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Uniform Securities Act
prevents securities fraud at STATE level
Investment Advisers Act of 1940
Federal covered advisers
Created federal covered securities
guidelines / best practices / model rules
the official that administers the state securities laws
A state is defined as
All 50 states + PuertoRico + DC + American Samoa + Guam + Virgin Islands
Who is not a person? (3)
3. legally incompetent
T/F A joint-stock company is a person
Who acts on behalf of a deceased person?
Executor of estate
What do exclusions and exemptions have in common
don't have to register
Legal authority to act
person that effects securities transactions for
1. its own account
2. the account of others
What do brokers charge?
What do dealers charge?
mark up/mark down
Can a broker/dealer charge both commission and mark up?
No, considered hidden profit and is illegal
When must a broker-dealer register?
1. office in the state
2. a single resident retail client in the state
What is not a broker dealer?
Out of state B/Ds
Individuals with a personal securities account
When can Canadian broker-dealers be exempt?
1. If registered under Canadian securities law
2. has no office in the state
3. submits a limited registration to the state
If a Canadian broker-dealer is exempt, then it can do business with who?
Canadians temporarily in the state (on vacation)
When is the only time a Canadian BD can do business with state residents?
Only Canadian retirement plans
Natural person who represents a BD in effecting securities transactions
Who is not an agent?
T/F Clerks and assistants can accept customer orders if they're not registered
False, only if regisered
T/F Clerks and assistants can give quotes
T/F Agents can register in states even if their BD is not registered
False, only register in states where BD is registered
An agent must register in any state where an offer (2)
2. is directed
When is effectiveness of an agent registration?
When granted by administrator
What is the expiration of agent registration?
Every Dec. 31
Who must notify the Administrator when leaving an agent leaves the firm?
Former employer, new employer and agent
An agent of an Issuer is exempt from registration if the agent (3)
1. sells exempt securities
2. sells in an exempt transaction
3. Sells to only fellow employees of the issuer without commissions
**THIS EXEMPTION DOES NOT APPLY TO AGENTS OF BDs
What is a sale offer?
every attempt to dispose of an interest in a security for value
What is a buy offer?
Every solicitation of an offer to purchase in a security
The offer or sale of a right, warrant, convertible security is also offering what?
The underlying security
What is NOT an offer (3)
Business reorganization transactions
T/F Advertisements are considered offers
T/F Radio/television/newspaper originating outside of the state is not an offer
What is a newspaper of general circulation and is it considered an offer?
2/3 of circulation outside the state of publication; advertisements are not offers in any state
What is a sale?
conveying ownership of a security for value
T/F A security given as a bonus with a purchase considered a sale
T/F An exercise of a right or warrant is not a sale
False, is a sale
What is assessable stock and is it a sale?
Type of stock where the issuer can demand/assess additional capital from shareholders; YES is a sale
When you convert a convertible security is this considered a sale?
What is not a sale? (5)
-pledge or loan of securities
- compensation bonus of common stock
- stock dividends
- merger transactions
- transactions part of a plan of reorganization
What are the 3 criteria that defines a security?
1. investment of money
2. common enterprise
3. expectation of profit from the effort of others
T/F Variable = security
T/F Pre-organization certificates and certificates of interest in oil/gas/mining titles or leases are securities
T/F Securities futures are considered a security
T/F Whiskey warehouse receipts are considered securities
What is not a security? (8)
-fixed life insurance
-IRAs & Keogh plans
- Commodities (&Futures)
- Antiques & collectibles
- Precious metals (&futures)
- real estate
- Currency (&futures)
What are federal covered securities? (5)
-Nationally traded securities (NYSE/NASDAQ)
- US Govt securities
- Muni bonds OUTSIDE the state of issuance
- Investment companies (mutual funds, ETFs, UITs, closed end funds)
- Federal Private placement (RegD)
What is the benefit of a fed covered security?
Exempt from state registration
What is notice filing and who files it?
When investment company securities must keep files for state administrator
T/F OTC securities are federally covered
False, only nationally traded securities like on the NYSE or NASDAQ
What are the requirements for the registration process of new issues? (4)
1. amount of securities to be issued
2. other states the security will be offered in
3. any adverse order concerning the offer AND
4. consent to service of process
When is registration effective for new issues of securities?
One calendar year
Who can register by coordination?
Any issuer that registers with the SEC
T/F SEC registration means the security is federally covered
How many copies must an issuer forward of the SEC registration to the state securities administrator for a registration by coordination?
When is registration by coordination effective?
simultaneously with SEC registration
What is registration by qualification?
Who can register by qualification?
When is registration by qualification effective?
