FREQUENTLY ASKED QUESTIONS
Q:
What is the role of the Division of Securities?
A: The
Division of Securities (Division) administers the Ohio Securities
Act, Ohio Revised Code (ORC) Chapter 1707, by (i) overseeing
the licensing of securities salespersons, dealers, investment advisors (IA), and investment advisor representatives (IAR), by (ii)
requiring that all securities sold in Ohio be registered, properly exempted from
such registration, or have a notice filed, and by (iii) investigating alleged violations
of the Ohio Securities Act and enforcing its provisions.
The Division enforces its licensing, registration, and anti-fraud standards
through three primary remedies: administrative actions, civil injunctive
actions, and criminal prosecutions. Enforcement actions must be brought
within five (5) years of the alleged violation.
Q:
What is the jurisdiction of the Division?
A: The
Ohio Securities Act applies to all "securities" which are "sold" in Ohio. Thus,
the Division has jurisdiction over all securities transactions in Ohio, over all sales and offers of securities that originate
outside Ohio but is made to Ohio residents, and over all offers or sales that originate
in Ohio but is made to a non-Ohio residents.
Q:
Does a "security" mean more than just stock?
A:
Yes. The term "security" is broadly defined in the Ohio Securities Act to mean
"any certificate or instrument, or any oral, written, or electronic agreement,
understanding, or opportunity, that represents title to or interest in, or is
secured by any lien or charge upon the capital, assets, profits, property, or
credit of any person or of any public or governmental body, subdivision, or
agency." This definition includes such common items as shares of stock,
warrants, options, promissory notes, membership interests in limited
liability companies, bonds, and debentures. Limited partnership interests
are considered to be securities, while general partnership interests are
generally not considered to be securities. The statutory definition additionally
includes the term "investment contract," which has been construed by judicial
decisions to include numerous investment opportunities and business schemes
which at first glance may not appear to fit within the definition of
"security."
Q:
What constitutes a "sale" for purposes of the Ohio Securities Act?
A: The
term "sale" is defined broadly as meaning "the full meaning of sale as applied
by, or accepted in, courts of law or equity, and includes every disposition of, or attempt to dispose of, a security."
Q:
Must all "sales" of "securities" in Ohio be registered with the Division?
A:
If the Ohio Securities Act applies, its fundamental requirements are (i) that
all sales of securities be registered with the Division, be properly exempted from
registration, have notices filed, and also (ii) that the persons selling the securities
be licensed by the Division or be properly exempted from licensure.
Q:
Does the Division provide a forum for the arbitration of disputes regarding
securities transactions?
A:
No. The Division will investigate a dispute if there appears to be any violations of
the Ohio Securities Act, but the Division does not provide a formal forum for
the parties to resolve the dispute. It is
the National Association of
Securities Dealers, Inc. (NASD), now part of the Financial Industry Regulatory Authority (FINRA), that provides
a forum
for the arbitration of disputes regarding securities transactions.
Q:
Does the Division determine the value of a security?
A:
No. The value of a security is determined by the market for that security.
Furthermore, the Division is prohibited from issuing a statement or opinion regarding
the value of any security.
Q: Can
the Division state that a security is worthless for tax purposes?
A:
No. Again, the Division is prohibited from issuing a statement or opinion regarding
the value of any security.
Q:
Does the Division recommend or rate companies or securities in which to invest?
A:
No. The Division reviews registration and exemption statements required to be
filed therewith and generally applies certain fairness guidelines to public
offerings. However, the Division does not recommend or rate companies or
securities in which to invest. Any representation that the Division has
endorsed securities sold or to be sold is a violation of the Ohio Securities
Act.
Q:
Does the Division have current information about companies that issue
securities?
A:
Possibly. It depends whether the company has submitted a filing to the
Division. Remember that a company can comply with the Ohio Securities Act, but
not need to submit a filing to the Division. The Division does not
have requirements that routine financial reports be filed with the Division
after the offering becomes effective. Furthermore, the only information the
Division does retain is information that is contained in a filing submitted
to the Division.
