Chapter 2 - Series 66 (Sept 2011) - State Regulation Under The Us)

Front 1

UNIFORM SECURITIES ACT OF 1956 (USA)

Back 1

In 1956, the National Conference of Commissioners on Uniform State Laws (NCCUSL), a national organization of lawyers devoted to unifying state laws, drafted the original Uniform Securities Act (USA) as model legislation for the separate states to adopt. As model legislation, the USA is not actual legislation; the USA is a template or guide that each state uses in drafting its securities legislation.

Front 2

Definition of and use of the term 'Administrator'

Back 2

Office responsible for administering the securities laws of the state. Has jurisdiction over all securities activity that emanates from his state as well as that received in his state. The Admin has jurisdiction over the registration of securities professionals and securities. He has the power to make rules and issue orders. He can deny, suspend, or revoke registrations.

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Definition of 'Cease and Desist Order'

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Used when any reg person has engaged or is about to engage in any violation of any provision of this act or any rule or order hereunder. May be issued with/out prior hearing. Applies to reg people not securities

Front 4

Definition of 'Stop Order'

Back 4

Used to deny effectiveness to, or suspend/revoke the effectiveness of any registration statement. This applies only to securities, not pro's such as BD's, agents, IA's & IAR's

Front 5

Summary Order (Acting Summarily)
(1 of 2)

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Power of Admin as applies to persons and securities. 3 specific cases where this applies in USA; -Postponing or suspending the reg of any Sec professional pending a final determination re a problem.
- Postponing or suspending the reg of a Sec pending a final determination of a proceeding relating to a problem.
- Denying or revoking a specific security or transaction exemption

Front 6

Summary Orders (2 of 2)

Back 6

In each instance, upon the entry of the order, the Admin must promptly notify all interested parties that it has been entered, the reasons for the order, and that within 15 days after the receipt of a written request a hearing will be granted.

Front 7

Final Orders

Back 7

Regardless of whether we’re referring to persons, exemptions, or Reg, other than in the case of a summary order, no final order may be entered without:
- Appropriate prior notice to the interested parties; - Opportunity for hearing; & Written findings of fact and conclusions of law.

Front 8

BLUE-SKY LAWS

Back 8

The common term used to refer to state securities laws.

Front 9

USA Definition of a 'Person'

Back 9

Any individual, (aka 'natural person'), Corp, partnership, Assn, joint stock Co., or trust where the interests of the beneficiaries are evidenced by a security, an unincorporated Org, a Govt, or a political subdivision of a Govt. Very broad def'n.

Front 10

Thus, what are the three examples of non-persons

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- Minors (anyone unable to enter into contracts under the laws of the state);
- Deceased individuals; and - Individuals legally declared mentally incompetent.

Front 11

Definition of 'Broker Dealer'

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Any person engaged in the biz of effecting transactions in securities for the account of others or for his own account. When acting on behalf of others = B; when acting on behalf of themselves = D. Primary function of a B/D is making securities trans.

Front 12

Definition of 'Agent'

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Agent means any individual/natural person (aka 'Registered Rep' in FINRA speak), other than a BD, who represents a BD or issuer in effecting or attempting to effect purchases or sales of securities. AKA Sales Reps or RR's. Only an individual can be an agent. The brokerage firm is the legal person (legal entity) that the agent (natural person) represents in securities transactions.

Front 13

USA definition of 'Investment Adviser'
(1 of 2)

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Any person; who, for comp, engages in the Biz of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. Advice can be delivered in person, through publications or writings, or research reports.

Front 14

USA definition of 'Investment Adviser'
(2 of 2)

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Or, who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. Under the Nat'l Sec Markets Improvements Act of 1996 (NSMIA), IA's are registered with either the SEC or the State - never both.

Front 15

USA Definition of 'Investment Advisor Representative'

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Any individual who represents an IA performing duties related to the giving of or soliciting for advisory services.

Front 16

Definition of 'Issuer' Under USA

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Any person who issues a security. Primarily incl Co's Govt. However, under the USA, with respect to certificates of interest in oil, gas, or mining titles or leases, or in payments out of production under such titles or leases, there is not considered to be any “issuer.”

Front 17

Definition of 'Security' Under USA

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Broad term that incl normal def'n e.g., stocks, bonds, CD, MF's, VA's, etc.) Also incl Investment contract & a pre-organization certificate.

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Definition of 'Exempt Security' under USA

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A Sec is exempt under the USA if it does not have to be registered in order to be sold, & there are no req'ts to file advertising about the security with the Administrator. Hence, an 'exempt' security trades in an 'exempt transaction'

Front 19

Definition of 'Guaranteed' under USA

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Means guaranteed as to payment of principal, interest, or dividends, but not capital gains.

Front 20

Definition of 'Solicitor under USA

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Any indiv who, for comp, acts as an agent of an IA in referring potential clients. Solicitors must be registered as IAR's.

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Definition of 'Accredited Investor' Under USA

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No such def'n - only defined under Sec Act of 1933. Refers to a person who is not counted when computing the # of investors under a Reg D transaction.

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Definition of 'Registrant' Under USA

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Used in legal circles to refer to a Sec professional (e.g. BD, IA, IAR) or Sec issuers, who are in the process of, or who have registered with the Admin.

Front 23

Definition of 'Institution' Under USA

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Incl's banks, trust Co's, S&L's, Ins Co's, Pension funds, with >1M AUM and Govt agencies. The Act generally affords less protection to these investors owing to their greater investment sophistication.

