Series 63 Exam Preparation: Definition of Terms & Registration PDF

**Series 63 Exam Preparation: Chapter 1 -- Definition of Terms (1.1)** **Person** - The term \"person\" under the Uniform Securities Act (USA) is defined broadly to ensure all legal entities capable of owning securities or engaging in securities transactions are included. - Includes:...

**Series 63 Exam Preparation: Chapter 1 -- Definition of Terms (1.1)** **Person** - The term \"person\" under the Uniform Securities Act (USA) is defined broadly to ensure all legal entities capable of owning securities or engaging in securities transactions are included. - Includes: - Individuals: Natural persons acting in personal or professional capacities. - Corporations: Legal entities created to conduct business and issue securities to raise capital. - Partnerships: Includes both general and limited partnerships, often structured for investment purposes. - Trusts: Business trusts or personal trusts where securities may be issued. - Joint-Stock Companies and Associations: Formal or informal organizations with multiple members pooling resources. - Unincorporated Organizations: Entities lacking formal incorporation but engaging in securities transactions. - Governments and Political Subdivisions: Such as municipalities issuing bonds to fund projects. - Importance: Understanding this definition helps identify who must register and comply with securities laws. **Issuer** - Defined as any person who issues or proposes to issue a security. - Key Applications: - Corporations: Issue equity (e.g., stocks) and debt (e.g., bonds) to raise capital. - Investment Companies: Mutual funds issue shares to investors as part of pooled investment strategies. - Trusts: In cases where certificates of interest in trusts are issued, the trustee is treated as the issuer. - Oil, Gas, or Mining Programs: The sponsor or depositor is the issuer. - Issuer Transactions: - Involves the issuer directly benefiting from the sale of securities. - Examples: Initial Public Offerings (IPOs), mutual fund share sales, or the issuance of corporate bonds. - Non-Issuer Transactions: - Occur in secondary markets where the issuer does not benefit directly. - Examples: Trading of securities on stock exchanges like NYSE or NASDAQ. - Examples for Clarity: - Buying shares of a mutual fund involves an issuer transaction as proceeds go to the fund. - Trading shares of Apple on NASDAQ is a non-issuer transaction as the company does not directly benefit. **Non-Issuer** - Transactions where the issuer does not directly or indirectly benefit. - Common Examples: - Secondary market trades such as retail investors selling shares through brokerage accounts. - Private resales of securities between individuals. - Regulatory Significance: - Non-issuer transactions often qualify as exempt under certain state securities laws, reducing regulatory burdens. **Broker-Dealer (BD)** - A BD is any person engaged in the business of buying or selling securities for others or for its own account. - Key Functions: - Facilitates securities transactions for customers (broker capacity). - Trades securities for its proprietary accounts (dealer capacity). - **Exclusions:** - Issuers, agents, and banks are not considered broker-dealers under the USA. - Firms with no office in a state and transactions limited to issuers, institutional investors, or existing clients temporarily in the state. - **Statutory Broker-Dealer:** - Any individual conducting securities transactions as a business must register as a BD. - Example: Soliciting securities trades via email and executing these for personal profit. - **Registration Requirements:** - Broker-dealers must register in every state where they transact business unless specifically exempt. **Agent** - An individual representing a broker-dealer or issuer in effecting securities transactions. - Key Requirements: - Must register in every state where they transact business. - Agents of broker-dealers are generally not exempt from registration. - Exclusions: - Individuals representing issuers in exempt securities or exempt transactions. - Clerical and administrative personnel with no sales or solicitation responsibilities. - Exempt Transactions for Agents: - Sales to institutional buyers. - Employee stock purchase plans where no commission is received. - Examples: - An individual representing a broker-dealer selling corporate stocks must register as an agent. - An individual representing an issuer in transactions involving U.S. government securities is typically exempt. **Investment Adviser (IA)** - Defined as any person who provides securities-related advice for compensation. - Scope of Services: - Portfolio management. - Financial planning. - Publishing investment research tailored to client needs. - Exclusions: - Banks, savings institutions, and trust companies. - Broker-dealers providing advice incidental to their brokerage services. - General financial publications not tailored to individuals. - Examples: - A firm charging fees for managing client portfolios must register as an IA. **Federal Covered Adviser** - Advisers registered with the SEC under the Investment Advisers Act of 1940. - Criteria: - Advisers managing \$100 million or more in assets. - Advisers to investment companies, such as mutual funds. - State Regulation: - Federal supremacy limits state regulation; however, notice filings and fees may be required. - State Administrators retain audit rights for federal covered advisers conducting business in their state. **Investment Adviser Representative (IAR)** - Individuals employed by or associated with an IA to provide advice or solicit clients. - Key Responsibilities: - Managing client accounts or portfolios. - Providing advice on securities. - Soliciting or negotiating investment advisory services. - Exclusions: - Administrative staff with no advisory functions. - Individuals providing general, non-tailored financial education. **\ ** **Series 63 Exam Preparation: Chapter 1 - Registration Requirements (1.2)** **Entities Requiring Registration** - Registration is mandatory for: - Broker-dealers, agents, investment advisers, and IARs conducting securities business in a state. - Key Considerations: - Activities involving the solicitation, sale, or advice on securities trigger registration requirements. Exemptions 1. Broker-Dealers: - No office in the state and transactions limited to institutional buyers, issuers, or temporary residents. 2. Agents: - Representing issuers in transactions involving exempt securities or exempt transactions. 3. Investment Advisers: - Advisers whose only clients are insurance companies, institutional investors, or other exempt entities. Illustrative Scenarios: - A broker-dealer headquartered in New York with clients in Texas must register in Texas. - An IA advising only insurance companies may qualify for exemption from registration in certain states. **\ ** **Series 63 Exam Preparation: Chapter 1 - Registration Procedure (1.3)** **1.3 Registration Procedure** **Forms and Documentation Required for Registration** 1. **Broker-Dealers**: - Must file **Form BD** with the Central Registration Depository (CRD). - The form includes information about: - Legal name, form of organization (e.g., corporation or partnership). - Business activities (e.g., market-making or proprietary trading). - Disclosure of disciplinary history, including regulatory violations, civil suits, or criminal convictions. - A consent to service of process must be submitted to allow legal actions within the state. 2. **Agents**: - File **Form U4**, which contains: - Personal information, including residential and employment history. - Disclosure of criminal or disciplinary events. - Registration requests for specific states and firms. - Must be submitted by the broker-dealer employing the agent. 3. **Investment Advisers (IAs)**: - File **Form ADV**, divided into: - **Part 1**: General information about the IA, such as business structure, clients served, and assets under management (AUM). - **Part 2**: Disclosure brochure provided to clients, detailing fees, conflicts of interest, and investment strategies. - The form must be filed through the Investment Adviser Registration Depository (IARD). 4. **Investment Adviser Representatives (IARs)**: - File Form U4, similar to agents. - Registration must be sponsored by the employing IA. **Consent to Service of Process** - Required for all registrants. - Grants the state Administrator authority to accept legal service on behalf of the registrant. - Useful for handling civil suits or enforcement actions. **Filing Fees** - Registration fees vary by state and are non-refundable. - Fees must be paid annually upon renewal. **Disclosures Required During Registration** - Registrants must disclose: 1. Financial condition, including bankruptcy filings. 2. Past or ongoing legal disputes, regulatory actions, and customer complaints. 3. Ownership structure and affiliations. 4. Business locations and scope of operations. **Effective Date of Registration** - Registrations generally become effective **30 days** after the filing is complete. - The Administrator may accelerate or delay this process based on the application review. - **Exceptions**: - Applications containing errors or omissions may face delays until corrected. **Renewal Requirements** - Registrations must be renewed annually by **December 31st**. - Late renewals may incur additional penalties or suspension. **Amendments and Material Changes** 1. **Material Changes**: - Examples include: - Change in business address. - Ownership or control changes. - Updates to disciplinary history or financial disclosures. - Amendments must be filed promptly (typically within 30 days of the change). 2. **Accuracy of Records**: - The Administrator may audit records to ensure compliance. - Registrants are responsible for correcting any inaccuracies. **Rejections or Denials** - Reasons for application rejection may include: - Omissions of material facts in the registration. - Financial insolvency or regulatory violations. - Criminal history, particularly related to securities fraud. - Applicants are entitled to: - Notification of the rejection reasons. - A hearing to contest the Administrator's decision. **\ ** **Series 63 Exam Preparation: Chapter 1 - Standards for Registration (1.4)** **1.4 Standards for Registration** **Competency Requirements** - **Examinations**: - Passing required qualification exams demonstrates a registrant's competency to act as a broker-dealer, agent, investment adviser, or investment adviser representative. - **Examples of Exams**: - **Series 63**: Focuses on state securities regulations under the Uniform Securities Act. - **Series 7**: General Securities Representative Exam for broader securities knowledge. - **Series 65/66**: Required for investment advisers and investment adviser representatives. - Exam requirements vary based on the role and the state's Administrator. **Ethical Standards** - Registrants must adhere to ethical practices, including: - Full disclosure of conflicts of interest. - Providing accurate and truthful information to clients and regulators. - Avoiding fraudulent or deceitful behavior. - Acting in the best interests of clients (fiduciary responsibility for IAs). **Financial Standards** - Broker-dealers and investment advisers must meet minimum financial thresholds to operate. - **Net Capital Requirements**: - Broker-dealers are subject to net capital rules under both state and federal law to ensure financial solvency. - Failure to maintain adequate net capital can result in suspension or revocation of registration. - **Surety Bonds**: - Some states require registrants to post a surety bond as a guarantee of financial responsibility. - Amounts are determined by the Administrator and vary based on the registrant's business activities. **Supervisory Requirements** - Firms must establish written supervisory procedures to monitor compliance with securities laws and regulations. - Key components of supervisory systems include: 1. **Designated Supervisors**: - Firms must appoint qualified individuals to oversee specific activities, such as trading or client account management. 