When granted by administrator
T/F Non-issuer transactions (secondary transactions) are exempt transactions
T/F Unsolicited orders are not exempt transactions
False, they are exempt
When are state private placements exempt?
Offers to 10 or fewer retail clients in a 12 month period
When is the only time fiduciary transactions must register?
When its a custodian
T/F Institutional sales are exempt transactions
What are the only 2 exempt securities that are revocable?
-Non profit securities
-Employee benefit plan securities
Which exempt transactions are revocable?
all exempt transactions EXCEPT transactions with federally covered securities
T/F Employee benefit plan securities are exempt
What is required to commit fraud?
Define wash sales & painting the tape
Trading securities to create the appearance of interest/liquidity with the intent to manipulate or deceive other investors
Define pegging and fixing
Maintaing a security at a particular price with intent to manipulate/deceive other investors
T/F Parking securities is fraud
T/F Implying/stating approval of securities by the administration is fraud
Define an investment adviser (ABC)
-Provides securities related
-in the course of normal
What are the registration requirements for investment advisers?
-Any office in the state
-6 or more resident retail clients
When can a a broker dealer be an investment adviser?
For wrap accounts
What is a wrap account?
Charging a single fee for both brokerage services and investment advice
T/F Providers of Advice incidental to their profession are not investment advisors
True; Includes (LATE) Lawyers, accountants, teachers, engineers
If a provider of advise incidental to their profession holds himself out as offering investment advice, is he considered an investment adviser?
Yes, because he held himself out as offering investment advice
T/F Commercial bank, thrifts and trust companies can be investment advisers
What are investment adviser reps? (3)
-providers of advice
-solicitation of new customers
-supervisors of IARs
T/F If a business is a sole proprietorship, then the human is an investment adviser, not rep
When is investment adviser rep registration expiration?
Every December 31 unless renewed
Who notifies the administrator when an IAR leaves a federal covered adviser?
IAR notifies only
Who notifies the administrator if an IAR leaves a state registered investment adviser?
The advisory firm
When MUST an IA register with the Fed?
$110 mm in assets
When may an IA switch to Fed or State registration?
$100mm in assets
T/F Advisers to registered investment companies are federal covered advisers
T/F Advisers required to register in 15+ states are federal covered advisers
How do you register as a federal covered adviser?
1. File form ADV with SEC and pay a fee
Who an register a security?
T/F All new purchases of new issues are required prospectus delivery
When can a new issue registration be suspended or revoked?
When misleading info is involved
When does a fed covered adviser registration expire?
Never, remains effective until withdraw, cancelled, revoked, suspended by SEC
When can an IA be exempt from federal registration? (4)
1. must qualify registration with the SEC AND
2. not render any advice on exchange-listed securities
3. all clients reside in one state
4. all clients are insurance companies or foreign private advisers or venture capital advisers
How do you register as an IA with the state?
File form ADV, pay a fee, and file a consent to service of process
What is a consent to service of process
Grants the administrator legal authority to accept non-criminal securities-related legal documents on behalf of applicant
What information is on Form ADV Part 1?
-investment adviser's name
-number of employees
-form of org
-nature&method of the business
-any regulatory sanctions
-name/address/education/business affiliates for past 10 years
- whether IA will maintain custody/exercise discretion
What info is on the Form ADV Part 2?
-type of clients
-types of investments
-education/business background of those who render advice
-any affiliations with other securities professionals
If there is a change or material info that becomes inaccurate in an ADV form, what must the amended form be filed?
What form is used when exiting the investment advisory business?
ADV-W (W for withdrawal)
T/F Investment advisers may be required to meet financial requirements
How much would an IA required to post a bond if IA has custody?
How much would an IA be required to post a bond if the IA has discretion?
T/F An IA must advertise in a local newspaper when it has registered
When are state adviser registrations effective?
Noon on the 30th day after app is filed
When are fed covered adviser registrations effective?
45 days after the app is filed
What are the 2 reasons the admin must have for denying/revoking/suspending a registration
-public's best interest
T/F Notice must be given if the admin is going to deny/revoke
When must a hearing be held when denial/revocation of a registration?
Within 15 days of a request
When can an appeal be taken?
Within 60 days of order issuance
When can an admin cancel a registration? (3)
1. no longer in business
2. no longer in existence
3. a court finds the person to be legally incompetent
When does a withdrawal take effect?
30 days after filing unless disciplinary proceeding are underway
How long does an admin retain jurisdiction after withdrawal?
T/F IA contracts must be in writing, must disclose compensation, and no assignment without clients consent
When a partnership minority interest changes, what should happen?
When a partnership majority interest changes, this requires what?
An assignment and written client consent
T/F Stipulations waiving adviser's compliance with the law are void
What are the 2 qualifications for performance fees for "qualified clients"?
