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Series 63
| Term | Definition |
|---|---|
| Person | An individual; corporation; business trust; estate; trust; partnership; limited liability company; association; joint venture; government; governmental subdivision, agency, or instrumentality; public corporation; or any other legal or commercial entity |
| Non-persons | minors, incapacitated and deceased. Non-persons cannot enter into contracts. (Minors can but not legally binding.) |
| Exemption | Regulations do not apply because of ongoing legal exception. |
| Exclusion | Regulations do not apply because the item or entity is not the subject of the law. (Life insurance products like annuities are excluded because they are not securities.) |
| Securities | investments initially sold to the public by issuers. |
| Issuers | persons (usually companies, organizations, or governments) that raise capital (money) through selling securities. Investors purchase securities, effectively funding that issuer’s activities. |
| Issuer transactions | • Issuer receives sales proceeds • Occur in the primary market |
| Broker-dealer | Any person engaged in the business of effecting transactions in securities for the account of others or for his own account. |
| Broker/Agency Capacity | • Trading for the accounts of others • Connecting buyers and sellers • Earns a commission |
| Broker (Principal Capacity] | • Trading for their own account • Buying into or selling out of inventory • Earns markdowns and markups |
| Agent | • Natural person (human being) representing broker-dealers and issuers • Effects securities transactions for customers |
| Investment Advisor | A person (usually a firm) of providing regular ongoing advice or advisory products (e.g., wrap accounts) for compensation. |
| Investment Advisor Representative | A natural person representing an investment advisor providing securities advice or supervising other IARs. |
| ABC Rule for determining an investment Advisor | advice, business, compensation. |
| Power of Attorney | Legal authority provided to a third party to take action on behalf of an individual |
| Discretion (Triple-A) | • A financial professional chooses any of the following for a client: ○ Action (buy or sell) ○ Amount (how much) ○ Asset (what security) |
| IA-1092 | Provides clarity as to who is and isn't advisors: • Added as investment advisers: Financial planners, Pension consultants andAthlete & celebrity advisers • Not included: Lawyers, accountant, teachers Engineers; US Banks, IARs & Broker dealers |
| Investment adviser representative | Any partner, officer, director or other individual employed/associated with an investment adviser that is registered or required to be registered, or who has a place of business located in a state and is employed by or associated with a federal-covered ad |
| Wrap account | An investment account that offers a wide range of services, including investment management, trade execution, and financial planning, with all services “wrapped” up into one single fee |
| State Administrators oversee: | • Registration and regulation of securities • Enforcement of general securities regulations • Enforcement of anti-fraud provisions |
| USA | Uniform Securities Act |
| Retail Investors | • Individual investors • Typically lack market expertise • Rules and regulations tend to protect retail investors |
| Institutional Investors | Institutional investors • Single entity investing on behalf of a pool of capital • Examples: Mutual funds, Hedge funds, Pension funds, Banks & credit unions, Insurance companies and Investment advisers • Rules and regulations generally do not protect t |
| Offer | Includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value Solicitation or attempt = offer |
| Sale | Includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value contract = sale |
| Assessable stock | It’s stock that’s initially offered by the issuer at a discount to the “face value” (what the issuer valued the shares at), with the expectation the issuer would ask for the difference later. |
| Form BD | Used for broker/dealer registration |
| Controlling affiliates | any executive employee (officer, director, or partner) and/or any person (including outside entities) owning a significant amount of the business. |
| Injunction | Legal order from a court requiring either an action to occur or cease |
| Enjoinment | A court order, also known as an injunction, requires someone to either do a specific act, cease a course of conduct, or be prohibited from committing a certain act. |
| Consent to service process | a document submitted alongside the registration form that appoints the state administrator as eligible to accept civil (non-criminal) complaints or legal requests on behalf of any registered person. |
| Surety bond (fidelity bonds) | A guarantee offered by a third party covering obligations and promises made by another party (insurance |