Q:
Does the Division help trace corporate information from old stock certificates
to ascertain the current value of a certificate?
A:
The Division’s records are retained for eight (8) years, then destroyed by
law. Consequently, if you seek information from a time period greater
than eight (8) years ago, then the Division would not have such information. In
addition, keep in mind that it is possible to comply with the Ohio Securities
Act and not have to submit a filing. In such an instance, the Division
would not have information on that company. You may wish to search the
Ohio Secretary of State’s Business database at
http://www.sos.state.oh.us/sos/businessservices/corp.aspx?Section=104
or check
the Division of Unclaimed Funds
"Treasure Hunt" at http://www.com.state.oh.us/unfd/treasurehunt.asp
for additional information.
Q:
Does the Division maintain shareholder lists or financial statements for
companies that issue securities?
A:
No. Under the Ohio General Corporation Law, Revised Code Chapter 1701, the
company itself is responsible for maintaining shareholder lists and current
financial statements. Under Revised Code 1701.37
and 1701.38, a
shareholder is generally entitled to get this information from the company.
Q:
Does a securities salesperson or dealer have to be licensed by the Division
before selling securities in Ohio?
A:
Yes, salespersons and dealers must be licensed by the Division or properly
exempted from licensure. Keep in mind that "selling" includes soliciting
securities purchases.
Q: Do
investment advisors and investment advisor representatives have to be licensed
with the Division?
A:
The Division provides oversight of investment advisors and investment advisor
representatives operating in Ohio. The Ohio Securities Act provides for the
licensing of advisors, for exceptions therefrom, and for notice filing requirements
(R.C. 1707.141), and also provides for
the licensing of investment advisor representatives with a
place of business in Ohio (R.C. 1707.161).
Q:
Does the Division recommend or give ratings to securities salespersons or
dealers?
A: No.
The Division licenses securities salespersons and dealers, but does not
recommend or rate them. The Division does, however, have access to a list of
formal disciplinary incidents of a securities salesperson or dealer as
maintained on behalf of Ohio and other states by the
NASD Regulation's (now FINRA's) Central
Registration Depository (CRD).
Q: Is
information contained within the CRD public information, and what types of
disciplinary incidents of salespersons and dealers are reported within the CRD?
A: The licensing, examination, and disciplinary incidents of salespersons
and dealers contained within the CRD are public information. CRD disciplinary
incidents include final disciplinary actions taken by State and Federal
regulators, self-regulatory organizations (such as the NASD Regulation),
civil judgments, arbitration decisions, criminal convictions, bankruptcies
filed within the last 10 years, settlements of $10,000 or more, and some
pending actions, including pending written complaints alleging sales practice
violations and damages of $5,000 or more.
Q: Can
the Division recover money lost on an investment?
A:
No. The Ohio Securities Act, which the Division administers and enforces, does
not grant the Division authority to recover money on behalf of investors. In
addition, in State v. Buckeye Finance, 54 Ohio St. 2d 407 (1978),
the Ohio
Supreme Court held that the Securities Act does not authorize the Division to
sue to rescind purchases of securities on behalf of the purchasers, or to
impose personal liability on the corporate directors for monetary damages the
purchasers may have sustained.
Q: Can
the Division recover money lost on an investment if there are criminal
violations of the Ohio Securities Act?
A:
No. The Division does not have the authority to recover funds on behalf of
investors, even if it is proven that a crime was committed. However, in the
past, some courts hearing securities criminal trials have ordered that the
defendants pay restitution to the victims.
Q: Can
the Division recover money lost when a securities dealer goes bankrupt?
A:
No. However, an investor may recover some money if the dealer was insured by
the Securities Investor Protection Corporation (SIPC). An investor may also be
able to file a proof of claim in the bankruptcy proceeding.
Q:
Does the Ohio Securities Act provide a means for recovering money lost on an
investment?
A:
Yes. R.C. 1707.43 provides that every sale
or contract for sale made in violation of the Act is voidable at the election of the purchaser.
An action for rescission under this section must be brought within two (2) years of when the
purchaser knew of the violation or within four (4) years of when the purchase was
made, whichever is shorter. A purchaser should consult legal counsel to pursue
this remedy.
