Acting Against Recommendations
When a broker’s investment recommendations for a client are contrary to what the broker would do for his own account, then that broker has an obligation to tell the client that this is contrary, or against, what he would do in his own account. The point being that, even if it is contrary to the broker’s own personal recommendation, the recommendation issued must take into account only the client’s investment profile.
Acting As A Principal
Within the securities industry, Acting as a Principal isn't where you get to suspend a bunch of snotty ten-year-olds for smoking behind the gym. When a firm is acting as a principal, it functions as the main party in a transaction and acts as either the buyer or the seller for its own account.
These are the tools used by the administrator to protect investors from getting fleeced by unscrupulous individuals. If an administrator thinks something shady is going on, he can issue an order to deny, suspend, or revoke the shady individual's license so that investors are protected.
Within each state, the head honcho of securities regulation is called the administrator. The administrator oversees administration (hence, "the administrator") of the provisions of the Uniform Securities Act for securities regulation within their state.
An advertisement is any public communication where the owner of said communication has no ability to control the audience that sees it, such as newspaper readers or TV watchers.
A specific type of advertisement for mutual funds that provides basic fund information and cites past performance data.
Agency Cross Transaction
Derived from the Investment Advisers Act of 1940, investment advisers must notify a client in writing and obtain their consent before selling any security from its own account to that client's account, or for purchasing securities from a client. We're sorry to disappoint anyone who thought this had something to do with cross dressing.
If only every assignment could be as easy as signing your name. Actually, for the Series 63, it does mean to sign your name, but within the context of signing a power of substitution or a stock certificate so that a transfer of ownership can occur.
There are all kinds of ways to earn certifications within the financial industry, and most of these organizations are legit. But when brokers began creating misleading or bogus certifications, and then advertising them as part of their financial expertise, NASAA decided to issue written rules and guidelines around how, and when, financial professionals can claim certification in specialized areas.
Certified Or Approved
Registered investment representatives or brokers can receive certification from professional organizations, but not from state or national securities regulators. Regulators are careful to not issue any type of certification or approval process for any investment professionals registered within that state. What this means is that they do not endorse or otherwise support investment professionals. Their job is simply to police, or regulate, the actions of registered investment professionals.
Compensation - Advisory Fee Limits
Advisory fees tend to be a hot-button issue with securities regulators. Limiting advisory fees and requiring advisors to disclose additional fees, such as 12b-1 fees, allows the client to better assess if the broker's advice is worth what he's charging.
Conflict Of Interest
This is a situation where an individual, employee, or a corporate entity has a vested interest in something that makes their vote or input unreliable. For example, cosmetics tycoon and board member Mabel Doughy voted in favor of granting a multi-year contract to Sticky Lipsticks, a major lipstick manufacturing company. The problem? Her son, Hughie Doughy, is CEO of Sticky Lipsticks.
Mabel needs to disclose her association with Hughie and abstain from voting on this issue.
Consent To Service Of Process
Consent to Service of Process sounds very dull and wordy, and it is. Basically, all this is, is a form that must be signed by all parties registering in the state, which allows for the state securities administrator to be served legal papers on behalf of the registrant.
Contempt Of Court
Yeah, we all know what this one means. Being held in contempt of court means you've been stupid enough to violate a court order, court injunction, or a subpoena. Probably not the smartest thing to do.
The Uniform Securities Act requires contracts between investment advisory firms and their clients to disclose all pertinent information, including the fees to be charged and the method for calculating those fees, services provided, and whether the account is discretionary, among other things.
A custodian is the business entity, such as a trust company or bank, which holds the cash and/or securities for both investment and insurance companies and their separate accounts.
When you have custody, you have the actual physical assets, whether they are in the form of cash or securities.
If a client has given their investment adviser full discretion to withdraw customer cash and securities, the investment adviser is considered to have custody.
Dealers can also be called broker-dealers or self-dealers. They transact securities business for their own account. They also often operate as a principal when executing customer transactions.
The effective date is the date when registration of a security becomes effective, allowing the security to be sold to the public.
A security that is exempt from the registration requirements of The Securities Act of 1933. Generally, exempt securities are those that are backed by or insured by a government or government institution, banks or depository institutions, insurance companies authorized to do business in the state, railroads and public utilities securities, options or warrants, employee benefit plans, equipment trust certificates, and nonprofits.
