Key Facts for Chapter 1: Securities Markets The Securities Act of 1933 regulates the new issue market All new issues require a prospectus be delivered for up to 90 days following the offering The secondary market is regulated under the Securities Exchange Act of 1934 Specialists do not deal with the public and cannot compete with public orders The First Market is an auction market where trading occurs on exchanges, including NASDAQ Securities that trade in the first market are referred to as NMS The OTC market is a negotiated market for trading unlisted securities and Pink sheets are referred to as Non-NMS securities Market makers buy at the bid and customers sell at the bid Market makers sell at the ask and customers buy at the ask The difference between the bid and ask is the spread Capitalization of a corporation includes equity sold and amount of debt issued According to liquidation priority in bankruptcy, creditors are always paid before owners A.D.Banker&Company® 1 Key Facts for Chapter 2: Equity Securities 2 Shareholders have a limited liability since the most they can lose is original investment Authorized shares are the maximum number of share allowed to be sold under the corporate charter Treasury stock has no voting rights and is not entitled to receive dividends Shareholders have voting rights on matters affecting the corporation Cumulative voting favors minority shareholders Dividends are payable in the form of cash, stock, or property The declaration date is when the BOD announces a dividend will be paid The ex-dividend date is set by FINRA and occurs 1 business day before the record date The record date is set by the BOD as the date the shareholders must be on record to receive dividends The payable date is set by the BOD as the date shareholders are paid the dividend Stock splits and stock dividends are not considered taxable when received Preferred stock has a fixed dividend and has preference over common stock dividends Preferred stock price has an inverse relationship with interest rates Cumulative preferred shares must pay dividends in arrears + current year before common shares pay dividends Convertible preferred shares may be converted to common shares at the conversion price Dividend Yield = Annual Dividend ÷ Current Market Price ADRs pay dividends in U.S. dollars and have no voting or preemptive rights Bullish investors anticipate stock prices will increase Bearish investors anticipate stock prices will fall The BUYER of an option has RIGHTS The SELLER of an option takes on an OBLIGATION Hedge strategies protect a position by purchasing an option contract Income strategies generate income in a flat market by selling an option contract Investors speculating rising prices will BUY a futures contract Investors speculating falling prices will SELL a futures contract Investors hedging or protecting a long position will SELL a futures contract Investors hedging or protecting a short position will BUY a futures contract A.D.Banker&Company® Key Facts for Chapter 3: Debt Securities Bonds are loan contracts between the issuer (borrower) and the investor (creditor) for a fixed period at a fixed rate Bonds are fixed income securities that pay fixed semi-annual interest payments A bond is initially issued at par value, which is assumed to be $1,000 per bond Zero coupon bonds are purchased at a discount from par and have no interest rate At maturity, the final payment received by bondholders is the principal (par value) plus the last semiannual interest payment Bonds trading in the secondary market can sell at a premium (above par) or discount (below par) Bonds prices have an inverse relationship with current interest rates Bond coupons are determined by the general level of interest rates and the issuers credit history and financial strength Nominal yield is the stated coupon as a percentage of par Current yield= Annual interest ÷ Current Market Price Discount bonds have a current yield greater than the nominal yield Premium bonds have a current yield less than the nominal yield Yield to maturity is also referred to as basis yield Secured bonds are backed by collateral such as real estate, equipment, or owned securities Convertible bonds may be converted into common shares at the conversion price Conversion Price= $1,000 ÷ Conversion Ratio ETNs give a return tied to an index, there is no liquidity risk, and they are tax efficient Market Linked CDs have a guaranteed minimum return, cap, and index participation rate U.S. Government securities are virtually free of default risk but have an interest rate risk Maturities of treasury securities ranging from shortest to longest are T-bills, T-notes, and T-bonds TIPS have the principal amount adjusted every 6 months based on the CPI GNMA have interest and principal guaranteed by the U.S. Government CMOs are unsuitable for small/unsophisticated investors due to their complexity Mortgage and Asset-Backed securities have prepayment risk when interest rates decline Mortgage and Asset-Backed securities have extension risk when interest rates rise General obligation bonds are backed by the full faith, credit, and taxing power of the issuer Revenue bonds are self-supporting debt payable from user fees of projects or facilities Municipal bonds that contain a legal opinion are exempt from federal income tax Tax-Equivalent Yield= Interest on municipal bond ÷ (100% - tax bracket %) Investors in a high tax bracket benefit from the tax-free yields of municipal bonds Money market instruments are short-term debt instruments maturing in 1 year or less A.D.Banker&Company® 3 Key Facts for Chapter 4: