Series 63 pass Perfect Chapter 1. Chapter one covers 40 % of your exam

Exam at a glance

The Series 63 Uniform State Law Examination qualifies an individual to sell securities in each State. The test covers an agent's knowledge of the Uniform Securities Act (referred to in the text as the Act). This Act: Defines the persons and securities to be registered with the State. Defines activities that are prohibited by the State. Details the enforcement powers of the State. Most states have adopted this law. Prior to these laws, unscrupulous operators would sell worthless securities to investors - who bought "pieces of the big blue sky." Thus, state securities laws are often termed "blue sky" laws. The examination is based upon the 1956 Act as amended, along with amendments to the Act caused by the enactment of the National Securities Markets Improvement Act of 1996 and certain rules written by the North American Securities Administrators Association (NASAA). Please note that individual States can vary many of the numerical provisions of the Act. In the United States, the examination is administered each work day on computer through the FINRA "PROCTOR" system at Prometric Testing Centers. Please follow this link to access Prometric website (Opens in a new tab). To register for the Series 63 exam, the applicant must complete a U4 or U10 Form, which is sent to FINRA. After processing the form, FINRA enrolls the candidate. The candidate then calls the nearest test center to schedule the examination. The exam consists of 60 multiple choice questions plus 5 "trial" questions that will not count in the grading (65 questions total). The time to take the exam is 75 minutes. The passing grade is 72% or 43 questions correct out of 60 questions. 

About Our Program Program at a Glance The Pass Perfect Series 63 program is designed to cover all items that are tested on the examination while making the most efficient use of a candidate's time. With time tested best practices originally created by educator and author Edward Fleur, we’ve organized the material in a logical, concise, and clear way. The course is divided into 4 chapters. Each chapter and the approximate number of questions included on the Series 63 test for that chapter are: Chapter Number of Exam Questions 1: Registration and Licensing Requirements 21 2: Securities Registration 8 3: Business Practices 25 4: Administrative Procedures 6 Total 60 Back

How to Use the Program

Study Tips

The passing grade on the Series 63 examination is 72% (this is determined by NASAA based on their experience, so remember that a 70% is a failing grade on this exam!). To prepare for the examination, each chapter must be studied thoroughly. The examinations are very important because they reinforce your knowledge of the material and highlight any weak areas that you might have. Before proceeding to the next chapter, review those areas where questions were answered incorrectly. It is important to note that all chapters are not equally important to passing the exam. Chapter Percentage of Exam Questions 1: Registration and Licensing Requirements 35% 2: Securities Registration 13% 3: Business Practices 42% 4: Administrative Procedures 10% Total 100% The Pass Perfect learning model employs a building-block approach. After completing each section, you take a Check Your Understanding quiz. After completing all sections within a chapter, you move on to a chapter test. There are also mastery exams, each of which covers content from several chapters to provide a cumulative review of content. The final step in the process is for you to take a final exam that covers the entire course content to reinforce key concepts and objectives; measure how much you know; identify areas of weakness; build confidence in test taking via unlimited retakes; and allow you to practice the timing and pacing it takes to complete each question, so that you are well prepared on the big day. The online program offers unlimited retakes across all assessments so you can practice as much as needed to achieve competency with the content. Please note that the most important areas on the exam are Business Practices and Registration and Licensing Requirements. On the other hand, Securities Registration and Administrative Procedures are a small portion of the test and are not as critical to passing. We recommend daily, consistent study of the book and online test bank to ensure retention of the materials and increased test scores over time.

 Chapter 1: Registration and Licensing Denial, Revocation, or Suspension  Withdrawal or Termination and Overall 

Definitions

Overview of Registration and Licensing Forty percent of the Series 63 examination (24 questions) covers registration requirements under the Uniform Securities Act (State law). These include definitions that must be understood in order to know how and to whom state registration requirements apply. Please note that the examination covers these definitions in extreme detail, so they must be memorized. Also, please note that this examination is basically written by securities attorneys - so the questions are extremely legalistic and very picky - so be prepared to endure some painful moments! Unless an exemption is available, the Act requires that broker-dealers, agents, investment advisers, and investment adviser representatives be registered in the State. Also note that if these persons were excluded from the definition of a broker dealer, agent, investment adviser, and investment adviser representative, then registration as such is not required in the State because they do not fall under the definition.

State Blue Sky Laws

These State registration laws (which also require registration of securities in the State - covered in the next section) are commonly known as "Blue Sky" laws. These laws actually pre-date the adoption of the Federal Securities Acts in 1933 and 1934. At that point in time, the larger States passed their own laws to protect their citizens from stock swindlers who were selling a "piece of the big blue sky."

National Securities Markets Improvement Act

As further background, a federal law, the National Securities Markets Improvement Act of 1996 (NSMIA), was enacted to eliminate duplicate regulations that required registrations at both the Federal and State level. In essence, NSMIA mandated that in certain cases, if registration: is required at the Federal level; then the State cannot require registration as well; and is not required at the Federal level; then the State can require registration.

Federal Law Supersedes State Law in Most Cases Also,

NSMIA made clear that Federal law will supersede State law regarding net capital rules, custody rules, margin rules, financial responsibility rules and recordkeeping rules (all of which are set by the SEC or FRB). Finally, NSMIA requires that if any State law impedes the Federal legislation, Federal law prevails. References to NSMIA are made throughout the text - since it had a major impact on state registration requirements.

Definition of a Person “Persons”

Are Legal Entities Under the Act, a “person” may issue securities or can trade securities. Legal terminology allows “persons” to be either human or non-human. For example, under the Act, a corporation is considered to be a “person.” Under the Act, PERSONS are defined as: Individuals (human beings) Corporations (non-human persons!) Partnerships (including general partners who can contractually bind the partnership) Business Trusts Estates Trusts (where the interests of the beneficiaries of the Trust are evidenced by a security) Associations Joint Stock Companies or Joint Ventures Governments and Political Subdivisions of Governments (for example, a township is a political subdivision) Unincorporated Organizations and any other legal or commercial entity

Definition of an Issuer Issuer

 An “issuer” is any person (see previous definition) who issues or proposes to issue a security. For example, if ACME Corporation sells, or proposes to sell a new issue of bonds, it is considered to be an “issuer” under the Act. For certain types of securities, the legal “issuer” is further defined as: “Issuer” for Trusts For securities where the structure is such that there is no Board of Directors (these include Collateral Trust Certificates, Voting Trust Certificates, Certificates of Deposit for a Security, and Unit Investment Trusts), the “issuer” is defined as the person performing the functions of manager or depositor under the Trust agreement. “Issuer” for Equipment Trusts For Equipment Trust Certificates, the issuer is the person to whom the equipment is to be leased or conditionally sold – which is the corporation. (In an equipment trust, the trustee holds the title to the equipment until the loan is fully repaid – similar to a bank holding the title when an automobile is purchased with a car loan. In effect, the trustee “leases” the equipment to the corporation. When the corporation completes all payments, the title reverts to the issuer.) No Issuer for Fractional Interest in Oil and Gas Programs For Fractional Interests in Oil and Gas Programs, or Mining Titles or Leases, there is not considered to be any “issuer.” (This “unusual” distinction is included in the Uniform Securities Act because this forces anyone who wants to register these securities in the State to use the most difficult method – Registration by Qualification. The easier methods of registering primary (new issue) offerings of securities in a State are not available for securities that are being registered by a “non-issuer.” This is the case because State regulators have encountered many frauds in the sale of oil and gas programs, and this forces the securities to undergo a stringent review before they can be sold in the State.) Issuer Transaction When an “issuer” sells or redeems securities, this is termed an “issuer transaction.” In an “issuer transaction,” the sale of the securities is for the benefit of the issuer – the issuer receives the proceeds from the sale. As another example, if a mutual fund redeems securities, making payment from the issuer (the fund) to the shareholder, this is an “issuer transaction” as well. Primary Transaction An "issuer transaction" that involves a sale of securities is also known as a "primary transaction," since it takes place in the primary or new issue market.

