Table of Contents

Table of Contents

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Various guidelines and laws regulate the securities industry.

 A. Investment Adviser (including state-registered and federal covered) regulations 

To begin, let’s see the definition of an investment adviser according to the Uniform Securities Act:

“Investment adviser means a person that, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or the advisability of investing in, purchasing, or selling securities or that, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities.”

There are three key elements at play here:

  • An investment adviser provides advice to others about securities
  • Giving this advice is considered as part of the business activity they carry out on a regular basis
  • For providing this advice to others, they will receive compensation

Let’s look into each of these in a little more detail.

Providing advice regarding securities 

This includes providing advice on anything securities-related, from stocks to bonds, mutual funds to limited partnerships, and asset allocation.

This even pertains to advice that might be considered to be indirect. 

The advice doesn’t have to be written either but could be provided in oral form, for example, via a phone call. 

Regulators, however, do say that advice on other investment types is not considered as giving advice on securities. 

These non-securities include:

  • Real estate
  • Commodities
  • Collectibles
  • Precious metals

Providing advice as a business activity 

When doing the following, an individual is considered to be an investment adviser:

  • Provides securities advice on a regular basis. This doesn’t have to be the principal activity the person carries out either
  • Advertises the fact that they are available to give investment advice and present themselves to the public as an adviser

Someone who is not covered by the act, for example, would be those who publish a general newsletter that includes nonspecific investment advice.

Receives compensation

Should the person providing investment advice receive compensation for doing so, they are considered to be an investment adviser. 

This compensation can come in various forms, including commissions or advisory fees, and can be paid both directly and indirectly. 

SEC Release IA-1092

Back in the 1980s, many people fell under the umbrella term of investment adviser.

As a result, things got a little confusing and Congress stepped in. 

They did so by specifically asking the SEC to define what activities an investment adviser would carry out as defined by the Investment Advisers Act.

This was carried out through Release 1A-1092 which under the act, interprets the investment adviser definition.

This meant that the following were included under that definition:

  • Financial planners
  • Pension consultants
  • Sports and entertainment representatives
  • Others offering various forms of investment advice

While on this subject of who is included, we also need to cover who isn’t. 

The following are considered as exclusions and not considered investment advisers:

  • Bank holding companies
  • Saving institutions
  • Trust companies
  • Broker-dealers and their agents (who carry out traditional services)
  • Lawyers
  • Accountants
  • Engineers
  • Publishers (that meet certain criteria and offer advice not adapted to specific portfolios or client needs)

In the case of the last three, the advice is excluded which is incidental to the practice of their profession.

There are exemptions as well that we must look at. 

These individuals won’t need to register as investment advisers although they technically meet the definition of one. 

They include:

  • Intrastate advisers (only within one state)
  • Insurance company advisers
  • Private fund advisers (within certain requirements)
  • Foreign private advisers

Investment advisers’ registration requirements

All investment advisers will need to be registered, so let’s look at the registration requirements as set out by various regulations.

Currently, advisers will either be registered with the SEC or within the state they operate.

They will never be registered with both, however. 

This is covered under what is known as a federal covered investment adviser often shortened to just a covered adviser.

When is an adviser considered to be a federal covered investment adviser?

Well, for the most part, they will be registered with the SEC and will work for large firms.

In the exam, these are the three most tested categories that they fall under:

  • SEC registered as they have $100 million in assets under management and are therefore eligible or because the minimum threshold of assets under management ($110 million) is met by them
  • Those contracted to manage assets of an investment company, like a mutual fund for instance, that falls under the Investment Company Act. Assets under management don’t come into play here
  • Those excluded from the definition of an investment adviser and not registered with the SEC. An example of this would be advisers who pass on advice only about U.S government issued securities or those from its agencies

Assets under management

Federal covered advisers have state registration requirements eliminated as a result of assets under management (AUM).

Three thresholds were created by Dodd-Frank in this regard so let’s look at each of these. 

Large investment advisers

When it comes to AUM, these advisers deal with assets of $100 million and upwards. 

This makes them eligible for SEC registration but that registration becomes mandatory as soon as the AUM moves over $110 million. 

SEC registration is for all, unless they fall into the excluded or exempt categories covered earlier. 

Because federal law preempts state law, registration at state level is not necessary.

Mid-sized investment advisers

Mid-sized investment advisers have AUM of between $25 million and $100 million. 

In general, state registration is necessary for these advisers but they won’t have to be SEC-registered.

SEC registration is required if the adviser works for an investment company that is registered under the Investment Company Act, no matter the size of the company.

There are other ways in which SEC registration can be obtained for a mid-sized firm of advisers. 

They can do so if:

  • They need to be registered in more than 15 states
  • If they take advantage of the buffer (which we will explain later)
  • When registered, the administrator doesn’t subject them to examination as an adviser
  • In the state where it maintains its main office and carries out business, the adviser is not required to register with the state

Small investment advisers

Here we are dealing with advisers that work with AUM of $25 million and lower.

Registration with the SEC is not allowed unless they work for a company registered under the Investment Company Act. 

State registration, unless not required by regulations, is required, however.

SEC registration is permitted if the adviser needs to register with 15 or more states.

AUM time frames

AUM fluctuates, that’s a given but it’s something that has to be reported annually by the adviser. 

In other words, AUM could drop below $90 million for example, but if it’s back above it when the adviser files their annual AUM update, a change in registration is not necessary. 

Should that not be the case, a change of registration is necessary and the adviser has 180 days to do so. 

When reported AUM exceeds $110 million, SEC registration must take place within 90 days, however. 

The process of registration

There are a few differences when it comes to registration with the state and the SEC.

For the state, you must:

  • Prepare an application
  • Give consent to service of process
  • Pay the required filing fees
  • If the administrator requires, post a bond
  • Pass the examinations required by the administrator

The Form ADV is used to complete the registration process. 

It consists of four parts: 1A, 2A, 2A, and 2B.

Investment advisers need to use this form for:

  • Registration with the SEC
  • Registration with the state administrator
  • Making amendments to their registration with either of the parties above

Form ADV organization

We are not going to go into this too much as it’s something you can follow up while you study but let’s break down what the various parts of the Form ADV comprise.

  • Part 1A: This includes questions that cover the adviser, their business practices, who owns the firm, who controls the firm, and those who give advice on behalf of the firm. Part 1A must be completed by all advisers, no matter if they are registering with the SEC or the state.
  • Part 1B: This includes questions that are only asked by the state, so advisers applying for SEC registration need not complete it.
  • Part 2A: Advisers must provide narrative brochures that deal with the advisory firm itself. 
  • Part 2B: Advisers must provide brochure supplements that deal with various details of certain supervised persons. 

Form ADV updating

This has to occur every year.

To update the Form ADV, within 80 days of the end of the fiscal year of each adviser, updating amendments have to be filed with either the SEC or the state administrator. 

One of the most critical areas here is AUM verification as we spoke of earlier. 

If anyone of the following has changed, the Form ADV must also be updated:

  • The registrant’s name has changed
  • The principal business location has changed
  • The location where books and records are kept has been changed
  • The contact person in control of Form ADV preparation has changed
  • The organizational structure of the company has changed
  • Information in any of the brochures accompanying the Form ADV has become inaccurate
  • Questions regarding disciplinary actions have changed
  • Customer funds and securities and how they are handled have changed

Consent to service of process

We’ve mentioned this earlier and it’s one of the aspects of state registration that an adviser must agree to.

This means that effectively, the state administrator now acts as the attorney of the applicant and will receive and deal with any noncriminal securities-related complaints that come against them.

This consent does not need to be renewed, it remains in force permanently. 

Registration and renewals: Effective dates

Following the filing of a complete registration and barring no irregularities, SEC registration comes into effect after 45 days. 

For state-registered investment advisers, the period is 30 days.

To withdraw registration, should they no longer operate as an investment adviser, for example, a Form ADV-W must be completed. 

The withdrawal period is 60 days for SEC-registered advisers and 30 days for those registered with the state although it’s a period of a year that administrators hold jurisdiction over former registrants.

Registration as an investment adviser: Financial requirements 

There can be various rules or orders as set out by state administrators that pertain to minimum financial requirements for registered advisers.

In this section, we will look at some of these. 

Prepayment of fees

For investment adviser clients that have made large advanced feed payments for future services, both state and federal law offer added protection. 

Substantial prepayment of fees is the term that is used to cover this. 

With federal covered advisers collecting $1,200 per client up to six months and more in advance, this would apply.

The NASAA model rule is different, however.

While the time frame of six months remains the same, the amount collected in advance is less and amounts to anything over $500.

Balance sheet requirements

If they receive substantial prepayment fees as outlined above, federal covered investment advisers must include an independently audited balance sheet for the recent fiscal year with their Form ADV Part 2A.

The same applies to state-registered advisers. 

For those who control customer funds and securities, an audited balance sheet as described above is also necessary. 

If the custodian is an affiliated broker-dealer, an audited balance sheet is necessary as well.

Should advisers not maintain custody of funds and securities but can carry out discretionary transactions, a balance sheet will need to be supplied but this can be unaudited.

Financial impairment disclosure

Should an adviser hold discretionary authority or have custody over a client account, or the client pays substantial prepayment of fees, if there is a financial condition that could impair their ability to meet their commitments from a contractual sense, this must be disclosed. 

Inability to keep to minimum net worth amounts

NASAA has a model rule that deals with the minimum net worth of a financial adviser.

If it falls below the minimum set out, by the end of the next business day, the administrator has to be notified thereof. 

Following that, a financial report must be filed by the close of the business day following the first notice filing.

The number of client accounts held by the adviser is part of the information required.

The administrator will require the adviser to take out a bond the amount of which is the deficiency in their current net worth and the value it needs to be.

Federal and state law book and record requirements

The SEC and state require the following books and records to be maintained unless an investment adviser is exempt from registration:

  • Journal (must include disbursement records and cash receipts)
  • Auxiliary and general ledger
  • Memorandums for orders related to buying and selling securities, or when receiving an instruction from a client to do so
  • Checkbooks (including canceled checks), bank statements, cash recons
  • Bills and statements
  • Internal audit working papers, financial statements, trial balances
  • Various written communications regarding securities/client assets
  • Records of discretionary power given to an adviser and the transactions carried out
  • Any agreements between an advisor and their client
  • Any communications circulated by the adviser
  • Any written communication involving litigation against the adviser or an employee
  • Details of registration of staff at the advisory company

Records must be kept for a period of five years. 

