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100 Cards in this Set

  • Front
  • Back
What else is the Securities Act of 1933 known as ?
Paper Act
Truth in Securities Act
Prospectus Act
Define a Security
An 'investment contract' is a security if 4 criteria met; 1) investment of money 2) in a common enterprise (pooling) 3) with the expectation of profits 4) resulting solely from the efforts of others
Examples of Securities
Stock, bond, debenture,
right or warrant, Note, Put/call, Ltd partnership interests, Certificate of interest in a profit-sharing arrangement
Define a 'Person'
'Person' is very broad and incl an individual, a Corp, partnership, Association, Joint stock company, Trust, any unincorporated organization, or a governmental or political subdivision thereof
Define a 'Prospectus'
Any notice, circular, letter, or communication, written or broadcast by radio or television, that offers any security for sale or confirms the sale of a security. Not oral
Define a 'Tombstone' advertisement
Simply identifies the security, the price, and the underwriters. Not considered a prospectus nor an offering of the subject security.
What is and is not 'an offer to sell'
Any attempt or offer to dispose of a security or an interest in a security for value or a solicitation of an offer to buy a security for value. Doesn't include: preliminary negotiations or agreements between the issuer and underwriter; or a gift of securities.
Role of SEC in reviewing issues
SeC does not approve securities registered with it. does not pass on the investment merit of any security, and never guarantees the accuracy of statements in the registration state- ment and prospectus. SeC merely attempts to make certain that all pertinent information is fully disclosed
Exempted Securities under Securities Act of 1933
Unlawful to sell or deliver a security through any instrument of interstate commerce unless a registration statement is in effect.
What issues qualify as 'exempt' from the 'Securities Act of 1933'
(1 of 4)
1) Any security issued or guaranteed by the United States, any state, or any political subdivision of a state (all federal government issues and municipal securities are exempted securities)
What issues qualify as 'exempt' from the 'Securities Act of 1933'
(2 of 4)
2) Any commercial paper that has a maturity at the time of issuance of no more than nine months (270 days), with the stipulation that the proceeds are to be used by the issuer to increase working capital and not for the purchase of fixed assets. No min denomination or rating
What issues qualify as 'exempt' from the 'Securities Act of 1933'
(3 of 4)
3) Any security issued by a religious, educational, charitable, or not-for-profit institution
4) Any interest in a railroad equipment trust
What issues qualify as 'exempt' from the 'Securities Act of 1933'
(4 of 4)
5) Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution. Does not apply to bank holding companies. Most of the large US banks today are owned by holding companies.
Describe the attributes of securities exempt from Sec Act of '33 but not exempt under the Uniform Securities Act and likely will have to register with the state
Rule 147 exemption; not exempt under the Uniform Securities Act and will probably have to register with the state.
What attributes must be met to qualify for a rule 147 exemption?
Only available if the entire issue is offered and sold exclusively to residents of a single state. 9 months must pass from the date of last sale by the issuer of any part of the issue before resale, 80% of the issuer’s gross revenue, proceeds & assets must reside in state
The 3 Exemptions available under the Securities Act of 1933 Vs. Uniform Securities Act
1) Foreign government issues
2) Federal covered securities listed on a national exchange or nasdaq (blue chip exemption)
3) Securities issued by insurance companies
Other Exemptions under the 1933 Securities Act
1) Transactions by any person other than an issuer, underwriter, or dealer; and
2) Transactions by an issuer that do not involve a public offering (private placement under Reg D).
Securities Act of 1933 protects investors who buy new issues by;
1) requiring reg of new issues
2) Requiring an issuer to provide full and fair disclosure
3) All material info to judge investment merit
4) Regulating the underwriting and distribution of primary and secondary issues
5) Criminal penalties for fraud in the issuance of new securities.
Who must sign the Registration Statement?
CEO, CFO and a majority of the board of directors. All of the signers are subject to criminal and civil penalties for willful omissions and mis- statements of material facts.
Info required in a Registration Statement?
Purpose of issue, Range of POP, Underwriter’s promotion expenses, Use of proceeds, B/S, 3 yrs of PL's, Names, addresses, and bios of D/O's underwriters, and stockholders owning >10%, Underwriting agreements, Articles of incorporation
The Three phases of an Underwriting (1 of 3)
Issuer files Registration statement with SEC.
