Series 63 Study Guide
Post 1 of 7
- Module 1: Definitions from the Uniform Securities Act
- Module 2: Securities Act regulates broker-dealers and the agents
- Module 3: Investment Advisers and their representatives
- Module 4: Securities registration, exemptions, and their issuers
- Module 5: Administrative provisions and remedies
- Module 6 - Customer and prospects communication
- Module 7 - Obligations and ethical practices
Post 1 of 7 in the Series 63 Study Guide
To start, we look at various definitions as outlined by the Uniform Securities Act.
UNIFORM SECURITIES ACT TERMINOLOGIES
We begin by looking at the Act itself.
Securities are governed in states using what are known as blue-sky laws.
To ensure more conformity, the Uniform Securities Act was promulgated in 1956 to unify these individual state laws and adopt model legislation.
The Uniform Securities Act is more of a guide or a template for states to follow than a legislative act.
States can look to the act for guidance when drawing up their legislation but in most cases, they follow it.
So when comparing the act and the securities laws of most states, there isn’t much difference.
Knowledge of the act is important, but it’s more critical to understand how that knowledge can be applied practically.
Let’s move on to the terms that appear in the act and the Series 63 exam.
Administrator refers to a specific agency in every state.
Some states may call this office or agency another name, however.
An administrator will have full jurisdiction to administer the blue sky laws of a state.
In addition, the administrator monitors and controls the registration of:
- securities professionals
This means the power to deny, suspend and revoke registrations for both of the above lies with the administrator.
An administrator’s powers include the issuing of various orders.
Cease and desist
If stipulations, rules, or orders contained in the Uniform Security Act have been contravened in any way, a state administrator can issue a cease and desist order.
This cannot be issued on securities, only securities professionals, and can be done so without a hearing.
This is issued on registration statements and will either suspend, revoke or deny their effectiveness.
This only pertains to securities, however.
*Summary order or acting summarily
Summarily means to act without prior notice.
This is a power afforded to an administrator and can be used as follows:
-Securities professionals’ registration can be postponed or suspended pending a final determination if a problem is detected.
– An issue with a security can cause postponement or suspension pending a final determination
– A specific security or exempt transaction can be revoked or denied
Parties involved in any of the examples above have the option of requesting a hearing if necessary.
Other than summary orders, final orders aren’t able to take place without:
- Prior notice is given to the relevant parties
- The opportunity of a hearing
- Written factual findings/conclusions of law
Final orders can be issued with regards to registrations, persons as well as exemptions.
These are state laws that oversee securities and persons involved with them.
This means a legal or natural person.
It includes an incorporated organization, trust, corporation, government (or a division thereof), partnership, or association.
The Series 63 exam also will expect candidates to understand nonperson classifications.
This includes those seen as mentally incompetent, deceased persons, and minors.
A person who affects securities transactions.
This could be for their account or a client.
When doing so for their clients, they are considered to be a broker.
When doing so on their own account, they are considered to be a dealer.
Should the Series 63 exam ask for a broker-dealer’s primary function, the answer should include a phrase about carrying out or making securities transactions.
They won’t deal with any other types of investments, for example, real estate or commodities.
Agents (or registered representatives as they are also known) are associated with broker-dealers and will represent them in numerous ways and are considered natural persons.
Securities may be sold or purchased by them, for example.
They could, for instance, be involved in selling or buying securities or they could supervise others involved in securities sales.
An agent ISN’T anyone who only performs clerical or administrative duties.
While most work for broker-dealers, they can also be employed by those who issue securities.
In this capacity, they will sell securities on behalf of the issuer.
These are people who:
- Those who give advice on the value of securities, either directly or through writings or publications, or about selling, buying, or investing in securities and who are compensated for their services.
- Those who, as part of their job, compile and issue reports on securities.
The SEC requires that federal covered advisers are registered with them while the state will require registration from state-registered advisers.
Investment adviser representatives
They will carry out the duties for investment advisers.
These duties include providing investment advice or soliciting for advisory services and must be considered as a natural person.
These are both related to investment advisers and broker-dealers and relates to those who hold positions in the company.
This includes directors and business partners for example, but also others that carry out similar duties.
It does not include administrative or clerical staff.
The term issuer is immediately associated with securities.
When a corporation or government proposes to or issues securities they are called an issuer.
An issuer transaction takes place when investors buy those securities that have been issued.
The issuer will receive the proceeds the investors pay for the shares they have bought.
In most cases, securities are issued to raise capital to fund projects, for example by local government or large corporations.
These are transactions in which the securities are not sold by the issuer, but by another party.
The issuer is therefore not compensated for their sale.
An excellent example of this is the stock market.
The issuer of those securities are not involved in their sale on the stock market.
That’s because these securities don’t come from an initial public offering and are traded sometime after that.
When you think of a security, you think of bonds and stocks, for example, but it is more than that.
It also includes mutual funds, debentures, promissory notes, variable insurance products, and debentures among others.
There is no need for exempt securities to be registered before they can be sold.
They won’t need any advertising that’s related to them filed with the state administrator either.
Don’t mix up an exempt transaction with an exempt security.
With an exempt transaction, a sale or purchase takes place and this is considered an action, unlike an exempt security.
Investment advisers who wish to register with the state administrator must fill out this form.
It’s used not only at the state level but also at the federal level for registration purposes.
Broker-dealers who wish to register with the state administrator must fill out this form.
It’s used not only at the state level but also at the federal level for registration purposes
Both investment advisers and agents are required to fill out a Form U4 when applying for registration.
This type of security means a guaranteed payment of principal, interest, or dividends.
There is no guarantee on capital gains, however.
On the Series 63 exam, you might encounter a reference to a guaranteed security, which means a third party instead of the issuer offers the guarantee.