2. **Employee Training**: - Ongoing education ensures all employees understand regulatory requirements and firm policies. 3. **Periodic Audits**: - Internal reviews assess compliance and identify potential risks. **Registration Standards for Broker-Dealers** 1. **Net Capital**: - Minimum requirements depend on the firm's activities (e.g., market-making, underwriting). - Firms engaging in high-risk activities often face stricter capital requirements. 2. **Recordkeeping**: - Maintain records of transactions, customer accounts, and communications. - Retention periods typically range from three to six years, depending on the record type. 3. **Disciplinary History**: - Disclosure of past regulatory actions or customer complaints is mandatory. **Registration Standards for Investment Advisers** 1. **Fiduciary Duty**: - IAs must act in the best interests of their clients at all times. - Full disclosure of fees, conflicts of interest, and material risks is required. 2. **Financial Requirements**: - Advisers with custody of client assets must maintain higher net worth thresholds (e.g., \$35,000). - Advisers using discretion but not custody may face reduced requirements. 3. **Advertising Rules**: - Advertisements must be fair, balanced, and not misleading. - Prohibited practices include: - Use of testimonials. - Guaranteed performance claims. **Administrator's Role in Setting Standards** 1. **Authority**: - The state Administrator has broad discretion to: - Adjust financial requirements for registrants. - Impose additional conditions, such as surety bonds or examinations. - These powers ensure local investor protection. 2. **Flexibility**: - Administrators may waive or modify requirements for firms or individuals under specific circumstances (e.g., hardship exemptions). 3. **Review and Audits**: - Registrants are subject to periodic audits by the Administrator to verify compliance. **\ ** **Series 63 Exam Preparation: Chapter 1 - Maintenance Requirements (1.5)** **1.5 Maintenance Requirements** **Recordkeeping Obligations** 1. **Broker-Dealers (BDs):** - Must maintain detailed records of their operations to ensure compliance with state and federal regulations. - Required records include: - **Customer account files**: Includes agreements, authorizations, and updates. - **Transaction records**: Trade confirmations, order tickets, and account statements. - **Communications**: Emails, advertising materials, and any correspondence with customers. - **Financial records**: General ledger, trial balances, and net capital computations. - **Retention Periods**: - Most records must be kept for **3 years**, with the first **2 years** being readily accessible. - Specific records, such as customer complaints, may have longer retention periods. 2. **Investment Advisers (IAs):** - IAs must maintain: - Financial records such as cash receipts, disbursements, and balance sheets. - Records of written communications related to recommendations, orders, and client correspondence. - Client agreements and any amendments. - A copy of the disclosure brochure provided to clients (Form ADV Part 2). - Advertising and marketing materials. - **Retention Periods**: - Most records must be retained for **5 years**, with the first **2 years** readily accessible. 3. **Electronic Recordkeeping**: - Permitted for both BDs and IAs as long as the records: - Are stored in a non-rewritable, non-erasable format. - Are organized and easily retrievable. - Are backed up to prevent data loss. **Filing Amendments and Updating Information** 1. **Material Changes**: - Registrants must promptly file amendments to their registration when material changes occur. - Examples of material changes include: - Change in address or principal office. - Change in ownership or control of the firm. - Addition or termination of key personnel. - Disclosure of new disciplinary events or legal actions. 2. **Frequency of Updates**: - Certain updates are required annually (e.g., renewal of registration). - Material changes must be reported promptly, typically within **30 days** of the occurrence. 3. **Accuracy of Information**: - Administrators may require registrants to periodically review and certify the accuracy of their filings. **Advertising and Solicitation Rules** 1. **General Requirements**: - Advertising must be truthful, balanced, and not misleading. - All claims in advertisements must be substantiated. 2. **Prohibited Practices**: - Use of testimonials in investment adviser advertising. - Guarantees of performance or exaggeration of potential returns. - Failure to disclose risks associated with the investment strategy. 3. **Filing Advertising Materials**: - Some states require BDs and IAs to file advertising materials with the Administrator before use. - Commonly applies to advertisements for specific securities or investment programs. **Compliance and Supervision** 1. **Supervisory Systems**: - Firms must implement written supervisory procedures to monitor compliance with securities laws and firm policies. - Key areas include: - Oversight of customer accounts and transactions. - Approval and review of advertising and sales materials. - Ensuring agents and representatives meet regulatory qualifications. 2. **Internal Audits**: - Periodic internal reviews assess compliance and identify potential risks. - Results must be documented and corrective actions implemented when deficiencies are identified. 3. **Training Requirements**: - Firms must provide ongoing training to ensure employees stay informed about regulatory updates and firm policies. **Renewals and Expirations** 1. **Annual Renewal Requirements**: - Registrations expire annually on **December 31st** unless renewed. - Renewal involves: - Payment of renewal fees. - Filing updated information with the Administrator. - Certifications of compliance with state regulations. 2. **Failure to Renew**: - Failure to renew may result in suspension or revocation of registration. - Reinstatement may require the submission of a new application and payment of penalties. 3. **Continuing Education Requirements**: - Agents and representatives may be required to complete continuing education programs as mandated by the Administrator. **Audits and Inspections by the Administrator** 1. **Scope of Audits**: - Administrators may conduct audits or inspections of registrants to: - Verify compliance with recordkeeping and reporting requirements. - Investigate potential violations of securities laws. - Audits may be scheduled or conducted without prior notice. 2. **Access to Records**: - Registrants must provide access to all required records during audits. - Failure to comply may result in enforcement actions, including fines or suspension. 3. **Follow-Up Actions**: - Registrants may receive recommendations or orders to address deficiencies identified during an audit. - Non-compliance may lead to further disciplinary actions. **\ ** **Series 63 Exam Preparation: Chapter 1 - Denial, Revocation, or Suspension (1.6)** **1.6 Denial, Revocation, or Suspension** **Grounds for Action by the Administrator** 1. **Incomplete or Misleading Registration Applications**: - Filing false, misleading, or incomplete information during the registration process. - Example: Omitting disclosure of a past securities violation or bankruptcy. 2. **Securities-Related Criminal Convictions**: - Any felony conviction or securities-related misdemeanor within the last **10 years**. - Administrators consider both state and federal offenses. 3. **Violations of Securities Laws**: - Violating provisions of the Uniform Securities Act (USA), federal securities laws, or another state's securities laws. - Examples include: - Selling unregistered securities without an exemption. - Engaging in fraudulent or deceitful practices. 4. **Dishonest or Unethical Practices**: - Examples include: - Excessive trading in a client's account (churning). - Making unauthorized trades. - Misrepresenting material facts about investments. 5. **Financial Insolvency**: - Firms or individuals unable to meet financial obligations may face suspension or revocation. - Examples include: - Filing for bankruptcy. - Failing to meet net capital requirements. 6. **Failure to Supervise**: - Broker-dealers and investment advisers are responsible for supervising their agents and representatives. - Lack of adequate policies or oversight leading to violations can result in penalties. 7. **Other Specific Provisions**: - Refusal to allow or cooperate with an audit or inspection. - Failure to pay filing fees. - Violating any rules or orders imposed by the Administrator. **Administrator's Process for Taking Action** 1. **Notice of Intent**: - The Administrator must notify the registrant of the intent to deny, revoke, or suspend the registration. - The notice will include the specific reasons for the action and inform the registrant of their rights. 2. **Opportunity for a Hearing**: - Registrants have the right to request a hearing within a specified timeframe (typically **15 days**). - If no hearing is requested, the Administrator may proceed with the action. 3. **Evidence and Testimony**: - At the hearing, the registrant may present evidence, call witnesses, and cross-examine witnesses presented by the Administrator. - The Administrator must provide evidence supporting the action. 4. **Written Findings**: - After the hearing, the Administrator must issue written findings detailing the facts and legal basis for the decision. 5. **Appeals**: - Registrants may appeal the Administrator's decision in a court of law within a specified timeframe (e.g., **60 days**). **Penalties and Consequences** 1. **Denial of Registration**: - Prevents the registrant from engaging in securities activities in the state. - Often applied to new applicants with significant deficiencies in qualifications or disclosures. 2. **Suspension of Registration**: - Temporarily prohibits a registrant from conducting securities business until the issue is resolved. - Example: A broker-dealer's suspension for failing to meet net capital requirements may be lifted once compliance is achieved. 3. **Revocation of Registration**: - Permanently prohibits a registrant from operating in the securities industry within the state. - Typically reserved for severe violations, such as repeated fraud or criminal convictions. 