Unit 1 - FEDERAL Laws Regs

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Securities Act of 1933 (federal)

SPO IPO SEO (secondary equity offering) -- applies to NEW issues unless exempt

registration statement goes to SEC, full disclosure & publish prosectus, unell exempt

known as Paper Act, Truth in Securities Act, Prospectus ACT



4 conditions: investment of money, in a common enterprise (pooling), with an expectation of a profit; and results solely from the efforts of others

*stock. bond, debenture, right or warrant, note, put, call or other option, limited partnership interests, certificate of interest in a profit sharing arrangement



any person who issues or proposes to issue any security ; generally business also could be a government entity.



any person who has purchased from an ISSUER with a view to selling (does NOT include brokerage firm earning a commission on retail sale to public.



any notice circular letter or communication, written or broadcast by radio or television that offers a security for sale or confirms the sale. S1 filing happens first.


tombstone advertisement

simply identifies the security, the price and the underwriter. is NOT a prospectus and is NOT an offering of the subject security. The Term prospectus does not include oral communications. S1 filing happens first.


Sale vs offer to Sell

sale includes contract or the disposition of a security for value. (gifts of )securities or preliminary negotations are NOT sales of a security

offer to sell refers to ANY attempt or offer to dispose of a security or an interest in a security for value or a solicitation of an offer to buys a security for value.



does NOT approve securities registered with it, does NOT pass on the merit of a security, simply makes certain that all pertinent info is fully disclosed


Exempted Securities under Securities Act of 1933

any security issued or guaranteed by US govt, any state or any political subdivision of a state (ALL federal govt issues and municipal securities are exempted)

any commercial paper that has a maturity at the time of issuance of no more than 9 months (270 days) -- proceeds must be used for working capital, not fixed assets. ie corp notes

any security issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, or charitable purposes and not for pecuniary profit

railroad equipment trust

any security issued by federal or state bank, savings & loan association, building and loan association or similar institution.


Exemptions as they relate to Banks and Rule 147

the exemption does not apply to bank holding companies. Most of the large US Banks today are owned by holding companies. ( ie citigroup not exempt)

Rule 147: security IS exempt under federal law, BUT, is NOT exempt under the Uniform Securities Act and will likely have to register with the State. 80/80/80 rule. Security is offered/sold only to folks resident in one state. can only be resold in the same state. 80% of issuer's gross rev must be derived from operations w/I state; 80% proceeds must be used for business purposes within the state, 80% of issuers assets must reside within the state. (The purpose of the exemption is to allow issuers to raise $ on a local basis) 100% residents resale rule.



No waivers can be granted by the purchaser with respect to registration.


Exempt Transactions under the Securities Act of 1933

transactions by any person OTHER than an issuer, underwriter, or dealer

transactions by an issuer that do NOT involve a public offering (ie public placement under Regulation D)


Cooling off period

3 phases of underwriting: issuer files registration, cooling off period, effective date - offering period may begin.

prior to filing - no sales or prospectus can circulate; cooling off -- no sales can happen, but indications of interest with red herring can occur (preliminary prospectus); effective date - sales can now be solicited but the firm must use a final prospectus.

cooling off - 20 days, but can take several months due to corrections etc


Red Herring Prospectus

used during cooling off period, preliminary prospectus, used to acquaint investors with essential facts. CANNOT be used to confirm sale, in place of registration statement; or to declare the final public offering price. cannot write or mark up red herring, two missing items are price and effective date. an expected price range can be given. Red Ink on from page says this is not yet effective etc


Rule 482 (omitting) Prospectus

SEC rule that permits investment companies to use an omitting prospectus. describes Mutual Fund advertisements. KEY the dates must come from regular prospectus, ad must sate from whom the full prospectus can be obtained, ad must urge investors to READ entire prospectus, an data yields etc must be accompanied by associated disclaimers/disclosures; ad cannot be used to purchase shares


on Effective Date of Registration

Investment Bankers can begin to sell to public.. Registration Statement must have SEC disclaimer.


Liabilities under Securities Act of 1933

Statute of limitations similar to Uniform Securities Act (rare instance where USA is greater than federal ): earlier of 1 yr AFTER discovery OR 3 yrs after date of the action. USA is 2 years after discovery.

penalties can be severe: fiines, barring officer or director from public corp for years, criminal can include fine, prison or both.


SEC Rule 506

a private placement where there is not dollar limit on the amount sold.