Front 24

Definition of 'Retail Investor' Under USA

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Retail client = noninstitutional client. Retail clients need far more protection than Inst ones. Also, Accredited Investors are still retail rather than Inst clients.

Front 25

National Securities Markets Improvements Act of 1996

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Promotes efficiency in Cap formation in the financial markets. The act generally preempts states’ blue-sky laws, eliminating the dual system of state and federal registration of certain securities and investment advisers.

Front 26

What three situations exist where an Agent, acting as an agent, is not defined as such under the USA?

Back 26

1) When effecting transactions in 'securities' exempt from registration; (2) When effecting 'transactions' that are exempt from registration; and
3) When effecting transactions with existing employees, when no commissions are paid.

Front 27

Definition of 'Exempt from Registration under the Act'

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Exemption in the USA means not being subject to a Reg provision of the act even though that person is otherwise covered by the act. e.g. a person defined as an IA can be exempt from state Reg reqt's as an IA because that person enjoys an exemption from state Reg under Fed law, such as in the case of a federal covered adviser.

Front 28

Persons Subject to State Registration

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1) BD's - generally legal persons, such as Co's or Prtnrs,
2) Agents—always individuals (natural persons)
IA's—generally legal persons, such as Co's or Partnrs
IAR—always individuals

Front 29

Expanding on the definition of Broker/Dealer

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BD's are firms for which RR's (agents) work. They engage in Securities trans. When acting on behalf of their customers—that is, buying and selling for their clients’ accounts— BD's act in an Agency capacity. When BD's buy and sell securities for their own accounts, called proprietary accounts, they act in a Principal capacity as Dealers.

Front 30

Exclusions from the Definition of Broker/Dealer 1: Agents, Issuers and Banks

Back 30

Persons not included in the definition of broker/dealer are: Agents, Issuers & Banks, S&L's, & Trust Co's (not engaged in BD activities). However, with Gramm-Leach-bliley Act in 1999, (aka 'financial modernization Act'), federal securities law adopted a functional approach meaning that any person who acted in a BD manner would be regulated as such.

Front 31

Exclusion from Definition of BD 2: No Place of Business in the State

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Relates to the physical loc of the BD. Excluded from the states def'n of BD are those BD's that have no place of biz in the state; 1) & deal exclusively with issuers, other BD's, & other financial Insts, (i.e. banks, S&L's, Trust Co's, Ins Co's, Inv Co's). 2) but are licensed in a state where they have a place of Biz & offer sec's in the state only with persons who are existing customers and who are not residents of the state. (Snowbird exemption). Applies to Agents, IA's & IAR's.

Front 32

Exclusion from Definition of BD 3: Use of the Internet (Part 1 of 2)

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Several reqt's to insure that the person is not deemed to be in the state when using the internet; 1) The comm clearly states that the person may only do biz in this state if properly registered or exempt from reg. 2) Any follow-up responses with prospects in this state will not be made without compliance with state BD, IA, Agent or IAR reg reqt's, or an applicable exemption or exclusion. 3) Only general recomm's allowed

Front 33

Exclusion from Definition of BD 3: Use of the Internet (Part 2 of 2)

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If you generally ad on the I'net, you don’t have to be Reg in the state but if you give advice (IAR) or offering secs (agent), you either have to register or find an exemption. 4) In the case of an Agent or IAR; a) Affiliation with BD must be well displayed b) BD retains responsibility for reviewing and approving content c) Associated BD or IAR authorizes the distribution of info on the particular products & services d) in disseminating info through the I'net, Agent or IAR acts within the scope of the authority granted by the BD or IA.

Front 34

Net Capital Requirements (NCR's) for Broker/Dealer's

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NCR's of the states <= those req'd by Fed law, in this case, the SEA of 1934. State Admin may impose a 'Surety Bond' on those BD's with discretion. Similarly, Surety Bonds < = Fed req'd amount. In lieu of a surety bond, the Administrator will accept deposits of cash or securities.

Front 35

Exclusions from the Definition of Agent for Personnel
Representing Issuers

Back 35

When a Co. uses its' own employees to raise additional capital. These indiv's are exempt from Reg representing issuers in; a) Exempt securities; b) Exempt from registration; and c) with existing employees, partners, or D/O of the issuer if no commission or other remuneration is paid for soliciting any person in this state. Exemptions from reg as an Agent generally apply to rep's of issuers, rather than to rep's of BD's.

Front 36

Exemptions to Agent status when Effecting Transactions in Exempt Securities

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An Emp of an issuer is not an Agent when representing an issuer in the following exempt securities: US Govt & Munis; Sec's of Govt's with which the US has diplomatic relationships; Sec's of US commercial banks and S&L's or Trust Co's (when not engaged in Sec-related BD activities); CP given a top 3 rating & in denominations of >= $50K or with maturities of <=9 months; Inv contracts issued in connection with Emp’s stock purchase, savings, pensions, or PS plans

Front 37

Exemptions to Agent status when Effecting Exempt Transactions

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Examples of exempt transactions incl; isolated nonissuer transactions; transactions between the issuer and underwriters; transactions with financial institutions; or private placements.

Front 38

Agent Registration Requirements
(1 of 2)

Back 38

Reg reqt's similar to BD. Generally a U-4 must be completed. Citizenship must be disclosed. While official registration is pending, an pre-Agent may perform the same activities as any other non-reg Emp (clerical & Admin duties).