Definition of a Non-Issuer Non-issuer 

A "non-issuer" is simply a person who is not defined as an issuer under the Act. For example, if a purchaser of the ACME Corporation bonds (referred to in the previous section) wishes to sell those bonds in the market, this is considered to be a "nonissuer" transaction. Non-issuer Transaction In a "non-issuer transaction," the proceeds from the sale of the securities go to someone other than the issuer. When the customer sells his ACME bonds in the market, he receives the proceeds. This is a "non-issuer" transaction. The legal definition of a "non-issuer" transaction under the Act is a transaction not directly or indirectly for the benefit of the issuer. Secondary Transaction Non-issuer transactions are also known as “secondary transactions,” since they take place in the secondary or trading market. Back

Definition of an Institutional Buyer

 An institutional buyer is distinguished from the general public in the Act. Firms with No Office in the State That Only Deal with Institutions Are Not Required to Register The “idea” is that: as long as a broker-dealer or investment adviser does not have a physical office in a State; and only institutional buyers are solicited in the State; then no registration is required in the State. Note that if the general public is solicited or if the firm has an office in the State, generally, it must register. Institutional Buyers Are “Big Boys” Institutional buyers are considered to be “big boys” who can watch out for themselves. Institutional buyers include: Banks; Savings and Loans; Trust Companies; Insurance Companies; Investment Companies; Pension and Profit Sharing Plans; and Anyone Else So Designated By The State Administrator.

Definition of a Broker-Dealer (BD) 

Broker-Dealer Definition It is important to know the definition of a "broker-dealer" because each broker-dealer must register in the State under the Act, unless an exemption is available. A "brokerdealer" is defined as a person who: Engages in the business of effecting securities transactions for the account of others; or Engages in the business of trading for his own account (known as "proprietary trading"). Agency Capacity When a firm effects trades for the account of others, it is a middleman in the transaction and is acting in an "agency" capacity. When a firm effects transactions in an "agency" capacity, this is the same as acting as a broker. Principal Capacity When a firm trades out of its own account, it is acting in a "principal" capacity in the transaction. When acting in a principal capacity, the firm is considered to be a "dealer." Broker-Dealers Must Register with the State Because these firms can function in either a "broker" or "dealer" capacity, they are known as "broker-dealers." "Broker-dealers" are required under the Act to register in any State in which they solicit or conduct business. (Registration rules are covered in the following section.) M&A Advisers, Finders Can Be Defined as BrokerDealers Note that State regulators have interpreted that anyone that gives advice on mergers and acquisitions, and finders that "find" companies to be acquired, can be defined as being in the business of engaging in securities transactions, if one company buys the securities of the other in the deal and compensation is paid based on closing the deal. Listed below are the PERSONS NOT considered to be "broker-dealers." Agents These are individuals who represent the broker-dealer when performing securities transactions, basically sales representatives. A registered representative is an "agent" of a broker-dealer

Review Chapter 2: Securities Registration

institutions – Banks, Savings Institutions, and Trust Companies These firms are separately regulated under the Federal and State banking laws. Issuers Issuers (except when an issuer effects transactions other than with respect to its own securities). Firms That Trade Exclusively with Professional Investors with No Place of Business in the State Are Excluded The Act also EXCLUDES from the definition of a broker-dealer, any persons who have no place of business in the State, and who transact business exclusively with: Issuers of the securities involved in the transaction; Other Broker-Dealers; or Institutional Buyers. Essentially, this provision states that an out-of-state broker-dealer, who is NOT dealing with the public in your State, is not considered to be a broker-dealer in your State and thus would not have to register in your State. Firms That Contact Existing Customers on Vacation in Another State Are Excluded The Act EXCLUDES from the definition of a broker-dealer any firm which is licensed in a State in which the broker-dealer maintains a place of business, and who offers and sells a security to a person who is an existing customer of the broker-dealer and where the firm's principal place of residence is NOT in the State. Such a firm is not defined as a broker-dealer, and hence, is exempt from registration. This convoluted wording is intended to cover the situation where a customer is vacationing in another State, or simply traveling through another State. For example, a customer of ACME Brokerage who lives in New York, goes on vacation in the State of Florida, leaving his forwarding phone number with ACME. While in Florida, the customer is contacted by the ACME broker-dealer with a solicitation to buy a security. Under this exemption, the broker-dealer is exempt from registering in Florida - but, of course, ACME Brokerage must have a current registration in the State of New York. Exclusion Does Not Apply to New Customers Note that if the broker-dealer were soliciting a new customer in a State in which the customer were vacationing or traveling, this exclusion does NOT apply. If 30 Days or Fewer Are Spent in Another State, This Is a Vacation Also note that this exclusion only applies to vacationing customers, not to customers who are temporarily residing in another State. The Uniform Securities Act does not specify the time length where a vacation becomes a temporary residence. In most States, if an individual spends more than 30 days in that State, that person is considered a resident. 

Chapter 4: Administrative Procedures  

Canadian BD Exempt for Existing Customers Who Are Temporarily Residing in the US The Act also addresses Canadian broker-dealers, as their customers often travel extensively in the United States. The Uniform Securities Act covers all 50 States and the Canadian provinces. As long as a Canadian broker-dealer is registered in Canada and does not have a place of business in the United States, it is exempt from registration (as are its agents) when effecting trades for pre-existing customers who are temporarily residing in the United States. As long as the Canadian client spends less than 1/2 year in the United States, and intends to return to Canada, then the Canadian BD and Agent are not required to be registered in the State where the customer is temporarily residing. For example, an existing client of a Canadian broker-dealer that is registered in Canada, spends the entire winter in Arizona. Is the Canadian broker-dealer required to be registered in the State of Arizona? Answer: No, because the client is spending less than 1/2 year in Arizona and intends to return to Canada when winter is over. (Note: This is a completely different rule than the 30-day rule for broker-dealer clients that travel to another State.) De Minimis Exemption When a broker-dealer has no office in a State and only has a "few" clients in that State, a fair number of States have a "de minimis" exemption in their version of the Uniform Securities Act. This is called a "de minimis" exemption, because the brokerdealer does not have a physical presence in the State and is only doing "minimal business" in the State. This provision of State law is not uniformly applied - some States have it and other States do not. For example, California, Kansas and Missouri have it, but Oregon and Texas do not. Because this provision is inconsistently applied, it should not be tested. (Also note, in contrast, that when you get to the investment adviser and adviser representative registration rules later in this section, NSMIA created a specific "de minimis" exemption that only applies to investment advisers and their representatives - where an out-of-state adviser with 5 or fewer clients is exempt from state registration.)

Definition of an Agent 

It is important to know the definition of "agent" or "sales representative," because these individuals must register in the state under the Act. Agent Is an Individual Who Represents an Issuer or Broker-Dealer An "agent" is an individual (not a "person" as defined by the Act) who represents a broker-dealer or issuer in effecting securities transactions. "Agents" are also known as sales representatives, and must register in each state in which they wish to perform trades. Registered Representatives Are Agents As a practical matter, registered representatives are agents for broker-dealers. The definition of an agent is an individual who "effects trades." Please note that there is no requirement that this person earn commissions to be defined as an "agent" under the Act. Agents May Be Compensated on Either a Salary or Commission Basis Thus, whether an individual who effects trades is compensated on a commission or salary basis, has no relevance to determining whether they are considered to be an "agent." Clerical employees and managerial employees who do not effect trades with the public are not considered to be agents and do not have to be registered in the state. Partners, directors, or officers of a broker-dealer are only considered to be "sales representatives" if they represent the broker-dealer or an issuer in effecting securities transactions. Otherwise, they are not defined as "agents." For example, a partner at a brokerage firm who handles customer account transactions must register as an "agent" in the state. A partner at a brokerage firm who has no sales function and who does not effect trades is not required to register in the State as an agent. Automatic Registration of Officers Named in BD Application as Agents Also note for the exam, that the names of the officers of the company that will act as agents are included in the broker-dealer application filed to register in the State (Form BD). Once the registration is effective, these persons who were named as officers with a sales function, or supervising a sales function, were also registered as agents, as long as they pass the appropriate exam (e.g., Series 63 or Series 66 - Combined Securities Agent and Investment Adviser Representative). Non-sales officers are not registered as agents (e.g., a back office supervisor) and are not required to take a State licensing exam.

