February 19, 2024 • 30 mins
In this comprehensive tutorial, gain critical insights into the Federal Securities Act, a must for all preparing for the FINRA and NASA exams. Relevant to Series 63, 65, and 66, this discussion demystifies complex concepts related to Acts of 33, 34, 39, 40 and other federal laws. Ken, the course creator, will guide you through the world of pre-filing, registrations, and prospectus, emphasizing the importance of error-free and authentic documentation to avoid legal troubles.
Explore the posts in the 'effective' phase, understanding the allocation of shares, restrictions for the brokerage industry, and required documentation. Furthermore, delve into the intricacies of the IPO process, from over-the-counter and follow-up rounds to exchange-listed offerings, breaking down the risks, legal requisites, and timeline for each.
In this episode, we'll zoom in on the Act of 1933, focusing on securities that are exempt from registration. Learn about the roles of various players in relation to this Act, such as issuer companies, government agencies, non-profit organizations, U.S banks, and trust companies. Join us to unravel the nuances of securities regulations and the dynamics of the financial market.
Dig deeper into the lesser-talked about regulations, such as the Act of 1939, as we share real-life anecdotes on money laundering from the '80s, discuss the three stages of money laundering, and shed light on the mandatory annual compliance training every financial firm has to follow.
Expand your understanding of the role of municipal securities rule and Making Board (MSRB) in enforcing rules for various entities. Lastly, we'll cover the Investment Company Act of 1940 and the Investment Advisors Act of 1940 to understand their jurisdiction. Tune in to this reservoir of invaluable information, ideal for finance students, practitioners, and anyone interested in learning about securities regulations!
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:07):
Hey this is ken at capital advantage tutoring it's my
job to get you past the finra and nasa exams today we're
going into the federal securities act this is for both the
63 the 65 and the 66 i can't
make separate i can't put the same video up with different titles so
just fucking deal with it so this is going to be about the series
63 the 65 and the 66 the federal
(00:28):
acts not the state acts the federal acts that's where
we're going let us get into it let's start
out with this what are the federal these are acts that are governed by
they're written by the federal government right so they
usually usually on these exams if you see a year the
only one that's different is USA act of 1956 which
is a state law if you're at this part of the video you should know this already
(00:50):
but the federal acts are the act
of 33 the fact of 34 the
act of 39 oh you haven't read
about that one and the two act of 40 and then the pay trade act and all that
stuff so usually if there's a year of tax it's almost always going to be a federal
let's start with the first one the act of 33 think of it since it's the first
(01:13):
act it's the primary act the act of 1933 is all about issue it.
So you don't need the fucking history of it, but understand the purpose of it.
Prior to 33, people didn't have any consistent rules they had to follow when
they went selling shares to the public.
So there was a lot of fraud and lying and ripping off.
So the Act of 33 literally just wrote a menu for how people are going to issue their shares.
(01:34):
And we're not going to go heavy into it, but let's get into it a little bit.
So when you're going to go public, raise money through the public register with
the SEC or whatever it is. And it is the SEC for the Act of 33.
Remember, blue sky laws, if you do what they call qualification,
you don't worry about this act, right? Other than anti-fraud.
So what we're going to do is we want to issue shares. We want to raise money.
So what we're going to do is fill out a letter of intent with a underwriter
(01:57):
and file with the underwriter and say, listen, an underwriter is a broker dealer
that's going to help us sell shares to the public. So during that time,
that's a pre-filing period.
We're hiring the lawyers, the underwriters, all the group, we're filling everything
out, but we're not telling telling anyone about it, except for like insiders
and stuff like that. Well, that's where insider trading comes in.
Now, once we have all the shit filled out, we're going to fill out a registration statement with the SEC.
(02:22):
So we file a registration statement with the SEC right away.
And inside that, the prospectus is in there. The prospectus is like a disclosure doc.
That starts a 20-day cooling off period or the waiting period or the cooling
off period, the waiting period, the timeout period, right? Okay.
Whatever you want to call it.
That, we can't really talk about the issue. We can in a way,
but we'll talk about that. You can't really publish and advertise and market the issue.
(02:46):
That's what, we're just staying quiet while the SEC reviews it.
Okay, and they take 20 days minimum. Now, if you're a big company,
you can get it accelerated, but let's not go there right now.
We're just talking about regular 20-day review.
They're going to take 20 days to review it, and they're going to come back at
some point and go, it's deficient, which means you got to fix something, or you're effective.
We want effective. You'll never see the word approve. prove. We want effective.
(03:09):
Effective means that the SEC has gone, eh, we haven't found anything wrong with
it. It doesn't mean you're good.
It doesn't mean it's going to make money. It doesn't mean we approve you.
It's literally going, eh, we don't have a problem. I think of it as like getting
a gun license in Alabama.
You're not a felon and you paid the fee. There we go. Okay. And you didn't lie
on the thing, but they don't even know if you lied. What they do is fill out the paperwork.
And if you did lie on it, well, you filed federal paperwork and you lied on it So you're in trouble.
(03:33):
So during the 20 days, you can't do a whole lot, but you can do some things
to kind of get it out there, kind of test it.
It's not really testing the orders, but kind of like stick your toe in the water.
Now, blue sky on the issue, you can start running it through all the states.
Because remember, if you're not exempt from state registration,
which being registered with the SEC doesn't always exempt you from registering
with the state unless you're federally covered, which is not what we're talking about.
(03:55):
So you're registered with the SEC and the states at the same time so to recap
the act of 33 is for new issues it starts once you file it starts a 20 day cooling
off period and you can't do a whole lot with it and now we're going to go through one.
You can register in the various states
then you can send out what they call a red herring which
(04:15):
is a preliminary prospectus understand a prospectus is a disclosure doc disclosing
all the the problems the good stuff the bad stuff all that stuff fair and balanced
way to and it has to be under certain certain standards that we have to send
that out to people who are interested in buying the securities from us and the issue.
So we send out a preliminary one, which is missing like the date and the price,
(04:38):
because we don't know what that is yet, because we can't assume we're going to be effective.
So you blue sky the issue, which means registered to all the states.
Then we're going to do a red herring or preliminary prospectus,
send that out to anyone we think it's suitable for.
Now remember, the issuer writes that, not the broker dealer.
The issuer writes writes that and sends it out to us.
And now here's the thing. It used to be, have to be in paper form and untouched.
(04:59):
Now you can send an email link or a, or like put it in a PDF.
The idea is that access equals delivery. So if you give someone access,
if you give someone access to the prospectus through a website or a link,
it's considered delivered.
Now, if they, as long as you have a paper copy to back it up,
you're good to go. So again, prospectus.
(05:20):
Now, if you have to deliver this, This is a preliminary prospectus,
same thing. And the final prospectus is after it's effective.
Same rules kind of thing. So now, as far as getting into that.
Then you can get indications of interest. It's not finding.
Indications like, hey, Larry, are you interested? Yeah, I'd buy some.
Maybe at this price, I wouldn't, whatever.
They have a conversation, not finding, okay? So the point is to just kind of
(05:44):
figure out if people are interested in it.
And then the last thing we do is right before it's issued, everyone gets in
a room, there's a due diligence meeting, accountants, lawyers,
everyone, and they do over the phone, make sure everything's,
all the I's are T'd and the T's are dotted, right? I'm reversed.