Front 39

Agent Registration Requirements
(2 of 2)

Back 39

An agent’s Reg isn't effective during any period when the agent is not associated with a BD registered in the state. Therefore, if the BD’s registration is terminated, the agent is no longer considered licensed. When an Agent begins or terminates a connection with a BD/Issuer, Agent and the BD/ssuer must promptly notify the Admin.

Front 40

Financial Requirements of an Agent

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No financial reqt's, or net worth requirements, to register as an Agent. The Admin may, however, req an agent to be bonded, particularly if the agent has discretion over a client’s account.

Front 41

Fee and Commission Sharing

Back 41

RR's of BD's may split commissions with other RR's of the same BD or for a BD under common ownership. Not necessary to disclose split to clients.

Front 42

Multiple Registrations as an Agent

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An indiv may represent only 1 BD's at a time unless the other BD or Issuer is commonly owned or unless the Admin grants an exception. Eitherway, an Agent would have to submit a a second application (filing another form U-4).

Front 43

Limited Registration of Canadian Broker/Dealers and Agents
(1 of 2)

Back 43

A BD domiciled in CA with no US Office may effect transactions in sec with; a) a person from Canada who is temporarily a resident in this state who was already a client of the BD, or; b) a person from Canada who is a resident in this state, whose transaction is in a self-directed, tax-advantaged retirement plan in Canada of which the person is the holder or contributor. (Registered Retirement Savings Plan (RRSP).

Front 44

Limited Registration of Canadian Broker/Dealers and Agents
(2 of 2)

Back 44

For the Canadian BD to register in this fashion, it must: a) file an application in the form required by the jurisdiction where it has its principal office in Canada; b) file a consent to service of process; c) provide evidence that it is registered in good standing in its home jurisdiction; & d) be a member of an SRO or stock exchange in Canada. Reqt's for agents are the same, (except no SRO/SExch not relevant).

Front 45

Definition of 'Investment Advisor' Common to both State and Federal securities law

Back 45

a) Provide advice about securities (not about jewelry, rare coins, or real estate);
b) provide that advice as part of an ongoing business (hang out a shingle and have an office for conducting biz); and
c) Receive comp (actually get paid for the advice).

Front 46

Distinctions between and 'Investment Advisor' (IA) and Investment Advisor Representative' (IAR)

Back 46

In most cases, IA's are legal persons—that is, partnerships or Co's that provide investment advice or portfolio mgmt services on an ongoing basis. IAR's work for IA's, just as RR's work for BD's. An indiv can be an IA if he operates as a sole proprietorship and is registered as both an IA & the only IAR of the biz.

Front 47

Steps in the General Registration Procedures

Back 47

Any person who meets the def'n of BD, Agent, IA, or IAR must register with the state. To do so;submit an application; provide a consent to service of process,
pay filing fees, post a bond (if req'd by the Admin); &
take & pass an exam if req'd by the Admin. The exam may be written, oral, or both.

Front 48

Step 1: Submitting an Application
(1 of 3)

Back 48

All persons must complete & submit an initial app (& renewals). App may contain; form and place of biz (BD's & IA's), proposed method of doing biz, qual's & biz history (BD's and IA's must incl the qual & history of partners, D&O's & other persons with controlling influence over the org);court-issued injunctions & administrative orders; adjudications by the SEC or any Sec SRO <= 10 yrs

Front 49

Step 1: Submitting an Application
(2 of 3)

Back 49

Convictions of misdemeanors involving a security or any aspect of the securities biz;
Felony convictions, whether Securities related or not;
Financial condition & history (BD's & IA's only, but only of the firm—no credit reports on the officers); Any info to be furnished or disseminated to any client or prospective client, if the applicant is an IA

Front 50

Step 1: Submitting an Application
(3 of 3)

Back 50

In the case of an individual registrant (Agent or IAR), citizenship info. The Admin also may require that an applicant publish an announcement of the registration in one or more newspapers in the state.

Front 51

Who is an Agent to notify upon terminating employment with a BD?

Back 51

If an Agent terminates emp with a BD, both parties must notify the Admin promptly. If an Agent terminates emp with one BD to join another BD, all 3 parties must notify the Admin. In the case of an agent, the first letter, A, tells us that All the parties involved must notify the Admin.

Front 52

Step 2: Provide a Consent to Service or Process (CtSoP)

Back 52

The (CtSoP) appoints the Admin as the applicant’s attorney to receive & process noncriminal sec-related complaints against the applicant. Under the (CtSoP), all legal doct's (e.g., subpoenas or warrants) received by the Admin have the same legal effect as if they had been served personally on the applicant. Doesn't need to be renewed. If registering in multiple states, multiple CtSoP's req'd.

Front 53

Step 3: Payment of Initial & Renewal Filing Fees

Back 53

Fee req'd for all initial apps & renewal apps. If an app is withdrawn or denied, the Admin is entitled to retain a portion. The renewal date for all registrations is december 31, and there is no proration of fees.

Front 54

Effectiveness of Registration
(1 of 2)

Back 54

Unless a legal proceeding is instituted or the applicant is notified that the app is incomplete, the license of a BD, Agent, IA, or IAR becomes effective at noon, 30 days after the ≥ the date an app for licensing is filed & is complete or the date an amendment to an app is filed and is complete.

