Flashcards

Directed brokerage may or may not be allowed by an investment adviser. If the investment adviser allows directed brokerage it can take place in one of two ways. Either the investment adviser directs the clients’ trades to be executed through a specific broker-dealer, or the investment adviser allows the client to tell the firm which broker-dealer they would like to use for execution.

A discretionary account is an account permitting a client to designate an individual such as a broker-dealer to exercise authority over the selection, timing, and amount of investment for the client. The authorization for the discretionary account must be in writing, and the account must be approved and accepted by a principal of the broker-dealer firm.

Due diligence is the duty of the underwriter, the issuer, and the attorneys that are involved in the new issue to conduct an inquiry into the circumstances surrounding the new offering.  The underwriter(s) or party charged with discovery must not be negligent in its attempt to discover and disclose relevant facts that would affect the offering. Neither the SEC nor the state performs due diligence.

A durable power of attorney is a document that grants either limited or full authority to a third party. The word durable ensures that the power of attorney survives a declaration of mental or physical incompetence of the grantor. A durable power of attorney ceases upon the grantor’s death.

The effective date is the date that the registration of an issue of securities becomes effective with the SEC. Shares of a new issue can be sold as of the effective date.

Stock (common or preferred) is sold to individuals and institutions. In return for the money paid, the individual or institution receives an ownership interest in the corporation.

The executor is the person named in a will to settle the financial affairs and distribute the assets of a deceased person.

An exempt security is a security that may be sold without registration, it is exempt from the Securities Act of 1933 and/or the Uniform Securities Act. U.S. Government securities and municipal securities are both exempt securities. Exempt securities are not required to file sales and advertising materials.

: An exempt transaction is a transaction that does not require registration or the filing of a registration statement. Exempt transactions include private placements, fiduciary transactions, unsolicited transactions, and institutional transactions.

: In 2016 NASAA adopted The Model Act to Protect Vulnerable Adults from Financial Exploitation. The Act gives industry participants and state regulators new tools to help detect and prevent the financial exploitation of vulnerable adults.

A federal covered adviser is an investment adviser that is required to register at the federal level, with the SEC. Federal covered advisers are exempt from state registration.

The FDIC is a federal agency that provides deposit insurance for member banks. The FDIC protects the clients of insolvent banks.

A fiduciary is a person in a place of financial trust.  The custodian of a minor’s account is a fiduciary. The trustee of a trust is a fiduciary. Section 404(c) of ERISA, Safe Harbor Provisions, defines a fiduciary as a person who can exercise discretion or control in administering and/or managing/controlling a plan’s assets.   Investment advisers must act in a fiduciary capacity in making recommendations to clients, fully disclosing all conflicts of interest.

The final prospectus must be delivered to a client who is buying a new issue. It includes the price of the securities, the delivery date, and the underwriting spread.

The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms and registered securities representatives doing business in the United States.  FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.

FINRA Bylaws are the body of laws that describes how FINRA functions, defines its powers, and determines the qualifications and registration requirements for broker-dealers and registered representatives.

FINRA’s Department of Enforcement is a committee appointed from among the members of the FINRA that acts in accordance with the FINRA’s Bylaws, Rules of Conduct, and Code of Procedure to handle trade complaints.

A firm quote is an actual price at which a trading unit of the security may be bought or sold by dealers. The trading unit is 100 shares of stock or five bonds.

Form ADV applies an investment adviser for registration. The form is filed either at the state or federal level. It includes Part 1 which is the application. It also includes Part 2A which is the firm brochure. Part 2B are brochure supplements, describing the investment adviser representatives. Firms that charge wrap fees must prepare Appendix 1 of Form ADV.

Fraud is the deliberate concealment or misrepresentation of a material fact.

Freeriding is the buying and selling of securities, without fully paying for them. Freeriding is prohibited under Federal Reserve Board Regulation T.

A front-end load is a sales charge that is charged when mutual fund shares are purchased. Class A shares have a front-end load. The front-end load is included in the public offering price (ask).

Front running occurs when a broker-dealer or investment adviser places a trade for their own account ahead of a trade for a customer. Front running is a prohibited practice.

A frozen account occurs when an investor engages in freeriding. When an account is frozen under Regulation T subsequent transactions must be paid in cash in advance for the following 90 days.

A full power of attorney is a written authorization for someone other than the account owner to make deposits and withdrawals and to execute trades in the account. Also referred to as full trading authorization.