For the first two years of this period, the records must be kept at the principal office used by the advisory firm.

For the next three years, it can be transferred to a storage device that complies with the Investment Advisers Act.

Supervisory requirements

Written policies and procedures must be in place for a registered investment adviser to ensure that federal and state securities laws are adhered to.

This should be the task of the designated chief compliance officer (CCO) and these procedures must be reviewed each year. 

In particular, the supervision of other staff working for the advisory firm is critical in this regard. 

The definition of a supervisory person

The most common person to fall under this definition would be an investment adviser representative.

Any other person(s) subject to control or supervision will also be defined in this category.

This includes officers, directors, partners, and other employees.

 B. Regulation: Investment Adviser Representative 

Now that we’ve covered various regulations pertaining to investment advisers, we must talk a little more about their representatives.

In this section, we are going to define what they are, look at some exclusions and then note the regulation requirements for these representatives.

Investment adviser representatives (IARs) can work for an advisory company or a single investment adviser. 

They can take on several roles including partners, officers, directors, and others.

The definition of an IAR falls under anyone carrying out the following:

  • Gives advice or makes recommendations to clients about potential securities
  • Deals with the client accounts and portfolios
  • Decides as to what type of advice or recommendations should be given to a client 
  • Negotiates, offers, or solicits for the sale of or sells investment advisory services 
  • Acts as a supervisor to any staff carrying out the duties listed above

Under the Investment Advisers Act as well as the Uniform Securities Act, there are exclusions and exemptions when it comes to who needs to be registered as an IAR.

IAR exclusions

When their activities only relate to administrative or clerical duties that are incidental to the advisory services offered, it’s not necessary for these staff to register as an IAR. 

As soon as they carry out daily tasks that an IAR would be expected to do, registration is necessary.

Individuals who do not regularly solicit, communicate or meet with clients of the investment adviser or give only impersonal investment advice are not required to register either.

Let’s expand on giving impersonal investment advice. 

This covers oral statements and written materials that do not try to meet specific objectives or can be linked to the needs of individuals.

It’s advice of a more general nature, for example, what you would find in an advertisement brochure for an advisory service, for example. 

IAR exemptions

In this section, for those defined as IARs, we will cover three exemptions.

  • For those who work for an adviser registered with the state, they would fall under a de minimis exemption. So in other words, registration is not necessary if they don’t have a place of business in the state and they have not had five or more retail state clients for the past 12 months.
  • IARs fall under the snowbird exception as well. This means that they are only dealing with already existing clients that are non-resident (temporarily) in that state and they themselves don’t have a place of business in the state. 
  • IARs working for covered investment advisers have a special exemption too. Here, only in the state where the individual has a business must their IARs be registered. 

Investment advisers representatives: Registration requirements

For those that are not excluded or exempt, registration as an IAR is necessary at all times. 

As for who that registration takes place with, well it’s only at state level. 

To register, the IAR must complete a Form U4.

On this form, the Disclosure Reporting Pages (DRP) is of critical importance as it is here that any disciplinary events from their past must be listed. 

The Series 65 exam will often test the following regarding registration.

Firstly, it’s the function that an IAR carries out and not only their title will determine the registration of an IAR.

This is covered by the Uniform Securities Act which states: “Registration of an investment adviser automatically constitutes registration of any investment adviser representative, who is a partner, officer, or director, or a person occupying a similar status or performing similar functions.”

So if an adviser that is state-registered grows their business and starts operating in another state, they will need to carry out registration there as well. 

This includes information about those who operate as IARs for their business, including those that are officers, directors or partners, as stated by the rule.

In this case, they will receive automatic registration.

This means they won’t need to file a Form U4 in the new state, but only if they are in the positions listed above. 

Other existing IARs not in those positions will need to file a Form U4 in the new state so that they can be registered. 

Secondly, there is testing.

Passing the Series 65 or 66 exam is necessary, unless an individual has been granted a waiver. 

Termination procedures related to IARs

It’s how an investment adviser is registered that will guide the notification requirements when an IAR terminates employment with them.

  • For state-registered advisers, the administrator must be notified by the firm
  • For federal covered advisers, the administrator must be notified by the IAR

Financial and recordkeeping requirements for IARs

There are no recordkeeping or financial requirements that an individual acting as an IAR has to worry about.

C. Regulation: Broker-dealers

To start this section, let’s just define what a broker-dealer is.

They will be involved in:

  • Carrying out securities transactions
  • These transactions will be for the accounts of others, but can also be on their own accounts

Broker-dealers can be individuals in a sole proprietorship or large brokerage companies with hundreds of clients.

Those working for broker-dealers do so in the capacity of an agent, also sometimes called registered representatives.

Broker-dealers who buy and sell securities for others are operating in the capacity of an agency.

When they do so for their own accounts, they are operating in the capacity of a dealer.

Exclusions and exemptions: Broker-dealers

For the purpose of state regulation, some who effect securities transactions are excluded from the definition of a broker-dealer. 

These include:

  • Agents
  • Issuers of securities
  • Trust companies
  • Banks
  • Savings institutions
  • Those operating as broker-dealers but who don’t have a place of business in the state

Federal exemption from registration

A broker-dealer won’t have to register with the SEC if they conduct all their business in only one state.

This means that when it comes to transactions they carry out, this has to occur only within the state’s borders.

If a transaction takes place on a national securities exchange, they cannot partake in it without SEC registration.

These are known as intrastate broker-dealers and it is only in the state that they are located that they will be registered. 

State exemption from registration

If the transactions affected in a state are with the issuer involved in the transaction, a broker-dealer without a place of business in that state is exempt from registration.


Agents are individuals that represent a broker-dealer as well as issuers.

They are tasked with effecting the sales or purchase of securities and are paid a commission for doing so. 

Whether they sell securities that are registered or not, they are also known as registered representatives.

Agents can only be natural persons, or in other words, an individual. 

A brokerage firm is not an agent.

While talking about agents, we must also touch on the definition of an associated person

This includes partners, officers, or directors of the broker-dealer. 

Others that fall under this definition are persons controlled by the broker-dealer (including employees, but not those that carry out clerical tasks)

D. Regulation: Broker-dealers and Agents

Exclusions and exemptions: Agents

The most obvious group of employees of a broker-dealer that won’t be required to register are those that work in clerical positions. 

That’s because they only carry out administrative tasks.

Should they carry out any function related to securities, however, this will change and registration is necessary. 

Exclusion: Personnel representing issuers

Issuers of securities may have personnel that represent them and they must be registered as an agent if they effect the sale or purchase of securities. 

It’s in the states that they carry out these duties that they must be registered. 

There are exceptions where these individuals are excluded when it comes to the definition of an agent.

  • With the sale of securities that are exempt
  • Dealing with transactions that are exempt from registration
  • Dealing with transactions with partners, directors, or employees of the issuer for which they receive no remuneration 

Exemptions for agents

No de minimis exemption exists for agents, just as it is with broker-dealers.

Registration is required in a state, even if you don’t have a place of business there and only deal with one or two clients.

But, of course, there are some exceptions.

The first covers the snowbird rule, which we covered earliest when dealing with investment advisers and  IARs. 

Another exemption applies to firms that are excluded from the broker-dealer definition.

These will deal only with institutions and other broker-dealers and won’t have a place of business in the state. 

The employees of these firms are not considered to be agents either and thus, don’t require registration in the state. 

Registration requirements: Broker-dealers

As we now know, all those who do not fall under the exemptions or exceptions that we’ve covered must be registered as broker-dealers.

This goes for individuals acting as broker-dealers as well as companies that carry out these types of services. 

Registration with the state is carried out by filing a Form BD from the SEC.

This will need to be modified as necessary depending on the state’s needs.

As always, any changes that occur after this form has been filed will need to be brought to the attention of the state administrator as soon as possible. 

Also know that almost all broker-dealers will have to be registered with the SEC as well. 

Application submission

When submitting an initial application submission (and any renewals after that), they will be sent to the securities administrator of the relevant state.

We’ve already mentioned that broker-dealers will use a Form BD to do so while a Form U4 is necessary for their agents. 

The following information is usually required:

  • A broker-dealer’s place of business  
  • How they will do business
  • Jurisdictions in which the individual has already registered or intends to register
  • Their qualifications (and those of partners, directors, officers, and other individuals with controlling influence)
  • Their business history (and those of partners, directors, officers, and other individuals with controlling influence)
  • Any administrative orders received
  • Any court-issued injunctions received
  • SEC adjudications as well as any received from other regulators, FINRA for example. This is over the last 10-year period.
  • Securities misdemeanors, charges, and convictions
  • Felony convictions (doesn’t have to be securities related)
  • Financial history
  • Financial condition
  • Unsatisfied liens or judgments
  • Any declaration of bankruptcy over the last 10 years
  • Citizenship information in the case of an individual who is registering

Statutory disqualification of a registrant can occur if they:

  • Had their membership suspended, or they were expelled by an SRO (like FINRA, for example)
  • Are subjected to an SEC or other regulatory authority order that has revoked, denied, or suspended their registration
  • Were found to cause any suspension, expulsion, or order as described in the points above during their association with a broker-dealer
  • During the last decade, have been convicted of a securities violation or misdemeanor that involves theft, forgery, bribery, dishonest or such felonies
  • Cannot engage in any phase of the business of securities due to a temporary or permanent court injunction
  • Have violated security laws intentionally
  • Have provided false or misleading information when dealing with a regulatory body

Filing fees payment and renewal 

When applying for the first time as well as when a renewal is made, filing fees will have to be paid by the broker-dealer.

Renewals will have to be filed from December 31 each year.

Record requirements

The following books and records must be kept by broker-dealers:

  • Accounts
  • Blotters
  • All correspondence (including email, but not personal emails)
  • Papers
  • Books
  • Memorandums
  • All other records as prescribed by the administrators 

Records will need to be kept for three years.

For the first two years, they will have to be easy to access and kept at the principal office of the broker-dealer. 

Any amendments to these records must be filed as quickly as possible. 

When it comes to record-keeping requirements, regulations as imposed by the SEC cannot be superseded by those of an administrator.