Investment Companies 4 Investment companies must have at least $100k net assets, a minimum of 100 shareholders, and a clearly defined investment objective Investment companies with 100 shareholders or more must register with the SEC Investment company offerings provide diversification and full-time professional money management UITs have fixed portfolios, are not actively managed, and are redeemable Open-end investment companies are called mutual funds Mutual fund purchases are always primary offerings that require a prospectus delivery Mutual funds only issue one class of security, which is common stock Mutual fund shares can only be redeemed by the issuing fund and are not traded POP = NAV + Sales Charge Closed-end funds trade in the secondary market on exchanges or OTC Buyers of closed-end funds in the secondary market do not receive a prospectus Closed-end fund shares may trade above or below the NAV per share Closed-end funds can be capitalized with common stock, preferred stock, and bonds Diversified investment companies meet the 75-5-10 rule Mutual funds minimum asset-to-debt ratio is 3:1 Mutual funds cannot buy on margin, sell short, or sell uncovered options Covered call writing is permitted in mutual funds to generate extra income Mutual fund shares owned for 30 days can be used as collateral in a margin account A majority of the board of directors of a fund must be disinterested members The investment adviser/fund manager must be registered with the SEC The investment adviser management fee is the largest part of the operating expenses The custodian safeguards fund assets The transfer agent issues and cancels shares and distributes dividends and gains Growth funds invest primarily in common stock Equity income funds invest in preferred stock and high dividend paying common stock Bond funds seek current income Money market funds seek capital preservation and/or liquidity The NAV of money market funds is expected to be stable at $1 per share Asset Allocation funds divide the portfolio among different asset categories Index funds are passively managed, which lowers operating expenses and management fees A.D.Banker&Company® Key Facts for Chapter 5: Mutual Fund Purchase, Redemption, and Taxation Customers pay the Public Offering Price (POP) when purchasing mutual fund shares Customers receive the Net Asset Value (NAV) when redeeming mutual fund shares Mutual funds calculate the NAV once daily at 4 p.m. Mutual fund orders are processed at the next calculation of NAV based on forward pricing A prospectus must be provided to the purchaser before or at the time of purchase Mutual fund sales charges cannot exceed 8.5% of the POP NAV + Sales Charge= POP (POP - NAV) ÷ POP = Sales Charge % NAV ÷ (1- Sales Charge %) = POP 12b-1 fees include marketing, advertising, and other costs of distributing fund shares 12b-1 fees cannot exceed .75% of the fund’s average net assets per year Class A shares have a front-end load and the lowest 12b-1 fees Class B shares have a back-end load (CDSC) that declines annually and higher 12b-1 fees Class B shares are converted to Class A shares once the CDSC drops to zero Class C shares have a level load and charge 1% annually with higher 12b-1 fees No-Load funds do not charge a sales load and can assess a 12b-1 fee no higher than .25% per year To charge the maximum 8.5% sales charge, Class A shares must offer breakpoints and ROA Breakpoints offer volume sales charge discounts to Class A shareholders Selling just below a breakpoint, or failing to disclose a breakpoint is a Breakpoint Sales Violation The LOI has a maximum life of 13 months and can be backdated up to 90 days ROA allow shareholders to qualify for breakpoints on new money invested Mutual funds must update their prospectus every 16 months Agents may not modify, summarize, or alter the prospectus in any manner Mutual funds must send audited annual reports to the SEC and shareholders Mutual funds must furnish semi-annual reports to shareholders The Statement of Additional Information (SAI) is available upon request Regulated Investment Companies (RIC) must pass on at least 90% of its NII to investors Investors will have a capital gain if they sell their shares for more than the cost basis A fund owned for 12 months or less may have a short-term gain taxable at ordinary income rates A fund owned for 12 months and one day or longer may have a long-term gain taxable at preferential rates (assume 15%) Mutual funds only pay out capital gain distributions on an annual basis Mutual fund dividends can be paid out more than once a year and are taxable in the year paid ETFs invest in stocks that track a benchmark index and are listed and traded on an exchange Hedge funds are unregistered, open only to accredited investors, aggressive and have a high risk REITs invest in real estate (property) or mortgages on real property, are highly leveraged and have a high risk REITs are a type of RIC that must pass on 90% of ordinary income to investors A.D.Banker&Company® 5 Key Facts for Chapter 6: Insurance-Based Products 6 In a life insurance contract, the insured is the person whose life the policy is based The policyowner is responsible for making all decisions and for paying the premium Cash values of fixed insurance products are held in the insurer’s general account Cash values of variable products are held by the insurer separate account containing only customer money Term insurance is temporary coverage providing pure insurance with no cash value build-up Whole life is permanent insurance with level premiums, a fixed death benefit, and cash value UL is permanent