Series 66 Day 4

Day 4 State Regulations Governing Broker-Dealers and Agents Test
1. Mark recently joined N&N brokerage and is in the process of becoming registered as an agent. What information would be required to furnish to the Administrator as part of his application?
A. His name and address
B. Employment history
C. Financial condition and history
F. Any felony convictions
2. The sole proprietor of an investment adviser decides to close the business. Within weeks, several dissatisfied clients file a civil lawsuit alleging abuses in their accounts. The owner cannot be located; therefore, the clients serve the complaint to the Administrator. The clients sue the owner in court and receive a judgment. The owner reappears claiming the judgment is invalid since he was never notified of the suit. Which of the following statements is TRUE?
C. The judgment is valid unless the Administrator issues an order denying it within 30 days of the court’s decision
3. Tom has been hired as an agent by CTS Brokerage, which is located in Illinois. Will he be required to post a bond if he wishes to be registered in the state?
B. Yes, if Tom has discretionary authority over client’s accounts
4. A new broker-dealer in North Dakota files an application for registration on November 30. The North Dakota Administrator notifies the broker-dealer that its registration is effective as of December 24. When will the BD’s registration expire?
B. December 31 of the same year
5. Which of the following choices is considered a broker-dealer?
D. PQR Company, which sells only mutual funds to individual investors
6. Sandstone Brokerage currently has a single office located in Arizona. Sandstone is in the process of opening an office in New Mexico, where it will serve only banks and other institutional customers. Will Sandstone be required to register as a broker-dealer in New Mexico?
A. Yes, Sandstone will have a place of business in New Mexico
7. Lloyd is in the process of registering as an agent with a broker-dealer. Just this morning, he passed his regulatory examination and received a printout confirming his passing score. May Lloyd begin soliciting client business as soon as he returns to the office?
B. Lloyd’s broker-dealer is properly registered, therefore, he will be able to solicit clients once his compliance officer gives him the OK
8. A broker-dealer has offices in every state in North America. Edward is an agent with the broker-dealer and is presently registered in five of these states. One of Edward’s clients informs him that he is being relocated by his company. In order for Edward to continue to work with his client after he has moved:
D. Edward should register in the state, and generally would be able to conduct business for 60 days before the state declares his registration effective

9. The limited registration provision available to Canadian broker-dealers conducting business in a state permits a broker-dealer to
C Transact business with Canadian residents with whom the broker-dealer had an existing relationship
10. Which of the following statements is NOT TRUE concerning the limited registration status of Canadian broker-dealers?
A They are exempt from the antifraud provisions of the Uniform Securities Act

Series 66 Day 3

State Regulations Governing Broker-Dealers and Agents

General Registration of Financial Professionals Chapter 3

The Application Process

·         Name of applicant AND address

·         Type of business

·         Qualifications and business history of partner, officer, director, or other person in an important position

·         Financial status of applicant

·         History of applicant

·         ANY injunction, administrative order, felony conviction, or conviction of a securities related misdemeanor

·         Details about unsatisfied judgments OR liens against registrant

·         Has a bonding company denied OR paid out on OR revoked a bond for registrant

Amendment

·         MUST occur in 30 days

Consent to Service of Process

·         Irrevocable

·         Appoints Administrator as the registered person’s attorney for service of legal papers

·         Customers can serve notice to Administrator NOT registrant

·         Consent, part of registrant’s file

Case Study

Ann believes that her registered representative, Blake, has taken funds from her securities account without authorization so she files a lawsuit in state court to recover her losses. However, Blake is no longer associated with his now former employer and cannot be located to serve him with legal papers. Does Ann have recourse?

·         Ann MAY serve the papers on the state Administrator INSTEAD of Blake

·         Equivalent to serving the legal papers on Blake directly

Filing Fee

·         A filing fee MUST be paid at the time of initial registration and annually upon renewal

·         If an application is denied OR withdrawn, the Administrator May keep ALL or PART of the fee

·         If 2 or MORE firms become 1 firm, the new successor firm can fill the unexpired portion of the registration term by filing an application

Case Study

Heritage Securities, a California broker-dealer purchased GST Investments, a small New York-based broker-dealer. Heritage completed the purchase of GST in March and will now operate as the new firm. Heritage Investments, with offices in California and New York. What are the requirements for Heritage Investments to open as the successor firm for the remainder of the year?