| Effective registration | • Signifies a financial professional may legally operate in a state • Requires BD disclosures, filing fees, consent of service process, net capital requirements and possibly surety bond • granted on the 30th day after filing at noon • Regi |
| Registrant | A person that applies for registration with the state administrator |
| Form U4 | Registration of Agents and IARs; not used for controlling affiliates who are registered via Form BD |
| U4 Reportable Items | New events must be reported within 30 days: • Criminal actions (only last 10 years can result in revokation) • Regulatory actions (e.g., suspension or revocation) • Civil litigation involving securities • Certain customer complaints* • Financia |
| U-5 | Termination or withdrawal from State Registration Responsibility of Agent & BD to report |
| Institutional Rule | organizations can avoid registration if they have no place of business in a state and generally avoid retail investors. broker-dealers can avoid registration when engaging these investors |
| Vacation rule | If an existing customer travels to another state the broker-dealer does not do retail business in or maintain an office, they can continue to do business with that customer without registering in the new state. |
| Canadian broker-dealers | Maintain effective registration with the appropriate self-regulatory organization (SRO) or stock exchange in Canada and continue to maintain “good standing” with their regulators can gain limited registration status if they’re doing business with a person |
| Exclusions from Agent Registration (5) | • Clerical roles • Institution rule • Vacation (snowbird) rule • Representing an issuer during certain transactions • Facilitating an employee benefit plan |
| Exempt transactions | • Isolated non-issuer transactions • Unsolicited transactions • Transactions between issuers and underwriters (investment banks) • Certain fiduciary transactions, -e.g., Estate executors and/or administrators ,Sheriffs and marshalls, Trustees • |
| Finder | is a person that identifies potential investors for an issuer and are excluded from the definition of an agent if they are not compensated based on sales* and are not involved in the promotion, recommendation, or sale of the security |
| Investment Advisers Act of 1940 | Federal law regulating investment advisers Excludes a person who solely provides advice on US securities |
| National Securities Market Improvement Act (NSMIA) | • Established the term “federal-covered” • Enforces federal laws over state laws if common jurisdiction exists |
| Federal-covered advisers | • Register with and regulated by the SEC • Provide notice filing to the state |
| Mandatory registration as a federal-covered adviser | • Advisers exceeding $110 million AUM • Advisers to registered investment companies • Advisers operating in 15 states or more. |
| Investment Advisors eligible for registration as a federal-covered adviser | • Advisers with $100 - $110 million AUM • Advisers operating in 15 or more states • Pension consultants with $200 million+ AUM • Advisers expecting to qualify as federal-covered within 120 days |
| Federal de-Registration | • If falling below $90 million AUM |
| National Securities Market Improvement Act of 1996 (NSMIA) | was enacted to reduce over-regulation and promote efficiency in the securities markets. • Established the term “federal-covered” • Enforces federal laws over state laws if common jurisdiction exists |
| Form ADV | Investment Advisor Registration Form |
| Form ADV Part 1 | • Discloses the basics of the business, including: ○ General business information ○ Other jurisdictions ○ Business structure ○ Business dynamics ○ Business history |
| Form ADV Part 2A (aka Brochure) | discloses important information relating to clients, including: ○ General business characteristics ○ Fees and compensation ○ Types of clients serviced ○ Investment philosophy ○ Disciplinary information ○ Conflicts of interest |
| Form ADV Part 2B (aka Brochure Supplement) | • Discloses information on IARs involved in: ○ Providing securities advice ○ Roles exercising discretion • Disclosed information: ○ Educational background* ○ Business experience ○ Disciplinary information ○ Other business activities |
| Advisory Affiliate | • Any current employee (except for clerical roles) • All officers, directors, and/or partners • Any other person controlling the firm (making big business decisions) |
| Broker-dealers generally offer | custodial services and execute securities transactions, while investment advisers provide advice on what securities transactions should be performed. |
| Investment advisers services | • General securities advice and/or market commentary • Financial planning • Portfolio management (including discretionary accounts) • Wrap accounts |
| Custody | holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them |