Exclusions from the Definition of Agent Only Apply to Individuals

 Representing Issuers The Act EXCLUDES certain individuals from the definition of an agent. Basically the exclusions only apply to individuals who represent issuers - they do not apply to individuals who represent broker-dealers (this must be known for the test). And they apply only to transactions in exempt securities or in exempted transactions. There are 4 exclusions for individuals who represent ISSUERS in: Sales of specified exempt securities (but not all exempt securities); Exempt transactions; Sales of specified covered securities (but not all covered securities); and Sales of securities to employees of that issuer if no remuneration is paid. These exclusions are now discussed in more detail. Individuals Representing ISSUERS Trading Exempt Securities - Excluded The Act specifically EXCLUDES from the definition of an agent, any individual who represents issuers in trading specified (but not all) exempt securities. Thus, these individuals do not have to be registered, for example, an individual who is hired by a municipality to market that issuers general obligation bonds to the public, is excluded. Individuals Who Represent BDs in Selling Exempt Securities MUST Register Notice that if that individual represents a broker-dealer, they must be registered in the State unless another exemption is available. Thus, an individual who represents a broker-dealer selling municipal bonds (which are exempt) in a State must still be registered in that State! Exempt Securities The specified securities that are exempt that come under this provision are those issued by (the): US Government; Foreign Governments; Municipal Governments; Canadian Government; Bank and Savings Institutions (such as Bank CDs); Trust Companies. In addition, the following specific securities also fall under this exclusion: Promissory Notes that will mature in 9 months or less, that are rated in one of the 3 highest rating categories, issued in amounts of at least $50,000. Essentially, this provision exempts individuals representing issuers selling corporate Commercial Paper from registering as an agent. Securities issued in connection with Savings, Pension, Profit Sharing Plans, and Employee Stock Option Plans. As illustrations for this exclusion, consider the following: An individual who represents Ford Motor Credit Corporation (the issuer), selling commercial paper (an exempt issue) to the public, is not required to be registered in the State. 

Chapter 3: Business Practices

An individual who represents Wells Fargo Bank (the issuer), selling certificates of deposit (an exempt issue) to the public, is not required to be State registered. An individual who represents Cowen and Co. (a broker-dealer), selling commercial paper to the public (an exempt issue), must be registered in the State (unless another exemption is available). (Please note that there are other exempt securities under State law that will be covered in the Securities chapter.) Individuals Who Represent ISSUERS in Exempt Transactions Are Excluded The Act also EXCLUDES from the definition of an "agent," those individuals who represent ISSUERS in "exempt transactions." (This exclusion does not apply to individuals who represents broker-dealers - it only applies to individuals who represent issuers.) These individuals do not have to be registered in the state. Generally, exempt transactions are trades that do not involve the public. Exempt Transactions There are many transactions that are exempt. These will be covered in detail in the Registration of Securities section. Some of the more important exempt transactions are: Isolated transactions with someone other than an issuer (a "non-issuer" transaction - essentially these are trades in the secondary market). The term "isolated" is not defined, but is intended to cover the occasional or casual sale of a security by an individual. It is not intended to cover repeated or successive trades by the same person (in which case, this exemption cannot be used). Transactions between issuers and underwriters (since the public is not involved). Transactions with financial or institutional investors, as defined under the Act (including banks, financial institutions, trusts, insurance companies, investment companies, and pension plans). These transactions are exempt because the investors are sophisticated, and are not deemed to require legislative protection. Again, please note that this exclusion only applies to individuals who represent ISSUERS; it does not apply to individuals who represent broker-dealers. Individuals Representing Issuers in Trades of Some Covered Securities The Act also EXCLUDES from the definition of an "agent," any individual who represent ISSUERS in effecting trades of some, but not all, so-called "covered" securities under the Securities Act of 1933. Individuals Who Represent Issuers in Trades of Federal Covered Securities MUST Register in the State Covered securities, also called "federal covered securities" cannot be required to be registered in the State - they can only be required to be federally registered with the SEC (this is covered in the next section). The main "federal covered" securities are those traded on national securities exchanges and investment company issues. These do NOT fall under the exclusion. For example, if an individual represents Ford Motor Company (an issuer), selling Ford Motor Company stock, if the individual is compensated, they are defined as an agent who must register. Dashboard Course Calendar Resources Help 4/4 This boils down to the following - if an individual represents an issuer selling a security that must be registered and that individual is receiving compensation for this, they are defined as an agent who must register in the State. However, an individual who represents an issuer in the following "covered securities" transactions is EXCLUDED. Covered Transaction - Federal Private Placement Private placement offerings conducted under the provisions of Rule 506 of Regulation D (the Federal private placement exemption); and Covered Transaction - Qualified Purchasers Sales to qualified purchasers - defined as: Natural persons (humans!) or family owned companies who own investments of at least $5,000,000; Pre-existing trusts for the persons listed above as qualified purchasers (the trust cannot be formed expressly for the purpose of buying these securities); and Any other person, acting for its own account or for other qualified purchasers, who owns and invests on a discretionary basis, at least $25,000,000. Again, please note that this exclusion only applies to individuals who represent ISSUERS; it does not apply to individuals who represent broker-dealers. Employees of an ISSUER Who Effects Trades Only for the Issuer's Employees Are Excluded Those individuals who represent ISSUERS effecting trades with employees, partners, officers, and directors of the issuer are EXCLUDED from the definition of an agent, as long as no commissions or other compensation is given to the sales representative for soliciting these persons. For example, a corporation may maintain an employee stock purchase plan, and may use an employee to solicit its employees and officers to participate, without having that individual being considered to be an "agent" that must be registered in the State. Again, remember that the exclusions from the definition of an "agent" only apply to individuals who represent issuers - they do not apply to individuals who represent broker-dealers

Definition of an Investment Adviser

 Investment Advisers Give Advice for a Fee and Must Register in the State Investment advisers also must register with the State under the Act. An "investment adviser" is defined as a person, who for compensation: Engages in the business of advising others, directly or indirectly (such as through a newsletter), as to the value of securities or the advisability of investing in, buying, or selling securities; or Issues or promulgates analyses or reports concerning securities on a regular basis as part of a business: or Provides investment advisory services to others in a financial planning practice. Persons that are NOT DEFINED as "investment advisers" (meaning those that are EXCLUDED from the definition of an investment adviser) include: Investment Adviser Representatives Employees of investment advisers thus the employing firm must register as an "investment adviser"; its individual employees do not register as investment advisers - rather they register as "investment adviser representatives" (covered in the next section). Depository Institutions Banks, savings and loans, trusts. Professionals Lawyers, accountants, engineers, teachers, whose performance of these services is solely incidental to their professional practice. Broker-Dealers Broker-Dealers whose performance of these services is incidental to the conduct of the business and who receive no special compensation for these services. Publishers of Newsletters That Do NOT Give Advice Based Upon Specific Investment Situations Publishers, employees or columnists of bona fide newspapers, news magazines, business or financial periodicals and owners and employees of cable, radio, or television networks, where the content does NOT consist of rendering advice based upon the specific investment situation of each client. Federal Covered Advisers Federal Covered Advisers (covered following). Any other person designated by the State Administrato

Definition of a Federal Covered Adviser

 The National Securities Markets Improvement Act of 1996 (Federal Legislation) was enacted to eliminate duplicate regulation of investment advisers at both the Federal and State level. If an adviser is defined as a "federal covered adviser" - then the adviser must register with the SEC; but is not required to register in the State. If an adviser is NOT a "federal covered adviser" - then it must register in the State; but is not required to register with the SEC. Federal Covered Advisers "Federal covered advisers" are defined as: $100+ Million of Assets Investment advisers that manage $100 million or more of assets; or Advise Investment Companies Investment advisers to registered investment companies. (Federal registration of advisers to investment companies started under the Investment Advisers Act of 1940, where the Act's main intent was to register advisers to mutual funds and to place limits on their compensation so that fund shareholders are not charged excessive advisory fees.) Thus, investment advisers with $100 million or more of assets under management must register with the SEC as "Federal Covered Advisers" and cannot be required to be registered in each State (though each State can require a notice filing, which is covered later in the text). The SEC then issued some interpretations regarding this requirement. These are: SEC Interprets That Advisers That Have $100–$110 Million of Assets Have Option of Federal Registration Advisers that have between $100 million and $110 million of assets under management have the choice of registering either at the State or Federal level. Thus, SEC registration as an adviser is truly only required once an adviser has $110 million or more of assets under management. An adviser that is SEC-registered already does not have to de-register unless its assets under management fall below $90 million. Thus, there is a $90 million to $110 million "buffer" range where an investment adviser will be Federal Covered and will register with the SEC and not with the State. Mid-size Adviser Registration with SEC In addition, the interpretations cover SEC registration of so-called "mid-size" advisers, which are advisers with $25 million or more of assets under management.