4. **Fines and Restitution**: - The Administrator may impose monetary fines on registrants or require restitution to harmed investors. - Restitution often includes: - Refund of the original investment amount. - Interest accrued during the period. 5. **Reinstatement**: - Registrants may apply for reinstatement after addressing the cause of suspension or revocation. - The Administrator has discretion to approve or deny reinstatement applications. **Examples of Administrator Actions** 1. **Case 1: Misrepresentation**: - An agent falsely claims a security is guaranteed by the government to increase sales. - Result: The agent's registration is suspended, and the broker-dealer may face additional penalties for failure to supervise. 2. **Case 2: Unauthorized Trading**: - An agent executes trades in a client's account without obtaining prior authorization. - Result: The agent's registration is revoked, and restitution is ordered for any client losses. 3. **Case 3: Insolvency**: - A broker-dealer files for bankruptcy and fails to meet its financial obligations to clients. - Result: The firm's registration is revoked, and the Administrator appoints a receiver to manage remaining assets. **\ ** **Series 63 Exam Preparation: Chapter 1 - Withdrawal or Termination of Registration (1.7)** **1.7 Withdrawal or Termination of Registration** **Withdrawal from Registration -- WATCH THE VIDEO TOO** **\ ** **Series 63 Exam Preparation: Chapter 2 - Definition of Terms (2.1)** **2.1 Definition of Terms** **Security** - Broadly defined under the Uniform Securities Act (USA) to include any financial instrument that represents an investment and carries an expectation of profit from the efforts of others. - **Examples of Securities**: - Stocks (common and preferred). - Bonds and debentures. - Notes and other evidences of indebtedness. - Investment contracts. - Certificates of interest in oil, gas, or mining titles. - Variable annuities and variable life insurance policies. - Options on securities, commodities, or indices. - **Exclusions**: - Fixed annuities, fixed life insurance policies, and endowment policies. - Commodities and commodity futures contracts. - Retirement plans (e.g., IRAs, Keoghs) that do not invest in securities. **Registration of Securities** - The process of ensuring securities comply with state laws and are properly disclosed to investors. - Methods of registration include: 1. **Registration by Notification (Filing)**: - Typically used by well-established issuers (e.g., large corporations). - Requires less documentation compared to other methods. 2. **Registration by Coordination**: - Used when a security is being registered at both the federal and state levels. - Relies on information filed with the SEC. 3. **Registration by Qualification**: - Required for securities sold only within a single state (intrastate offerings). - Involves submitting a detailed disclosure statement to the Administrator. **Issuer** - Defined as any person who issues or proposes to issue a security. - For oil, gas, or mining programs, the issuer is the sponsor or depositor. **Non-Issuer Transaction** - A transaction where the issuer does not directly or indirectly benefit from the proceeds. - Examples include: - Secondary market trades of stocks, bonds, or other securities. - Resales of securities by private investors. **Federal Covered Security** - Securities that are exempt from state registration due to federal preemption under the National Securities Markets Improvement Act (NSMIA). - Examples: - Securities listed on national exchanges (e.g., NYSE, NASDAQ). - Securities issued by registered investment companies (e.g., mutual funds). - Securities offered under Regulation D, Rule 506. - States can require notice filings and filing fees for these securities but cannot impose additional registration requirements. **Institutional Buyer** - Defined as entities with substantial financial resources and experience in investing. - Examples: - Banks, insurance companies, and pension funds. - Investment companies and broker-dealers acting for their own accounts. - Institutional buyers are granted exemptions from many registration and disclosure requirements under the USA. **Exempt Securities and Transactions** - **Exempt Securities**: - Securities that do not require state registration. - Examples include: - U.S. government and municipal securities. - Securities issued by banks, savings institutions, or credit unions. - Securities issued by nonprofit organizations. - Federal covered securities are also exempt from state registration. - **Exempt Transactions**: - Transactions that are exempt from registration due to the nature of the participants or circumstances. - Examples: - Isolated nonrecurring transactions. - Transactions with institutional buyers. - Private placements limited to a small number of sophisticated investors. **\ ** **Series 63 Exam Preparation: Chapter 2 - Methods of Securities Registration (2.2)** **2.2 Methods of Securities Registration** The Uniform Securities Act (USA) allows securities to be registered at the state level using one of three methods: **Registration by Filing (Notification)**, **Registration by Coordination**, and **Registration by Qualification**. Each method is suited to specific types of issuers and offerings and has unique requirements. **1. Registration by Filing (Notification)** - Designed for well-established issuers with a proven track record of regulatory compliance. - Primarily available to companies that are already publicly traded and have met SEC filing requirements. **Eligibility Requirements:** 1. **Issuer Requirements**: - The issuer must have been in continuous business operation for a specified period (typically 5 years). - Demonstrated profitability in at least 2 of the last 3 years. 2. **Securities Requirements**: - Securities must: - Be senior securities (e.g., bonds) or of equal standing. - Have been previously registered under the Securities Act of 1933. **Filing Process:** - The issuer submits the following to the Administrator: - A statement of eligibility. - Copies of SEC registration documents, including the prospectus. - A consent to service of process (grants the Administrator authority to receive legal notices). - Filing fees. **Effective Date:** - Registration becomes effective simultaneously with the SEC registration, assuming all state-level requirements are met. **Advantages:** - Simplified process with minimal state-level scrutiny. - Best suited for large, established issuers with no recent compliance issues. **2. Registration by Coordination** - Used for securities being registered with the SEC and one or more states simultaneously. - Often used for Initial Public Offerings (IPOs) or multi-state offerings. **Eligibility Requirements:** - Securities must be registered with the SEC under the Securities Act of 1933. **Filing Process:** 1. Submit the following to the Administrator: - Copies of the SEC registration statement. - Prospectus and all amendments filed with the SEC. - Consent to service of process. - Filing fees. 2. Amendments to the SEC registration must also be filed with the state. **Effective Date:** - Registration becomes effective concurrently with the SEC registration, provided all required documents have been filed with the Administrator. **Advantages:** - Ensures consistency between federal and state filings. - Streamlined for issuers already undergoing SEC review. **3. Registration by Qualification** - The most comprehensive and complex registration method. - Required for securities that do not qualify for filing or coordination, such as intrastate offerings. **Eligibility Requirements:** - No federal registration is required. - Securities must comply fully with state-specific rules and disclosures. **Filing Process:** 1. Submit a detailed registration statement to the Administrator, including: - A prospectus detailing: - The issuer's business, financial condition, and operating history. - Terms and conditions of the offering. - Risks associated with the securities. - Information about officers, directors, and underwriters. - Copies of any security instruments (e.g., bond indentures). - Financial statements audited by a certified public accountant (CPA). 2. Consent to service of process and filing fees must also be submitted. **Effective Date:** - Registration becomes effective on a date determined by the Administrator, typically after a thorough review. **Advantages:** - Provides extensive information to investors, ensuring transparency. - Tailored for smaller issuers or intrastate offerings. **Comparison of Registration Methods** **Feature** **Registration by Filing** **Registration by Coordination** **Registration by Qualification** ---------------------- ---------------------------- ---------------------------------- ----------------------------------- **Eligibility** Large, established issuers SEC-registered securities All other issuers **Complexity** Low Moderate High **Effective Date** Concurrent with SEC Concurrent with SEC Set by Administrator **Common Use Cases** Seasoned issuers IPOs, multi-state offerings Intrastate offerings **\ ** **Series 63 Exam Preparation: Chapter 2 - General Rules for Securities Registration (2.3)** **2.3 General Rules for Securities Registration** Understanding the general rules governing securities registration is critical to ensure compliance under the Uniform Securities Act (USA). These rules outline the foundational requirements and prohibitions for issuers, broker-dealers, and agents involved in securities transactions. **1. Registration Requirements for Issuers** **Disclosure Requirements:** - Issuers must provide full and fair disclosure of all material information relevant to the offering. - Disclosures typically include: - Description of the issuer's business and operations. - Financial statements, audited if required by the Administrator. - Terms and features of the securities being offered (e.g., interest rate, maturity date). - Purpose for which the proceeds will be used. - Details of any pending litigation or adverse regulatory actions. **Prospectus Requirements:** - A prospectus must be distributed to potential investors. - Includes comprehensive details about the offering and issuer. - Must disclose risks, historical financial performance, and rights of security holders. **Advertising and Sales Literature:** - Materials used to promote the securities must: - Be filed with the Administrator for review. - Avoid false, misleading, or exaggerated claims. - Clearly disclose material risks. **2. State-Level Filing Requirements** **Consent to Service of Process:** - Mandatory for all registrants. - Authorizes the Administrator to accept legal service on behalf of the registrant in case of lawsuits or legal actions. **Filing Fees:** - Non-refundable filing fees are required as part of the registration process. - Fees are often proportional to the size of the offering. **Amendments to Registration Statements:** - Material changes to the offering or the issuer's financial condition must be reported promptly. - Amendments are subject to Administrator review and approval. **3. Ongoing Reporting Obligations** **Annual Reporting:** - Issuers may be required