Scope of Securities Act of 1934
- Regulation of transactions in the secondary market, including antimanipulation rules and regs
- Registration and regulation of BDs
- Oversight of SROs
- Registration and regulation of companies w/ securities trading in secondary markets
Composition of SEC
Members are appointed by the president w/ the recommendations coming from the Senate. There are 5 commissioners w/ no more than 3 of them from the same political party. These 5 commisioners cannot participate in securities transactions during their tenure. The members are appointed for terms every 5 years.
Interstate commerce
Trade, commerce, transportation, or communication among the states or between any foreign country and a state.
Antifraud rules
Any transaction involving something or someone in the US is subject to antifraud rules.
Prohibition against manipulation of securities prices
Section 9 of the 1934 Exchange Act governs manipulative activities.
Rule 10b-1 and 10b-3
These rules prohibit the use of manipulative and deceptive devices regarding listed securities and exempt securities. The rule covers activities by mail, interstate commerce, and activities within the facilities of a national exchange.
Rule 10b-5 (a.k.a. catch-all-fraud rule)
This rule prohibits any activity that a person or BD may use to manipulate the securities markets or the purchase or sale of securities. Specifically, the rule prohibits:
- Any scheme to defaud
- Untrutheful statements or omission of material facts
- Participating in any act, practice, or course of business
Section 15D of Act of 1934
Governs conflicts of interest
Reocrds that must be kept for 6 years
- Blotters: must be posted by the next business day
- Customer account ledgers: must be posted by settlement date
- Position records: must be posted by next business day after settlement date OR date of securities movement
- GL: must be posted no less than once per month
- Cash and margin account records: must be posted before the execution of a transaction
Records that must be kept for 3 years
- Fail to receive; fail to deliver: must be posted no later than 2 days after settlement
- Long and short stock record differences: must be posted no later than 7 business days after discovery
- Securities in transfer, dividend and interest received, securities borrowed and loaned, money borrowed and loaned: must be posted no later than 2 business days after movement
- Order tickets: must be posted before the execution of the transaction
- Confirmations: must be posted by no later than the business day after the transaction
- Options records: must be posted no later than one business day after the option is written
- Trial balance: must be posted no later tan 10 business days after the accounting period
- Associated person’s application and fingerprint card: must be posted before the start date
- Termination notice: must be posted shortly after termination of job
- WSP: must be current
- Supervisory personnel designations: must be posted at time of designation until no longer effective
Records that must be kept for a lifetime:
- Articles of partnership
- Articles of incorporation
- Minute books
- Stock certificate books
True or false: A BD is not required to prepare records if it clears its trades through a bank and the bank prepares the records?
True. However, the bank must provide the BD w/ a written agreement indicating that the records are the property of the BD. Additionally, the bank must provide the SEC w/ a written notification that the records are available for SEC inspection.
True or false: If a BD clears a trade on a fully disclosed basis through another BD, the obligation to maintain records rests w/ the clearing firm?
True
Fully disclosed account
An account where the introducing BD turns over full responsibility for the maintenance of the account to the clearing BD.
Omnibus account
An account where the clearing BD will transact the orders and clear the trades, but the introducing BD will maintain the account in all other respects.
- For omnibus accounts, the introducing BD is responsible for record maintenance.
True or false: If a BD intends to use electronic storage for recordkeeping or retention, it must notify their designated examining authority (DEA) at least 60 days prior to use?
False, 90 days
Reg AC
Requires RAs to make certifications regarding any conflicts. The RA must disclose whether their compensation is related to recommendations/views expressed in the report. Also requires BD maintain records regarding public appearances made by their personnel.
Reg AC’s rules regarding recordkeeping after public appearances
Reg AC requires that records be created within 30 days after the end of each calendar quarter in which a research analyst makes a public appearance. The records must include certifications that include:
- A statement by the RA to certify that the views they expressed during his public appearance(s) reflect their own personal views.
- A written statement that describes whether the RAs compensation will or will not be related to the performance of their recommendations.
- If the BD doesn’t obtain these certifications, it must notify the DEA. If this happens, for the next 120 days, the BD must disclose in any report which is prepared by the analyst that the analyst did not provide certifications regarding certain public appearances.
Reg G
Reg G mandates that a registrant who publicly discloses material info that incluses non-GAAP measures must accompany that w/:
1. A presentation of the most directly comparable GAAP financial measures
2. A reconciliation for the non-GAAP measures.
- Reg G also prohibits untrue or deceptive material non-GAAP measures
Reg G doesn’t pertain to foreign pvt issuers that meet these conditions:
- The securities are listed or quoted on an exchange or quotation system outside the US.
- The non-GAAP financial measure is not based on a measure that’s calculated and present under GAAP
- Non-GAAP disclosure made outside of the US by the registrant or on its behalf
True or false: Generally, Reg M restricts distribution participants (underwriters) and issuers from bidding on their stock in the secondary market for a predetermined period around the effective date. However, under specific conditions, the SEC makes exceptions for market makers and syndicates that want to stabilize the price of the new issue?
True
Restricted period (Rule 101)
A period where distribution participants are not permitted to buy or bid for the security. This period generally begins five days prior to pricing OR whenever the BD becomes a participant, whichever comes later. The period ends when the BD’s participation ends. If the subject security has an average trading volume of at least $100M and the issuer’s public float is $25MM or more, the five business day standard is reduced to one business day.
Exceptions to Rule 101
- Transactions involving gvt and muni bonds, non-convertible investment-grade debt and PS, and registered investment company securities.
- Odd-lot transactions
- Actively traded securities: those with an avg. daily trading volume of at least $1MM and where the public float is at least $150MM
- The excerise of any option, warrant, right, or similar instrument during the restricted period.
- Unsolicited brokerage transactions and unsolicited purchases when acting as a principal
What is a reserch report as defined by Reg AC
A written communication that analyzes a security/issuer, and provides info that’s resaonably sufficient on which an investment decision may be based. These reports include BOTH equity and debt
FINRA’s definition is only equity