Just to make sure we're in good shape.
That's what they're going to do. And then hopefully on the 20th day,
the SEC says you're effective.
(06:05):
If they say you're effective, you can start selling it. If they say,
no, we have issues, then sometimes you have to wait longer.
You have to get it solved and then fix it. Okay?
That's basically the beginning of the Act of 33. After it's effective,
we call it post-effective.
That's where it starts trading. But now we're going to start allocating shares
to the people who said, hey, I want to buy them. And some people get screwed.
(06:27):
They wanted to buy 1,000. They get 100.
Like, I think the way you knew the Facebook deal wasn't good in the beginning.
Now, it's a great company now, right, I guess. They steal data,
so they're good, okay? They make money.
Back then, the stock came out at a price and then it dropped in half.
Morgan Stanley came out with it and they said, anyone who wants 500 shares,
give it to them, okay? Anyone who wants shares, give them 500.
Usually, it's like you're begging and stealing. Like, back in the early 90s,
(06:50):
we wanted the Yahoo deal.
We had to take all these crap. We were a buyer and we wanted the Yahoo deal
because it was going to come out at 20 and we knew it was going to open at like
80 bucks, okay? OK, there's immediate money.
OK, hot deal. Good stuff. Great company at the time.
We had to take all these crap deals to create like a good favor with the companies.
And that comes into an issue that may or may not be on this test.
(07:11):
But what happened is we would sell them on the opening and that creates issues
with the underwriters because they're like, wait, you're supposed to give it
to people who are going to invest for the long haul.
Now, one thing I'm going to add in here, if you work for a broker dealer,
if you work for a broker dealer or a broker dealer, are a broker dealer or immediate
family, you cannot not buy on equity IPOs.
Now, the word IPO literally means equity being issued for the first time.
(07:33):
But I say common stock IPO. That's what I should say.
Common stock IPOs, because you can buy preferred IPOs, you can buy bond IPOs.
So common stock IPOs, you cannot buy.
Even though preferred and bonds aren't considered IPOs, they're just offerings.
Now, back to this. I'm a little rant.
After it's effective, you start allocating it to the people who wanted it.
(07:53):
Say, you're going to get four shares you're gonna get a hundred whatever it is now.
Once you give it to them, they have to get their prospectus no later than completion of the trade.
OK, no later than completion of the trade. So they have to get their prospectus
no later than completion. I've said it three times, but let me say what that means.
Completion of the trade is basically settlement or when the con firm has to
(08:13):
get there. So they have to get it by then.
Now, I'm going to show you how long we are subject to the rule.
So if you buy it from the issuer for a certain amount of days after the effective
period, you must get a prospectus.
Now after a certain days you don't but if you're buying it from the
issuer over these time periods you need to get it no
later than completion of the trade let's get okay so this
(08:34):
is the time period right so here's the deal if you
buy an over-the-counter ipo over-the-counter just means it's not on an exchange
it's trading on the pinks or the otcbx or whatever it is it's not on an exchange
so it's risky we can't say that but it is risky or not covered by as many people
so if If you buy an IPO from an over-the-counter security, then it's 90 days.
(08:54):
Then for the next 90 days after the effective date, you will have to get a prospectus
no later than completion of the trade.
If you have an over-the-counter follow-on, what the hell is a follow-on, Ken?
A follow-on is when you issue more shares.
So you issue shares one time, and then you do it a second, third, fourth time.
(09:15):
If it's over-the-counter, it's only 40 days. days because it's already been out there and done.
Now, if it's an exchange-listed IPO, it's 25 days because it's on the exchange.
It's covered by a lot of companies. They're scrutinizing every part of it, so not too much worries.
And then if it's an exchange-listed follow-on, again, listed on exchange,
and then you issue more shares than Zippo, NADA, Zilch, no prospectus delivery
(09:38):
at all because it's already out there in trading.
And there's every, probably half the brokerages in the country are already covering
it and giving information, So you don't have to do that.
That is the issuing part of the Act of 33.
Now, the question is, these are for non-exempt securities, right?
These are for non-exempt securities.
So now let's go through the list of securities that will not have to register
(09:59):
under the Act of 33 because they are exempt.
Okay, these are the securities that do not have to register with the SEC.
Government, any U.S. government, any U.S. government agency.
This is different than the state rules, a shorter list. U.S.
Government and agency, like Ginny makes shit like that.
Anything issued by a muni, nonprofit, charitable, religious,
domestic banks, all U.S. banks and trust companies. Remember,
(10:22):
a trust company is a bank.
Savings and loans count, but bank holding companies don't.
Remember, bank holding companies are not exempt. exempt any railroads,
utilities, religious, education, charitable institutions, and commercial paper.
Now, the commercial paper, we have to put in here 270 days or less.
Once you're under 270 days, they don't give a shit, okay?
There are other exemptions, exempt transactions, but these are the securities.
(10:46):
Governments, munis, charitable, religious, non-profit, banks,
banks and trusts, savings and loans, not bank holding companies,
railroads, utilities, I don't have it written written here, but it is,
religious, education, charitable, and commercial paper, 270 less.
Those are all exempt securities, which means they do not have to follow the
Act of 33, but fraud is fraud.
(11:07):
Now, the other thing we can talk about is exempt transactions.
These are issued by companies that are not exempt.
Remember, if you remember from my other videos, exempt transactions means it's
a security that is not exempt, but because of the way you're doing it,
it doesn't have to register.
The one of them is Rule 147. That means it's registered in the state only.
(11:27):
It's only sold in one state. It's exempt from SEC rules.
It doesn't have to do it. Reg A, Regulation A, they're not going to go deep on these exams.
Regulation A is exempt from rules because it's too small.
Tier 1 is up to $20 million. Tier 2 is up to $75 million.
They're not going to go deep on it. Just know that Reg A is exempt from federal
law, from federal registration. Registration.
(11:49):
Then we have Reg S, which is outside the country. So as long as it's not sold
to U.S. residents, we're good to go.
Then we have Reg D. Reg D is private placement. Now, that is basically selling
to accredited investors. But here's what it is.
504, which is a small one, up to 10 million, you can sell to up to as many people as you want.
You can only raise 10 million. Anyone can buy. You cannot really advertise.
(12:13):
506B says, okay, you can raise as much money as you you want
but you can sell to as many accredited investors what the
hell is accredited accredited is one two three accredited remember that one
two three accredited that is one million net worth or 200 salary of single and
300 salary of miserable i mean married okay those are the three things also
(12:33):
if you have the series seven or the 65 not the 66 the 65 you're,
you're considered an accredited investor. I think they don't do the 66 because
you're going to have to get the seven anyway. So why put the right here?
Now, you can sell to as many accredited
as you want, but only up to 35 non-accredited. Again, no advertising.
(12:53):
506C, as much money as you want, and you can only sell to accredited investors.
Zero non-accredited. So that means they can advertise because their idea is
that if they put an ad out in the paper,
Grammy, just say Grammy or Grampy, is not accredited, they
couldn't buy on it even if they wanted to so that's why
it's allowed to advertise so again reg a small issuer
(13:14):
reg s outside the country think offshore s for
offshore 147 i always think ben and jerry's is never mind i'm not gonna get
into it just remember 147 is one state only and if you want to know about the
ben and jerry thing just come on my live on tuesdays and thursday nights 8 30
p.m on youtube okay also and then the last one is a red d think d for direct
it's a a private placement on the federal level,
(13:36):
not the same as a private placement on the state level,
which is as many institutional as you want versus non-institutional.
