Offers / Sales

- Include
o Gift / Bonus (to purchaser of any item as an incentive) of security (stock needs to be accessible – able to get more later )

- Not include:
o Result of class vote by shareholders in M&A, like a M&A stock issuance
o Stock switch (sec exchanged for sec of another co) as a result of legal business reorg
o Stock div for cash div
o Pledges / loans (using stk as collateral for loan)

o Gift / Bonus of non-assessable stock

o Divs

Person may refer to generally any entity

Agent must ensure suitability and affordability

1
 Person Registration
BD + Agents
- BDs and Agents have to register, if they do biz with public
- Unlawful for BD to employ an unregistered agent
- 1 Agent for 1 BD
- Not
o No place of biz, and customers temp in state (not a resid) or effect deals through others

BD (individual or firm)
- Not
o Issuer, Agent

o FIG (bank/savings/trust co), Other BDs doing business that have no office, and does business w other BDs / institional
investors

Agent (of BD or Issuer)

- Agents of a BD ALWAYS have to register (solicits/receives orders)
o Agent terminates employee all 3 parties has to notify

- Not (have no commissions)

o BD, Issurer?

o Person that represents issuer of exempt securities or exempt transactions, if no commissions paid
o Other no commissions
 Officer selling issuer’s stock to employees, if no commissions paid
 Officer (of a BD) does not effect/supervise purchase/sales (only manages)
 Administrative staff (not authorized to solicit/accept orders)

IA + IAR
- IA and IAR have to register if they do biz with public
- Unlawful for IA to employ an unregistered IAR

- IAR beings/terminates employee either one notify ADMIN

- Regulation is federal if > $30mm assets, and state if < $25mm, and choice if in-between
- IA Fed Cov / registered with SEC, IAR notify state
- IA state registered, firm notify ADMIN
- Have to file consent to service of process and pay filing fee

- IA Not
o IAR, Fed covered advisers

o Professionals, whose tasks are required/incidental (no fee charged) to their profession practice

 Also includes admin workers

o No place of biz
 Inv cos, IAs, BDs
 Banks, trusts, savings, insurance cos
 Employee benefit plans (with assets > 1mm)
 Govt agencies
o Communications < 5 institutional clients, per year

 General publishers and sellers to general audience

o FIG (see below)

- IAR Not
o IA, BD, Issuer
o Second major pts above?

- IAR
2
o Financial Planner
o Manage IAR?

3
ADMIN requires for registration
- Consent to service of process

- Agent
o Application
o Filing fee
o Examination

ADMIN may require for registration

- Capital Requirements: > $35k or equivalent bond/cash/securities (ie surety bond)
- Sales and ad material

Expiration of registration
- Annually, on 12/31
Must File
- Financial reports
- Blotters, GL, order tickets
- Records
o IA Records kept for > 5y
o BD records for > 3y

Effective Date of Registration / Withdrawal

- 30 days after filing registration or sooner from ADMIN
Denial / Suspension / Revocation of Registration
- ADMIN may if in public interest, and guilty of offense (list)
o Securities MM or Any Felony conviction in past 10y, or
o Willfully violating USA,
o Lack of experience cannot be sole factor in denying, or
o Insolvency
- ADMIN provide notice and hearing (cease-and-decease can precede hearing)
- ADMIN may take action against entire firm due to company official violation – however, this has to be fair

4
II Security Registration
Security Registration
- All securities have to be registered, unless its not a security, exempt security or exempt transaction
o Can take unregistered non-issuer security orders, if unsolicited

Securities
- Are (investment that is int in public enterprise, for profits, managerial efforts of 3rd party)
o Oil/gas lease program
o Animals/farmland
o LPs, LP units
o Real estate investments, such as condos and coops, REITs
o Commodity options (not futures)
o Whiskey warehouse receipts
o Insurance co separate accounts
o Multilevel distributorship arrangements
o Merchandise marketing programs
o
o Evidence of indebtedness (mortgages)
o Certif of int in profit sharing or partnership agree, preorg certif
o Certif of depos for security
o Collateral trust certif
o Transferable share
o Voting trust certif.

- Not
o Fixed insurance policies / annuities
o Retirement plans, checking, savings, etc.
o Future or commodity future
o Precious metals
o Antiques, collectibles
o Retirement plans / fixed insurance
o Written confirms of trades
o Real estate

Exempt Securities (generally safe or regulated elsewhere)

Risk-free / Trusted
- US Govt, Municipal, Recog Foreign Govt (or subdivisions)
- Religious / Charitable Org / Non-profit

Sophisticated Institutional / Non Public Main

- FIG (ie. national bank, fed savings, CDs, bank/savings/trust/credit unions/industrial loan)
o Exception: Bank holding is non-exempt
- Insurance
o Exception: Variable annunities and inv contracts is non-exempt
- CP (<9m=270d, requirement: >$50k denom, high credit ratings)
- Employee Plan Inv Contract (ie. pension, profit-sharing, savings)

Already Fed Covered

- True Fed Covered (ie. reg inv com like MF)
o Exception: OTC is non-exempt
- Public Utilities / Common Carriers (ie railroad) / subject to ICC, etc.