Prior to filing, no sales can be solicited & no prospectus can circulate
The Three phases of an Underwriting (2 of 3)
Once Registration Statement filed, min of 20 day cooling period begins. No solicitations can occur but IOI's can be obtained with use of 'red herring'
Issuance of a Stop Order
May be done if reqt's of the 1933 Act have not been met or may SEC can suspend registration after the effective registration date if untrue statements or omissions suspected.
The Three phases of an Underwriting (3 of 3)
Effective Date issued >> sales may begin with use of final prospectus
Red Herring or Preliminary Prospectus
Used to acquaint investors with essential facts concerning new issue. Also used to solicit IOI's. Can't be used: as a confirmation of sale, in place of a registration statement; or to declare the final POP
During Cooling Off Period, Underwriters may NOT
Make offers to sell the securities, take orders; or distribute sales literature or advertising material.
They MAY; take IOI's, distribute red herring, publish tombstone to provide info re
availability of the securities.
Prospectus Vs. Registration Statement
A prospectus is an abbreviated Registration statement. A prospectus must be provided NLT @ confirmation of sale. It is unlawful for a company to sell securities before the effective date of the registration statement.
Rule 482 (Omitting) Prospectus
Any info in the ad must be taken substantially from regular prospectus. The ad must state clearly from whom a prospectus may be obtained. The ad must urge investors to read the prospectus carefully. Any past performance data quoted must be accompanied by appropriate disclaimers and disclosures of load, if any. The ad cannot be used to purchase the shares; only via app found in the prospectus.
SEC disclaimer
Liabilities under the Securities Act of 1933
Criminal penalties for false and misleading statements con- tained in the RS/prospectus. Purchaser may sue; every person who signed the registration form, all directors of the issuer, attorneys, accountants, appraisers or other experts, underwriters or parent Co.
Statute of Limitations for bringing action for under Securities Act of 1933 vs Uniform Securities Act
The SOL for bringing action is the earlier of 1 year after discovery of the violation or 3 years after the date of the action. Compares SOL with USAct except that the time limit is 2 years after discovery. This is 1 of the rare cases where the time period in the USA is > than that in federal law.
Other powers of the SEC include the ability to
Make, amend, and rescind rules, administer oaths, subpoena witnesses & other records for evidence,
seek injunctions/restraining orders and turn over evidence to the attorney general of the US for possible criminal pros- ecution.
SEC REG D (Private Placement Exemption - contains SEC rule 506)
Exemption for offers and sales to < 35 purchasers. Accredited investors, however, do not count toward limit. Unsophisticated investors (<35) may participate if purchaser representative (accountant, lawyer, or financial adviser) is representing the unsophisticated investor. To remain exempt, the law prohibits any general solicitation or general advertising.
SEC Rule 501 - Accredited Investors
Investors are considered to be accredited under the rule only if the issuer or any person acting on the issuer’s behalf has reasonable grounds to believe, and does believe after reasonable inquiry, that the investors are in 1 of the accredited categories
Definitions of Accredited Investors
1) institutional investors > $5M. 2) D/O or GP's of the issuer. 3) Any natural person whose individual net worth, or joint net worth with that person’s spouse, excluding the net equity in his primary residence, > $1M @ time of purchase. 4) Any person who had an indiv income > $200K in each of the 2 most recent years or joint with spouse > $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. 5) Entities made up of accredited investors
Form D
Reg D issues must file Form D NLT 15 days after first sale. Form D contains certain basic information about the issuer and the offering, incl total size of the offering, amount sold to date, use of proceeds, & names of any persons paid commissions.
Restricted Securities
Restricted securities are unregistered securities purchased by an investor in a private placement. They are also called letter securities (or legend securities) referring to the fact that purchasers must sign an investment letter attesting to their understanding of the restriction upon resale
Control Person and Control Stock
A D/O, or any spouse with > 10% share ownership of Co. Aka insiders or affiliates.
Control stock is stock held by a control person. what makes it control stock is who owns it, not how he acquired it.
Rule 144 - Sale of Restricted and Control Securities
Created so that certain resales of already existing securities could be made without having to file a complete registration statement with the SEC.
