit organizations
i. Promissory notes, drafts, or banker’s acceptances expiring in less than 9 months
j. Securities issued in denominations of 50K or less and in the 3 highest rakings cat.
k. Investment contracts issued in connection with pension and profit sharing plans
6. Exempt transactions:
a. Any isolated non-issuer transaction
i. Isolated isn’t specifically defined, but 2/yr is too many
b. A non-issuer transaction by a agent of a BD
i. Original issuer must be filing with the SEC
c. Any unsolicited transaction done through a BD
d. Transaction btwn issuer and underwriter
e. Transactions in bonds secured by real estate (mortgage bonds)
f. Transactions by certain fiduciaries on behalf of a third party
g. Offers or sakes to institutional investors
h. Private placements
i. Offers or sakes of preorganization certificates (no commissions + < 10 subscribers)
j. Transactions with existing securities holders (rights, options, warrants)
k. Offers during the cooling-off period
7. Questions as to a security or transactions exempt status is on the claimer to prove
8. There is no exemption from anti-fraud rules
9. Federal law prohibits state registration of federally covered securities
a. Any exchange listed security
b. Securities of investment companies listed under the IA act of 1940
c. Securities sold to qualified purchasers
d. Securities exempt under the exchange act of ‘33
e. Securities listed as private placements by the SEC
10. States may only require issuers to just file notice
11.
Bonded:
1. A type of insurance used to cover any damages awarded in legal action against an agent or firm
2. The Administrator may require anyone to be bonded who
a. Holds discretionary authority over a client’s funds or securities
3.
Friday, June 25, 2010
Thursday, June 24, 2010
1 IAs who have custody of client funds must maintain a minimum of $35K.
i) The Administrator may require a firm to post a bond if in possession of client funds
ii) OR administrator may accept an appropriate deposit of cash
b) If IA does not maintain custody of funds, then only $10K
c) IA that have a prepayment amount of $500 or more months in advance, must maintain a positive net worth at all times
d) Filing fee
i) Required of IA’s
ii) Not required if the firm is a successor ( a merger or firm taken over by another firm)
e) Effective within 30 days
f) The Administrator may deny the IA’s application is any partner, officer, director, or a person directly or indirectly controlling the IA, if they commit:
i) Is insolvent either because the firm’s liabilities exceed its assets or it cannot meet its obligations.
ii) Failed to reasonably supervise its agents or employees
iii) Once registered as an IA all of the officers, partners, and directors are registered as IARs
g) Renewal on the 31 of Dec.
h) There are two situations where an IA is exempt from state registration
i) If the IA 1) has no place of business in the state and 2) has only institutional clients in the state
//make a card for institutional clients
ii) If the IA 1) has no place of business in the state and 2) during the preceding 12 months, has had no more than 5 non-institutional clients.
2 Registration as an IAR
a) IARs must file an application that includes
//make a card for what you have
b) There is no provision for the administrator to require a bond of an IAR in the USA
c) They have to take and pass the series 65/66
i) If the IA is a company, then the partners or officers must pass
3 IAR regulation
a) Brochure Rule
i) An IA must provide his clients with a written disclosure document (brochure)
ii) It must contain the same info as part II of the ADV form, in any form, but the info needs to be there.
b) Initial delivery
i) The IA must deliver to each client either A) not less than 48 hours prior to entering into any investment advisory contract with a client, or B) at the time of entering into an advisory contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
(1) Doesn’t apply to contracts with ICs or contracts for impersonal advisory service
c) Annual offer to deliver
i) The IA must deliver, without charge, his brochure to his clients
(1) Upon request
(2) Not required in the case of contracts with ICs or impersonal advisory services requiring a payment of less than $200
d) Contracts
i) USA contracts need to be in writing and should contain:
(a) The IA may not charge an unreasonable advisory fee
(2) The services to ne provided
(3) The term of the contract
(4) The advisory fee
(5) The formula for computing the fee
(6) The amount if any prepaid fee to be returned in the event of contract termination
(7) The advisor may not assign the contract to another person with our the client’s consent
e) Performance Fees
i) Usually prohibited
ii) If more that 5mil under management or clients with more that 1mil in net assets.
iii) Must take capitol losses into account as well as cap gains
f) Changes in IA partnerships
i) If structured as a partnership, the contract must state that the IA must make clients aware of any management changes
g) Exculpatory clauses (forgiving, or hedge clauses) may not relieve the IA or the IAR of any violations of the USA or other security law
h) If the administrator prohibits it, the IA may not have custody of client’s securities or funds.
i) If the Admin doesn’t prohibit it, they may take possession, but must still inform the admin
i) Records must be kept for at least 5 years, and generally for the first 2 in the primary office
j) Discretionary accounts
i) IAs must receive written authorization for a discretionary account within 10 business after placing the first order
(1) Price/time exception applies
k) Cross agency transactions
i) A transaction that takes place btwn two clients of the same IA
ii) Usually the IA would have to disclose this potential conflict of interest, but can obtain blanket authorization
(1) The IA must disclose any potential conflicts (in writing)
(2) All compensation the IA may gain must be disclosed
(3) The client must be sent an annual report of all agency cross transactions
(4) The client must be notified that he may revoke the blanket authorization at any time
(5) The advisor may not advise both sides to take the trade
l) Principal transactions
i) These require authorization
4 IA acting ethically
a) IAs must adhere to suitability requirements
i) Can’t churn
b) An IA must disclose, in writing, any potential conflicts of interest that could impair the rendering of unbiased and objective advice, including:
i) Any additional compensation agreements
ii) Charging an advisory fee when a commission will be received
c) Communications
i) No guarantees
ii) Advertising
(1) IA advertising may not
(a) Contain a testimonial of any kind
(b) Represent that any chart or graph, or formula used, can in and of itself be used to may investment decisions
(c) State that any report or service is free of charge, unless it really is free of charge
(d) Contain any untrue statement of material fact or be false in anyway
(e) Refer, directly or indirectly, to any recommendations of the IA that were, or would have been, profitable
(i) You can list all recommendations in the last 12 mo.
