Series 63 Study Guide

Unit 2
. Broker-dealer: any person engaged in the business of effecting transactions in securities for
the accounts of others or for its own account
. Exclusions: agents, issuers, banks, savings and trust companies.
. Place of Business: If BD has place of business it must register with state
. No Place of Business: Does not need to register if no place of business and only
deals with issuers, other BD’s, institutions, or pension or profit sharing trusts
>$1mill
¦ If a BD with no place of business has 1 retail client it must register
. Snowbird Exemption: need not to register if existing clients are temporarily in
another state
¦ EX: Registration in State A, Client is on vacation in state B. BD does not
need to register in state B
. Agent: any individual who represents a broker-dealer or an issuer in effecting (or attempting
to effect) transactions in securities.
. Individuals representing an issuer are excluded from the definition of agent, and
do not have to register, representing issuers in effecting transactions:
¦ Exempt securities: Issuers of US/Can/Foreign Gov Securities,
Bank/Saving/Trust securities, commercial paper >$50k denom & less than
9mo maturities, investment contracts
¦ Exempt transactions: private placement, unsolicited trans, transaction
between underwriters and issuers, and transactions with institutions
¦ With existing employees, partners, or directors of the issuer with NO
COMMISSIONS
Unit 3
. Investment Advisor: Gives A-dvice in the B-usiness of advising and receives C-ommission.
. Exclusions: Investment adviser representatives,
¦ Banks, savings institutions, and trust companies
¦ lawyers, accountants, teachers, or engineers (L.A.T.E) whose advice is
solely incidental to the practice
¦ BD’s that are incidental and receive NO COMMISSIONS
¦ Publisher of media if it is generically available publicly and no specific
advice to clients
¦ Federal covered investment advisers registered with the SEC
¦ Any other person the Administrator specifies
¦ IA’s excluded with no Place of Business and only deals with:
. broker-dealers registered under the act;
. other investment advisers;
. institutional investors, including employee benefit plans >$1m
. existing clients who are not residents but are temporarily in state
. De Minimis Exception: <5 retail clients in preceding 12mo
. Federal covered investment advisers: advisors registered with the SEC
¦ required to register or registered with SEC because asset under
management >$110 million
¦ registered with the SEC because they are under contract to manage an
investment company registered under the Investment Company Act of
1940
. Dodd-Frank: >$110m- SEC Registered, Between $100m-$110m- SEC or State,
<$100m- State
. Registration ADV : 1A&B- About the IA, 2A- Information for customers, 2BDisclosures
about the IA
. Investment adviser representative: Person who works for the IA giving advice
. IAR’s Representing Federally Covered IA’s: DO NOT need to register if they
have NO PLACE OF BUSINESS.
. Registration: Similar to that of an IA
. Termination Procedures:
¦ If the IA is state registered- the firm notifies the administrator
¦ If the IA is SEC registered- the IAR notifies the administrator
Unit 4
. Three Methods of Registering a Security
. Notice Filing: for federally covered securities, files documents with the
administrator
¦ A federally covered security does not have to register with the state and is
not required. Administrator does not have authority to prevent sale unless
there is an appearance of fraud
. Coordination: Most common form of registration, security simultaneously
registers federally and with state
¦ Becomes effective in state when it becomes federally effective
. Qualification: for intrastate (single state) offerings.
. It is unlawful for any person to offer or sell any security in this state unless:
. it is registered under the act;
. the security or transaction is exempted under the act; or
. it is a federal covered security.
. Exempt Securities: Securities exempt from registration
. U.S. and Canadian government and municipal securities.
. Foreign government securities
. Depository institutions.
. Insurance company securities.
. Public utility securities.
. Federal covered securities
. Securities issued by nonprofits, cooperatives, and employee benefit plans
. Exempt Transactions
. Isolated nonissuer transactions: one time one off situation
. Unsolicited brokerage transactions: transactions initiated by customer
. Underwriter transactions: transactions between issuers, BD’s and syndicates
. Bankruptcy, guardian, or conservator transactions
. Institutional investor transactions
. Limited offering transactions: offerings directed to 10 or less persons that
aren’t institutional investors during the previous 12mo provided that
¦ Seller reasonably believes their buying it for investment purposes only,
NO COMMISSIONS, and no advertising or general solicitation
. Preorganization certificates: with no commissions, 10 or less subscribers and no
payment to the solicitor
. Transactions with existing security holders: rights, warrants, etc
. Nonissuer transactions by pledgees: bonafide pledges- lender recoups costs by
taking securities.
