Series 66 Chapters 1-12

Uniform Securities Act (USA) 

Model Law, Blue Sky, Regulator= state administrator; uses rules, laws, and orders to enforce the USA

North American Securities Administrators Association (NASAA) 

-updates the USA model law

-writes series 66 exam 

NASAA comes together to create what the USA model law should look like to then allow states to create their rules, orders, and laws based on their own state

National Securities Market Improvement Act (NSMIA) (Probably won’t be too much on exam)

-Federal Law

-Reduced duplication of federal and state regulation 

-Defined federal covered securities and federal covered advisors that are exempt from state regulation 

Federal covered securities and federal covered advisors are…

nationally recognized securities and advisors with many assets under management 

Person Definition 

An individual corporation, partnership, unincorporated organization, government or political subdivision of government and certain trusts (any legal entity) 

• Does NOT include minors, mentally incompetent, or a deceased person 

State

Includes all 50 States, territory (D.C.) and Possession (Puerto Rico)

Broker Dealer registered with…

-Sell securities

-Must be registered with the state admin, FINRA, and SEC (ALL 3)nv

Investment Advisor (IA) registered with…

-Advises people for a fee

• Must be registered with state admin OR SEC (one or the other)

Agents/ Registered Reps. registered with…

Must be registered with State Admin and FINRA (2)

Investment Advisor Rep (IAR) must be registered with…

People who work with investment advisors 

Must be registered with state admin (1)

Agents/RR work for….

IAR work for …..

B/D

IA 

IA (ABC Test) 

Advice

Business 

Compensation 

Definition of a security

An investment of money with a common enterprise with the expectation of profits that are derived from the efforts of others

• defined by the Howey Test

  • if defined by security, it is regulated under the Uniform Securities Act (must register)

Not Investment/Instruments include…

• life insurance

• endowment policies

• fixed annuities

• The four “C”s

  • Commodities

  • Collectibles

  • Currencies

  • Condominiums as a place of residents

All are classified as securities including

Stocks

Bonds

Notes

Debentures

Rights

Warrants

Investment

Contract

Larger issuers conduct follow-on ______ offerings 

interstate 

Registration by filing (notification) includes requirements such as

• Registered with the SEC

• issuer must meet requirements like perviously filed under Securities Act of 1933

• In business at least 36 calendar months

• Issuer registered with SEC a class of equity Securities held by 500 or more persons

• at least 4 market makers

• commission don’t exceed 10%

• offering price is at least $5.00 per share

• *Becomes effective at the same time as the federal registration

Smaller issuers conduct follow-on ______ offerings 

interstate 

Registration by coordination is

State registration is coordinated with the Federal registration under the ‘33 Act (does not have to be the same time)

Registered with the SEC

• *Becomes effective at the same time as the federal registration

For issuers conducting intrastate offerings (one state only) Registration by qualification requirements include

requirements determined by individual state

No Federal registation

Used in any state for any security

Extensive disclosure required by Admin with correcting Amendments

*Becomes effective when determined by Admin (all effective for at lease 1 year from effective date)

General provisions for all require issuers to

-pay a filing fee

-disclose the amount of securities being offered

-disclose other states in which registration statement has been filed

*A state admin may require a prospectus to be sent to any person whom an offer is made

Intra =

Inter =

Intra= inside one state

Inter= between states or more than one state

Actions Admin can take against Registration include….

-deny

-suspend

-revoke

Stop order

Cannot be issued against an effective registration based on the fact the admin knew when registration become effective unless within 30 days (i.e. registration can be taken away within 30 days regardless of knew facts if needed)

Exempt securities are

based on safety of the investment Ex:listed securities 

Exempt transaction are

based on limited purchasers (non-public) Ex: Private placements between issuer and underwriter) 

Exempt securities can be issued by ….

-U.S gov.

-Municipal gov.

-Canadian gov.

-Foreign Gov.