1. Must list name
2. Date
3. Nature of the recommendation
4. The market price at the time
5. The price at which the recommendation was to be acted on
6. And the current market price of the security
(f) Misleading statements
(i) It is improper to misrepresent the nature of the services being offered or fees charged
(ii) Or to omit a material fact
(iii) In reports, it is illegal to misrepresent someone else’s recommendations or reports as your own
1. Not applicable for “research”
d) Have to keep customer’s information confidential
i) Extends to handling customer funds
ii) It is unethical to borrow or loan funds to a client, unless your client is a broker-dealer, an affiliate of the IA, or a financial institution engaged in loaning funds
5 The administrator cares about every security that changes hands
a) Even in the case of a right, option, or warrant.
b) Not an offer of sale:
i) Gifts, generally aren’t an offer or a sale (except where value can be demanded in addition to the gift)
ii) A bona fide pledge or loan
iii) A stock dividend
iv) Exchanges of security in mergers, reclassifications, or consolidations
v) Exchanges of securities in connection with bankruptcies]
6 Jurisdiction
a) The administrator has jurisdiction over a person who sells or offers to sell a security when:
i) An offer to sell is made and accepted in the state
ii) An offer to buy is made and accepted in the state
b) An offer to buy or sell:
i) If it originates in the state
ii) Or is directed by the offeror to the state
c) Acceptance
i) Is communicated in the state to the person making the offer and
ii) Has not previously been communicated to the offeror, orally or on writing, outside the state
/*for both acceptance and offers, interstate the offering or accepting parties have to reasonably believe the other party is located in a specific state, or the state is defaulted to the offeror’s home state * /
7 Published offers
a) An offer to by or sell is NOT made in a state when:
i) The offer is published in a magazine or newspaper that is not published in the state
ii) When the offer is published in a magazine or newspaper that is published in the that, but has 2/3 of it’s readership outside of the state
b) Radio or television broadcasts are considered offers only in the state in which the broadcast originates.
8 Administrator tools
a) Investigations
i) the administrator has the ability to initiate investigations, either inside or outside of the state to determine if any person has or is about to violate any rules or reg.
(1) may require written statements or publish information concerning violations of the USA
ii) during an investigation, an Administrator may:
(a) may only act in another state on the approval of the other state’s Administrator
(2) administer oaths and affirmations
(3) subpoena witnessed and compel their attendance
(a) may apply to a court to compel a subpoena, and threaten jail time
(4) take evidence
(5) require the production of documents
b) If it appears that someone is about to commit a crime the Admin may issue:
i) cease and desist order.
(1) Can be issued with, or without a formal hearing
ii) Judicial review of orders
(1) Any orders may be appealed by the subject of the orders for judicial review for a period of 60 days
iii) Injunction (force compliance in court)
(a) A court may appoint a receiver or conservator for the defendants assets
(b) May not require the Admin to post a bond
(2) Permanent or temp
(3) Restraining order
(4) Writ of mandamus
(5) And order of rescission, restitution, or disgorgement
iv) Criminal proceedings
(1) When a case is so willful that it’s remanded to the state’s attorney
(2) The max under the USA is a $5,000 fine and/or 3 years in jail
(a) A person found guilty of violating the USA has to PROVEN to have knowingly broke the law
(3) 5 year statute of limitations
v) Civil proceedings
(1) Where the clients can seek justice
(2) The plaintiff may sue for:
(a) The consideration paid for the security
(b) Interest at the state mandated rate from the date of payment
(c) Attorneys’ fees and reasonable costs
(d) less any income from the security
(3) If the broker was unlicensed the client may sue for:
(a) Consideration paid for the advice
(b) Any loss due to the advice
(c) Interest at the state mandated rate from the date the consideration was paid
(d) Costs and attorneys’ fees
(e) less any income received from the security
(4) 3 year statute of limitations
(5) Letter of rescission:
(a) If any wrong doing is found to have occurred, the party involved, may offer a letter of rescission to the buyer / seller to take back the security + interest less any income received from the security
(b) The receiver has 30 days to respond
i) The Administrator may require a firm to post a bond if in possession of client funds
ii) OR administrator may accept an appropriate deposit of cash
b) If IA does not maintain custody of funds, then only $10K
c) IA that have a prepayment amount of $500 or more months in advance, must maintain a positive net worth at all times
d) Filing fee
i) Required of IA’s
ii) Not required if the firm is a successor ( a merger or firm taken over by another firm)
e) Effective within 30 days
f) The Administrator may deny the IA’s application is any partner, officer, director, or a person directly or indirectly controlling the IA, if they commit:
i) Is insolvent either because the firm’s liabilities exceed its assets or it cannot meet its obligations.
ii) Failed to reasonably supervise its agents or employees
iii) Once registered as an IA all of the officers, partners, and directors are registered as IARs
g) Renewal on the 31 of Dec.
h) There are two situations where an IA is exempt from state registration
i) If the IA 1) has no place of business in the state and 2) has only institutional clients in the state
//make a card for institutional clients
ii) If the IA 1) has no place of business in the state and 2) during the preceding 12 months, has had no more than 5 non-institutional clients.