These records should always be available for inspection by the administrator. 

Broker-dealers: Financial requirements

Administrators can put certain net capital requirements in place for broker-dealers. 

These cannot exceed those as laid out in the Securities Exchange Act, however.

In certain cases, if a broker-dealer has custody of client funds and securities, or discretionary authority of their account, the administrator might request that they post a surety bond.

A surety bond isn’t necessary, however, if the net capital of the broker-dealer is higher than the requirement the administrator requires. 

Registration requirements: Agents

Agents will need to register by completing a Form U4.

Once that’s been granted, they can effect securities transactions in the state in which they operate. 

As with broker-dealers, and unlike investment advisers and IARs, there is no de minimis exemption.

So even if they have one client in a state, registration is necessary.

Should a broker-dealer have their registration terminated, those agents that operate for them are no longer licensed.

When an agent terminates their contract with a broker-dealer, both them and the company they work for must inform the administrator. 

Agents: Financial requirements

As with IARs, there are no net worth requirements for agents. 

On occasions, however, like when they hold discretion over a client’s account, the state administrators may require that they are bonded. 

Registration with multiple broker-dealers

Under current regulations, this is not allowed and applies to both agents who work for broker-dealers and those that are employed by issuers.

If there is an affiliation between the broker-dealer and issuer through direct or indirect common control, the administrator may grant an exception. 

Should this be the case, they will need to register a second time as well. 

E. Regulations: Issuers and securities

State securities administrators are responsible for regulating the securities transactions as well as the issuers of those securities.

That’s what we look at in this unit.

What is considered as a security?

The term “security” is a critical part of the Uniform Securities Act, the guideline that all working in the financial industry must follow.

Defining what exactly constitutes a security is not easy, however. 

The US Supreme Court has ruled that for an instrument to be deemed a security, it must include money that has been invested in a common enterprise. 

The person who invested the money expects that investment to give them a profit.

This profit will come from the efforts of another party, who is not the investor 

There are many instruments that are considered to be securities, many of which you will know.

What you can rather focus on is what’s not considered as a security because this list is far shorter, and therefore easier to memorize.

It includes:

  • Insurance, endowment policies (that pay a fixed lump sum)
  • Annuity contracts (that pay a fixed lump sum)
  • Retirement plans like IRAs or 401(k) interest
  • Collectibles
  • Commodities including futures/forwards contracts and precious metals
  • Condos used as a residence for an individual in their personal capacity
  • Any form of currency

Investments in non securities

There is no regulation from state securities laws when it comes to the sale of those non securities that we have listed above. 

That doesn’t mean they aren’t attractive investments, however, and many people do look to them as a way to invest their money.

It’s critical to note, however, that should a registered person commit fraud when selling or buying these kinds of items for clients, under state securities laws, no violation has been committed.

They can be prosecuted through antifraud provisions related to other regulations, however. 

We’ve talked about annuities that provide fixed payments as non securities.

Note, however, that variable annuities are considered as securities.

That’s because the performance of the securities within the annuity determines how well it performs. 


Securities need to come from somewhere and the party that will originate them is known as the issuer.

They will propose to issue and then issue (which means to distribute) a security. 

When you think of an issuer, the most obvious that spring to mind are large corporations.

Other large issuers include government at both federal, state, and municipal level as well as various subdivisions thereof and agencies.

An issuer can be nonexempt.

This means that any time that they want to issue securities, it will need to be registered.

If sold in multiple states, it will need to be registered in all of them. 

Issuer transactions

When all the proceeds of the sale of the securities go to the issuer, this is known as an issuer transaction. 

An example of an issuer transaction is any newly insured securities, which are known as the initial public offering (IPO). 

Also, if a company sells securities to investors, that too is an issuer transaction because the proceeds of the sale will go into the company coffers. 

Non issuer transaction

There are non issuer transactions too.

Here, the sale proceeds of the securities do not go to the issuer who originally put up the IPO.

So securities that are sold on the NYSE are an example of a non issuer transaction. 

It’s the investor who puts the securities up for sale on the exchange that will get the profits from their sale. 

Primary offering

This is also called the initial offering and always will involve new securities that are being made available to the public. 

As we mentioned earlier, this takes the form of an IPO.

Because the proceeds generated from the sale of these securities, this is always an issuer transaction. 

Security exemptions from registration

The regulation of securities sold to the public is done so through the Uniform Securities Act. 

When securities are not exempt, this act means that investors should be able to find all the information they need to make fully informed decisions regarding their investments.

A security might or might not have to be registered under state and/or federal law depending on the type of transaction as well as who issues it.

With regard to state law, an unregistered security cannot be sold lawfully in a state unless:

  • It has been registered under the Uniform Securities Act
  • The security is deemed to be exempt from registration according to the act
  • The transaction involving the security is deemed to be exempt  from registration according to the act
  • It’s a federal covered security

Let’s look at that last point by determining what a federal covered security is.

Ultimately, at the state level, this type of security won’t need to be registered to be sold. 

Some, like mutual funds, however, will require that notice filings for these securities are passed on to the state when these come up for sale. 

This is made up of SEC-filed documents (copies) as well as filing fees.

Federal covered security categories

These are the major categories of federal covered securities:

  • Those issued by registered open-end or closed-ended investment companies 
  • Those issued by registered unit investment trusts or face amount certificate companies
  • Securities listed on the following: NYSE, NYSE American LLC, Nasdaq and other stock exchanges. Rights or warrants (equal in seniority to these securities) or bonds and preferred stock (higher in seniority to these securities) are also included
  • Securities linked to the provisions of Regulation D Rule 506 (b) and (c). It is under the private placement transaction exemption that these qualify. 
  • Securities that according to the Securities Act of 1933 are exempt. The ones you should know in this regard are securities that the federal government says are exempt. This includes municipal bonds, for example. Note, that the security is not considered as a federal covered security under the NSMIA if the municipal issuer is in the same state as which the security is offered.

Registration exemptions 

We know that a security can be exempt but also a transaction.

This means that the filing requirements as listed in the Uniform Securities Act related to sales literature don’t have to be carried out. 

Exempt securities will carry that exemption from the point they are issued and in whatever trading may follow.

Before each transaction, however, they must be justified as an exempt security. 

With transactions, if they are exempt, it’s before each transaction that this must be established. 

While a state administrator can revoke, suspend or deny a security its exemption, this is not true for federal covered securities.

An exempt transaction is considered as such because of the person to whom the sale is made or the manner in which the sale takes place.

Each transaction, however, is judged on its merits.

Exempt securities

Here’s a list of exempt securities:

  • U.S. and Canadian government and municipal securities
  • Foreign government securities
  • Depository institution securities
  • Insurance company securities
  • Public utility and common carrier securities
  • Federal covered securities
  • Non-profit organization issued securities
  • Employee benefit plan securities
  • Some money market instruments

Exempt transactions

While there are many transactions that are considered exempt, let’s focus on those that might appear on the Series 65 exam.

  • Isolated non issuer transactions: These do not typically involve security professionals, for example, when someone sells stock to someone else. These generally occur infrequently. 
  • Unsolicited brokerage transactions: These will not be initiated by the agent, but by the client instead. Of all exempt transactions, this is the most common. In this case, the client calls the agent to sell securities to them. 
  • Underwriter transactions: Such as those that take place between broker-dealers acting as underwriters and the issuer. It also includes transactions between underwriters.
  • Conservator, guardian, or bankruptcy transactions: These are carried out by executors, administrators, sheriffs, marshalls, guardians, or trustees. 
  • Institutional investor transactions: This covers transactions with banks, investment companies, insurance companies and other financial institutions. 
  • Limited offering transactions: These are for private placement offerings. With these, the offering is for no more than 10 offerees but it does not include institutional investors. The seller must believe that it is for investment purposes that the offerees are making the purchase. No remuneration can be paid for soliciting these offerees and at no point can advertising or general solicitation be used to find them.
  • Preorganization certificates: This will be exempt when no remuneration is paid for soliciting a subscriber. There can only be 10 or less of them as well while they won’t make any payments either. 
  • Transactions with existing security holders: This includes people who hold warrants, rights, or convertible securities and who receive a transaction offer. For this to be exempt, no commission or remuneration can be paid for their solicitation. 
  • Non issuer transactions by pledges: These are exempt if they are not carried out to avoid the Uniform Securities Act.

Securities Act: Exempted securities

While we’ve covered the exempt securities under state laws which the exam will focus on, you should have an idea of those that are exempt under federal ones. 

These include:

  • Those guaranteed or issued by the United States. This includes states and their political subdivisions, including any federal government and municipal issues 
  • Commercial papers. The time of issuance to maturity must be no longer than 270 days (9 months). The issuer must use the proceeds as working capital only. 
  • Securities issued in relation to religious, educational, fraternal, charitable, and benevolent purposes. 
  • Railroad equipment trust interests
  • Federal and state bank-issued securities

Securities Act: Exempt transactions

Generally, there are only two exempt transactions under the Securities Act that appear in the Series 65 exam.

  • Private transactions. These cover those that are by any other parties other than the dealer, underwriter, or issuer.
  • Issuer transactions that are not a public offering

Federal law requirements for the registration of securities

When securities are to be registered, there’s a process to be followed as designated by the SEC.

This includes providing information regarding various details in the form of different documents that will need to be filed.

This isn’t something that we are going to look at in too much detail, because it’s covered in the coursework and various other exams, like Series 6 and Series 7. 

We will, however, mention the critical documents that form part of this registration process with the SEC.

Registration statement

The material information pertaining to the issue of securities must be filed with the SEC in the form of a registration statement.

The main information found in this statement includes:

  • The overall purpose of the issue
  • The anticipated range of the public offering price
  • Commissions and discounts of the underwriters
  • Promotion costs
  • What the proceeds will be used towards
  • Balance sheet
  • The last three years earnings statements from the issuer
  • Details of officers, directors, and stockholders who own more than 10% of the outstanding stock 
  • Underwriting agreement copies
  • Articles of incorporation copies

A 20-day cooling-off period is in effect once the SEC receives the registration document.

Once this period has passed, the registration is in effect.

From that point on, sales can be solicited for the issue. 

Preliminary prospectus

Also called a red herring, this is a critical document for prospective purchasers who show an interest in a security issue.