-Banks

-Savings institutions

-Trust Companies

-Insurance Companies

-Common Carriers (Railroads)

More exempt securities include

-Public Utilities- Public Utility Act of 1935

-Non-Profits (Religious Organizations)

-Short-term debt with the following characteristics

• 9 months max maturity

• Min denomination of $50,000

• Rated 1 of 3 by NRSRO

*Commercial paper exempt if maturity is 270 days or less

Federal Covered Securities include

-Securities listed on NYSE,NASDAQ or regional exchanges

-Securities issued by an investment company

-Securities issued by Reg D rule 506

-Securities sold to QIBs

Even if securities are exempt, they still remain subject to anti-fraud provisions of both….

FED law and USA

Under NSMIA, any securities classified as “______ ______” are given a specific state registration exemption

Federal Covered

Notice Filing (Not Registration) includes

-filing copies of any offering docs (Prospectus) that have been filled with SEC

-filing consent of services of process

-payment of fee

-*Cannot be denied by Admin

Non-issuer Transaction (Exempt Transactions) are

Secondary marker trades, ‘34 Act

-Isolated, non-recurring, unsolicited trade

-Trades in securities listed on the Toronto Stock Exchange 

Private Placements (Exempt Transactions) are 

-Limited to no more than 10 non-institutional investors

-Purchases for investment only purposes

-No commission paid

Institutional Transaction (Exempt Transactions) are

-Those with banks, B/D’s or other financial institutions, insurance, trust, or investment companies

-Between issuer and underwriter

Fiduciary Transaction (Exempt Transactions) are

-Those involving a trustee, admin, executor, or sheriff

Mortgage Backed (Exempt Transactions) are

-Transaction in bonds that are secured by real estate mortgages (If sold as a unit)

What is a Broker Dealer?

Any person in the business of effecting securities transactions for the accounts of others (agency/broker) or for its own account (principal/dealer)

What is an agent? 

An individual who represents a B/D in effecting securities transactions is always an agent and subject to registration

Agent= Registered Representative 

Ex: Officers, Partners, or directors of a B/D who are involved in the sale of securities 

NOT INCLUDE: Those whose jobs are clerical (file paperwork or answer phones) 

What is an Issuer?

Any person that issues or purposes to issue any security to raise capital 

(A sale by an issuer is an issuer transaction)

Ex: Institutions, Limited Partnerships, etc. 

*Issuers are also the individual states 

What is an agent of an issuer? 

An individual who represents an issuer in sale of certain securities is NOT required to register as an agent if the sale involves exempt securities, exempt transactions, federal covered security, or an existing transaction with employees partners or directors of an issuer- no commission is paid for soliciting in the state 

*The difference between a B/D and an issuer is….

B/D are financial institution that sells securities while an issuer is a corporation or government entity that create their own securities 

*Difference between the two types of agents are

Agents to B/D are always subject to registration while Agents to an issuer maybe subject to registration (I.e.= if securities and transaction are exempt, the agent is exempt)

What are finders?

Individuals who search for investors for private placements and are considered agents only if they receive compensation for the completed transaction

What is a private placement?

The sale of securities directly to a small group of accredited or institutional investors, without a public offering

What firms are not considered B/Ds?

Agents, issuers, banks, savings institutions, trust companies, A person with no place of business in a state and only transacts business there with issuers involved in transaction, other B/Ds, financial institutions, existing clients who are not residents of the state (students, vacationers, etc.) - No registration is required 

What are snowbirds?

Individuals who live in two different states depending on the warm weather (register in both states)

If a firm is a B/D is state registration required?

Yes

An agent may engage in securities transactions in a state in which they are not registered if….

1) Existing customer is temporally visiting another state (student or vacationer) or

2) Existing customer moves to a new state and the agent registration is pending in the new state, agent is registered in at least one other state, agent is registered with a national securities association like FINRA, or an agent’s B/D is already registered in the new state

What are Canadian Broker Dealers? 

A securities firm based in Canada that is licensed to buy and sell securities for clients or for its own account. The USA allows limited registration of B/D and agents that are residents of Canadian residents in the state, they don’t solicit new clients from the states, B/D must be a part of the SRO, must file with state admin along with a consent to service or process, and renewal application must be filed prior to December 1 each year  

What form to B/D’s use and where is it filed to?

Form B/D and Central Registration Depository (CRD)

What form to agents use and where is it filed to?

Form U4 and the Central Registration Depository (CRD)

What form to investment advisors use and where is it filed to?