Securities Exchange Act of 1934
(1 of 2)
The Exchange act created the SEC. The act grants the SEC authority over all aspects of the industry except those regulating the extension of credit. Incl's power to register, regulate, and oversee brokerage firms, transfer agents, & clearing agencies as well as the nation’s securities SRO's.
Securities Exchange Act of 1934
(2 of 2)
The act also ID's & prohibits certain types of conduct in the markets and confers to the SEC disciplinary powers over regulated entities & the persons associated with them.
Act also empowers the SEC to require periodic reporting of info by Co's with publicly traded securities.
Consists of 5 people - 1 serving as Chair. SEC commissioners are appointed to 5 yr terms. Non-partisan (3+2 members Dem or Rep). No trading allowed while on SEC.
Definition of 'Broker'
A broker is any person engaged in the business of effecting transactions in securities for the account of others. banks are not included in this definition.
Definition of 'Dealer'
Any person regularly engaged in the business of buying and selling securities for his own account. Banks, insurance companies, investment companies & any persons engaged in investing etc for clients, aren't incl
Definition of 'Associated Person'
Any partner, D/O of the BD (or any person performing similar functions) or any person directly or indirectly controlling or controlled by the BD, incl any employees of the BD, except any person associated with a BD whose functions are solely clerical or ministerial, shall not be incl in the meaning of the term. Even “outside” D's or partners whose only connection to the firm is the contribution of capital are considered AP's of the BD.
Definition of Securities Information Processor (SIP)
Any person engaged in the biz of: collecting, processing, or preparing for distribution or publication information with respect to transactions in, or quotes for, any nonexempt security; or distributing or publishing (whether by means of a ticker tape, a comm network, a terminal display device, or otherwise), on a current and continuing basis, info with respect to such transactions or quotes.
Examples of SIP's
- The Consolidated Ticker Tape, - Bloomberg and Reuters - NASDAQ &
The Pink Sheets. SIP's don't incl a bona fide newspaper, news mag, or biz or financial publication of general or regular circulation, such as The WSJ; any SRO (other than NASDAQ);
any bank or BD supplying quotes and transaction info as part of its customary banking or brokerage business; or
any common carrier subject to the jurisdiction of the FCC or a state commission (radio and television stations).
Definition of a 'Transfer Agent'
Countersigns the stock certificates -Registers the transfer of the issuer’s securities -Exchanges or converts the issuer’s securities &
transferring record ownership of securities by bookkeeping entry without physical issuance of securities certificates.
Transfer Agent DOES NOT include
Any Ins Co. or separate account that performs these functions solely with
respect to VA contracts or VL policies that it issues; or
any registered clearing agency (e.g., OCC) that performs these functions solely with respect to options contracts it issues.
Definition and Registration of Exchanges
Exchange is an Org, Assn, or group of persons providing a marketplace or facilities for bringing together purchasers and sellers of securities. Must be registered. Registration is performed by filing an app with SEC. Decision will be made <90 days.
Registration requirements of Exchanges
Must demonstrate; formation of exchange in public interest, exchange will have compliance enforcement ability (both own & SEC's rules), the BoD's will have >=1 member representing public, >=1 representing listed Co's - rest of BoD's represent membership of the Exchg. Membership in the Exchg may only be offered to registered BD's or AP's.
Definition of Government Securities
Govt securities are direct obligations of, or guaranteed by Govt. Term also incl's Govt Agency securities (e.g. Fannie Mae).
Statutory Disqualification
(1 of 2)
A person is subject to this if; has been or is expelled or suspended from membership from SRO, is subject to an order of the SEC or other appropriate regulatory agency denying, suspending for a period not exceeding 12 months, has been suspended by his BD, has associated with such a person, has been convicted within the past 10 years of a securities violation or a misdemeanor involving finance or dishonesty, bribery, embezzlement, forgery, theft, and so forth, or any felony;
Statutory Disqualification
(2 of 2)
- Convicted within <=10 years of a securities violation or a misdemeanor involving finance or dishonesty, bribery, embezzlement, forgery, theft, and so forth, or any felony;
- Is subject to a temporary or permanent injunction from a court
- willfully violated any federal securities law
- has made a false or misleading statement in any filing with information requested by an
SEC's Jurisdiction
SEC is appropriate regulatory agency for MRSB however, the SEC has no jurisdiction over banks and other similar financial institutions that are regulated by their functional regulators, including the:
- Federal Reserve;
- Office of the Controller of the Currency;
Investment Discretion
Authorized, in writing, to determine:
1) which securities will be purchased or sold
2) Amount of the securities to be bought or sold for the account
3) or whether the transaction will be a purchase or sale.