They must have access to this when the issue is filed with the SEC and until it is available for sale. 

It is used as a way to gauge the interest of investors and provide them with the details they need regarding the issue.

It is never seen as a confirmation of a sale, however, and won’t be used in place of a registration statement. 

The preliminary prospectus can also never include the final offering price but a price range per share must appear in it. 

Final prospectus

Not every potential investor is going to want to read through the registration statement for a new issue.

For that reason, the issuer must include a prospectus, which is a shorter document that includes information important to an investor.

In a nutshell, this is a summary of the registration document. 

Any investor that shows interest in an issue must receive a prospectus. 

Registration statement and the filing thereof

The following information is required by the state administrator for any application:

  • How many securities will be issued in their specific state
  • Which states will have the securities offered in them
  • If there are judgments or adverse orders by regulatory authorities against the offering
  • The effective date that is anticipated
  • What the proceeds will be used towards

State registration of securities methods

Under the Uniform Securities Act, securities issuers have two methods by which they can register securities in a state while federal covered securities have their own specific way.

These are:

  • Notice filing
  • Coordination
  • Qualification

Notice filing registration

Although they are considered exempt from registration, notice filings may be required from state administrators when a federal covered security is sold. 

This is particularly true for those offered by SEC-registered investment companies. 

Notice filings provide a way for revenue to be collected by the state.

This comes by the way of filing fees which are lower than the other two other registration types we will look at.

The notice filing procedure sees the following documents needed when federal covered securities are put up for sale:

  • Those filed with the SEC accompanying their registration statement
  • Any documents filed with the SEC as amendments
  • A report regarding the securities value in the state it is offered in
  • A service to process consent

Coordination registration

For securities that are not federal covered, the most common way to register them is by coordination, especially multistate offerings.

If in connection with the same offering, the securities have been filed under the Securities Act, this method of registration can be used. 

Along with a service to process consent, the following records must be supplied:

  • If the administrator requires it, a copy of the prospectus in its latest form
  • Articles of incorporation and bylaws copies
  • Underwriting agreement copies or a copy of the certificate
  • Other information filed with the SEC, if required by the administrator
  • All prospectus amendments 

When the federal registration becomes effective, so too does registration by coordination.

Qualification registration

This registration option is available to any security and for those that cannot be registered through the first two methods above, this is the only option.

This type of registration is mostly for securities that are going to be sold in a single state. 

Along with a service to process consent, the following will need to be provided:

  • Organization details (name, address, nature of business, etc.)
  • Details of persons owning 10% or more of outstanding shares of the issuer
  • An estimate of the proceeds that will be raised
  • How these proceeds will be used
  • Copies of the following offering documents: prospectus, circulars, pamphlets, or any other sales literature
  • Specimen copy of the certificate of the relevant security

The effective date of registration by qualification happens on an order from the state administrator.

All of the registration methods above are effective for one year.

This starts as soon as the effective date is established.

Should unsold shares remain past this point, they will continue to be registered as long as it is at the original POP. 

This applies to unsold shares held by both the issuer and any underwriters.

Uniform Securities Act: Antifraud provisions

Regulatory bodies like the SEC have antifraud provisions but for this exam, the focus is on those found under the Uniform Securities Act. 

This covers fraud related to investment advisers, broker-dealers and securities.

Even a security that is exempt will fall under these antifraud provisions.

When an investment is not considered a security, these antifraud provisions do not apply.

But there are other laws that will protect an investor in that regard, it just doesn’t apply to those antifraud provisions laid out in the Act.

F. Administrative provisions and remedies

In this section, we look at the Uniform Securities Act’s administrative provisions.

We also cover what remedies an administrator has available to them in their jurisdiction over securities transactions. 

The jurisdiction of state administrators

When it comes to their overall jurisdiction, state administrators are in control with regard to securities transactions that take place in their state.

This jurisdiction, however, also covers those directed to the state as well as accepted in the state.

This jurisdiction includes any:

  • Sale or sell
  • Offer 
  • Offer to sell

The following are considered exclusions to these:

  • Pledges or loans (for example, using stock as collateral for a loan)
  • Nonassesable stock given as a gift by themselves and not attached to anything else
  • Stock dividends and splits
  • Class vote by stockholders

Actions available to administrators

There are four main powers available to the administrator when acting in their state:

  • When it comes to the use of specific forms, they can make, change, and revoke rules and orders
  • They can carry out investigations and serve subpoenas, where necessary
  • They can file injunctions and serve cease and desist orders
  • When it comes to registrations and licenses, they have the power to deny, suspend, cancel or revoke them

Let’s look at these in a little more detail.

Make, change and revoke rules and orders pertaining to forms

This is pretty self-explanatory but what you should remember is the difference between a rule and an order.

An order will just be for a particular instance while it’s to everyone that a rule will apply.

Carry out investigations and serve subpoenas

When handling an investigation, the administrator or someone designated by them is able to:

  • Pertaining to the issue being investigated, request statements made under oath and in writing
  • Concerning the issue under investigation, publish the facts surrounding it
  • Issue subpoenas and enforce the attendance and testimony of those named in them
  • Produce correspondence, books, and papers related to the evidence in book form, if needed.

File injunctions, serve cease and desist orders

In this regard, should it be necessary to stop an act that is violating the provisions as set out in the Uniform Securities Act, an administrator can:

  • Serve a cease and desist order. No prior hearing is necessary for this. 
  • A temporary or permanent injunction can be issued to ensure enforcement of the order by going to the relevant court

Administrators can stop a potential violation, for example, if they receive information from a whistleblower beforehand.

Deny, suspend, cancel or revoke registrations

This applies to broker-dealers, investment advisers, and anyone that represents them.

It also includes the securities and their registration. 

Let’s start by looking at this with reference to broker-dealers, investment advisers and their representatives

These powers can be put into effect when the above-mentioned have:

  • Provided a registration application that is incomplete, false, or in some way, misleading
  • Violated the Uniform Securities Act wilfully
  • Because of an act committed in the last 10 years, been disqualified from membership to any regulatory body related to securities or commodities
  • A felony conviction within the last decade
  • Been stopped by law from taking part in the securities business
  • Been put under a denial, revocation, or suspension from another state administrator
  • Taken part in unethical or dishonest securities practices previously
  • Been declared insolvent
  • Been the subject of a previous adjudication that rules that the broker-dealer has violated any one of the five different Acts, including the Investment Advisers Act, the Securities Exchange Act, and the Securities Act
  • Not paid their application fees
  • Been found guilty in the past in their role as a broker-dealer or adviser of not supervising those under them correctly
  • Due to their lack of experience in, knowledge of, or training in the securities business are not deemed qualified

What about securities issues?

These too can be denied, suspended, revoked, or canceled by an administrator.

This will occur if the administrator finds this within the public interest or when:

  • An incomplete or misleading registration statement is filed
  • If the offering is related to unfair, unjust, inequitable, or unfair terms
  • If fees that are unreasonable or excessive are charged by the registrant of the securities
  • If there has been a previous securities-related conviction for the control person in charge of the securities
  • If a court injunction is currently in place against the securities registrant
  • If the securities registrant is using illegal business methods
  • If an administrative stop order from another state is in effect against the securities registrant

Failure to pay a filing fee on time can result in the denial of registration as well.

Once this is paid, the order will be removed if all other procedures are met.

Registration: Nonpunitive terminations

Should a violation not have occurred under the Uniform Securities Act, registration can still be terminated by the administrator.

Reasons for cancellation include a request for withdrawal as well as a lack of qualifications.


A withdrawal of registration can be a request from the individual involved. 

Once the administrator receives it, this will come into effect within 30 days as long as there are no proceeds against the individual. 

If there is, the administration can still, within one year of the withdrawal having come into effect, institute suspension or revocation proceedings. 


Should a registrant or applicant no longer practice or be in business, the administrator can choose to cancel the registration linked to them. 

G. Client and prospects and communicating with them

Clients don’t start out that way. 

When they first approach a securities professional, they are a prospect. 

The way you approach a prospect and a client is important in terms of the things that you can and cannot say to them. 

This protects not only the prospect or client, but the securities professional as well.

That’s what this section covers.

Disclosure relating to capacity

Understanding disclosure is crucial to those operating in the securities industry, especially if they want to steer clear of disciplinary action.

As long as they make the proper disclosures, a securities professional will be fine and there isn’t much they cannot do. 

We know that broker-dealers can operate in two capacities when carrying out transactions.

This is either as a principal or an agency.

They are on the other side of the trade or contra party to it when acting as the principal.

The security is being sold out of the inventory of the firm to the client and the profit will be a result of markup. 

Should the client sell from their inventory, the firm buying it is again acting as the principal. 

In this case, markdown results in a profit.

In an agency capacity, it’s different.

Here the firm operates as an agent or broker and puts a seller together with a buyer or vice versa. 

Money is earned in this situation through commissions paid. 

For the exam, you should know that it’s on trade confirmations that the capacity a broker-dealer is acting in must be clearly marked. 

While the markup or markdown might have to be included too, depending on the circumstances, if they acted in an agency capacity, the commission must be included.

Investment advisers: Disclosure of capacity

While the main job of an adviser is to give investment advice, on occasions, they can act in a principal capacity when buying securities from or selling them to an advisory client. 

Also, if they bring a buyer and seller together and a transaction takes place, then they are acting in an agent’s capacity. 

This potential for advisers to engage in self-dealing in both principal and agency transactions has been recognized by regulators. 

Their worry is with principal transactions mostly as this can lead to abuse, for example, putting unneeded securities in the accounts of their clients or manipulating prices.

There can be a conflict of interest too when advisers, on behalf of their clients, take part in an agency transaction and it’s linked to earning extra compensation.

Regulators don’t stop advisers from doing so, however, but if they do want to carry out these transactions, there are certain client consent and disclosure requirements that must be followed.

This includes that:

  • Full written disclosure is given to clients informing them in which capacity the adviser will act when those particular situations arise
  • Consent to do so must first be obtained from the client before they do so

We must also mention agency cross transactions here. 

This is when advisers are taking on the role of the agent for their client and then on the other side of the trade, they are the party involved too. 