Mid-size Adviser in a State That Does Not Require Registration Must Register with SEC An adviser with $25 million or more of assets under management that is NOT required to register in the State where it has its principal office, must register with the SEC. This rule was written because there were some States that did not require registration of investment advisers, so this ensured that these advisers were registered with someone! Note, that currently, all States require registration of investment advisers so this will not happen anymore, but it is still tested. Mid-size Adviser That Must Register in 15 or More States Can Opt to Be SEC-Registered An adviser with $25 million or more of assets under management that is required to be registered in 15 or more States may choose to register with the SEC rather than having to register separately in those 15 or more States. Since the adviser is operating in so many States, it truly is an "interstate" enterprise and it is easier for such a firm to deal with one regulator (the SEC), instead of having to deal with 15 or more State regulators. Federal Covered Adviser - Any Person NOT an "IA" Under 1940 Act Finally, a Federal covered adviser is any person that is excluded from the definition of an Investment Adviser under the Investment Advisers Act of 1940. Exclusions from "IA" Definition If the adviser is excluded from the Federal definition, then it does not have to register in the State. Excluded from the definition of an investment adviser under the 1940 Act are: banks or bank holding companies; lawyers, accountants, engineers or teachers whose performance of such services is solely incidental to the practice of their profession; broker-dealers and their registered representatives whose advisory services are solely incidental to the securities business and who receive no special compensation for making recommendations; publishers of bona fide newspapers, magazines, or financial publications of a general and regular circulation; any person who advises solely about US Government guaranteed obligations.

Definition of an Investment Adviser Representative 

(IAR) The Act defines an "investment adviser representative" as any partner, officer, director, or other individual employed by an investment adviser, who: Makes recommendations or renders advice regarding securities; Manages accounts or portfolios of clients; Determines which recommendations or advice regarding securities should be given; Solicits, offers, or negotiates for the sale of investment advisory services; or Supervises employees who perform any of the functions listed above. Specifically EXCLUDED from the definition of investment adviser representative are individuals who solely perform clerical or ministerial duties. While the National Securities Markets Improvement Act (NSMIA) of 1996 defined "federal covered advisers" as ones that must register with the SEC (or who are excluded from SEC registration under the Investment Advisers Act of 1940 and who therefore are neither required to register with the SEC nor with the State), the NSMIA said nothing about registration of investment adviser representatives of federal covered advisers. NASAA (the North American Securities Administrators Association) has interpreted this to mean that each State still has jurisdiction to require the registration of the individuals associated with federal covered advisers. Thus, the Act defines as an investment adviser representative, any partner, officer, director, or other individual that: performs any of the activities outlined above; and has a place of business in the State; and is employed by a "federal covered adviser." When registration requirements are covered in the next section, you will see that these individuals that are associated with "federal covered advisers" must register in the State as investment adviser representatives.

Registration Requirements for Broker-Dealers and Agents Broker-Dealers and Agents Must Register The Act states that it is unlawful for any person to transact business in the State as a broker-dealer or agent unless that person is registered in the State. Broker-Dealers Use Form BD to Register Federally with the SEC Broker-dealers must initially register federally with the SEC. They use Form BD for this, which is a broker-dealer registration form. Then the BD registers with an SRO (self regulatory organization) such as FINRA. Form BD has the broker-dealer "check-off" the SRO(s) to which it is applying for membership. Form BD Is Also Used to Register with the State To register in the State, again, the Form BD has the broker-dealer "check-off" the States in which it wants to register. The State uses the SEC approved BD application as the basis for registering the BD in the State - given that the appropriate registration fee is paid (of course!). Agents Cannot Be Employed Unless They Are Registered Under the Act, broker-dealers are prohibited from employing an agent unless the agent is registered. If an agent is no longer employed by that firm, his registration ceases to be effective in the State. Remember that an agent is always an individual. Agents Cannot Be Affiliated with More Than One BD at One Time in Most States In most States, agents are prohibited from being associated with more than one broker-dealer at any one time, unless the broker-dealers for whom the representative acts are affiliated (also known as being under "common control"). However, some states do permit so-called "dual registration." If Administrator Allows Dual Registration - This Must Be Disclosed to Broker-Dealers If a State Administrator allows multiple registrations for an agent, a separate registration application is filed by the agent through each broker-dealer. Part of the application is a disclosure to the broker-dealer of any other current registrations held by that agent.

Prompt Notification to State if Agent Ceases Employment When an agent begins or terminates employment with a broker-dealer or issuer, the agent, as well as the employer, must promptly notify the State's Administrator. An Agent May Only Be Registered through a BrokerDealer If a broker-dealer loses its registration, its agents are no longer registered with that firm. The agents may, however, associate with another broker-dealer, who "picks-up" their registration. If an agent loses their registration, this has no effect on the brokerdealer. Agents Cannot Register on Their Own Agents are prohibited from registering individually with the State Administrator - their registration is performed through the broker-dealer. Firms EXCLUDED from the Definition of a Broker-Dealer The Act EXCLUDES various persons from the definition of a broker-dealer; these firms are not required to register in the State. The list of exclusions was given previously in this chapter. To broadly summarize these exclusions again, a broker-dealer is excluded from registration if: The firm has no place of business in a State and transacts solely with issuers, other broker-dealers, and institutional investors; The firm has no place of business in a State where an existing customer is vacationing and contacts the customer in that State. Canadian BDs with Clients Temporarily Vacationing in US - EXEMPT In addition, the Act EXEMPTS from registration, broker-dealers that are Canadian broker-dealers with no place of business in a State, whose customers are temporarily residing that State for less than 1/2 year and who intend to return to Canada. In these cases, the broker-dealer is not required to be registered in the State. Also, please note that the distinction between being EXCLUDED from the definition and therefore not having to register in the State; and being EXEMPT from registration in the State; must be known for the exam. Agents Associated with Excluded or Exempt BrokerDealers Are Exempt In addition, agents who act for excluded or exempt broker-dealers are also exempt. Thus, an agent who is associated with a broker-dealer that qualifies for one of the exclusions or exemptions listed above, does not have to be registered in the State. For example, a BD (Broker-Dealer) in Oregon and the firm's resident agent are both registered in Oregon. The BD has no office in Nevada. If the agent solicits institutional clients in Nevada, both the BD and agent are exempt from registration in Nevada. On the other hand, if the agent solicits retail clients in Nevada, then both the BD and agent must register in Nevada.

Individuals Excluded from the Definition of an Agent The Act EXCLUDES various individuals from the definition of an agent - they are not required to register in the State. The list of exclusions was given previously in this chapter. To broadly summarize these exclusions again, the following individuals are NOT required to register in a State. These are individuals who represent ISSUERS (not broker-dealers!): in trades of exempt securities; in exempt transactions; in covered transactions (the sale of private placement securities or the sale of securities to qualified purchasers - investors with at least $5,000,000 invested; or investment managers with at least $25,000,000 under management); selling securities to the issuer's employees (as long as no commissions are paid).