This is accredited versus non-accredited. Two things. One, my hatcher is crooked.
And I swear to God, I never knew until I wore glasses that one ear was obviously
lower than the other. Or I'm just, hold on, there it is. I'll just stand like
this and it'll be straight.
Now, so that's the exempt transactions. actions.
(14:00):
So those securities, those companies issuing those shares would normally have
to register, but because you're either doing a Reg D, a Reg A,
a 147, a Reg S, they don't have to register.
One thing I totally fucking forgot about during the beginning,
during the 20-day cooling off period, we can do a tombstone.
Yeah, we can kill people, put a tombstone. A tombstone ad, okay?
(14:22):
A tombstone ad is a very basic thing saying, hey, we're issuing shares.
These are the underwriters this is how much money we're raising they really
can't put the price on until it's effective but you can that's kind of the only
advertising you can do during the cooling off period i'm sorry it's out of order
i'll try to edit it in there but there's a really good chance i won't and it'll
still be here in the middle of the exam transactions but again going go back,
(14:45):
tombstones can be done during the cooling off period now remember
before i move on to the 34 for if new
year happy new year if you violate if you
intentionally violate always the word is intentionally or willfully
if you intentionally violate these laws there's some
jail time on the on the table okay okay so this is where i come up with the
thing about you know the three five ten rule if you violate state laws it's
(15:08):
three years in jail or five thousand dollar fine and if it's federal law five
years in jail ten thousand dollar fine so if you willfully violate any of these
acts If you willfully or intentionally violate the acts,
you are subject to up to five years in jail and a $10,000 fine per event.
Okay, the Act of 1934, my God, I can't speak.
(15:30):
Act of 1934 is the second act. So think, it's a second act, so it's a secondary.
So Act of 33 is the first one. That's a primary act, primary market.
Second act is the Act of 34, so it's a secondary market, okay?
So here are the things. I remember misperms as my, misperms,
so if you remember misperms as an acronym, a mnemonic, whatever the hell you
(15:52):
want to call it, it's going to help you, okay?
I never know. It's an English thing and grammar thing.
I don't care. Now, so under the Act of 34, they created the 33,
they created the rules, and now the 34, they created the SEC and among other things.
So here are all the things that you need to know for under the Act of 34.
So one, they gave all of the margin, anything to do with money,
(16:14):
anything to do with money in the broker deal and the customer,
they gave to the Federal Reserve Board.
So that's the whole reg T. Remember, because reg T is not just margin.
And it's also when you buy shares on a Monday, you actually have four days to pay.
That's right to settlement. That's when the customer has to put money in.
So they gave all the money, anything to do with money and broker dealers and
(16:35):
customers, they put under the guise of the Federal Reserve Board.
Then the next thing is they defined what insiders were. They had a lot more rules.
So now insiders are anyone who's a pods, partner offices, directors,
all that shit, plus anyone who is in possession of material inside information.
Information and the tipper i mean it used to be just
a tippy got in trouble now anyone in the change if i
(16:57):
tell you information and then you tell your brother and then you
tell your sister and then remember if they don't trade on it there's no problem
i may get fired but no criminal once they trade on it everyone in the line could
be now okay then in the the first s they created the sec which is the the government
that regulates okay the government that read the government from an agency that
(17:18):
regulates anything to do with securities,
broker-dealers, investment advisors,
securities, exchanges, all that stuff. Okay.
The next one is short sales. They regulate short sales. So they started saying
before 1933, you could short sell without rules.
So now if you want to sell stock short, the SEC has a lot of rules on it.
We're not going to go heavy into it because it's not for the seven or the 24,
(17:41):
but you will need to know that you will need to get a borrow ahead of time.
So if you want to do a short sale, you have to get a borrow or a locate, okay?
And there's other rules, but we're not going to get into that.
So short sales, if you want to sell short, which is basically borrowing shares,
selling them, hoping they drop in price, and then buy back to give the shares back, proxies.
(18:02):
Now they allow you to vote by mail. So proxy rules are literally allowing somebody
else to vote on your behalf for matters like stock splits, stuff like that.
Exchanges they actually made
the exchanges in all the broker dealers and the broker dealers okay and.
To register with the SEC. Now, remember, IAs are registered with the SEC,
but under the Act of 40, not Act of 34. Key.
(18:23):
That could show up. So broker-dealers and exchanges, according to the Act of
34, had to now register with the SEC.
And now the SEC looks over their financials and makes sure they're not doing
bad stuff. So their job is to regulate the broker-dealers and exchanges.
Now, what they normally do is they have FINRA do it first, and then the SEC
comes in and brings brings the hammer down. Okay, report.
(18:44):
If you've ever heard of a reporting company, that means that they are reporting to the SEC.
They're reporting their financials. So most issuers, all issuers that are registered
with the SEC have to report their financials to the SEC.
Now, some companies that are not, like the exempt, they're not registered with
the SEC, they may choose to report because then they get this different allowance.
(19:06):
It's like if somebody buys the shares of a company that does report their financials
to the SEC, the holding period period is only six months versus a year.
So the main reports you have to worry about are an 8K, which is just like an
update somewhere in between, a 10Q, you're welcome, 10Q, you're welcome.
That's a quarterly report, unaudited, unaudited. And then a 10K,
(19:26):
which is an annual report audited by an independent auditor.
Okay. That's the reports.
Those are the main ones. If you're an issuer, boom.
Manipulation, they put manipulation under here and they made a very broad stroke
and And they said, listen, if the SEC decides what you're doing,
if the SEC decides what you're doing is manipulation or fraud, it is.
So this is stuff like painting the tape, wash trades, not wash sales,
(19:50):
wash trades, spoofing, marking the open, marking the close, insider trading
fraud, all this shit, collusion, spreading rumors are all under the SEC.
And what they say is wrong is wrong. OK, then stabilizing. So when we come out
with a new company, it may not have a lot of buzz yet.
So they allow the underwriter. It's a legal form of manipulation.
(20:12):
They allow the underwriter, okay? It allows the underwriter to buy shares.
At, at the offering price or lower the IPO pressure lower to hold it there for
a certain number of days.
They have to announce it. It's there. They have to let everyone know,
but they are allowed to do that. Okay.
And that's where I said before that if we were selling shares right in the opening,
flipping them out, the underwriter might be buying them and that will cause a problem.
(20:34):
So that's why you're supposed to sell to people are going to invest a long time
because what they do. And again, details don't matter on this so much.
There's a thing called the penalty bid where if I'm the lead underwriter and
I find out that you're selling to people who who are selling right in the open,
I can actually initiate a penalty bid and start penalizing you,
taking commissions out of your pocket when you do that.
(20:55):
So that's the Act of 34. Remember, misperms, they covered margin,
insiders, SEC, short sales, proxies, exchanges, and broker-dealers,
reports by issuers, manipulation, the bad shit, and stabilizing a transaction.
Okay, most of the books won't talk about it. My dog just jumped because I jumped.
I was quiet for like 10 minutes.