insurance with a flexible premium, adjustable death benefit, and cash value Variable life has cash value growth dependent upon the performance of the separate account Variable life has a death benefit that fluctuates, but the face amount is the guaranteed minimum VUL has flexible premiums, a death benefit that fluctuates, and no guaranteed minimum death benefits VUL cash value is not guaranteed and growth is dependent upon the performance of separate account Variable life policy loans allow the policyowner to borrow up to 75% of cash value Variable contracts may be converted/exchanged to whole life within 24 months from issuance The viator is the policyowner selling their life insurance policy to the viatee in a life settlement Death benefits are not subject to income tax when paid to the beneficiary 1035 exchange allows life insurance policies to be exchanged without current income tax liability An exchange from an annuity to a life insurance policy is not permitted A MEC contract is a policy that has failed the 7-Pay test The accumulation period is the pay-in period of an annuity The annuity period is the payout period Perpetuity is an annuity that has no end and the stream of payments continues forever Life income option provides the highest monthly income and payments cease when annuitant dies Life income period certain is payable for life of the annuitant, or a specified period, whichever is longer Life income with refund will refund the beneficiary any balance not received by annuitant Joint and last survivor pays for the lives of both annuitants Fixed annuities are guaranteed to principal and interest and are not considered securities EIAs have minimum guarantees, cap rates, and index participation rates The 3 performance measures of an EIA include Point-to-Point, Annual Reset and High-Water Mark Funds invested in a variable annuity are held in separate accounts with no performance guarantee The number of annuity units paid during the annuity period is fixed but the value of the units fluctuates VA payments fluctuate based on the performance of the separate account compared to the AIR Partial surrenders and withdrawals made from an annuity are taxed on a LIFO basis Annuity withdrawals prior to age 59 ½ may be subject to a 10% penalty on the taxable portion The exclusion ratio determines the portion of each payment that is excluded from taxation Selling variable insurance products requires a Series 6 or 7, 63 and state insurance license Prospectus delivery is required when selling variable insurance products A.D.Banker&Company® Key Facts for Chapter 7: Economic Factors GDP is the total value of goods and services produced in the U.S. in a year Real GDP is calculated by subtracting the rate of inflation from GDP A recession begins when there are 2 consecutive quarters of declining real GDP A depression is a decline in real GDP for 6 consecutive quarters The 4 phases of the business cycle in order are expansion, peak, contraction, trough The CPI measures change in consumer prices of goods and services The FRB is responsible for the nation’s monetary policy Open market operations are the most frequently used monetary policy tool The Fed increases the money supply by buying Repos The Fed tightens the money supply by selling Repos The discount rate is the rate of interest charged by the Fed on loans to member banks Interest rates from lowest to highest are: Fed Funds, Discount, Call Money, Prime Rate The discount rate is set by the Fed, Prime Rate is set by banks Congress and the President set fiscal policy Fiscal policy includes government spending, taxation, and budgetary decisions Importers want their national currency to be strong against foreign currencies Exporters want their national currency to be weak against foreign currencies Favorable trade balance exists when exports are greater than imports Unfavorable trade balance exists when imports are greater than exports The U.S. will likely have a trade deficit when the U.S. dollar is strong The U.S. will likely have a trade surplus when the U.S. dollar is weak A positive/normal ascending yield curve has short-term rates lower than long-term rates Inverted yield curves may indicate a recession on the horizon A widening credit spread indicates a weakening in the economy and a recession is coming A narrowing credit spread indicates a strengthening economy and an expansion is coming The stock market, money supply, and housing starts are leading indicators that forecast the direction of the economy Coincident indicators show the current economic situation and include GDP, personal income, and industrial production Lagging indicators, such as the unemployment rate, show where the economy was in the business cycle Total return includes interest, dividends, capital appreciation, and distributions Risk-adjusted return measures the security’s return based on the amount of risk Inflation-adjusted return, also called real return, subtracts the inflation rate from the return Geometric return factors in compounding and arithmetic return does not consider compounding A.D.Banker&Company® 7 Key Facts for Chapter 8: Securities Analysis 8 The balance sheet is a statement of a company’s financial position at a point in time Assets – Liabilities = Net Worth Current assets include cash, accounts receivable, marketable securities and inventory Current liabilities include accounts payable, wages, taxes, and any debt payable within 12 months Net Working Capital = Current Assets - Current Liabilities Current ratio determines the number of times the current assets can pay the current liabilities Current