Front 55

Effectiveness of Registration
(2 of 2)

Back 55

The Admin will notify the employing firm of effectiveness, & they will tell the new registrants when they are “good to go.” Admin can do 'rush order's however.

Front 56

Revoking Registration

Back 56

Same as Reg become effective 30 days after app. However, should there be any legal proceedings in progress, the withdrawal will be held up until resolution of the issue. In any event, once withdrawal has taken place, the Admin has jurisdiction of the former registrant for a period of 1 year.

Front 57

Completion of Exam Reqt

Back 57

Although successful completion of the S66 exam may satisfy a portion of the reqt's of a particular state, it doesn't convey the right to transact biz prior to being granted a license or Reg by that state.

Front 58

Post-registration Requirements: Books and Records
(1 of 3)

Back 58

To keep Reg, BD's must keep certain admin elements in order, incl: Books & records; every BD must make and keep such accounts, blotters (records of original entry), correspondence (including emails), memo's, papers, books, & other records as the State Admin by rule prescribes.

Front 59

Post-registration Requirements: Books and Records
(2 of 3)

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Records must be kept for ≥3 yrs (the first 2 easily accessible in Principle's office) unless Admin states otherwise. Records must be current, complete, and accurate. B/D's are obligated to promptly file correcting amendments. State Admin cannot impose more stringent record keeping reqt's than those of SEC.

Front 60

Post-registration Requirements: Books and Records
(3 of 3)

Back 60

Records BD's are req'd to maintain are subject to periodic, special, or other examinations by reps of the Admin of the state where the BD’s principal office is located or of any other state in which the BD is reg as the Admin deems necessary or appropriate in the public interest. If any filed info with Admin becomes inaccurate in any materiel respect, must be corrected promptly.

Front 61

Post-registration Requirements: Website Storage

Back 61

Websites are treated as would be any other ad, thus original site design must be kept for 3 yrs & whenever revised the new copy maintained for 3yrs also. Although it is required to keep all records relating to customers, there are no requirements to keep copies of their tax returns.

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What is a Security under the USA?

Back 62

The USA applies only to those financial instruments that are secs. US Supreme Court, in the Howey decision, defined what a Sec is. Must satisfy 4 criteria (listed previously). A common enterprise means an enterprise in which the fortunes of the investor are interwoven with those of either the person offering the investment, a 3rd party, or other investors.

Front 63

List the examples of securities
(1 of 2)

Back 63

notes, stocks, treasury stocks, bonds, debentures;
evidence of indebtedness, COI or participation in a profit-sharing agreement, collateral trust certificates, pre-org certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, CD's for a security, fractional undivided interests in oil, gas, or other mineral rights, puts, calls, straddles, options, or privileges on a security,

Front 64

List the examples of securities
(2 of 2)

Back 64

CD or groups or indexes of securities, puts, calls, straddles, options, or privileges entered into on a Nat'l Sec Ex relating to foreign currency, any interest or instrument commonly known as a security COI or participation in, receipts of, guarantees of, or warrants or rights to subscribe to or purchase, any of the above.

Front 65

What following 6 are not defined as Securities?

Back 65

An Ins, endowment policy, annuity contract under which an Ins Co. promises to pay a fixed sum of money either in a lump sum or periodically (this is basically any product from a Life Ins Co. that does not use the word “Variable”) ■ Interest in a retirement plan, (e.g. IRA, 401K) ■ Collectibles ■ Commodities incl futures contracts ■ Condo's used as a home ■ Currency

Front 66

Nonsecurity Investments

Back 66

Although the aforementioned 6 can be attractive investments, they are not secs. because these items are not secs, their sale is not regulated by state securities law, thus if fraud is committed, agent has not committed a violation of any state securities law. He has violated the antifraud provisions of another act.

Front 67

What is an Issuer Transaction?

Back 67

One in which the proceeds of the sale go to the issuer. All newly issued securities are issuer transactions. In other words, when a company raises money by selling (issuing) secs to Invs, the proceeds from the sale go to the Co. itself.

Front 68

What is an Nonissuer Transaction?

Back 68

One in which the proceeds of the sales do not go, directly or indirectly, to the issuer. E.g. everyday stock trading on the exchanges aka - secondary trading

Front 69

Distinction between trading of shares in a mutual fund Vs. a Closed end fund

Back 69

When Invs purchase shares of an OE Inv Co. (MF), that is always an issuer transaction because the fund is continuously offering new shares. However, when the Inv Co. sells shares out of its portfolio, that is a nonissuer transaction in the secondary markets.

Front 70

Registration of Securities under the USA

Back 70

Under the USA, it is unlawful for any person to offer or sell an unregistered Sec in a state unless (1) it is registered under the Act, (2) the Sec or transaction is exempted from registration under the Act, or (3) it is a federal covered security. Else, it cannot be lawfully sold in the state.

Front 71

Federal Covered Security (FCS) as per the 'Nat'l Sec Markets Improvements Act' of 1996

Back 71

FCS is a Sec exempt from Reg on the state level. State sec Reg req's were preempted with respect to FCS. However, states may require 'Notice Filings', consisting of filing fees and copies of documents filed with the SEC, primarily in the case of RI Co's.