Who Needs to Register under Sec Exchange Act of 1934?
1) BD's operating in interstate commerce
2) Securities exchanges
3) National securities associations, such as FINRA or MSRB
4) Co's with with listed securities
What info do companies need to disclose when registering with SEC? (1 of 2)
- Financial structure, nature of the business.
- The D/O's & underwriters, & each security holder of record holding >10% of any class of equity security of the issuer, incl their remuneration and their interests in the securities & their material contracts with the issuer and any person directly or indirectly controlling or controlled by the issuer.
What info do companies need to disclose when registering with SEC? (2 of 2)
- the terms, position, rights, and privileges of the different classes of outstanding securities.
- the terms on which their securities are to be, and during the preceding 3 years have been, offered to the public.
- certified B/S & P/L for the previous 3 fiscal years prepared by independent CPA.
Insider Transactions Under the Sec Exchange of 1934
SEC must be notified of any changes in the ownership of such securities for people;
- Every person who is directly or indirectly the beneficial owner of >10% of any class of equity security (other than exempt securities).
- D/O's of the issuers of such securities.
Trading Restrictions on Insiders
Prohibited from selling short and from engaging in ST transactions, usually called short-swing profits. These are defined as gains made when both the purchase and sale take place within a 6-month period. Exercise of stock options is not prohibited
Schedule 13D Filings
5% Beneficial Owners generally requires a class of equity securities registered under the SEAct of 1934 to file a report with the issuer, SEC, & the securities markets where those securities trade <=10 days of any transaction that results in beneficial ownership of <5%.
Info Required on a 13D Filing
- Name & background of the person or entity (incl partners, D/O's, & controlling persons);
- Origin of the money for the purchase;
- the purpose of acquiring the securities, such as to acquire control of the business of the issuer, and plans or proposals that such persons may have to liquidate the issuer, to sell its assets to or merge it with any other persons, or to make any other change to its business or corporate structure.
Section 13F Filings
Requires any Inst investor that uses the mail etc & has discretion over >$100M in >13(f) securities must file <=45 days of Qtr end. Purpose is for public disclosure of large shareholders
What are 13F securities?
Called the Official List of Section 13(f) Securities—may be found on the SeC’s website. Incl's AMEX, NYSE, NASDAQ stocks, some ETF's, equity options and warrants, shares of CE Inv Co's, & certain convertible debt securities.
Schedule G Filings
For Passive Investors (PI's), rather than filing a 13D, passive investor with >5% may file a 13G. PI's who choose to file a 13G must do so <=10 calendar days after crossing the 5% threshold. PI's must amend their Schedule 13G <=45 days after the end of the calendar year to report any changes in the info previously reported.
Definition of Passive Investor
A Passive Investor (PI) is defined as any person who can certify that they did not purchase or do not hold the securities for the purpose of changing or influencing control over the issuer and hold <=20% of the issuer’s securities.
Section 16 Filings
Requires D/O's & >10% stockholders (i.e. insiders), to file transaction reports before the end of the 2nd Biz day following the day on which a transaction has been executed in an equity security where they are considered an insider.
Types of Securities not eligible for Margin Lending
1) New issues (underwriting syndicate must receive full payment <=35 days of purchase)
2) Mutual funds held <=30 days
3) Purchase of options
Prohibited Forms of Manipulative, Deceptive, or other Fraudulent Trading Practices
1) Churning - excessive trading
2) Wash trades - no change in the beneficial ownership of the security
3) Matched Orders - entering of sel/buy order knowing that a corresponding order of approx. the same size, at approx. the same time and at approx. the same price, has been or will be entered.
4) Pegging, fixing & stabilizing - attempt to create a price level different from that which would result from market forces.