Ratio = Current Assets ÷ Current Liabilities The Quick Ratio/Acid test shows how quickly a company can meet short-term obligations Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities Capitalization is a company’s total long-term debt and stockholders’ equity A company is highly leveraged if its liabilities are a large part of its capitalization The income statement is used to determine the profitability of a company The statement of cash flow is an indication of a company’s ability to pay its bills Earnings Per Share = Earnings Available for Common ÷ Common Shares Outstanding The PE ratio represents the price an investor pays related to corporate earnings per share Corporations must send a comprehensive annual report to stockholders Form 10K is the audited annual financial statement filed with the SEC Form 10Q is the quarterly unaudited financial statement filed with the SEC Form 8K reports significant events and must be filed with the SEC within 4 days of the event Form 13D is filed if an investor reaches 5% or more ownership with potential takeover interest Form 13G is filed if an investor reaches 5% or more ownership with no takeover potential Technical analysts review historical prices, price movement, and trading volume of a security Resistance occurs when a security’s price rises to a certain point and then falls, as if refusing to rise above that point Support occurs when a security’s price falls to a certain point and then rises, as if refusing to fall below that point A stock price that breaks through the resistance is considered a bullish trend A stock price that breaks through the support is considered a bearish trend A head and shoulder top formation is bearish A head and shoulder bottom formation is bullish A.D.Banker&Company® Key Facts for Chapter 9: Quantitative Analysis and Portfolio Managements Time value of money states a sum of money today is more value than that sum at a future date The potential for money to earn interest makes it more valuable Future Value considers the length of time an investment is held, and the interest rate earned FV= P(1+r)n FV= Future Value, P= original principal amount, r= interest rate, n=number of years compounding Present value discounts the FV of a sum back to the present using a time period and interest rate Expected return assigns probabilities to various scenarios for an investment’s potential return If NPV is positive, an investment should be pursued If NPV is negative, an investment should not be pursued IRR discounts the cash flows to current prices and is the return that would make NPV zero Dividend discount model (DDM) discounts future dividends to be paid to their NPV Discounted cash flow (DCF) discounts future cash flows to value a business Mean is the average value of a group of numbers Median is the middle number in a series of numbers listed smallest to largest Mode is the number that occurs most frequently Range is found by subtracting the smallest number from the largest number in a set Strategic asset allocation assigns specific percentages for each asset class selected for a portfolio Tactical asset allocation sets the percentage range for each asset class selected in the strategic step Growth stocks are purchased for capital gains and do not typically pay dividends Value stocks typically have low PE ratios Income investments include bonds, preferred stock, blue chip stocks, and utility stocks Diversification allocates funds among different securities, industries, and asset classes Top-down approach starts with considering the overall economy to determine which sector to invest in Bottom-up approach researches specific companies that should do well regardless of the economy Sector rotation looks to invest in industries that do well in different points of the business cycle Hedging is used as insurance to reduce systematic risk Modern Portfolio Theory tries to find the best portfolio to maximize returns given the level of risk Systematic risk is the possibility that a decline in the overall market will cause a portfolio to decline Interest rate risk is the possibility that an investment’s value will change inversely to interest rate changes Bonds with a high duration will carry a higher interest rate risk than bonds with a lower duration Bonds with a longer maturity and/or lower coupon carry a higher interest rate risk Bonds with a shorter maturity and/or higher coupon carry a lower interest rate risk Unsystematic risks can be lessened or eliminated through diversification Risk premium is the amount an investor earns above the risk-free rate T-bills are typically used as the risk-free rate The Sharpe Ratio measures the risk-adjusted return of a portfolio A higher Sharpe Ratio should provide a greater return as compared to the level of risk taken Beta measures the risk of a security in relation to the risk of the overall market The beta of the overall market is 1 A beta higher than 1 has a higher risk and is more volatile than the market Standard deviation measures the variability of returns as compared to the mean The CAPM determines the RRR of a portfolio factoring in any risk taken above the risk-free rate The 3 forms of the EMH are the weak form, semi-strong form, and strong form A.D.Banker&Company® 9 Key Facts for Chapter 10: Customer Accounts 10 An individual account with TOD/POD eliminates the probate process All owners share equally in a JTWROS registered account Owners in a TIC may have an unequal interest General partners manage the business and have unlimited liability Limited partners have no management role and have limited liability Partnerships, S