·         Heritage investments MUST file a new application with the Administrator in California and New York

·         Successor firm will NOT need to pay another fee until the successor firm’s registration is renewed

Examinations

·         The Administrator reserves the right to MAKE applicants take an examination

·         Charter Financial Analysts can get a waiver for the Series 66

·         After passing the exam, applicants MUST register with the state Administrator, Administrator MUST make their registration effective before they CAN effect business

Surety Bond

·         Agrees to pay the sum of money awarded by a court up to a certain amount as a result of a registrant’s violations of the USA

·         Bond applies to registered broker-dealers and agents WITH custody OR discretionary authority over client funds OR securities

·         The bond MUST be maintained for as long as the registrant is in business and for 3 years afterward

·         Bonds are NOT required of broker-dealers whose net capital exceeds specified minimum amounts as set by federal law

·         Registrants MAY deposit cash OR securities

·         If investment advisor’s net worth is above Administrator’s minimum, no bond is required

Effective Date and Expiration

·         Registration IS effective at noon on the 30^th day after filing the application OR on the 30^th day after filing an amendment

·         ALL registrations of financial professionals expire on December 31

·         Application MUST be renewed

·         Consent to Service of Process is ONLY filed once

Case Study

LJ Securities has completed all of its requirements for registration as a broker-dealer and has filed an application with the Administrator on May 1. Provided the Administrator does not deny LJ’s application, when will it become effective?

·         Effective ON May 31

·         Remain effective until December 31

·         If Administrator  notifies company on May 8, they may begin acting as a broker dealer earlier

State Registration of Broker-Dealers

Net Capital

·         Broker dealer’s liquid net worth

·         State Administrator may NOT exceed federal (SEC) rules

Advertising and Sales Literature

·         File with Administrator

·         NO filing for EXEMPT securities, EXEMPT transactions, OR federal covered transactions

Maintenance Requirements

·         Broker-dealer records for 3 years, the first 2 years in an easily accessible location

Financial Reports

·         MUST be filed with the Administrator every quarter or as often as determined by rule or order

Special Examination

·         Administrator can inspect records periodically

Exclusions

·         Broker-dealer persons MUSTR register in that state

·         People who are not broker-dealers are not required to register

·         A person that has NO place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers

·         A person that has NO place of business in the state AND is registered where the person maintains her place of business and only conducts business with existing clients who are not residents of the state (e.g. clients on vacation, or attending school, or working there but not living there)

Case Study

·         Rocksolid is a broker-dealer located in Wyoming that consistently engages in securities transactions with mutual fund managers in Colorado

·         If Rocksolid has NOT opened an office in Colorado and its ONLY clients are institutional investors in Colorado

Does Rocksolid NEED to register as a broker-dealer in Colorado?

·         NO, NO place of business, clients are limited to institutional investors in Colorado

Case Study

Rocksolid decides to expand and open a branch office in Colorado. It has yet to open any accounts with noninstitutional clients. Therefore, its only clients are institutional. Since Rocksolid has no retail clients in Colorado, will it be required to register in the state of Colorado?

·         Yes, it has a place of business

·         MUST register

Case Study

Younge Securities, a Michigan broker-dealer, has both institutional and retail clients. Grace, an existing retail client of the broker-dealer, is spending 3 weeks in Florida house-sitting for her best friend Stephen, who is travelling out of the country. If Younge Securities is not registered in Florida, will it be able to do business with Grace while she is in Florida> Will her agent Carolos be required to register in Florida?

·         No, Grace is only in Florida temporarily

·         Younge Securities will NOT be required to register in Florida

·         Grace’s agent Carols will not be required to register in Florida since Grace is NOT a resident of Florida

Checklist

·         identify the activity in which the firm is involved

·         determine if the firm has an office in the state

·         if YES, the firm MUST register

·         if NO, think of who the client’s are

·         If clients are institutional, NO registration requirement

·         If 1 or more clients are retail clients, firm MUST register

Not Broker-Dealers

·         Agents

·         Issuers

·         Banks, savings and loan companies, savings institutions, and trust companies

Agents of Issuers

·         On behalf of an exempt issuer

-the U.S. government (national and local)

-The Canadian government and other specific foreign national government securities

-Securities of banks, trust companies, and savings institutions

·         When the security is exempt

-Commercial paper with an initial maturity of 9 months or less

-Investment contracts for employees such as savings plans, profit-sharing and pension plans, and stock purchase plans

·         When the sale is made through an exempt transaction

-Private placements

-Sales to qualified purchasers

-Transactions between an issuer and an underwriter

-Transactions with a trust company or savings institution

-Transactions involving the sale of the issuer’s stock to partners, directors, or employees of the company (an employee purchase plan) provided

-The transaction is initiated by the employee

-An officer of a company selling the stock of the company (issuer)

·         IF an individual agent effects securities transactions for compensation, the person MUST be registered even if the security is EXEMPT from registration

Case Study

The treasurer’s office of the city of Metropolis frequently issues municipal notes directly to large institutional investors. Mona, a Metropolis government employee, arranges these transactions. Is Mona considered an agent and required to register?