Regulations allow this with written consent and disclosures of the following:

  • Commissions will be collected from both sides of the trade by the adviser
  • Because of a division of loyalties to both sides of the transaction, there is potential for a conflict of interest
  • Advisers must provide annual statements showing the number of these transactions made and the remuneration gained from them 
  • Show that termination of these arrangements can occur at any point
  • Transactions cannot be effected if the investment adviser or anyone linked to them recommended it to both any purchaser or any seller. 

After obtaining prior written consent either before or at the conclusion of an agency transaction, a written trade confirmation that includes the following must be received by a client:

  • The nature of the transaction provided in a statement
  • The date on which the transaction occurred (and the time, if the client requests it)
  • The amount of remuneration as well as its source received by the adviser or anyone connected to them 


Disclosure requirements

Regulators suggest that all clients be provided with literature, usually in the form of a written statement that will make the relevant disclosures by an adviser. 

The following would be considered as required disclosure:

  • If the adviser or any management person had violated rules or statutes that lead to state or regulatory proceedings. This could have led to them having their registration denied, revoked, or suspended or that of the firm itself
  • If permanent or temporary injunctions or other similar court proceedings which are linked to investment-related activities or felonies are in place against individuals or the firm currently
  • If any proceedings from regulatory bodies against an adviser led to the firm losing registration. Also, if an individual was suspended, barred, expelled, or received a fine of $2,500 or more

The following would be considered as examples of when material information has not been disclosed to clients:

  • Not telling them about all the fees that they need to pay. This is linked to the advisory contract and includes whether fees are negotiable and how the client will be charged
  • When it comes to other securities professionals or issues, their affiliation with them is not disclosed by the broker-dealer to the client
  • When a financial condition could compromise the adviser’s ability to meet contractual commitments in their contract with a client, it must be disclosed. This is for advisers that are state-registered and who hold either the funds of the customer, have discretionary authority over their account, or the client has paid $500 upfront ($1,200 for federal covered advisors)
  • When allocating securities to accounts taking part in bunched trades, the adviser doesn’t use the average price paid and doesn’t disclose the allocation policy of the firm. 
  • All existing clients should be told about any material legal action against an adviser. This must take place at least 48 hours after the client enters a contract with a state-registered adviser if this legal action was in the last decade but can be later if the client is allowed to terminate the contract should they so wish and without penalty in a period of five working days. 

Conflict of interest disclosures

A client expects that investment advisers will do what’s best for them. 

That’s what a fiduciary relationship is but even though these exist in the client, adviser dynamic, conflicts of interest can arise. 

Here’s some examples of that:

  • Asking clients if they want to participate in a proprietary product they are affiliated to
  • Having a client consider a DPP but the sponsor is an affiliate 
  • Selling investment or insurance company products where they are rewarded by the program sponsor for doing so
  • When recommending a security that they have a financial interest in
  • Placing shares of their own stock into the discretionary accounts of their clients
  • When broker-dealers underwrite a stock issue and then publish favorable research reports about that stock

These are just examples, there are many others. 

Fee disclosures

Not all securities professionals offer the same services, so fee structures cannot be set in stone.

What regulatory bodies want, however, is to ensure that when clients are charged, it’s not at an unreasonable rate. 

Also, a violation has occurred when fees are not disclosed to a client.

Research has shown that fees are one area where customers of securities professionals say that they don’t always understand how the charges on their accounts work.

Making disclosure easier for them to understand can be achieved by:

  • Disclosing them when a new client opens an account 
  • Passing on new fees schedules as soon as they come into effect but always giving advance notice beforehand as well
  • Make fees and charges as clear as possible. Don’t hide them in the small print
  • As a way to allow prospects or clients to compare fees between different firms, uncomplicated and standardized terms should be used

Falsely representing a securities professional’s registration 

Misrepresentation of a securities professional’s registration as well as that of a security is not allowed.

For a security professional, even though you have registered within a state, for example, this is never approval from the administrator of that state.

You simply cannot tell a client that. 

You are only a registered broker-dealer, adviser, agent, or representative working in that state.

The false representation of a securities registration

While on the subject, let’s talk about securities too.

Again, no regulatory body or state administrator has approved a security that is registered.

The prospectus of the security will include a disclaimer confirming this as well.

Telling any clients that it is approved by any regulatory authority is a prohibited practice and criminal proceedings can be brought against those that do. 

Guaranteeing performance

At no time can guarantees be passed from a securities professional to a client. 

Guaranteed securities

While a party that is not the issuer can guarantee the payment of interest and principal for debt securities or dividends for equity securities, no guarantee of performance is allowed.

This means that gains cannot be included in a guaranteed security. 

Providing a guarantee against losses

It is prohibited to offer a client any form of performance guarantee.

In other words, offering to buy back shares that don’t perform or making up the difference if they don’t earn a specific amount over the next couple of months isn’t something you can promise a client.

Performance-based compensation, however, is allowed under certain circumstances.

So if the investment return is higher than a selected index, for example, the securities professional receives a higher compensation from the client. 

Should the performance be lower, the client will pay less in compensation too.

Investment advisory contracts

When an investment advisory contract exists, it must disclose the following:

  • What services will be offered
  • The contract terms
  • The advisory fee to be charged or the formula used to calculate that fee
  • In the event that the contract is terminated, what prepaid fees will be charged or how this will be calculated
  • If discretionary power is provided to the adviser or their representatives by the contract
  • The client has to give the adviser consent for assignment of the contract
  • Changes to minority interests in a firm organized as a partnership must be communicated to clients
  • That fees cannot be waived in the event of the client suffering a loss

Communicating with clients

In this section, we are going to look at electronic communication, social media, and advertising and the proper use thereof.

Social media and correspondence

At all times, when communicating with any prospects or clients, this must be done in a fair manner with disclosure always at the forefront of your thoughts.

In the last decade, social media has become hard to ignore.

Ultimately, however, this is just another form of communication and should be treated in the same manner as those that have gone before it.

It is up to securities firms to ensure that they have policies and systems in place when it comes to social media sites to ensure that these are not only supervised, but reviewed as well.

Social media concerns that investors have

While social media has revolutionized the way we communicate, it has a downside too and many phony investment schemes are looking to catch out the unwary.

It’s the job of the securities professional to try to help protect their clients against this. 

When it comes to content on social media, there are generally two forms.

The first is static content.

This is posted and remains the same until it’s changed by the person who owns the account.

The second type is interactive content. 

Here, the creator as well as those viewing it can interact with posts.

Think of posts on Facebook or Twitter when those reading it can reply. 

It’s important that securities professionals alert investors to online red flags which include:

  • No risk on an investment offering high returns
  • Offshore operations where U.S. regulators have no control
  • Sites that only operate with e-currency
  • Investment opportunities that encourage others to recruit their family and friends
  • Websites that may look professional, but ultimately contain little detail as to who is running them
  • No comprehensive written information about the potential investment. For example, if it’s a security, there is no prospectus to download to learn more about it
  • Testimonials from others. Early investors often do get paid high returns from scam artists initially as a way to dupe others. Their testimonies are then used to do so.

Social media concerns that regulators have

Regulatory bodies such as the SEC and FINRA do have policies in place that securities professionals need to take note of when it comes to social media and the use thereof.

These are also regularly updated.

FINRAs guidance, for example, not only includes social media but also email usage, and other online activities such as blogs, chat rooms and messaging.

While the delivery method of communication is important, what’s more crucial is determining the category of communication as this helps to establish both supervisory and filing requirements. 

In this regard, the actual content will play a role. 

FINRA says that whether they are communicating face to face with a client or via an online method, the compliance responsibility remains the same when it comes to regulations. 

Securities professionals must also adhere to the policies and procedures as determined by their employer. 

There are hefty fines in store for those who use online communication such as social media and email in an inappropriate manner. 

Note that, even during their own time, those representing securities firms must follow the regulations that govern online communication. 

While some staff will understand this, others might not and that’s why continual training is critical. 


Using advertising or sales presentations that are deceptive or misleading is not allowed and it’s considered unethical business practice by the NASAA. 

These practices can include the following:

  • Using nonfactual data and the distribution thereof
  • Basing material or presentations on pure conjecture
  • Making unrealistic or unfounded claims in advertising material
  • When it comes to the information found in the prospectus, anything that might defeat the purpose thereof, supersede or detract from it

For example, it’s a violation to prepare sales material for an issue that only takes the positive information about it from the prospectus. 

There are risk factors associated with most securities and these simply cannot be left out as any advertising should give the full picture. 

Advertising: Broker-dealers

When we talk about advertising, the website of a firm is a critical part of that. 

It, along with social media, plays a very critical communication role when making recommendations to the public.

So, if recommendations are made through social media, do they have the same suitability constraints as when made through any other methods?

You know the answer to that, right?

Of course.

What’s not always so clear, however, is where, for the purposes of the suitability rule, when a communication represents a recommendation. 

To help with that, we need to look at what is a recommendation and what isn’t. 

These would fall outside of the definition of a recommendation in a situation when a broker-dealer acts as an order-taker in a transaction. 

  • A broker-dealer website that has research reports or electronic libraries that include buy or sell recommendations by the authors.
  • A broker-dealer website that has a search engine where customers can sort relevant data about stock performances, industry sectors and more. This covers a wide range of information, not only pertaining to the securities the broker-dealer trades in
  • A broker-dealer has an email subscription service that provides news about the securities the custom owns or that they might have on their watch list. This includes price changes, for example. The scope of the information received by the customer will be selected when they sign up for the service

The following, however, would be considered as a recommendation: 

  • Sending electronic communication to a client or group of clients that advises them to consider a specific security
  • Sending electronic communications to clients that suggest that stock from a certain sector should be purchased for their inventory and then including a list of stock recommendations they should buy into
  • Providing clients with a portfolio analysis tool that allows them to put in an investment goal as well as personal information (such as age, condition of their finances, and tolerance for risk). From that information, the customer is then sent a list of securities  that fits their needs
  • Using data mining to evaluate a client’s financial activity and from that, send investment suggestions and securities that are specific to those needs 

Obviously, there are many more examples than this, but this gives you a great idea of what a recommendation is. 

Advertising: Investment advisers

According to model rules as set out by the NASAA, should advertisements not observe requirements as set out in the Investment Advisers Act, they cannot be used at all. 

As for what an advertisement is, SEC regulations stipulate that communications including notices, circulars, websites, letters, and others would fall under this category.

