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
Security
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
Issuer
any person who issues or proposes to issue any security ; generally
business also could be a government entity.
Underwriter
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.
Prospectus
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.
SEC
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.
Waivers
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.
Broker
any person engaged in business of effecting transactions in
securities for the
acct of others. Banks NOT included in def.
Dealer
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.
Exchange
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
SECURITY INFO PROCESSORS (SIP)
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.
NOT IC:
BD/underwriter
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.
Custodian
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