2 Registration as an IAR
a) IARs must file an application that includes
//make a card for what you have
b) There is no provision for the administrator to require a bond of an IAR in the USA
c) They have to take and pass the series 65/66
i) If the IA is a company, then the partners or officers must pass
3 IAR regulation
a) Brochure Rule
i) An IA must provide his clients with a written disclosure document (brochure)
ii) It must contain the same info as part II of the ADV form, in any form, but the info needs to be there.
b) Initial delivery
i) The IA must deliver to each client either A) not less than 48 hours prior to entering into any investment advisory contract with a client, or B) at the time of entering into an advisory contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
(1) Doesn’t apply to contracts with ICs or contracts for impersonal advisory service
c) Annual offer to deliver
i) The IA must deliver, without charge, his brochure to his clients
(1) Upon request
(2) Not required in the case of contracts with ICs or impersonal advisory services requiring a payment of less than $200
d) Contracts
i) USA contracts need to be in writing and should contain:
(a) The IA may not charge an unreasonable advisory fee
(2) The services to ne provided
(3) The term of the contract
(4) The advisory fee
(5) The formula for computing the fee
(6) The amount if any prepaid fee to be returned in the event of contract termination
(7) The advisor may not assign the contract to another person with our the client’s consent
e) Performance Fees
i) Usually prohibited
ii) If more that 5mil under management or clients with more that 1mil in net assets.
iii) Must take capitol losses into account as well as cap gains
f) Changes in IA partnerships
i) If structured as a partnership, the contract must state that the IA must make clients aware of any management changes
g) Exculpatory clauses (forgiving, or hedge clauses) may not relieve the IA or the IAR of any violations of the USA or other security law
h) If the administrator prohibits it, the IA may not have custody of client’s securities or funds.
i) If the Admin doesn’t prohibit it, they may take possession, but must still inform the admin
i) Records must be kept for at least 5 years, and generally for the first 2 in the primary office
j) Discretionary accounts
i) IAs must receive written authorization for a discretionary account within 10 business after placing the first order
(1) Price/time exception applies
k) Cross agency transactions
i) A transaction that takes place btwn two clients of the same IA
ii) Usually the IA would have to disclose this potential conflict of interest, but can obtain blanket authorization
(1) The IA must disclose any potential conflicts (in writing)
(2) All compensation the IA may gain must be disclosed
(3) The client must be sent an annual report of all agency cross transactions
(4) The client must be notified that he may revoke the blanket authorization at any time
(5) The advisor may not advise both sides to take the trade
l) Principal transactions
i) These require authorization
4 IA acting ethically
a) IAs must adhere to suitability requirements
i) Can’t churn
b) An IA must disclose, in writing, any potential conflicts of interest that could impair the rendering of unbiased and objective advice, including:
i) Any additional compensation agreements
ii) Charging an advisory fee when a commission will be received
c) Communications
i) No guarantees
ii) Advertising
(1) IA advertising may not
(a) Contain a testimonial of any kind
(b) Represent that any chart or graph, or formula used, can in and of itself be used to may investment decisions
(c) State that any report or service is free of charge, unless it really is free of charge
(d) Contain any untrue statement of material fact or be false in anyway
(e) Refer, directly or indirectly, to any recommendations of the IA that were, or would have been, profitable
(i) You can list all recommendations in the last 12 mo.
1. Must list name
2. Date
3. Nature of the recommendation
4. The market price at the time
5. The price at which the recommendation was to be acted on
6. And the current market price of the security
(f) Misleading statements
(i) It is improper to misrepresent the nature of the services being offered or fees charged
(ii) Or to omit a material fact
(iii) In reports, it is illegal to misrepresent someone else’s recommendations or reports as your own
1. Not applicable for “research”
d) Have to keep customer’s information confidential
i) Extends to handling customer funds
ii) It is unethical to borrow or loan funds to a client, unless your client is a broker-dealer, an affiliate of the IA, or a financial institution engaged in loaning funds
5 The administrator cares about every security that changes hands
a) Even in the case of a right, option, or warrant.
b) Not an offer of sale:
i) Gifts, generally aren’t an offer or a sale (except where value can be demanded in addition to the gift)
ii) A bona fide pledge or loan
iii) A stock dividend
iv) Exchanges of security in mergers, reclassifications, or consolidations
v) Exchanges of securities in connection with bankruptcies]
6 Jurisdiction
a) The administrator has jurisdiction over a person who sells or offers to sell a security when:
i) An offer to sell is made and accepted in the state
ii) An offer to buy is made and accepted in the state
b) An offer to buy or sell:
i) If it originates in the state
ii) Or is directed by the offeror to the state
c) Acceptance
i) Is communicated in the state to the person making the offer and
ii) Has not previously been communicated to the offeror, orally or on writing, outside the state
/*for both acceptance and offers, interstate the offering or accepting parties have to reasonably believe the other party is located in a specific state, or the state is defaulted to the offeror’s home state * /
7 Published offers
a) An offer to by or sell is NOT made in a state when:
i) The offer is published in a magazine or newspaper that is not published in the state
ii) When the offer is published in a magazine or newspaper that is published in the that, but has 2/3 of it’s readership outside of the state
b) Radio or television broadcasts are considered offers only in the state in which the broadcast originates.
8 Administrator tools
a) Investigations
i) the administrator has the ability to initiate investigations, either inside or outside of the state to determine if any person has or is about to violate any rules or reg.
(1) may require written statements or publish information concerning violations of the USA
ii) during an investigation, an Administrator may:
(a) may only act in another state on the approval of the other state’s Administrator
(2) administer oaths and affirmations
(3) subpoena witnessed and compel their attendance
(a) may apply to a court to compel a subpoena, and threaten jail time
(4) take evidence
(5) require the production of documents
b) If it appears that someone is about to commit a crime the Admin may issue:
i) cease and desist order.