Offer/offer to sell
An offer to sell involves two parties: the offeror, who tries to make the sale, and the offeree who the offeror is hopefully selling to.
Any attempt, offer, or solicitation to sell interest in a security or at a certain price constitutes an offer to sell.
The expression sale/sell refers to the sale or exchange of an interest in a security or the security itself for a specified price.
In short, an attempt is an offer (as previously mentioned) and if successful, a sale has occurred.
Clients can give this power to a securities professional and it will be linked to their account.
In granting discretionary power, they can have sole or shared authority (with the client) to:
- Action: This sees them decide to buy or sell
- Amount: This determines the quantity they are going to buy or sell
- Asset: This is the security that they are going to buy or sell
When a broker-dealer has discretionary control over an account, monitoring of the activities on that account must take place.
Broker-dealers deciding on the price or time of execution does not fall under the definition of discretion.
Fiduciaries are individuals who possess a person’s confidence and trust in order to manage their assets and these are often securities.
A fiduciary relationship is defined as an obligation to act at all times with the benefit of the client in mind.
A fiduciary can include guardians, trustees, and investment advisors.
Fraud in legal circles refers to deceiving someone to gain a profit.
Fraud can certainly lead to criminal charges in the securities world.
It also covers more than common-law deceit.
Based on provisions found in both the Uniform Securities Act and the Securities Exchange Act, statutory disqualification is a real possibility for individuals who breach regulations.
This could include felony or misdemeanor convictions in the previous 10 years or being barred by the SEC for securities-related incidents.
It’s the role of the SEC to regulate stock exchanges.
Here, members of the exchanges will purchase and sell both listed bonds and stocks listed by the exchange.
These purchases and sales are facilitated by the mechanisms of the exchanges themselves.
An auction system is used to work out the pricing of these securities.
Over-the-counter market (OTC)
An over-the-counter market exists for securities that are not traded on a national securities exchange.
These are known as unlisted securities.
Securities are offered and sold through a system of dealers who negotiate the price for them.
The Financial Industry Regulatory Authority (FINRA) is an example of a self-regulatory organization or SRO.
These organizations regulate the securities industry.
Also, brokers and investment advisers must pass various FINRA exams so as to be registered before they can work in their various capacities.
There are other SROs too which include the Chicago Board Options Exchange (CBOE) and Municipal Securities Rulemaking Board (MSRB) amongst others.
Foreign countries have SROs that regulate their securities industry as well.
An example is the Industry Regulatory Organization of Canada (IIROC) which regulates the Canadian securities industry.
Individuals who receive compensation for referring clients to investment advisers are often referred to as solicitors.
To be able to perform this duty, the representative of the investment adviser must be registered.
This Latin term means “about minimal things”.
This is a particular exception that applies to investment advisers and their representatives.
It comes into effect when they only have five or fewer retail investors in a state and do not have a set place of business either.
This exception never applies to broker-dealers, however.
An accredited investor is defined by the Federal Securities Act and Rule 501 and Regulation D, in particular.
It refers to the people not included in the number of investors who purchase private placements.
This term is often used by NASAA to confuse people taking the Series 63 exam because it is a federal term that you won’t find in the Uniform Securities Act.
When a company or client enters into a performance-based contract with an investment adviser that governs the compensation he/she will receive, they are commonly known as a qualified client.
A qualified purchaser is an individual or a family business with over $5 million in investments or an entity/individual with over $25 million invested on their account or on others’ behalf.
These can be issuers of securities or securities professionals who are in the process of registering with the state or who have already done so.
Many companies, organizations, and others can be considered institutions.
- Investment companies
- Government agencies
- Trust companies
- Insurance companies
- Savings institutions
- Employee benefit plans (assets must be more than $1 million)
- Savings and loan associations
The Uniform Securities Act will provide less protection for institutions.
This is because they are considered to be sophisticated investors.
NSMIA – National Securities markets Improvement Act (1996)
In 1996, the NSMIA was enacted in order to increase the efficiency of financial markets in terms of capital formation.
By preempting the blue-sky laws of U.S. states, it assists in eliminating a dual system of state and federal registrations for investment advisers and some securities.
This refers to any of the 50 states found in the United States but also includes U.S. territories like Puerto Rico, American Samoa, and Guam.
A surety bond will involve three parties.
The securities professional is the party that will be bonded.
The bonding requirement is set by the state administrator, the second party.
The bonding company is the third party and they will issue the bond.
A surety bond confirms that the securities professional will abide by the law.
If they act criminally, then customers’ losses are covered under the surety bond.
Forgery, embezzlement, and theft are some of the criminal activities that a surety bond can cover.
A holding company has a holding interest in another company’s securities as its primary business.
When compared to a regular investment company, because a holding company is in control of the securities, it is different if matched up against a regular investment company.
A bank holding company is the most common type found on the Series 63 exam and they generally control more than one at a time.
Holding company subsidiaries can be registered as broker-dealers and investment advisers as well as broker-dealers
Exclusion from a definition
How does this work with regard to the Uniform Securities Act?
Let’s look at an agent.
State laws for agents won’t don’t come into play with someone who is excluded from the definition of what an agent is.
In this study guide, there are many exclusions from a definition.
They will relate to broker-dealers, their agents as well as investment advisers, and their representatives.
Registration under the Uniform Securities Act exemptions
It means, for example, that security is exempt from the registration provisions in the Uniform Securities Act.
Wrap fee program
Wrap fee programs apply when a client’s fee is not derived from investment advisory services but instead, a specific fee is charged.
Clients usually pay a single fee to the investment advisor when this program is used and this will be worked out the account’s total assets.
It covers a wide range including commissions, custody, brokerage, and management.
If a broker-dealer opts to use a wrap fee program they need to be registered as an investment adviser as well.