·         Mona is NOT an agent because these are municipal notes

·         If an agent of Rocksolid Brokerage sold municipal notes, not EXEMPT

Agents of Broker Dealers

·         Individual who represents a broker-dealer in effecting transactions in securities

·         Register under USA with Form U4 through the CRD

·         A B-D cannot employ an agent who is not registered

·         If an agent leaves, Form U5 describes ending of relationship

·         Dual registration is allowed only if Administrator allows

Case Study

Nathaniel is a sales assistant for a broker-dealer and performs functions that are purely clerical or ministerial, such as answering phones, filing paperwork, and giving clients quotations.

Is Nathan an agent?

·         No, Nathan does not effect securities transactions

Case Study

Brenda has been employed as an agent of Fairmont Brokerage for the last 4 years. She was recently passed over for a promotion and decides to resign. Will her registration as an agent remain in effect?

·         Both agent and broker-dealer MUST notify the Administrator

·         Her registration will be terminated within 30 days and will not be effective unless she becomes affiliated with another broker-dealer within 2 years

Case Study

Morgan has resigned from Fairmont Brokerage and is taking a new position with another broker-dealer, Ostrich Investors Inc.

Who must notify the Administrator of the employment change?

·         The agent, the prior employer, and the new employer MUST all notify the Administrator of the change

Agent Exemptions from State Registration

·         The agent MUST be eligible to register in the state

·         The agent’s broker-dealer MUST be registered in the state

·         The agent MUST be registered with a national securities association (e.g. FINRA)

·         The agent MUST be registered in at least one other state

Managers as Agents

·         All partners, officers, and directors of a broker-dealer, who are involved in effecting securities transactions are automatically registered as agents when the broker-dealer initially registers with the state

Case Study

Al, Bob, and Charlene are the founders of Beeken Brokerage, Inc, and were named senior officers when the company was formed. Al is responsible for handling the finances and does not participate in the securities transactions in any way. Bob and Charlene are responsible for managing the brokerage business. Two years after Beeken was founded, Elsie replaced Bob as a senior officer. Who would be required to register as an agent? When would their registrations become effective?

·         Bob and Charlene AS agents

·         Al, NOT an agent

·         Elsie, was not registered automatically, MUST register as an agent

Rules for Canadian Broker-Dealers and Agents

·         Canadian broker can effect transactions with a person from Canada who is temporarily in a state if there was an existing broker-dealer/client relationship before the person entered the United States

North American Free Trade Agreement

·         NAFTA eliminated MOST of the barriers to free trade and investment between the United States, Canada, and Mexico

·         Did NOT expand the limited broker-dealer registration to include broker-dealers and agents of Mexico

 

Series 66 Day Two State Registration of Securities

Chapter 2 State Registration of Securities

Securities

• An investment of money
• In a common enterprise
• With the expectation of profits
• Solely from the efforts of others

List of Securities

• Stock, treasury stock, right, warrant, transferable share, or certificate of deposit for a security (e.g. American Depositary Receipt)
• Note, bond, debenture, collateral trust certificate, or other evidence of indebtedness
• Interest in any profit-sharing agreement
• Rights
• Warrants
• Options on Stocks
• Options on Currencies
• Options on Futures
• Variable Life Insurance
• Variable Universal Life Insurance
• Investment Companies (Face-Amount Certificates, Unit Investment Trusts, and Management Companies)
• Packaged Real Estate Investments, such as Interests in a Condominium Pool, REITs, or Real Estate Limited Partnerships
• Participation in a Profit Sharing Plan
• Investment Contracts
• Limited Partnerships
• Whiskey Warehouse Receipts
• Multilevel Distribution Arrangements
• Merchandise Marketing Schemes
• Profit-Sharing Arrangements
• Voting or Collateral Trust Certificates
• Preorganization Certificates
• Interests in Farmland or Livestock
• Variable annuity and variable life insurance contract
• Voting trust certificate, certificate of interest in an oil, gas, or mining title or lease, preorganization certificate or subscription
• Investment contract, including interests in oil and gas drilling programs, real estate condominiums and cooperatives, farm lands or animals, whiskey warehouse receipts, multilevel distributorship arrangements, and merchandising marketing schemes
• Stock option or an option on a commodity futures contract

NOT Securities

• Fixed annuity
• Life insurance or an endowment policy
• Commodity futures contract
• Individual retirement account (IRA) or Keogh plan
• Currency
• Collectibles
• Condominiums (primary residence)
• Whole Life Policies
• Universal Life Policies
• Endowments
• Fixed Annuities
• Individual Real Estate Properties and Mortgages
• Keogh Plans
• IRAs, 401 (k) Plans, and other Retirement Plans
• Art, Antiques, and Other Collectibles

Case Study

Bruce and Ben are silent partners in an oil and gas drilling program. Gwen, the general partner who runs the program, tells Bruce and Ben that their investment will pay off if it strikes oil.