The Act of 39, the Trust Indenture Act of 39 is for corporate bonds, non-exempt bonds.
(21:18):
They have to register under the Act, not under the Act of 39.
They are registering according to the rules. They have to have the Trust Indenture,
which is literally just a document between the issuer and the trustee listing
all things the issuer can do and the trustee will do it.
Just know that corporate bonds are issued under the rules of the Trust and Denture Act of 1939.
Now let's talk about AML, AML, and the U.S. Patriot Act.
(21:42):
Okay, so I don't care about the act so much. Just understand that the BSA is
under the Bank Secrecy Act and the Patriot Act and AML, they all go together
because they're making sure you're not ripping people off.
So the big thing you have to know about money laundering is the best time to
catch it is during the placement, when people put the money in.
Placement is when they put it in. Layering is when they put layers between the
(22:02):
money to hide it, like wiring money, doing transactions, moving it around between
different countries, so it's hard to track.
And integration is when they withdraw it. So let me give my little story in
the 1980s when I was a dealer at, not that kind of dealer, a dealer,
an assistant dealer. Did they have them?
They wouldn't have them on the street, in a casino in the 80s.
And back then, we didn't know that money launderers were feeding terrorists.
(22:25):
We just thought they were doing drug dealers, so we didn't care as much,
especially in Atlantic City.
Like literally the strip of Atlantic City is there.
It's great. And then one step off, you're watching some people get shot and all that crazy.
Now, every Wednesday night for like six months, a little guy,
a little white guy, we'll walk in there and drop $5,000 or $8,000 on red on
the nine different tables in the, in the, wherever I was.
(22:46):
Okay. So now every time nine, nine, nine, nine, and, and he,
and he wouldn't react. He put the cash down.
Never. He would always put cash in each one. And that's weird.
And he would never react win or lose. So then.
What happened is he'd take the money and go to the window and take the cash.
He was, think about it, he was doing all this stuff. Placement was putting the bets.
Then by betting it and getting the chips, winning or losing,
(23:08):
he was layering it. And then when he took it out, it was integration.
Literally did it every week.
As far as I was aware, they knew him. They knew of him. They didn't care because
the casino actually didn't care because they were making money.
They were making a little bit of money off of him because it's like 49%. He was losing money.
He knew if he bet every time. I think there were nights where he walked away
with nothing, and then there were nights he hit every time. He knew over the
(23:29):
long haul that it was going to work.
It doesn't work anymore because now you report this shit, but back then it was a little different.
To come back from my story, placement is when they put the money into the system.
That's the best time to catch it. That's why you need to take a record of when
people open the accounts, where they get the money from.
That's why you have, if you put more than 10 grand in cash in an account, they do a CTR.
(23:50):
If you think something's suspicious over over five grand
you're going to do a sars which is a bad thing right
so ctrs are currency transaction reports anything any
cash in or out in an account is going to be reported it's not a big deal they
report hundreds of thousands a day happen okay so but the sars is when they
did something wrong and you're going to you're going to report them to the fbi
(24:11):
or the treasury department whatever that's kind of like you're going to screw
that guy's life up so you better make sure you notice i assume it's a guy always
doing this shit the criminals are all moment, right?
So, again, placement is when they put the money in. That's the best time to track it.
You've got to take a record of who brings money in, if they bring cash,
their name, address, all that shit.
And layering is when you're, like, wiring it to, like, the Cayman Islands and
(24:34):
the Isle of Man and then Ireland and England and then Afghanistan,
Pakistan, all the countries.
So it's Switzerland, you know,
Luxembourg. So it's very hard to track the money, and that's layering.
Layering and then he sits and in any when it gets back to the u.s or wherever
it goes they will draw the money out and that's integration so again placement
is placement layering then integration.
(24:54):
So to go on a little farther on this every firm has to
do annual mandatory compliance training it could be the little modules that
you do they do the trick or they come and do a speech to you and they you know
they walk and they give you questions and stuff like that and they all have
to have what they call a cip a customer identification program like they don't
tell you how to do it but there There has to be a way for every broker deal
to verify the identity of any person that owns the account.
(25:18):
That's part of AML. You also have to check if anyone's on a governmental list, like OFAC, right?
They're going to check your name against OFAC to see if you're a foreign national
that has some issues with it.
And in reality, there's a thing called FinCEN, which only U.S.
Broker dealers get to see. It's a list.
And remember, in the list, like when I had it, it was like I had to sign off
(25:38):
on so much fucking shit that I wasn't going to share the list or anything.
Thing i could talk about it it's like fight club you can talk about it but you
can't be it now nobody talks about fight club but fincen
financial financial crime enforcement
network is a list every week or two weeks you get a list of
all people that had like they were suspected of money laundering or hiding money
and then you you would get their report and if you had one of them as your account
(26:00):
they're the the case agent be there and you send it to them not a big deal you
should verify customers information okay this is a must you need their name
the date of birth the address and an identification number.
Now remember, FINRA does not require a social security number,
but under Bank Secrecy Act, Bank Safety Secrecy, whatever the hell it is.
What is Bank Secrecy Act? I guess I was right. Sometimes I'm right,
(26:22):
okay? And if it's a non-U.S. person, you need some sort of tax priority number, something like that.
So you need to verify who they are. You need to verify the accounts, okay?
MSRB, Municipal Securities Rule and Making Board, just know this,
that they write the rules. They don't enforce them.
They write the rules not for the issuers but for the people selling them,
(26:43):
the broker-dealers, the banks, the dealers, the agents, all that stuff.
They make the rules for them, but they don't enforce. force.
If it's a bank, it's a Federal Reserve or the FDIC or the comptroller of the currency for the banks.
Or for broker deals, it's the SEC offender that enforces the rules.
Now, the last one, there's two more. The Investment Company Act of 1940.
(27:03):
The Investment Company Act of 1940 is FUM. F-U-M, face amount certificates,
unit investment trust, management companies, F-U-M. It covers all investment
companies under there. That's what it is, okay?
So remember, and this is, I always thought this is so cool.
You know, how, 60, 80, 83 years ago, they wrote this.
(27:26):
They did the investment company after 40, and then they couldn't have just waited
a year to do the investment advisors after 40.
So literally, you knew there'd be students confusing the two.
They must have done it on purpose to have a big laugh up in heaven. I've never seen...
A lot of questions on this, but I'm going to link the mutual fund stuff up here
for the mutual funds and annuities.
See, the investment company, Active40, literally just regulates mutual funds,
(27:50):
annuities, face amount certificates, unit investment trust, and management companies.
Management companies are open-end funds, closed-end funds, ETFs, all that stuff.
REITs are not covered under this. Everyone tries to think they do.
The books try to trick you into that. They don't. Real estate limited partnerships
are not under this either.
When I do the investment vehicle stuff, I'll talk about mutual funds there.
(28:11):
We don't need to do it now because I am just too fucking tired.
And the last one is Investment Advisors Act of 1940.
That covered all federally covered advisors, which I've done videos on.
So the Investment Advisors Act of 40 covers federally covered advisors,
not state advisors and federal advisors.
So let's go through it. Act of 33, new issues. Act of 34, secondary market.
(28:34):
Act of 39, corporate bonds, non-exempt bonds. Remember, Remember,
non-exempt means corporate.