Corp, and LLC all have flow through taxation Only the C Corp is a taxable entity Partnerships are referred to as DPPs S corporations can have no more than 100 shareholders and are only available to U.S. citizens A revocable trust allows the grantor to change the trust and upon death, the assets are included in the grantor’s estate An irrevocable trust cannot be changed, and the assets are not included in the grantor’s estate Irrevocable trust transactions must be based on the beneficiary’s needs, not the trustees UTMA/UGMA accounts have 1 custodian, 1 minor, and the account is registered under the minor’s SS# 4 critical pieces required to open accounts are legal name, street address, DOB, SS# or Tax ID # The customer’s signature is not required to open a new account New account forms require the signature of a principal of the firm Under Reg T, customers must pay for securities in T+4 (S+2) Margin accounts involve the extension of credit and customers may borrow money or securities When opening a margin account, customers must sign a margin agreement that pledges their securities A hypothecation agreement is required promptly after the initial transaction in the margin account A short sale is selling shares of stock that are not owned and is considered bearish At or before an option account approval, customers must receive an Options Disclosure Document Failure to settle a transaction in T+4 leads to a frozen account for 90 days Wrap accounts assess a fee that covers all investment advisory fees, administrative fees, and trades Wrap accounts can only be offered by an Investment Adviser/Investment Adviser Representative Limit orders allow the investor to choose a price limit and they want either that price or better When a stop order hits the stop price, the order turns into a market order When a stop limit order hits the stop price, the order turns into a limit order Orders placed above the current market price: Open Sell Limits-Open Buy Stops (OSLOBS) Orders placed below the current market price: Open Buy Limits-Open Sell Stops (OBLOSS) The client profile contains personal and financial information about the client Discretionary income is the amount of income that is left for spending, investing, or saving Suitable products for short-term needs include money market funds, CDs, and short-term bonds Capital preservation indicates a very conservative risk tolerance Capital appreciation indicates a moderate to aggressive risk tolerance Suitable recommendations meet customer’s objectives, risk tolerance, time horizon, liquidity needs 3 Levels of Suitability include: Reasonable-basis, Customer-specific, and Quantitative suitability A fiduciary is a person who acts on behalf of, and in the interest of, another person No firm or associated person can guarantee a customer against loss in connection with a security A.D.Banker&Company® Key Facts for Chapter 11: Retirement and Education Savings Accounts ERISA regulates private sector retirement plans Section 404(c) mandates retirement plans offer at least 3 investment alternatives with varying risk/rewards ERISA eligibility standards include full-time employees for at least 1 year and age 21 or older Qualified plan contributions are tax deductible and distributions are 100% taxable Qualified plans are subject to RMD at age 70 ½ Premature distributions prior to 59 ½ may be subject to a 10% penalty on the taxable portion Defined benefit plans have a pre-set benefit upon retirement and favor older employees Defined contribution plans pay a stated dollar or percentage of earnings contributed Profit-sharing plan contributions are discretionary and may be skipped in unprofitable years 401(k) plans are corporation plans and contributions may be matched by the employer 403(b) plans are for eligible employees of public school systems and nonprofit organizations Defined contribution plans include 401(k), 403(b), ESOP, and profit-sharing plans A QDRO is a court order that splits a retirement plan in the event of divorce or separation Nonqualified plans may discriminate and are often used as a benefit to retain key employees Deferred compensation plans defer a portion of income to a specified future date 457 plans are nonqualified plans established for government employees Anyone with earned income can contribute to a traditional or Roth IRA Excess IRA contributions are subject to a 6% penalty each year until withdrawn from the account Traditional IRA contributions can be made until age 70 ½ when they are subject to RMD Failure to take RMD results in a 50% penalty on the amount that should have been distributed Traditional IRA contributions may be tax-deductible Distributions from IRAs of deductible contributions are subject to federal and state income taxes IRA transfers move assets from one trustee to another There is no limit to the number of IRA transfers per year IRA rollovers the owner takes assets, must place into new IRA within 60 days, Only one IRA rollover per 12-month period is allowed Roth IRA contributions are after-tax dollars and are not subject to age limit restrictions Roth distributions are tax-free on accounts opened for 5 years and recipient is over age of 59 ½ Roth IRA does not require RMD Traditional IRA can be converted to Roth IRA, but taxes must be paid Coverdell plans allow a maximum nondeductible contribution of $2k per year Coverdell contributions can continue until the beneficiary reaches age 18 529 plan contributions have no beneficiary age restriction 529 plans maximum nondeductible contribution limit is determined by plan or state Coverdell and 529 plan distributions are not