Chapter 1: Registration and Licensing Requirements 

 Registration and Notice Requirements for Investment Advisers Registration and Notice Requirements for Investment Advisers Investment Advisers Must Register The Act states that it is unlawful for any person to transact business in the State as an investment adviser unless that person is registered in the State, or unless that person is exempt from licensing. The Act states that it is unlawful for any investment adviser that is required to be registered to employ an investment adviser representative unless that representative is registered. If an investment adviser representative ceases to work for a registered investment adviser, that individual's registration is no longer effective. When the representative begins or terminates employment with an investment adviser, the investment adviser must promptly notify the Administrator. "IAs" Cannot Employ Persons Who Have Been Suspended or Barred Furthermore, investment advisers are prohibited from employing, directly or indirectly, any person, who has been suspended or barred by the Administrator from association with a broker-dealer or investment adviser. Persons EXCLUDED from Investment Adviser Definition Certain persons are EXCLUDED from the definition of an investment adviser and therefore are not required to register in the State. These were already covered previously. To summarize these again, the persons who are EXCLUDED from the definition of an investment adviser are: Investment Adviser Representatives Employees of investment advisers thus the employing firm must register as an "investment adviser"; its individual employees do not register as investment advisers - rather they register as "investment adviser representatives" (covered in the next section). Depository Institutions Banks, savings and loans, trusts. Professionals Lawyers, accountants, engineers, teachers, whose performance of these services is solely incidental to their professional practice. Broker-Dealers Broker-Dealers whose performance of these services is incidental to the conduct of the business and who receive no special compensation for these services. Publishers of Newsletters That Do NOT Give Advice Based Upon Specific Investment Situa

Publishers, employees or columnists of bona fide newspapers, news magazines, business or financial periodicals and owners and employees of cable, radio, or television networks, where the content does NOT consist of rendering advice based upon the specific investment situation of each client. Federal Covered Advisers Federal Covered Advisers (covered previously): Regarding the last category - Federal covered advisers - until 1996, if an investment adviser was registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, this did not affect the requirement for the adviser to register in the State (this is true for broker-dealer registration as well - if a brokerdealer is registered under the Securities Exchange Act of 1934, it still must register in the State). Congress realized that such duplicate registration was "wasteful" and addressed the issue for investment advisers (but not for broker-dealers). Federal Registration with the SEC Is Only Required for Larger Advisers In 1996, the National Securities Markets Improvement Act of 1996 was passed to limit the duplicate registration of investment advisers that occurred previously at both the Federal and State level. If an adviser is considered to be a "federal covered adviser" then it is EXCLUDED from the definition of an investment adviser that must be registered in the State. Federal Covered Adviser The definition of a federal covered adviser was covered previously in this chapter. To broadly summarize these, a federal covered adviser is defined as: an adviser that manages $100,000,000 or more of assets; or an adviser to registered investment companies; or any person excluded from the definition of an investment adviser under the Investment Advisers Act of 1940. Thus, advisers who manage $100,000,000 or more of assets; or who advise registered investment companies; or who are excluded from the definition of an investment adviser under the Investment Advisers Act of 1940; are NOT required to register in the State - since they are "federal covered advisers." The concept here is that the Federal regulators are only concerned with the "big guys"; while the "local police" - the States - are concerned with the little guys. Federal Covered Advisers Must File Notice in the State Also note that federal covered advisers that must register with the SEC, must also "notify" each State (file notice in the State along with a consent to service of process covered later in this chapter) in which they conduct business and pay a State filing fee (which the States really like!). Advisers with No Office in the State Who Deal Only with Institutional Investors Are EXEMPT The Act EXEMPTS the following investment advisers from the licensing and registration requirements. These are advisers with no place of business in the State, whose only clients in the State consist solely of: Other Investment Advisers and Federal Covered Advisers; Broker-Dealers; Banks, Trust Companies and S&Ls;

Insurance Companies; Investment Companies Employee Benefit Plans with Assets of at least $1,000,000; Government Agencies; Anyone so designated by the Administrator. In these cases, the general public is not receiving the investment advice, so the protection afforded by registration is not needed. Also notice that if any of these advisers had a place of business in the State, then they would be required to register in the State. (As you learn the exclusions and exemptions under the Act, you might now be confused because broker-dealers with no place of business in the State who only deal with institutions are EXCLUDED from the definition, while investment advisers with no place of business in the State who only deal with institutions are EXEMPTED from registration. This is a "historical relic." The wording used for the broker-dealer "exclusion" dates back to the original Uniform Securities Act of 1956. When the investment adviser registration rules were rewritten in this Act to conform to NSMIA in 1996, the rule for IAs was revised to "correctly" call this an exemption, since the firm is really an investment adviser, but because it only deals with professional clients and has no place of business in the State, the firm is exempt from registration. Of course, when the IA wording was changed from exclusion to exemption, the original BD wording was left untouched, since it was not affected by NSMIA!) Advisers with No Office in the State with No More Than 5 Clients in State in Past Year - EXEMPT Advisers who have no place of business in the State, with no more than 5 clients in the State (except financial or institutional investors) within a 12-month period are exempt. Please note that 5 is the "recommended" figure; the actual number may vary from State to State. De Minimis Exemption This exemption is often called the "de minimis" exemption, since the adviser is "minimally" engaged in the business in the State if it has so few clients. Thus, an "out-of-state" firm that has only a "few" clients in another State, does not have to register in that State. Of course, the advisory firm must still register in the State where it has an office; and must register in any State in which it has no office, where it has more than 5 clients (other than the institutional clients listed above). (Also note that this is a tested item, because it has been adopted by almost every State, as compared to the broker-dealer "de minimis" rule that some States have, and others do not.) Canadian Adviser Exempt for Existing Customers Who Are Temporarily Residing in the US The Act also addresses Canadian advisers, as their customers often travel extensively in the United States. As long as a Canadian adviser does not have a place of business in the United States, it is exempt from registration (as are its agents) when effecting business with pre-existing customers who are temporarily residing in the United States. As long as the Canadian client spends less than 1/2 year in the United States, and intends to return to Canada, then the Canadian IA and IAR are not required to be registered in the State where the customer is temporarily residing. To summarize these exemptions, advisers with no place of business in a State who: only deal with professionals; or

have 5 or fewer clients in that State; or are Canadian advisers with pre-existing customers that are Canadian citizens who are temporarily residing in the United States; are EXEMPT from registration in that State. Also note that the difference between those persons EXCLUDED from the definition of an investment adviser; and those persons who are defined as investment advisers but who are EXEMPT from the registration requirement, must be known for the exam.

Registration Requirements for IARs The Uniform Securities Act states that it is unlawful for: IA Representatives Must Be Registered in the State any person required to be registered as an investment adviser to employ an investment adviser representative unless that representative is registered in the State; or IA Representatives of Federal Covered Advisers Must Be Registered in the State a federal covered adviser to employ, supervise or associate with an investment adviser representative having a place of business in the State unless that representative is registered in the State. What is going on here is most interesting. The Uniform Securities Act requires the registration of ALL investment adviser representatives that transact business in a State - whether they are associated with a state registered investment adviser or a federal covered adviser! (unless an exemption or exclusion is available). The issue regarding federal covered advisers is that the SEC only requires registration of investment advisers; it does not require registration of their representatives. NASAA is taking the stance that the "local police" - the States - still need to oversee the business conduct of the IARs at the State level - since no one else is doing this. For IARs that are employed by Federal Covered advisers, the NASAA rule is that: if the IAR of a Federal Covered adviser is physically present in the State, then they must register in the State; and if the IAR of a Federal Covered adviser is not physically present in the State, and the Federal Covered adviser files notice in the State (because it is doing business there), then the IAR must register in the State. So the bottom line here is that if an IAR of a Federal Covered adviser is physically located in a State, then they must register there (and the employing IA is required to make a notice filing in that State); and if the IAR is not located in a State, but solicits business there, then the IA must make a notice filing and the IAR must register in that State. (Of course, each State also gets to collect an annual registration fee for the registration of each IAR - though we are sure that this fact had no influence on NASAA's interpretation of the rule.) Solicitors for Advisers Must Be Registered in the State Also note that so-called "solicitors" for investment advisers that refer clients are required to be registered in the State, even if they are not employees of that adviser (they can be independent third parties).

