Series 63: Unit 3-4 Key Concepts

securities

• Options are always securities

• Futures are securities only when the underlying asset is a security

Endowment contracts

endowment contracts are not considered securities.

guaranteed

• Under the USA, "guaranteed" refers to a third party's assurance to pay the principal, interest, or dividends on a security if the issuer defaults.

• Agents, however, are prohibited from guaranteeing investment performance

info required for registration

• SEC registration requires detailed issuer disclosures, including business information, insiders, underwriters, use of proceeds, legal proceedings, and certified financials

• State registration by qualification requires similarly detailed disclosures and may include merit review

permitted amendments

An issuer can amend an effective registration statement to increase the size of the offer, but not the public offering price.

Notice filing deadlines

• Mutual funds notice file before being offered in a state and are not state-registered because they are federal covered.

• Other federal covered securities must notice file within 15 days of the first offer

Registration req. of Canadian companies

Canadian exchange-listed securities must be state-registered unless they are also listed on a U.S. exchange, which makes them federal covered and exempt from state registration.

nonfederal covered stocks

Unlisted OTC Pink stocks are not federal covered and must be state registered to be sold lawfully

factoring

• the sale of a company’s receivables for cash

• It is not a securities transaction unless the company issues promissory notes or other instruments backed by those receivables.

pre-org certificate conditions

The sale of a preorganization certificate is an exempt transaction if three criteria are met:

• No commissions are paid

• The number of subscribers is 10 or less

• No payment is made by the subscriber

private placement (USA) conditions

• is exempt if offered to no more than 10 non-institutional investors in a state within 12 months with no commissions

• while sales to institutional investors may be made in unlimited number with commissions

non-issuer transaction by a pledgee

an exempt transaction that occurs if a client pledges securities as collateral as a loan and then defaults and the lender sells the securities in an exempt transaction.

registration implies…

Registration with the administrator does not imply that a security’s registration is true and accurate. It just means that sufficient disclosure has been made to allow for registration.

excessive offer fees

The Administrator may deny registration for a new security if the offering fees are excessive.

subscription agreements

• accompanies a private placement memorandum (PPM)

• some may outline a specific rate of return to be paid to the investor, such as a percentage of company net income or lump sum payments

exempt securities - banking + insurance companies

• Securities issued by US banks and insurance companies to raise capital are exempt from state registration

• Foreign bank or insurance company securities are NOT exempt

admin jurisdiction

• applies whenever an offer or sale originates in the state, is directed into the state, or is accepted in the state

• this means the administrator can investigate conduct from another state if it affects investors in their state

admin investigations

an Administrator may investigate without prior notice and may arrive unannounced during business hours.

Authority reg. subpoenas

the Administrator may issue subpoenas but cannot enforce them or issue injunctions; only a court can do that.

Registration relationship of BDs and agents

• an agent’s registration is only valid when the agent is associated with a registered BD

• If an agent/IAR leaves their old firm, they cannot transact/advise for prior clients → client notification is not required when leaving a BD/IA

• If a BD/IA loses its registration, agent/IAR registrations are rendered inactive → when the firm registration is again active, the employees’ registrations may be reinstated

• if an agent/IAR’s registration is cancelled, suspended, or revoked, it does not automatically affect the firm’s registration.

Admin notice of change in agent registration

• When an agent changes BDs, the agent, the former BD, and the new BD must all notify the Administrator of the change.

• When there is any change in agent registration, all parties involved must notify the Admin.

Summary action – notice/hearing

A summary suspension requires no prior notice, but the Administrator must provide prompt notice and an opportunity for a hearing.

Requirements for a final order

A final order requires prior notice, an opportunity for a hearing, and written findings of fact.

Personal bankruptcies

A personal bankruptcy within the past 10 years must be disclosed when applying for registration:

• a prior bankruptcy is not a statutory disqualification

• current insolvency may be grounds for denial or revocation at the Admin’s discretion

Registration denial

To deny a security’s registration, the Admin must have two reasons:

1) that the action is in the public interest

2) that a specific statutory ground exists, such as an incomplete filing or excessive fees.

An Admin would not revoke a registration based on a firm posting losses for any number of consecutive years.

Form U6

reports disciplinary actions against individuals and firms.

Record retention - time periods

• BDs must keep records for 3 years and IAs for 5 years, with the first two years maintained on-site

• Records may be on 1) paper, 2) micrographic (microfilm or microfiche), or 3) electronic storage media.

• Firms must also keep duplicate off-site copies of all records for the required time periods.

• If a client changes advisers, the original IA must keep its records for the full retention period; records do not transfer to the new adviser

Record retention - exceptions

• Records related to legal actions (arbitration, litigation) must be kept until final disposition

• Organizational records must be retained for at least 3 years after business termination.

Letters of recission - Effect

An offer of rescission returns the original cost of the securities plus interest from the payment date.

Letters of recission – Time period

A client who rejects a rescission offer within 30 days may still sue; if the client does not respond within 30 days, the right to sue is forfeited.

Offering progress reports

While a registration is effective, the Administrator may require quarterly progress reports but not more frequent updates.

Jurisdiction over federally covered IAs

Only the Admin in the IA’s home state may examine the books of a federal covered adviser.