(1) Can be issued with, or without a formal hearing
ii) Judicial review of orders
(1) Any orders may be appealed by the subject of the orders for judicial review for a period of 60 days
iii) Injunction (force compliance in court)
(a) A court may appoint a receiver or conservator for the defendants assets
(b) May not require the Admin to post a bond
(2) Permanent or temp
(3) Restraining order
(4) Writ of mandamus
(5) And order of rescission, restitution, or disgorgement
iv) Criminal proceedings
(1) When a case is so willful that it’s remanded to the state’s attorney
(2) The max under the USA is a $5,000 fine and/or 3 years in jail
(a) A person found guilty of violating the USA has to PROVEN to have knowingly broke the law
(3) 5 year statute of limitations
v) Civil proceedings
(1) Where the clients can seek justice
(2) The plaintiff may sue for:
(a) The consideration paid for the security
(b) Interest at the state mandated rate from the date of payment
(c) Attorneys’ fees and reasonable costs
(d) less any income from the security
(3) If the broker was unlicensed the client may sue for:
(a) Consideration paid for the advice
(b) Any loss due to the advice
(c) Interest at the state mandated rate from the date the consideration was paid
(d) Costs and attorneys’ fees
(e) less any income received from the security
(4) 3 year statute of limitations
(5) Letter of rescission:
(a) If any wrong doing is found to have occurred, the party involved, may offer a letter of rescission to the buyer / seller to take back the security + interest less any income received from the security
(b) The receiver has 30 days to respond
1. What is a person?
i. Basically anything except for a minor
b. An individual
c. A corporation
d. A partnership
e. An association
f. An unincorporated association
g. A government
h. A political subdivision of a government
i. Certain Trusts
Agents:
1. Registered Representatives + agents of issuers = Agents
a. Anyone that enacts transactions on behalf of a client
b. When you’re not an agent (doesn’t have to register in a state):
i. If your client takes a trip to another state for 30 days or less
ii. If your client moves to another state, you have 60 days to register from the longer of
1. 10 business days after your last transaction with a client
2. 10 business days after learning of the change in residence
iii. To qualify for any of these exemptions, you have to:
1. Be eligible to register
2. Be registered with an registered securities association in at least 1 state
3. Your BD must be registered in the new state
2. When you’re not an agent:
a. When you’re representing an exempt security:
i. US Gov’t bonds
ii. Municipal services
iii. Issues by recognized foreign governments
iv. Securities issued by domestic banks, savings institutions, and trust companies
v. Investment-grade promissory notes if mature in less than 9 months, and > $500k denomination
vi. Any investment contract related to employees or their retirement (expt if you receive a comish)
vii. Any exempt transaction
viii. It it’s a private placement (different rules for qualification from fed private placement)
3. An agent may only sell securities that are in compliance with USA anti-fraud rules
a. May not employ any device, scheme or artifice to defraud
b. May not make any untrue statement, or omit any fact necessary to make any statement true
c. May not engage in any act, practice or course of business that defrauds or deceives
d. Only case law exists to show what to do
i. You can’t guarantee anything
ii. You can’t omit anything
iii. You can’t imply that registration implies approval
iv. You must provide all documents material to a security
v. Advertisements containing the following are illegal
1. Non-factual data
2. Material based on conjecture
3. Unfounded or unrealistic claims or assertions
4. Material that is designed to detract from any prospectus or disclosure
4. When dealing with a client
a. You must make sure all recommendations are suitable
i. Their investment objectives
ii. Risk tolerance
iii. JAWT
b. The same activities unauthorized under SEC are unauthorized under USA
i. Churning
ii. Unauthorized trading
1. Any unauthorized action
2. Spouses can’t put in an order for an account
c. Need a signed agreement to trading on margin
1. Hypothecation agreement to use stock as collateral to trade on margin
d. You must provide the customer any requested information
e. You must respond to a written complaint from a customer
A BD:
1. A BD is someone / something that is in the business of effecting transactions for the accounts of others
a. Broker = matching clients and investments
b. Dealer = effects transactions for it’s own account (principal)
2. Who is not a BD?
a. A bank
b. An Issuer
c. An Agent
d. A person who has no place of business in the state and only deals with institutional investors or the issuer of the security involved in the transactions
3. Must keep books and records
a. Available for inspection at any time
4. A BD has certain obligations to a customer while in possession of their funds
a. A BD may not unreasonably delay any payment or refund to a customer
b. Even if held in “street name”, the funds must be held separate form the firms funds
c. An RR may not borrow or lend $ to a client
d. An RR may only share in profits or losses with a client with express written consent
i. Client and BD and only in proportion to the RR’s contribution
e. An
The Administrator:
1. The person who’s in charge of enforcing the states security laws and regulations
a. Can’t make law, only certain rules and regulations
2. Advertising
a. The administrator may require the filing of any documents or materials intended for distribution to the public
i. Any exempt security or transaction doesn’t require filing
b.
Issuers:
1. Any person who issues a security, except issuing:
a. CD’s
b. Voting trust certificates
c. Collateral trust certificates
i. These are all managed or deposited instead of issued
d. Certificates of interest in:
i. Oil
ii. Gas
iii. Mining titles
iv. Leases
1. These have no issuers…
//Look for the words certificate when deciding if issued or not
e.
Registering:
1. Required to apply:
a. The applicant’s qualifications and business history (required of any partner, officer, director, and other persons performing a similar functions for companies)
b. Any injunctions or administrative orders involving securities
c. Any convictions for misdemeanors involving securities or any felonies (regardless of time)
d. The applicant’s financial condition and history
e. A consent to service of process
i. Makes any legal papers served have the same force of law as if served by the Administrator
1. Prevents party from dragging their feet in legal proceedings
f. Applicant’s proposed method of doing business (required for BD)
g. Place of business (required for a company)
h.