IARs of Exempt Investment Advisers Are Also Exempt from State Registration Remember, as well, that advisers that have no office in the State that only deal with institutions; or that have 5 or fewer clients in the State in the last 12 months; are exempted from registration. This exemption extends to the IARs of these advisory firms, conditioned on the fact that the investment adviser representative is not physically located in that State. If an investment adviser representative (IAR) ceases to work for an investment adviser, that individual's registration is no longer effective. Representative Begins or Terminates Employment - Adviser Gives Prompt Notice to Administrator When the representative begins or terminates employment with an investment adviser (State registered adviser), the investment adviser must promptly notify the Administrator. (Please note that this differs from the notification requirement for the agent of a broker-dealer that changes employment. In that instance, BOTH the agent and the broker-dealer must notify the Administrator). Representative Begins or Terminates Employment with Federal Covered Adviser - Representative Gives Prompt Notice to Administrator When a representative begins or terminates employment with a federal covered adviser, the representative must promptly notify the Administrator (please note that for federal covered advisers, since the advisory firm is not registered in the State, the Administrator cannot require the advisory firm to give the notice. Since the representative is required to register in the State, only the representative is required to give prompt notice). Investment Advisers Cannot Employ Persons Who Have Been Suspended or Barred Furthermore, investment advisers are prohibited from employing, directly or indirectly, any person, who has been suspended or barred by the Administrator from association with a broker-dealer or investment advisor

Registration Procedure Registration of broker-dealers, agents, investment advisers, and investment adviser representatives is accomplished by filing a registration application with the State Administrator along with a form giving consent to service of process. Consent to Service of Process The form giving consent to service of process appoints the State Administrator to be the "attorney" for the registrant. Once this consent is completed, the State Administrator can receive orders for any lawful process or proceedings against a person arising in a non-criminal suit. In other words, if a person is sued, the State Administrator will receive the Summons. The Administrator would then notify that person. Consent Only Required for Initial Applications The consent to service of process need only be filed for initial applications. There is no requirement to file these for renewal applications. Registration Information The registration application includes the following: Form of business organization (e.g., corporation, partnership, sole proprietorship); Place of business and proposed method of doing business; Qualifications and business history of applicant (including that of any partners, officers, or directors of broker-dealers and investment advisers); Fingerprints of partners, directors, or officers of broker-dealers and investment advisers, and their representatives (though this is usually not required if a representative's fingerprints are already on file via FINRA Gateway; Listing of any injunctions, administrative orders, or convictions for misdemeanors or felonies in the securities business; Applicant's financial condition and history; For investment advisers only, any information required to be furnished to any client or prospective client. The Administrator can, by rule, require an applicant for initial registration to publish an announcement in one or more newspapers published in the State. Federal Covered Advisers File Notice in State In the case of federal covered advisers, the adviser is required to file notice in the State by filing with the State, the same documents as have been filed with the SEC for federal registration of the adviser. This document is the Form ADV (ADViser registration) filed with the SEC under the Investment Advisers Act of 1940. In addition, a consent to service of process must be filed. Initial Licensing Fee Each State requires an initial licensing fee for the registration of each:

Broker-Dealer; Agent; Investment Adviser; Investment Adviser Representative. Initial Notice Fee Each State requires an initial notice fee for each federal covered adviser that transacts business in the State. Completion of Filing Note that any filing in a State is not considered to be "complete" until both the proper documents and the filing fee have been received by that State (Saying that they are "in the mail" is not enough!). Annual Renewal Fee, No Pro-rating of Fee for Mid-year Initial Filing The amount of the initial fee varies from State to State. In addition, each licensed person must pay an annual renewal registration or notice fee to the State. Note that if a person initially registers in mid-year, there is no pro-rating of the annual filing fee - the full year fee must still be paid. Registration Effective in 30 Days Registration, if there are no problems, becomes effective 30 days from filing date. The Administrator may, however, specify an earlier effective date or a later effective date. No Additional Filing Fee for Successor Firm If a registered broker-dealer or investment adviser wishes to file with the administrator for a successor firm (for example, to change its business name or the composition of partners in the firm), then the successor firm can complete the unexpired portion of the year without paying an additional filing fee. Registration Expires Each December 31 Unless Renewed Every registration or notice filing expires on December 31st of that year unless renewed (this is the wording of the Uniform Securities Act and this fact is tested). Note that since states can modify USA, you may live in a state that does not follow this (e.g., bi-annual license renewal). Registering via FINRA Gateway Satisfies State Requirements If an individual (only agents of broker-dealers or investment adviser representatives are agents) is registered with the Securities and Exchange Commission via FINRA Gateway, the information required in the State application is satisfied. The only requirement is that the State Administrator be notified of the registration, and the appropriate filing fees be paid. IARD - Investment Adviser Registration Depository Please note that FINRA Gateway is used for broker-dealers and their agents that are registered at the Federal level. Investment advisers and their representatives register or give notice via the IARD system - the Investment Adviser Registration Depository. Note that the IARD system handles

he registration of both State registered advisers and Federal covered advisers; notice requirements for Federal covered advisers; and registration of investment adviser representatives (IARs), which is required for both IARs of State registered advisers and IARs of Federal covered advisers that have filed notice in the State. Form ADV Filed in IARD for Both Federal Covered Advisers and State Registered Advisers To register with either the SEC or a State, the investment advisory firm files a Form ADV (as in "ADV"iser), along with the payment of a fee. At the same time, Federal covered advisers"check off" the states that they are "notifying" and send them a fee as well. (Yes, the States love to collect those fees!) Just like broker-dealer registration, the IA registration expires on December 31st and must be renewed annually before that date by paying a fee to each State. For Federal covered advisers, each notice filing also expires on December 31st and must be renewed before then, along with paying a notice fee. Annual Form ADV Updating Amendment Filed Within 90 Days of Fiscal Year End Under SEC and NASAA Rules In addition, the adviser must file an annual updating amendment to the Form ADV on file in IARD. This is required whether the adviser is Federal covered or State registered, and this annual updating amendment must be filed within 90 days of the IA's fiscal year end, under both SEC and NASAA rules. "Other Than Year End" Updating Amendment for Material Changes Filed Promptly Under SEC Rules, Filed Within 30 Days Under NASAA Rules If there is a material change that occurs during the year, the Form ADV must be amended in IARD to reflect this. This is called an "other-than-year-end amendment." Under NASAA rules for State registered advisers, any such amendment must be made within 30 days of occurrence; while the SEC rule for Federal covered advisers is that the amendment must be filed "promptly." (Yes, it would be nice for the rule to be the same for both, but it is not and this must be known for exam!) U4 Industry Application Creates FINRA Gateway File for Individuals, Annual U4 Update Within 30 Days of Yearend Renewal Date To register through either FINRA Gateway as an "agent" of a broker-dealer or IARD as an "investment adviser representative," that individual completes and signs a U4 Form (the Uniform Securities Industry Application). The information is used to create that person's file. At calendar year end, registration in the State must be renewed and a fee paid (this is covered later in this section). This is done by updating that agent's or investment adviser's U4 filing within 30 days of the end-of-year renewal date. U5 Industry Termination Form Filed Within 30 Days of Termination If an individual is terminated, the former employing firm files a U5 termination form via FINRA Gateway or IARD. This must be filed within 30 days of termination by the former employer U6 Report of Disciplinary Action Taken by a Regulator If an individual or firm is subject to disciplinary action by a State or Federal regulator, that regulator files a U6 Form via FINRA Gateway or IARD and this goes into the firm's or individual's record, which can be viewed by the public. The Form U6 must be

filed by the regulator "promptly," but no later than 30 days after the action has been taken. U6 Report of Customer Complaints Alleging a Felony Also note that serious written customer complaints that allege a felony are "reportable items" even though their resolution is still pending. These go into that firm's or individual's file and can be viewed by the public but it is noted to the viewer that there has been no proof of the claim made in the complaint. This requirement really aggravates the industry, because this is an allegation that is not proven, so whoever is the subject of such a complaint feels that they are being "branded" as guilty without a chance to defend themself. If the complaint is resolved without action taken, then this must be reported with a U6 amendment to clear that person's record. Electronic Signature and Payment Also note that the States are moving toward full electronic filing of documents. Thus, any signature requirement for the electronic filing systems is simply met by that individual or an officer of the firm typing in the name in the required field. Any required payment can now be made electronically by credit or debit card. Many States require electronic filing and will only allow paper forms to be filed for reasons of "hardship

