Series 63 What

In addition to the information required in all registration statements mentioned earlier, the registration statement filed under registration by coordination must contain:

3 copies of the latest prospectus filed with the SEC If required by the Administrator, copies of any other documents filed with the SEC under the Securities Act of 1933 A statement that the issuer agrees to provide the Administrator with any amendments to the prospectus within one business day If required by the Administrator, a copy of the articles of incorporation and bylaws, a copy of any underwriting agreement, a copy of the security being offered and, if applicable, a copy of any trust indenture While it is necessary to meet more preliminary conditions to register by filing, registration by coordination is more rigorous and requires more documentation with the State Administrator.

Broker vs. Dealer Conflict of Interest

A broker-dealer that acts in a broker capacity is acting as a middleman by matching its client with a buyer or seller on the other side of the trade and is paid a commission for the transaction. The firm is being paid to represent the client and look after the client's best interests. This is also referred to as acting in an agency capacity. When a broker-dealer acts in a dealer or principal capacity, it is buying or selling stock for its own account. They must still treat their clients fairly in such trades and charge reasonable markups or markdowns, but they are not representing the client's interest in the same way they do when simply acting as a broker. It would be a conflict of interest for a broker-dealer to act in both a broker and dealer capacity in the same trade. Providing disclosure, in this case, is not enough. A broker-dealer may NOT act as both a broker (earning a commission) and a dealer (earning a markup) in the same transaction.

Consent to Service of Process

A consent to service of process appoints the State Administrator as the representative to be served legal papers on behalf of the registrant.

Issuer Agent

A person who represents an issuer in transactions of certain exempt securities is excluded from the definition of an agent. These exempt securities, which are not required to be registered in the state, include: US gov't and municipals. Canadian gov't and municipals. Other recognized gov't securities. Bank/trust/savings institution issues. Investment grade promissory notes and BA's. Investment contracts issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan A person who represents an issuer in an exempt transaction, though called an issuer agent, is excluded from the definition of an agent under the USA. Exempt transactions usually do not involve the public and include: They're all private placement, institutional transactions, transactions between underwriters and issuers. A person who represents an issuer in transactions with employees of that issuer involving that issuer's securities, though called an issuer agent, is not an agent, and is excluded from the definition of an agent under the USA if that person receives no commissions or compensation specific to those transactions. This would include sales to partners of the issuer or members of its board of directors. Issuer agent exclusions: Persons representing an issuer in transactions of certain exempt securities Persons representing an issuer in exempt transactions Persons representing an issuer in transactions with employees of the issuer in that issuer's securities when no compensation is received for those transactions

Revocable v Irrevocable Trusts

A revocable trust will allow the grantor to retain control over the assets in the trust and change beneficiaries; an irrevocable trust is one in which the terms cannot be changed, and the grantor gives up control of the assets once the trust is created.

An arrangement whereby a broker-dealer provides certain free services to an investment adviser with the expectation that the investment adviser will direct trades to the broker-dealer for execution is called:

A soft dollar arrangement Since these permissible arrangements present a potential conflict of interest, investment advisers must regularly review their soft dollar arrangements.

Arbitrage

A wash trade involves the simultaneous purchase and sale of the same security by the same person, with the intention of giving the appearance of active trading without an actual change in beneficial ownership. This is not the same as arbitrage, which is the simultaneous buying and selling of a security at 2 different prices in 2 different markets, resulting in profits without risk. Arbitrage is an acceptable trading activity.

Wrap Account Brochure

ADV Part2A - Appendix 1 Same delivery requirement as traditional account Material changes filed immediately Amendments provided to investors Nonmaterial changes filed within 90 days of fiscal year end

exculpatory provisions

Advisory contracts may not contain clauses "forgiving" the adviser or its IARs for violations of the USA or any other securities law. These clauses, sometimes called "exculpatory provisions" or "hedge clauses," are considered invalid.

blanket authorization

Agency cross transactions create a potential conflict of interest since the adviser is acting as the broker for both sides of the trade. This requires the adviser to disclose the conflict to advisory clients prior to the trade and to obtain their permission for each trade. However, the IA may obtain a blanket authorization to execute agency crosses for clients without notifying the client prior to each trade, if the authorization meets certain conditions.

Agency Cross Transaction vs Principal Transaction

Agency-Cross Transaction: Client-to-client; may use blanket authorization Principal Transaction: IA-to-client: may not use blanket authorization. Exempt if based on publicly distributed written material.

Broker-Dealer Exclusions

Agents Depository institutions (banks, savings, institutions, trust companies) Issuers Institutional Exclusion - Firms that trade with institutional investors AND have NO place of business in the state. Snowbird Exclusion - Firms contacting existing customers while vacationing in another state.

Agents and IARs may not share directly or indirectly in profits and losses in client accounts without

Agents and IARs may not share directly or indirectly in profits and losses in client accounts without prior written agreement between the client and the agent or IAR and approval of the employing firm. FINRA guidelines state that any sharing must be proportionate to contributions to the account. The USA doesn't address proportionate sharing, only that the sharing must be approved. Under no circumstances may an agent, IAR, or firm share in client losses as a way of guaranteeing the client against a loss, nor may clients be guaranteed a profit on any transaction. Key Concepts Under the USA, a proportionate sharing arrangement is not needed. The agent and the investor do not have to share gains and losses in proportion to their contribution. The proportionate sharing arrangement is under FINRA regulation.

When can agents divide or split commissions/other compensations for security transactions?

Agents may not divide or split commissions or other compensation for securities transactions with anyone who is not also an agent of the same broker-dealer or an affiliated broker-dealer, and both representatives must be registered in the state. Some additional points to remember about commissions include: If a broker-dealer is charging higher-than-normal commissions, this must be disclosed to clients. If a broker-dealer or agent is receiving other compensation relating to client transactions, this must be disclosed. For example, if an agent is investing client funds in a portfolio of insurance products, securities, and real estate, and is receiving real estate and insurance commissions in addition to the securities commissions, this must be disclosed. Discounting commissions and/or waiving fees is acceptable, except in cases where a fixed sales charge applies, such as for mutual funds. Fees and commissions are subject to market conditions.