Form ADV parts 1 and 2 and the Investment Advisor Registration Depository (IARD)

What form to investment advisor reps use and where is it filed to?

Form U4 and the Investment Advisor Registration Depository (IARD)

What is the CRD and the IARD?

CRD= FINRA database

IARD= FINRA database for investment advisors and their reps

Registration Process for all (B/D’s, Agents, IA’s and IAR’s) in regards to the Application

--effective for ________ days after filing

-expires ______ on December 31st

-updated _________ when renewed

-Material changes made within ______ days

-effective for 30 days after filing

-expires annually on December 31st

-updated annually when renewed

-Material changes made within 30 days

What is consent of service process? 

A legal document where a securities firm (or professional) agrees that if they get sued in a state, the state regulator can accept legal papers on their behalf. It is for all (B/D’s, Agents, IA’s and IAR’s)

Consent of service is filed ____ not reviewed irreversible and Grants ______ power of attorney (POA) to receive and process non-criminal legal complaints

once; admin

When is a registration filing fee paid?

Annually (December 31st); If a firm changes ownership (successor firm) a new application must be filed and no additional filing for for remainder of the year

What are bonding requirements? 

A financial guarantee (bond/insurance) that covers customer losses if the firm or agent breaks the rules

-required for B/Ds, agents, and IA’s that have control over clients funds 

-not required if B/D or IA’s net capital exceeds the minimum set by the Admin

-Must remain as long as B/D or IA are in business and for 3 years after 

-In lieu of bond, cash or securities may be deposited (amount and type determined by admin; no other personal property) 

What does promptly mean in regards to the exam?

30 days

For a B/D, who determines the financial requirements, what is the minimum net capital requirement, and when do they report a deficiency if occurs?

SEC; Depends on activity; Within 1 business day

*If a B/D falls below, they must report to the SEC, probably FINRA, and maybe the state they are registered within _______. They must also submit statement of financial condition by the ___________ and obtain a _______ to make up for the deficiency. 

1 business day; next business day; surety bond 

What is a surety bond?

A surety bond is a guarantee that if the firm or agent breaks the rules, there’s money set aside to protect clients.

B/D must maintain books, records, and correspondence by admin for ______ and keep them in easily accessible spot for _______.

3 years; 2 years

*TEST QUESTION!! B/Ds must file with _____ any advertising, sales literature, or other communication unless for exempt securities

Admin

B/Ds must file with admin any required financial reports with amendments for material changes within ____ days

30

Agents of a B/D ____ register and Agents of an issuer only register _______

always; sometimes

What is an investment advisor?

Any person (firm or business) that meets the ABC test

What is the ABC test?

Advice- provides advice about securities

Business- as a regular business

Compensation- receives compensation for advice

What is an investment advisor rep (IAR)?

Any individual who: 

-promotes or determines investment advice 

-manages accounts

-*solicits advisory services 

-manages those who perform these functions (but are not managers of accounting, human resources, etc.) 

*Only registers with the state

*Under the USA act, third-party solicitors (people who make referrals) maybe considered IARs and maybe subject to registration in most states

If an investment advisor is considered a firm they must….

Register unless exempt

An advisor with no place of business in a state and All clients there are financial institutions OR has more than 5 non-institutional clients in the state within the last 12 months (de minimis)

What does de minimis mean?

so minor/small that the law ignores it

An investment advisor is not considered a firm if it is 

an IAR, Bank, Savings institution, trust company, Lawyer, Accountant, Teacher, Engineer (LATE), B/D and their agents, publisher, and or Federal Covered Advisors (under NSMIA)  

What does the LATE acronym stand for in regards to investment advisors?

Lawyer, Accountant, Teacher, Engineer (LATE)

What is form ADV part 1? 

Used by investment advisors to register with the SEC or the state along with ADV Part 2 

-Info on this form is available to the public through Investment aAdvisor Public Disclosure website, Specific info about the company (Name, # of employees, personal history of each partner

What is form ADV part 2?