| conflicts of interest | Any circumstance, relationship, or event that may compromise an adviser’s fiduciary obligation is considered a conflict of interest. |
| Investment adviser financial requirements | • Must maintain a minimum net worth of: ○ $10,000 if exercising discretion ○ $35,000 if maintaining custody • May be required to post a surety bond |
| Large prepayment of fees | • Requires balance sheet disclosure in the brochure • Defined as: ○ Receiving more than $500 ○ For services 6 months or more in advance |
| Investment Advisors who fall below the financial requirements must: | • notify the administrator the next business day • file financial report the following business day • obtain a surety bond in the amount of shortfall (rounded up to the nearest $5k increment) • notify clients if IA has custody of assets |
| IA Post Registration Requirements | • Must maintain records of Accounts, Correspondence, Memoranda, Books and records and records required by the administrator • 5-year record maintenance requirement - Most recent 2 years must be readily available |
| Brochure updates | • Material changes require a prompt update • Annual updates ○ Required to file with administrator within 90 days of fiscal year end ○ Updated brochure sent to clients within 120 days of fiscal year end |
| ADV-W | Advisor withdraw of registration from state |
| Impersonal advisory services | ○ Statements which do not purport to meet the objectives or needs of specific individuals or accounts ○ Through the issuance of statistical information containing no expression of opinion as to the investment merits of a particular security ○ Any |
| Trusts | are legal entities set up to benefit a specific beneficiary (e.g. a family trust). Trustees are legally appointed to manage the trust, giving them full access to any securities or funds owned by the trust. |
| Accidental custody | - Merely having access to client funds or securities is considered custody. - Includes the ability to pull funds directly from a client’s bank account. - Custody exists if a client mistakenly sends a check, wires funds, or transfers and not returned in |
| Annual surprise audit | Required if providing custody. NASAA rules also require an annual surprise audit of the adviser’s books and records to ensure their compliance with proper recordkeeping and custodial guidelines |
| ADV-E | Report of Exam must be made to Administration within 120 days. All deficiencies must be identified. |
| Balance sheet disclosure (state only) | Investment advisers that maintain custody of client assets must additionally disclose this document in their brochure annually. (State Registered Advisors) The Investment Advisers Act of 1940 does not require this |
| LATE | Lawyers, Accountant, Teachers and Engineers are exempt from registration if incidental advice is provided |
| Investment adviser exemptions (aka rules) | • Snowbird/vacation rule • Institution rule • De minimis rule • Private fund advisers |
| Investment advisor exclusions | • Investment adviser representatives (IARs) • LATE: Lawyers, Accountants, Teachers & Engineers • Broker-dealers and agents (pro bono basis) • Media programs (general advice) • Federal-covered advisers • Banks or savings institutions |
| Form U5 | Agent or Representative termination form. Filed by AIR if state registered, Filed by IA (Firm) for Federal registration. |
| De minimis rule | Applies to IAs and IARs, not BDs and Agents. Engaging no more than 5 retail clients in a 12-month period in that state and no office in state (if you have an office you must register) |
| Commissions | Considered the cost of fulfilling a transaction request, not payment for securities advice. exist regardless of whether the trade was based on a recommendation or not (unsolicited trade) |
| Registration by Filing | issuers of federal-covered securities must provide a notice filing in every state their security will be offered in. (not considered registered with State) |
| Registration statements may be filed by | • Issuers • A person on whose behalf the offering is to be made • Broker-dealers |
| Required items in notice filing | ○ A copy of the SEC registration form and any amendments ○ Consent to service of process ○ Report detailing the dollar amount of securities to be sold in state ○ Filing fee |
| Indenture | a legal agreement between an issuer and the investors of its securities |
| A stop order | is an administrator-created demand for an issuer to no longer issue a security. Orders may not be permanent, Orders prevent the issuer from raising capital (money) from investors for at least a short period. |
| Registration by qualification | this form of registration is primarily utilized by issuers of intrastate securities (sold in one state only) • SEC has no jurisdiction; • Subject to escrow requirements |
| Affinity fraud | A form of fraud that targets members of cultural, ethnic, or religious groups, State Administrators have right to revoke/decline registration of these securities. |
