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What is a broker-dealer?
- A "person" (firm) engaged in the business of effecting securities transactions.
- - Either for the accounts of others (agency capacity)
- - Its own account (principle capacity)
What is NOT a broker-dealer?
- Banks, savings institutions, trust companies
- An issuer
- An agent
- Institutional exemption (only deals with institutional investors)
- Nonresident exemption (existing customers, non-residents of that state)
Who is an agent?
Individual who represents a broker-dealer in effecting or attempting to effect security transactions (RR or Sales Representative)
An individual who represents an issuer in effecting or attempting to effect security transactions (an entrepreneur selling stock in his own company to raise capital).
Who is NOT an agent?
- Those who represent issuers sellings EXEMPT securities
- Those who represent issuers in EXEMPT transactions
- Those who are selling only to qualified purchasers or private placements
- Those who are selling to employees involving securities (may not receive commission)
What is ABC in relation to an investment advisor?
Advice, as a Business, for Compensation.
What is an Investment Advisor?
A person that provides investment advice as a business for compensation (includes wrap fees).
What is NOT an investment advisor?
- Banks, savings institutions, or trust companies.
- Lawyers, Accountants, Teachers, or Engineers
- Broker-dealers and their agents
- Federal Covered Advisors
What are the exemptions of a definition of an investment advisor?
- Advisors whose only customers are qualifying private funds as defined by the SEC
- Managers of hedge funds
Which organization must an Investment Advisor with Assets Under Management of less $100 million register with?
The State, not the SEC.
Which organization must an Investment Advisor with Assets Under Management of $110 million register with?
The SEC, not the state.
What must an investment advisor with Assets Under Management of $105 million register with?
They have a choice between the SEC or the state.
What is the buffer zone that applies to the switch of registration regarding Assets Under Management?
The buffer zone is an area of $20 million, between $90 million and $110 million within which an advisor is not required to switch its registration.
An investment advisor has no place of business in the state and has only institutional clients in the state.
Does this IA have to register under the Universal Securities Agent act?
No. The IA only does business with institutional clients and does not have a place of business in the state.
An investment advisor has no place of business in the state and does business with less than 6 non-institutional clients in the previous year. Does this advisor have to register under the USA?
No. The IA does NOT have a place of business in the state and does NOT do business with MORE THAN 5 non-institutional clients.
What is an IAR?
- An IAR is an Investment Advisor Representative.
- - Manages accounts or portfolios of clients
- - Determines which recommendations or advice regarding securities should be given
- - Solicits, offers or negotiates for the sale of, or sells, investment advisory services
- - Supervises employees who DO engage in any of the aforementioned.
What is a solicitor and what documents are they required to provide a client?
- A person who refers to an investment advisor for compensation.
- Is required to provide clients with the ADV Part 2 of the advisors form (brochure)
- Required to provide the solicitor's disclosure document.
- Required to obtain a signed and dated acknowledgement from the client verifying the delivery of the ADV form and the disclosure form.
What is the required information to be included on application for registration?
- Name and location of organization (BD's and IA's)
- Proposed method of doing business (
- Qualifications and business history of any partner, officer, director, or similar "person"
- Financial condition and history
- Any misdemeanors involving the securities industry
- Any felony.
- Consent to service of process.
What may an investment advisor or broker-dealer be required to do if they have custody or discretionary authority of a client's account?
They might have to post a bond. In lieu of a bond, the Administrator must accept an appropriate deposit of cash or securities. IAR's are NOT required to post a bond.
What might an IA be required to meet to register if they have custody of a client's assets? And if they have discretionary authority?
- An IA may be required to have at least $35,000 in net worth if they have custody.
- If they have discretion, but NOT custody, the amount is $10,000.
What might a broker-dealer be required to do (by the admin) to register under the USA?
What about an agent?
- A BD may be required to maintain a specified amount (set by the admin) of net capital (or liquid net worth).
- An agent may be required to post a bond if he has DISCRETIONARY authority.
When is a "person's" registration effective after filing?
The registration is effective at NOON on the 30th day after a complete application is filed. The admin may grant earlier effectiveness or defer effectiveness until 30 days after any amendment to the registration.
When does a person's registration expire?
Registration expires on December 31 each year, regardless of the year filed.