Act of 40, investment company, Act of 40, mutual funds, based on certificates,
unit investment trusts, management companies.
Investment Advisors Act of 40 is a federal covered advisors.
MSRB regulates muni, the dealers, not the issuers, because issuers are exempt from federal law.
(28:55):
It's the broker dealers, the banks, the issuers, not the issuers,
the agents, the IARs, all those people who sell the securities,
not the issuers, because they're exempt, because they're states.
Okay i got done i see i told you i was near the end guys
check me out every tuesday and thursday night youtube 8 30
p.m i do a live q a ask you questions in any exam you want not just the 65 one
(29:17):
so let's get on to this and i'll do investment advisory i don't know what i'm
going to do next i have no idea wait for it baby and don't forget please like
subscribe share because it makes me feel good when people do that it gets that dopamine hit.
Music.
Hey this is ken at capital advantage tutoring it's my
job to get you past the finra and nasa exams today we're
going into the federal securities act this is for both the
63 the 65 and the 66 i can't
make separate i can't put the same video up with different titles so
just fucking deal with it so this is going to be about the series
63 the 65 and the 66 the federal
(00:28):
acts not the state acts the federal acts that's where
we're going let us get into it let's start
out with this what are the federal these are acts that are governed by
they're written by the federal government right so they
usually usually on these exams if you see a year the
only one that's different is USA act of 1956 which
is a state law if you're at this part of the video you should know this already
(00:50):
but the federal acts are the act
of 33 the fact of 34 the
act of 39 oh you haven't read
about that one and the two act of 40 and then the pay trade act and all that
stuff so usually if there's a year of tax it's almost always going to be a federal
let's start with the first one the act of 33 think of it since it's the first
(01:13):
act it's the primary act the act of 1933 is all about issue it.
So you don't need the fucking history of it, but understand the purpose of it.
Prior to 33, people didn't have any consistent rules they had to follow when
they went selling shares to the public.
So there was a lot of fraud and lying and ripping off.
So the Act of 33 literally just wrote a menu for how people are going to issue their shares.
(01:34):
And we're not going to go heavy into it, but let's get into it a little bit.
So when you're going to go public, raise money through the public register with
the SEC or whatever it is. And it is the SEC for the Act of 33.
Remember, blue sky laws, if you do what they call qualification,
you don't worry about this act, right? Other than anti-fraud.
So what we're going to do is we want to issue shares. We want to raise money.
So what we're going to do is fill out a letter of intent with a underwriter
(01:57):
and file with the underwriter and say, listen, an underwriter is a broker dealer
that's going to help us sell shares to the public. So during that time,
that's a pre-filing period.
We're hiring the lawyers, the underwriters, all the group, we're filling everything
out, but we're not telling telling anyone about it, except for like insiders
and stuff like that. Well, that's where insider trading comes in.
Now, once we have all the shit filled out, we're going to fill out a registration statement with the SEC.
(02:22):
So we file a registration statement with the SEC right away.
And inside that, the prospectus is in there. The prospectus is like a disclosure doc.
That starts a 20-day cooling off period or the waiting period or the cooling
off period, the waiting period, the timeout period, right? Okay.
Whatever you want to call it.
That, we can't really talk about the issue. We can in a way,
but we'll talk about that. You can't really publish and advertise and market the issue.
(02:46):
That's what, we're just staying quiet while the SEC reviews it.
Okay, and they take 20 days minimum. Now, if you're a big company,
you can get it accelerated, but let's not go there right now.
We're just talking about regular 20-day review.
They're going to take 20 days to review it, and they're going to come back at
some point and go, it's deficient, which means you got to fix something, or you're effective.
We want effective. You'll never see the word approve. prove. We want effective.
(03:09):
Effective means that the SEC has gone, eh, we haven't found anything wrong with
it. It doesn't mean you're good.
It doesn't mean it's going to make money. It doesn't mean we approve you.
It's literally going, eh, we don't have a problem. I think of it as like getting
a gun license in Alabama.
You're not a felon and you paid the fee. There we go. Okay. And you didn't lie
on the thing, but they don't even know if you lied. What they do is fill out the paperwork.
And if you did lie on it, well, you filed federal paperwork and you lied on it So you're in trouble.
(03:33):
So during the 20 days, you can't do a whole lot, but you can do some things
to kind of get it out there, kind of test it.
It's not really testing the orders, but kind of like stick your toe in the water.
Now, blue sky on the issue, you can start running it through all the states.
Because remember, if you're not exempt from state registration,
which being registered with the SEC doesn't always exempt you from registering
with the state unless you're federally covered, which is not what we're talking about.
(03:55):
So you're registered with the SEC and the states at the same time so to recap
the act of 33 is for new issues it starts once you file it starts a 20 day cooling
off period and you can't do a whole lot with it and now we're going to go through one.
You can register in the various states
then you can send out what they call a red herring which
(04:15):
is a preliminary prospectus understand a prospectus is a disclosure doc disclosing
all the the problems the good stuff the bad stuff all that stuff fair and balanced
way to and it has to be under certain certain standards that we have to send
that out to people who are interested in buying the securities from us and the issue.
So we send out a preliminary one, which is missing like the date and the price,
(04:38):
because we don't know what that is yet, because we can't assume we're going to be effective.
So you blue sky the issue, which means registered to all the states.
Then we're going to do a red herring or preliminary prospectus,
send that out to anyone we think it's suitable for.
Now remember, the issuer writes that, not the broker dealer.
The issuer writes writes that and sends it out to us.
And now here's the thing. It used to be, have to be in paper form and untouched.
(04:59):
Now you can send an email link or a, or like put it in a PDF.
The idea is that access equals delivery. So if you give someone access,
if you give someone access to the prospectus through a website or a link,
it's considered delivered.
Now, if they, as long as you have a paper copy to back it up,
you're good to go. So again, prospectus.
(05:20):
Now, if you have to deliver this, This is a preliminary prospectus,
same thing. And the final prospectus is after it's effective.
Same rules kind of thing. So now, as far as getting into that.
Then you can get indications of interest. It's not finding.
Indications like, hey, Larry, are you interested? Yeah, I'd buy some.
Maybe at this price, I wouldn't, whatever.
They have a conversation, not finding, okay? So the point is to just kind of
(05:44):
figure out if people are interested in it.
And then the last thing we do is right before it's issued, everyone gets in
a room, there's a due diligence meeting, accountants, lawyers,
everyone, and they do over the phone, make sure everything's,
all the I's are T'd and the T's are dotted, right? I'm reversed.
Just to make sure we're in good shape.
That's what they're going to do. And then hopefully on the 20th day,
the SEC says you're effective.
(06:05):
If they say you're effective, you can start selling it. If they say,
no, we have issues, then sometimes you have to wait longer.
You have to get it solved and then fix it. Okay?
That's basically the beginning of the Act of 33. After it's effective,
we call it post-effective.
That's where it starts trading. But now we're going to start allocating shares
to the people who said, hey, I want to buy them. And some people get screwed.
(06:27):
They wanted to buy 1,000. They get 100.
Like, I think the way you knew the Facebook deal wasn't good in the beginning.
Now, it's a great company now, right, I guess. They steal data,
so they're good, okay? They make money.
Back then, the stock came out at a price and then it dropped in half.