Front 72

Categories of Federal Covered Securities
(1 of 2)

Back 72

Major federal categories of covered secs; (which therefore cannot be regulated by state Sec Admins, incl: A) Secs issued by an OE or CE Inv Co., UIT, or Face Amount Certificate Co, Reg under the Inv Co. Act of 1940 B) Secs offered under Rule 506 of Reg D under the Sec Act of 1933 (private placements) cont'd

Front 73

Categories of Federal Covered Securities
(2 of 2)

Back 73

C) Secs offered by a US Fed Govt issuer or a Muni issuer, (unless the Muni issuer is in the state in which the Secs are being offered; and D) Secs listed on the NYSE, ASX, NASDAQ, etc. Also, any Sec equal in seniority (rights or warrants) or senior to these Secs (bonds and preferred stock) is also considered Fed covered.

Front 74

A Note on SEC Registration

Back 74

Registering a Sec with the SEC does not automatically make it federal covered. Yes, it's true of Inv Co's & of stocks reg with the SEC that trade on the OTC Bulletin Board or the Pink Sheets & they are not federal covered.

Front 75

Methods of State Registration of Securities

Back 75

USA provides 2 ways for a securities issuers to register their securities in a state; + a special method for certain federal covered securities; Notice Filing, Coordination, & Qualification.

Front 76

Description of Notice Filings
(1 of 2)

Back 76

Any person that sells a Fed covered Sec must be licensed as a BD or Agent (unless otherwise exempted) & must also comply with the anti-fraud provisions of state laws. The USA gives the Admin the authority to require Notice Filings with respect to Fed covered secs (generally Inv Co's reg with the SEC under the ICA of 1940). Largely a tool to collect filing fees.

Front 77

Description of Notice Filings
(2 of 2)

Back 77

Under the Notice Filing procedure, state Admins may req the issuer of certain Fed covered secs to file the following docs as a condition for sale of their secs in the state: 1) Docs filed as amendments to the initial Fed Reg statement; 2) A report as to the value of such secs offered in the state; 3) Consent to service of process.

Front 78

Registration by Coordination (RbC)

Back 78

Most common form (typically for OTC BB or the Pink Sheets). A Sec may be RbC if a reg statement has been filed under the SE of '33 in connection with the same offering. Following docts must be supplied;

Front 79

Registration by Coordination (RbC) (2 of 2)

Back 79

1) Copies of the latest form of prospectus filed under the SA of 1933, if the Admin reqs it. 2)
Copy of Art of Incorp & Bylaws, a copy of the underwriting agreement, or a specimen copy of the sec.
3) If the Admin requests, copies of any other info filed by the issuer under the SA of 1933. 4) Each amendment to the Fed prospectus promptly after it is filed with the SEC.

Front 80

Registration by Qualification (RbQ)

Back 80

RbQ reqs a registrant to supply any info req'd by the Admin. To RbQ, an issuer must supply a consent to service of process & a list of detailed info (p 77 of text)

Front 81

Exemptions from Registration - Exempt Securities and Exempt Transactions
(1 of 2)

Back 81

A security, a transaction, or both, can be exempt. Secs that are nonexempt must register unless sold in exempt transactions. Fed covered secs do not register with the Admin but may, esp in the case of Inv Co's, have to notice file with the Admin. An exemption for a trans, however, must be established with each trans.

Front 82

Exemptions from Registration - Exempt Securities and Exempt Transactions
(2 of 2)

Back 82

An exempt trans is exempt from the Reg control of the state Admin because of the manner in which a sale is made or because of the person to whom the sale is made. Important statement made in USA: It's unlawful for any person to offer or sell any security in this state unless: 1) it is reg under the act; 2) the sec or trans is exempted under the act; or 3)it's a fed covered sec.

Front 83

Examples of Exempt Securities
(1 of 2)

Back 83

1) US, Canadian & Muni Secs; 2) Foreign Govt Secs; 3) Depository institutions ( a) USA divides into categories; Any security issued or guaranteed by a) Any bank governed by US or State law; b) S&L or building & loan or c) federal credit union or any credit union, industrial loan association, or similar association

Front 84

Examples of Exempt Securities
(2 of 2)

Back 84

4) Ins Co. Secs - stocks or bonds issued (not variable policies); 5) Public Utility Secs; 6) Fed Covered Sec e.g. rights, warrants, preferred stock 7) Non-profits; 8) Coop's 9) Employee benefit plans 10) Certain money market instruments. CP & BA 2 most common.

Front 85

The distinction between exemptions and exceptions

Back 85

An exempt sec is not exempt from the anti-fraud provisions of the USA compared to an exceptional sec. E.g. Typical LI policy is not a security thus not covered under USA while secs issued by Ins Co's are exempt from filing ad & sales lit they're not exempt from anti-fraud provisions of USA.

Front 86

Registration of Promissory Notes

Back 86

A PN (a type of CP), draft, bill of exchange, or BA that matures in <9 months, is issued in denominations of ≥ $50K, & receives one of the 3 highest ratings by a NRSRO is exempt from Reg reqts. Only case where a security’s rating is part of the registration or exemption under the USA.

Front 87

Examples of Exempt Transactions
(1 of 4)

Back 87

1) Isolated Nonissuer Transactions. Incl secondary (nonissuer) trans, whether through BD or not, that occur infrequently (very few trans per agent p.a. - the exact # varies by state). Typically private party sales; 2) Unsolicited Brokerage Trans. Initiated by the client, not the agent; 3) Underwriter Transactions. Incl trans between issuer and uw;

Front 88

Examples of Exempt Transactions (2 of 4)

Back 88

4) Bankruptcy, Guardian, or Conservator Transactions - custodian under UGMA or UTMA not incl; 5) Institutional Investor transactions - primarily financial institutions; 6) Limited Offering Transactions - Private Placement directed at <10 offerrees (other than II's) in past 12 months - unlike Fed law, USA restricts # of offers

Front 89

Examples of Exempt Transactions (3 of 4)

Back 89

7) Preorganization certificates - exempt if no commission paid, # of subscribers ≤10 & no pmt made until effective registration > simply postpones reg ≠ excl; 8)Transactions with Existing Security Holders - is exempt as long as no comm or other pmt paid directly or indirectly for soliciting that sec holder.