| Common carrier | a person or company that transports goods or passengers on regular routes at set rates (e.g., railroads) |
| Covered Securities include | • securities listed on exchanges, • investment companies, • Reg D offerings • certain federally exempt securities (municipal - offered outside their state, only, Federal products) |
| Required Criminal Disclosure on U4 | All felonies or securities related misdemeanors must be disclosed on U4 forms |
| Promoters/Solicitors | 1. Third parties who are compensated for referring prospective clients to an IAR. 2. Registered at State level, but not at Federal level. 3. Promoters are IARs at state level, not federal level. 4. Firm's brochure delivery not required by SEC, requi |
| State Administrator Rules vs State Administrator Orders | State Administrator rules apply to everyone, State Administrator orders apply to specific individuals. |
| Investment Advisor Representatives Payment Structure | IARs have fixed fees, hourly fees, based on AUM or Wrap account fees - usually not commissions. IARs must be affiliated with B/Ds to collect commissions. |
| Howie Test (1946) for a security (Ice-T) | 4 Elements -Investment of money, - Common enterprise (pooling funds with other), - Expectation of profit - Third party management (efforts of others). |
| Adoption | occurs when a firm endorses or approves third party content. |
| Entanglement | is when the firm has influence over the content of the third party content. |
| Cross agency transactions | involving two clients, the transaction can only be recommended to one the clients. Trade confirmations must be provided. Written approval from both clients needs to be obtained. Must be shared with client annually. |
| Provision of Brochure To Prospective Clients | Need to provided 2 days in advance or a five BUSINESS day cancellation must be accepted, not CALENDAR days. No need to be provided in advance if for impersonal services. |
| Balance sheet disclosure | Only for Investment Advisors that provide custody of client assets Only applies to State Registered IAs |
| Registration by Filing | Issuers of federal-covered securities must file with every state where security will be sold. Registered with the SEC, not State. Regulated by SEC, but State can issue stop orders if fraud is suspected. |
| Registration by Coordination | SEC (federal) and state registration simultaneously. Effective when: State registration paperwork on file at least 10 days (20 days is common) and No stop orders exist. May require escrow account. |
| Form BD-W | Broker Dealer withdraw form |
| Enjoin | To legally prevent a person from engaging in a particular action or activity State Admin must: • Provide prior notice to the applicant • Opportunity for hearing is provided • Disclosure of written facts and findings of law |
| Withdraw of Registration | Initiated by the registrant, non-punitive |
| Cancellation of Registration | State administrator proactively removes the registration Most common reasons: Death, Incapacitation or Cannot get in contact with the person |
| Criminal Penalties | Must involve a willful violation of the law. Includes 5-year statute of limitations and 3 year prison term for each count/incident. |
| "5-5-3 rule." | Applies to criminal as opposed to civil actions 5 year statute of limitation $5,000 penalty 3 year prison term for each incident |
| Fulcrum Fees | A performance-based fee. Charged by a financial adviser or an asset manager. FULCRUM FEES = PERFORMANCE FEES to qualified purchasers ($2.2 M Networth less residence or $1.1 M with Advisor). IAR must have been with firm 1 year. |
| NOT-NOT-MAY Rule for IAs Operating at Financial Institutions | For offering securities at a financial institution (usually a bank) - NOT part of the bank, NOT FDIC Insured and client MAY lose money. |
| Private Placements | Private placements are restricted stock - cannot be sold publicly, must be liquidated through a private placement transaction. The SEC, not USA, restricts sales to 35 accredited investors. |
| Qualified Purchasers | Net worth $2.2 M - not including residence, $1.1 M with broker |
| Covered Advisor | Required to register w/SEC. Exceeding $100 in AUM or advisor to a registered management company. Eligible to register at $110 M AUM or operating in 15 states. |
| Access Person | Any supervised person of an investment advisor who has access to: - nonpublic information - to any person's purchase or sale of securities; - portfolio holdings of a reportable fund - and makes securities recommendations |
| Interactive Communications | Real time communication involving dialog with investors, including direct messages |
| Static communications | Posted for longer term, lacks real time immediacy (e.g., blogs without comments or likes abilities). |
| Margin Agreement (parts of) | Hypothecation, Credit, and Loan Consent Form. The Loan consent form does not need to be signed. |
Created by:
Mark H
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