Good delivery is when the securities are delivered in such a form that the ownership is clearly assigned from the seller to the buyer and can be easily transferred. Good delivery includes proper assignment, good condition of the securities, the proper number of units, at the proper time, not in the name of a deceased person, and with a permanent certificate, if available.

A guardian is a fiduciary who manages the assets of a minor or an incompetent person. The guardian must be of legal age and sound mind.

The home state of a broker-dealer or investment adviser is the state in which they maintain their principal place of business. The strictest rules that may be imposed on an investment adviser that is registered in more than one state are the rules of the firm’s home state.

Hypothecation is when the client pledges their margin securities as collateral for the loan.  Brokerage firms re-hypothecate clients’ securities to a bank to finance the margin accounts.

NASAA passed a model rule that allows for states to adopt a continuing education requirement for investment adviser representatives. The continuing education requirement includes 12 hours of CE to be completed annually, by December 31st. Of those 12 hours 6 hours must be in the area of Products and Practices, and 6 hours must be in the area of Ethics and Professional Responsibility (with 3 of those 6 specific to ethics).

Impersonal investment advice is advice that does not purport to meet the needs of any specific client, but that is general in nature.

An indication of interest is an investor’s expression of conditional interest in buying a forthcoming securities issue after the investor has reviewed a preliminary prospectus. An indication of interest is not a commitment to buy.

In an initial public offering shares of stock are sold for the very first time to the general public. Shares in an IPO are sold at a fixed price in the primary market, one time only. After the shares trade in the primary market, they will trade in the secondary market at a price set by the market.

An injunction is a court order requiring a person to either do or not do a specific act. If a person has been issued an injunction and he or she fails to meet the requirements of the order, they may be held in contempt of court.

Inside information is material information that is not known by the general public that if known would affect the stock price.

An insider includes any person who has material nonpublic information about a publicly traded company. According to the l934 Act, directors, officers, and stockholders who own at least 10% of any class of equity security issued by the corporation are all considered insiders.

An institutional account is an account held for the benefit of others. Institutional accounts include banks, pension plans, insurance companies, mutual fund companies, and profit sharing plans.

An institutional communication is a written communication (including electronic) that is distributed or made available to only institutional investors, not to retail investors. The term institutional communication does not include a firm’s internal communications.

Institutional investors include broker-dealers, banks, pension plans, insurance companies, mutual fund companies, profit sharing plans, and any entity with $50 million or more in total assets. Most regulations are written to protect retail investors and not written towards institutional investors, with the belief that institutional clients should know what they are doing.

Interactive content is a social media format that allows for input from both the creator and the viewer.

An interstate offering is a securities offering that will be sold across state lines. Interstate offerings must be registered, prior to sale, with the SEC, as well in each state in which the security will be sold.

An investment adviser is a firm that manages money for the accounts of others. An investment adviser files Form ADV to register as an investment adviser, either with the SEC or at the state level, depending upon current rules. An investment adviser to a mutual fund has the day-to-day responsibility of investing the cash and securities held in a mutual fund’s portfolio. The adviser must adhere to the objective as stated by the client or found in the fund’s prospectus.

Amended by the Dodd-Frank Act in 2010, investment advisers are required to register at the federal level (with the SEC) if they manage a mutual fund or have $100 million or more in assets under management (AUM). Investment advisers with assets under management under $100 million are required to register at the state level. Investment advisors are the firms that either charge a flat fee for investment advice or an asset-based advisory fee.  The investment advisory fee of a mutual fund is the fund’s largest expense.

The investment banker is a broker-dealer that is hired by a corporation or government to raise capital by marketing new issues.  Sometimes called the underwriter, sponsor, or distributor.

An investment company is engaged primarily in the business of investing and trading in securities. There are three types of investment companies under the Investment Company Act of 1940: face-amount certificate companies, unit investment trusts, and management companies. All mutual funds are management companies. Management companies employ investment advisers (investment managers) to manage the assets in the portfolios.

The Investment Company Act of 1940 regulates investment companies.  The act requires any investment company that is engaged in interstate commerce to register with the SEC.

Investment grade securities are debt instruments that are rated BBB/Baa or higher. They are often purchased by fiduciaries.

The investment objective is the goal of the client or the goal of the mutual fund portfolio. There are many different investment objectives including safety/preservation of capital, income, and growth.

The issuer is a corporation, municipality, or the U.S. government that offers or proposes to offer its securities for sale.

In a joint account there are two or more individuals who possess power over the account. Joint accounts must be designated as either tenants in common or joint tenants with right of survivorship.