Front 90

Examples of Exempt Transactions (4 of 4)

Back 90

9) Nonissuer Transactions by Pledgees (i.e. receiver of sec as collateral for a loan) - if pledgee sells - exempt; Next 3 unlikely to be tested 10) Unit Secured transactions 11) Control transactions (i.e. M&A which the issuer and the other person or its parent or subsidiary are parties 12) Rescission offers

Front 91

Administrator’s Powers Over Exemptions

Back 91

Admin has authority, by rule or order, to exempt a sec, a trans, or an offer from the USA’s registration and filing reqt's. The Admin may deny or revoke the reg exemption of; any sec issued by any person organized and operated on a non-profit basis; or any investment contract issued in connection with an employees’ retirement plan.

Front 92

State Securities Registration Procedures >> Filing Formalities (1 of 3)

Back 92

1) Registrant needs to file Reg statement with Admin. Need to disclose; a) Amount of secs to be issued in the state; b) States in which the security is to be offered, but not the amounts offered in those other states; c) Any adverse order or judgment concerning the offering by regulatory authorities, court, or the SEC. Registrant typically issuer but can insider making large block-sale

Front 93

State Securities Registration Procedures >> Filing Formalities (2 of 3)

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2) Filing Fee - typically a % of total offering price. 3) Ongoing Reports - admin may require on-going reporting to keep info in filing current; 4) Escrow - Admin may req Sec to be placed in escrow if the sec was issued; ≤ 3 yrs, at a price substantially different than the POP, or to any person for a consideration other than cash.

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State Securities Registration Procedures >> Filing Formalities (3 of 3)

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5) Special Subscription Form - Admin may req of subscription using special form (to be stored for 3 yrs). 6) Withdrawal of Registration Statement - may not be withdrawn until 1 yr > effective date - only with approval from Admin.

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Overview of Fraudulent and Prohibited Practices

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Severity of punishments - fraud can = jail, prohibited acts/Unethical acts = fines. Under USA, there are no exceptions to the anti-fraud provisions. Fraudulent acts incl: 1) Misleading or Untrue Statements 2) Failure to State Material Facts 3) Using Inside Info

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Fraudulent Acts >> Misleading or Untrue Statements
(1 of 3)

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E.g's of material facts that constitute fraud if misstated by agents knowingly and willfully; 1) Inaccurate market quotes 2) Misstatements of an issuer’s earnings or projected earnings or dividends 3) Inaccurate statements regarding the amount of commissions, markup, or markdown

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Fraudulent Acts >> Misleading or Untrue Statements
(2 of 3)

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4) Stating/implying that the agent has inside info when not the case 5) Telling a customer that a Sec will be listed on an exchange without concrete info concerning its listing statue 6) Informing a client that the reg of a Sec with the SEC implies 'approval' 7) Misrepresenting the status of customer accounts

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Fraudulent Acts >> Misleading or Untrue Statements
(3 of 3)

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8) Promising a customer services without any intent to perform them or without being properly qualified to perform them 9) Representing to customers that the Admin approves of the BD's or Agent’s abilities

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Fraudulent Acts >> Failure to State Material Facts

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Not ALL info must be disclosed, only material info needed to make an informed investment decision. Also, Agent may not state facts that individually are true but as a result of deliberately omitting other facts, render the recommendation misleading.

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Fraudulent Acts >> Using Inside Information

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Violation occurs when trade actually processed rather than merely sharing material, non-public info. Inside info can't be traded on until it's made public. If revealed to, disclose to compliance officer/supervisor.

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Dishonest and Unethical Business Practices of BD's and Agents
(1 of )

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1) Delivery Delays 2) Churning 3) Unsuitable Recomm 4) Unauthorized Transactions 5) Exercising Discretion without authority 7) Margin trading without approp Doc's (may be obtained after trade) 8) Commingling of Client & Firm Assets 9) Improper Hypothecation

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Dishonest and Unethical Business Practices of BD's and Agents
(2 of )

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10) Unreasonable Commissions or Mark-Ups (remembering that when acting in a dealer capacity/selling from inventory, BD's sell at current market price, thus potential for big gain/loss) 11) Timely Prospectus Delivery (due NLT trade confirm) 12) Unreasonable Servicing Fees 13) Dishonoring Quotes

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Dishonest and Unethical Business Practices of BD's and Agents
(3 of )

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14) Market Manipulation (e.g. matched orders or wash trades) 15) Guaranteeing against loss - (Sec pros may not guarantee a certain performance, nor may they guarantee against a loss by providing funds to the account). 16) Disseminating False trading Info

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Dishonest and Unethical Business Practices of BD's and Agents
(4 of )

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17) Deceptive Ads (any nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in any form (incl verbal) by words, pictures, graphs, or otherwise designed to supplement, detract from, supersede, or defeat the purpose or effect of any prospectus or disclosure - Also - no highlighting of prospectuses)