Morgan Stanley came out with it and they said, anyone who wants 500 shares,
give it to them, okay? Anyone who wants shares, give them 500.
Usually, it's like you're begging and stealing. Like, back in the early 90s,
(06:50):
we wanted the Yahoo deal.
We had to take all these crap. We were a buyer and we wanted the Yahoo deal
because it was going to come out at 20 and we knew it was going to open at like
80 bucks, okay? OK, there's immediate money.
OK, hot deal. Good stuff. Great company at the time.
We had to take all these crap deals to create like a good favor with the companies.
And that comes into an issue that may or may not be on this test.
(07:11):
But what happened is we would sell them on the opening and that creates issues
with the underwriters because they're like, wait, you're supposed to give it
to people who are going to invest for the long haul.
Now, one thing I'm going to add in here, if you work for a broker dealer,
if you work for a broker dealer or a broker dealer, are a broker dealer or immediate
family, you cannot not buy on equity IPOs.
Now, the word IPO literally means equity being issued for the first time.
(07:33):
But I say common stock IPO. That's what I should say.
Common stock IPOs, because you can buy preferred IPOs, you can buy bond IPOs.
So common stock IPOs, you cannot buy.
Even though preferred and bonds aren't considered IPOs, they're just offerings.
Now, back to this. I'm a little rant.
After it's effective, you start allocating it to the people who wanted it.
(07:53):
Say, you're going to get four shares you're gonna get a hundred whatever it is now.
Once you give it to them, they have to get their prospectus no later than completion of the trade.
OK, no later than completion of the trade. So they have to get their prospectus
no later than completion. I've said it three times, but let me say what that means.
Completion of the trade is basically settlement or when the con firm has to
(08:13):
get there. So they have to get it by then.
Now, I'm going to show you how long we are subject to the rule.
So if you buy it from the issuer for a certain amount of days after the effective
period, you must get a prospectus.
Now after a certain days you don't but if you're buying it from the
issuer over these time periods you need to get it no
later than completion of the trade let's get okay so this
(08:34):
is the time period right so here's the deal if you
buy an over-the-counter ipo over-the-counter just means it's not on an exchange
it's trading on the pinks or the otcbx or whatever it is it's not on an exchange
so it's risky we can't say that but it is risky or not covered by as many people
so if If you buy an IPO from an over-the-counter security, then it's 90 days.
(08:54):
Then for the next 90 days after the effective date, you will have to get a prospectus
no later than completion of the trade.
If you have an over-the-counter follow-on, what the hell is a follow-on, Ken?
A follow-on is when you issue more shares.
So you issue shares one time, and then you do it a second, third, fourth time.
(09:15):
If it's over-the-counter, it's only 40 days. days because it's already been out there and done.
Now, if it's an exchange-listed IPO, it's 25 days because it's on the exchange.
It's covered by a lot of companies. They're scrutinizing every part of it, so not too much worries.
And then if it's an exchange-listed follow-on, again, listed on exchange,
and then you issue more shares than Zippo, NADA, Zilch, no prospectus delivery
(09:38):
at all because it's already out there in trading.
And there's every, probably half the brokerages in the country are already covering
it and giving information, So you don't have to do that.
That is the issuing part of the Act of 33.
Now, the question is, these are for non-exempt securities, right?
These are for non-exempt securities.
So now let's go through the list of securities that will not have to register
(09:59):
under the Act of 33 because they are exempt.
Okay, these are the securities that do not have to register with the SEC.
Government, any U.S. government, any U.S. government agency.
This is different than the state rules, a shorter list. U.S.
Government and agency, like Ginny makes shit like that.
Anything issued by a muni, nonprofit, charitable, religious,
domestic banks, all U.S. banks and trust companies. Remember,
(10:22):
a trust company is a bank.
Savings and loans count, but bank holding companies don't.
Remember, bank holding companies are not exempt. exempt any railroads,
utilities, religious, education, charitable institutions, and commercial paper.
Now, the commercial paper, we have to put in here 270 days or less.
Once you're under 270 days, they don't give a shit, okay?
There are other exemptions, exempt transactions, but these are the securities.
(10:46):
Governments, munis, charitable, religious, non-profit, banks,
banks and trusts, savings and loans, not bank holding companies,
railroads, utilities, I don't have it written written here, but it is,
religious, education, charitable, and commercial paper, 270 less.
Those are all exempt securities, which means they do not have to follow the
Act of 33, but fraud is fraud.
(11:07):
Now, the other thing we can talk about is exempt transactions.
These are issued by companies that are not exempt.
Remember, if you remember from my other videos, exempt transactions means it's
a security that is not exempt, but because of the way you're doing it,
it doesn't have to register.
The one of them is Rule 147. That means it's registered in the state only.
(11:27):
It's only sold in one state. It's exempt from SEC rules.
It doesn't have to do it. Reg A, Regulation A, they're not going to go deep on these exams.
Regulation A is exempt from rules because it's too small.
Tier 1 is up to $20 million. Tier 2 is up to $75 million.
They're not going to go deep on it. Just know that Reg A is exempt from federal
law, from federal registration. Registration.
(11:49):
Then we have Reg S, which is outside the country. So as long as it's not sold
to U.S. residents, we're good to go.
Then we have Reg D. Reg D is private placement. Now, that is basically selling
to accredited investors. But here's what it is.
504, which is a small one, up to 10 million, you can sell to up to as many people as you want.
You can only raise 10 million. Anyone can buy. You cannot really advertise.
(12:13):
506B says, okay, you can raise as much money as you you want
but you can sell to as many accredited investors what the
hell is accredited accredited is one two three accredited remember that one
two three accredited that is one million net worth or 200 salary of single and
300 salary of miserable i mean married okay those are the three things also
(12:33):
if you have the series seven or the 65 not the 66 the 65 you're,
you're considered an accredited investor. I think they don't do the 66 because
you're going to have to get the seven anyway. So why put the right here?
Now, you can sell to as many accredited
as you want, but only up to 35 non-accredited. Again, no advertising.
(12:53):
506C, as much money as you want, and you can only sell to accredited investors.
Zero non-accredited. So that means they can advertise because their idea is
that if they put an ad out in the paper,
Grammy, just say Grammy or Grampy, is not accredited, they
couldn't buy on it even if they wanted to so that's why
it's allowed to advertise so again reg a small issuer
(13:14):
reg s outside the country think offshore s for
offshore 147 i always think ben and jerry's is never mind i'm not gonna get
into it just remember 147 is one state only and if you want to know about the
ben and jerry thing just come on my live on tuesdays and thursday nights 8 30
p.m on youtube okay also and then the last one is a red d think d for direct
it's a a private placement on the federal level,
(13:36):
not the same as a private placement on the state level,
which is as many institutional as you want versus non-institutional.
This is accredited versus non-accredited. Two things. One, my hatcher is crooked.
And I swear to God, I never knew until I wore glasses that one ear was obviously
lower than the other. Or I'm just, hold on, there it is. I'll just stand like
this and it'll be straight.
Now, so that's the exempt transactions. actions.
(14:00):
So those securities, those companies issuing those shares would normally have
to register, but because you're either doing a Reg D, a Reg A,
a 147, a Reg S, they don't have to register.
One thing I totally fucking forgot about during the beginning,
during the 20-day cooling off period, we can do a tombstone.