Order Tickets
- Account #
- Whether order is solicited, unsolicited, or discretionary
- whether long or short
- if a bond, aggregate par value (but not rating or CY); &
time stamp. Not incl is the current market price of the security.
Insider Trading & Securities Fraud Enforcement Act of 1988 (ITSFEA)
- An insider is in violation of SEC rules when he trades on the basis of material, non- public info or when he passes on this info to another who subsequently acts on it.
- Made tipper and tippee liable.
- No chargeable violation has occurred unless a transaction has taken place.
- ITSFEA gave SEC civil & criminal penalties: > of <$1M or 3x damages, or max <20yrs in jail
Private Rights of Action for Contemporaneous Trading
Private damages may be pursued but limited to;
1) Gain or loss of transaction
2) 5 yr statute of limitations
Powers of the SEC
SEC has power to investigate possible violations of the federal securities laws & SRO's (Exchanges, FINRA, MSRB). In course of investigation, SEC has right to; administer oaths, subpoena witnesses, compel attendance, require books & records to be produced, summarily suspend trading in any nonexempt security for <=10 days without prior notice, & suspend trading on an entire exchange for <=90 days
Financial Responsibility Rules under SE Act of 1934
SEC rule 15c3-1 (Uniform Net Capital Rule) min capital reqt's for BD's. BD's must also maintain a fidelity bond to protect against misappropriation, forgery, or similar violations of the firm & its associated persons. Min $25K.
Securities Amendments Act of 1975
Main purpose of the act was to remove barriers to competition in the biz. Amended SE Act of 1934.
1) Fixed-commission rates were abolished.
2) SEC to develop a national market system.
3) SeC was given the power to approve any proposed rule changes by the exchanges or SRO's.
4) Reg of Muni dealers with SEC >> led to MSRB
5) SEC given power to regulate the Clearing Co's, securities depositories, & transfer agents.
Investment Co. Act of 1940
Concerns biz's who invest, rein vest, or trade securities. Considered an 'investment co' if >40% of the value of the issuer’s total assets invested in securities. Specifcally doesn't incl: BD's & underwriters, Banks, Insurance Co', Holding Co's,
Issuers whose securities are beneficially owned by <=100 persons, issuers who trade in investments other than securities.
Investment Co. Act of 1940 defines 3 Types of Investment Co's
1) Face Amount Certificate Co's: represents an obligation on the part of its issuer to pay a stated sum at a fixed date >24 months after the date of issuance, in consideration of the payment of periodic installments of a stated amount.
2) UIT's: doesn't have a BoD & issues only redeemable securities
3) Management Co's: managed by advisers with a fee generally based on AUM.
Subclassifications of Investment Companies
(1 of 2)
1) Open-end: Offering for sale, or has out- standing, any redeemable security of which it is the issuer (e.g. mutual fund).
2) Closed-end: onetime offering of shares & don't redeem their outstanding shares. Unlike OE, pricing not based on NAV but supply & demand.
Subclassifications of Investment Companies
(2 of 2)
1) Diversified: >75% of assets invested & <5% in any 1 security. <10% of the outstanding voting securities of any issuer are held. There are no other specific requirements for the other 25% of assets.
2) Nondiversified: anything other than diversified
Registration of Investment Companies
Registration statement used by OE investment Co's to file with the SEC is the Form N-1A. Registrant describes all of the important info incl. objective, sales loads, investing in particular industry or group of industries etc.
Ineligibility of Certain Affiliated Persons & Underwriters
(1 of 2)
Inv Act of 1940 prohibits people who;
1) convicted, <=10 yrs, of any felony or misdemeanor involving the purchase or sale of any security.
2) permanently or temporarily enjoined by order, judgment, or decree of any court;
from serving in certain sensitive positions with an Inv Co., its adviser, or its principal underwriter.
Ineligibility of Certain Affiliated Persons & Underwriters
(2 of 2)
Investment Co's can't have a BoD that consists of >60% "interested persons" of the investment company. Or, >40% must be non-interested, that is, “outside” directors. These are individuals who have no connection to the fund other than a position on the board.
Rule 12b-1
Payment of Asset-based Sales Loads by registered OE Mgmt Investment Co's. Permits a MF to act as a distributor of its own shares without the use of an underwriter and with an asset-based sales load.
