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45 Cards in this Set
- Front
- Back
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Uniform Securities Act (USA)
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Model law - not actual law of any state
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State Administrator
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Uses rules, orders, and laws to enforce the USA
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NASAA - North American Securities Administrators Association
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Responsible for updating the USA through various NASAA Model Rules and Statements of Policy
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Broker-dealer
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Any person in the business of effecting securities transactions for the accounts of others or for its owna ccount (agency vs principal capacity)
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Agent of broker-dealer
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Any individual who represents a broker-dealer in effecting securities transactions is always an agent and subject to registration
Included: all officers, partners, or directors of a B/D who are involved in the sale of securities Excluded: those whose jobs are clerical (file paperwork or answer phones) |
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Issuer
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Any person that issues or proposes to issue any security for the purpose of raising capital (a sale by an issuer is an issuer transaction)
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Agent of issuer
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An individual who represents an issuer in the sale of securities is considered an agent and subject to registration if:
The securities are not exempt and it is not an exempt transaction Compensation is received for effecting the sale |
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Investment Adviser
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(IA) Any person who meets the ABC test:
Advice - provides advice about securities, including asset allocation Business - as a regular business Compensation - receives compensation for the advice |
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Investment Adviser Representative
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Any individual who:
Provides or determines investment advice Manages accounts Solicits advisory services** Manages those who perform these functions (but not managers of accounting, human resources, etc.) **Solicitors not employed by a securities firm may also be defined as IARs and required to register in most states |
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Definition of a security
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-Investment of money
-In a common enterprise -With expectation of profits -Solely from efforts of others |
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List investments/instruments that are/are not securities
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Yes:
Stocks and bonds Options Variable contracts Keough plan participation Limited partnerships Multi-level distributorships Pre-organization certificates Whiskey warehouse receipts No: Life insurance and endowments Fixed annuities IRAs and Keough plans "Four Cs" -Commodities (futures contracts) -Collectibles -Currencies -Condominiums as a place of business or residence |
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Methods of Securities Registration
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Registration by filing
Registration by coordination Registration by qualification |
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Registration by filing (notification)
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For larger issuers conducting follow-on interstate offerings:
Issuers must strict financial requirements/conditions such as: -Registration statement previously filed under Securities Act of 1933 -In business at least 36 calendar months preceding registration -No default on preferred dividend or bond payments in last year -Total underwtiting commissions <10% -Offering price of at least $5/share Becomes effective at the same time as federal registration Rarely used since msot issuers who qualify actually issue Federal Covered Securities, which are exempt from state registration |
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Registration by coordination
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State registration is coordinated with the federal registration under the '33 Act (though it doesn't have to be filed at the same time)
-Copies of SEC documents must be filed with the Administrator, including three copies of the latest prospectus -Any amendments must be properly forwarded -Coordination requires more documentation than notification/notice filing Becomes effective at the same time as federal registration |
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Registration by qualification
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For issuers conducting intrastate offerings (one state only)
Requirements are determined by the individual state -No federal registration is required -May be used in any state, for any type of security -Extensive disclosures required by Administrator, with correcting amendments sent for inaccuracies Becomes effective when determined by Administrator |
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Administrator can deny, suspend, or revoke a registration if:
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It is in the public interest and:
-False or misleading information has been filed on any report or application -Any officer of the issuer or underwriter has been convicted of a crime involving securities -The issuer's enterprise is illegal -The proper fee has not been paid -Terms of the offering are unfair -Spread earned by syndicate is unreasonable |
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Exempt issuers
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Exempt from issuing:
Government entities (federal, state, local, foreign) Banks, savings and loans, trust companies, credit unions Insurance companies Non-profit organizations (social, athletic, professional, churches) Common carriers Companies regulated by Public Utility Holding Company Act of 1935 |
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Exempt securities
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Short-term debt with:
-9-month max maturity -Rated in one of the three highest categories by a NRSRO* -Denominations of $50,000 or more Federal covered securities -Securities listed on NYSE or Nasdaq (blue chips) -Securities issued pursuant to Rule 506 (private placements exceeding $5 million) -Securities issued by open-end (mutual) funds, closed-end funds, and unit investment trusts *Nationally Recognized Statistics Ratings Organization |
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Notice filing
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Issuers of private placements under Rule 506 and investment companies are exempt from state registration, but must submit to administrator:
-Consent to service of process -Filing fee -Copies of documents filed with Administrator for federal registration Not a method of registration that may be taken away by Administrator |
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Federal covered securities
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If a state administrator can:
Cancel registration of a federal covered security? Prohibit its sale in the state? Investigate fraud in the sale of the security in the state? Is notice filing required: -If issued by an investment company? -If issued by a listed company (NYSE or Nasdaq)? -For private placements under Rule 506 of Reg. D? |
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Exempt transactions
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Non-issuer transactions (secondary market trade)
-Isolated, non-recurring, or unsolicited trades -Trades in securities subject to '34 Act (reporting companies) -Trades in securities listed on Toronto Stock Exchange Private placements -Limited to no more than 10 non-institutional investors -Purchases must be made for investment purposes only -No commission paid for soliciting non-institutional investors Institutional transactions -Those with banks, B/Ds or other financial institutions; insurance, trust, or investment companies; between issuer and underwriter Fiduciary transactions -Those involving a trustee, administrator, executor, or sheriff Transactions in bonds secured by real estate mortgages (if sold as a unit) |
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Is a firm a broker-dealer?