Q: Can
the Division impose monetary penalties, or fine, violators of the Ohio
Securities Act?
A:
No. The Division has no authority to fine or impose monetary penalties.
Q: How
do I find out the background of my salesperson or dealer, or a salesperson or
dealer through whom I am thinking of doing securities transactions?
A: The
Division recommends investigating before you invest. To obtain
a CRD
report, simply call the Division at 614-466-3466, or via long distance (and toll free) at
1-800-788-1194. There is no charge for
the CRD information. The salesperson's
full name is needed, and it is also helpful to have his or her
individual CRD
number, which your salesperson can give you.
Q:
Does licensure by the Division insure that a salesperson, dealer, investment
advisor, or investment advisor representative is "legitimate"?
A:
Hopefully, but not necessarily. The Division performs a background check of
license applicants to make sure that they are of "good business repute." The
Division also constantly investigates complaints against licensees and also
performs regular examinations, and has the authority to revoke a license if
improprieties or non-compliance with the Ohio Securities Act are proven.
Q: Are
complaints filed with the Division open to the public?
A:
No. Pursuant to the Ohio Securities Act, generally, complaints filed with the
Division and information obtained by the Division during an investigation are
not open to the public.
Q: Is
the list of persons and entities under investigation by the Division open to
the public?
A:
No. Pursuant to the Ohio Securities Act, generally, information obtained during
an investigation, including the targets of investigations, is not open to the
public.
Q: Do
investment advisors and investment advisor representatives have to be licensed
with the Division?
A: The Division provides oversight of investment advisors and investment
advisor representatives operating in Ohio. The Ohio Securities Act provides for
the licensing of advisors, exceptions therefrom, and notice-filing requirements
(Revised Code 1707.141), and the licensing of investment advisor
representatives with a place of business in Ohio (Revised Code 1707.161).
Q: Does
the Division recommend or give ratings to securities firms and professionals?
A:
No. The Division licenses certain securities firms and professionals, but
does not recommend or rate them. The Division does, however, have access to
online databases of formal disciplinary incidents of securities professionals
maintained on behalf of Ohio and other States by the National Association of
Securities Dealers, which is now merged into
FINRA.
These databases are called the Central Records
Depository (CRD) and the Investment Advisor Registration Depository (IARD).
Q:
Is information contained within the CRD and IARD public information, and what
types of disciplinary incidents of securities firms and professionals are
reported within the CRD and IARD?
A: The
licensing, examination and disciplinary incidents of securities firms and
professionals contained within the CRD
and IARD are public
information. Disciplinary incidents include final disciplinary actions taken by
State and Federal regulators, and self-regulatory organizations such as the
NASD. They also include civil judgments, arbitration decisions, criminal convictions,
bankruptcies filed within the last 10 years, settlements of $10,000 or more,
and some pending actions, including pending written complaints alleging sales
practice violations and damages of $5,000 or more.
Q: How
do I find out the background of my securities firm or professional with whom
I am thinking of conducting securities transactions?
A: The Division recommends investigating before you invest. To
obtain information about your securities firm or professional, simply call the
Division at 614-466-3466, or long distance (or toll-free) at 1-800-788-1194. There is no charge
for the information. To optimize the Division’s ability to provide you with
information, have as much information as possible regarding the firm or person,
including CRD number or Social Security Number.
Q: Does
licensure by the Division insure that a securities professional is
"legitimate"?
A: Hopefully, but not necessarily. The Division performs a background
check of license applicants to make sure that they are of "good business
repute." The Division also constantly investigates complaints against licensees
and also performs regular examinations, and has the authority to revoke a
license if improprieties or non-compliance with the Ohio Securities Act are
proven.
Q: Are
complaints filed with the Division open to the public?
A:
No. Pursuant to the Ohio Securities Act, generally, complaints
filed with the Division and information obtained by the Division during an
investigation are not open to the public.
Q: Is
the list of persons and entities under investigation by the Division open to
the public?