506b can sell offering to unlimited number of accredited investors, and up to 35 non accredited, no advertising

506c allows advertising if all investors are accredited and issuer takes reasonable steps to ensure investor is accredited

Jobs Act - Jumpstart Our Business Act of 2012 changed Part D reg, likely not on exam. included the Bad Actor/Bad Boy provision -- if issuer or other relevant persons convicted of securities fraud/violations, offering under rule 506 CANNOT take place


Accredited Investors - SEC rule 501

bank, insurance co, registered investment co

an employee benefit plan if a bank, insurance co, invest adviser makes investment decisions, or if plan has total assets in excess of $5m

charitable org or corp with over $5m in assets

directors, executive officers, general partners of issuer

person and their spouse, excluding primary residence, net worth exceeds over $1m

person with income over $200k, or $300k if married in 2 most recent years and is expected to earn as much in current year

entities made up of accredited investors

term accredited ONLY applies to private placements. Income levels haven't changed since 1982, real estate exclusion added, :eligibility does not equal suitability.


Rule 501 - test alert

assets in acct held jointly but not spousal can be included in determining the purchasers net worth. but only to the extent of her % ownership of the account/property.


Rule 506b - test alert

any relative, spouse or relative of spouse of a purchaser living in the primary residence of purchaser counts as a SINGLE purchaser; a corp, partnership, or other entity is counted as one purchaser UNLESS entity was organized for the purpose of acquiring the securities -- each owner will be counted separately.


From D Under Rule 503

requires certain basic info about the issuer and the offering, including total size of offering, amount sold to date, use of proceeds, name of persons paid commission

Form D of Regulation D must be filed with SEC no later than 15 days AFTER the first sale. There is talk of changing this to 15 days prior to sale under 506 C.


Restricted Securities

are unregistered securities purchased by an investor in a private placement and are restricted from resale for a period of time. Also known as letter securities (or legend securities)


Restricted Securities

control person, control stock, nonaffiliate, SEC Rule 144 (Sale of restricted & control securities)

CONTROL PERSON: loosely referred to as insiders/affiliates. A corp director, officer, greater than 10% voting stockholder, or spouse of any of the preceding.

CONTROL STOCK: held by control person. What makes it a control stock is WHO owns it, not how it was acquired. Generally must be reported to SEC.

NONAFFILIATE: an investor who is NOT a control person and has not other affiliation with the issuer other than as an owner of securities.


SEC Rule 144 (Sale of Restricted and Control Securities)

created to allow for the resale of already existing restricted securities without having to go thru cost prohibited registration filing. Those who wish to sell a control stock or restricted stock MUST do so by filing Form 144.


Securities Exchange Act of 1934 (created the SEC)

Grants SEC authority over all aspects of the securities in industry, including the power to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies as well as nation's securities self regulatory organizations (SRO's)

NYSE CHX NASDAQ are SRO's. FInra is the largest SRO, the organization which all broker-dealers belong.

Act also identifies and prohibits certain Conduct. Empowers SEC to require reporting info by companies with publicly traded securities.



any person engaged in business of effecting transactions in securities for the acct of others. Banks NOT included in def.



person regularly engaged in business of buying selling securities for his OWN acct. (banks insurance companies etc trading for their own acct are not included in the definition if the trading is not part of regular business)


Associated Person (SEC)

a person associated with a broker-dealer is ANY partner, officer, director of the broker dealer or any person directly or indirectly controlling or controlled by BD. Including employees of BD with the exception of clerical.


Market Maker

dealer who holds himself out as being willing to buy sell a particular security for his own acct and on a regular continuous basis.


Securities Information Processor (SIP)

person engaged in business of any securities info (non exempt). Doesn't include newspapers etc , SRO, bank or BD or any common carrier falling under FCC ie radio /TV.


Transfer agent (under SEC)

person who engages on behalf of issuer of securities. Does NOT include , insurance company or separate accts within variable annuities or vul, nor registered clearing agencies.



an organization, association, group of persons providing marketplace or facilities for bringing together purchasers and sellers of securities. Must be registered. accepted or denied within 90 days.


SRO self regulatory organization

is a national securities exchange or registered association such as FINRA.


Municipal Security

direct obligation of state or political subdivision there of, most common are municipal bonds


Government Securities

direct obligation of US gov't. Also includes Govt agencies such as those issued by FANNIE MAE (Federal National Mortgage Association)


Appropriate Regulatory Authority...SEC

SEC is appropriate reg author for : national security exchanges, registered security assocations, members of exchange/association, persons associated with member, applicants to become a member or person associated with a member.