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State registration required: yes, always
Not broker-dealers: Agents Issuers Banks, savings institutions, trust co's Broker-dealer with no place of business in a state that only transacts business there with: -Financial institutions -Existing individual clients who are not residents of the state (e.g. students) |
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Agent registration exemptions
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Agents can engage in securities transactions in a state in which they are not registered if:
1. Existing customer is temporarily visiting another state 2. Existing customer moves to a new state and: -Agent's registration is pending in new state -Agent is registered in at least one other state -Agent is registered with a national securities association (e.g. FINRA) -Agent's B/D is registered in the new state |
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Limited registration for Canadian broker-dealers and agents
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Allows Canadian firms to conduct business with existing Canadian clients who are temporarily in a US state, provided B/D does not have an office in the state
NAFTA did not expand limited B/D registration to include Mexico |
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Is firm an investment adviser?
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Yes:
Is registration required? Yes, unless exempt: Exemptions: An adviser with no place of business in a state and: -All clients there are institutions, or -Has no more than 5 non-institutional clients in the state within the last 12 months Not investment advisers IARs Banks, savings institutions, trust companies Lawyers, accountants, teachers, engineers (LATE) Broker-dealers and agents Publishers of periodicals (e.g. newspapers) Federal Covered Advisers (under NSMIA) -Subject to registration with the SEC -Subject to notice filing with states -Main types: --Advisers to registered investment companies --Those with $100 million or more under management (old rule: $30 million) --Providers of advisory service in 15 or more states (old rule: 30 states) |
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Who must IAR register?
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Keep in mind that this relates to places of business of the particular IAR, not the federal covered adviser
State with place of business/IAR of State registered adviser = Yes (regardless of # of clients) State with place of business/IAR of Federal covered adviser = Yes (regardless of # of clients) State with over 5 non-institutional clients/IAR of state registered adviser = Yes (even if he has no business in the state) State with over 5 non-institutional clients/IAR of federal covered adviser = No |
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What are registration requirements for BD/agents/IA/IAR
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Note registration form and where it's filed
BD: Form BD, Central Registration Depository (CRD) Agents: Form U4, Central Registration Depository Investment Adviseres: Form ADV Parts 1 and 2, Investment Adviser Registration Depository (IARD) IAR: Form U4, IARD |
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What is registration procedure for BD/agents/IA/IAR
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Application:
-Effective on 30th day after filing -Expires annually on December 31st -Updated annually at time of renewal -Amendments for material changes are filed promptly (usually within 30 days) Consent to Service of Process: -Filed once, not renewed, irreversible -Grants the administrator power of attorney to receive/process non-criminal legal complaints Filing fee: -Paid annually -For successor firms (firm ownership changes): --New application must be filed --No additional filing fee for remainder of year Bonding requirement: Posted to cover cost of possible legal action -May be required for B/Ds, agents, and IAs who have custody of/discretionary authority over client funds/securities -Not required if BD's net capital or IA's net worth exceeds minimum set by admin -Must be maintained as long as BD/IA is in business + 3 years -In lieu of bond, cash or securities may be deposited (amt and type determined by admin), no other personal property |
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Evidence of custody of funds
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Adviser indirectly or directly holding funds, including:
-full discretion over account held at separate BD -check-writing privileges in a client's account Unintentional situations: -Inadvertently obtaining client funds/securities, not returning them within 3 business days -failing to forward 3rd party checks within 24 hours |
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If investment adviser has custody of client funds/securities, it must:
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Notify administrator in writing
Appoint a qualified custodian (bank, BD) to hold client funds/securities in a separate account Notify clients of name of custodian/how assets are held Ensure that clients are sent quarterly statements by either IA or custodian -If sent by IA, must have unannounced audit by independent CPA -CPA must report audit results to admin on Form ADV-E within 30 days |