A:
No. Pursuant to the Ohio Securities Act, generally, information obtained during
an investigation, including the targets of investigations, is not open to the
public.
Q: Are
administrative orders that have been issued by the Division open to the public?
A:
Yes.
Q: After
I have filed articles of incorporation, are there any requirements for a filing
with the Ohio Division of Securities?
A: Maybe. Maybe not. Most
frequently, newly formed corporations intend to
have fewer than 10 shareholders in the first year. If there is no advertising
or general solicitation to obtain those shareholders, and they are purchasing
for investment and not for subsequent distribution, then you may have an exemption
under Section 1707.03(O) of the Ohio Revised Code.
Additionally, if there is a broker
or dealer involved in the sale, then the commissions and other remunerations may not
exceed ten percent (10%). The broker, dealer, or any salesperson who receives any such
commission must be licensed in Ohio.
Q: I
have checked with the file room of the Division or on the ERNIE database, and
find that there are no filings for an issuer of the securities. Have they violated
the Ohio Securities Act when they sold me the securities?
A: Not necessarily.
Under Sections 1707.02
and 1707.03 of the Ohio
Revised Code, numerous exemptions are available for a company that does not require a filing. Ask the
person selling the securities how they are complying with the Ohio Securities
Act. Section 1707.45 of the Revised Code places the burden of proof for
compliance with an exemption or registration upon the seller of the securities.
The records of the Division go back eight (8) years pursuant to Section 1707.48
of the Revised Code. As such, if you purchased the securities more than eight (8) years
ago, then the Division would not have a record of any filing made by an
issuer. The statute of limitations for an unregistered sale would be not
more than five (5) years.
Q: May
the issuer sell the securities itself or is a licensed dealer required?
A:
An issuer may sell the securities itself without a licensed dealer provided
that no commissions or other remuneration is paid for the sales. For more information, see
Section 1707.01(E) of the Ohio Revised Code.
Q: Has
Ohio adopted SCOR
(Small Corporate Offering Registration)?
A:
Rule 1301:6-3-09(I) of the Ohio Administrative Code provides that the Division
of Securities may accept the SCOR offering document for a registration by qualification.
The SCOR or Form U-7 is a
question and answer format prospectus. The sample form is available from
the CCH (Commerce Clearing House) NASAA Reports at paragraph 5,057.
It is
advisable that small corporate issuers review the relevant provisions of
the Ohio Securities Act, Ohio Administrative Code, and published merit standards
prior to filing the application for registration by qualification with the
Division. Issuers must comply with Section 1707.09 of the Revised Code,
rule 1301:6-3-09 of the Ohio Administrative Code, and merit standards applied to
public offerings which are published in early issues of the Ohio Securities
Bulletin and the CCH Blue Sky Reporter at paragraphs 45,705 - 45,719.
Ohio Administrative Code 1301:6-3-09(A)(1) requires
that issuers submit Form U-1
or Form 9. A consent to service of process on
Form U-2/U-2A
or the Division's Form 11 is
required for issuers located outside of Ohio (see Section 1707.11 of the Ohio
Revised Code). The Division will require an accountant’s consent to the
use of any report contained in the offering circular or advertisement pursuant
to OAC 1301:6-3-09(A)(2).
The merit standards most applicable to SCOR and
Rule 504 offerings published in the Ohio Securities Bulletins and CCH Blue Sky
Reporter concern the following topics: cheap stock or promotional shares,
underwriting compensation, use of proceeds, insider loans, insolvent issuers,
options & warrants, blank check preferred disclosure, subordinate voting
rights disclosure, and future transactions with affiliates disclosure. An issuer
may sell its own securities without dealer licensing, provided that the issuer does
not receive commissions or other remuneration from such sales [see
Section 1707.01(E)(1)(a) of the Revised Code]. An escrow of securities or
proceeds may be required pursuant to OAC 1301:6-3-09(C).