Unit 5
. Offer or offer to sell: every attempt or offer to dispose of, or solicitation of an offer to buy, a
security or interest in a security for value
. Sale or sell: every contract of sale, contract to sell, and disposition of a security or interest in
a security for value
. Assessable stock: A stock given as a gift that could have a potential future obligation on the
recipient
. Exclusions from offer and sale:
. bona fide pledge or loan
. gift of non-assessable stock
. stock dividend, stock split, and reverse split
. class vote by stockholders: like mergers, consolidations, etc
. act incidental to a judicially approved reorganization with which a security is
issued in exchange for one or more outstanding securities.
. The USA describes activities considered to have taken place in the state as any offer to
buy or sell a security, as well as any acceptance of the offer, if the offer:
. originated in the Administrator’s state; or
. was directed to the Administrator’ state; or
. is accepted in the Administrator’s state.
. The Administrator would not have jurisdiction if the offer were made under any of the
following circumstances:
. Television or radio broadcast that originated outside of the state
. Bona fide newspaper or periodical published outside of the state
. Newspaper or periodical published inside the state but with more than two-thirds
(66%) of its circulation outside the state in the last year
. The four broad powers the Administrator has to enforce and administer the act in his
state are to:
. make, amend, or rescind rules and orders and require the use of specific forms;
. conduct investigations and issue subpoenas;
. issue cease and desist orders and seek injunctions; and
. deny, suspend, cancel, or revoke registrations and licenses.
. Contumacy: Administrator may apply to the appropriate court in her state and ask for help
for a person who is the subject of an investigation refuses to furnish the required evidence or
ignore subpoenas
. Other than when acting summarily, no order to deny, suspend, or revoke may be
entered without:
. appropriate prior notice to the applicant or registrant
. an opportunity for a hearing; and
. written findings of fact and conclusions of law.
. Summarily: that he may order, without going through the hearing process, a
postponement or suspension of a registration pending final determination of any
proceeding
. Once Order is entered representative and employer is notified immediately of the
order and the reason
. If hearing is requested it must be written and within 15 days of the request it will
be set down for hearing
. Cease and desist order can be issued with or without a hearing and a stop order can
only be placed with a hearing
. Withdrawal: Withdrawal of a registration will take place 30 days after the withdrawal
provided no revocation or suspension proceedings are in process against the person
. Once your registration has been withdrawn, the Administrator still retains
jurisdiction over you for a period of one year.
. Cancellation: does not result from violations or a failure to follow the provisions of the act.
. occurs as the result of death, dissolution, or mental incompetency
. Statute of limitations: violations of the civil provisions of the USA is three years from the
date or two years after discovering the violation, whichever is sooner
. Rights of Recovery: At the direction of the Administrator when a case is proven client may
receive original price + interest - any income that was made while still being held
. Right of rescission: seller can offer to buy back securities if they realize sale was made
unlawfully
. Seller has to send the customer a letter of rescission and the customer has 30 days
to accept or reject. If no response they may lose right to sue
. If accepted seller has to offer: original price + interest + reasonable attorney and
court costs - income received while held
. Persons found guilty of a fraudulent securities transaction: can be criminally charged by
a court, NOT ADMINISTRATOR, a fine of $5,000, a jail sentence of three years, or both
. while the Administrator does not have the power to arrest anyone, he may apply
to the appropriate authorities to do so
. 5-5-3 for the application of criminal penalties: 5-year statute of limitations, $5000
fine, 3 years of jail
. Appeals: A person may petition an Administrators orders by filing an appeal within 60 days
Unit 6
. Disclosure of Capacity by Broker-Dealers: BD has to disclose the capacity of the sale
. If principal the sale came from the BD’s inventory
. If agency the BD is an agent for the client (real estate agent)
. Must be disclosed on the trade confirmation sent on the settlement date
. Disclosure of Conflict of Interest: must always put the client first
. Disclosure of Fees: must make disclosure of fees easily readable, accessable, and known
. Not included in the fee disclosure documents are: commissions,
markup/downs, and advisory fees
. IA’s have to have their form ADV
. Every state-registered IA must file a copy of a complete ADV Part 2 with the
Administrator within 90 days of the end of the adviser’s fiscal year.