Does this arrangement between the partners and Gwen constitute an investment contract?

• Bruce and Ben made an investment in a common enterprise—the drilling program
• Bruce and Ben expect to receive profits based on the management efforts of Gwen

Ponzi scheme

• Pyramid scam
• Early investors get returns from later investors
• Leads to investors losing money

General Registration Process

• Security MUST be registered OR exempt

State Administrators WANT

• The amount of securities to be offered
• Any adverse ruling entered in connection with the offering by a state regulatory authority, a court, or the SEC
• Other states in which a registration statement WAS or WILL BE filed

Filing Fees

• Pay at initial registration AND annual renewal
• If NOT paid, Administrator MAY issue a stop order

Effective Date of Registration

• When it is released to the public
• Registration statement lasts one year
• The person who prepared the registration statement MAY need to file quarterly reports

Expiration Dates

• Registration EXPIRES one year after effective date (release to the public)

Case Study

HCI Company’s public offering of securities became effective on January 14, 2011. When will the registration expire?

• One year after effective date (release to the public)
• December 31

Types of Securities Registration

• Filing (Notification)
• Coordination
• Qualification

Registration by Filing

• AKA notification
• Big companies with STRICT requirements
• Large companies, high quality securities
• Notification IS GONE

Filing Conditions

• A registration statement MUST filed with Securities Act of 1933
• MUST be a registered issuer under the Securities Exchange Act of 1934 AND have a registered class of equity securities held by 500 or more shareholders
• MUST have a total new worth of $4,000,000 or a total net worth and net pretax income of $2,000,000 for at LEAST 2 of the last 3 years
• MUST be in business for AT LEAST 36 calendar months before registration
• MUST be four market makers for the securities registered with the 1934 Act for AT LEAST 30 days during the 3 months before filing
• Commissions or discounts that the underwriters get MAY NOT be more than 10% of the offering price
• The issuer MAY NOT have skipped paying a dividend on preferred stock OR defaulted on any bond or long-term lease since the end of the last fiscal year before the filing of the registration statement
• Offering price MUST be $5 or more per share

Filing Application

• A statement of eligibility
• The name, address, and form of organization of the issuer
• A statement that describes the offering
• A copy of the prospectus filed with the SEC

Nonissuer Distribution

• Name, address, and amount of securities held by the other person AND the reasons for making the offering

Registration by Coordination

• If Federally registered, NOT state registered
• Registration statement & 3 copies of prospectus that the SEC has
• Valid when federal registration statement is valid

Registration by Qualification

• Valid when Administrator says it is!
• Federal registration IS valid
• General data about issuer OR relevant subsidiary
• Info about directors and officers
• Info about 10% or MORE holders
• Name and address for offering of nonissuer distribution
• A description of worth and long-term debt
• Type, amount, price, likely selling fees, underwriting agreements
• Likely cash that will be received, how cash will be used
• Prospectus, letter, advertisement, and literature as marketing materials
• Balance sheet with profit and loss for 3 years

Denial, Suspension, and Revocation of Registration

• IF registration statement Is incomplete OR false OR misleading
• IF violation of USA or Administrator rules
• IF officer/underwriter IS convicted of securities crime
• IF business does illegal activities
• IF fraudulent OR unfair OR unjust OR inequitable terms
• If seller is overpaid for trade
• If the proper filing fee isn’t paid
• Administrator can suspend registration
• MUST notify registered person, CAN write for a hearing

Registration Exemptions

• NOT registered IS EXEMPT

Exempt Issuers

• United States: municipality OR agency OR state agency
• Canada: state, province OR municipality
• Foreign national governments that deal with the United States
• Banks OR savings companies OR trust companies
• Federal OR credit union OR industrial loan associations
• Insurance companies
• Railroads, common carriers, public utility holding companies regulated under Public Utility Holding Company Act of 1935
• Not for profits: religious, educational, charitable, social, athletic, trade, professional