to file annual updates with the Administrator, including: - Updated financial statements. - Reports on the progress of the use of proceeds. **Material Event Disclosures:** - Events that may impact the securities or the issuer must be disclosed immediately. - Examples: - Bankruptcy filings. - Resignation of key executives. - Regulatory investigations or penalties. **4. Prohibited Practices** **Fraudulent and Deceptive Practices:** - Examples include: - Omitting material facts about the security. - Misrepresenting the safety or potential returns of the investment. - Making unsubstantiated performance guarantees. **Unsuitable Recommendations:** - Recommending securities inconsistent with an investor's financial goals, risk tolerance, or investment experience. **Failure to Comply with Registration Requirements:** - Selling securities without proper registration or exemption. - Misrepresenting the registration status of a security. **5. Exemptions and Exceptions** **Exempt Securities:** - Securities that do not require registration, such as: - U.S. government and municipal bonds. - Securities issued by banks or nonprofit organizations. - Commercial paper with maturities of less than 270 days. **Exempt Transactions:** - Transactions not subject to registration, including: - Isolated nonrecurring transactions. - Private placements to a limited number of investors. - Transactions with institutional buyers. **Federal Preemption:** - Federal covered securities are exempt from state registration requirements but remain subject to anti-fraud provisions. - States may require notice filings and fees for federal covered securities. **\ ** **Series 63 Exam Preparation: Chapter 2 - Federal Covered Securities and Exemptions (2.4)** **2.4 Federal Covered Securities and Exemptions** The Uniform Securities Act (USA) distinguishes certain securities and transactions that are exempt from state registration due to their federal preemption or the nature of the security. This section highlights the classifications of federal covered securities, exempt securities, and exempt transactions, as well as their regulatory implications. **1. Federal Covered Securities** - Securities that are exempt from state registration requirements due to federal preemption under the National Securities Markets Improvement Act (NSMIA). - States cannot impose registration requirements but can require notice filings and fees. **Categories of Federal Covered Securities:** 1. **Securities Listed on National Exchanges**: - Securities listed on recognized exchanges like NYSE and NASDAQ. - Includes securities of the same issuer ranked equally or higher (e.g., senior debt). 2. **Securities Issued by Investment Companies**: - Includes mutual funds, closed-end funds, and unit investment trusts (UITs). - Registered under the Investment Company Act of 1940. 3. **Securities Offered under Regulation D, Rule 506**: - Exemption applies to private placements: - Unlimited capital raising. - Sales to accredited investors and up to 35 sophisticated non-accredited investors. - Limited advertising permitted under Rule 506(c) if all investors are accredited. 4. **Certain Government and Municipal Securities**: - U.S. government securities and securities issued by municipalities outside the state. **2. Exempt Securities** - Securities that do not require state registration based on their inherent nature or issuer. **Examples of Exempt Securities:** 1. **U.S. Government Securities**: - Treasury bonds, notes, and bills. - Federal agency securities (e.g., GNMA, FNMA). 2. **Municipal Securities**: - Issued by state and local governments. - Exempt when sold outside the issuer's jurisdiction. 3. **Bank and Financial Institution Securities**: - Issued by federally regulated banks, savings institutions, and trust companies. 4. **Securities Issued by Nonprofit Organizations**: - Includes religious, charitable, educational, and fraternal organizations. 5. **Commercial Paper**: - Short-term debt instruments with maturities of 270 days or less. - Used for current transactions and not offered to the public. 6. **Employee Benefit Plan Securities**: - Securities issued as part of stock purchase, pension, or profit-sharing plans. **3. Exempt Transactions** - Transactions that are exempt from registration due to the nature of the participants or the circumstances of the sale. **Examples of Exempt Transactions:** 1. **Isolated Nonrecurring Transactions**: - Private, infrequent sales by individuals not engaged in the securities business. 2. **Unsolicited Transactions**: - Initiated by the client rather than the broker-dealer or agent. - Documented by the broker-dealer as unsolicited. 3. **Transactions with Institutional Buyers**: - Sales to banks, insurance companies, and investment firms. 4. **Private Placements**: - Limited offerings to a small number of sophisticated investors. - General solicitation is prohibited unless all investors are accredited. 5. **Fiduciary Transactions**: - Executed by trustees, executors, administrators, or other fiduciaries. 6. **Issuer Transactions**: - Includes transactions between issuers and underwriters. 7. **Intrastate Offerings**: - Securities sold exclusively within a single state to residents of that state. - Must comply with SEC Rule 147 or Rule 147A. **4. Anti-Fraud Provisions** - Exempt securities and transactions remain subject to anti-fraud regulations under the Uniform Securities Act. - Prohibited practices include: - Misrepresentation or omission of material facts. - Misleading or high-pressure sales tactics. **\ ** **Series 63 Exam Preparation: Chapter 2 - Denial, Revocation, or Suspension of Securities Registration (2.5)** **2.5 Denial, Revocation, or Suspension of Securities Registration** Under the Uniform Securities Act (USA), state Administrators have the authority to deny, revoke, or suspend the registration of securities. This authority is exercised to protect investors and maintain compliance with securities laws. **1. Grounds for Denial, Revocation, or Suspension** **1.1 Misrepresentation or Fraud:** - Filing registration statements that include false or misleading information. - Omitting material facts necessary for investors to make informed decisions. **1.2 Unfair or Unethical Practices:** - Examples: - Misrepresentation of risks or features of the securities. - High-pressure sales tactics or deceptive advertising. **1.3 Failure to Pay Fees:** - Non-payment of required registration or filing fees. - The Administrator can revoke registration if fees are not paid promptly. **1.4 Financial Instability:** - The issuer is in unsound financial condition, creating undue risk for investors. - Examples include insolvency or inability to meet obligations. **1.5 Violations of Securities Laws:** - Any violation of the Uniform Securities Act, federal securities laws, or similar state laws. **1.6 Previous Legal or Disciplinary Actions:** - Prior injunctions, administrative orders, or convictions related to securities fraud or unethical practices. **2. Administrator's Authority** **2.1 Notice of Intent:** - The Administrator must provide the issuer with a written notice of intent to deny, revoke, or suspend registration. - The notice outlines specific reasons for the action. **2.2 Right to a Hearing:** - Issuers are entitled to request a hearing within a specified period (typically **15 days**). - The hearing allows the issuer to present evidence and defend against the proposed action. **2.3 Written Findings:** - Following the hearing, the Administrator must issue written findings detailing the rationale for the decision. **2.4 Immediate Suspension:** - The Administrator may impose a temporary suspension if the action is deemed necessary to protect investors. **3. Effects of Suspension or Revocation** **3.1 Prohibition of Sales:** - The security cannot be offered or sold within the state. **3.2 Investor Notification:** - Issuers may be required to notify existing investors of the suspension or revocation. **3.3 Potential Restitution:** - The Administrator may order the issuer to: - Refund investors' purchase amounts plus interest. - Compensate for any losses incurred. **3.4 Impact on Future Registrations:** - A revocation can lead to increased scrutiny during future registration attempts. - Repeat violations may result in permanent bans. **4. Key Examples** **Example 1: Fraudulent Financial Statements** - An issuer submits falsified financial statements to inflate its perceived profitability. - Action: Registration is revoked, and the issuer is fined and barred from future offerings. **Example 2: Misrepresentation of Risks** - A mutual fund advertises guaranteed returns but fails to disclose market risks. - Action: The Administrator suspends the fund's registration and orders corrective disclosures. **Example 3: Failure to Pay Fees** - An issuer neglects to pay the required filing fees. - Action: Registration is denied until fees are paid in full. **\ ** **Series 63 Exam Preparation: Chapter 2 - Other Rules Related to Securities Registration (2.6)** **2.6 Other Rules Related to Securities Registration** This section outlines additional rules and provisions that govern securities registration under the Uniform Securities Act (USA). These rules address amendments, notice filings, and specific conditions that apply to both issuers and state Administrators. **1. Amendments to Registration Statements** **1.1 Material Changes:** - Registrants must promptly file amendments to reflect any material changes in the securities or issuer. - Examples of material changes include: - Change in the offering price. - Change in the number of securities being offered. - Updated financial information that impacts the disclosure. **1.2 Administrator Review:** - Amendments are subject to review by the Administrator to ensure compliance with state regulations. - The Administrator may request additional information or documentation as needed. **1.3 Effective Date of Amendments:** - Amendments typically become effective upon Administrator approval or after a specified waiting period. **2. Notice Filings for Federal Covered Securities** **2.1 Purpose of Notice Filings:** - Although federal covered securities are exempt from state registration, issuers may be required to file a notice with the state Administrator. **2.2 Filing Requirements:** 1. **Documents to Submit**: - Copies of the SEC registration statement and prospectus. - Consent to service of process. - Payment of state filing fees. 2. **Timing**: - Notice filings must be submitted before the offering begins in the state. **2.3 Administrator Oversight:** - The Administrator cannot deny or suspend the sale of federal covered securities but can enforce anti-fraud provisions. **3. Expiration and Renewal of Registrations** **3.1 Annual Expiration:** - Securities registrations expire annually on **December 31st** unless renewed. - Issuers must: - Submit renewal filings. - Pay renewal fees. **3.2 Failure to Renew:** - Failure to renew results in the termination of registration. - Reinstatement requires re-filing and payment of penalties. **4. Conditions Imposed by the Administrator** **4.1 Escrow Requirements:** - The Administrator may require that: - Securities be placed in escrow until