Provides info for client purpose and can be used as firms brochure

Includes things like services, fees, types of securities, soft dollar arrangements, client of interest and affliation, education and business of investment advisors, IA balance sheet if it has custody of client funds or securities or collects prepaid fees of more than $1200, six months or more in advance (IA act of 1940)

• At the state level prepaid fee is triggered at $500

Form ADV is required to be renewed _______ within _____ days of advisor fiscal year 

Must file _____ updating amendments to determine whether register with the SEC or state. Includes AUM, financial statements, # of accounts, # of IARs, # of employees and # if clients 

annually; 90; annual

Material changes of ADV are filed within ____ days (changes in status of general partner, etc.)

Routine changes of firm updated on ADV at _____ renewal (Change in # of employees, etc.)

30; annual

What are soft dollar arrangements?

Instead of dollars in cash, the adviser pays with “soft dollars” (brokerage commissions).

What is form ADV-W used for?

Advisors filing full or partial withdrawal (Full- no longer operating as an IA) (Partial withdrawal from statement

W=Withdrawal

What is form ADV-E used for?

Filed by independent public accountant to report result of audit of advisor that has custody of client funds/securities

Must be filed within 120 days of audit

What is form ADV-NR used for?

Filed by advisors with general partners who are non-US residents; appoints secretary of SEC as advisor agent for receipts of legal papers

NR= Not resident

Under the USA Act. IA contracts must be in _______

May not contain hedge clauses or mandatory ______ clause

Prohibits performance fees (% of profit)

Compensation expressed as % of total value of account average over a giver period of time (___)

Performance fees may be charged to qualified clients ($1.1 million under management with advisor or more than $2.2 million net worth)

May only be assigned to another advisor with client _____

Must be state that if the IA is a partnership, all clients will be notified of any change in partners

writing; arbitration, AUM; consent;

Partnership= a business owned by two or more people who share profits, losses, and responsibilities

General=____________

Limited=_____________

• General partnership → all partners manage the business and share liability.

• Limited partnership (LP) → general partners run the business & have unlimited liability; limited partners invest money & have limited liability.

IA written disclosure document is also known as a _______

Must be delivered to clients no later than ______

After, it must be delivered _______

Not required if contract with registered investment company or for a impersonal activity less than $500 per year

brochure; signing; annually

According to USA, delivery of brochure is required _____ hours prior to signing a contract (cannot cancel) OR At time of signing and client is allowed to cancel within ___ business days without penalty (Can cancel within _____ business days 

48; 5; 5

What does Custody of funds and securities by IA mean?

Holding client funds or securities directly or indirectly or having authority to obtain possessions of them

Advisor does not have custody if accidentally held or obtained client securities and returned within _____ business days OR Forwards third party checks within _____ business days

3; 3

If custody of clients are held, they must

1)

2)

3)

4)

1) Notify admin in writing

2) Appoint custodian

3) Notify client who custodian is

4) Ensure client receives quarterly statements

For IA’s who determines the requirements, what is the minimum requirement and when do they report deficiency too?

State admin where home office is located

$35,000 for custody or $10,000 for discretion

Within 1 business day

If IA firm is deficient the firm must, 

1) 

2) 

1) Submit financial statement by next business day 

2)  Obtain a surety bond to make up for deficiency 

IA are required to maintain books, records, and correspondence by admin for ____ years and appropriate location for the first ____ years 

5; 2; 

IA must file with ____ for advertising, sales, literature, or other communication (unless exempt)

File with admin required reports for material changes within ____ days

Provide full and fair disclosure

Fed Covered Advisor records subject to inspection by admin

Admin, 30,

What is a federally covered advisor? 

An investment adviser regulated by the SEC (not the states).

• Must register with the SEC if they manage $100 million+ in assets.

• States cannot require them to register as advisers, but states can require notice filings and fees.

So simply: A big investment adviser under SEC authority, not state authority.

What is an endowment policy?

An endowment policy is life insurance that pays a lump sum either on death during the term or on survival at the end of the term.

If the AUM (Assets Under Management) is more than $110 million, who do the investment advisors register with?

SEC (Automatically)

If the AUM (Assets Under Management) is between $100 million and $110 million, who do the investment advisors register with?

SEC OR State Admin

If the AUM (Assets Under Management) is between $25 million and $100 million, who do the investment advisors register with?

State Admin

If the AUM (Assets Under Management) is less than $25 million, who do the investment advisors register with?

State Admin