2. When registration takes effect?
a. 30 days after filing at noon
b. Anytime before 30 days have elapsed if the administrator specifies an earlier date
3. Grounds for denying an application
i. These may also be used to disqualify someone currently licensed
b. Filing incomplete / inaccurate information
c. willfully violating or failing to comply with any provisions of the USA
d. being convicted, within the last 10 years, of any securities misdemeanor or any felony
e. having been enjoined (forbidden) by a court from participating in the securities business
f. having been found to have violated any federal securities or commodities law in any state
g. engaging in any unethical or dishonest business practices in the securities business
h. being not qualified on the basis of inexperience, insufficient training, or lack of knowledge
i. inexperience alone cannot disqualify you
i. failure to pay the proper licensing fee
j. being insolvent because of the firm’s current or future liabilities (for companies)
k. Failure to reasonably supervise their Agents (firms)
4. Annual Renewal
a. Must renew 1x / year by Dec. 31
b. Generally just requires a filling fee
5. If an agent leaves a BD or issuer
a. All three parties involved must inform the Administrator:
i. You
ii. The firm you left
iii. The employing firm
6. Registering a security:
a. All of these people must file a registration statement with the Administrator:
i. The issuer
ii. The BD underwriting the offer
iii. A person on whose behalf the offering is made
b. The filing fee it typically a % of the offering price
i. If a security is withdrawn, the administrator will retain part of the fee
c. Called a registration statement
i. Includes:
1. The amount of securities to be offered
2. The states in which a registration statement or similar document has been filed
3. Any adverse order, judgment, or decree by the regulatory authorities of any state, court, or the SEC
4. A consent to service of process
d. Registration by filing (notification)
i. Register merely by filing notice with an administrator
ii. Usually reserved for large, seasoned issuers
iii. Becomes effective when the security becomes federally effective
1. As long as it’s been on file with the Administrator for 5 days
2. The requirement fee has been paid
3. The is no stop order in effect
iv. Must meet following criteria
1. Filed registration statement under Federal Security Act of 1933
2. Must have actively conducted business in the US for 36 consecutive months
3. Issuer must have equities owned by 500 people
4. Must have securities registered under federal security act of ‘34 (SEC)
5. Must meet financial standards
a. A total net worth of $4mil
b. A total net worth of $2mil, and a positive pretax income for 2 of the last 3 preceding years
c. At least 400,000 units held by the public, excluding insiders
6. Issuer’s equities securities must have been held by 4 market makers for at least 30 days during the last 3 months
7. The compensation received by underwriter doesn’t exceed 10%
8. The underwriters are members of FINRA and are engaging in firm commitment underwriting
9. The issuer hasn’t defaulted in it’s preferred stock, bonds or long-term leases since the end of it’s fiscal year
10. If the securities are equities, they are priced at no less than $5/share
v. The registration statement must include
1. A statement proving the issuer’s eligibility to file by notification
2. The issuer’s name, address, and form of organization
3. A description of the security being registered
4. A copy of the prospectus filed with the SEC
e. Registration by coordination
i. For those that might not qualify for notification
ii. Additional required information on the registration statement
1. Three copies of the latest prospectus filed with the SEC
2. Copies of any other documents filed with the SEC under the act or ’33 (if required by the administration)
3. A copy of the articles of incorporation, by-laws, a copy of the Underwriting agreement, a copy of the security and any indenture or similar instrument, if applicable (if required by the administration)
4. A statement that the issuer agrees to forward any future amendments to the federal prospectus to the administrator(within one business day)
iii. Less requirements needed to qualify than with notification
iv. Effective when security becomes federally effective
f. Registration by qualification
i. Least required to qualify
ii. Most detailed information required for registration statement
1. Name, address, form of organization, date organized, and state or foreign jurisdictions in which organized
2. Nature and location of issuer’s business, major assets, competitive conditions of its industry or business
3. Name, address, occupation for the last 5 years, and amount of issuer’s securities owned required for each director and officer
4. Total remuneration paid to all directors
5. For each person owning 10% or more of the issuer’s securities
a. Their name
b. Address
c. Amount owned
d. Capitalization and long term debt of the issuer
e. Kind and amount of securities to be offered, and the proposed offering price
f. Max and min amounts of proposed underwriter’s compensation, any other selling expenses, and copies of any underwriting agreements
g. Estimate of the proceeds to be received from the offering and the purposes for which it will be used
h. A description of any current, material litigation in which the issuer is involved
i. A copy of the prospectus, circular, advertisements, or other sales literature to be used as of the effective date
j. A copy of the articles of incorporation, by-laws, a copy of the Underwriting agreement, a copy of the security and any indenture or similar instrument, if applicable
k. An opinion of counsel as to the legality of the security being registered, stating whether it is a binding obligation of the issuer
l. A non-assessable agreement agreeing to not charge more than the initial amount paid for the security
m. Financial statements for the issuer for the past 4 months including a balance sheet and a profit and loss statement
6. Security doesn’t have to be fully registered with the SEC if using qualification
7. Becomes effective when the Administrator says so
g. Once a registration is filed, the administrator has the option to deny it:
i. Must give two reasons when denying(one must be public interest):
1. He filing statement contains false or misleading statement
2. There was a violation of a “blue sky” law by:
a. The person filing the registration statement
b. The issuer
c. Any partner, officer, or director of the issuer
d. The underwriter
3. Any federal stop order less than 1 yr old
4. The issuer’s business, if performed would be illegal
5. The offering intends to defraud investors
6. To much is being paid to the underwriters
7. The securities do not meet the requirement for how they were filed
8. Failure to pay the proper filing fee
ii. He must act within 30 days
iii. Doesn’t have to provide notice of postponing / stopping the offering, but must allow for a hearing:
1. Hearing must be held within 15 days
2. The interested parties must be given the reasons for a perm stop order
iv. Once effective, the issue remains so for 1 yr after effective date
1. Can be required to submit a report (up to quarterly)
2. Holder of security may only sell when security is effective
a. Holder may sell when any like security of the same issuer is sold
b. …
3.