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Dishonest and Unethical Business Practices of BD's and Agents
(4 of )

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18) Failing to disclose conflicts of interest 19) Withholding Shares of Public Offering (must be allocated equitably) 20) Responding to Complaints (only written complaints are recognized) 21) Front running

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Dishonest and Unethical Business Practices of BD's and Agents
(5 of )

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22) Spreading Rumors 23) Backdating records 24) Waivers of Compliance to USA 25) Inv Co. Sales in any of following cases >> a) Sales Load Comm (claiming no load when it is) b) Failure to disclose Breakpoints 26) Lending or Borrowing from Customers

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Dishonest and Unethical Business Practices of Agents Only

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1) Selling away (trading in Secs not part of BD's offerings without explicit written approval) 2) Ficticious Accounts (to boost account value) 3) Sharing in Accounts (without written approval from BD - unlike IA & IAR's who aren't ever allowed).4) Splitting Commissions with unreg agent

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Jurisdiction & Powers of the State Admin

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The USA describes those activities considered to have taken place in the state as any offer to buy or sell a security, as well as any acceptance of the offer, if the offer: 1) originated in the Admin's state; 2) Is directed to the Admins state; or 3) Is accepted in the Admin's state. N.B; may be >1 Admin if Sec trans across State lines

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Exclusions from Def'n of Sale/Sell and Offer/Offer to Sell

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Don't incl any: 1) bona fide pledge or loan; 2) gift of nonassessable stock; 3) stock dividend 4) Class vote by stockholders; 5) Act incident to a judicially approved reorganization

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Legal Jurisdiction of the Admin >> Publishing & Broadcasting Exceptions to Jurisdiction

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Admin doesn't have jurisdiction if; 1) a TV or radio broadcast that originated outside of the state; 2) a bona fide newspaper or periodical published outside of the state; or 3) a newspaper or periodical published inside the state but with more than two-thirds (66%) of its circulation outside the state in the last year.

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Actions to be Taken by the Admin

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Admin has 4 broad powers within jurisdiction; 1) make, amend, or rescind rules and orders; 2) conduct investigations and issue subpoenas; 3) issue cease and desist orders and seek injunctions; and 4) deny, suspend, cancel, or revoke registrations and licenses.

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Standard of Care Expected of Administrator's

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Admins & emp's have the obligation not to misuse the office for personal gain. Admins are prohibited from using for their own benefit any info derived from their official duties that has not been made public.

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1) Make, Amend, or Rescind Rules and Orders

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Admin may issue interpretive letters. USA requires that all rules and orders be published. A USA rule applies to everyone, an 'Order' applies to a specific instance. A Person may challenge ≤ 60 days of order issuance.

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2) Conduct Investigations & Issue Subpoenas

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Investigations may be public or private & may occur in or outside of the Admins state. In conducting investigation, Admin has power to; 1) Require statements in writing, under oath, as to all matters relating to the issue under investigation; 2) Publish & make public the facts and circumstances concerning the issue to be investigated; 3) Subpoena witnesses & compel their attendance & testimony; 4) Take evidence & require the production docs deemed relevant.

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What is Contumacy?

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If someone refuses to cooperate with investigation. Admin may apply to court for help. The court issues an order requiring the subject to appear before the Admin. If still no show - then contempt of court.

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3) Issue Cease and Desist Orders (C&DO)

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If an Admin determines that a person is about to engage in a violation of the USA or her rules, the Admin may issue a C&DO without a hearing. Admin doesn't have legal standing to compel compliance >> must apply to court. 'Enjoined' is the term for someone who has been injuncted.

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4) Deny, Suspend, Cancel or Revoke (DSC or R) Registrations >> Broker/Dealers, Advisers, and Their Rep's (1 of 3)

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Must be in public interest & one of the following; B/D, partner, IA, IAR D/O etc must; 1) have filed an incomplete, false, or misleading Reg app; 2) willfully violated the USA; 3) convicted of a Sec related misdemeanor ≤ 10 yrs; 4) convicted of any felony ≤10 yrs; 5) enjoined from Sec biz; 6) subject to another Admin's denial, revocation, or suspension;

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4) Deny, Suspend, Cancel or Revoke (DSC or R) Registrations >> Broker/Dealers, Advisers, and Their Rep's (2 of 3)

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7) engaged in dishonest or unethical sec practices; 8) is insolvent; 9) subject of an adjudication that the BD willfully violated the Sec Act of 1933, the SE Act of 1934, IA Act of 1940, the ICo. Act of 1940, or the Commodities Exchange Act; 10) failed to reasonably supervise his agents or employees 11) failed to pay application filing fees 12) N/Q on the basis of training, lack of experience, & knowledge of the sec biz.

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4) Deny, Suspend, Cancel or Revoke (DSC or R) Registrations >> Broker/Dealers, Advisers, and Their Rep's (3 of 3)

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Admin must notify the registrant of any reason to DSC or R registration &, if asked in writing, must provide a hearing ≤15 days.

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4) Deny, Cancel, Suspend or Revoke (DCS or R) Registration >> Lack of Qualification

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Admin may not base a denial of a person’s reg solely on his lack of experience. Admin may consider that registration as a BD doesn't necessarily qualify one for a license as an IA & may restrict that applicant’s reg as a BD conditional upon not functioning as an IA.