taxed on earnings used for qualified education Coverdell and 529 plan balances may be transferred to another relative HSA are tax-deductible savings accounts available for employees with high deductible health plans HSA distributions are not taxable if used for qualified medical expenses HSA distributions used for nonqualified medical expenses are taxable and a 20% penalty applies A.D.Banker&Company® 11 Key Facts for Chapter 12: Uniform Securities Act - Registration of Persons 12 The USA is a set of securities laws used to establish registration standards at the state level The terms USA, NASAA or Administrator indicates that a question refers to state securities laws NSMIA was enacted to eliminate dual regulations between states and the federal government The Administrator is responsible for enforcing state securities laws The legal definition of person includes individuals and legal entities such as businesses, governments, estates An issuer is any person who issues or proposes to issue a security “Exclusion” means a person doesn’t meet the definition and they are not included in the group “Exemption” means a person meets the definition, but is released from the obligations of the group Broker-dealers (BD) effect securities transactions for the account of others or their own account BD exclusions include an agent, issuer, bank, savings institution, or trust company The institutional exclusion and snowbird exclusions apply if the BD has no location in the state Canadian BDs and their agents are exempt when temporarily dealing with existing clients in U.S. BDs must register in any state where the firm has an office and/or retail customer residing BD correspondence, emails, and trade confirmations must be retained for 3 years BD account statements, new account forms, and trade blotters must be retained for 6 years Customer complaints are written complaints that must be kept for 4 years Life records are kept for the life of the firm plus 3 years after the firm is no longer in existence Agents are individuals representing BDs or Issuers in the trading of securities Unless exempt, an agent must always be registered in a state where the agent’s customer resides Clerical or ministerial personnel are not agents Partners, officers, or directors of BDs are not agents, unless they place trades Individuals representing issuers in the trading of certain exempt securities are an agent exclusion Individuals representing issuers in an exempt transaction are not agents BDs and agents must submit an application, provide consent to service of process, and pay fees to register Registration applications, if approved, become effective at noon 30 days after it is filed Registrations and notice filings expire annually on Dec 31, unless renewed ABC test defines an IA- provides advice about securities as a business for compensation The IA is the firm and an IAR represents the IA firm IA-1092 specified that certain individuals may fall under the IA definition and require registration Under IA-1092, pension consultants and sports or entertainment reps may be defined as an IA IA exclusions: IARs, LATE, BDs, agents, financial institutions, publishers, and federal covered IAs IA exemptions: IA with no place of business in the state dealing only with institutional clients An IA with no place of business in a state may also be exempt under the De Minimis exemption De Minimis under the USA is no more than 5 non-institutional clients during the past 12 months An adviser with AUM $110 million or more must register with the SEC An adviser with AUM between $100-$110 million has the choice to register with state or SEC An adviser with AUM less than $100 million will register with the state Advisers with AUM $25-$100 million required to register in 15 or more states may register w/SEC Advisers with AUM $25 million or more not required to register in the state must register w/SEC Firms acting as IA for a registered investment company must register with the SEC Federal laws exclude certain family offices, which makes them Federal Covered A.D.Banker&Company® Form ADV Part 1 and Part 2 is the application for registration as IA Firms may be required to maintain a minimum net capital (BD) or minimum net worth (IA) IAs that have custody of, or discretionary authority over, client assets must post a surety bond State definition of custody: Accepting $500 of prepaid fees 6 months or more in advance IA records must be readily accessible for a total of 5 years with first 2 years in the principal office A solicitor must be registered as an IAR in the state, even if they are independent third parties Solicitors are required to provide clients with an adviser’s brochure and solicitor’s disclosure Solicitors must obtain a signed/dated acknowledgement that client received both disclosures IAR never register at the federal level, only with the states where they do business IAs and IARs submit an application, provide consent to service of process, and pay fees to register The Administrator has the authority to deny, suspend, or revoke the registration of any person Denial, suspension, or revocation if in the public’s interest and if certain conditions apply Registration will be denied for a misdemeanor conviction that is securities business related Registration will be denied for any felony conviction within the past 10 years A.D.Banker&Company® 13 Key Facts for Chapter 13: Uniform Securities Act - Securities Registrations 14 A security is an investment contract that is managed with the efforts for an unexpected profit A non-exempt security must register with the state The Howey test determines