Securities:
1. What is a security?:
a. A note
b. A stock
c. A bond
d. A debenture
e. Treasury stock
f. Options
g. Evidence of indebtedness
k. Collateral trust
l. Transferable shares
m. Investment contract
n. Voting-trust certificate
o. Certificate of deposit from a security
p. Preorganization certificate or subscription
h. Certificate of interest or participation in any profit sharing agreement
i. Certificate of interest or participation in an oil, gas, mining lease or title, or payments out of production from any of the above
j. In general, any interest or participation in, temporary
2. The Howey test
a. An investment contract = a security
b. To be considered a security
i. Must include an investment of $
ii. Must be in common enterprise
iii. The expectation of profits from efforts of a third party must exist
c. Flexible definition allows Administrator to broadly regulate securities
3. What’s not a security?:
a. Traditional Life Insurance
b. Endowment policies
c. Fixed annuity contracts
d. Commodity futures contracts
e. Collectables (art, antiques, coins, fine wine, etc.)
f. Currency
g. A person’s primary residence
h. IRA or Keogh plans
4. Just because it meets the definition of a security, does that mean it may be sold?
a. No, according to the USA, it’s unlawful to sell or offer to sell any security unless:
i. It is registered under the USA
ii. The security or transaction is exempted under the USA
iii. It is federally covered
5. Exempt securities:
a. US government securities
b. Municipal securities
c. Any foreign government security
d. Securities issued by banks, savings institutions, S&Ls, or trust companies
e. Securities representing interest in, or debt of an insurance company
f. Any security guaranteed by a credit union, regulated public utilities, or railroad or other common carriers
g. Securities listed on the NYSE, ASE, or MSE
i. This is the blue chip exception
h. Securities listed by non-profit organizations
i. Promissory notes, drafts, or banker’s acceptances expiring in less than 9 months
j. Securities issued in denominations of 50K or less and in the 3 highest rakings cat.
k. Investment contracts issued in connection with pension and profit sharing plans
6. Exempt transactions:
a. Any isolated non-issuer transaction
i. Isolated isn’t specifically defined, but 2/yr is too many
b. A non-issuer transaction by a agent of a BD
i. Original issuer must be filing with the SEC
c. Any unsolicited transaction done through a BD
d. Transaction btwn issuer and underwriter
e. Transactions in bonds secured by real estate (mortgage bonds)
f. Transactions by certain fiduciaries on behalf of a third party
g. Offers or sakes to institutional investors
h. Private placements
i. Offers or sakes of preorganization certificates (no commissions + < 10 subscribers)
j. Transactions with existing securities holders (rights, options, warrants)
k. Offers during the cooling-off period
7. Questions as to a security or transactions exempt status is on the claimer to prove
8. There is no exemption from anti-fraud rules
9. Federal law prohibits state registration of federally covered securities
a. Any exchange listed security
b. Securities of investment companies listed under the IA act of 1940
c. Securities sold to qualified purchasers
d. Securities exempt under the exchange act of ‘33
e. Securities listed as private placements by the SEC
10. States may only require issuers to just file notice
11.
Bonded:
1. A type of insurance used to cover any damages awarded in legal action against an agent or firm
2. The Administrator may require anyone to be bonded who
a. Holds discretionary authority over a client’s funds or securities
3.
i. Basically anything except for a minor
b. An individual
c. A corporation
d. A partnership
e. An association
f. An unincorporated association
g. A government
h. A political subdivision of a government
i. Certain Trusts
Agents:
1. Registered Representatives + agents of issuers = Agents
a. Anyone that enacts transactions on behalf of a client
b. When you’re not an agent (doesn’t have to register in a state):
i. If your client takes a trip to another state for 30 days or less
ii. If your client moves to another state, you have 60 days to register from the longer of
1. 10 business days after your last transaction with a client
2. 10 business days after learning of the change in residence
iii. To qualify for any of these exemptions, you have to:
1. Be eligible to register
2. Be registered with an registered securities association in at least 1 state
3. Your BD must be registered in the new state
2. When you’re not an agent:
a. When you’re representing an exempt security:
i. US Gov’t bonds
ii. Municipal services
iii. Issues by recognized foreign governments
iv. Securities issued by domestic banks, savings institutions, and trust companies
v. Investment-grade promissory notes if mature in less than 9 months, and > $500k denomination
vi. Any investment contract related to employees or their retirement (expt if you receive a comish)
vii. Any exempt transaction
viii. It it’s a private placement (different rules for qualification from fed private placement)
3. An agent may only sell securities that are in compliance with USA anti-fraud rules
a. May not employ any device, scheme or artifice to defraud
b. May not make any untrue statement, or omit any fact necessary to make any statement true
c. May not engage in any act, practice or course of business that defrauds or deceives
d. Only case law exists to show what to do
i. You can’t guarantee anything
ii. You can’t omit anything
iii. You can’t imply that registration implies approval
iv. You must provide all documents material to a security
v. Advertisements containing the following are illegal
1. Non-factual data
2. Material based on conjecture
3. Unfounded or unrealistic claims or assertions
4. Material that is designed to detract from any prospectus or disclosure
4. When dealing with a client
a. You must make sure all recommendations are suitable
i. Their investment objectives
ii. Risk tolerance
iii. JAWT
b. The same activities unauthorized under SEC are unauthorized under USA
i. Churning
ii. Unauthorized trading
1. Any unauthorized action
2. Spouses can’t put in an order for an account
c. Need a signed agreement to trading on margin
1. Hypothecation agreement to use stock as collateral to trade on margin
d. You must provide the customer any requested information
e. You must respond to a written complaint from a customer
A BD:
1. A BD is someone / something that is in the business of effecting transactions for the accounts of others
a. Broker = matching clients and investments
b. Dealer = effects transactions for it’s own account (principal)