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4) Deny, Cancel, Suspend or Revoke (DCS or R) Registration >> Summary Powers

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Admin may order, without the hearing process, a postponement or suspension of a reg pending final determination of any proceeding based upon actions described above. If applicant wishes a hearing, written request must be made &, ≤15 days will be given. If no hearing is requested & none is ordered by the Admin, the order will remain in effect until it is modified or vacated by the Admin.

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4) Deny, Cancel, Suspend or Revoke (DCS or R) Registration >> Securities Issues
(1 of 2)

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Admin has the power under the USA to DSR or C the reg of a sec. However, may only invoke if in public interest &; 1) applicant files a false or incomplete statement; 2) the applicant is in violation of the USA; 3) Applicant is engaged in a method of biz that is illegal; 4) Applicant has prepared a fraudulent reg;

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4) Deny, Cancel, Suspend or Revoke (DCS or R) Registration >> Securities Issues
(2 of 2)

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5) the UW charges unreasonable fees; 6) the issue is subject to a court injunction; 7) the registrant is subject to an admin stop order of any other state. Or, if applicant hasn't paid filing fee. If Admin denies, must provide hearing ≤15 days.

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Non-Punitive Terminations of Registration

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1) Withdrawal - effective 30 days after the Admin receives it, (provided no revocation or suspension proceedings in place) - once withdrawn, Admin retains jurisdiction for 1yr; 2) Cancellation - If Admin finds that an applicant no longer exists or has ceased to transact business, the Admin may cancel the reg.

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Overview of the Penalties for Violations of the USA

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Both civil liabilities and criminal penalties. USA provides for recovery resulting from the fraudulent sale of a security or investment advice. Often, when the IAR is found liable, D/O's of the BD or IA may also be liable for neglect.

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Civil Penalties for Violations of the USA
(1 of 4)

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Purchaser may sue for recovery if: a) sale was made of an unreg nonexempt sec in violation of the reg provisions; b) the sec pro omits or makes an untrue statement of material fact during a sales pres; c) Agent was named along with BD for a civil infraction; d) the Secs were sold by an agent who should have been but was not reg under the act; e) The Secs were sold in violation of a rule or order of the Admin.

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Civil Penalties for Violations of the USA
(2 of 4)

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3 yr Statute of Limitations (from date of sale for IA or 2yr > discovery); From improper sale of Secs - Buyer entitled to several remedies if BD/Agent found liable by Admin incl; a) Original purchase price of Sec, b) interest at a rate determined by Admin + all reasonable attorney’s fees and court costs - any income received while the secs were held.

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Civil Penalties for Violations of the USA
(3 of 4)

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Rights of Recovery from Improper Investment Advice; client may recover cost of the advice; + loss as a result of the advice; + interest at a rate determined by the Admin; + any reasonable attorney’s fees.

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Civil Penalties for Violations of the USA
(4 of 4)

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If sale of Sec made in violation of USA, seller may offer to buy back Sec's (must incl purchase price + interest) known as 'right of rescission'. Buyer has ≤ 30 days from receiving 'Letter of Rescission' to respond.
Claims against the Surety Bond - to meet the reqts of the USA, it must provide that any customer who can prove a violation (& does so within the SOL's) is entitled to collect against the bond.

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Criminal Penalties for Violations of the USA - Penalties & Def'n of Fraud
(1 of 2)

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Persons found guilty of a fraudulent Secs trans are subject to criminal penalties (& civil). May be fined, sentenced to prison or both. To be convicted of fraud, the violation must be willful, & the registrant must know that the activity is fraudulent. Under USA, fraud is not limited to common-law deceit.

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Criminal Penalties for Violations of the USA - Statute of Limitations & Breadth of Responsibility
(2 of 2)

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For criminal offenses, SOL from date of offense is 5 yrs. Under USA, the actual seller of the secs or advice is'nt the only person liable for the violation of the act. Every person who directly or indirectly controls the person who sold the securities or the advice, or is a material aid to the trans, is also liable to the same extent as the person who conducted the trans unless that supervisor couldn't have reasonably known about the improper activity.

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Judicial Review of Orders (Appeals Process)

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Any person affected by an order of the Admin may obtain a review of the order ≤ 60 days. Filing appeal, doesn't suspend penalty. The order will go into effect as issued unless the court rules otherwise.

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Sales of Securities at Financial Institutions - Model Rules for Sales of Secs @ Financial Inst - adopted Oct 6, 1998. (1 of 3)

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No BD shall conduct BD services on the premises of a Financial Inst where retail deposits are taken unless the BD complies initially and continuously with the following reqts; 1) Setting - physically distinct from retail deposit area

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Sales of Securities at Financial Institutions - Model Rules for Sales of Secs @ Financial Inst - adopted Oct 6, 1998. (2 of 3)

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2) Customer Disclosure & Written Ack - a) BD must disclose orally & in writing not insured by FDIC; b) not deposits or other obligations of the Inst& aren't guaranteed by the Institution c) subject to investment risks,incl possible loss of the principal, &; make reasonable efforts to obtain from each customer, during the acc opening process, a written acknowledgment of the disclosures

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Sales of Securities at Financial Institutions - Model Rules for Sales of Secs @ Financial Inst - adopted Oct 6, 1998. (3 of 3)

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3) Comm with public - following disclosures may be made to public in Ads & sales lit; a) not FDIC Insured, b) no bank Guarantee c) may Lose Value. Not req'd in radio ads ≤ 30 secs or small/short public ads.