A security is anything that can be exchanged for value that involves a risk to the holder. A security also represents an investment in an entity managed by a third party. The Howey test was used by the Supreme Court to determine a security and states that a security must meet the following four characteristics. It must:
The following are examples of securities:
Most times when you see the term certificate, you have a security that is a:
The term variable will also identify a security, as in:
The phrase interest in is another key to identifying a security on the Series 65 exam. All of the following are securities:
Interest in:
The term option is also a good way to identify a security, such as:
The following are not considered securities:
The term future as it appears alone is an indication that a security is not involved. If the question is asking about a commodity future option, however, then a security is involved. Also the term fixed is a good indication that a security is not involved. If a person commits a fraudulent act in the sale of an investment that is not deemed to be a security, that person has not violated securities laws but has committed a fraudulent act in violation of other state and federal laws.
The term person as it is used in the USA refers to any entity who may enter into a legally binding contract. Any entity who can enter into a legally binding contract may transact business in the securities markets. Agreeing to buy or sell a security represents a legally binding contract. For the Series 65 exam, a person is any of the following:
A nonperson is an individual or entity who may not enter into a legally binding contract and therefore may not transact business in the securities market. A nonperson is:
A broker dealer is a person or a firm who maintains a place of business and affects transactions in the securities markets for its own account or for the account of others. A broker dealer must be registered in the home state as well as in the states of its individual clients. A broker dealer is not a(n):
An agent or registered representative may only be an individual (natural person) who represents the issuer or a broker dealer in the purchase and sale or the attempted purchase and sale of securities with the public. Agents are required to register in their home state, their state of employment, and the state of residence of their customers. An agent is not required to register if:
Agents who represent exempt issuers are not required to register. Examples of exempt issuers are:
An issuer is any person who issues or simply proposes to issue a security. Issuers include:
In an issuer or primary transaction, the issuer receives the proceeds from the sale.
A nonissuer is anyone who does not issue or propose to issue a security. All secondary market transactions that take place on an exchange or in the over-the-counter (OTC) market are nonissuer transactions, and the selling security holder receives the proceeds from the sale.
An investment adviser is any person who is actively involved in and receives a fee for any of the following:
A pension consultant is anyone who advises employees on how to fund their employee benefit plan. A person also would be considered to be a pension consultant if they advise the employees on the selection of asset managers or investment advisers for the plan. An investment adviser is not:
The Investment Advisers Act of 1940 provides a strict definition as to which professionals may call themselves investment counsel. An investment counsel must be principally in the business of giving continuous investment advice and must supervise or manage the accounts. The Act does not define how much of the professional's time must be dedicated to providing advice, just that the professional's principal business is giving advice. A key to meeting the definition of an investment counsel are the key words “continuous and regular supervisory or management services.” A professional who provides a wide range of services indicates that the professional in question is not principally involved in giving investment advice.
An investment adviser will begin its formal registration process by filling out Form ADV. The ADV form will provide detailed information regarding the investment adviser and it is comprised of four parts: Part 1A, Part 1B, Part 2A, and Part 2B. Form ADV Parts 2 A and 2 B are provided to clients.
ADV Part 1A includes general information about the investment adviser, including:
ADV Part 1B provides details on the indirect owners of the firm and is filed with the state securities administrator for advisers registered at the state level. Advisers who are federally registered do not file ADV Part 1B.
Form ADV Part 2A is the adviser's narrative brochure and will disclose information relating to clients. ADV Part 2A will state:
Form ADV Part 2B provides information relating to individuals who:
Investment advisers will file Form ADV and all of the required parts based on their business profile and place of registration through the Investment Adviser Registration Database or IARD. The IARD is a centralized clearinghouse for all investment adviser registrations. Advisers electronically file all required registration documents, disclosures, and any required updates or amendments through the IARD. The IARD is used by the SEC and NASAA to review all investment adviser registration data. Advisers must file annual updates to their Form ADV within 90 days of the end of the adviser's fiscal year. It is at this time that the adviser will certify the value of the assets under the adviser's control. Advisers must promptly file any changes to the adviser's business and to Form ADV through the IARD. These changes include any:
An investment adviser representative is a natural person who is under the control of the investment adviser and includes:
Clerical employees are not considered investment advisory representatives and are not required to register.