Notice Filing

Although states may not require the issuer of a federal covered security to register those securities under blue-sky laws, any federal covered security that is registered with the SEC is subject to a "notice filing" requirement. The state may require the issuer to file with the Administrator any documents being filed with the SEC, along with a statement of the value of the securities to be sold in that state. The state may also charge a notice filing fee based on the value of the securities to be sold in the state. Exempt securities, exempt transactions, and federal covered securities are not subject to the advertising filing requirements of the USA.

A qualified custodian is any of the following:

An FDIC insured financial institution A registered broker-dealer who holds client assets A registered futures commission merchant who holds client assets A foreign financial institution holding assets for clients Inadvertent custody of client funds or securities could cause the adviser to be in violation of custody rules if not handled properly. Inadvertent custody occurs if an adviser mistakenly receives a client's funds or securities or if a third-party check is mistakenly accepted. In both instances, the adviser has 3 business days to either return the funds to the client or forward the check to the third-party. If the adviser follows these guidelines, they will NOT have been deemed to have taken custody.

Agent

An agent is an individual who represents a broker-dealer, or an issuer, attempting to effect or effecting securities transactions

How can an agent trade unregistered, non-exempt securities?

An agent may not solicit the purchase of an unregistered, non-exempt security. Agents may execute trades in these securities for either institutions or retail customers, provided the trade is the customer's idea (done on an unsolicited basis). The unsolicited nature of the trade makes it an exempt transaction.

selling away

An agent representing a broker-dealer in a security transaction may not sell investments the broker-dealer does not offer, without disclosing this transaction to the firm. This practice is known as selling away and can lead to disciplinary action not only by the Administrator, but by the broker-dealer as well. Agents may not even realize they are involved in selling away. They may believe an outside business venture in which they are participating does not involve securities transactions, when, in fact, it might be an unregistered securities transaction. For this reason, agents should inform their broker-dealers of their involvement in any outside business activity, not just to follow the rules, but also to protect themselves.

Investment advisers are generally prohibited from being compensated based on capital gains or capital appreciation in a customer's account, which is often referred to as performance-based compensation. An exception to this prohibition applies if the customer meets certain financial requirements. What are they?

An exception to this prohibition applies if the customer meets certain financial requirements. Exceptions to this prohibition apply in the case of fulcrum fees and in dealings with customers who meet certain financial requirements. Investment advisers may charge performance-based fees to qualified clients. A qualified client is defined as a customer with a net worth of at least $2.2 million (not including the customer's primary residence) or $1.1 million under the adviser's management. The NASAA also requires certain disclosures in writing to clients that are charged performance fees before any advice is rendered. The adviser must disclose that this fee arrangement may cause the adviser to make riskier investments, that payment is made on unrealized appreciation and how that is calculated, the time frames used to measure performance, and any indexes used in comparison for performance measurements. Key Concepts Though investment advisers are generally prohibited from charging fees based on capital appreciation in the account, it is an acceptable practice for compensation to be based on the total value of the account, averaged over a specified period or as of a definite date.

Canadian Broker-Dealer State Registration Exemption

An exemption from registration as a broker-dealer applies to Canadian firms doing business with existing retail customers who are temporarily in the U.S. An exemption from registration also exists for firms who only effect transactions in Canadian self-directed tax advantage retirement accounts for persons residing in a state. The agents of the Canadian broker-dealer are also exempt from registration. However, the firm must be registered as a broker-dealer in Canada and cannot have a place of business in the state. The firm is subject to the anti-fraud provisions of the USA. The firm must sign a consent to service of process and is required to disclose to all U.S. clients that it has a limited registration in the state and is not subject to the full regulatory provisions of the USA. Canadian broker-dealers and their agents may not solicit new clients in a state under this exemption. If soliciting new clients, the registration process outlined must be followed.

For investment advisers, under the USA and SEC marketing rules, an advertisement is deemed to be:

Any communication that goes to more than 1 person and offers new or additional services Advertising by investment advisers must meet the standards set out in the rules under the Uniform Securities Act which also encompass the SEC's marketing rules for investment advisers. Within the USA an advertisement is defined as any communication that goes to more than 1 person and offers new or additional services.

The application must contain the information required for a uniform application to be filed with the Administrator. Any information that is not included in the uniform application may be required by the Administrator, including the following:

Applicant's form and place of business Applicant's qualifications and business history; in the case of a broker-dealer or investment adviser, the same information for each partner, officer, director, or controlling person Applicant's proposed methods of conducting business Applicant's financial condition Administrative orders and court injunctions Misdemeanor convictions relating to the securities or commodities business or any felony conviction If an investment adviser, any information concerning the investment adviser to be furnished to prospects and customers (Brochure Rule) Any other information that the Administrator determines is material to the application The Administrator may require an applicant for initial registration to publish an announcement of the application in one or more newspapers published in the state.

Agency vs Principal Capacity

Broker-Dealers The USA defines a broker-dealer as a person, or firm, engaged in the business of buying or selling securities for the accounts of others or for its own account. A firm that is in the business of effecting transactions for the accounts of others is acting in an agency capacity as a broker and charges a commission. A firm that is in the business of effecting transactions for its own account may be referred to as a market maker and acts in a principal capacity as a dealer. It will be referred to as either dealer or principal capacity on tests, interchangeable terms.