They would be addressed to more than a single person and include:

  • Reports, analyses, or publications on the subject of securities
  • Charts, graphs, or formulas that, when concerning securities, can help clients make decisions about them
  • Other security investment advisory services 

Advertising used by investment advisers cannot:

  • Include statements of material fact that are untrue
  • Include testimonials
  • Include devices such as charts and formulas that by themselves, show which securities are purchased or sold
  • Say that analysis reports will be provided free of charge when they won’t be
  • Include an adviser’s past specific recommendations which were profitable
  • Include gross performance data
  • Imply that the adviser is in any way recommended  or sponsored or that the SEC or state administrator approves them

Agent related issues

Agents carry out the day-to-day work of broker-dealers.

It’s important to be aware of the following:

  • Should they use their personal devices (cell phones, for example) as a way to communicate with clients on social media, these are governed by the rules we’ve mentioned.
  • Priory supervisory approval may be necessary at times but this depends on the nature of the media used. 
  • Be careful of linking to third party sites that might include information that goes against regulations as set out by SROs.

Broker-dealer/Investment adviser supervisory actions

Set policies and procedures should be in place when it comes to the business use of social media. 

Staff, however, should also receive the correct training.

For example, understanding the difference between static and interactive content is crucial.

That applies to communication that is business or non-business related as well as when it’s deemed to be retail communication.

That’s because, if it is seen as such, pre-approval is necessary. 

Privacy is also something to consider when it comes to social media use.

This means that the policies that guide social media usage in a firm should also comprise relevant privacy issues. 

Policies should always:

  • Be in writing 
  • Communicated to all 
  • Be as clear and concise as possible
  • Define the responsibilities expected of various parties 
  • Explain how the firm monitors social media usage

Because social media continues to evolve, these policies will need to as well.

In summary, when staff are using social media for business, the policies must:

  • Already be established beforehand
  • Be specific and clear
  • Define the various responsibilities expected of different categories of employees
  • Show how the firm intends to monitor social media use for each specific platform

H. Fiduciary obligations and ethical practices

In this section, we are going to cover a broad range of ethical considerations as well as fiduciary responsibilities, which is where we begin.

Investment advisers and their fiduciary responsibility

When providing investment advisory services to clients, there’s no doubt that an adviser has to act ethically and they will have fiduciary responsibility too. 

This is unlike a broker-dealer. 

We’ve talked about operating in a principal or agent capacity during trades, and in doing so, the consent of a client will be needed.

When it comes to fiduciary responsibility, the adviser must at all times find potential conflicts of interest and eliminate them, as well as inform their clients about them.

It’s simple, really. 

At all times, you should be working in the best interests of every client.

Compensation disclosure

A critical part of any fiduciary relationship deals with compensation and the disclosure thereof. 

Clients should always be told about the following:

  • How an adviser calculates compensation
  • Prepaid fees and the refunding thereof
  • What type of compensation method they use (fees calculated by AUM, hourly, monthly, or commissions)
  • If any compensation or incentives comes from the securities issuer (this certainly could lead to a huge conflict of interest)

While performance-based compensation isn’t allowed, there are qualifying exceptions worth noting. 

These apply to qualified clients only and these are:

  • A company or natural person with $1 million or more under the adviser’s management at the time the contract is entered into
  • A company or natural person that the adviser believes has a net worth of over $2.1 million before entering into a contract with them (with certain provisions)
  • An officer/director or IAR of the adviser who is considered a natural person. They must have worked in the industry for a period a year at least

For the test, you should know that it’s not considered a performance fee when it is calculated using the average amount of money under management over a certain period. 

Also, the rules for state-registered advisers and federal-covered ones have one major difference.

A state-registered adviser must disclose in writing to a client the following noted below if they start, extend or renew a contract for which they are paid compensation based on a share in capital gains or if there is capital appreciation on a client’s funds:

  • An incentive for the adviser may be created by the fee arrangement so that they look to riskier or more speculative investments to benefit from it
  • The adviser might get higher compensation based on unrealized appreciation and a client’s account that shows realized gains, where relevant
  • The index used to measure the performance of the investment, as well as the significance thereof and why it is appropriate 

When it comes to federal-covered advisers, these disclosures are not necessary. 

When we talk about these fees, the one you would see most often used is called a fulcrum fee.

Here, a specific period is taken (but at least 12 months) and the fee is averaged over that.

This average is based on the overall performance of the investments in relation to a securities index, for example, the S&P 500.

Cash referral fees

Payment for referrals is something we have to mention when talking about compensation.

The payment of cash referral fees is not prohibited by the SEC or the Investment Advisers Act.

For solicitors to receive these fees, however there are four conditions that will need to be met, with three specifically covering payment for cash referrals. 

Let’s look at those.

  • The adviser has to be registered under the Advisers Act
  • They cannot currently be subjected to any statutory qualification
  • A written agreement must be established before these fees can be paid

Even when these three conditions are met, cash referral payments could still be denied unless they occur in one of these situations: 

  • It’s for impersonal advisory services that these payments are made
  • A referral fee is paid to an affiliated of the adviser by the adviser
  • It’s paid to non-affiliated third-party solicitors 

Disclosure will need to be made if third-party solicitors not affiliated with the adviser receive these fees.

They include:

  • The third party must be disclosed to the client unless impersonal advisory services are carried out
  • The adviser is responsible for any sales approach or script used by the third party

When it comes to referrals and solicitors, the following must be kept, as regulated by the SEC:

  • The written agreement shows that in relation to the payment of these fees, the adviser is a party to this
  • A signed acknowledgment from the client that they have received both the disclosure statement of the advisor and the solicitor. This must be dated as well
  • A copy of the written disclosure document of the solicitor as well as that of the investment adviser

For state-registered advisers, according to the Uniform Securities Act, those who solicit for them must be a registered IAR. 

Soft dollar compensation and safe harbor

Let’s look at the concept of soft dollars as well as safe harbor. 

What are safe harbor and soft dollars?

Simply put, safe harbor entails acting in a way that won’t break the law. 

With reference to Section 28 (e), this deals with when an investment adviser is compensated by a broker-dealer in a manner that’s deemed to be ethical. 

So how does this work?

Well, there’s several different services that broker-dealers provide to others, other than executing transactions.

This includes research which is often a service required by investment advisers.

When the research component is paid for by a certain dollar portion specifically allocated for it, these are called soft dollars. 

The SEC called these soft dollar practices directed transactions.

So these are products or services from broker-dealers that are not related to the transaction of securities that are obtained by advisers.

In exchange for this, client brokerage transactions are directed towards the broker-dealer. 

SEC regulations state that any soft dollar arrangements must always be disclosed to clients. 

The brokerage allocation policies of registered investment advisers must also be disclosed in Part 2A of Form ADV.

Also, regulations state that advisers that accept soft dollar perks should mention that:

  • Because they don’t pay for the research or produce it, the adviser will benefit
  • The incentive is then for the adviser to choose or recommend broker-dealers that will provide them these benefits rather than getting the most favorable execution for a client

Funds and securities custody rules

In this section, we look at how broker-dealers and advisers are tasked with ensuring that they protect any securities or funds that they hold for clients. 


The following conditions have to be met for an investment adviser registered under either state or federal law, to hold the funds or securities of a client:

  • They have a qualified custodian. The funds or securities for each client are kept in separate accounts under each of their names. They can be kept in the account of the adviser or broker-dealer where they are a trustee or agent for them.
  • They give their clients notice when the accounts are opened with qualified custodians. The client must be informed in writing of the custodian’s details, how the funds or securities are kept, and any changes on the account that takes place.
  • Clients must receive account statements either from the qualified custodian or the adviser.
  • As per the NASAA model rule, the administrator is notified by the adviser in writing on a Form ADV. 

When we talk about a qualified custodian, this could be a savings association or even a bank that includes FDIC insurance. 

It can also be a registered broker-dealer or a financial institution from overseas (under certain conditions). 

Direct fee deduction is also something that’s covered under the NASAA model rule. 

When an adviser has custody as a result of their fees being deducted straight from the account of the client, the following safeguards are also required:

  • Clients must get written authorization from each client whenever the account is held by a qualified custodian and advisory fees are to be deducted from it
  • Clients must get a notice of fee deductions when fees are to be deducted from their accounts. The custodian will receive a notice of the fee amount to be deducted while an invoice itemizing the fee is sent to the client. This will include a breakdown of the AUM the fee is calculated from and the period of time the fee covers.
  • The administrator must be told via the Form ADV that the adviser will put these safeguards in place.

Investment discretion

When we talk about custody of client funds or securities, you will often find that investment discretion is coupled together with that. 

But it’s important to note that these aren’t the same thing at all and you should be able to tell the differences between the two for the exam.

When we talk about a discretionary account, the securities professional, with having to get approval from their client, can make transactions as they see fit.

When a securities professional is given discretion, they have the authority to decide the following:

  • The security in question
  • The number of units of that security
  • Whether the security is going to be bought or sold

There can be a conflict of interest when a securities professional has discretionary control over a client’s account.

For example, if we look at a broker-dealer (or their agents), the transactions that take place in the account of their client lead to their compensation.

That’s because it is transaction based, so more income is generated through more trading.

This is less of a problem for advisers and IARs because when it comes to trading action from an account, they are rarely compensated for that.

We also need to mention time and price discretion

This is not written but given orally by the customer, for example, by 100 shares of ABC stock at the best price you are able to. 

It’s interesting to note that this is an exception to the requirements that we have talked about above. 

What you should know about this type of discretion is the time period that it’s valid.

And that’s only on the day that the customer gives it.

Extensions are possible but then, a dated and signed customer instruction is necessary. 

As is the case with regular discretion, should a time and price discretion purchase or sale of securities take place, it must be reflected on the order ticket. 

Investment adviser discretion

When operating in the advisory account of their clients, an adviser would have had to receive written authorization to do so in advance.

The NASAA model rule does include a provision that’s pretty unique. 

This says that for the first 10 business days after the first discretionary transaction date, oral discretionary authority is permitted on the account. 

Once that period is over, however, for any further transactions to take place, written authority is necessary.

If that’s not received, the adviser may not trade using that client account. 

Trading authorization: Third parties

You should note another way in which the ability for others to exercise control over their account is given by a client.

