series 63

Uniform Securities Act of 1956 (USA)

Template or guide that each state uses in drafting securities legislation, 1956 version used by North American Securities Administrator Association

Administrator

Office or agency responsible for administering securities law at state level, expansive powers

Cease and Desist Order

Used whenever registered rep has engaged, or is about to engage, in any act violating the USA or other rules, can be done w/o prior hearing

Stop order

Deny or suspend effectiveness of any registration statement, applies to securities

Summary order (acting summarily)

Acting w/o prior notice, one of the powers regarding registration of persons and securities (postpone/suspend registration of any securities pro pending final determination, security, denying or revoking a specific security or transaction exemption). Upon entry of an order, administrator must promptly notify all parties, reasons, and that within 15 days after receipt of written request a hearing will be granted

Final orders

Cannot be entered w/o appropriate prior notice to the interested parties, the opportunity for a hearing, written findings of fact and conclusions of law

Person

Any individual/natural legal person (corporations, partnerships, associations, trusts, unincorporated organizations, governments, political subdivision of government)

Nonpersons

Minors, deceased individuals, mentally incompetent individuals

Broker-dealer

Any person engaged in business of effecting transactions in SECURITIES for account of others or for its own account

Agent

Any individual who represents a BD or issuer in effecting or attempting to effect purchase/sale of securities, always natural individual persons, involved in securities sales/supervise (excludes ministerial/clerical functions)

Investment Adviser

Any person who, for compensation, engages in the business of advising others, either directly or through writings, as to the value of securities or as to the advisability of dealing w/ securities or, for compensation and regular business, issues or announces analyses regarding securities. Under National Securities Markets Improvement Act of 1996, IAs registered w/ either SEC or state but never both

Investment Adviser Representative (IAR)

Any individual representing an investment advisor performing duties related to the giving of or soliciting of advisory services, always individual natural persons

Associated Person

Any partner, officer, director of BD or IA, including any employees of the BD or IA, excludes clerical

Form ADV

Official form for IA to register, used to register on federal or state level

Guaranteed Security

Guaranteed as to payment of principal, interest, and dividends, but not capital gains, guaranteed by third party other than issuer

Discretion

Sole or shared authority to determine action, amount, asset

Solicitor

Individuals who for compensation acts on behalf of an IA in referring potential clients, must be registered as IAR

Qualified Purchaser

Individual or family business that has over 5mm in investments or an individual/entity that invests over 25mm on own account or others’ behalf

Surety Bond

Involves 3 parties: securities professional that needs to be bonded, Administrator that sets the bonding requirement, bonding company issuing the bond - guarantees the professional will adhere to the law, covers losses if professional acts criminally (theft, embezzlement, forgery)

Exclusions from BD Definition

Banks, commercial banks, savings associations, agents, issuers

No place of business in the state: excludes BD that deal exclusively with other BD, issuers of securities being traded, financial institutions

• effects transactions in the state exclusively with/through issuers of securities involved in transactions (underwriting), other BDs or banks, institutional clients w/ assets not less than 1mm (qualified purchasers) OR

• person is licensed under securities act of state in which person maintains a place of business, and person offers+sells in state to existing customer whose residence is not in state (snowbird exemption)

Internet Advertising Exclusion

Can make generic advertisements w/ disclosure of BD or IA affiliation, lose exemption once advice (IA) or securities (BD) offered

Steps to register w/ state administrator as BD

1. submit an application

2. provide consent to service of process

3. pay filing fees

4. post a bond (if required by Administrator)

5. take and pass examination if required, can be written oral or both

6. can require applicant to publish notice of registration in one or more state newspapers

Consent to service of process

Appoints Administrator as applicant’s attorney to receive and process noncriminal securities-related complaints against applicant, all legal documents have same legal effects as if served on applicant

Renewal Date for ALL Registrations

December 31st regardless of when first registered, filing fee is free for successors

Effectiveness of Registration

Assuming no legal proceedings or incompleteness, effective 30 days from filing at noon, can be rush orders

Withdrawals also become effective 30 days from filing, Administrator has jurisdiction for 1 year

Exempt Securities for Exemption from Agent Registration

• Securities guaranteed by US, Canadian, or other diplomatic ally municipal/federal governments

• securities guaranteed by any bank organized under laws of US

• Commercial paper rated in top 3 rankings w/ denominations of 50k or more and maturities of 9 months or less