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Minimum financial requirements for BDs/IAs
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BD
Determines requirement: SEC (no state) Min requirement: depends on activity When to report deficiency: within 1 business day IA Determines requirement: State administrator where IA's home office is located Min requirement: $35k for custody, $10k for discretion only Report deficiency: within 1 business day If deficient, firms must: -submit statement of financial condition by next business day -obtain surety bond to make up deficiency |
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Record-keeping requirements for BDs/IAs
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Maintain books, records, correspondence as required by admin for:
3 years for BDs - easily accessible for 1st 2 years 5 years for IAs - appropriate office for 1st 2 years File with admin any advertising, sales, etc. communication disseminated to existing/prospective clients (unless deals with exempt securities) File with admin any required financial reports, with amendments for material changes filed promptly (within 30 days) Provide full/fair disclosure to clients Federal covered adviser records also subject to inspection by administrator Records can be in: physical, microfilm, microfiche, electronically Access must be limited to authorized personnel, SEC, and examine |
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What SEC rule dealt with definition of IA
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SEC Release IA 1092
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What is the expanded definition of an IA?
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ADVICE, reports, or analyses regarding securities, includes:
-General information about advantages/disadvantages of investing in securities -Recommending asset allocation services -Evaluating investment managers BUSINESS standard: -IA holds itself out as an investment adviser through advertising, written form, word of mouth, etc. -Provides advice on other than rare occasions -Provides recommendations regularly, may include investment supervisory service (continuous advice tailored to specific client needs) COMPENSATION - any economic benefit for providing investment advice -Fees, or fee/commission combination (wrap fees), rebates, soft dollars |
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Exclusions from IA definition
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State:
1. Banks, savings institutions, companies (not bank holding co) 2. Professionals giving incidental advice (LATE) 3. BDs and agents 4. Publishers of newspapers/periodicals (no timed/tailored advice) 5. IAR 6. Fed covered adviser 7. Any other person designated by admin Federal 1. Banks/bank holding companies (not IA subsidiaries of banks) 2. Professionals giving incidental advice (LATE) 3. BDs and representatives 4. Publishers of regular/general circulation publications 5. US government securities advisers 6. Any other person designated by SEC |
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Federal covered advisers (rules prior to 2012, after Dodd-Frank
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Assets, before: Advisers managing over $30m in assets
Assets, after: Advisers managing over $100m in assets States covered, before: Advisers providing advice in 30 or more states States covered, after: Advisers providing advice in 15 or more states Employee benefit plan size, before: Pensions consultants to plans with at least $100m in assets Employee benefit plan size, after: Pension consultants to plans with at least $200m in assets FCA standards that are the same -Advisers to registered investment companies regardless of amt of AUM -Advisers not regulated as IAs in state in which they have principal offices -Newly-formed advisers who believe they will be eligible for federal registration within 120 days |
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Exemptions from IA registration
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State:
Adviser has no place of business in state and its only clients are specific institutional investors (RICs) or no more than 5 non-institutional clients in 12-month period who are residence of state Federal: Local exemption: all clients are residents of state where adviser's office is located, and gives no advice on exchange-listed securities Insurance: All clients are insurance companies De minimis: Fewer than 15 clients in last 12 months, does not registered investment companies Still subject to antifraud provisions of '40 Act |
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IA registration requirements
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To register with SEC, adviser must file forms ADV parts 1 and 2 through IARD
Information available through Investment Adviser Public Disclosure website ADV Part 1, provides specific disclosure information for SEC/state use, including: IA name, # of employees, nature of business Name, address, education, 10-year business history of each partner, officer, or director How firm maintains custody of client assets If principal business consists of investment supervisory service Number and size of discretionary and non-discretionary accounts ADV part 2 provides information for client purposes and may be useful for firm's brochure: All actual and potential conflicts of interest and affiliations Services provided and related fees Soft dollar arrangements Types of securities on which advice is given and types of analyses used Education and business background of those rendering investment advice IA's balance sheet if it has custody of client funds or securities or collects prepaid fees of more than $1,200, six months or more in advance -At state level, prepaid fee trigger is $500 |