Canadian Broker-Dealer and Agent: State Registration Details

Canadian broker-dealers and agents effecting transactions in a specific state who are not exempt may register with the state by filing an application and consent to service of process with the Administrator and must be registered in good standing in the jurisdiction of the head office. A broker-dealer must be a member of a self-regulatory organization in Canada. Registration becomes effective on the 30th day after an application is filed and must be renewed annually by December 31st to continue doing business in a state. Upon registration, Canadian broker-dealers and agents must: Maintain provincial or territorial registration in good standing Broker-dealers must maintain membership in an SRO in good standing and provide the Administrator, upon request, with books and records relating to business in the state Inform the Administrator of any criminal action taken as a result of regulatory action involving fraud, theft, deceit, or misrepresentation

Certificates of deposit for a security, voting trust certificates, collateral trust certificates, or unit investment trusts refer to the issuer as

Certificates of deposit for a security, voting trust certificates, collateral trust certificates, or unit investment trusts refer to the issuer as the manager or depositor. An issuer transaction occurs when the issuer sells or redeems securities for its own benefit and receives the proceeds. Issuer transactions are primary market transactions.

Consent to service of process

Consent to service of process is a consent form that must be signed and submitted when a person registers with the Administrator. The registrant must agree to appoint the State Administrator as their representative to be served legal papers on behalf of the registrant. Service to the Administrator constitutes service to the registrant. The papers can be served to the Administrator if the registrant cannot be located. This process prevents the delay of the start of legal proceedings under the USA due to a registrant avoiding receipt of a summons or subpoena. The Administrator may be served any complaints, petitions, or orders involving any noncriminal proceeding against that person. The consent is irrevocable and does not need to be renewed. It remains effective as long as the person is registered.

IAs may take custody of client securities or funds if

Custody means having responsibility or control of another person's assets. Under the USA advisory firms are considered to have custody when they are in possession of client funds or securities. IAs may take custody of client securities or funds unless the Administrator specifically prohibits it. They must promptly notify the Administrator at the point they begin taking custody of any assets. They must also meet the minimum financial requirements. Investment advisers who have custody of client assets must maintain a minimum net worth of $35,000. If the adviser does have custody of client funds and/or securities, it must segregate those assets and may not commingle (mix) them with its own assets. Advisers may open an omnibus account in their name to hold all customer funds and securities in 1 account. Customer assets must be held by a qualified custodian. The customer must be given written notice of the name of the qualified custodian and the location of the account. Quarterly statements revealing the account status and transactions must be provided to each customer. Key Concepts Customer funds and securities may NOT be commingled with those of the adviser or adviser representative. Customer funds and securities MAY be commingled with those of other customers in an omnibus account.

Agents

Definition The term agent is used to describe an individual who represents or acts on behalf of someone else. Under the USA, any individual who represents a broker-dealer or an issuer when buying or selling securities is referred to as an agent. An agent's compensation may be based on salary or commission. Individuals who fit this definition must be registered in each state where they do business or be exempt from registration in that state. Key Concept A broker-dealer agent is often referred to as a registered representative or a securities salesperson. The NASAA and USA use the term agent when referring to a registered representative. Agent Exclusions An individual that does not meet the definition of an agent is excluded and does not have to be registered with the state.

Escrow

Escrow Under the USA, issuers using the registration methods of coordination or qualification may be required to hold the proceeds of the offering in escrow until certain minimums are obtained. This prevents the issuer from simply taking the money from investors if the offering requirements are not met. Proceeds held in escrow would be returned to investors if the offering is cancelled before completion. Key Concept An escrow account is an account managed by a third party where specific funds are held and only disbursed when certain conditions are met.

Exclusions to the Definition of an Investment Adviser

Even though these persons may be in the business of giving advice about securities for compensation, they are specifically not included in the definition of an investment adviser and, therefore, not required to be registered as an investment adviser: Investment advisers representatives - Individuals representing or employed by the firm are registered as investment adviser representatives; the employing firm itself is registered as an investment adviser. Lawyers, accountants, teachers, engineers (LATE) - This is sometimes known as the "professional exclusion," but it only applies to these four occupations. Broker-dealers and their agents - As with the previous exclusion, the advice must be incidental to the broker-dealer's normal activities. Broker-dealers and their agents - As with the previous exclusion, the advice must be incidental to the broker-dealer's normal activities. Publishers of bona fide generally circulated newspapers, news columns, newsletters, magazines or other business or financial publications—whether communicated in print or electronic media. Federal covered investment advisers

Investment Adviser Exclusions vs Exemptions

Exclusions: Investment adviser reps Lawyers, accountants, teachers, engineers (advice must be incidental) Broker-dealers (advice must be incidental) Depository institutions Publishers Federal covered advisers Exemptions: De minimis exemptions (5 or fewer in 12 months, also stated as less than 6) Institutional exemption - (no office in the state that deal solely with institution clients)

Key Exemptions

Exempt Security: Gov't securities, financial institution securities, commercial paper, exchange listed securities. Exempt Transaction: Isolated non-issuer transactions, unsolicited broker-dealer transactions, fiduciary transactions, institutional investor transactions. A security is exempt based on what type of entity it represents. A transaction is exempt based on how the transaction is processed.

What requirements are exempt securities not subject to?

Exempt securities are not subject to either the registration or advertising filing requirements contained within the USA. All securities, exempt or not, are subject to the antifraud provisions found within the Act.

the following are all exempt transactions

Exempt transactions include institutional investor transactions (such as sales to an investment company, unsolicited sales transactions, and fiduciary transactions, such as those of a guardian). Securities sold in exempt transactions are not subject to USA registration requirements. Federal covered securities are exempt securities, not an exempt transaction. A security is exempt based on what type of entity it represents, while a transaction is exempt based on how the transaction is processed.

What are NOT securities?

Fixed insurance company products are NOT securities. Precious metals, currencies, collectibles, and retirement plans are not defined as securities. Commodity futures contracts are not securities as they are an agreement to deliver a commodity (such as wheat, corn, crude oil, lumber, gold, sugar, or natural gas) at a specified future date and at an agreed upon price.

XYZ Industries has filed a registration statement with State A to offer $6,000,000 of equity securities. According to the Uniform Securities Act, this registration remains in effect:

For 1 year after the effective date According to the Uniform Securities Act, once a registration statement for securities is effective, it remains so for 1 year after the effective date. The Administrator may require the issuer to keep the registration statement up-to-date, as well as file reports about the progress of the offering. If there are securities remaining unsold after the 1-year period elapses, the issuer may apply to the Administrator for an extension, which may or may not be granted.