• investment contracts issued in connection w/ an employee’s stock purchase, savings, pension, or profit-sharing plans

Exempt Transactions for Exemption from Agent Registration

• unsolicited brokerage transactions

• transactions b/w issuers and underwriters

• transactions w/ financial institutions (banks, trust companies, insurance companies, investment companies)

• private placements

Definition for Investment Adviser

ABC test: Advice on SECURITIES, is in the Business of advising, receives Compensation

SEC Release IA-1092

Interprets definition of IA under IA Act of 1940 to include financial planners, pension consultants, others who offer investment advice as part of financial practices

Person is in the business of providing advice if

gives advice on a regular basis w/ some regularity and advertises investment advisory services and presents himself to the public as an IA

Exclusions from definition of IA

• IAR

• banks, savings institutions, trust companies

• lawyers, accountants, teachers, engineers (LATE) whose advice is solely incidental

• Any BD whose investment advisory services are incidental, no wrap fee charged

• publisher, employee, columnist of a newspaper or financial publication of regular and general circulation or anyone involved in cable or TV stations

• federal covered IA registered with the SEC

• any other person specified by the Administrator

Federal Covered IAs

• Large advisors required to be registered w/ the SEC

• meet the minimum AUM of 110m

• under contract to manage an investment company registered under the Investment Company Act of 1940 regardless of AUM

• not registered with the SEC because they are excluded from definition of IA (involved in US gov securities advice)

Small Investment Advisors

Less than 25mm AUM, must register at state level unless in 15 or more states

Mid-size Advisors

More than 25mm but less than 100mm, must register at state level unless…

• if adviser is not required to be registered as an IA with the securities Administrator of the state in which it maintains its principal office and place of business

• if registered, the adviser would not be subject to examination as an IA by that securities Administrator

• the adviser is required to register in 15 or more states

• if the adviser elects to take advantage of the 20mm buffer

Other exceptions under Dodd-Frank

• pension consultants w/ 200mm under control

• mid-size advisors w/ b/w 100 and 110mm aum

• IA expecting to be SEC eligible within 120 days of filing Form ADV

Federal covered advisers will make notice filing with a state if

place of business in the state or 6 or more retail clients located within the state in a 12-month period

Definition of an investment contract as a security according to Howey

Must constitute an investment of money in a common enterprise with the expectation of profits to be derived primarily from the efforts of a person other than the investor

6 things not securities by definition under USA

• nonvariable insurance products

• interest in a retirement plan like an IRA or 401k

• collectibles

• commodities

• personal residences like condos

• currency

Notice Filing

Required to meet licensing and antifraud state laws, usually investment companies registered under Investment Company Act of 1940

• docs filed along with registration statements filed with SEC

• documents filed as amendments to initial federal registration statements

• report on value of securities offered

• consent to service of process

Registration by Coordination (OTC Bulletin or Link)

“Coordinate” federal (through Securities Act of 1933) and state registration by supplying

• copies of latest prospectus

• copy of articles of incorporation and bylaws

• copy of underwriting agreement

• copies of other info filed under Securities Act of 1933

• promptly, each amendment to federal prospectus after filing with SEC

Effective date: effective same as federal effective, assuming no stop orders by administrator, has been on file for minimum number of days, statements of min/max underwriting and pop for 2 business days

Registration by Qualification

Single state offerings, extensive info requested, may require prospectus be sent to purchasers before sale, effective set by Administrator

Exempt Transactions

• isolated nonissuer transactions: secondary nonissuer transactions that occur infrequently

• unsolicited brokerage transactions

• underwriting transactions

• bankruptcy, guardian, conservator transactions

• institutional investor transactions

• limited offering transactions/private placement: directed at no more than 10 offerees other than institutional investors over the last 12 months, no general solicitation/commission

Gift of Assessable Stock

is considered an offer to sell

Publishing and Broadcasting Exceptions to Jurisdiction

• television or radio broadcast originate outside the state

• bona fide newspaper or periodical published outside of the state

• newspaper published inside the state but >66% circulation outside of state in last year

can result in no state having jurisdiction

4 powers of the Administrator

• make, amend, rescind rules and orders and require use of specific forms

• conduct investigations and issue subpoenas

• issue cease+desist orders, injunctions

• deny, suspend, cancel, revoke registrations and licenses

Administrator Orders

Can be appealed within 60 days of issuance, ruling specific to an individual

Administrator Investigation Powers

• require statements in writing, under oath, regarding all matters of issues relating to an investigation