For example, a spouse can give instructions to trade on an account but only if a third-party trading authorization has been secured beforehand.

If there isn’t one, then it’s not necessary to follow through on any instructions received at all. 

Should one be in place, or an adviser chooses not to follow through on an instruction they receive from their client, well that’s a prohibited practice as well.


No doubt that you have heard this term before. 

Customer securities should always be kept segregated from those of the firm.

Included are securities that don’t have a lien against them, which are unlike those pledged as collateral for a margin account. 

These are known as free securities.

But why can’t securities be commingled?

Well, the main reason is that when this happens, the firm will have more borrowing power and leverage. 

Also, in the event of a default, the securities of the client will be jeopardized. 

Improper hypothecation

The securities of a customer cannot be pledged as collateral (or hypothecated) unless consent has been received from them.

This consent must be written as well. 

Anti-money laundering considerations

By laundering money, those with nefarious intentions take the proceeds that they have generated from illicit activities and transform them into funds that seem to be produced through a legal concern. 

This is the perfect way for criminals to hide their ill-gotten gains.

There are many ways in which securities professionals can help in the fight against money laundering.

The most important of these are customer transaction reports (CTRs).

For each transaction that exceeds $10,000 and within 15 days of receiving the money, the Bank Secrecy Act requires that CTR must be filed. 

No matter the transaction, be it a transfer of funds electronically, paying off a loan, purchasing certificates of deposit, bonds, stocks, and mutual funds. 

Wire transfers of $3,000 or higher must also be reported the act stipulates. 

It’s considered a prohibited activity when deposits are specifically designed to be under the $10,000 threshold.

Systems should be in place in financial institutions to look out for this practice which is commonly referred to as structuring. 

The prudent investor rule

When making suitable recommendations to their clients, advisers and IARs should always keep the prudent investor rule in mind. 

This is guided by the legislation we find in the Uniform Prudent Investors Act (UPIA) which was adopted around three decades ago. 

This made some core changes to the criteria regarding prudent investing which are as follows:

  • It’s not to individual investments but to any investment as part of a portfolio that the standard of prudence is applied. When we talk about a portfolio in this regard, it’s all the assets of a client or trust.
  • The fiduciary’s main concern is to always consider the trade-off between risk and return for all investments.
  • When it comes to categorical restrictions on investment types, they have been removed. This means that any investments can be made by the fiduciary as long as it plays an effective role in meeting the objectives of the account from a risk and return perspective and keeps in line with other prudent investing requirements. 
  • Prudent investing now includes the requirement that investments are diversified.
  • While trustees could not delegate investment functions before the passing of the UPIA, that has now been reversed. These delegations are now allowed but the fiduciary must take care in doing so. 

Broker-dealer and agents: Statement of policy regarding unethical business practices 

When it comes to unethical business practices for securities professionals, these are fully covered under the NASAA model rule (covering investment advisers)  as well as their statement of policy (covering broker-dealers). 

Let’s look at some of the dishonest or unethical business practices that are included in these policies. 

Delivery delays

Unreasonable and unjustifiable delivery delays are not allowed.

This is in regard to not only the delivery of securities that a customer may have purchased but also when they request money from their account or any free credit balances that reflect completed transactions. 

Also prohibited is holding back a certificate that a client has requested for a security that they may have purchased. 

This must be delivered to them when the request is made.

Making unsuitable recommendations

At all times, any purchase, sale, or exchange of securities recommended to customers must always have their investment objectives, needs, financial situation, ability to assume risk, and other critical information in mind.

This means obtaining the relevant information from a client and if they are unwilling to give it or discuss what their objectives are, then there is no basis for making a recommendation.

Can you still take orders from clients when this scenario plays out?

The answer to that is yes, but the broker-dealer or agent that finds themselves in this situation can only accept unsolicited orders. 

For investment advisers, because they will receive remuneration for the advice that they provide, should a client not provide the requisite information that they require, an advisory account should not be opened. 

For the exam, know that making blanket recommendations to a range of clients is considered an unethical business practice. 

For example, telling all your clients to buy a certain security as a broker-dealer.

This simply doesn’t take individual suitability into account. 


Free lunch seminars aren’t something that’s specifically included in the NASAA’s statement policy, but you should be aware of it, especially when it’s linked to seniors.

These seminars include a free meal as a way to attract clients but are used by financial service firms as a way to sell their products. 

While they are marketed as informational seminars, that’s not the idea behind them.

They want to get people to sign up for their products or at least get contact information that they can follow up on. 

Both the firm sponsoring these types of seminars and the registered individuals involved are considered by the NASAA to have committed a prohibited business practice should they carry one out. 

Withhold public offering shares

If acquired as an underwriter, as part of the selling group, or from someone acting in those capacities, public offerings of all securities allotted to broker-dealers must be made available.

This means that no shares can be withheld at any time or kept for themselves. 


Upon reasonable requests from customers, any information that they are entitled to should be made available to them. 

It’s a prohibited offense not to. 

It’s also an offense not to respond to any written requests or formal complaints received. 

Front running

Placing their personal orders at the front of a customer order that was previously received is the term as front running (or trading ahead) and it’s not allowed at all. 

When firms receive institutional orders of a massive size that the market could move, this is something that can occur because by putting their order in front, the firm representative can make big profits when the movement does occur.


Rumors are not something that any agent or IAR should be spreading at all and if they hear any, it should be reported immediately. 

And rumors should never form the basis of any recommendations made to a client. 


At no point may records be backdated.

They should always reflect the actual day, for example, when an order to purchase certain securities was put through.

Clients might push securities professionals to backdate trade confirmations as a way to gain tax or other benefits, but it’s always an unethical practice to do so.


When a firm borrows to or lends from a customer, this practice is known as engaging and it can include not only money, but securities as well. 

Securities professionals are allowed to borrow money for securities from a client.

That client, however,  must be either a financial institution that lends funds as their business, a registered broker-dealer, or an affiliate of a professional,

As for loaning money to clients, well if the firm is a broker-dealer or a financial institution that lends funds, then that’s allowed.

It’s possible too if the client is an affiliate of the firm as well. 

Practices that relate only to agents

So far we have covered unethical practices for both broker-dealers and agents but there are some that relate solely to the latter. 

Accounts that are fictitious

It’s prohibited to both establish and maintain accounts that include fictitious information and that are used to carry out transactions.

An example of this would be to make a client’s net worth look far more than what it is so that they are then allowed to take part in the trading of options or margins.

Account sharing

Agents cannot share directly or indirectly in customer accounts, including any profits made or losses incurred without the proper authorization.

This authorization must be a written confirmation from the client that they have given consent to do so.

Written authorization from the broker-dealer that the agent represents is necessary too. 

If the agent has the necessary authorization as described above, then the commingling of their funds with that of the customer is allowed in the joint account. 

Note that broker-dealers, investment advisers and IARs may never share in the account of a customer or any profits or losses that it may generate. 

Commission splitting

Splitting of commissions, profits, or any other type of compensation with other parties not registered as an agent and working for the same broker-dealer under direct or indirect control is not allowed. 

If the conditions are met as set out above and commission splitting does take place, the client doesn’t need to be told about it as long as the transaction cost to them is not increased. 

Unethical or criminal activities

The activities listed below are considered unethical and in some cases, could lead to criminal prosecutions linked to fraud.

Confidentiality of client information

The relationship between an adviser, their representatives, and the client is a confidential one. 

Unless required by law, or if a client gives consent, providing others with information such as identity, financial affairs, or any investments that they hold is prohibited. 

The misuse of inside information 

Should they be privy to any material inside information about a particular security or an issuer, an adviser or their representatives cannot make recommendations to their clients based on this knowledge. 

In fact, as soon as this information is received, it should be reported to either a compliance officer or a supervisor

Regulations determine that using the information contained in a research report generated internally before it’s released to the public is seen as using inside information, also called material nonpublic inside information (MNPI) 

It is a prohibited activity for an insider or control person or their immediate family to trade on the basis of any MNPI that they have.

Chinese wall doctrine

When broker-dealers take part in investment banking and deal with mergers and acquisitions, they are exposed to confidential information that the investing public won’t yet know about.

That’s where the Chinese Wall analogy comes in as a barrier to ensure that this information doesn’t get out to other departments of the broker-dealer that simply don’t need to know about it. 

In essence, the procedures the firm has in place to ensure the information doesn’t leak out is placed under the term Chinese Wall.

In the exam, this is often called an information barrier.

Selling away

This sees a broker-dealer or agent effecting the transactions of securities that have not been recorded on their books or records. 

This isn’t a problem if these transactions have been authorized beforehand but this has to be done in writing. 


Churning is the practice of generating excessive transactions on a client’s account so as to generate extra compensation.

There are lots of factors to take into account when determining if there are excessive transactions on a customer account.

For example, a client who is 80 years old shouldn’t have an account with too many transactions happening rapidly while for someone who is 40 years younger with a different risk profile, that’s probably not a problem. 

Market manipulation

It’s a fraudulent practice to effect any transaction in or induce the sale or purchase of securities using manipulative or fraudulent methods. 

When it comes to market manipulation, the most common types are wash trades as well as matched orders. 

Let’s look at a matched order first. 

Here, an order to buy or sell securities is entered knowing that a matching order on the opposite side of the transaction will occur soon after, or has recently been carried out as well. 

The idea behind this is either to create an appearance that the stock in question is actively trading or to create the appearance that there is a market for that security. 

Ultimately, this can lead to unsuspecting investors purchasing the security which will then bid its price upwards. 

Those who initiated the match orders then sell the securities they hold and make a large profit. 

What’s a wash trade?

Here, there is no change of beneficial ownership when an order to buy or sell securities takes place.

This is carried out for one of the following reasons.

  • To create an appearance that the security is actively traded when this is not the case
  • To create an appearance that there is an active market for the security when there isn’t one

To do this, the security would be bought with one brokerage account but then sold through another and with that, there is no change of ownership.

The market, however, doesn’t know that and it appears that the price and/or volume of the security is going up. 

Don’t confuse this with a wash trade when it comes to tax.

This occurs when a security is sold and then repurchased within 30 days. 

The one way in which market manipulation can be combated is through accurate record keeping when it comes to orders and the subsequent trades related to them. 