For a security to be federally covered it must be

For a security to be federal covered, it must be listed on the Nasdaq or a national or regional exchange that is registered with the SEC.

Brochure Rule

Form ADV Part 2 or Equivalent Part 2A: Information about the investment adviser firm Part 2B- Information regarding IARs, such as education, business history, disciplinary history, outside business activities, and compensation.

memoranda

IA order tickets may also be called order memoranda. The information on IA order tickets is different from broker-dealer order tickets. IAs submit trades to broker-dealers. It is the broker-dealer's responsibility to record execution time and price. The customer's name is not on an IA order ticket, the IA account information is. IA order tickets must have the following information: Buy or sell Account designation (name or account number) Date of order entry Ticker symbol for the security Size of order Type of order, price if a limit order, and life of order Name of person connected with the IA making the recommendation Name of person placing the order Name of executing broker-dealer Discretionary or nondiscretionary Investment advisers who have branches or other locations in several states only need to comply with the recordkeeping requirements applicable to the state in which they have their principal office.

Surety Bond

If a broker-dealer has custody or discretionary authority over client accounts, the Administrator will require the firm to post a surety bond that guarantees the protection of customer assets. In lieu of a bond, the Administrator must accept an appropriate deposit of cash or securities.

Price/Time Exception

If the client specifies whether the order is a buy or a sell, the security to be bought or sold, and the amount of the security to be bought or sold, the client may verbally authorize the firm or representative to choose the price at which the order is executed and/or the time of execution. With these types of orders, the firm or representative does not need written discretionary authority. However, this order is only good for the business day the customer made the verbal request.

Under what circumstances may an investment adviser share in the profits of an account subject to an investment advisory contract?

If the contract specifies that the compensation is based upon the total value of the account averaged and assessed annually A contract that specifies that the investment adviser's compensation be based on the total value of the account averaged over a specified period or as of a definite date is not prohibited.

In addition to the general registration requirements, which include a filing fee and consent to service of process, the registration statement under this method must include:

In addition to the general registration requirements, which include a filing fee and consent to service of process, the registration statement under this method must include: A statement demonstrating the issuer's eligibility The name, address, and form of business A description of the security being offered A copy of the offering circular and prospectus filed with the SEC

When working for a BD, the only time an individual doesn't need to register as an agent is when

In general, sales people that represent broker-dealers must register as agents. An agent cannot register in a state without first being employed by a broker-dealer. The following persons representing broker-dealers would not need to register: An employee, partner, officer or director of a broker-dealer if that person does not attempt to offer or sell securities or supervise these activities, however these persons must be registered as agents if they do offer or attempt to offer securities or supervise these activities (not working in a sales capacity) Individuals who perform clerical or ministerial functions only (not working in a sales capacity) Individuals who represent exempt broker-dealers, such as Canadian broker-dealers (works for an exempt broker-dealer) Key Concept When working for a BD, the only time an individual is not required to register is when they are not working in a sales capacity or when they are an agent of an exempt BD. Unregistered employees of registered BDs may not accept any customer orders, open customer accounts, or service customer accounts. An example of an agent of an exempt BD, is an agent that is employed by an exempt Canadian BD.

In most states, the Administrator will require an investment adviser who has discretionary authority over, or custody of, customer assets must

In most states, the Administrator will require an investment adviser who has discretionary authority over, or custody of, customer assets to be bonded. IAs who have discretionary authority but not custody must maintain a net worth of not less than $10,000 and must submit a balance sheet to the Administrator. There is no requirement that the balance sheet be audited, unless the IA holds custody of customer assets.

principal transactions

Investment advisers should be buying and selling the same securities for their own accounts as they do for their customers. However, due to individual's having different suitability requirements and risk tolerances, it may sometimes be appropriate for an investment adviser to sell securities to a customer from its own account or buy securities from a customer for its own account. These are principal transactions since the IA is on one side of the trade with the customer on the other side of the trade and they are occurring directly in the IA's account. Like agency cross transactions, principal transactions involve a conflict of interest. The conflict is more serious in a principal transaction than in an agency cross, so blanket authorizations to do such trades are not permitted. The adviser or IAR must obtain written authorization for each trade prior to completing the transaction. There is an exemption to this requirement if the transaction is based on publicly distributed written material.

Other Conflicts of Interest There are several other items that are viewed as potential conflicts of interest that must be disclosed to clients. Some examples are:

Investment companies providing incentives or rewards to agents for selling their products Broker-dealers publishing favorable research reports after being involved in that security's underwriting Securities professionals having a financial interest in any security being recommended Offering products of affiliated broker-dealers or investment companies

Investment counsel

Investment counsel is a title that is used by firms and individuals. The use of the title is permitted in circumstances where acting as an adviser is the main part of their business. Regulations further state that the adviser using the title must have a large part of their business consisting of supervisory services. Supervisory services are services providing continuous advice regarding a client's investments based on the client's needs. If these conditions are met, the adviser may use the title investment counsel in their advertising, correspondence, and business cards. The use of the initials RIA for registered investment adviser and IAR for investment adviser representative is strictly prohibited and may not be used in any client communications.

An IA embeds a link to a third-party BD within its own website to showcase the BDs execution services for transactions the IA might recommend to its clients. The IA fully discloses in a prominently placed disclaimer that the third-party website does not reflect the views of the IA and that the IA has not reviewed the content in the link for completeness or accuracy. In such a scenario the third-party website:

Is not deemed to be a communication of the IA and is not subject to mandatory monitoring given the disclosure made Firms that have not been involved in entanglement or adoption must provide a disclaimer in a prominent manner stating that the third-party website does not reflect the views of the firm and has not been reviewed for completeness or accuracy. In these cases, the third-party communications are not deemed to be communications of the firm and are not subject to mandatory monitoring by the firm.