• publish and make publics the facts of an investigation

• subpoena witnesses and compel attendance+testimony

• take evidence and require production of any documents deemed relevant

Contumacy

Administrator may appeal to state court and can request help administering compliance with investigation, can result in contempt of court if help granted

Cease and desist orders

Have no legal power and may be issued w/o hearing, can move to court injunction to enjoin individual if needed to reverse resistance

Civil Liabilities: purchaser can sue for recovery of securities sold in violation if

• securities sold were in violation of registration provisions of USA

• sale was of an unregistered nonexempt security

• securities professional omitted/made untrue statements of material facts during sales presentation

• agent was named along w/ the BD for a civil infraction

• securities sold by an agent who should have been but was not registered under the act

• securities sold in violation of a rule or order of Administrator

Statute of limitations for civil liabilities

Earlier of 3 years from date of sale or two years from discovering violation

Recovery of civil liability damages

Original purchase price, interest (legal rate set by administrator), all reasonable court+attorney fees, minus any income received while securities held

Right of recission/Letter of recission

Seller of securities offers to repurchase securities if they sold in violation of the USA - letter must be accepted within 30 days

Criminal Penalties for violations of USA

Max 3 years jail sentence and/or 5k fine for WILLING violation of rule, 5 year statute of limitations, can file petition within 60 days

3 Disclosures of BDs

Disclosure of Capacity: must indicate if agent or principle by settlement date

Disclosure of Conflicts of Interest

Disclosure of Fees: Fees disclosed at account opening, updated within 30 days of any change (typical fees: issuance of a stock certificate, transferring an account, wiring funds, margin account interest, account maintenance fees, safekeeping of funds/securities, late settlement fees, postage&handling)

Investment Adviser Brochure Rule

Must receive written acknowledgement of receipt of disclosures from customer

Required Material Disciplinary Disclosures

• state/regulatory proceedings in which the advisor was found to violate rules or statutes that led to denial, suspension, revocation of registration

• court proceedings like injunctions against firm relating to investment related activity or any felony

• SRO proceedings that punished the adviser/firm

IA must furnish each advisory client and prospect with

• brochure (copy of Part 2A of form ADV)

• copy of 2B brochure supplement

• copy of 2A Appendix 1 wrap fee brochure if applicable

• summary of material changes

• any other Administrator required info

Initial Delivery of Brochure

• at time of entering contract if client has right to terminate within 5 business days

• waived if delivered 48 hours in advance

Annual Delivery of Brochure

Must deliver within 120 days of end of fiscal year

• free updated brochure w/ supplements

• or summary of material changes w/ offer to send free brochure

Exceptions to brochure requirements

• clients who receive only impersonal advice and who pay less than $500 in fees per year

• client who is a registered investment company under 1940 act

Contract for impersonal advisory services

Any contract relating to investment advisory services

• by means of written material or oral statements that dont claim to meet the objectives or needs of specific individuals/accounts

• issuance of statistical information containing no expression of opinion as to the merits of a particular security

• any combo

Performance Based comp for IAs

Cannot charge performance based comp unless

• natural person/company w/ 1.1mm under management of firm

• IA has reason to believe natural person/company has 2.2m net worth excluding primary residence

Static vs Interactive Content

Static content requires pre-approval. Interactive content can be reused by others and commented on by others. Both static and interactive content can be changed by its originator, but static can only be changed by its originator and interactive by the originator or others.

Advertisements about charting systems must include information about

limitations and difficulties

Unlawful to

• employ any device, scheme, or artifice to defraud

• make untrue statements of material fact or omit material fact

• engage in fraud

Matched Orders

Form of market manipulation where market participants agree to buy and sell securities among themselves to boost trading volume

Wash Trade

Attempt to manipulate security’s price by buying in one brokerage account, selling in another (arbitrage, a legal strategy, would be trading in separate mkts)

5-step process for prudence under UPIA

1. analyze current position

2. design optimal investment portfolio structure

3. formalize investment policy

4. implement investment policy

5. monitor+supervise

Business accounts are not

covered accounts