Take Note - Securities Exchange Act

provision in act gives Federal Reserve authority to govern use of credit for purchase or carrying of securities known as Regulation T.


Discretionary account

securities professional has authority to decide: security, number of shares or whether to buy and sell.

discretion has nothing to do with TIMING or PRICE. if client says to purchase 100 shares of Apple, but doesn't mention price or when to buy, this is NOT a discretionary trade.

To Identify a discretionary order, any of the 3 A's missing it is discretionary: Activity, Amount, Asset.


Unsolicited Order

client initiates securities order


Registration under Securities Act of 1934

BDs operating interstate, and on exchanges and in OTC must file for app for membership on FORM BD, and SEC has 45 days to accept or deny the registration.

SECURITY EXCHANGES ,sec has 90 days to accept /deny

NATIONAL SECURITY ASSOCATIONS: FINRA (formerly NASD), MSRB (municipal rule making board) both came from amended 1934 Security Exchange Act

CORPORATIONS with listed securities

Transfer agents



Insider Transactions of 1934

any person direct or indirect owner of more than10 %(other than exempt) registered on national security exchange; and officers or directors of the issuers of such securities.

SEC must be notified of any changes in ownership, can't sell short, or short-swing profits. Exercise of stock options is not prohibited.


Schedule 13 D (SEA) filings

5% Beneficial Owners must file report with the ISSUER, SEC, and market where traded, within 10 days of any transaction that results in beneficial ownership of more than 5%.


Section 13 F of SEA 1934

any institutional investment manager that uses mail...exercise investment discretion over an equity portfolio with market value on the last trading day of the preceding 12 months of $100M or more. must file form 13f QTRLY within 45 days of the end of each quarter.

13F securities: includes exchange traded, equity options, closed end investment co, certain convertible debt and ETFs. Shares of open-end investment (ie mutual funds) are NOT on the list


Schedule G filings

adopted to ease beneficial ownership; if exceeds 5% ownership but has no intention of changing the company or influencing control.. Invest co and large pension funds are examples. Passive investors must file from w/I 10 days of crossing over 5% owner


16 a filing

of sea 34 requires offices directors greater than 10% to file by end of 2nd business day on which transaction there are considered insider/control person.


credit requirements (margin)

was 10% now 50%. New issues cannot be bought on margin. MF always new issue. after owned for 30 days, can be used on margin loan.


regulation of manipulative and deceptive devices

churning - bd turns over excessive trades in discrectionary acct

wash trades - security trans results in no change in ownership; buy / sell shares in 2 different BD's.. to give impression of high activity

matched orders - buy/sell same amt of security and same price substantially, no real real change in ownership/


insider trading and securities fraud enforcement act of 1988 (ITSFEA)

gave sec power to invoke civil penalties. greater amt of $1m or treble damages.

Treble damages penalty can be 3x gains/losses..in addition to profit or losses made of result of insider trading. Crimininal max 20 yr sentence.

Person who lost their $ can recover, but no Treble damages. Treble damages only for SEC. Statue of limitation is 5 yrs from date of last transaction.


Chinese wall

must keep non public info protected when doing a deal...must remain confidential from other departments in firm


Financial Responsbility rules under SEA of 1934

SEC RUle 15c-1 - Uniform Capital Net Rules

BD must maintain minimum net liquid assets (minimum capital rqmts); must maintain Fidelity Bond


Securities Amendment Act of 1975

biggest change to security laws since 1933 and 1934; removes barriers to competition.

fixed commission rates removed; r

equires municipal securities dealers to register with SEC. these BDs were exempt before...MSRB (Municipal Securities Rule Making Board). Rule gave rise to MSRB. Many members of MSRB are banks that are beyond jurisdiction of SEC are regulated by banking industry.;

SEC given power to regulate Transfer Agents


SEA of 1933

required full disclosure of IPO


Investment Act of 1940 (IA)

Investment Company (IC) - any ISSUER that is or holds itself as being engaged primarily in the business of investing in securities.



banks saving loans

insurance companies

holding companies

issuers whose securities are owned by less than 100 persons

issuers who trade in ivenstements other than securities


Types of IC

Face Amt Company - ic obligated to pay on installment plans, pays a stated sum at fixed date more than 24 months after date of issuance.

UIT - Unit Invest Trust - ie municipal bond trust; no board no adviser; redeemable shares only; once compiled - fixed units

Management Company - operates with advisers who charge a fee for AUM.