Securities sold in the following types of transactions are exempt from registration under the Uniform Securities Act:

Isolated non-issuer transactions - A non-issuer transaction is one that does not involve the issuer. While the USA does not define what "isolated" means, more than one or two transactions per year by the same broker-dealer is too many to qualify for this exemption. These usually do not involve broker-dealers or their agents and are usually meant to cover one-on-one transactions between individual investors in the secondary market. Unsolicited, non-issuer transaction effected by, or through, a broker-dealer - The Administrator may require that the customer acknowledge in writing that the order was unsolicited. Transactions between an issuer and its underwriters or transactions between underwriters Transactions by certain fiduciaries - Included in this group are transactions by executors, administrators (of estates), sheriffs, marshals, receivers, trustees in bankruptcy, guardians, and conservators. Transactions by a bona fide pledgee, if the transaction is not intended to avoid the USA - An example might include a bank selling stock that was pledged as collateral for a loan that is now in default. Offers or sales to institutional investors - Institutional investors include banks, savings institutions, trust companies, insurance companies, registered investment companies, pension plans, and other financial institutions. Offers or Sales of preorganization certificates - The conditions for this exemption include no commissions and 10 or fewer subscribers. Transactions with existing securities holders involving convertible securities or warrants Offers (but not sales) of securities for which a registration statement has been filed but is not yet effective - This permits prospecting of potential purchasers by obtaining indications of interest during the cooling-off period for a new issue. Private placements - The USA includes in this category transactions resulting from offers to 10 or fewer persons (other than institutional investors) during any 12-month period. The seller must believe that the purchasers are buying for investment only, there can be no solicitation or advertising used, and there must be no commissions paid, directly or indirectly. Key Concept An unsolicited order is any order directed to the firm or agent by the customer

At, or prior to, the time that a client's investment account is opened, the firm must disclose orally, and in writing, that the securities recommended, purchased, or sold in a transaction with investment firm are:

NOT insured by the Federal Deposit Insurance Corporation (FDIC) NOT deposits or other obligations of the financial institution and are not guaranteed by the financial institution Subject to investment risks, including possible loss of principal invested, and MAY lose value Key Concepts This disclosure is the Interagency Statement and is sometimes simply referred to as: NOT, NOT, MAY

ABC common stock trades on the NYSE and is considered a federal covered security. Which of the following securities issued by ABC are also federal covered according to NSMIA?

NSMIA (the National Securities Markets Improvement Act) eliminates the dual regulation of securities. The Act states that federal covered securities have a "federally imposed exemption from state registration" and do not have to register with the states. Securities listed on the NYSE, NYSE American, and Nasdaq are considered federal covered. In addition, similar securities as the listed securities (such as warrants) and securities senior to the listed securities are also considered federal covered. Senior securities include any type of preferred stock and any bond issued by the same corporation as the listed securities. Therefore, all the choices (subordinated debenture, mortgage bond, preferred stock, common stock) are considered federal covered securities.

Performance information is allowed under the following conditions

Net performance is included with any advertised gross performance Specific time periods involved are provided Results include all portfolios with similar investment policies, objectives, and strategies Performance of subsets of the portfolio must also include performance of the entire portfolio Hypothetical performance may only be included if the adviser has adopted and implemented policies to ensure the performance is relevant based to the intended audience

The following instruments are NOT securities and are excluded from the definition under the USA:

Nonvariable life insurance policies, endowment policies, or fixed annuities where the insurance company promises to pay a fixed sum of money either in a lump sum or periodically for life or a specified period Commodity futures contracts Currencies Precious metals Antiques/collectibles Ownership interests in credit unions Real estate for personal residence Bank certificates of deposits, checking and savings accounts, and money orders Retirement plans, including pension plans, IRAs, and Keogh (HR-10) plans. However, the underlying investments within these plans may be securities Key Concepts Options on currency and futures contracts are securities. Currencies and commodity futures contracts are not securities. Key Concept Variable insurance products with separate accounts indicate the product is a security. Assume insurance products are excluded from the definition in all other cases.

back away

Offers at Stated Prices When a broker-dealer gives a quote to buy or sell a security, they are expected to honor their quote at its stated price, and for the stated amount of securities. If the broker-dealer is placing conditions on its quote, these must be clearly expressed with the quote. They cannot back away from a stated offer.

non-issuer distribution

Often registration by filing is used for a non-issuer distribution. This means the proceeds of the sale do not benefit the issuer and the distribution is for the benefit of someone else, such as an officer or insider of the issuer. If an officer of a company who personally owns a large block of stock wishes to sell the shares to the public, the securities may have to be registered, similar to the company selling an additional offering. If the security qualifies for registration by filing, the registration statement must include the name and address of the person(s) selling the securities, the amount of issuer's securities held by the person(s) as of the date of filing of the registration statement, and a statement of the reasons for making the offering.

Order Tickets

Order Tickets Order tickets are used to record trade requests for broker-dealer customers. Order tickets can either be in paper or electronic form, must be retained for 3 years, and contains the following: Buy or sell Account number Type of account Ticker symbol for the security Number of shares Type of order Solicited or unsolicited Discretionary or not discretionary A customer's name is not recorded on the order ticket

the following items cannot be purchased with soft dollars:

Overhead expenses of the adviser including office space, computers, furniture, and clerical assistance Compensation to broker-dealers for referring business to the adviser Training of new broker-dealer personnel Trades that involve soft-dollar arrangements raise suitability concerns. Therefore, the adviser must regularly review each soft-dollar arrangement.

ADV Initial Delivery

Paper or electronic delivery: 48 hours prior to contact, or At time of contract if termination within 5 business days is permitted. Firm must offer to deliver updated brochure annually.