-$750,000 in clients account OR
-Clients net worth $1.5mm+
Fed level = $1mm/$2mm
Performance fees compensate IAS based on
gains in the account
When must the brochure rule (form adv part 2) be delivered?
-At least 48 hours before contract is signed OR
-at the same time the contract is signed IF customer can cancel without penalty for 5 business days
If material changes, a new brochure must be
-offered for state IAs
-delivered for Fed covered IAs
When must IAs include a balance sheet in the brochure rule?
If IA has custody and collects prepayment of fees
What is considered a prepayment of fees for state level / fed level?
State: at least $500 at least 6 months in advance
Fed: at least $1200 at least 6 months in advance
Who do not get brochures?
-investment company clients (mutual fund clients)
- clients for impersonal advisory services that are charged less than $500
What is custody?
-holding/possessing client funds or securities
- having authority to obtain possession of client funds or securities
T/F Discretionary authority is custody
False, not custody
T/F Prepayment of fees is custody
T/F If a check is forwarded and returned in 3 business days it is custody
When must an IA give notice to the admin when it has or may have custody?
T/F When an IA has custody, the securities must be segregated and IDd with a qualified custodian, and also have a separate account
T/F When an IA has custody, the client should be notified of the location and quarterly reports must be sent by the IA or the qualified custodian
T/F When an IA has custody, surprise annual audits by the CPA are required
Agency cross transaction requires (2)
- written client approval
-at least one side of transaction is unsolicited
T/F For principal transactions, the IA must disclose capacity and requires written client approval before each trade
When an IA has custody, it's net worth cannot be less than ?
When an IA has investment discretion, it's networth must not be less than
When an IA requires prepayments of more than $500 in fees more than 6 months in advance, it can't have
negative net worth
How far back must IA disciplinary action be disclosed to clients?
Define Fiduciary responsibility
must act in clients best interest
Define prudent investor rules
have a reasonable basis for investment advice
To avoid conflicts of interest, an IA should disclose (2)
-ownership in recommended securities
-commissions for recommended securities
T/F Broker dealers do not owe their clients a fiduciary duty
Discretionary authority is when the Agent/IAR selects: (3)
excessive trading to generate commission
When can agents/IARs loan to and from clients?
Only if client is lending institution
T/F Reports of others are permitted with disclosure
It is permissable to execute a trade in a margin account before obtaining signed margin agreements only if
the signed margin agreements are received promptly after the initial trade
When can client info be disclosed?
-when required by law
When may agents share in customer accounts?
When there is written permission from customer AND firm
When can investment advisers and IARs share in customer accounts?
When can agents and IARs share commissions?
Only with registered persons at the same/affiliated firm
When does sharing commissions require disclosure?
only when it increases the transaction cost to the client
How long must IAs keep records
5 years (first 2 in the office)
How long must BDs keep records
3 years (first 2 years in office)
When can a mutual fund claim to be "no load"
-no front end load
-no bad end load (contingent deferred sales charge)
-12b-1 fees < .25% of average annual net assets
reduced front end sales charge as purchase price goes up; volume discount
T/F It is a violation to fail to tell a customer about a breakpoint
What type of shares do mutual funds issue?
T/F Mutual funds have no commission
True, only sales charges
When mutual funds sell shares, they must return the proceeds within how many days
12 in 1 fee
Annual fee for marketing and administration
T/F Each mutual fund will have an expense ratio annual fee (cost of covering fund)
What is a soft-dollar arangement
When an adviser receives research/brokerage services from a BD in exchange for placing securities with that BD
When are soft-dollar arrangements permitted/prohibited
purchases for benefit of advisers clients / items that don't benefit advisers clients
Who do the trustees owe a fiduciary benefit to?
The trust's beneficiaries
T/F The trustee must minimize risk by diversifying the trust's investments
Duty of impartiality
treat all beneficiaries equally
Duty of care
Duty of loyalty
maintain trust assets first and foremost
An admin has jurisdiction if (4)
1. offer originates in the state
2. offer is directed in the state
3. transaction settles in the state
4. securities pro is registered in the state
What can't the admin do? (3)
1. Levy fines
3. change state securities laws
What can a customer recover from a civil liability?
Cost of transaction
+cost of advice
+cost of attorney fees
Under the statute of limitations, investors must bring suit by the earlier of
-3 years of violation or
-2 years of discovery
How long is an offer of rescission valid?
What are the criminal penalties?
$5,000 fine and/or
3 years in jail
What is the statute of limitations for criminal penalties under state laws?
What are the criminal penalties for fed covered?
$10,000 fine and/or
5 years in jail
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