BD and IA Registration Standards Registration Standards for Broker-Dealers To register as a broker-dealer, the State Administrator can require: Minimum Dollar Amounts of Net Capital; Surety Bond Coverage (the amount is set by each Administrator; the old law called for a $10,000 minimum requirement). The law requires the Administrator to accept a deposit of cash or securities in lieu of the bond; and The Passing Of A Qualification Examination. The Net Capital ("Net Capital" is the same as a liquid net worth requirement for the firm) and Surety Bond standards are imposed because broker-dealers are permitted to take custody of customer funds and securities, or may have discretionary authority over client funds. Surety Bond Gives the State Assurance That Registrant Will Not Violate State Law A "surety bond" is a deposit of cash, securities (the State Administrator gets to decide which securities are acceptable), or an insurance "bond." The State gets to seize the assets on deposit or gets the insurance proceeds if the registrant violates State law. The "idea" is that if the registrant has "skin in the game," the firm and its owners are less likely to violate State law. Registration Standards for Investment Advisers To register as an investment adviser, the State Administrator can require: Minimum Dollar Amount of Net Worth (Minimum Financial Requirements); Surety Bond Coverage (the amount is set by each Administrator; the old law called for a $10,000 minimum requirement). The law requires the Administrator to accept a deposit of cash or securities in lieu of the bond; and The Passing of a Qualification Examination. Surety Bond Only Required for Advisers That Take Custody There is a minimum Net Worth and Surety Bond requirement for investment advisers, because, under State law, investment advisers are permitted to take custody of customer funds and securities. Please note, however, that if the investment adviser will not take custody of a client's funds, there is no surety bond requirement. (Note: Under NASAA Rule 202d-1, investment advisers that take custody of customer funds must have a minimum net worth of $35,000; investment advisers that do not take custody of customer funds, but that have discretionary power, must maintain a minimum net worth of $10,000. Under Rule 202e-1, investment advisers that have

either custody or discretionary authority over customer accounts must maintain minimum surety bond coverage of $35,000, if their reported net worth is less than this amount.) Higher Financial and Bonding Requirements for Investment Advisers That Take Custody or That Exercise Discretion The point that must be known is that the Administrator can require different minimum financial requirements and bonding requirements for investments advisers that take custody of customer funds than for ones that don't; and can require different minimum financial requirements and bonding requirement for investment advisers that have discretionary authority than for ones that don't. Net Worth Requirement Only Applies in State Where Adviser Has Principal Business The minimum Net Worth requirement is only required in the State where the adviser has its principal place of business. If the adviser has "out of state" branches, there is no additional Net Worth requirement based on those locations. Only the Net Worth requirement of the adviser's State where it has its principal office applies. Items Included in Net Worth or Net Capital Computation The minimum net worth or net capital requirement for investment advisers is: All Assets - All Liabilities - Intangibles (e.g., goodwill, trademarks, copyrights, etc.). In addition, if the adviser is an individual, the value of all personal property (home, furnishings, automobile) is deducted; but if the adviser is a partnership or corporation, these items used in the business are included and are not deducted (this is a test point). Filing of Financial Reports, Balance Sheet of Applicant The Act requires that every registered broker-dealer and investment adviser file any financial reports required by the Administrator. As a condition of registration, the State Administrator typically requires a statement of financial condition (balance sheet) for the applicant, along with an oath or affirmation that it is true and accurate. If "BD" or "IA" Fails to Meet Financial Standards, Notify Administrator Next Business Day and File Report the Following Business Day If a broker-dealer or investment adviser knows, or has reason to know that it is not meeting the Net Capital or Net Worth Requirements, the firm is obligated to promptly notify the Administrator of its financial condition - that is, notice is required by the next business day. No later than the day after notice is given, a report must be filed with the Administrator detailing the adviser's financial condition. (Note: The fact that the net worth deficiency notice is given the day after discovery, and that a report is filed the day after, should be known for the exam.)

Registration Standards for Agents and IARs Registration Standards for Agents To register as an agent, the State Administrator can require: Surety Bond Coverage (if the agent will have custody of, or discretionary power over, client funds); and The Passing Of A Qualification Examination. If no examination is required, the Administrator can ask for certification that the individual has reviewed the State's Blue Sky laws and understands his responsibilities. Registration Standards for Investment Adviser Representatives (IARs) To register as an investment adviser representative, the State Administrator can require: The Passing Of A Qualification Examination. (Note that there is no surety bond requirement to be registered as an IAR, but this is a requirement for broker-dealer, agent and investment adviser registration.) If no examination is required, the Administrator can ask for certification that the individual has reviewed the State's Blue Sky laws and understands his responsibilities. Exam Waiver If an individual holds, and maintains in good standing, a Certified Financial Planner (CFP) or Certified Financial Analyst (CFA) designation, the State Administrator waives the Series 65 (Registered Investment Adviser Representative) exam requirement, because these individuals have already passed tough exams covering most of the same information. However, that individual must still register in the State and pay annual State registration fees. Also note that this waiver does not apply to an individual taking the Series 63 or 66 exam. Filing of Fingerprints Required by Many States Finally, note that filing of fingerprints is not a requirement for State registration of agents or representatives under the Uniform Securities Act, but many States require fingerprint filings anyway. The States generally apply the fingerprinting requirement as follows - if the fingerprints have been filed via FINRA Gateway for a federal registration, then they are not required to be filed in the State; if they have not been filed via FINRA Gateway (for example, a representative of a State-registered investment adviser), then the State requires a fingerprint filing.

Requirements for Maintaining Registration Standards for Maintaining Registration To maintain registration, the Administrator can require: Books and Financial Records - Registered broker-dealers and investment advisers must keep account, correspondence, memoranda, books and other records as prescribed by the Administrator by rule or order. However, if the broker-dealer is subject to Federal recordkeeping requirements under the Securities Exchange Act of 1934; or an investment adviser is subject to recordkeeping requirements under the Investment Advisers Act of 1940; then the records are to be kept in accordance with these rules (NSMIA avoiding duplicate regulation at the Federal and State level again). Broker-Dealer Records - Act of 1934 Sets Rule Regarding specific records that must be known for the exam, the SEC (and hence State) retention periods for broker dealers are: Customer Correspondence/Emails: 3 years Customer Trade Confirmations: 3 years Customer Account Statements: 6 years Federal Covered Advisers Keep Records 5 Years Regarding Federal Covered Advisers, the Investment Advisers Act of 1940 requires that all records be kept for 5 years. State-Registered Advisers - NASAA Rule Regarding State-registered advisers, NASAA has written an extensive rule, since it has jurisdiction, and it must be known for the exam. IA Records to Be Kept Under NASAA Rule NASAA requires that State-registered advisers maintain the following records: Journals of original entry (e.g., cash receipts and disbursements); General ledger and trial balances; Order ticket copies; Copies of canceled checks, bank statements and bank reconciliations; Originals of all written communications sent to or received from clients (including complaints); List of discretionary accounts; Copy of each power of attorney granted to adviser; Copy of each advisory agreement entered into with a client; Copy of each notice, circular, advertisement, article investment letter, etc., sent to 2 or more customer

Record of each securities transaction except for transactions in US Government securities; Initial Form U4 and each amendment. Note that the NASAA rule then goes on to list even more records, but you get the idea - keep everything! Advertising Defined as a Communication to More Than One Person Regarding advertising (defined as a communication to more than 1 person, which you should know for the exam), it can include recommendations of the purchase or sale of a specific security; and if the communication does not state the reason for the recommendation, a memo must be retained indicating the reasons for the recommendation. Customer Accounts Posted by 10 Business Days After End of Calendar Quarter Regarding records of securities transactions, the rule requires that customer accounts be posted no later than 10 business days after the end of the calendar quarter in which the trade occurs (in contrast, broker-dealers must post customer account transactions on settlement, under SEC rules). Retain Both Business and Personal Emails Regarding email retention, the regulators take the stance that both business and personal emails sent and received by agents must be retained by the broker-dealer or investment adviser. They do this because agents often send emails to clients, or receive emails from clients, while at home. Electronic Recordkeeping, Data Integrity The Uniform Securities Act states that any records that must be retained must be kept in compliance with SEC rules on recordkeeping. The SEC updated its recordkeeping rules to allow electronic recordkeeping (but paper records, as well as microfilms or microfiches of paper records, are still permitted). Electronic storage is permitted on computer disks, computer tapes, or any other digital storage medium. In order to ensure the integrity of electronically stored data, the storage medium must be non-rewritable and non-erasable. A separate duplicate copy must be retained in another location. Recordkeeping Rules for Adviser Based on Location of Principal Office Finally, note that advisers that have locations in multiple States only have to comply with the recordkeeping rules of the State in which the adviser's principal office is located. (This applies to advisers only; not to broker-dealers). Adviser That Takes Custody Must Keep Customer Records in Principal Office The Uniform Securities Act also states that if an adviser takes custody of client funds, it must retain, in its principal office, for a period of 5 years, a copy of: Client Purchase and Sales History; and Current Client Securities Positions. 5-Year Retention with First 2 Years' Records Kept in Principal Office 