Definition of Person Under the USA

Person All references to "person(s)" in the USA indicate a legal entity. Therefore, a person is one who has legal standing to sue or be sued, and includes individuals, or natural persons, as well as legal entities such as: Partnerships Corporations Associations Business trusts and trusts in which the interests of the beneficiaries are evidenced by securities Unincorporated organizations Investment clubs Federal, state, or local government bodies, political subdivisions, or agencies A joint stock company or joint venture Any other legal or commercial entity Estates Under the USA, the following are NOT defined as persons: Minors Mentally incompetent Deceased

Examples of products or services that might qualify for purchase with soft dollars include:

Publications or services that provide information about the value of securities or the advisability of investing in them Analyses or reports concerning issuers, industries, securities, economic factors and trends, portfolio strategies, and the performance of accounts Electronic services that provide market data to an adviser's analysts Computer software that assists in the investment decision-making process

There are certain conflicts of interest that regulators have deemed to be fraudulent and have prohibited IAs from engaging in the behaviors all together. In these cases, disclosure of the conflict is insufficient, and the actions may not occur under any circumstances. Those actions include:

Recommending unregistered, non-exempt securities Recommending an unregistered broker-dealer to handle transactions Activities that would defraud or deceive clients Charging unreasonable fees Failing to disclose available discounts Using hedge clauses (exculpatory provisions) in contracts Trying to limit client options of civil remedies or arbitration

Registration by Qualification

Registration by Qualification is a more complex procedure for registering a new issue. This method can be used to register any security in any state; however, it is usually used only when the issue is not eligible for notice or coordination filing. Qualification must be used for securities that will not register with the SEC, but are required to register with the state, or for a security which is registered in only one state (intrastate security). Registration statement filed with the state only Any issuer may use this method Used by issuers who do not meet prerequisites to use notification or coordination Commonly used for intrastate registration Key Concept A security that is not registered, or is being registered, federally with the SEC would need to be registered with the state (if required to register with the state) by using qualification. Most detailed disclosure of the three registration options

Notification (Filing)

Registration statement filed with SEC Notify the state Used by large, established companies In business 3 consecutive years Often used for non-issuer distributions Effective date-Same time as federal registration if statement has been on file with the admin for 5 days. The easiest and least costly form of state registration and is only permitted by qualified issuers who have filed a registration statement with the SEC as required under the Securities Act of 1933

Registration by coordination

Registration statement filed with SEC and the state Used by issuers who do not meet the prerequisites for notification. If stop order is issued, the burden of proof lies on the Administrator. Effective date - Same time as federal registration if statement has been on file with the administrator for 10 days.

Advertisements may not

Represent that any graph, chart, formula, or other service being offered can, by itself, be used to determine which securities to buy or sell or when to buy or sell them State or imply that any report, analysis, or other service will be provided for free or without charge, unless the report, analysis, or other service actually is, or will be, provided entirely free and without any condition or obligation Contain any untrue statement of material fact, or be false or misleading in any way

Advertisements may not:

Represent that any graph, chart, formula, or other service being offered can, by itself, be used to determine which securities to buy or sell or when to buy or sell them State or imply that any report, analysis, or other service will be provided for free or without charge, unless the report, analysis, or other service actually is, or will be, provided entirely free and without any condition or obligation Contain any untrue statement of material fact, or be false or misleading in any way

Federal covered securities are exempt from the registration requirements of the USA and include:

Securities listed, or authorized for listing, on the New York Stock Exchange (NYSE), the NYSE MKT, NASDAQ, or any other national securities exchange with similar listing standards as determined by the Commission Securities of the same issuer that are equal in seniority or that are senior securities, or rights or warrants to purchase any listed securities Securities issued by an investment company that is registered under the Investment Company Act of 1940, including mutual funds and closed-end funds Securities offered or sold to "qualified purchasers", such as wealthy or sophisticated investors Municipal securities of out-of-state issuers Securities that are private placements under SEC rules (Regulation D) and any other transaction exempted by the Securities Act of 1933

exempt from registration at both the federal and state levels

Securities offered or sold to "qualified purchasers", such as wealthy or sophisticated investors Municipal securities of out-of-state issuers Securities that are private placements under SEC rules (Regulation D) and any other transaction exempted by the Securities Act of 1933

The following are excluded and are not broker-dealers.

Several persons are specifically excluded from the definition of a broker-dealer under the USA. If a person is excluded, it means that they do not meet the definition. The following are excluded and are not broker-dealers: Agents Issuers (except when transacting business in securities other than its own) Bank, savings institutions, or trust companies A broker-dealer that has no place of business in the state and only effects transactions with other broker-dealers, institutional investors, or the issuer of the security involved in the transaction is excluded and does not need to register in that specific state as a broker-dealer. Broker-Dealer Retail Customer (Snowbird) Exclusion A broker-dealer that has no place of business in a state and only effects securities transactions with existing customers who are temporarily in the other state and NOT residents of the state is not considered a broker-dealer. This exclusion allows broker-dealers to transact business with their existing customers who are on vacation or temporarily residing in another state. The broker-dealer is not required to register in the state if they do not solicit new customers who are residents of that state. However, if a customer relocates to another state and establishes residency, the exclusion no longer applies to the broker-dealer. Key Concept To be excluded from the definition of a broker-dealer under the USA, 2 conditions must be met: No place of business in the state The customer must either be an institution or in the state temporarily.

An empty security is exempt from registering at what level?

State

Agents, broker-dealers, investment advisers, and investment adviser representatives who are required to register in the state must follow these general registration procedures:

Submit an application for registration Provide consent to service of process Pay filing/licensing fees Pass a qualification exam (if required by the Administrator) Post a surety bond (if required by the Administrator)

Summary Powers

Summary Powers The Administrator may summarily (without advance notice) postpone or suspend a registration pending final determination. The Administrator would do this if delaying the action could harm the public. The applicant and employer (if applicant is an agent or an IAR), must be notified by the Administrator of the order and such reasons. Upon receipt of a written request by the applicant, a hearing must be scheduled within 15 days of the request. If no hearing is requested, the order will remain in effect until it is changed or vacated by the Administrator. Unless the Administrator is acting summarily, no final orders can be issued without providing the opportunity for a hearing and providing findings of fact and conclusions of law. Cancellation of Registration If a registrant or applicant has ceased to do business, is subject to adjudication of mental incompetence, cannot be located, or is deceased, the Administrator may order a cancellation of the registration or application.