IC must register with SEC under SEA 19333 and IC Act of 1940.


Subclassification of management Investment Companies

Closed-end - manangement company generally have 1x offering and do not redeem outstanding shares. Based on supply and demand. Not NAV. can be bought above/below or at NAV. Prospectus only reqd on the IPO.

Open-end - MF ; redemption price (selling) is NAV + sales charge. set at close of business day. Purchases are made next computed NAV minus any redemption fees if any. As continuous new share offering must give prospectus prior to or concurrent with sale.

Management companies can be subdivided into diversified and nondiversified.


Ineligibility of certain affiliated persons and underwriters

Invest Co Act of 1940 prohibits certain people who have committed certain acts from serving in sensitive positions with an IC, it's adviser, or its principal uw. felany within prev 10 yrs. decree from courts. Person may file with SEC to become eligible again.

40% of board of IC must be 'outsiders'. no connection to fund other than a position on the board ( may own some shares though)


Rule 12b-1

titled Payment of Asset-Based Sales Loads by Registered Open-End Mgmt Investment Company

allows MF to distribute its own shares w/o uw and with a sales load.

Asset based sales load any financying used to marek MF sales.. Allows No Load funds to pay commission. can's exceed .25 to be called no load

Under no circumstance can 12b-1 exceed .75% (finra permits another .25% add on as a svc fee)

MF may act as distributor as long as there is a plan. Plan approved initially by AT LEAST a majority of outstanding voting securities of IC.

Must be reapproved at least annually. Quarterly review. WHOLE BOARD must say yes and must be non interested. reviewed 3x by board per yr.

Directors must believe will benefit shareholders, negoatiate at arms length; non interested members of board can terminate at any time. OR, by vote of majority shareholder of the company.


Prohibited Activities of IC

May not:

buy on margin

cannot have joint acct with another ic or someone else

sell short

acquire more than 3% of outstanding voting securities of another IC


Changes in Investment Policy of IC

Size of IC

changes requires majority of the outstanding voting stock

no registered IC can make IPO w/o net worth of $100k


Investment Advisory & Underwriter contracts

IA / U/W cannot be hired withot majority of its outstanding voting securities

must be contract detailing comp , approved annually, can be termed automatically; also majority of non interested directors must approve (remember board made up of 40% of non interested directors)


Test Topic alert - Affiliated Person / Control Person

Affiliate person - person directly or indirectly owning more than 5%; no one is determined to be affiliated soley b/c of board membership.

Control person has more than 25% outstanding shares.



of IC assets are typically a bank. required to have a custodian. bank is not required to have FDIC coverage


Sale of Redemable Securities

Price at which MF may be sold. Public offering price per prospectus. Breakpoints. Individual, spouse, dep children under 21; any legitimate entity as long as not formed only to make this purchase, trustee ie pension profit sharing plan..qualified eb plan

Definition of a person does NOT include: investment club, group without common purpose

No Sales charge to officers, ee's, adviser or u/w of fund. Or, via automatic reinvestment of cap gains and div


Test Topic Alert - when can IA reduce fee's

can offset his fees with commissions earned on sale of MF, insurance product etc. BUT, cannot reduce price of MF, insurance product with stated price by reducing commission..as would be rebating. Legally there is a difference.


Periodic Reports

IC msut file annual financials; semi annual to shareholders


Larceny Embezzlment

fine upto $10k and 20 yr imprisonment (was 5); ic act of 1940 allows for civil damages via the SEC, right to appeal with 60 days if found guilty


MF returns: Current and Total

Currert Yield: yearly dividend/current offering price aka as public offering price

TR: yearly div + cap gains / pop


Currency Transaction Reports (CTRS)

Bank secrecy act rquires every financial institu to report electronically via form 112 each cash trans over $10k. applies to loan payoffs, etf''s, purchase of cod's, stocks, bonds, mf, any other investment.

also requires wires of $3k+ to be reported


National Securities Market Improvement Act of 1996 (NSMIA)

extensively amended 1934 1933 1940 acts;

preemptive authority of SEC; eliminates dual registration rquirements for certain secur and IA. ie NYSE only has to Federally register.; created federal class covered of advisers and secur managing over $100 m or more..may reg with SEC, federal.


Rule 482 - Omitting Prospectus

Federal Rule. Omits critical info. Legal name for the typical mutual fund ad/tombstone ad


Q bank quest - would bond issued by Canada be exempt

non exempt Federal' exempt State