certain conditions are met. - Proceeds from sales be held in escrow until the issuer receives a specified minimum amount. **4.2 Performance Bonds:** - Issuers or broker-dealers may be required to post a performance bond as a condition of registration. - This ensures financial responsibility and protection for investors. **4.3 Advertising and Sales Literature:** - The Administrator may require prior approval of all advertising materials used to promote the securities. **5. Special Situations** **5.1 Intrastate Offerings:** - Securities sold exclusively within a single state are subject to state registration unless exempt. - Must comply with SEC Rule 147 or Rule 147A for exemption from federal registration. **5.2 Limited Offerings:** - Offerings to a small number of investors may qualify for exemptions but must still comply with disclosure requirements. **5.3 Cross-Border Transactions:** - Transactions involving issuers or investors from multiple states require careful compliance with the laws of each jurisdiction. **6. Anti-Fraud Provisions** - All securities, regardless of registration status, are subject to anti-fraud rules under the Uniform Securities Act. - Prohibited practices include: - Misrepresentation or omission of material facts. - Use of deceptive or manipulative schemes to defraud investors. **\ ** **Series 63 Exam Preparation: Chapter 3 - Advisory Contracts and Anti-Fraud Rules (3.1)** **3.1 Advisory Contracts and Anti-Fraud Rules** Investment advisers and their representatives are subject to strict standards of conduct under the Uniform Securities Act (USA). This section outlines the rules governing advisory contracts and anti-fraud provisions to protect clients and ensure ethical practices. **1. Advisory Contracts** **1.1 Written Contract Requirements:** - All advisory contracts must be in writing and clearly outline the terms of the agreement. - Verbal contracts are generally not permitted. - The contract must include: - **Services Provided**: A description of the advisory services to be rendered. - **Compensation**: Details on fees, including: - Whether fees are fixed, hourly, or based on assets under management (AUM). - Prohibition of performance-based fees unless the client is a qualified investor. - **Termination Clauses**: Terms for ending the agreement, including notice requirements. - **Assignment Provisions**: - Advisory contracts cannot be assigned to another party without the client's consent. - Assignment includes any change in ownership of the advisory firm. **1.2 Disclosure Obligations:** - Advisers must disclose all material facts, including: - Conflicts of interest (e.g., compensation from third parties). - Risks associated with investment strategies. - The adviser's financial condition if it may impair service delivery. - Form ADV Part 2: - A key disclosure document that must be provided to clients before or at the time of entering into an advisory contract. **2. Anti-Fraud Provisions** **2.1 General Anti-Fraud Rule:** - Advisers are prohibited from employing any scheme or device to defraud clients. - Prohibited practices include: - Making false or misleading statements. - Omitting material facts necessary to prevent misunderstandings. - Engaging in any act, practice, or course of business that operates as a fraud. **2.2 Specific Prohibited Practices:** 1. **Misrepresentation of Qualifications**: - Claiming certifications or experience that the adviser does not possess. 2. **False Advertising**: - Using testimonials, guarantees of performance, or exaggerated claims in marketing materials. 3. **Unauthorized Transactions**: - Executing trades or making decisions without client consent. 4. **Churning**: - Excessive trading in client accounts to generate higher commissions or fees. 5. **Commingling of Funds**: - Mixing client funds with the adviser's personal or firm assets. **3. Fiduciary Duty** **3.1 Obligation to Act in the Client's Best Interest:** - Advisers have a fiduciary duty to prioritize the client's interests above their own. **3.2 Duty of Care:** - Advisers must: - Provide advice based on a reasonable inquiry into the client's financial situation and objectives. - Use care, skill, and diligence in making recommendations. **3.3 Duty of Loyalty:** - Advisers must avoid conflicts of interest or disclose them fully when they exist. - Example: An adviser receiving compensation from a mutual fund company must inform clients. **4. Recordkeeping Requirements** **4.1 Maintenance of Records:** - Advisers must maintain records of: - Client communications. - Advisory contracts. - Transaction records and account statements. **4.2 Retention Period:** - Most records must be retained for **5 years**, with the first **2 years** readily accessible. **5. Key Examples of Anti-Fraud Violations** **Example 1: Misleading Performance Claims** - An adviser advertises guaranteed returns without disclosing associated risks. - Consequence: The Administrator may impose fines, revoke registration, or order restitution to clients. **Example 2: Failure to Disclose Conflicts** - An adviser recommends a proprietary product without disclosing the associated compensation. - Consequence: The adviser's fiduciary duty is breached, leading to potential penalties. **Example 3: Unauthorized Account Activity** - An adviser places trades in a client's account without prior approval. - Consequence: The Administrator may suspend the adviser's registration and order client compensation. **\ ** **Series 63 Exam Preparation: Chapter 3 - Conduct of Customer Accounts (3.2)** **3.2 Conduct of Customer Accounts** The Uniform Securities Act (USA) establishes rules to ensure ethical and lawful management of customer accounts. These rules govern the behavior of broker-dealers, agents, investment advisers, and representatives when handling client accounts. **1. Account Opening Requirements** **1.1 Customer Identification:** - Firms must verify the identity of all clients before opening an account. - Required under the USA Patriot Act to prevent money laundering. - Documents may include a driver's license, passport, or other government-issued identification. **1.2 Suitability Determination:** - Before recommending investments, the agent or adviser must: - Understand the client's financial situation, goals, and risk tolerance. - Collect information such as: - Income, net worth, and liquid assets. - Investment objectives (e.g., growth, income, preservation of capital). - Time horizon and tax considerations. **1.3 Written Agreements:** - Advisory accounts must include a written agreement outlining: - The scope of services to be provided. - Fees and compensation arrangements. **2. Handling Customer Transactions** **2.1 Authorization and Approval:** - **Discretionary Accounts**: - Written authorization from the client is required before exercising discretion over account transactions. - Discretion applies to the choice of security, amount, or timing of trades. - **Non-Discretionary Accounts**: - Agents must obtain explicit client approval for each trade. **2.2 Confirmations and Statements:** - Clients must receive trade confirmations for each transaction, detailing: - Date and time of the trade. - Price, quantity, and security details. - Broker-dealer fees and commissions. - Periodic account statements must provide: - Holdings and current valuations. - Activity during the reporting period. **3. Prohibited Practices** **3.1 Unauthorized Trading:** - Executing transactions without the client's knowledge or consent. **3.2 Churning:** - Excessive trading in an account to generate higher commissions. - Example: An agent executes unnecessary trades in a client's account without consideration for the client's investment objectives. **3.3 Fraudulent Behavior:** - Misrepresenting or omitting material facts about investments. - Providing guarantees of specific returns or profit levels. **3.4 Borrowing and Lending:** - Borrowing money or securities from clients is prohibited unless the client is: - A financial institution in the lending business. - A close personal or business associate with a pre-existing relationship. - Lending to clients is prohibited unless permitted under the firm's policies and disclosed to the client. **3.5 Commingling of Funds:** - Mixing client assets with those of the firm or representative is strictly prohibited. **4. Safeguarding Customer Information** **4.1 Confidentiality:** - Customer information must be kept confidential and shared only: - With the customer's consent. - As required by law or court order. **4.2 Data Security:** - Firms must implement procedures to protect customer data from unauthorized access or breaches. - Example: Encryption of sensitive client information. **5. Recordkeeping Requirements** **5.1 Transaction Records:** - Firms must maintain detailed records of all client transactions, including: - Trade tickets. - Confirmations and account statements. **5.2 Retention Period:** - Records must be kept for **3 years** for broker-dealers and **5 years** for investment advisers. - The first **2 years** must be easily accessible. **6. Key Examples of Violations** **Example 1: Unauthorized Trading** - An agent executes trades in a client's account without prior approval. - Consequence: The Administrator imposes fines and suspends the agent's registration. **Example 2: Churning** - A broker engages in frequent trades to increase commission earnings, ignoring the client's objectives. - Consequence: The firm is fined, and the agent's registration is revoked. **Example 3: Mishandling Customer Data** - A firm fails to secure customer records, resulting in a data breach. - Consequence: The firm faces regulatory penalties and must compensate affected clients. **\ ** **Series 63 Exam Preparation: Chapter 3 - Payment, Margin, and Commingling Rules (3.3)** **3.3 Payment, Margin, and Commingling Rules** The Uniform Securities Act (USA) establishes clear rules for payment terms, the use of margin accounts, and the handling of customer funds. These rules aim to protect investors and ensure ethical practices in securities transactions. **1. Payment Rules** **1.1 Settlement Requirements:** - Standard settlement for most securities transactions is **T+2** (trade date plus two business days). - Example: A stock trade executed on Monday must settle by Wednesday. **1.2 Payment Deadlines:** - Customers must deliver payment for purchased securities by the settlement date unless other arrangements are made. - Late payments may result in: - Account restrictions. - Forced liquidation of the securities. **1.3 Extension of Payment:** - Broker-dealers can request an extension from the Administrator or clearing agency if a client cannot meet the payment deadline. - Frequent late payments may prompt additional scrutiny or account termination. **2. Margin Rules** **2.1 What is a Margin Account?