. Changes must be notified promptly
. Brochure Delivery Requirements:
. Initial Delivery: Must be delivered >48hrs of entering the advisory contract or if
<48hrs then the client is allowed to terminate within 5 days of entering contract
. Annual Delivery: IA must deliver a free updated brochure OR summary of
changes within 120 days of the fiscal year.
. Exceptions: clients who only receive impersonal advice <$500/yr or clients who
are investment companies
. New Brokerage Account Agreement:
. Verifies if the client is of legal age and has the mental capacity to understand
. Employment information
. Customer Identification Program (CIP):
¦ Name, actual DOB, actual living address, EIN/SSN,
¦ CIP requires actual DOB and address, while new account will take age
and PO Box
. Citizenship
. Financial information
. Margin Account Agreement: requires credit agreement, hypothecation agreement, and
optionally consent loan agreement
. Margin Risk Disclosure: must be sent annually
. Options Account: 1st requires account approval by ROP, 2nd Options Disclosure be sent to
the client no later than with account approval
. In approving options for customer, BD or agent may inquire experience and
knowledge with finance and also gauge suitability
. Within 15 days after a customer’s account has been approved for options trading,
the BD must obtain from the customer a written agreement that the customer is
aware of and agrees of the disclosures
. Static content: remains posted until changed by the person who established the account on
the site
. Interactive content: as the name implies, has input from both the creator and the viewer.
. Affinity fraud: Fraud aimed at groups of people who share similar interests
. BD communications falling outside the definition of recommendation:
. BD creating a website that has a library of resources that clients can view
. BD creating a search engine that allows clients to sort through available resources
to request, view, or obtain
. BD allows research tools to research wide array of securities without
recommendations
. BD allowing clients to subscribe to emails that alert customers to news affecting
the securities in the customer’s portfolio or on the customer’s watch list
. BD communications as falling within the definition of recommendation:
. BD sends a customer-specific electronic communication encouraging client to buy
security
. BD sends its customers an email stating that customers should be invested in
stocks from a particular sector and gives specific recommendations
. BD provides a portfolio analysis tool that allows a customer to indicate an
investment goal and input personalized information which the BD then uses to
recommend securities
. BD using data-mining technology to recommend securities
. IA’s are not allowed to use testimonials
. investment advisers who advertise a charting or similar system—they must
indicate that there are limitations and difficulties inherent in using such programs.
. They can not mistate, exaggerate, or furnish any information at all
. Entanglement: the firm or representative has paid for or been involved in the preparation of
the content
. Adoption: the firm or representative explicitly or implicitly endorsed/approved the content
Unit 7
. Fraud: the deliberate or willful attempt to deceive someone for profit or gain.