2. Who is not a BD?
a. A bank
b. An Issuer
c. An Agent
d. A person who has no place of business in the state and only deals with institutional investors or the issuer of the security involved in the transactions
3. Must keep books and records
a. Available for inspection at any time
4. A BD has certain obligations to a customer while in possession of their funds
a. A BD may not unreasonably delay any payment or refund to a customer
b. Even if held in “street name”, the funds must be held separate form the firms funds
c. An RR may not borrow or lend $ to a client
d. An RR may only share in profits or losses with a client with express written consent
i. Client and BD and only in proportion to the RR’s contribution
e. An
The Administrator:
1. The person who’s in charge of enforcing the states security laws and regulations
a. Can’t make law, only certain rules and regulations
2. Advertising
a. The administrator may require the filing of any documents or materials intended for distribution to the public
i. Any exempt security or transaction doesn’t require filing
b.
Issuers:
1. Any person who issues a security, except issuing:
a. CD’s
b. Voting trust certificates
c. Collateral trust certificates
i. These are all managed or deposited instead of issued
d. Certificates of interest in:
i. Oil
ii. Gas
iii. Mining titles
iv. Leases
1. These have no issuers…
//Look for the words certificate when deciding if issued or not
e.
Registering:
1. Required to apply:
a. The applicant’s qualifications and business history (required of any partner, officer, director, and other persons performing a similar functions for companies)
b. Any injunctions or administrative orders involving securities
c. Any convictions for misdemeanors involving securities or any felonies (regardless of time)
d. The applicant’s financial condition and history
e. A consent to service of process
i. Makes any legal papers served have the same force of law as if served by the Administrator
1. Prevents party from dragging their feet in legal proceedings
f. Applicant’s proposed method of doing business (required for BD)
g. Place of business (required for a company)
h.
2. When registration takes effect?
a. 30 days after filing at noon
b. Anytime before 30 days have elapsed if the administrator specifies an earlier date
3. Grounds for denying an application
i. These may also be used to disqualify someone currently licensed
b. Filing incomplete / inaccurate information
c. willfully violating or failing to comply with any provisions of the USA
d. being convicted, within the last 10 years, of any securities misdemeanor or any felony
e. having been enjoined (forbidden) by a court from participating in the securities business
f. having been found to have violated any federal securities or commodities law in any state
g. engaging in any unethical or dishonest business practices in the securities business
h. being not qualified on the basis of inexperience, insufficient training, or lack of knowledge
i. inexperience alone cannot disqualify you
i. failure to pay the proper licensing fee
j. being insolvent because of the firm’s current or future liabilities (for companies)
k. Failure to reasonably supervise their Agents (firms)
4. Annual Renewal
a. Must renew 1x / year by Dec. 31
b. Generally just requires a filling fee
5. If an agent leaves a BD or issuer
a. All three parties involved must inform the Administrator:
i. You
ii. The firm you left
iii. The employing firm
6. Registering a security:
a. All of these people must file a registration statement with the Administrator:
i. The issuer
ii. The BD underwriting the offer
iii. A person on whose behalf the offering is made
b. The filing fee it typically a % of the offering price
i. If a security is withdrawn, the administrator will retain part of the fee
c. Called a registration statement
i. Includes:
1. The amount of securities to be offered
2. The states in which a registration statement or similar document has been filed
3. Any adverse order, judgment, or decree by the regulatory authorities of any state, court, or the SEC
4. A consent to service of process
d. Registration by filing (notification)
i. Register merely by filing notice with an administrator
ii. Usually reserved for large, seasoned issuers
iii. Becomes effective when the security becomes federally effective
1. As long as it’s been on file with the Administrator for 5 days
2. The requirement fee has been paid
3. The is no stop order in effect
iv. Must meet following criteria
1. Filed registration statement under Federal Security Act of 1933
2. Must have actively conducted business in the US for 36 consecutive months
3. Issuer must have equities owned by 500 people
4. Must have securities registered under federal security act of ‘34 (SEC)
5. Must meet financial standards
a. A total net worth of $4mil
b. A total net worth of $2mil, and a positive pretax income for 2 of the last 3 preceding years
c. At least 400,000 units held by the public, excluding insiders
6. Issuer’s equities securities must have been held by 4 market makers for at least 30 days during the last 3 months
7. The compensation received by underwriter doesn’t exceed 10%
8. The underwriters are members of FINRA and are engaging in firm commitment underwriting
9. The issuer hasn’t defaulted in it’s preferred stock, bonds or long-term leases since the end of it’s fiscal year
10. If the securities are equities, they are priced at no less than $5/share
v. The registration statement must include
1. A statement proving the issuer’s eligibility to file by notification
2. The issuer’s name, address, and form of organization
3. A description of the security being registered
4. A copy of the prospectus filed with the SEC
e. Registration by coordination
i. For those that might not qualify for notification
ii. Additional required information on the registration statement
1. Three copies of the latest prospectus filed with the SEC
2. Copies of any other documents filed with the SEC under the act or ’33 (if required by the administration)
3. A copy of the articles of incorporation, by-laws, a copy of the Underwriting agreement, a copy of the security and any indenture or similar instrument, if applicable (if required by the administration)
4. A statement that the issuer agrees to forward any future amendments to the federal prospectus to the administrator(within one business day)
iii. Less requirements needed to qualify than with notification
iv. Effective when security becomes federally effective
f. Registration by qualification
i. Least required to qualify
ii. Most detailed information required for registration statement
