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2 What is NASAA? 2  Membership association for the securities regulators in the fifty states, U.S. territories, the District of Columbia, the Canadian provinces and Mexico.  How we can help you:  Amicus briefs in state and federal courts in support of our members and other groups.  Support for multi-state investigations.  Assisting with Comment letters.  Corporate Office Leadership:  Russ Iuculano, Exec. Dir.  John Lynch, Dep. Exec. Dir./Controller  Deborah Fischione House, Director of Policy  Rex Staples, General Counsel  Bob Webster, Director of Communications  Visit us on the web at

3 Alphabet Soup  FINRA. The Financial Industry Regulatory Authority is a self regulatory organization for broker- dealers and their associated persons. It was formed from the merger of the regulatory functions of the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE).  SRO. Self-regulatory organization.  SEC. The Securities and Exchange Commission.  NSMIA. National Securities Market Improvement Act of 1996.  USA. Uniform Securities Act.  RR. Registered representative, associated person of a broker- dealer, or an agent of a broker- dealer.  IAR. Investment adviser representative.  BDs and IAs. Broker-Dealers and Investment Advisers.  CRD and IARD. The Central Registration Depository and the Investment Adviser Registration Depository are the systems used to process the registrations of broker- dealers and their associated persons and investment advisers and their representatives. 3

4 SECURITIES REGULATORS  State – All 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have agencies that regulate securities.  Federal – Securities and Exchange Commission.  SROs – “Self-Regulatory Organizations” such as FINRA.  Criminal Prosecutors – District attorneys, state attorneys general, and the offices of the federal U.S. Attorneys. 4

5 Overview of Securities Regulation History: State statutes regulating securities transactions date back to the early 1900s. Kansas is credited with enacting the first “Blue Sky” law in 1911.  Basic Structure – Five Essential Regulatory Areas: 1. Define securities and core concepts. 2. Licensing of firms and professionals. 3. Registration/Exemption of securities. 4. Standards of conduct. 5. Remedies. 5

6 Major Securities Laws - Statutes  State Statutes – The Uniform Securities Act  Uniform Securities Act 1956  Revised Uniform Securities Act 1985  Uniform Securities Act 2002  Federal Statutes  Securities Act of 1933, 15 U.S.C. § 77a et seq  Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq  Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq  Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq 6

7 Major Securities Laws - Regulations  State and Federal. State and federal regulators enact rules governing the regulation of securities in their respective jurisdictions.  Rules of Self-Regulatory Organizations. Self- regulatory organizations enact rules applicable to their member firms and associated persons. 7

8 Major Securities Laws – Other Sources  Case Law. Decisions from state and federal courts in addition to SEC and state administrative proceedings.  Interpretive and No Action Letters. State and federal regulators issue no action and interpretive letters providing guidance on the application of securities laws to various scenarios.  Treatises. Professor Joe Long’s treatise on Blue Sky law is an excellent resource. 8

9 State and Federal Law: Interpretation and Preemption  Shared Interpretation  Dual system of regulation.  State and federal court decisions.  Coordination between state and federal regulators.  Preemption  Express preemption.  Field preemption.  Conflict preemption.  NSMIA. Registration. Books and records. Investment advisers.  Savings clause for fraud and deceit. 9

10 What is a Security? “Security” means any note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral-trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting-trust certificate; certificate of deposit for a security; certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under such a title or lease; or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. “Security” does not include any insurance or endowment policy or annuity contract under which an insurance company promises to pay [a fixed sum of] money either in a lump sum or periodically for life or for some other specified period.  SEC v. Howey, 328 U.S. 293 (1946) and the “investment contract.”  An investment of money.  In a common enterprise.  With the expectation of profits.  To come predominantly from the efforts of others (the key element of passivity).  Risk capital test. Alternative to Howey definition of “investment contract.”  An investment.  In the risk capital of an enterprise.  With the expectation of benefit. 10

11 Is it Security? ProductClassification Variable Annuity.Security under federal law. Consult state law for inclusion. Fixed Annuity.Not a security. Equity Indexed Annuity.Proposed SEC rule would treat some as a security. Limited Partnership Interest.Security. General Partnership Interest.Generally not a security. CD Issued by a National Bank.Not a security. 11

12 Licensing: Firms and Individuals  Broker-Dealers.  Broker-dealers are defined in the USA as any person engaged in the business of effecting transactions in securities for the account of others or for his own account.  Form BD with CRD.  Agents.  Individual salespeople who represent broker-dealers.  Form U4 with CRD.  Investment Advisers.  Investment advisers are defined in the USA as any person who, for compensation, engages in the business of advising others as to value or advisability of investing in securities.  Form ADV with IARD.  Investment Adviser Representatives.  Individuals who represent investment advisers and provide investment advice to clients.  Form U4 with CRD. 12

13 Duty of Care – Broker-Dealers v. Advisers  Suitability  FINRA Rules (2310)  Only applies to recommendations to customers.  Reasonable grounds that security is suitable based on customer’s security holdings, financial situation/needs.  Generally not fiduciary.  Fiduciary Duty  SEC v. Capital Gains Research Bureau, Inc., 84 S. Ct. 275 (1963).  Recommendations must be in the customer’s best interest.  Eliminate conflicts and where not possible manage through disclosure. Broker-DealersInvestment Advisers 13

14 Registration of Securities  Unlawful to offer or sell any security in a state unless it is registered or exempt from registration  Basic types of registration:  Notification. Available to seasoned issuers who meet certain standards relating to defaults on previously issued securities and average net earnings. (Obsolete)  Coordination. Securities undergoing federal registration pursuant to the 1933 Securities Act.  Qualification. All other securities that are not otherwise registered or exempt. 14

15 Exemptions  State law exemptions.  Exempt transactions.  Exempt securities.  Federal law exemptions.  NSMIA preempted state authority to review “covered securities” which include the following: Securities traded on national exchanges Securities issued by investment companies (mutual funds)  Private offerings – Regulation D, Rule 506. 15

16 Sale of Securities to Public Investors 16

17 Common Violations 17  Offering or selling a security or providing investment advice without a license.  Offering or selling a security that has not been registered or is otherwise not exempt.  Committing fraud in connection with the offer, sale or purchase of a security.  Failure to supervise.

18 Fraud 18  Relevant state and federal statutory provisions:  USA 1956 §101 – General Fraud Provision. Unlawful in connection with the offer, sale or purchase of any security: To employ schemes to defraud; To make any untrue statements of material fact or to omit facts necessary to make other statements not misleading; To engage in any act, practice or course of business that operates as a fraud or deceit.  USA 1956 §102 – Unlawful for any person who receives compensation for investment advice to employ schemes to defraud or to engage in any act, practice or course of business that operates as a fraud or deceit on any person.

19 The Key Elements of Fraud 19  “Offer” and “Sale.”  Under the broad definitions in state uniform acts this would also include every attempt to “offer or dispose” of a security  Materiality.  Generally, is there a substantial likelihood that a reasonable purchaser or seller would consider the information important in deciding whether or not to purchase or sell.  Scienter.  Generally not a requirement in most state civil or criminal enforcement proceedings.  Reliance and Damages.

20 Remedies 20  Injunctive actions in civil courts.  Administrative actions.  Cease and desist/desist and refrain orders.  Orders denying, suspending, revoking licenses and registrations.  Civil remedies for private plaintiffs.  Criminal penalties.  Some states have criminal prosecutorial authority.  Most states have to refer to criminal authorities.


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