Exempt Transactions
- Definition: Non-issuer = no benefit to issuer = secondary mkt transactions

No Benefits

5
 - Isolated/few non-issuer
o Ie. Brother selling stock to his brother
- Non-issuer in outstanding securities
o < 90 days
o & and has related securities Fed registered, or has filed with SEC < 6mths
o Ie. Securities already traded in secondary market
- Unsolicited non-issuer
o May need written evidence
o Commissions are not important
- Issuer between underwriters (primary mkt)
 Issuer = primary mkt transactions = provide issuer with the capital

Sophisticated Institutional / Non Public Main

- FIG
- By certain persons
- PP
o < 10 people receiving offers in 1y
o Buyers for inv
o No commissions / fees
- Pre-org certif.
o < 10 subscribers
o No commissions / fees / subscriber pmt
- Existing security holders
o No commissions / fees

- Not exempt: Limited partnership units to public

Types (1y)
- Coordination (if filing in various states, but fed covered securities)
o Effective when SEC clears

- Notice Filing (if filing in various states, but not fed covered securities)
o Effective when SEC clears or ADMIN conditions satisfied

- Fed covered securities

o Includes securities traded on national exchange or MF
o ADMIN may require file: fees, consent to service of process, filed (ie reg statement) SEC docs
- RELATED: Fed covered IAs
o ADMIN may require file: fees, consent to service of process, filed (ie reg statement) SEC docs

- Qualification
o Effective when ADMIN clears

Content
- Amount, states, and prospectus
- Prospectus given to new investors in primary offering, at trade confirmation (nbd) (not settlement) date
o Prospectus given prior to sale, by agent

Denial / Suspension / Revocation of Registration

- ADMIN may
o If in public interest
o Cite cause (see list, lack of corporate earnings is not valid rat)
- ADMIN issue stop-order

Provisions
- Denial / revocation of exemptions
o Certain exemptions may never be revoked
 Govt/state sec
 Bank/insurance cos
o Non-profit exemption may be revoked
- ADMIN authority
o Public or private, in state and out of state, investigation
- NSMIA ’96
o States no longer doc regulation
o States respon for antifraud enforcement

6
III Ethics/Practices

BDs
- Execute transaction, needs authorization
- Exercise discretionary power, needs written authorization
o Need written power of attorney from customer, for amount and type, on behalf
o Exception: time or price
- Execute transaction on margin account, needs written authorization, after the initial transaction
o Margin agreement contains hypothecation of securities (pledge securities as collateral for loan), equity min, margin loan
interest rates
o Hypothecation requires a lien or written authorization
- May not mix / commingle securities with firm (however may do joint accts)
- Furnish prospectus no later than confirmation (mailed out NBD after trade date)
- May transact private securities outside BD, with BD authorization
- Conflict of interest: May not share commissions with CPAs for client referrals
Agents
- May not lend / borrow $ / securities
o May not act as custodian for $ / securities / executed stock power (transfer ownership of stock to others to expedite trading)
 BD ok, agent not
- “Sell away” (engage in transactions outside employing B/D A and yet record transaction on books of BD A), prior written
authorization
- (joint account) Share in profits in direction proportion to contribution, written authorization of customer and BD (doesn’t have to
be in acct opening)
- May not divide / split commission, with an not registered agent, at same BD
o May not do this with customers

- Sharing commissions betw BD and agent is normal

- Agreement betw IA and client must specify

o No assignment w/o consent of client
o Clients notified when new partners notified
- Have to disclose conflicts of interest

IA / federal covered advisor (a fiduciary)

- May not lend / borrow $ / securities
o Unless IA is a bank / Unless customer is a bank
- For discretionary, see above
-
7
 - May have custody of client funds if notify ADMIN and no rule
- Assigning contract to another IA with permission
- Notifying clients when new partner is added

Failure to supervise same as guilty as violator

May buy and sell in different markets (arbitrage)

IV Provisions

ADMIN powers
- ADMIN provide notice and hearing (cease-and-decease, require violator to file statements, bring court action -- can precede
hearing)
o No notice required for investigation
o If court order, violator can appeal within 60d of court order
o ADMIN cannot enter order to suspend registration without prior notice (to employer and registrant) and hearing

- ADMIN can only make rules to protect public (rules published)

- ADMIN will cooperate with others
- Public or private, in state and out of state, investigation

Penalties for Willful violations

- Criminal penalties
o Statue of limitations: 5y
o Penalty: <3y, <$5k OR BOTH

o If no knowledge, then no prison

- Civil penalties
o Statue of limitations: 2y from advice OR (whichever is first) 3y from sale
o Penalty: $ paid + interest + legal – inv income

o Even the manager is involved, unless prove no knowledge

For unwillful violations

- Company can use the Right of Rescission
o Customer has 30 days to reply, unless sale remains

Other consequences are registration denial, suspension or revocation

Scope (orig, direct, accept)

- Ad in newspaper, TV and radio ad - only offer in publication state
- National newspaper and 2/3 of circulation is outside publication state - no offer state