Testimonials and endorsements involving compensation are permitted if

Testimonials and endorsements involving compensation are permitted if there is a written agreement with the promoters and the communications are supervised. If the promoter is affiliated with the adviser or if the promoter receives $1,000 or less in compensation (de minimis), they are exempt from the written agreement requirement. The following disclosures must be provided:Client statusCompensation status, including cash and on-cash compensationConflicts of interest

Net Capital

The Administrator may establish (by rule or order) a net capital requirement for registered broker-dealers. Net capital is the firm's liquid net worth. The State Administrator cannot set a net capital requirement that exceeds the SEC's requirement.

Due Process

The Administrator may summarily (without advance notice) postpone or suspend the effectiveness of a registration statement, but then must allow an opportunity for a hearing. The Administrator must immediately notify the applicant, the issuer, and any other person on whose behalf the offering is being made, of the postponement or suspension. Upon written request of one of the parties notified, the Administrator must schedule a hearing within 15 days. If the Administrator eventually makes the order permanent, the interested parties must be given the reasons for the order in writing. If a hearing is not requested (or ordered by the Administrator), the stop order remains in effect unless changed by the Administrator.

Which of the following provisions are true of both registration by coordination and registration by qualification?

The Administrator will require the filing of offering documents for its review For registration by both coordination and qualification, the Administrator will require filing offering documents. In registration by coordination, registration documents are filed with the SEC and the state, and the state registration automatically becomes effective when the federal registration becomes effective. Registration by qualification can be used by any issuer registering with the state. However, it is most commonly used for intrastate filings.

Who Cannot Engage in Exempt Transactions?

The Uniform Securities Act identifies exempt transactions and includes any transaction by a fiduciary, such as an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator. Transactions by principals are not traditionally exempt.

Securities of an open-end investment company (mutual funds) or unit investment trust that have a registration statement filed under the Securities Act of 1933 may qualify for registration by filing, if:

The applicant previously qualified the sale of its securities within the preceding 24 months The applicant is in compliance with the material terms of prior registrations Since the prior registration, there has been no material change in the terms, method of distributing, investment practices or objectives, or sales terms of its securities

Non-Documentary Methods

The customer's identification is traditionally verified through government-issued identification cards, such as an investor's driver's license, military ID card, or passport. Additionally, a firm can use non-documentary procedures to verify an investor's identity. A firm that uses non-documentary methods must keep an updated policy on what is suitable for non-documentary identification verification. Common forms of non-documentary identification include contacting the customer, obtaining the information from a consumer reporting agency, and checking references from other financial institutions.

Effective Date

The effective date is the date the State Administrator declares the issue effective for sale within the state. The registration remains effective for 1 year from the effective date, or until the offering is complete. The Administrator may require the issuer to file reports, no more frequently than quarterly, after the registration becomes effective and to keep the registration statement updated. Key Concept Securities registrations expire one year from the effective date. Registrations of persons all expire on December 31, regardless of when they are registered.

Firms such as IAs or BDs often have links embedded in their own websites to third-party websites. Regarding third-party links in a firm's website, which of the following is true?

The firm is deemed to be entangled with the third party if it was involved in the preparation of any of the content within the link When firms embed third-party links within their own websites, they are deemed to be "entangled" with the third party if they were involved in the preparation of any of the link's content. Adoption is deemed to have occurred if the firm endorses or approves the links content. Neither entanglement or adoption are prohibited, but when a firm is not entangled with, nor has adopted the content of a third party, it must provide a disclaimer in a prominent manner stating that the third-party website does not reflect the views of the firm and has not been reviewed for completeness or accuracy.

The following are examples of information that would be considered material facts:

The following are examples of information that would be considered material facts: Acquisition or buy-out of an issuer Industry changes Changes in management of an issuer Changes in competition Risks associated with a particular investment Changes in tax laws that may affect an investment New or proposed government regulations

To make certain that investors are provided with material information regarding an offering, a risk disclosure should be included in the prospectus for all new issues. According to the Risk Disclosure Guidelines in the NASAA Statements of Policy, the following risk factor disclosure guidelines should be applied:

The prospectus should provide a detailed list of material risk factors associated with the offering. This list should immediately follow the cover of the prospectus. Risks associated with the offering should be prioritized in order, with the most significant risks listed first. Risk factor captions should stand out. Italicizing, bolding, or underlining items help the reader to quickly comprehend the nature of each particular risk. Whether being registered with the SEC or states, it is prohibited to markup or highlight a prospectus. It is a legal document and doing this alters the document.

prudent person rule

The prudent person rule is the guideline that fiduciaries must observe in managing client assets, and it applies to investment advisers. The rule directs advisers "to observe how persons of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." More specific standards were desired regarding this fiduciary responsibility.

The Administrator may issue a stop order to deny, suspend, or revoke the registration of a security if it is in the public's best interest AND any one of the following conditions apply:

The registration statement is materially incomplete, or contains statements that are false or misleading There has been a violation of the state's blue sky law by:The person filing the registration statementThe issuerAny partner, officer, or director of the issuerAny underwriter Any officer of the issuer or underwriter associated with the registration has been convicted of a securities or theft-related misdemeanor or any felony The security is subject to a federal or state court injunction or an administrator in another state has issued a stop order The issuer's business involves activities that are illegal in the state where performed The offering is being made on terms that are fraudulent, unfair, unjust, or inequitable Unreasonable amounts of underwriting compensation are being paid The securities are being registered by filing or coordination, but do not qualify for the type of registration being requested The issuer has failed to pay the proper filing fee (a denial order only applies until the proper fee has been paid) The Administrator may not enter a stop order against an effective registration statement based on a known fact when the statement became effective, unless action is taken within 30 days of the effective date.