Yeah, we can kill people, put a tombstone. A tombstone ad, okay?
(14:22):
A tombstone ad is a very basic thing saying, hey, we're issuing shares.
These are the underwriters this is how much money we're raising they really
can't put the price on until it's effective but you can that's kind of the only
advertising you can do during the cooling off period i'm sorry it's out of order
i'll try to edit it in there but there's a really good chance i won't and it'll
still be here in the middle of the exam transactions but again going go back,
(14:45):
tombstones can be done during the cooling off period now remember
before i move on to the 34 for if new
year happy new year if you violate if you
intentionally violate always the word is intentionally or willfully
if you intentionally violate these laws there's some
jail time on the on the table okay okay so this is where i come up with the
thing about you know the three five ten rule if you violate state laws it's
(15:08):
three years in jail or five thousand dollar fine and if it's federal law five
years in jail ten thousand dollar fine so if you willfully violate any of these
acts If you willfully or intentionally violate the acts,
you are subject to up to five years in jail and a $10,000 fine per event.
Okay, the Act of 1934, my God, I can't speak.
(15:30):
Act of 1934 is the second act. So think, it's a second act, so it's a secondary.
So Act of 33 is the first one. That's a primary act, primary market.
Second act is the Act of 34, so it's a secondary market, okay?
So here are the things. I remember misperms as my, misperms,
so if you remember misperms as an acronym, a mnemonic, whatever the hell you
(15:52):
want to call it, it's going to help you, okay?
I never know. It's an English thing and grammar thing.
I don't care. Now, so under the Act of 34, they created the 33,
they created the rules, and now the 34, they created the SEC and among other things.
So here are all the things that you need to know for under the Act of 34.
So one, they gave all of the margin, anything to do with money,
(16:14):
anything to do with money in the broker deal and the customer,
they gave to the Federal Reserve Board.
So that's the whole reg T. Remember, because reg T is not just margin.
And it's also when you buy shares on a Monday, you actually have four days to pay.
That's right to settlement. That's when the customer has to put money in.
So they gave all the money, anything to do with money and broker dealers and
(16:35):
customers, they put under the guise of the Federal Reserve Board.
Then the next thing is they defined what insiders were. They had a lot more rules.
So now insiders are anyone who's a pods, partner offices, directors,
all that shit, plus anyone who is in possession of material inside information.
Information and the tipper i mean it used to be just
a tippy got in trouble now anyone in the change if i
(16:57):
tell you information and then you tell your brother and then you
tell your sister and then remember if they don't trade on it there's no problem
i may get fired but no criminal once they trade on it everyone in the line could
be now okay then in the the first s they created the sec which is the the government
that regulates okay the government that read the government from an agency that
(17:18):
regulates anything to do with securities,
broker-dealers, investment advisors,
securities, exchanges, all that stuff. Okay.
The next one is short sales. They regulate short sales. So they started saying
before 1933, you could short sell without rules.
So now if you want to sell stock short, the SEC has a lot of rules on it.
We're not going to go heavy into it because it's not for the seven or the 24,
(17:41):
but you will need to know that you will need to get a borrow ahead of time.
So if you want to do a short sale, you have to get a borrow or a locate, okay?
And there's other rules, but we're not going to get into that.
So short sales, if you want to sell short, which is basically borrowing shares,
selling them, hoping they drop in price, and then buy back to give the shares back, proxies.
(18:02):
Now they allow you to vote by mail. So proxy rules are literally allowing somebody
else to vote on your behalf for matters like stock splits, stuff like that.
Exchanges they actually made
the exchanges in all the broker dealers and the broker dealers okay and.
To register with the SEC. Now, remember, IAs are registered with the SEC,
but under the Act of 40, not Act of 34. Key.
(18:23):
That could show up. So broker-dealers and exchanges, according to the Act of
34, had to now register with the SEC.
And now the SEC looks over their financials and makes sure they're not doing
bad stuff. So their job is to regulate the broker-dealers and exchanges.
Now, what they normally do is they have FINRA do it first, and then the SEC
comes in and brings brings the hammer down. Okay, report.
(18:44):
If you've ever heard of a reporting company, that means that they are reporting to the SEC.
They're reporting their financials. So most issuers, all issuers that are registered
with the SEC have to report their financials to the SEC.
Now, some companies that are not, like the exempt, they're not registered with
the SEC, they may choose to report because then they get this different allowance.
(19:06):
It's like if somebody buys the shares of a company that does report their financials
to the SEC, the holding period period is only six months versus a year.
So the main reports you have to worry about are an 8K, which is just like an
update somewhere in between, a 10Q, you're welcome, 10Q, you're welcome.
That's a quarterly report, unaudited, unaudited. And then a 10K,
(19:26):
which is an annual report audited by an independent auditor.
Okay. That's the reports.
Those are the main ones. If you're an issuer, boom.
Manipulation, they put manipulation under here and they made a very broad stroke
and And they said, listen, if the SEC decides what you're doing,
if the SEC decides what you're doing is manipulation or fraud, it is.
So this is stuff like painting the tape, wash trades, not wash sales,
(19:50):
wash trades, spoofing, marking the open, marking the close, insider trading
fraud, all this shit, collusion, spreading rumors are all under the SEC.
And what they say is wrong is wrong. OK, then stabilizing. So when we come out
with a new company, it may not have a lot of buzz yet.
So they allow the underwriter. It's a legal form of manipulation.
(20:12):
They allow the underwriter, okay? It allows the underwriter to buy shares.
At, at the offering price or lower the IPO pressure lower to hold it there for
a certain number of days.
They have to announce it. It's there. They have to let everyone know,
but they are allowed to do that. Okay.
And that's where I said before that if we were selling shares right in the opening,
flipping them out, the underwriter might be buying them and that will cause a problem.
(20:34):
So that's why you're supposed to sell to people are going to invest a long time
because what they do. And again, details don't matter on this so much.
There's a thing called the penalty bid where if I'm the lead underwriter and
I find out that you're selling to people who who are selling right in the open,
I can actually initiate a penalty bid and start penalizing you,
taking commissions out of your pocket when you do that.
(20:55):
So that's the Act of 34. Remember, misperms, they covered margin,
insiders, SEC, short sales, proxies, exchanges, and broker-dealers,
reports by issuers, manipulation, the bad shit, and stabilizing a transaction.
Okay, most of the books won't talk about it. My dog just jumped because I jumped.
I was quiet for like 10 minutes.
The Act of 39, the Trust Indenture Act of 39 is for corporate bonds, non-exempt bonds.
(21:18):
They have to register under the Act, not under the Act of 39.
They are registering according to the rules. They have to have the Trust Indenture,
which is literally just a document between the issuer and the trustee listing
all things the issuer can do and the trustee will do it.
Just know that corporate bonds are issued under the rules of the Trust and Denture Act of 1939.
Now let's talk about AML, AML, and the U.S. Patriot Act.
(21:42):
Okay, so I don't care about the act so much. Just understand that the BSA is
under the Bank Secrecy Act and the Patriot Act and AML, they all go together
because they're making sure you're not ripping people off.
So the big thing you have to know about money laundering is the best time to
catch it is during the placement, when people put the money in.