Exempt Securities

• Promissory note, draft, bill of exchange, banker’s acceptance that matures in 9 MO or less in 50K amounts or MORE AND rated by one of the 3 Nationally Recognized Statistical Rating Organization (NRSRO)
• Any investment contract WITH employee stock purchase OR savings OR pension OR profit-sharing OR similar benefit plan IF Administrator knows 30 days before plan starts

Federal Covered Securities

• NOT registered with the state
• Exchange listed: New York Stock Exchange, Nasdaq, the American Stock Exchange, the Chicago Stock Exchange
• Qualified purchases via the Investment Company Act of 1940
• Investment Companies via the SEC 1933 Act
• Notice filing MUST happen

Exempt Transactions

• EXEMPT from registration
• Isolated, NOT frequent NON issuer transaction through broker-dealer OR NOT
• NON issuer by registered agent of a broker-dealer & issuer IN business. Securities MUST be senior to the issuer’s common stock OR outstanding at least 3 years AND issuer has not defaulted on obligations OR securities held by the public for 90 days or MORE AND price is related to security price AND securities were not part of underwriter’s batch that didn’t sell AND information about issuer is available AND issuer stock is on the exchanges
• NON issuer transaction can happen if issuer is a reporting issuer in Canada OR allowed by Administrator AND did reporting requirements for 180 days or more OR security is on Toronto Stock Exchange, TSX Venture Exchange, or designated by rule OR order of the Administrator
• NON issuer transaction complies with SEC Act of 1934
• OR is registered under the Investment Company Act of 1940
• Gave Administrator information, complies with Securities Exchange Act of 1934
• NON issuer transaction on unsolicited basis
• Transaction between issuer And underwriter
• Transaction in a bond, backed by real estate mortgage or deed of trust
• Transaction by executor, administrator, sheriff, marshal, trustee, guardian, conservator
• Transaction by bond fide pledgee, can NOT evade USA
• Sale OR offer to a bank OR savings company or trust company OR insurance company OR investment company OR pension or profit-sharing trust OR other financial OR institutional buyer OR to a broker dealer
• Transaction to 10 or less noninstitutional retail investors FOR investment purposes only and seller does not receive commissions AND Form D is filed
• If no commission AND Administrator does NOT turn down in 5 days
• Registration is filed AND NO stop order

Case Study

Acme Inc. is planning to expand its business and is need of additional capital. Acme’s financial advisers recommend they offer shares of the company to the public. Would the securities Acme offers need to be registered? What role will Acme play in the offering?

• Acme IS required to register before offering securities to the public

Coolidge Corporation is offering its stock only in California. The company’s stock will be listed on the NASDAQ. What method of state registration would Coolidge use?

• Coolidge IS listed on NASDAQ
• No state registration

State Registration of Securities Test

• 1) Which of the following choices are considered securities according to the Uniform Securities Act? Fixed annuities, Life insurance (term, whole, OR universal) or endowment policies
• 2) Which of the following factors MUST be present in order for an investment contract to be considered a security? Invests money in a common enterprise and expects profits
• 3) Under the USA, which method of securities registration would be used if the issuer is only planning to offer the securities in one state? Qualification
• 4) In order to register securities by filing, an issuer MUST meet all of the following conditions, EXCEPT Pay a dividend on its common stock every quarter
• 5) In order to use registration by coordination, an issuer MUST file a Registration statement with the SEC
• 6) Which of the following becomes effective when the Administrator so declares? Registration by Qualification
• 7) Interstate issue of stock by a newly formed company coordination
• An intrastate issue of stock by a well-established corporation qualification
• An intrastate issue of stock by a newly formed company qualification
• An issue of securities also being registered with the SEC under the Securities Act of 1933 coordination
• An issue of securities of an established company that meets certain financial conditions Filing
• The type of registration that requires specific response from the Administrator prior to issue Qualification
• 8)Under the Uniform Securities Act, an Administrator may deny the registration of a security for all of the following reasons, EXCEPT: She feels the SEC was in error in registering the security
• 9) Corporate bonds trading over the counter Nonexempt
• Securities issued by the national government of Japan Exempt
• Securities issued by the city of Albany, New York Exempt
• Securities issued by the city of Montreal, Quebec Exempt
• Securities issued by an insurance company Exempt
• Microsoft common stock Exempt
• A bond issued by the Reading Railroad Exempt
• 19(The sale of securities to a mutual fund Exempt
• The sale of securities by the executor of an estate Exempt
• The sale of stock through a public offering Nonexempt
• The execution of an unsolicited order Exempt
• The offer of unregistered securities to a maximum of 10 noninstitutional investors in a 12-month period Exempt
• A private placement where a commission is charged to retail investors Nonexempt