Due diligence

There’s a range of alternative investments that have come to the fore over the last couple of decades and regulatory bodies have noted that many investment advisers are recommending them to their clients. 

If they are doing so, and bearing their fiduciary responsibilities in mind, discretion by the adviser or manager means that the following should always be determined beforehand:

  • Will these alternative investments meet the investment objectives of each individual client that they are suggested to?
  • When it comes to the investment principles and strategies disclosed to the adviser by the manager in offering materials provided by them, are they aligned?

Because of the complexity of many alternative investment strategies, ensuring due diligence isn’t easy.

Compliance programs

We move from the various rules and regulations that are imposed on securities professionals to how the compliance of these rules is ensured by regulators. 

Well, those companies working in the field of securities must have written policies and procedures in place to ensure that federal securities laws are not violated. 

It’s no good to write up these policies and forget about them, however.

Regulatory bodies will enforce the fact that these policies and procedures are reviewed on an annual basis and are updated, where necessary. 

This is all carried out by a chief compliance officer (CCO) that each company will have to appoint to be on top of all of this. 

Under the Investment Advisers Acts (and rule 206 (4)-7, in particular), it’s against the law for firms that are SEC-registered to have policies and procedures in place to ensure that the act is not violated by their advisers or their representatives. 

If they do not, they cannot pass on investment advice to their client and are breaking regulations if they do. 

These policies and procedures should always be constructed with the fiduciary obligations of the investment advisers in mind. 

The place to start with this is to identify what creates risk exposure for the firm, and this can be carried out by finding conflicts and identifying various compliance factors. 

Once that’s being achieved, the policies and procedures put in place can look to mitigate those risks.

Adviser reporting

Let’s look at the types of reporting that investment advisers are required to carry out. 

SEC-registered advisers Section 13(f) filings

This requires that a Form 13F must be filed with the SEC within 45 days of the end of each quarter.

It applies to institutional investment managers in control of an equity portfolio that they exercise investment discretion over that have a market value of $100 million or higher in 13(f) securities).

It’s on the last trading day of any of the 12 preceding months that this value is calculated. 

The idea behind this rule is to ensure that periodic public disclosures of substantial portfolio holdings are made by these institutional investment managers. 

Code of ethics: Investment advisers

A code of ethics is something that will need to be prepared to ensure that investment advisers and IARs will carry out their duties in a manner that is ethical and puts the client first.

The code of ethics also applies to state-registered advisers as well according to the NASAA even though it is part of the Investment Advisers Act. 

The CCO of various firms will have the jurisdiction to carry out the code of ethics in their organization.

Each quarter, the access person of each adviser must report to the CCO their personal securities transactions and holdings at which point they should review them. 

This will help to pick up any patterns of trading that could be deemed unethical as well as improper trading that certainly is.

Pay to play rule: Political contributions

Advisers may not receive compensation for providing their advisory services to a government entity as per an SEC regulation when they’ve made a political contribution to a public official or candidate.

These officials or candidates will have to hold a position in which they could award business to the advisory firm. 

This is in effect for a period of two years after the contribution has been made.

There is a de minimis exception, however. 

With this, contributions of up to $350 can be made to officials or election candidates by covered employees (if they can vote in the election of these officials). 

They can make contributions of up to $150 if they cannot vote for an official or candidate. 

Firms may not contribute, however, as this is a violation of regulations.

When we talk about covered associates, this will include:

  • General partners, executive officers, managing members, or any other positions that carry out a similar function
  • Those employees that work for advisory firms and solicit work from government entities 
  • Anybody who supervises the employees mentioned in the point above
  • Any adviser-controlled political action committee

There are exceptions when it comes to newly hired covered associates.

The ban will not be triggered should they have made any political contributions up to a period of six months before starting their job at the firm. 

This exception won’t apply, however, should their role include the solicitation of new clients instead of giving investment advice. 

Should this be the case, a two-year look back period is in effect. 

Lastly, there are exceptions when it comes to returned contributions. 

An exemption from the prohibition for advisers is possible when this occurs but certain conditions have to be met:

  • Within a period of four months following the contribution, the adviser must have found out that because of it, the prohibition is in effect
  • The contributions made cannot be higher than $350
  • Within 60 days of the date of discovery by the investment adviser, the contributor must get the contribution returned

Cybersecurity, privacy, and protecting data

Advisor firms have lots of sensitive data that they keep about their clients. 

To protect against potential loss to both the firm and its clients, there are steps that need to be put in place.


Let’s start by looking at cybersecurity and what the NASAA suggest in this regard after they ran an extensive survey on the subject in 2014.

  • Preparedness is key. The firm must look at cybersecurity and determine the types of vulnerabilities and threats that can have a massive impact on its business.
  • A compliance program should be established. Client information must be safeguarded by having the proper policies and procedures in place.
  • Written policies and procedures need to be established for the use of social media for business purposes.
  • Does the firm have cyber insurance cover to protect them should something go wrong?
  • Do you have the right people in place handling cybersecurity? If they are not employed by the company, do you hire outside consultants to help?
  • Confidentiality is crucial, especially when third party service providers are involved. There must be confidentiality agreements in place with them. 
  • Has there ever been a cybersecurity incident at the firm? Has the firm taken the steps to ensure a similar incident cannot happen again?
  • When it comes to disposing of electronic data storage, is there a procedure in place to ensure that this is carried out in a secure way?  
  • Are plans and procedures in place to ensure the firm can continue to operate during a cyber event?
  • Should a laptop or storage device be stolen, does the firm have plans in place to deal with an incident such as this?
  • What safeguards does the firm have in place when it comes to anti-virus software, encryption, or anti-malware programs

Client information and the safeguarding thereof

There’s no denying that when it comes to having information about their clients, there are lots that securities professionals know about them that’s confidential and therefore critical to keep safe from those with nefarious intentions.

The one key thing to keep in mind is identity theft, or something acting as if they are the client and trying to make requests for funds, for example. 

Securities professionals should always be aware of the many red flags that are part of an identity theft scheme. 

For regulators, the main concern comes in when dealing with covered accounts. 

These are:

  • Accounts maintained by firms that allow multiple payments by design and are for personal, family, or household use. 
  • Other accounts maintained by firms where there is the risk of identity theft as well as financial, reputational, compliance, and litigation risks. They can be customer accounts or those of other financial institutions.

When advisers have the power to direct funds, payments, or direct transfers from an individual’s account to others, for example, a third-party, the necessary programs must be in place to ensure they can verify the identity of those making the request. 

When maintaining covered accounts, regulations state that a written program must be implemented.

This will help to detect attempts at identity theft and prevent them. 

The policies that form part of these programs must include procedures and policies that:

  • Notice potential red flags when it comes to covered accounts
  • Ensure that there is a course of action that is followed to deal with them when they are detected to stop attempts at identity theft
  • Are kept up to date to reflect on the risk to customers and to ensure their safety against identity theft. 

 Ways to protect customers and the firm

There are numerous systems that can be put in place to ensure both the firm and customers are protected when it comes to identity theft.

Here’s some methods that can be used:

  • ID/passwords or other types of single factor authentication
  • Dual-factor authentication such as key fobs
  • Adaptive-factor authentication which includes challenge questions
  • Biometric authentication like a fingerprint scan
  • Ensuring antivirus software is installed

The following should also be considered:

  • Is antivirus software updated regularly?
  • Are files and devices encrypted?
  • Are sensitive electronic files and information backed up online or remotely?
  • Is a virtual private network (VPN) in place to offer an extra layer of security?
  • Is personal client information stored on free clouds, for example, Google Drive or Dropbox?
  • Can client information be accessed through the firm’s website?
  • Is there a client portal on the firm’s website?

Regulation S-P and privacy

Regulation S-P also deals with identity theft and requires firms to take the necessary measures to keep their client information secure by way of effective privacy policies and procedures. 

When an account is opened by a new customer, they must receive an initial privacy notice from the firm. 

All customers of the firm should always receive a privacy notice annually as well over and above those sent to new customers. 

Unless a customer doesn’t want their information passed on, Regulation S-P does allow firms to share the information they have with trusted third parties, where necessary. 

This is only nonpublic personal information and examples of this include social security numbers, account balances, the transaction history on accounts, and others. 

Should they wish to opt-out, a customer has 30 days to do so. 

Note that when it comes to consumers and customers, there is a difference according to Regulation S-P. 

A customer has an ongoing relationship with a firm, while a consumer is someone who obtains a service or a financial product from them but then, doesn’t have any more contact. 

In terms of the privacy notice, both will receive the initial notice while a customer will then get a new issue of that notice each annum.

Regulation S-P does not cover businesses or institutions, but only individuals. 

In terms of keeping customer information confidential, it’s a Regulation S-P requirement that policies and procedures are adopted by the firm to do so. 

For example, if customer information is to be accessed remotely by employees, there must be appropriate measures in place to ensure that this is done in a secure manner. 

Succession plans and business continuity

NASAA has a model rule in place that governs state-registered advisers and their business continuity plans. 

It’s very similar to Rule 4370 for FINRA member broker-dealers.

This rule determines that all advisers should draw up and put in place a Business Continuity and Succession Plan (BCP). 

The plan will be determined by various factors relating to the firm, like its size, what services it offers and where the firm has business locations. 

The following should be provided for by the plan:

  • Systems are put in place that protect, backup books and records and can recover them, should that be necessary
  • That there are alternate ways in which the firm can communicate with various stakeholders 
  • The relocation of offices should there be a temporary or permanent loss of the firm’s principal place of business
  • Following the death of key personnel, ensuring that their duties can be reassigned to other qualified staff members until they are replaced
  • Ensure that service interruptions are minimal should there be a significant interruption to the business

BCP purpose

The main aim of having a BCP in place is to ensure that in the event of a disaster of some kind, the critical business functions of the firm can continue without too much impact.

BCPs are intended to deal with any manner of problems, from natural disasters to utility outages or terrorist attacks. 

They should cover any events that can cause a significant disruption to the day to day running of a company. 

Another aspect that a BCP should include is that of a succession plan because this forms part of the fiduciary duty of an adviser to their client. 

Not having a succession plan in place can be disastrous not only for the firm, but for its clients as well. 

In conclusion

Remember, this study guide is just that, a guide.

It should be used in conjunction with the course notes for the Series 65 exam and never as a replacement for them. 

Good luck!

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