If a security is being registered under state securities law, but not with the SEC, the cover legend on the prospectus must include each of the following items:

The security or offering has not been approved, disapproved, endorsed, or recommended by the State Administrator The investor should make an independent decision whether the offering meets their investment objectives and financial risk tolerance The Administrator has not confirmed the accuracy, truthfulness, or completeness of the disclosure

The Uniform Securities Act requires investment advisory contracts to be in writing and to disclose at least the following:

The services to be provided The advisory fees charged, and the formula for computing the fee The investment adviser will not share in customer profits The term of the contract and how it may be terminated by either party The amount of any prepaid fee to be returned in the event of contract termination or non-performance Whether the contract grants discretionary authority to the adviser Specific disclosure will be made when the adviser has a self-interest in any transactions being made for the account involved. The contract must also state that the adviser may not assign the contract to another person without the client's written consent. This is known as assignment. Key Concept Investment advisers may not charge a client an unreasonable advisory fee. Reasonable is determined by comparing fees to other advisers with similar operations.

Other Names for Administrator

The terms "Administrator," "Commission," "Commissioner," or "Secretary" refer to the person responsible for enforcing a given state's securities laws and rules. The NASAA and the USA refer to this person as the Administrator. In some states, securities regulation may be handled by a separate securities department. In other states, securities regulation may be part of a larger department that also regulates banking or insurance. Although the Administrator may have the power to create certain rules and regulations under a state's blue-sky law, the Administrator doesn't write the law itself. The law is created by the state legislature. Key Concept Under the Uniform Securities Act, the Administrator is the person responsible for enforcing a state's securities laws and regulations.

Investment Adviser Exemptions

There are situations in which an investment adviser is not required to register in a state, even though it meets the definition of an IA. These are not exclusions from the definition of an investment adviser, but are exemptions from the requirement to register with the State Administrator. Institutional Exemption This exemption applies to an investment adviser that has no place of business in the state and has only institutional clients in the state. Institutional clients include: Registered investment companies Other investment advisers Federal covered advisers Broker-dealers Banks or trust companies Savings and loan associations Insurance companies Employee benefit plans with assets of at least $1,000,000 Governmental entities, including governmental agencies A firm that meets the institutional exemption for an investment adviser is still considered an IA in the state, however the firm does not have to register in that specific state as an investment adviser. Key Concept Broker-dealers have an institutional exclusion. Investment advisers have an institutional exemption.

What does being a federal covered security mean?

This means they are to be registered at the federal level with the SEC, and are no longer subject to state regulation and registration. private placement has over 10 retail investors per 12-month period, it falls under Reg D of the Securities Act of 1933 and is, therefore, a federal covered security according to NSMIA and not required to register in the state.

Exclusion vs Exemption

Throughout the entire USA, exclusions and exemptions are important to understand. An exclusion means that the person, entity, or thing doesn't meet the definition so is therefore excluded from the group in question. An exemption means that they are part of the group, but for some reason they have been released from the obligations for the group in question. When talking about the USA, if something is excluded or exempt, they don't have to register. The reasons why they don't have to register will differ depending on whether it is an exclusion or exemption. Key Concept Under the USA, there are several broker-dealer EXCLUSIONS, but only 1 EXEMPTION. Reminders: If an entity is excluded, it means they do not meet the definition of a broker-dealer If an entity is exempt, it does meet the definition of a broker-dealer, but special circumstances mean it does not have to register.

name of the person that communicates insider trading info, name of the person that trades based on that information.

Tipper-tippee doctrine: Tipper = person that communicates the information Tippee = person that trades based on that information

Exempt Securities

To say that a security is "exempt" means it can be sold without going through the USA registration procedures. Included in the exempt securities are federal covered securities, financial institution securities, government and municipal securities, securities issued by the Canadian government and its subdivisions (includes both federal and municipal level), securities issued by recognized foreign governments other than Canada (does NOT include securities issued by foreign government entities below the national level), public utility issues, securities listed on exchanges, nonprofit institution securities, and commercial paper. According to the Uniform Securities Act, securities issued by railroads and other 'common carriers,' such as airlines, are exempt securities. Securities trading in the OTC market are subject to registration in the state. Bonds issued by foreign municipalities must also be registered in a state unless it is a Canadian municipal bond. Additionally, stock issued by a bank holding company requires state registration under the USA.

Under the USA, registration by coordination becomes effective at the time that the federal registration statement becomes effective as long as:

Under the USA, registration by coordination becomes effective at the time that the federal registration statement becomes effective as long as: The state registration statement has been on file with the Administrator for at least 10 days A statement of the maximum and minimum proposed offering prices, and the maximum underwriting discounts and commissions, has been on file with the Administrator for 2 full business days; and There is no stop order in effect If the Administrator issues a stop order when a registration by coordination is pending, the Administrator bears the burden of proof that the registration violates state law. The issuer must notify the Administrator of the date and time at which the federal registration statement became effective. If the federal registration is already effective when the documents are filed with the state, the registration statement becomes effective under the USA when the three conditions have been satisfied.

entangled

When firms are involved in the preparation of the content to a third-party's site, they have become "entangled" and are responsible for the information provided and are liable for any misstatements and misleading information. If the firm endorses or approves the third-party content, they have "adopted" the content and are also responsible and liable for any information provided. Firms that have not been involved in entanglement or adoption must provide a disclaimer in a prominent manner stating that the third-party website does not reflect the views of the firm and has not been reviewed for completeness or accuracy. In these cases, the third-party communications are not deemed to be communications of the firm and are not subject to mandatory monitoring. Many firms, however, do monitor third-party site communications to ensure that the information disseminated to their clients and prospects is accurate and not misleading.

Painting the Tape

When manipulative trading involves a series of purchases, or a series of sales, rather than paired buys and sells, the activity is known as painting the tape. This is an illegal activity, since the intent is to give the false appearance of a trend in a stock's price and lure other investors into the same trading activity.

Matched Sales

When two or more parties are involved in a pattern of buying and selling a security merely to give the appearance of active trading, this is known as engaging in matched sales. There is only one manipulator in a wash trade, matched sales involve two or more conspirators.

Under the Uniform Securities Act, an individual might be an agent if she represents which two of the following?

With some exceptions, agents are persons who represent either broker-dealers or issuers in effecting or attempting to effect securities transactions.