A solicitor is any person who, for compensation, actively seeks new business for an investment adviser. A solicitor can also include professionals who refer clients to the investment adviser for a fee. All solicitors must be registered as investment adviser representatives. Investors who are introduced to an adviser through the use of a solicitor must be provided with the solicitor's brochure. The solicitor's brochure will provide the client with all the details of the solicitor's relationship with the adviser and the compensation arrangement including the amount of the management fee paid to the solicitor. If the client is paying a higher fee by being introduced to the adviser by the solicitor that fact must be disclosed as well. The solicitor's professional background is not required to be disclosed in the brochure.
An access person is anyone employed by the investment adviser who has access to nonpublic information relating to activity and holdings in client accounts or in the investment adviser's portfolio account. A person will also be deemed to be an access person if that individual makes recommendations to clients or has access to recommendations prior to the release of such recommendations. All of the firms officers and directors are deemed to be access persons at advisory firms where the primary business is providing investment advice. All access persons must report their personal transactions to the firm's chief compliance officer or duly designated compliance officer. The firm must maintain a list of all individuals who were deemed to be access persons in the last five years.
An institutional investor is a person or firm who trades securities for his or her own account or for the account of others. Institutional investors are generally limited to large financial companies. Because of their size and sophistication, fewer protective laws cover institutional investors. It is important to note that there is no minimum size for an institutional account. Institutional investors include:
An accredited investor is an individual who meets one or more of the following criteria:
Has a net worth of $1,000,000 excluding the primary residence;
or
Earns $200,000 per year or more for the last two years and has the expectation of earning the same in the current year;
or
A qualified purchaser must meet strict minimum financial requirements. Securities sold to qualified purchasers are not required to register in the state where the qualified purchaser resides. A qualified purchaser is a(n):
A private investment company is an unregistered investment company or hedge fund that raises funds through the sale of securities to qualified purchasers for any business purposes.
An offer is any attempt to solicit the purchase or sale of a security for value. An offer is considered to have been made in the state where the offer originated, as well as in the state where it is received or directed. An offer will not be considered to have been made if it was received through a television or radio broadcast originating outside the state. Additionally, an offer will not be considered to have been made if received by a newspaper or magazine published out of the state or by a magazine published in state that has two-thirds of its paid circulation outside of the state.
The state securities administrator does not have jurisdiction over offers that are deemed to be made exclusively outside of the administrator's state.
To sell a security, its ownership must be conveyed for value. A sale is considered to have been made at the time of the contract (trade). A sale of a security that has warrants or a right attached is also considered a sale of the attached security. A sale of any security that is convertible or exercisable into another security is considered to include a sale of the security for which the security is convertible or exercisable. A gift of assessable stock is also considered a sale. Assessable stock is stock that may require the holder to make additional payments as a term of ownership. A sale does not include a dividend or the pledge of a security for a collateral loan.
The term guarantee means that another party other than the issuer of the security has guaranteed the payment of principal, interest, or dividends. Only three parties may guarantee something. They are:
Contumacy is the willful display of contempt for the administrator's order. An act of contumacy may result in the agent's or firm's registration being revoked or other disciplinary action.
The administrator may petition the court to have a person who has displayed contumacy for their order to be found in contempt of court. A finding of contempt of court may result in the court ordering a jail term.
A federally covered exemption provides for a full exemption from state registration for federally covered investment advisers and federally covered securities.
A federally covered investment adviser is one who meets the requirements for assets under management and is registered with the Securities Exchange Commission (SEC).
A federally covered security is any of the following:
A power of attorney once given to an individual allows that person to make decisions on behalf of the grantor with the same force and effect as if the grantor had entered into the agreement themselves. Most powers of attorney in the investment world are limited powers of attorney that allow an investment professional to purchase and sell securities without speaking to a client first. A full power of attorney will allow the individual to withdrawal cash and securities from an account. A standard power of attorney will terminate upon the death or incapacitation of the grantor. A durable power of attorney will remain in full force during the incapacitation of the grantor and will only terminate upon the grantor's death. Discretion may not be exercised by until the power of attorney has been received and approved.
A negotiable CD is one that may be sold by the holder prior to the maturity date of the certificate. With a standard certificate of deposit issued by a bank if the holder needed to access the funds prior to the maturity date the owner would pay a penalty for early termination. A negotiable or jumbo CD is issued by a bank for a time deposit in excess of $100,000 with many jumbo CDs being in excess of $1,000,000. The CDs pay periodic interest and will trade in the money market with accrued interest. FDIC insurance only covers the first $250,000 of the principal amount should the bank fail.