Assuming
compliance with Section 1707.09 of the Ohio Revised Code,
OAC 1301:6-3-09,
published merit standards, and the securities that are not to be sold on grossly
unfair terms nor in a manner tended to deceive or defraud (see Section 1707.13
of the Revised Code), SCOR
offerings will receive a 13-month period of effectiveness (see
OAC 1301:6-3-09(B)(1)). However, issuers are obligated
to notify the Division of any material change in the issuer or offering
pursuant to OAC 1301:6-3-09(B)(2)
and Section 1707.44(B)(2) of the Revised Code.
Q: I
am contemplating a public offering and wish to review previous public offerings
for a sample. Could you please recommend a good public offering?
A: No. The Division
does not recommend filings for review or public distribution. Filings are public records pursuant
to Section 1707.12 of the Revised Code, but
you must have the name of the issuer. The
Division will make any filing available upon your request for your review at
the offices of the Division, or will photocopy any filing upon payment of all
applicable reproduction costs of five cents (5¢) per page plus postage.
Q: Who
is excluded from Ohio's definition of "investment advisor?
A:
The Ohio definition tracks the Federal definition of "investment advisor" and
excludes several classes of persons. Whether an exclusion is available depends
on all of the relevant facts and circumstances.
The
first exclusion is for attorneys, accountants, engineers, and teachers whose
performance of advisory services is solely incidental to the practice of their
profession. In general, three (3) factors are relevant to whether the "solely
incidental" exclusion is available: (1) whether the person holds himself
or herself out to the public as an investment advisor, financial planner, or
other provider of advisory services; (2) whether the advisory services are
rendered in connection with, and reasonably related to, the professional
services; and, (3) whether the fee charged for advisory services is based on
the same factors as those used to determine the fee for professional services.
The second
exclusion is for publishers of bona fide newspapers, news magazines, and
business and financial publications of general and regular
circulation. In order to meet this exclusion, the publication must offer
only impersonal advice, contain disinterested commentary and analysis, and be
of a general and regular circulation.
There is also an exclusion for banks and bank-holding companies.
There is also
an exclusion for any securities dealer or salesperson licensed by Ohio
whose performance of advisory services is solely incidental to their business
as a dealer or salesperson, and who receives no special compensation for
advisory services.
There is also
an exclusion for persons who give advice only as to certain government
and government-sponsored securities.
There is also
an exclusion for solicitors.
There is also
an exclusion for certain IAs who, during the preceding twelve (12) months,
have fewer than 15 clients, do not hold themselves out to the public as an IA,
and whose clients are only those delineated in OAC 1301:6-3-01(K).
There is also
an exclusion for persons excluded from the Federal definition of "investment advisor."
Lastly, there is an
exclusion for any other person that the Division designates by rule.
Consequently,
if you do not have an exclusion from the Ohio definition of
"investment advisor," then you are subject to Ohio's jurisdiction. Remember
that you may be able to comply with Ohio's law and still not have to submit a
filing if you fit within an EXCEPTION from filing.
Q: What
is the difference between a notice filing and an application for licensure?
A:
Those investment advisors registered with the SEC must submit a notice filing
to the Division unless they have an exception or exemption from filing. Those
investment advisors who are not eligible to register with the SEC must submit an
application for licensure in Ohio unless they have an exception from filing.
The
difference between a notice filing and an application is that with the notice
filing, the investment advisor is merely informing Ohio that the selfsame investment advisor is operating
in the State, whereas with an application, the investment advisor is requesting
permission to operate in Ohio.
Q: How
are IARs defined?
A:
In general, an investment advisor representative (IAR) is a natural person who gives
advice on behalf of an investment advisor to a certain minimum number of
natural person clients through regular meetings or communications. If a
natural person provides advisory services only by means of written
materials or oral statements that do not purport to meet the objectives or
needs of specific individuals or accounts, then that natural person is excluded
from the definition of investment advisor representative.
Q: What
is the licensing fee for IAR licensure?
A: The
fee is $35 per investment advisor representative.
Q: How
does an IAR become licensed in Ohio?
A:
Generally, an investment advisor must submit, via the IARD, a
completed Form U-4 along with
the license fee of $35 for each investment advisor representative.
Q: Ohio
requires that investment advisor representatives meet certain minimum
requirements. How do I establish that I meet competency requirements?