** - A margin account allows clients to borrow funds from a broker-dealer to purchase securities. - Margin accounts require an agreement outlining terms and risks. **2.2 Initial and Maintenance Margin Requirements:** - **Initial Margin**: - Set by the Federal Reserve under Regulation T. - Typically **50%** of the purchase price for equities. - **Maintenance Margin**: - Minimum equity that must be maintained in the account. - Set by FINRA at **25%** of the total market value of securities. **2.3 Margin Calls:** - Issued when the account falls below the maintenance margin level. - Customers must deposit additional funds or securities to restore equity. - Failure to meet a margin call can result in liquidation of positions. **2.4 Risks of Margin Accounts:** - Amplified losses if securities decline in value. - Interest charged on borrowed funds increases the cost of investing. **3. Commingling Rules** **3.1 Separation of Client and Firm Assets:** - Broker-dealers and investment advisers must: - Keep customer funds and securities separate from their own. - Deposit customer funds into segregated accounts. **3.2 Prohibited Practices:** - **Commingling**: - Mixing customer funds with firm or personal assets. - Example: Using client funds to cover firm expenses. - **Conversion**: - Unauthorized use of customer funds or securities for personal or business purposes. - Example: Selling client securities without authorization. **3.3 Recordkeeping Requirements:** - Detailed records must be maintained for all customer accounts, including: - Deposits and withdrawals. - Securities positions and transfers. **4. Violations and Penalties** **4.1 Late Payment Violations:** - Example: A broker-dealer fails to enforce payment deadlines, allowing clients to repeatedly delay settlement. - Consequence: The Administrator may impose fines or suspend the firm's registration. **4.2 Margin Abuse:** - Example: An agent encourages excessive margin trading to generate commissions without disclosing the risks. - Consequence: The agent may face suspension or revocation of registration. **4.3 Commingling or Conversion:** - Example: A firm uses client funds to cover operational expenses. - Consequence: Severe penalties, including fines, restitution orders, and possible criminal charges. **5. Key Protections for Investors** **5.1 Disclosure Requirements:** - Clients must receive written disclosures about: - Risks associated with margin accounts. - Payment obligations and deadlines. - Policies for handling funds and securities. **5.2 Audits and Inspections:** - Administrators and regulatory agencies routinely inspect broker-dealers and advisers to ensure compliance with payment, margin, and commingling rules. **\ ** **Series 63 Exam Preparation: Chapter 3 - Orders and Confirmations (3.4)** **3.4 Orders and Confirmations** The Uniform Securities Act (USA) provides detailed guidance on the proper handling of client orders and trade confirmations. Adherence to these rules ensures transparency, accuracy, and ethical conduct in securities transactions. **1. Handling of Client Orders** **1.1 Order Instructions:** - Agents must follow client instructions precisely unless otherwise authorized. - Example: If a client places a market order to buy 100 shares of stock, the agent must execute it without modification. **1.2 Unauthorized Trades:** - Executing trades without the client's explicit consent is prohibited unless discretionary authority has been granted. - Discretionary authority must be documented in writing and approved by the broker-dealer. **1.3 Trade Prioritization:** - Agents must prioritize client orders over personal or firm trades. - Front-running, or trading ahead of a client's order for personal gain, is strictly prohibited. **1.4 Error Handling:** - Errors in order execution must be promptly reported and corrected. - Example: If an agent accidentally purchases 1,000 shares instead of 100, the firm must rectify the mistake at no cost to the client. **2. Types of Orders** **2.1 Market Orders:** - Executed immediately at the best available price. - Suitable for liquid securities with minimal price fluctuation. **2.2 Limit Orders:** - Executed only at a specified price or better. - Example: A client places a buy limit order for \$50; the trade will not execute above this price. **2.3 Stop Orders:** - Triggered when a security reaches a specified price. - Stop-Loss Order: Becomes a market order when the price hits the stop level. - Stop-Limit Order: Becomes a limit order when the price hits the stop level. **2.4 Good-Till-Cancelled (GTC) Orders:** - Remain active until executed or cancelled by the client. **3. Trade Confirmations** **3.1 Required Information:** - Confirmations must include: - Trade date and time. - Security name and quantity. - Price of the trade and commission charged. - Broker-dealer's name, address, and contact information. **3.2 Delivery Timeline:** - Confirmations must be sent to the client no later than the business day following the trade date (T+1). **3.3 Accuracy:** - Broker-dealers are responsible for ensuring the accuracy of trade confirmations. - Clients should report any discrepancies immediately. **4. Prohibited Practices** **4.1 Misrepresentation:** - Providing false or misleading information about trade execution. - Example: Misstating the price or timing of a trade. **4.2 Omissions:** - Failing to disclose material information on trade confirmations. - Example: Not disclosing a commission or fee. **4.3 Failure to Send Confirmations:** - Deliberate failure to provide trade confirmations is a violation of the Uniform Securities Act. **4.4 Late Reporting:** - Delayed submission of trade confirmations without reasonable cause is prohibited. **5. Key Examples of Violations** **Example 1: Unauthorized Trading** - An agent places a trade in a client's account without prior approval. - Consequence: The Administrator may suspend or revoke the agent's registration. **Example 2: Inaccurate Confirmation** - A client receives a confirmation with the wrong trade price. - Consequence: The broker-dealer must correct the error and may face regulatory fines. **Example 3: Front-Running** - An agent executes a personal trade ahead of a client's large order to benefit from anticipated price movement. - Consequence: The agent may face fines, suspension, or permanent revocation of registration. **6. Investor Protections** **6.1 Disclosure Requirements:** - Clients must be informed of all fees, commissions, and trade details. **6.2 Regular Audits:** - Broker-dealers are subject to periodic audits to ensure compliance with order and confirmation rules. **6.3 Complaint Handling:** - Firms must have procedures for handling client complaints related to orders and confirmations. **\ ** **Series 63 Exam Preparation: Chapter 3 - Borrowing, Lending, Sharing, or Guaranteeing - Customer Accounts (3.5)** **3.5 Borrowing, Lending, Sharing, or Guaranteeing - Customer Accounts** The Uniform Securities Act (USA) and related regulations establish clear guidelines on borrowing, lending, sharing, or guaranteeing related to customer accounts. These rules ensure that broker-dealers, agents, and investment advisers act in the best interest of their clients and avoid conflicts of interest. **1. Borrowing from Clients** **1.1 General Prohibition:** - Agents and investment advisers are generally prohibited from borrowing money or securities from clients unless specific exceptions apply. **1.2 Exceptions:** - Borrowing is allowed only if the client: - Is a financial institution in the business of lending (e.g., a bank or credit union). - Has a personal or business relationship with the agent that predates the advisory relationship. - Written agreements and proper documentation are required in such cases. **1.3 Common Violations:** - Borrowing money from clients without disclosure or a valid exception. - Example: An agent solicits a loan from a retired client for personal use. - Consequences: Suspension, fines, or permanent revocation of the agent's registration. **2. Lending to Clients** **2.1 General Prohibition:** - Lending money to clients is generally prohibited unless permitted by law or firm policy. - Prohibited even if the agent or adviser is financially capable of lending. **2.2 Exceptions:** - Lending is allowed if: - The client is a family member. - The firm permits loans between agents/advisers and clients under strict policies. - The client is a financial institution that routinely engages in lending activities. **2.3 Risk Management:** - Firms must have policies to: - Monitor and document all lending arrangements. - Ensure compliance with state and federal regulations. **3. Sharing in Customer Accounts** **3.1 Joint Accounts with Clients:** - Agents may share in the profits or losses of a client's account only if: - The client provides written consent. - The arrangement is approved by the broker-dealer. **3.2 Proportional Contributions:** - The agent's participation must be proportional to their financial contribution to the account. - Example: If an agent contributes 20% of the account's value, they can share 20% of the profits or losses. **3.3 Prohibited Practices:** - Sharing in accounts without client consent or broker-dealer approval. - Guaranteeing against losses in the account. **4. Guaranteeing Client Accounts** **4.1 Prohibition on Guarantees:** - Agents and advisers are prohibited from guaranteeing: - A specific return on investment. - Protection against losses. - Guarantees create unrealistic expectations and may constitute fraud. **4.2 Misleading Statements:** - Examples of prohibited guarantees: - "You will not lose money on this investment." - "This security is guaranteed to double in value." - Consequences: Penalties, fines, and potential criminal charges. **5. Examples of Violations and Penalties** **Example 1: Unauthorized Loan** - An adviser borrows \$20,000 from a client without disclosure or a valid exception. - Consequence: Revocation of registration and restitution to the client. **Example 2: Improper Account Sharing** - An agent shares in a client's profits without contributing financially to the account. - Consequence: Suspension of the agent's registration. **Example 3: Loss Guarantee** - An agent guarantees a client against losses in a volatile market. - Consequence: The Administrator imposes fines and revokes the agent's license. **6. Investor Protections** **6.1 Disclosure Requirements:** - Agents and advisers must disclose any financial arrangements with clients. - Written documentation is essential for compliance. **6.2 Compliance Oversight:** - Firms must implement policies to monitor: - Borrowing and lending practices. - Account-sharing arrangements. **6.3 Education and Training:** - Firms are encouraged to educate agents and advisers about the risks and consequences of violating borrowing, lending, and guaranteeing rules. **\ ** **Series 63 Exam Preparation: Chapter 3 - Charges to Customers (3.6)** **3.6 Charges to Customers** The Uniform Securities Act (USA) sets forth guidelines for the fees and charges that broker-dealers, agents, and investment advisers may impose on their customers. These rules ensure transparency, fairness, and ethical conduct in the treatment of clients. **1. Types of Charges to Customers** **1.1 Commissions:** - **Definition**: Compensation earned by agents or broker-dealers for executing trades on behalf of clients. - **Key Points**: - Must be disclosed to the client before or at the time of the trade. - Vary based on the type of security and trade volume. **1.2 Markups and Markdowns:** - **Definition**: Charges added to (markup) or subtracted