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Brochure Rule
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IA's disclosure document must be delivered to clients no later than time a contract is signed (must be delivered at least annually)
Exclusions: Contracts with registered investment companies Contracts for impersonal advisory services costing less than $500 per year Delivery is required 48 hours prior to signing a contract or at the time the contract is signed provided the client is allowed to cancel within 5 business days without penalty Brochure must contain: -Adviser's name/address/website -Details of firm's background, business principles, AUM, financial information -Fees, compensation, types of clients -Soft dollar arrangements -Adviser's code of ethics -Statement that registration is not indication of skills/expertise -Disciplinary information, such as civil/criminal actions that resulted in conviction -If firm has been subject to bankruptcy in last 10 years |
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Form ADV
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Amendments to Form ADV
Material changes are filed promptly (within 30 days) -Change in status of general partner, manner of custody, structure of fees Routine changes require amendment within 90 days of fiscal year-end -Change in number of employees, change in number of discretionary accounts Required annual renewal (90 days after fiscal year-end) -File annual updating amendment -Determines eligibility for continued SEC registration Form ADV-W For advisers filing for full (when no longer operating as IA)/partial withdrawal of registration (when no longer eligible to be FCA, withdrawing from a state) Form ADV-E Filed by independent public accountant to report result of an audit of adviser who has custody of client funds or securities (must be filed w/in 30 days of audit) Form ADV-NR Filed by advisers with general partners, managing agents who are non-US residents -Appoints Secretary of SEC (or state official) as the adviser's agent for receipt of legal papers |
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Wrap Fee Programs
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Advisory, custodial fee, transaction cost wrapped into one annual fee
SEC requires delivery of special brochure which details: -amount of wrap fee, services provided -how portfolio managers are chosen -that the adviser may have incentive to recommend program over other things -that costs may be higher than if services were paid separately Suitability considerations -Are services appropriate given client's needs? -Are fees reasonable given client's trading history? (not suitable for clients who trade infrequently) -If sponsored by BD, firm has to register as investment adviser |
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Investment advisory contracts
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Not required to be in writing
SEC rules: Assignment may only be made with client consent -For IA corporation, another entity acquiring majority of firm's assets would result in assignment -For IA partnership, majority change in partners would result in assignmnet (minority only requires client notification) -Change in IAR does not constitute assignment Exculpatory provisions/mandatory arbitration clauses not permitted Performance-based fees generally prohibited (certain exceptions apply) |
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Who are performance-based fees allowed for?
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Registered investment companies (e.g. mutual funds)
Qualified clients who have at least - under management with advisor or more than - in net worth Clients that are not US residents Knowledgeable officials associated with IA (exec officer, director, trustee, general partner, or nonclerical employee who has participated in the investment activities of adviser for at least 12 months) 3(c)(7) hedge funds, which consist solely of qualified purchasers, such as individuals who own at least $5m of investments or corporations who own and invest $25m on a discretionary basis |
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Particular records maintained by IA
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Communications sent to 10 or more persons (advertising)
All client/IA/IAR transactions (within 10 days of quarter end) Record of all discretionary accounts/powers of attorney Copy of the investment adviser's Code of Ethics All written agreements Ledgers/trade blotters Order memorandums Confirmations Complaints |
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Trade allocations
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Advisers often bunch orders (aggregate client orders) to obtain volume discounts on execution costs with a BD
-Shares received must be allocated fairly Must treat all clients fairly/equitably Adviser responsible for adopting program/formula for allocating securities among different clients Favoring one client/group is prohibited |