A: There
are two (2) methods for IARs to establish minimum competency: (1) by
achieving and maintaining a designation of Certified Financial Planner,
Chartered Financial Analyst, Chartered Financial Consultant, Chartered
Investment Counselor, or Certified Public Accountant/Personal Financial
Specialist; or (2) by achieving a passing score on one of the examinations of Series 6, 7, 22,
24, 26, 39, 62, 63, 65, or 66.
Q: I
own a fee-only planning firm in Ohio and I recommend only mutual funds, not
individual stocks, as part of my practice. Am I subject to the new Ohio
law?
A: Yes. The
new law does not distinguish between kinds of securities or types of compensation.
Q: My
primary practice is in taxes, not investment advice. Occasionally,
however, my clients will ask me about the tax effect on their portfolios.
Do I fall under the solely incidental exemption for accountants?
A: Maybe.
In general, three (3) factors are relevant to the availability of the "solely incidental"
exclusion: (1) whether the person holds himself or herself out
to the public as an investment advisor, financial planner, or other provider of
advisory services; (2) whether the advisory services are rendered in connection
with, and reasonably related to, the professional services; and, (3) whether the
fee charged for advisory services is based on the same factors as those used to
determine the fee for professional services.
Also, keep
in mind that, to fit within the definition of "investment advisor," it is not
necessary for a person's activities to consist solely of investment advisory
services to qualify as an investment advisor. Rather, the test is
whether any part of the person's activities meet the three (3) elements of the
definition which are "for compensation," "engaged in the business," and
"regarding securities."
Q: I
am a salaried instructor who also teaches at an Ohio college. Because part of
the course work involves investments, do I need to become licensed by the
State?
A: Probably
not, but review the three factors relevant to the availability of the "solely incidental"
exclusion: (1) whether the person holds himself or herself out
to the public as an investment advisor, financial planner, or other provider of
advisory services; (2) whether the advisory services are rendered in connection
with, and reasonably related to, the professional services; and, (3) whether the
fee charged for advisory services is based on the same factors as those used to
determine the fee for professional services.
Q: I
am an IAR through my broker-dealer. I am thinking of starting a separate
financial planning firm but still want to keep my broker-dealer
affiliation. May I do this?
A: First, keep
in mind that Ohio does not recognize independent contractor IARs, so in acting
as an IAR for your dealer, the dealer must also be a licensed investment
advisor. Second, Ohio law allows a person to act as an investment advisor
and an IAR, so you may start your own investment advisory firm, or become a
sole proprietor investment advisor, while maintaining your IAR license with
another licensed investment advisor. Ohio law further allows a licensed
IAR to be associated with, or employed by, up to two (2) non-affiliated investment
advisors.
Q: How
are "assets under management" defined?
A:
"Assets under management" means the securities portfolios to which an advisory
firm provides continuous and regular supervisory or management services.
Generally, those securities portfolios of which you have full discretionary
authority will be considered assets under management. If you do not have
discretion, then you would need to document and to be able to prove to the SEC
that you continuously managed the account on behalf of the client.
Q: What
is a securities portfolio?
A: A
securities portfolio is a client account that is made of at least fifty percent (50%)
securities, including cash and cash equivalents such as CDs and bank deposits.
Q: As
an SEC-registered firm, what will I need to do to meet State
requirements?
A: Generally, you must submit a
notice filing via the IARD to the Division consisting of a
completed Form ADV and a $50 filing fee.
Please note that ALL filings to be submitted by investment advisors
must be submitted via the IARD.
Q: When
I de-register from the SEC, what do I do with
the old books and records?
A: You
must retain all copies of your old books and records for five (5) years.
Because the Ohio rule for books and records tracks the Federal requirements,
the transition should be seamless.
Q: I
am a small, sole proprietor, advisory firm in Ohio. Do I need to become
licensed as an IAR since I am becoming licensed as an investment advisor?
A: No. You will need only
to submit an application to become licensed as an
investment advisor in Ohio. You would only need to obtain an IAR license if you
were going to act as an IAR for another investment advisor.