from (markdown) the price of securities in principal transactions. - Example: A broker-dealer selling securities from its own inventory may apply a markup to the sales price. - **Key Points**: - Must be reasonable and consistent with industry standards. - Full disclosure is required. **1.3 Advisory Fees:** - **Definition**: Fees charged by investment advisers for providing financial advice or managing accounts. - **Key Points**: - Can be structured as: - **Flat Fees**: Fixed amount regardless of account size. - **Asset-Based Fees**: Percentage of assets under management (e.g., 1% annually). - **Hourly Fees**: Charged based on time spent providing advice. - Fees must be clearly disclosed in the advisory contract. **1.4 Account Maintenance Fees:** - **Definition**: Charges for maintaining brokerage or advisory accounts. - Examples: Annual fees, inactivity fees, or account transfer fees. - **Key Points**: - Must be disclosed upfront. - Clients should be informed of the conditions under which fees apply. **1.5 Additional Charges:** - **Examples**: - Wire transfer fees. - Custodial fees. - Fees for issuing physical stock certificates. **2. Disclosure Requirements** **2.1 Timing of Disclosures:** - Fees and charges must be disclosed: - Before account opening. - When changes to the fee structure occur. **2.2 Form of Disclosure:** - Must be clear, detailed, and provided in writing. - Common disclosure methods include: - Fee schedules included in account opening agreements. - Advisory contracts outlining all charges. **2.3 Transparency in Advertising:** - Any advertisement referencing "low fees" must: - Include a detailed explanation of applicable charges. - Avoid misleading claims about cost savings. **3. Prohibited Practices** **3.1 Excessive Fees:** - Charging fees that are unreasonably high compared to industry standards is prohibited. **3.2 Hidden Charges:** - Failing to disclose fees or misrepresenting the nature of charges violates the Uniform Securities Act. **3.3 Double Charging:** - Charging clients for the same service in multiple ways without disclosure. - Example: Applying both a commission and an advisory fee for the same transaction. **3.4 Undisclosed Conflicts of Interest:** - Advisers earning additional compensation from third parties (e.g., mutual fund companies) must disclose such arrangements to clients. **4. Key Examples of Violations** **Example 1: Undisclosed Markup** - A broker-dealer charges a 3% markup on securities without disclosing it to the client. - Consequence: Fines and possible revocation of the firm's registration. **Example 2: Excessive Advisory Fees** - An adviser charges a 3% annual fee for portfolio management, far exceeding industry norms. - Consequence: The Administrator orders restitution to affected clients. **Example 3: Hidden Maintenance Fees** - A brokerage firm imposes undisclosed account maintenance fees on inactive accounts. - Consequence: Regulatory sanctions and client refunds. **5. Best Practices for Compliance** **5.1 Fee Transparency:** - Provide clients with a detailed fee schedule before account opening. - Update clients promptly about any changes to fees or charges. **5.2 Reasonable Charges:** - Ensure all fees are consistent with industry standards and proportional to the services provided. **5.3 Client Education:** - Educate clients about potential fees and charges during account onboarding. - Provide examples of how fees are calculated. **\ ** **Series 63 Exam Preparation: Chapter 3 - Prohibited Statements to Customers (3.7)** **3.7 Prohibited Statements to Customers** The Uniform Securities Act (USA) prohibits broker-dealers, agents, and investment advisers from making false, misleading, or deceptive statements to clients. This section outlines prohibited practices and provides guidance on maintaining ethical and lawful communication with customers. **1. Types of Prohibited Statements** **1.1 Guarantees of Performance:** - **Prohibition**: - Claims that a specific return or profit is guaranteed. - Statements assuring the client of no risk or losses. - **Examples**: - "This stock will double in value within six months." - "You will not lose any money on this investment." - **Consequences**: - Misleading guarantees create unrealistic expectations and violate anti-fraud provisions. **1.2 False or Misleading Information:** - **Prohibition**: - Providing inaccurate or incomplete information about a security, its issuer, or its performance. - **Examples**: - Overstating a company's earnings or financial health. - Failing to disclose material risks associated with an investment. - **Consequences**: - Clients making decisions based on false information may suffer financial losses, leading to penalties for the agent or adviser. **1.3 Exaggerated or Unsubstantiated Claims:** - **Prohibition**: - Making unverified or exaggerated claims about a security's potential. - **Examples**: - "This is the safest stock on the market." - "This mutual fund has the highest returns in the industry." - **Requirements**: - All claims must be factual, substantiated, and verifiable. **1.4 Implying Approval by Regulators:** - **Prohibition**: - Suggesting that a security, firm, or agent is endorsed or approved by regulators. - **Examples**: - "The SEC has approved this investment." - "State regulators have guaranteed this security." - **Key Point**: - Registration with a regulator only indicates compliance with filing requirements, not approval. **1.5 Misrepresentation of Fees:** - **Prohibition**: - Understating or failing to disclose fees, commissions, or other charges. - **Examples**: - "There are no fees associated with this account." - Failing to mention hidden costs, such as account maintenance or transaction fees. **1.6 Misleading Statements about Insurance Coverage:** - **Prohibition**: - Overstating the extent of SIPC coverage or other insurance protections. - **Examples**: - "Your account is insured against all losses." - "SIPC guarantees the value of your investments." **2. Ethical Communication Practices** **2.1 Full and Fair Disclosure:** - Provide clients with accurate, complete, and balanced information about investments. - Disclose all material risks and potential conflicts of interest. **2.2 Avoiding Speculation:** - Refrain from making speculative or unfounded predictions about market performance. - Base all recommendations on objective analysis and client suitability. **2.3 Clear and Transparent Language:** - Use simple, understandable language when discussing investments and fees. - Avoid technical jargon that could confuse or mislead clients. **2.4 Written Documentation:** - Provide written confirmations of all disclosures and agreements. - Retain records of client communications to demonstrate compliance. **3. Examples of Violations and Penalties** **Example 1: Guaranteed Returns** - **Violation**: An agent promises a 10% return on a high-risk stock. - **Consequence**: The agent's registration is suspended, and the firm is fined. **Example 2: Misrepresentation of Risks** - **Violation**: An adviser markets a speculative investment as risk-free. - **Consequence**: The Administrator orders restitution to affected clients and imposes penalties. **Example 3: False Endorsement** - **Violation**: A broker claims the SEC has approved a security. - **Consequence**: The firm is fined, and the broker's license is revoked. **4. Investor Protections** **4.1 Regulatory Oversight:** - State Administrators and federal regulators monitor communications for compliance with anti-fraud provisions. - Firms are subject to regular audits and inspections. **4.2 Complaint Resolution:** - Clients can report misleading statements to the Administrator for investigation. - Remedies may include restitution, rescission of transactions, and administrative penalties. **\ ** **Series 63 Exam Preparation: Chapter 3 - Customer Complaints, Mail, Incapacitation, or Death (3.8)** **3.8 Customer Complaints, Mail, Incapacitation, or Death** The Uniform Securities Act (USA) sets forth specific guidelines for handling customer complaints, managing client communications, and addressing unique situations such as client incapacitation or death. Adhering to these rules is critical for maintaining compliance and protecting customer rights. **1. Customer Complaints** **1.1 Definition of a Complaint:** - Any written or electronic communication from a client alleging dissatisfaction with: - Account activity. - Agent or adviser conduct. - Broker-dealer operations. - Verbal complaints are not formally recognized unless documented. **1.2 Complaint Handling Process:** 1. **Receipt of Complaint**: - Complaints must be acknowledged promptly. - Document all relevant details, including the date and nature of the complaint. 2. **Investigation**: - Conduct a thorough review of the client's account activity and interactions with the firm. - Identify any policy or procedural violations. 3. **Resolution**: - Respond to the client in writing, detailing the findings and resolution steps. - Retain records of the complaint and resolution for at least **3 years**. **1.3 Regulatory Oversight:** - State Administrators and other regulators may request complaint records during audits or investigations. - Failure to address complaints adequately can result in penalties, including fines or suspension of registration. **2. Handling Customer Mail** **2.1 Forwarding Mail:** - Clients may request mail to be forwarded to an alternate address temporarily. - Requests must: - Be in writing. - Specify the duration of the forwarding arrangement. **2.2 Holding Mail:** - Firms may hold customer mail only if: - The client provides written authorization. - The holding period does not exceed **3 months** unless extended for good cause. **2.3 Notification Requirements:** - Clients must be notified of the risks associated with mail holding, such as delayed account updates or transaction confirmations. **3. Incapacitation of a Client** **3.1 Durable Power of Attorney (POA):** - Clients may designate a trusted individual to manage their account in case of incapacitation. - The POA must: - Be durable (i.e., remain effective upon incapacitation). - Be properly executed and submitted to the firm. **3.2 Decision-Making Authority:** - Agents and advisers must: - Verify the validity of the POA. - Follow the instructions of the designated attorney-in-fact. **3.3 Safeguarding Client Interests:** - Maintain regular communication with the attorney-in-fact. - Ensure that all transactions align with the client's investment objectives and risk tolerance. **4. Death of a Client** **4.1 Immediate Actions:** - Upon notification of a client's death, firms must: - Freeze the client's account to prevent unauthorized activity. - Cancel all open orders. **4.2 Documentation Requirements:** - Require the following documents to release account assets: - Death certificate. - Letters testamentary or letters of administration (proof of executor's authority). - Affidavit of domicile (verifies the client's residence). **4.3 Transfer of Assets:** - Distribute assets according to the will, trust, or state intestacy laws. - Ensure compliance with beneficiary designations on accounts such as IRAs or annuities. **4.4 Tax Considerations:** - Inform