Definition of Asset Based Sales Load
Any direct or indirect financing by a MF of sales or promotional services or activities in connection with the distribution of shares. Basically permits no-load funds to pay commissions (aka. trails) to BD's who sell or otherwise promote the sale of their fund's shares. The MF can't be "no-load" if 12b-1 fee >25 bps.
Prohibited Activities of Investment Co's
1) Purchase any security on margin.
2) Participate on a joint basis in any trading account in securities (i.e., an investment company cannot have a joint account with someone else);
3) Sell any security short.
4) Acquire >3% of the shares of another investment Co.
Changes in Investment Policy
Majority vote of the outstanding voting stock is required. Fundamental changes incl:
- Change from OE to CE or diversified to non-diversified
- deviation from any fundamental policy in its registration statement (e.g. change in investment objective)
- changing the nature of its business so as to cease to be an investment company
Minimum size of investment company
Must have > $100K net worth
Transactions of Certain Affiliated Persons and Underwriters
Unlawful for any affiliated person, principal UW for a RI Co. to: knowingly sell any security to that Inv Co. unless it is a sale only of shares issued by that company itself (redemption of the fund’s shares) or a sale of securities of which the seller is the issuer and which are part of a general public offering; borrow money or any other property from the fund; or knowingly purchase from that Inv. Co. any security other than the fund’s
Affiliated Person(s) Vs. and 'Interested' Person vs. a 'Control' Person ( 1 of 2)
Affiliated person: directly or indirectly owning, controlling, or holding with power to vote >= 5%. Also incl any person directly or indirectly controlling, controlled by, or under common control with the Inv. Co. D/O, partner or employee of the Inv Co.
Affiliated Person(s) Vs. and 'Interested' Person vs. a 'Control' Person (2 of 2)
While technically considered an affiliated person, no person is deemed to be an “in- terested person” for purposes of the max % of interested persons on the board solely by reason of his being a member of the fund’s BoD or an owner of its securities. A person is deemed to be a control person when owning or controlling >25%
Every RI Co. req'd to keep assets with custodian (i.e. bank). Although capital req'ts of custodian, need not be FDIC insured.
Sale of Redeemable Securities
POP to be upheld for all buyers, however there are ways fund shares may be sold @ reduced sales charge or no sales charge; to related persons or through dividend reinvestments.
May an Investment Advisor reduce fees on sale of mutual funds, insurance to clients?
Not exactly - may be used to reduce advisory fees but cannot reduce/rebate from stated POP of product
Periodic & Other Reports
All Inv Co.'s must file annual financial reports with the SEC incl audited B/S and P/L. <= semi-annually shareholder must be mailed; B/S, P/L, a listing of the amounts and values of securities owned, statement of purchases and sales, statement of pay to D/O or affiliated person
Penalties for Larceny and Embezzlement
Anyone who steals or embezzles any of the monies, funds, securities, or assets of any RI Co. will be subject to max $10K fine, imprisonment <=5 years, or both. Also, D/O may be liable to civil action by SEC. If guilty, 60 day appeal window
Computing Returns on Mutual Fund Shares
SEC stipulates the methods used. 2 types; Current & Total; Current Yield; divide annual Div paid from net investment income by current POP. Can only use Div Pmt's from <=yr.
Total = Cap Gains + Div (assumes reinvestment of all Div declared). Current return = div yield, Total return = Periodic Yield
Money Laundering -
Currency Transaction Reports (CTR's) (1 of 2)
Bank Secrecy Act requires every financial institution to file a currency transaction report (CTR) on FinCen Form 104 for each cash transaction >$10K. Cash transaction defined as pay off loans, EFT, or the purchase of CD's, stocks, bonds, MF's, or other investments. Also, act reports on wire transfers in > $3K.
Money Laundering -
Currency Transaction Reports (CTR's) (2 of 2)
Structured transactions are a series of small deposits totaling >$10K in a short period to circumvent the $10K reporting req't. May involve cash deposits, Ac transfers, wire transfers, ATM or securities transactions, all <$10K. CTR should be filed.
National Securities Markets Improvement Act of 1996 (NSMIA)
Amends Sec of 33, SE Act of 34, & IAA of 40. Bifurcated regulation of IA; Covered Adviser & Covered Security.