if an instrument or transaction is an investment contract/security It is unlawful to offer/sell any security in a state unless the security is registered, the security or transaction is exempt, or is a federal covered security A registration statement, filing fee, and consent of service process must be filed with the administrator to register securities under the USA The filing fee for registration of a security is typically a percentage of the offering price of securities sold in that state Registration is effective when the Administrator declares the issue effective for sale in that state Registration remains effective for 1 year or until the offering is complete 3 methods of registration include Filing, Coordination, Qualification Registration by Filing is also called Registration by Notification Registration by Filing is only available to issuers who have been registered with the SEC Registration by Filing includes a statement demonstrating the issuer’s eligibility Registration by Filing includes a copy of the offering circular and prospectus filed with the SEC Non-issuer distribution offerings by an insider who personally owns a large block to sell to the public can register by Filing Mutual funds and UITs qualify to use Filing if they had previously qualified within the past 24 months Registration by Filing becomes effective within 5 days provided no stop order is in effect Registration by Coordination is when an issuer is filing with the SEC and state at the same time Coordination requires filing 3 copies of the latest prospectus filed with the SEC Coordination may require filing of any other documents filed with the SEC Under Coordination, prospectus amendments must be provided to the Administrator within 1 business day Coordination registration effective date is at the same time as SEC effective date provided state has been on file 10 days A security not registered with the SEC must register with the state using Qualification Qualification is used for intrastate offerings and requires the most detailed disclosure Qualification becomes effective when, and if, the Administrator declares The Administrator may issue a stop order to deny, suspend, or revoke the registration of a security Issuing a stop order, denial, suspension, or revocation must always be in the public interest Exempt transactions typically do not involve the public Key exempt transactions include: Isolated non-issuer, unsolicited, and fiduciary transactions Transactions between institutional investors are exempt A security is exempt based on what type of entity it represents A transaction is exempt based on how the transaction is processed Federal covered securities are required to register with the SEC Federal covered securities complete notice filing and pay state filing fee A sale occurs if a person disposes of a security in exchange for something of value An offer is an attempt to dispose of a security in exchange for something of value Warrants, rights, options, and convertibles are considered to include the underlying security Gifting an assessable security is an offer and sale Bona fide pledges or loans, stock dividends and stock splits are not offers or sales A.D.Banker&Company® An offer to buy or sell is made in a state when the offer originates from the state An offer to buy or sell is directed and accepted in that state The maximum number of state administrators who have jurisdiction over an offering is 2 The maximum number of state administrators who have jurisdiction over a sale is 3 The Administrator may conduct investigations, issue subpoenas, cease and desist orders The Administrator may seek court injunctions and initiate criminal or civil proceedings The Administrator may initiate investigations inside or outside of their state The Administrator may administer oaths and affirmations, and take evidence The Administrator may subpoena a witness and compel their attendance The Administrator may require production of documents The Administrator may apply to a court to enforce a subpoena Persons subject to an order from the Administrator may appeal to a court within 60 days Maximum criminal penalties under the USA are $5,000 fine, 3 years in prison or both Criminal proceedings may not be brought under USA more than 5 years after alleged violation Civil liabilities are available to investors when there is an unintentional violation Civil proceeds may not be filed under the USA more than 3 years after sale or 2 years after discovery Civil liability refunds purchase price plus interest and legal costs Offers of rescission offered by firms/reps to investor must be accepted within 30 days A.D.Banker&Company® 15 Key Facts for Chapter 14: Business Practices and Federal Regulations 16 An unethical practice is an unintentional violation of business practices subject to civil proceedings A fraudulent practice is an intentional violation subject to criminal proceedings Deliberately withholding material facts is a fraudulent act It is prohibited to mark-up or highlight a prospectus The State Administrator can require advertising/sales literature for state offerings to be filed Churning is the prohibited practice of performing excessive transactions in size or frequency Representatives can determine time and price if the client specifies action, asset and amount Trading authorization is provided by giving Power of Attorney to a third party Full POA (full discretionary authority) allows the third party to place trades and remove assets Limited POA (limited discretionary authority) may only place trades Commingling is mixing client and firm securities and is a