An exempt transaction is one that is exempt from the registration requirements of the Uniformed Securities Act. Important types of exempt transactions to know for the Series 63 exam include unsolicited transactions, fiduciary transactions, transactions with financial institutions, private placements, and isolated non-issuer transactions.
Like its name suggests, a fidelity bond is a type of bond that is required to be posted by broker dealers to ensure that the public will be protected in the (unlikely!) event of employee shenanigans or dishonesty.
Fraud is considered a serious crime, and carries serious penalties, we might add, for anyone caught practicing it, including not just investment professionals but individual investors, too. Fraud is defined as any attempt to gain an unfair advantage over another party through the use of misrepresentation, concealment, or outright deception.
This is another way of keeping things in balance between an investor and an adviser. A fulcrum fee reduces an adviser's compensation for underperformance by as much as it would raise it for overperformance. Now you won't have to pay Joe the Broker 20% of your account value when it's actually gone down in value.
A government security is any security that is issued by the U.S. Treasury and backed up and guaranteed by the U.S. government.
The word 'guarantee' by itself doesn't sound so bad, but when misused within the context of investment performance or returns, it is considered fraudulent. Think of Joe Blow the Broker guaranteeing his client will see 100% returns on his investment. Can anyone really guarantee an investment is going to return 100%?
A promise from a third party to pay interest, principal or dividends either for its own issue or on behalf of a subsidiary. The only parties that may make a guarantee include parent companies for a subsidiary, the government, or an insurance company.
Hiding Written Complaints
Remember when you were a kid and your teacher sent home a note to your parents? You knew you were in big-time trouble, so why not just hide the note? What your parents don't see can't hurt you, right? Well, this is kind of like that. If an investment rep receives a written complaint from a client, they are obligated to pass it along to their employer, who is in turn obligated to add it to the rep's U-4. Knowing that, it's probably tempting to just not pass it along, but it's a major violation if caught.
These are the people who are in the know when it comes to a company and its secrets. Insiders in a company include its officers and directors, large stockholders of the company, and anyone else who would be in possession of non-public material information. This also includes immediate family members of all the above.
An institutional account is a type of account that is opened in the name of an institution, but is operated for the benefit of others, such as banks or mutual funds.
An institutional investor is an investor who trades for their own account or for the account of others in large enough quantities to qualify as an institutional investor. What's the benefit of being an institutional investor, you ask? They don't receive the same level of protection by the U.S. government as individual investors do. Still, due to their institutional status institutional investors are better able to effect exempt transactions and often receive better treatment from brokerage houses due to the large size of their orders. Size does matter, it seems.
An interstate offering is an offering of securities that will be offered for sale in multiple states, so requires that the issuer register with the SEC as well as with every state in which the securities will be sold.
An investment advisor is any individual who charges a fee for investment advice or conducts securities analysis, or who advertises themselves to the public as giving investment advice for a fee.
Investment Advisor RepresentativeDefinition
The Uniform Securities Act defines an investment advisor representative as an individual employed by or associated with an investment advisor or federal-covered investment advisor and is responsible for any of the following duties in their day-to-day job:
- Makes any recommendations or otherwise gives investment advice regarding securities
- Manages accounts or portfolios of clients
- Determines which recommendation or advice regarding securities should be given
- Provides investment advice or holds herself or himself out as providing investment advice
- Receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice
- Supervises employees who perform any of the foregoing.
Investment Advisors Act Of 1940
The federal legislation enforced and interpreted by the Securities and Exchange Commission (SEC) that sets forth guidelines for business requirements and activities of investment advisers.
An investment company is a corporation or trust that invests the pooled capital of investors and manages the portfolio for the benefit of the investors. In the U.S., most investment companies, including management companies, unit investment trusts and face amount companies, are registered with the SEC.
Another term for a 'security' as defined in the Uniform Securities Act and the Federal Securities Act of 1933. The Howey Decision defines an investment contract as "an investment of money in a common enterprise whereby the investor's fortunes are entwined with other investors and/or the promoter, and the investor hopes to benefit solely through the efforts of others." Sounds good to us.