1. Name, address, form of organization, date organized, and state or foreign jurisdictions in which organized
2. Nature and location of issuer’s business, major assets, competitive conditions of its industry or business
3. Name, address, occupation for the last 5 years, and amount of issuer’s securities owned required for each director and officer
4. Total remuneration paid to all directors
5. For each person owning 10% or more of the issuer’s securities
a. Their name
b. Address
c. Amount owned
d. Capitalization and long term debt of the issuer
e. Kind and amount of securities to be offered, and the proposed offering price
f. Max and min amounts of proposed underwriter’s compensation, any other selling expenses, and copies of any underwriting agreements
g. Estimate of the proceeds to be received from the offering and the purposes for which it will be used
h. A description of any current, material litigation in which the issuer is involved
i. A copy of the prospectus, circular, advertisements, or other sales literature to be used as of the effective date
j. A copy of the articles of incorporation, by-laws, a copy of the Underwriting agreement, a copy of the security and any indenture or similar instrument, if applicable
k. An opinion of counsel as to the legality of the security being registered, stating whether it is a binding obligation of the issuer
l. A non-assessable agreement agreeing to not charge more than the initial amount paid for the security
m. Financial statements for the issuer for the past 4 months including a balance sheet and a profit and loss statement
6. Security doesn’t have to be fully registered with the SEC if using qualification
7. Becomes effective when the Administrator says so
g. Once a registration is filed, the administrator has the option to deny it:
i. Must give two reasons when denying(one must be public interest):
1. He filing statement contains false or misleading statement
2. There was a violation of a “blue sky” law by:
a. The person filing the registration statement
b. The issuer
c. Any partner, officer, or director of the issuer
d. The underwriter
3. Any federal stop order less than 1 yr old
4. The issuer’s business, if performed would be illegal
5. The offering intends to defraud investors
6. To much is being paid to the underwriters
7. The securities do not meet the requirement for how they were filed
8. Failure to pay the proper filing fee
ii. He must act within 30 days
iii. Doesn’t have to provide notice of postponing / stopping the offering, but must allow for a hearing:
1. Hearing must be held within 15 days
2. The interested parties must be given the reasons for a perm stop order
iv. Once effective, the issue remains so for 1 yr after effective date
1. Can be required to submit a report (up to quarterly)
2. Holder of security may only sell when security is effective
a. Holder may sell when any like security of the same issuer is sold
b. …
3.
Securities:
1. What is a security?:
a. A note
b. A stock
c. A bond
d. A debenture
e. Treasury stock
f. Options
g. Evidence of indebtedness
k. Collateral trust
l. Transferable shares
m. Investment contract
n. Voting-trust certificate
o. Certificate of deposit from a security
p. Preorganization certificate or subscription
h. Certificate of interest or participation in any profit sharing agreement
i. Certificate of interest or participation in an oil, gas, mining lease or title, or payments out of production from any of the above
j. In general, any interest or participation in, temporary
2. The Howey test
a. An investment contract = a security
b. To be considered a security
i. Must include an investment of $
ii. Must be in common enterprise
iii. The expectation of profits from efforts of a third party must exist
c. Flexible definition allows Administrator to broadly regulate securities
3. What’s not a security?:
a. Traditional Life Insurance
b. Endowment policies
c. Fixed annuity contracts
d. Commodity futures contracts
e. Collectables (art, antiques, coins, fine wine, etc.)
f. Currency
g. A person’s primary residence
h. IRA or Keogh plans
4. Just because it meets the definition of a security, does that mean it may be sold?
a. No, according to the USA, it’s unlawful to sell or offer to sell any security unless:
i. It is registered under the USA
ii. The security or transaction is exempted under the USA
iii. It is federally covered
5. Exempt securities:
a. US government securities
b. Municipal securities
c. Any foreign government security
d. Securities issued by banks, savings institutions, S&Ls, or trust companies
e. Securities representing interest in, or debt of an insurance company
f. Any security guaranteed by a credit union, regulated public utilities, or railroad or other common carriers
g. Securities listed on the NYSE, ASE, or MSE
i. This is the blue chip exception
h. Securities listed by non-profit organizations
i. Promissory notes, drafts, or banker’s acceptances expiring in less than 9 months
j. Securities issued in denominations of 50K or less and in the 3 highest rakings cat.
k. Investment contracts issued in connection with pension and profit sharing plans
6. Exempt transactions:
a. Any isolated non-issuer transaction
i. Isolated isn’t specifically defined, but 2/yr is too many
b. A non-issuer transaction by a agent of a BD
i. Original issuer must be filing with the SEC
c. Any unsolicited transaction done through a BD
d. Transaction btwn issuer and underwriter
e. Transactions in bonds secured by real estate (mortgage bonds)
f. Transactions by certain fiduciaries on behalf of a third party
g. Offers or sakes to institutional investors
h. Private placements
i. Offers or sakes of preorganization certificates (no commissions + < 10 subscribers)
j. Transactions with existing securities holders (rights, options, warrants)
k. Offers during the cooling-off period
7. Questions as to a security or transactions exempt status is on the claimer to prove
8. There is no exemption from anti-fraud rules
9. Federal law prohibits state registration of federally covered securities
a. Any exchange listed security
b. Securities of investment companies listed under the IA act of 1940
c. Securities sold to qualified purchasers
d. Securities exempt under the exchange act of ‘33
e. Securities listed as private placements by the SEC
10. States may only require issuers to just file notice
11.
Bonded:
1. A type of insurance used to cover any damages awarded in legal action against an agent or firm
2. The Administrator may require anyone to be bonded who
a. Holds discretionary authority over a client’s funds or securities
3.
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