. Misleading or Untrue Statements: action must be deliberate to be fraud
¦ Inaccurate market quotations
¦ Misstatements of an issuer’s earnings or projected earnings or dividends
¦ Inaccurate statements regarding the amount of commissions,
markup/down
¦ Stating or implying that the agent has inside information when not true
¦ Telling a customer that a security will be listed on an exchange without
concrete information concerning its listing status
¦ Informing a client that registration effectiveness means Administrators
approval
¦ Misrepresenting the status of customer accounts
¦ Promising a customer services without any intent to perform them or
without being properly qualified to perform them
. Failure to State Material Facts: omitting material fact, forgetting material fact is
also prohibited
. Using Inside Information: All insider information must be reported
. Market Manipulation: effecting transactions by being manipulative
¦ Matched orders: market participants agree to buy and sell securities
among themselves to create appearance of activity or trading in a security
¦ wash trade: attempt to manipulate a security’s price by creating an
apparent interest in the security that really does not exist. Done by buying
in one account and selling in another - No beneficial change
. Unethical Practices Solely Related to Broker-Dealers:
. Delivery Delays: Engaging in a pattern of unreasonable and unjustifiable delays
in the delivery of securities or delay in request of a client that is unreasonable
. Commingling of Customer and Firm Assets: securities of clients and of the
firm must not be placed together or comingle
. Improper Hypothecation
. Unreasonable Servicing Fees
. Dishonoring Quotes
. Withholding Shares of a Public Offering: When a BD given shares to sell and
they withhold them from being sold for personal gain
. Agreeing to Waivers: All agreements to waivers of compliance to provisions is
NULL AND VOID
. Unethical Practices Related to Broker-Dealers and Agents
. Unreasonable Commissions or Markups: Entering a transaction where you
overcharge or over profit from the transaction in relation to the market value
¦ In the case that a BD/Agent incurs costs to retrieve a security they are
entitled to higher commissions/markups
. Churning: excessively trading in customer account in relation to their
objectives/goals
. Unsuitable Recommendations: no blanket recommendations or
recommendations that aren’t aligned with clients objectives/goals
. Unauthorized Transactions: executing a transaction on behalf of a customer
without authorization to do so
¦ Third-Party Trading: allowing someone who isn’t allowed on the
account to trade on the account. Only allowed when special permission is
granted
. Margin Documents: exercising margin without proper documentation
. Timely Prospectus Delivery: failing to deliver prospectus no later than the due
date of the confirmation
. Guaranteeing Against Loss: guaranteeing a profit is STRICTLY prohibited
. Disseminating False Trading Information
. Deceptive Advertising Practices: BD’s can not send a brochure along with a
prospectus
¦ Along with that a prospectus may not be altered in any way shape or form
. Failing to Disclose Conflict of Interest
. Responding to Complaints: complaints must be sent to supervisor, and email
complaints are still considered to be in writing
. Front Running: putting a firm/institutional order before a client order
. Rumors: Spreading rumors about a security to affect the security’s price
. Accurate Records: All records and documents must reflect their actual dates.
. Lending and Borrowing To or From Customers: Can borrow from anyone who
aren’t clients unless
¦ Clients you can borrow from: bank/financial institution, BD in margin
account, co-worker
¦ Clients you cannot borrow from: employee of that lending institution,
agent who services your margin account, a mortgage broker, a family
member unless employed by same firm or affiliated firm
. Unethical Business Practices Involving Investment Company Sales
. Sales Load Communications: Cannot say you are “No Load Sale” if:
¦ Any front end load;
¦ any contingent deferred sales load; or
¦ a Rule 12b-1 fee or a service fee if such fees in total exceed 0.25% of
average net fund assets per year.
. Breakpoints: failing to disclose breakpoints or letter of intent features
. Unfair Comparisons: unethical to compare or imply that money market mutual
funds are similar to savings accounts
. Selling Dividends
. Share Classes: recommending higher share classes for higher fees without
reasonable suitability
¦ Switching funds: recommending switching funds without reasonable
suitability
. Unethical Business Practices Solely Related to Agents
. Selling Away: not recording securities transactions without BD authorization
. Fictitious Accounts: establishing/maintaining fake accounts to execute trades
. Sharing in Accounts: Sharing directly or indirectly in profits or losses in the
account of any customer without the written authorization of the customer and the
broker-dealer that the agent represents
¦ BD’s, IA’s, and IAR’s are never allowed to share in profit and losses in
their client accounts
. Splitting Commissions: to split commissions both agents have to be at the same
firm or affiliated firm with authorization and both have to be registered
. Exploitation of Vulnerable Adults
. Unethical Business Practices of Investment Advisers
. Suitability of Recommendations: making unsuitable recommendations is
unethical
¦ Investment advisers have a fiduciary responsibility to their clients
. Misrepresenting Qualifications
. Unreasonable Advisory Fees: unreasonable in relation to fees charged by other
advisers for similar services
. Unauthorized Disclosures: Disclosing the identity, affairs, or investments of any
client unless required by law is unethical
. Broker-Dealer Conflict of Interest: if there is any doubt about the transparency of the
recommendation or transaction, be sure to make full disclosure.
. Investment Advisors Conflict of Interest: Investment advisers are required to disclose to
clients in writing
. Compensation arrangements connected with advisory services to client; and
. Charging a client a advisory fee and also being compensated for executing trades