beneficiaries or executors about potential tax obligations, such as: - Estate taxes. - Capital gains taxes on inherited securities. **5. Best Practices for Compliance** **5.1 Recordkeeping:** - Maintain detailed records of complaints, mail requests, and client communications. - Ensure accessibility of records for regulatory inspections. **5.2 Client Communication:** - Educate clients on procedures for handling complaints, mail, and incapacitation. - Provide regular updates on account status and changes in firm policies. **5.3 Employee Training:** - Train agents and advisers to handle sensitive situations, such as client death or incapacitation, with professionalism and empathy. - Emphasize the importance of regulatory compliance. **\ ** **Series 63 Exam Preparation: Chapter 3 - Trading Practices (3.9)** **3.9 Trading Practices** Trading practices under the Uniform Securities Act (USA) are regulated to ensure fairness, transparency, and integrity in securities markets. This section provides an overview of permissible and prohibited practices related to trading activities. **1. Permissible Trading Practices** **1.1 Agency Transactions:** - **Definition**: The broker-dealer acts as an intermediary, executing trades on behalf of the client. - **Key Points**: - Clients pay a commission for the service. - Full disclosure of commissions is required before the trade is executed. **1.2 Principal Transactions:** - **Definition**: The broker-dealer trades securities from its own inventory with the client. - **Key Points**: - Markups or markdowns must be reasonable and fully disclosed. - Suitable for clients seeking immediate execution. **1.3 Best Execution:** - **Obligation**: Broker-dealers must execute trades under terms most favorable to the client. - Considerations include: - Price. - Speed of execution. - Market conditions. - **Compliance**: - Firms must document efforts to obtain the best execution. **2. Prohibited Trading Practices** **2.1 Churning:** - **Definition**: Excessive trading in a client's account primarily to generate commissions. - **Indicators**: - High turnover ratios. - Trading that exceeds the client's financial capacity or objectives. - **Consequences**: - Regulatory sanctions and potential restitution to the client. **2.2 Front-Running:** - **Definition**: An agent executes a trade in their own account ahead of a large client order to benefit from anticipated price movement. - **Key Points**: - Considered a conflict of interest. - Strictly prohibited by regulators. **2.3 Market Manipulation:** - **Definition**: Activities intended to deceive or mislead market participants by creating artificial price movements. - **Examples**: - **Wash Trades**: Simultaneous buying and selling of the same security to create false trading activity. - **Matched Orders**: Coordinating trades with another party to manipulate prices. - **Consequences**: - Severe penalties, including fines and criminal charges. **2.4 Trading on Material Non-Public Information (Insider Trading):** - **Definition**: Using confidential information not available to the public to execute trades. - **Examples**: - Buying shares of a company based on knowledge of an upcoming merger. - **Key Points**: - Violates the Securities Exchange Act of 1934. - Both civil and criminal penalties apply. **3. Recordkeeping Requirements** **3.1 Trade Confirmations:** - Firms must provide clients with trade confirmations detailing: - Date and time of execution. - Price and quantity of securities traded. - Commissions or fees charged. **3.2 Trade Blotters:** - A trade blotter records daily trading activity and includes: - Details of executed trades. - Counterparty information. - Time stamps for each transaction. **3.3 Retention Period:** - Records must be kept for at least **3 years** for broker-dealers and **5 years** for investment advisers. - The first **2 years** must be readily accessible. **4. Examples of Violations and Penalties** **Example 1: Churning** - **Violation**: A broker-dealer executes 50 trades in a month for a retired client with a low-risk tolerance. - **Consequence**: The broker's license is suspended, and the client receives restitution. **Example 2: Insider Trading** - **Violation**: An agent buys shares of a pharmaceutical company after learning about an upcoming FDA approval. - **Consequence**: The agent faces civil penalties and criminal prosecution. **Example 3: Wash Trades** - **Violation**: A firm coordinates wash trades to create the illusion of market demand. - **Consequence**: The firm is fined, and its registration is revoked. **5. Best Practices for Compliance** **5.1 Training and Education:** - Regularly train employees on prohibited trading practices and ethical standards. - Emphasize the importance of compliance with best execution and fiduciary duties. **5.2 Internal Controls:** - Implement systems to monitor trading activity for signs of manipulation or excessive trading. - Conduct regular audits of client accounts and firm practices. **5.3 Reporting Mechanisms:** - Establish channels for employees and clients to report suspected violations anonymously. - Ensure prompt investigation and resolution of reported issues. **\ ** **Series 63 Exam Preparation: Chapter 3 - New Issue Rules and Research Rules (3.10)** **3.10 New Issue Rules and Research Rules** The Uniform Securities Act (USA) outlines specific guidelines for handling new issues and the dissemination of investment research. These rules ensure fair practices and prevent conflicts of interest during securities offerings and the publication of research reports. **1. New Issue Rules** **1.1 Definition of a New Issue:** - A \"new issue\" refers to the first sale of securities by an issuer to the public. - Includes initial public offerings (IPOs) and newly issued bonds. **1.2 Restrictions on Sales:** - **Prohibition on Sales to Restricted Persons**: - New issues cannot be sold to restricted persons, which include: - Broker-dealers and their employees. - Immediate family members of broker-dealer employees. - Portfolio managers purchasing for their personal accounts. - Purpose: To ensure public access to new issues and prevent preferential treatment. **1.3 Underwriting Standards:** - **Firm Commitment Underwriting**: - The underwriter buys the entire issue from the issuer and assumes the risk of resale. - **Best Efforts Underwriting**: - The underwriter agrees to sell as much of the issue as possible but does not guarantee the entire issue will be sold. - **Key Compliance Requirements**: - Underwriters must ensure that all material information about the issuer is disclosed in the prospectus. - Full disclosure of underwriting fees and commissions is required. **1.4 Delivery of Prospectus:** - A prospectus must be provided to all purchasers of new issues. - Timing: - For IPOs, the prospectus delivery requirement extends for **25 days** after the offering date. - For non-IPO offerings, the period is typically **90 days**. **2. Research Rules** **2.1 Objectivity and Independence:** - Research analysts must: - Base recommendations on objective, verifiable data. - Avoid conflicts of interest that could compromise their judgment. **2.2 Disclosure of Conflicts:** - Research reports must disclose: - Any financial interest the analyst or their firm has in the issuer. - Compensation arrangements between the firm and the issuer. - If the issuer is a client of the firm's investment banking division. **2.3 Prohibited Practices:** - **Boosterism**: - Overly optimistic recommendations made to promote an investment banking client. - **Trading Ahead of Research**: - Executing trades in anticipation of publishing a research report. - Example: Buying shares of a company before issuing a \"buy\" recommendation. **2.4 Quiet Periods:** - During certain periods, firms are prohibited from publishing research reports on issuers for which they acted as underwriters: - **IPO Quiet Period**: 10 calendar days following the offering date. - **Follow-On Offering Quiet Period**: 3 calendar days following the offering date. **3. Recordkeeping Requirements** **3.1 Retention of Research Reports:** - Firms must maintain copies of all research reports for at least **3 years**. - Reports must include supporting documentation for recommendations made. **3.2 Supervision of Analysts:** - Supervisory procedures must ensure: - Analysts adhere to disclosure and objectivity requirements. - No undue influence from investment banking or trading departments. **4. Key Examples of Violations** **Example 1: Preferential Allocation of New Issues** - **Violation**: A broker-dealer allocates shares of an IPO to employees and their family members. - **Consequence**: Fines, suspension of registration, and restitution to affected clients. **Example 2: Misleading Research Report** - **Violation**: A firm issues a \"buy\" recommendation for a company without disclosing a conflict of interest. - **Consequence**: The firm is fined, and the research analyst's license is revoked. **Example 3: Trading Ahead of Research** - **Violation**: An analyst buys shares of a company before issuing a positive research report. - **Consequence**: Regulatory sanctions and restitution to affected clients. **5. Best Practices for Compliance** **5.1 Training and Education:** - Firms must train employees on: - New issue allocation rules. - The importance of maintaining research objectivity. **5.2 Internal Controls:** - Implement \"Chinese Wall\" policies to separate investment banking and research departments. - Prevents conflicts of interest. **5.3 Regular Audits:** - Conduct periodic reviews of new issue allocations and research reports for compliance. - Address any discrepancies or violations promptly. **\ ** **Series 63 Exam Preparation: Chapter 3 - Communication Rules (3.11)** **3.11 Communication Rules** The Uniform Securities Act (USA) regulates the communications of broker-dealers, agents, and investment advisers to ensure they are fair, balanced, and free of misleading statements. This section provides guidance on compliant communication practices and outlines prohibited behaviors. **1. Types of Communications** **1.1 Retail Communications:** - **Definition**: Written or electronic communications distributed to more than 25 retail investors within a 30-day period. - **Key Points**: - Must be approved by a principal before distribution. - Examples: Marketing emails, advertisements, brochures. **1.2 Correspondence:** - **Definition**: Written or electronic communications distributed to 25 or fewer retail investors within a 30-day period. - **Key Points**: - Does not require pre-approval but is subject to review and supervision. - Examples: Client-specific emails or letters. **1.3 Institutional Communications:** - **Definition**: Communications distributed exclusively to institutional investors, such as banks, insurance companies, and mutual funds. - **Key Points**: - Must include a disclaimer: "For institutional use only." - No retail distribution allowed. **2. General Standards for All Communications** **2.1 Accuracy and Fairness:** - Communications must: - Be truthful and based on verifiable facts. - Provide a balanced presentation of risks and benefits. **2.2 Avoidance of Misleading Statements:** - Prohibited