Placement is when they put it in. Layering is when they put layers between the
(22:02):
money to hide it, like wiring money, doing transactions, moving it around between
different countries, so it's hard to track.
And integration is when they withdraw it. So let me give my little story in
the 1980s when I was a dealer at, not that kind of dealer, a dealer,
an assistant dealer. Did they have them?
They wouldn't have them on the street, in a casino in the 80s.
And back then, we didn't know that money launderers were feeding terrorists.
(22:25):
We just thought they were doing drug dealers, so we didn't care as much,
especially in Atlantic City.
Like literally the strip of Atlantic City is there.
It's great. And then one step off, you're watching some people get shot and all that crazy.
Now, every Wednesday night for like six months, a little guy,
a little white guy, we'll walk in there and drop $5,000 or $8,000 on red on
the nine different tables in the, in the, wherever I was.
(22:46):
Okay. So now every time nine, nine, nine, nine, and, and he,
and he wouldn't react. He put the cash down.
Never. He would always put cash in each one. And that's weird.
And he would never react win or lose. So then.
What happened is he'd take the money and go to the window and take the cash.
He was, think about it, he was doing all this stuff. Placement was putting the bets.
Then by betting it and getting the chips, winning or losing,
(23:08):
he was layering it. And then when he took it out, it was integration.
Literally did it every week.
As far as I was aware, they knew him. They knew of him. They didn't care because
the casino actually didn't care because they were making money.
They were making a little bit of money off of him because it's like 49%. He was losing money.
He knew if he bet every time. I think there were nights where he walked away
with nothing, and then there were nights he hit every time. He knew over the
(23:29):
long haul that it was going to work.
It doesn't work anymore because now you report this shit, but back then it was a little different.
To come back from my story, placement is when they put the money into the system.
That's the best time to catch it. That's why you need to take a record of when
people open the accounts, where they get the money from.
That's why you have, if you put more than 10 grand in cash in an account, they do a CTR.
(23:50):
If you think something's suspicious over over five grand
you're going to do a sars which is a bad thing right
so ctrs are currency transaction reports anything any
cash in or out in an account is going to be reported it's not a big deal they
report hundreds of thousands a day happen okay so but the sars is when they
did something wrong and you're going to you're going to report them to the fbi
(24:11):
or the treasury department whatever that's kind of like you're going to screw
that guy's life up so you better make sure you notice i assume it's a guy always
doing this shit the criminals are all moment, right?
So, again, placement is when they put the money in. That's the best time to track it.
You've got to take a record of who brings money in, if they bring cash,
their name, address, all that shit.
And layering is when you're, like, wiring it to, like, the Cayman Islands and
(24:34):
the Isle of Man and then Ireland and England and then Afghanistan,
Pakistan, all the countries.
So it's Switzerland, you know,
Luxembourg. So it's very hard to track the money, and that's layering.
Layering and then he sits and in any when it gets back to the u.s or wherever
it goes they will draw the money out and that's integration so again placement
is placement layering then integration.
(24:54):
So to go on a little farther on this every firm has to
do annual mandatory compliance training it could be the little modules that
you do they do the trick or they come and do a speech to you and they you know
they walk and they give you questions and stuff like that and they all have
to have what they call a cip a customer identification program like they don't
tell you how to do it but there There has to be a way for every broker deal
to verify the identity of any person that owns the account.
(25:18):
That's part of AML. You also have to check if anyone's on a governmental list, like OFAC, right?
They're going to check your name against OFAC to see if you're a foreign national
that has some issues with it.
And in reality, there's a thing called FinCEN, which only U.S.
Broker dealers get to see. It's a list.
And remember, in the list, like when I had it, it was like I had to sign off
(25:38):
on so much fucking shit that I wasn't going to share the list or anything.
Thing i could talk about it it's like fight club you can talk about it but you
can't be it now nobody talks about fight club but fincen
financial financial crime enforcement
network is a list every week or two weeks you get a list of
all people that had like they were suspected of money laundering or hiding money
and then you you would get their report and if you had one of them as your account
(26:00):
they're the the case agent be there and you send it to them not a big deal you
should verify customers information okay this is a must you need their name
the date of birth the address and an identification number.
Now remember, FINRA does not require a social security number,
but under Bank Secrecy Act, Bank Safety Secrecy, whatever the hell it is.
What is Bank Secrecy Act? I guess I was right. Sometimes I'm right,
(26:22):
okay? And if it's a non-U.S. person, you need some sort of tax priority number, something like that.
So you need to verify who they are. You need to verify the accounts, okay?
MSRB, Municipal Securities Rule and Making Board, just know this,
that they write the rules. They don't enforce them.
They write the rules not for the issuers but for the people selling them,
(26:43):
the broker-dealers, the banks, the dealers, the agents, all that stuff.
They make the rules for them, but they don't enforce. force.
If it's a bank, it's a Federal Reserve or the FDIC or the comptroller of the currency for the banks.
Or for broker deals, it's the SEC offender that enforces the rules.
Now, the last one, there's two more. The Investment Company Act of 1940.
(27:03):
The Investment Company Act of 1940 is FUM. F-U-M, face amount certificates,
unit investment trust, management companies, F-U-M. It covers all investment
companies under there. That's what it is, okay?
So remember, and this is, I always thought this is so cool.
You know, how, 60, 80, 83 years ago, they wrote this.
(27:26):
They did the investment company after 40, and then they couldn't have just waited
a year to do the investment advisors after 40.
So literally, you knew there'd be students confusing the two.
They must have done it on purpose to have a big laugh up in heaven. I've never seen...
A lot of questions on this, but I'm going to link the mutual fund stuff up here
for the mutual funds and annuities.
See, the investment company, Active40, literally just regulates mutual funds,
(27:50):
annuities, face amount certificates, unit investment trust, and management companies.
Management companies are open-end funds, closed-end funds, ETFs, all that stuff.
REITs are not covered under this. Everyone tries to think they do.
The books try to trick you into that. They don't. Real estate limited partnerships
are not under this either.
When I do the investment vehicle stuff, I'll talk about mutual funds there.
(28:11):
We don't need to do it now because I am just too fucking tired.
And the last one is Investment Advisors Act of 1940.
That covered all federally covered advisors, which I've done videos on.
So the Investment Advisors Act of 40 covers federally covered advisors,
not state advisors and federal advisors.
So let's go through it. Act of 33, new issues. Act of 34, secondary market.
(28:34):
Act of 39, corporate bonds, non-exempt bonds. Remember, Remember,
non-exempt means corporate.
Act of 40, investment company, Act of 40, mutual funds, based on certificates,
unit investment trusts, management companies.
Investment Advisors Act of 40 is a federal covered advisors.
MSRB regulates muni, the dealers, not the issuers, because issuers are exempt from federal law.
(28:55):
It's the broker dealers, the banks, the issuers, not the issuers,
the agents, the IARs, all those people who sell the securities,
not the issuers, because they're exempt, because they're states.
Okay i got done i see i told you i was near the end guys
check me out every tuesday and thursday night youtube 8 30
p.m i do a live q a ask you questions in any exam you want not just the 65 one
(29:17):
so let's get on to this and i'll do investment advisory i don't know what i'm
going to do next i have no idea wait for it baby and don't forget please like
subscribe share because it makes me feel good when people do that it gets that dopamine hit.
Music.
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