How many reasons does the Administrator have to have to deny a registration?
The admin must have TWO reasons for denial. One of which must be "in public interest".
What is churning?
Trades excessive in frequency and/or size. The aim here is for the agent to gain commission. Also known as "twisting".
A trade must be approved by the customer prior to execution unless an RR or IAR has discretionary authority. If the RR/IAR does not get this approval and proceeds anyway with the trade, what is this an example of?
This is an example of unauthorized trading.
Is sharing in profits and losses in customer accounts permissable under the USA?
Yes, but only with written authorization.
What is front-running?
Front running is when an agent places a trade on the same security prior to the completion of a pending block transaction. (trading in front of a customer)
What does the NASAA say about comparing investment company portfolios to the performance of savings accounts, certificates of deposits, or other bank deposit accounts?
While it is allowed, one must inform the customer that investment products are not insured or otherwise guaranteed by the FDIC.
What are the requirements for an advisory contract under the USA?
- It must be in writing.
- If it is a partnership, there must be a clause stating that customers will be notified of any change in partners "within a reasonable time".
- Generally, there are no performance fees however, there may be a fulcrum fee based on overall assets, including capital losses and depreciation.
What is the difference between the delivery of discretionary authority between IA's, BD's, and RR's?
IA's may exercise discretionary authority granted verbally by a customer if written authorization is obtained within 10 business days. BD's and RR's are not permitted to do this. (prior written only)
Are testimonial and/or references to past recommendations of a security allowed by IA's?
- No testimonials are allowed concerning the IA, IAR's, advice, or any other services offered by the firm.
- References to past recommendations are not allowed unless a list of ALL recommendations within the last year is presented. The good, the bad, and the ugly.
What are soft dollars?
- Soft dollars is used to describe the means by which an IA pays for investment services through client commissions as opposed to normal payments.
- May only be used for the purchase of investment related services, primarily research services that BENEFIT the client.
What must be disclosed on the front cover of a prospectus?
- That the security(s) have not been approved or disapproved by the Securities and Exchange Commission or by any state securities commission.
- The above entitities cannot guarantee the adequacy or accuracy of the prospectus.
How long does an IA have to retain their records?
- 5 years total
- 2 years in the principal office
- Can be kept in any manner as long as they can be readily copied/printed.
How long does a BD have to retain their records?
- They generally follow SEC rules
- 3 years
- 2 years readily accessible
- However, principle designation records, records of original entry, and trade blotters must be retained for 6 years
- Stock certificates, partnership papers, articles of incorporation, and minutes of BOD meetings must be kept for the life of the firm
What is ICE?
- Description of what a security is.
- An investment of money, in a common enterprise, with the expectation of profit
What is the maximum number of states that can have jurisdiction over an offer?
- Where the offer was DIRECTED and where it is RECEIVED.
What is the maximum number of states that can have jurisdiction over a SALE?
- Where the sale is ORIGINATED.
- Where it is DIRECTED.
- Where it is ACCEPTED.
What are the three things that are necessary for a security to be offered or sold?
- Federally Covered.
If a publisher publishes an offer or sales in a newspaper that is NOT published in that state, can that security actually be offered or sold?
- NO. If the paper is not published in state, the offer/sell cannot be made.
- Also, if a paper IS in state but has more than 2/3 of it circulation out of state, it cannot be made.
- This means that if AT LEAST 1/3 of paper is circulated in state and paper is published in state, the offer/sell can be made.
What are the defining characteristics of NOTIFICATION FILING?
- Registration is filed with the SEC
- Used by large, established companies.
- minimum of 400k shares held
- At least 500 shareholders
What are the defining characteristics of COORDINATION filing?
- Registration is with the SEC
- Used by issuers who dont meet the prerequisites for Notification filing.
What are the defining characteristics of QUALIFICATION filing?
- Registered with the states
- Any issuer may use this.
- Used by issuers who don't meet the prerequisites of notification or coordination filing.
When is registration effective for notification filing?
- When the SEC says so
- If state registration is on file for 5 business days
When is registration effective for coordination filing?
- When the SEC says so.
- If the state registration is on file for 10 business days.
When is the registration effective for qualification filing?
When the state administrator says so.