Under NASAA rules, all records must be kept for 5 years in an easily accessible place with the first 2 years' records kept in the principal office of the adviser (this applies only to State-registered advisers, however the Investment Advisers Act of 1940 happens to have the same rule for Federal covered advisers.) Permanent Records Kept for Life of Firm, Permanent Records Must Be Kept for 3 Years After Firm Is Closed An exception to the 5-year record retention rule is applied to "so-called" permanent records. These are the investment adviser's articles of incorporation, minutes to Board of Directors' meetings, stock certificate books, partnership articles and any amendments. These must be retained for the life of the enterprise and, additionally, must be retained for 3 more years after the enterprise is terminated (this must be known for the exam). Reports to Customers - This requirement only applies to investment advisers; not to broker-dealers. The Administrator can require investment advisers to furnish certain information to customers. This takes the form of an "Investment Advisory Brochure" given to prospective customers at least 48 hours prior to entering into any investment advisory contract. This brochure gives full disclosure to the customer. The Investment Brochure is a requirement of the Investment Advisers Act of 1940 under the so-called “Brochure Rule.” If an adviser is satisfying the Federal delivery requirement; then State law is satisfied as well (NSMIA again). Financial Reports - Broker-dealers and investment advisers must file financial reports with the Administrator as required. If a broker-dealer is registered with the SEC under the Securities Exchange Act of 1934; or if an investment adviser is registered under the Investment Adviser's Act of 1940; this requirement may be met by filing the Federally required reports with the State. Inaccurate Information - If any filing with the Administrator is found to have material errors or omissions, the registrant must file a correcting amendment promptly. If the amendment corrects an initial registration application, the registration does not become effective until 30 days have elapsed from the filing of the amendment. Inspections - All records of registrants are subject to periodic examination by representatives of the Administrator. To avoid duplication of examinations, these reviews can be performed by representatives of FINRA or the SEC. The Administrator can inspect records, both in the State and outside the State and can conduct inspections on a "surprise" basis. Advertising and Sales Literature - These materials may be required to be filed with the State unless the security or transaction is exempt, or unless the security involved is a federal covered security (covered in the next section). Included in the requirement are prospectuses, pamphlets, circulars, form letters, advertising (including internet advertising) and sales literature. Advertising is defined as a communication that is seen by the general public, including TV, radio, newspapers, magazines, non-password protected websites, etc. Sales literature is defined as a communication that goes to a specific audience, including market and research reports, form letters that are not broadly distributed, password-protected websites, etc. Federal Law Supersedes State Law in Most Cases

Also, remember that NSMIA made clear that Federal law will supersede State law regarding net capital rules, custody rules, margin rules, financial responsibility rules and record keeping rules (all of which are set by the SEC or FRB). Of course, if there is no Federal law, then State law would apply. Finally NSMIA also requires that if any State law impedes the Federal legislation, Federal law prevails

Why Registration Can Be Denied, Revoked, or Suspended Reasons for Denial, Suspension, or Revocation of Registration Registration may be denied, suspended, or revoked if the Administrator finds that it is in the public interest and that the person who is the subject of the order: Has filed a materially incomplete, false or misleading registration application. Has willfully violated the Act's provisions. Has been enjoined by court order from engaging in the securities business. Is the subject of an order by the Administrator denying, suspending, or revoking registration as a broker-dealer, agent, investment adviser or investment adviser representative. Has been convicted of a misdemeanor involving any aspect of the securities business (e.g., embezzlement, fraud, misappropriation of funds, theft, larceny); or been convicted of any felony; within the past 10 years. Is the subject of a determination that the person has willfully violated the securities laws (after notice and an opportunity for a hearing is given) by an Administrator of another State or the SEC, within the past 10 years. Has willfully violated the securities or banking laws of a foreign jurisdiction or has been the subject of an order by a foreign regulator denying, suspending, or revoking that person's right to be in the securities business, within the past 5 years. (Here's a good question - how come the statute of limitations is 5 years for foreign infractions but 10 years for domestic infractions?) Has engaged in unethical or dishonest business practices. Is insolvent, which is defined as the inability to meet obligations as they come due. Is unqualified based on lack of experience, training and knowledge. Has failed to pay required fees to the State within 30 days after being notified by the Administrator. Has failed to properly supervise employees. This provision applies to brokerdealers and investment advisers. This does not apply to agents. Is no longer in existence; has ceased to do business as a broker-dealer, sales representative or investment adviser; cannot be located after a reasonable search; or has been adjudicated as mentally incompetent. The following interpretations are applied when determining if a registration should be denied, suspended or revoked: The Administrator cannot enter an order solely on the basis of a lack of experience if the applicant is qualified by training or knowledge. The Administrator can require different qualifications for broker-dealers than for their agents; and can require different qualifications for investment advisers than for their representatives. Experience as a broker-dealer or agent does not make one necessarily qualified to be an investment adviser. The Administrator can condition registration as a broker-dealer or agent upon that person NOT acting as an investment adviser. The Administrator is permitted to, by order, summarily postpone or suspend registration, pending a final determination. If an order is entered, the Administrator must: Promptly notify the applicant, as well as the employer (if it is an agent or investment adviser representative application) that the order has been entered and why it has been entered; and Within 15 days of written request, the matter will be set down for a hearing. If no hearing is requested, the order stands until the Administrator decides that it should be changed. Withdrawal from Registration Effective in 30 Days Broker-dealers, agents, investment advisers, and investment adviser representatives can withdraw from registration voluntarily by submitting an application to the Administrator. Withdrawal becomes effective 30 days after the filing date, or sooner only if the Administrator allows. Resuming Registration Status after a Withdrawal for an IAR Once an IAR’s registration is no longer effective, their qualification exam results remain valid for 2 years. That means if the person is hired by another firm within the next 2 years, they can register as an IAR without having to retake the Series 63, 65, or 66, or 7 exams. If, however, the person waits for more than 2 years before returning to the industry, they would need to retake their qualification exams. The North American Securities Administrators Association (NASAA) now allows securities professionals who leave the industry to maintain their Series 63, 65, 66, and 7 exams results for up to 5 years if they enroll in the Exam Validity Extension Program (EVEP). To receive this extension, an agent or investment adviser representative must have been registered in their terminated registration category for at least 1 year prior to termination, elect to participate in the EVEP within 2 years of termination, and participate in FINRA’s Maintaining Qualifications Program (MQP). As part of the MQP, the individual will need to complete the FINRA regulatory element and practical element each year. If Legal Proceedings Are Commenced Within 1 Year, Registration Cannot Be Withdrawn If there are legal proceedings against the person, withdrawal is not permitted. Proceedings may begin up to 1 year after termination of registration. This means that one's registration is not considered to be truly terminated until 1 year elapses without legal action. Since that person is still considered to be registered, they come under the jurisdiction of the State Administrator. Agents Can Maintain Registration Only if Affiliated with a Registered Broker-Dealer Please note that if a broker-dealer loses or withdraws its registration, its agents are no longer registered unless they become associated with another broker-dealer. They then re-register under the new broker-dealer. An agent cannot register on their own - they must be associated with a broker-dealer to be registered. The same treatment is true for investment advisers and their representatives. Chapter 

4: Administrative Procedures 

If Existing Customer Moves to a New State, BD and Agent Must Register in New State If an existing customer of an agent moves to another State in which the agent is not registered, the agent (and broker-dealer, if this is not the case) must register in that State. The actual number of days being in the State where a customer becomes defined as a "resident" is not defined in the Uniform Securities Act. Rather, it is applied State-by-State. Some States use 30 days, others use 60 days, some don't define it at all. For the exam, view a customer as "vacationing" in a State if the customer is there for under 30 days. Over 30 days, view the customer as a "resident," where the agent and broker-dealer must be registered in that State.