This sneaky scheme's goal is to drive up the price of a security and artificially create activity with the intent of drawing in new buyers. How does it work? Two or more parties agree to buy and sell the security at prearranged prices and times with no beneficial change in ownership. The new buyers drive up the price, which in turn allows the violators who were in on the scheme to sell their securities at a higher price.
A material fact is knowledge that, if publicly know, would affect the current or future prospects of a corporation.
Misappropriation can have multiple meanings, but for the purposes of the Series 63 exam, it commonly refers to the misappropriation of client funds, or when a member firm uses client funds in an inappropriate or unauthorized way. Under FINRA Rule 3070, member firms must report this activity if discovered by any employee or person associated with the member firm.
Misrepresentation of client accounts means that an agent or investment firm misrepresents the status of customer accounts or omits material facts that could have an affect on a customer's investment decisions.
Often referred to as municipal bonds, or bonds, a municipal security is issued by a state or local government and the interest should be exempt from federal income taxes for investors.
The net capital of a broker dealer or investment advisory firm is the minimum required level of financial solvency that must be met in order to offer sufficient protection for firm clients.
A non-issuer is any type of entity that does not issue or propose to issue a security. In non-issuer transactions, the selling security holder receives the proceeds from the sale.
All or part of a security offering that is for the benefit of someone other than the issuer of the security.
These are orders issued by a state administrator that are not related to any crimes, and are not considered punishment. There are two non-punitive orders: withdrawal and cancellation. If an agent wants to withdraw their license, or cancel it, the administrator can allow them to do so under a non-punitive order.
Outside Business Activities
Outside business activities refers to registered persons who earn monies or benefits not part of the registered firm where they are employed. NASD (FINRA)Rule 3030 requires registered persons who receive income from any business activity to provide written notification to their firm. Broker-dealers must approve and monitor outside business activities of registered persons within the firm.
Person" seems obvious, but within the investment industry the term "person" has a specific meaning. A "person" is any natural person past the legal age of majority or any entity that can enter into a legally binding contract.
Private Investment Company
A private investment company is an investment company or hedge fund that is unregistered and exists to raise funds through the sale of securities to qualified purchasers for any business purpose. A private investment company does not have the obligations to the public that a registered company has, and sales of their securities are therefore limited to qualified purchasers.
Also known as a Reg D offering, a private placement is an offering for unregistered securities which is made to accredited investors and no more than 35 non-accredited investors during any 12-month period.
Punitive' also means 'punishment,' so you can see where this is going. An administrator can issue punitive orders such as cease & desist, denial, suspension, or revocation of an agent's license, which all come from violations of securities regulations.
A qualified purchaser is a very rich person. No, seriously, they're rich. They are considered a sophisticated investor, and must qualify by having one of the following: At least $5M in investments; a family-owned business with at least $5M in investments; a trust sponsored by individuals with at least $5M each; or a corporation that invests for others with at least $25M.
Refusing To Follow Instructions From A Customer
This is a common claim against registered investment professionals, brokers, and fund managers, and it's surprising how often it actually happens. If a client's instructions are legitimate, meaning within the guidelines of the client's investment profile and within the broker's ability to perform, then the broker has an obligation to follow the client's instructions.
Registration By Coordination
A two-for-one special. This is the method for registering a new issue of securities at the state level and at the federal level simultaneously.
Registration By Filing/Notification
For established issuers within a state, this is the method used to register securities within that state.
Registration By Qualification
If an issuer is not established to sell securities within a state, they can register their securities by submitting all information required by the administrator, thereby registering by qualification.
This is a scary-sounding word that basically means to buy back what you had originally sold to someone. Why would you do that? Well, if your sale violated the securities act, then you are obligated to buy back the securities, plus interest less any income the security might have paid to the buyer. Of course, since the securities are most likely bogus, it's fairly certain that they didn't pay the buyer anything anyway.
Remember all that annoying stuff your broker sends you? When this type of written material by an investment firm is sent out to a controlled audience of 25 or more, for the purpose of increasing business, it is considered sales literature and includes; research reports, brochures of firm investment services, and form letters sent to more than 25 customers. We recommend reading while in bed to help you fall asleep.
An investment firm that unfairly uses its relationship with clients to take advantage of them.
Self-Regulatory Organization (SRO)
We're always skeptical when we hear about self-policing organizations, but what do we know? An SRO is a type of industry authority that regulates its own members. Examples of SROs are FINRA, NYSE, and AMEX. These organizations regulate their own members.