prohibited practice Agents may not share in profits and losses in client accounts without prior written consent Fees, commissions or profits on transactions must not be unreasonable Breakpoint sales are intentionally not disclosing potential discounts available to clients Selling dividends (instructing clients to buy securities just before payment of dividends) is prohibited BDs may not act as both a broker and a dealer in the same transaction Selling securities on the premises of financial institutions requires the Not, Not, May disclosures Dealers must honor quotes and cannot back away from a stated offer Wash trades involve simultaneously buying and selling the same security to give the appearance of active trading Matched sales involve 2 or more parties buying/selling to give the appearance of active trading Wash trades, matched sales, and painting the tape are all forms of market manipulation Insider trading is using material nonpublic information about an issuer in securities transactions The tipper and tippee are both liable if a trade takes place based on insider information Selling away means selling a security to a customer and the firm is unaware of the transaction Customer complaints must be given immediately to a manager for resolution Original records of complaint must be retained for 4 years Public offerings must be bona fide, and firms and agents can’t keep any of the offering for themselves OSJ handles order execution, approval of new accounts, approval of communications, and order reviews IAs must provide clients with the adviser’s brochure ADV Part 2 or similar separate document Under federal law, the adviser’s brochure must be delivered at or prior to entering into an advisory contract Under state law, the brochure must be delivered 48 hours prior to entering into an advisory contract If impossible to deliver 48 hours prior, the brochure can be delivered at the time of contract by giving the customer 5 business days to rescind Any material changes to the wrap fee brochure must be filed immediately Material changes to wrap fee brochure require an amendment or a sticker specifying changes be provided to investors IAs must annually offer delivery of a copy of its brochure upon written request of the client A copy of the brochure must be mailed within 7 calendar days of a customer’s request IAs are generally prohibited from being compensated based on capital gains or appreciation Fulcrum fees may be charged to qualified clients and additional disclosure is required IAs may exercise discretion in client accounts for up to 10 days if authorized verbally A.D.Banker&Company® BDs may not exercise discretion without written authorization from the client In an agency cross transaction, the IA must maintain the best execution and price for the customer In an agency cross transaction, the IA cannot recommend the transaction to both parties Gifted securities have the donor’s cost basis or current market value, whichever is lower Inherited securities have a cost basis of the market value on the date of death Wash sales prohibit investors from taking a loss to increase their cost basis by amount of loss Cyberattacks include malware, trojans, denial of service, and phishing attacks Affinity fraud is a method used by con artists to gain the trust of people of a target group Red Flag rules help firms manage and detect cybersecurity risks Regulation S-P requires firms to protect customer information and records Business Continuity Plans (BCP) ensure proper handling of a major business interruption Firms must provide privacy policies to customers with an initial and annual notice Customers can opt out of the firm’s policies on disclosing nonpublic financial information Under BSA, firms keep records of monetary instruments purchased with cash totaling $3k - $10k A CTR must be filed for transactions totaling more than $10k within 15 days of the transaction SARs must be filed with 30 days of any suspicious activity involving $5k or more Money laundering involves placement, layering, and integration SIPC coverage provides each separate customer protection against BD failure SIPC insures each customer for up to $500k total including a $250k limit on cash Federal IA exemptions include the retail customer De Minimis, Institutional exemption, and IAs with less than $100 million AUM Private fund advisers with less than $150 million AUM are federally exempt Public utilities and federal covered securities must register under the Act of 33 (not state) Exempt transactions under the Act of 33 include Reg D private placement and Rule 147 offerings Rule 10b-5 is the catch-all fraud rule which covers almost any conceivable wrongdoing Act of 34 requires insiders to report trading of their securities within 2 business days to the SEC Act of 34 restricts insiders from shorting their company shares Under Regulation SHO, all order tickets must be marked long or short Under Regulation SHO, only securities that are easily located may be sold short Sarbanes-Oxley mandates the CEO and CFO sign the 10K report verifying financial statements Reg T controls credit from BD to customers and states new issues are not marginable New issues are marginable after they have been held for at least 30 days Reg U controls credit from banks to BD Telephone Consumer Protection Act applies to abusive cold calling All cold calling must be done between 8 am - 9 pm in the customer’s time zone Prospects not wishing to be contacted must be placed on a do-not-call list TCPA requirements apply to wireless phone solicitations and faxes but not internet and email A.D.Banker&Company® 17