Because you're higher on the totem pole than Betty Homemaker, you get in on all the hot action, even the sleazy stuff. Selling away means your broker dealer recommends securities not held or offered by their firm, an act of solicitation that is generally frowned on by securities regulators.
Sharing In Profits/Losses Of ClientsDefinition
There are specific requirements around when an agent can share in a client’s account profits/losses:
- The agent's participation has been approved by a principal, and
- The agent's participation is directly proportional to his/her contributions to the account.
Soliciting Orders For Unregistered, Non-Exempt Securities
This is an important point, so make sure you understand it. While sales reps can accept unsolicited orders for registered non-exempt securities [see Unsolicited Order], and they can solicit orders for registered non-exempt securities or unregistered exempt securities, they cannot solicit orders for unregistered non-exempt securities. Got that? Soliciting orders for unregistered, non-exempt securities is a no-no.
Remember when you were a kid at summer camp and had to pony up a buck to prove your heavy roller status at Friday night's poker game? Well, this is kind of like that. A surety bond is posted by a broker dealer or investment adviser to ensure a firm's financial solvency.
A print or electronic confirmation sent out by your broker dealer, investment firm, etc. for a trade executed on your behalf. Also the traditional way in which the trade information for two counterparties is compared by a central system and, if they match up, the trade is sent on for settlement.
ExampleHere you go.
The term that securities regulators sometimes use to describe how often trades are happening in an account, compared to the actual average daily value of the account. For example, if Billy Bob's account has an average balance of $10,000 but total combined trades of $70,000 for the year, then his account is trading at a turnover rate of seven and is most likely the victim of churning in his account.
P.S Apples cost extra.
Turnover rates are a big issue in a high tax world: every time you "turn an investment over," you sell it. And when you sell, you realize gains, which means that you pay taxes. If you turn over a portfolio fully, you'll have done it 1x or 100%; turn it over 5x in a year and it's likely that your broker is stealing from ya...taking needless commissions on transactions you didn't need to do.
This sounds exactly like what it is: a transaction that isn't authorized. This is when Joe Broker executes a trade in your account without first obtaining you, the client's permission. He might even go so far as to set up a bogus mailing address so that you never see the trade confirmation and therefore remain blissfully ignorant of his nefarious shenanigans.
An order that the client asks to be executed but that was not specifically solicited or recommended by the firm. The important thing to know about this is that all unsolicited orders are exempt transactions, regardless of the security involved.
You've inherited 10 grand from Crazy Uncle Larry. It's been sitting in your brokerage account for 3 months. You're in bed watching Cramer screaming about something or other on CNBC and decide you like the cut of his scream. You want to buy shares in Booyah.com. So, out of the blue, you call your broker and just place the order. It was "unsolicited." Had it been "solicited," the broker would have called YOU and whispered in serious tones, the word, "...plastics."
If you're caught doing this, the security regulators are going to love making an example of you—trust us. The gist of the law is that you do what's best for your client...not what's best for you, your commission structure, or the Hawaii trip you win at the end of the year for who shafted the dumbest client. You work for them, not against them, etc.
Everyone's heard this one: an unscrupulous investment advisor recommends 90 year-old Grandma Madge sink her life savings into a 30-year long bond. Unsuitable? You bet. Like is she really gonna live 90 more years? Would you put her into venture capital? Uh...no.
A fund typically lasts a decade so that won't work either. Equities? Eh. Maybe very small, if it pays a fat dividend. So what is suitable for a 90-year-old grandma? Well, cash looks pretty good. You don't get big commissions selling people cash. But it's the suitable thing to do. Short term paper, low yields, low risk. Swap the polarity if the client is 9. More or less, anyway.
Okay, who's waiving at whom
? A waiver is an exemption - like you get a waiver of back fines in parking tickets if you just pay up now.
If you agree to not sue me over this patent issue, I waive my right to sue you; if I buy this house "as is," I realize that I waive my right to rescind my purchase if I do in fact find ghosts in it; if I hire you as my fund manager, I waive my right to sue you based on bad performance.
I can, however, fire you. And write mean things about you on the bathroom walls (as long as they are true—like that bad performance thing).